52 ideas that changed the world - 32. Capitalism
Invented by the merchants of Renaissance Italy, capitalism now underpins almost all of the world’s economies
In this series, The Week looks at the ideas and innovations that permanently changed the way we see the world. This week, the spotlight is on capitalism:
Capitalism in 60 seconds
Depending on which of the party leaders you asked in the December general election campaign, you would have been told that capitalism is either the best way to “support the poorest and the neediest in society” or a “greed-is-good” system that “isn’t working any more”.
There are no prizes for guessing which quote belongs to Boris Johnson and which to Jeremy Corbyn, but the debate between the two was symbolic of a wider discussion in Western politics.
In the US, the Democratic Party’s presidential candidate race has become a battle between pro-capitalists like Pete Buttigieg, and reformists like Bernie Sanders. Likewise, in France, Germany and Spain, parties from the left and right are going head-to-head over the success, and future, of capitalism.
In its simplest terms, capitalism is an economic system in which the government plays a secondary role to people and companies. Under capitalism, the government does not “centrally organise” production and instead products are freely produced by individuals and sold for a profit.
This is described as a “free market”, a means of running an economy described by Milton Friedman as “the only way that has ever been discovered to have a lot of people cooperate together voluntarily”. In most countries – for example the UK – the government intervenes in the economy to an extent, through laws and regulations, but it is freer than it is controlled.
Defenders of the system argue that the spread of capitalism around the globe has improved the quality of life of millions of people, with The Economist reporting in 2013 that in 20 years, capitalist economics has pulled nearly 1 billion people out of extreme poverty.
However others, like Corbyn and Sanders, argue that it is a system that leaves behind the poorest in society, as workers are always paid less than the value they create for their employer.
French economist Thomas Piketty says that capitalism leads to “unsustainable inequalities” that could fracture societies along wealth-lines.
How did it develop?
The first use of the word “capitalist” in English is attributed to Arthur Young in Travels in France, published in 1792. This was likely inspired by the earlier use of the phrase “capitalistes”, which appeared in the work of French academic Etienne Clavier as early as 1786.
The Economist reports that capitalism in its modern form can be traced back to the early Renaissance and the “enterprise and ingenuity” of Italian merchants. In city-states such as Florence, merchants realised that rather than selling products locally, in small amounts, there was the potential for “transforming a healthy local wool industry into an international business”.
This small-scale early capitalism saw merchants employ people to work for them on a regular basis for a regular income, while also exploring renting and lending activities.
According to historian Fernand Braudel, the Netherlands launched the world’s first stock market in the 17th century. This solidified the concept of investing capital, with investors putting their money into the market’s first companies – the Dutch East India Company and the Dutch West India Company.
The industrial revolution of the mid-18th century saw capitalism kick into overdrive. As historycrunch.com notes, prior to the mechanisation of industry, most people worked in cottage industries, in which goods for sale were produced on a small scale, usually in a home.
But the new industrial economy “required significant work and investment from individuals and not necessarily the government” in order to fund innovation, the sites adds. This perfectly suited the capitalist model, allowing for the foundation of what we would recognise as modern capitalism, in which “investment from individuals, whose actions were guided by the profit motive” formed the foundation of industrialising economies.
In 1776 Scottish economist Adam Smith published his work An Inquiry into the Nature and Causes of the Wealth of Nations (often shortened to The Wealth of Nations). In it, Smith argued that the government should not control the economy, but instead free trade and competition should rule, allowing individuals to choose how to spend their capital in order to produce more income.
Smith’s work was echoed by other economists such as fellow Scot David Hume. This dawning school of thought, coupled with the booming economy heralded by the industrial revolution, formed the foundation of “classical liberalism”, an ideology vital to capitalism that is based on economic individualism and the principles of economic freedom, private ownership, competition, self-interest and self-reliance.
Liberalism began to take root in politics, with Western countries abandoning protectionist economic policies, culminating in British Prime Minister Robert Peel’s decision to repeal the Corn Laws – a series of laws allowing the government to regulate corn prices – in 1846.
As the 20th century beckoned, capitalism’s grip on the world economy was becoming firmly cemented. Globalisation of trade ensured that capitalism was exported to the four corners of the globe, a process that was aided by the vast empires of the European powers and America.
However, opposition to capitalism began to spring up – first after the 1917 Russian revolution and again after the Great Depression in the 1930s. The foundation of the Soviet Union, a world superpower founded on communism, served as a threat to the Western capitalist doctrine throughout the 1900s until its fall in 1991.
Meanwhile, the Great Depression set in place an anti-capitalist sentiment that emerged in a similar form following the 2008 global financial crash. “The millions of people who lost their homes and jobs were left to fend for themselves”, said Harold James, professor of history and international affairs at Princeton University.
As James says, the financial crash of the 21st century “was enough to sow the seeds of anti-capitalist sentiment”. So too did the crash of the 1930s, but criticism of the system was reduced by the economic boom that followed the Second World War.
Throughout this period, advocates of capitalism, particularly in the US, became increasingly concerned by the appeal of Soviet communism. This led to the rise of McCarthyism in the US, a period known as the Red Scare, during which US senator Joseph McCarthy spearheaded a wave of political repression against perceived anti-capitalists.
As the West headed into the late 20th century, capitalism was enforced by the likes of Margeret Thatcher in the UK and Ronald Reagan in the US, both of whom reduced government spending, taxes and regulation. This laissez-faire approach to economics was intended to bolster the success of capitalism by making individuals as free to operate as they wished.
Reaganomics, as it became known, can be characterised by the president’s belief that “government is not the solution to our problem, government is the problem”. This suited the mood of the period, during which characters like Wall Street’s Gordon Gekko came to embody the “greed is good” age.
Speaking to Vox, author of Can American Capitalism Survive?, Steven Pearlstein, notes that the deregulation of the 1980s allowed for the growth of rampant inequality and means that the future of capitalism should be concerned with “let[ting] the pendulum swing a little bit back toward fairness and equality”.
This was thrown into sharp relief ten years ago when the global financial crash laid bare the shortcomings of capitalism.
A decade on, a new type of politician is on the rise, one who came of age in the late 2000s and remember the damage of that economic collapse. Alexandria Ocasio Cortez, a Democrat in the US, recently tweeted, “a living wage isn’t a gift, it’s a right. Workers are often paid far less than the value they create.”
In doing so she echoed Karl Marx’s most fundamental criticism of capitalism and with a new crop of like-minded politicians appearing across the West who share her views, the criticism is unlikely to get less vocal.
How did it change the world?
Capitalism is the foundation of every Western economy in the world today, a development that has only been challenged on a large scale by the rise of the Soviet Union and the “red wall” of the late 20th century.
Proponents of capitalism, for example the Yale University political theorist Robert Dahl, have pointed to improvements in nutrition, life expectancy, infant mortality, literacy, prevalence of child labour, education and available free time as side-effects of the spread of capitalist economics.
In this sense, Dahl makes the same argument as The Economist, that capitalism is rapidly pulling millions of people out of poverty, despite having some negative impacts.
However, capitalism’s detractors point to rising inequality between rich and poor, as well as the exploitation of the poorest in society, as reasons to abandon or reform capitalism. It is certainly true that in countries such as China, which only adopted capitalist tendencies as late as the 1970s, income inequality is growing.
At the same time economic growth is booming – China is currently one of the world’s fastest-growing economies, according to The World Bank.
Capitalism is, for now, the dominant economic ideology, but whether it remains in place for the duration of the 21st century and beyond remains to be seen. As American author Ursula Le Guin said: “We live in capitalism. Its power seems inescapable. So did the divine right of kings.”