The
history of capitalismCapitalism is an economic and social system in which the means of production are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in technologies and industries; and wages are paid to labor...
dates back to early forms of
merchant capitalismMerchant capitalism is a term used by economic historians to refer to the earliest phase in the development of capitalism as an economy and social system. The earliest stages of merchant capitalism were developed in the medieval Islamic world from the 9th century, and in medieval Europe from the...
practiced in the
Middle EastThe Middle East is a region that spans southwestern Asia, southeastern Europe, and northeastern Africa. It has no clear boundaries, often used as a synonym to Near East, in opposition to Far East...
and
Western EuropeWestern Europe is the collection of countries in the westernmost region of Europe, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a cultural entity—the region lying west of Central Europe...
during the
Middle AgesThe Middle Ages of European history is a period of European history covering roughly a millennium in the 5th century through 16th centuries. More specific starting and ending points are sometimes adopted by scholars to suit their respective specializations or current focus...
, though many economic historians consider the
NetherlandsThe Netherlands is a country in Northwestern Europe, constituting the major portion of the Kingdom of the Netherlands. It is a parliamentary democratic constitutional monarchy. The Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east...
as the first thoroughly
capitalistCapitalism is an economic and social system in which the means of production are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in technologies and industries; and wages are paid to labor...
country. In
early modernIn history, the early modern era of modern history follows the late Middle Ages. Historians refer to the period beginning from approximately 1500 AD and lasting to around 1800 AD. The events include the first European colonies, the rise of strong centralized governments, and the beginnings of...
EuropeEurope is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally divided from Asia to its east by the water divide of the Ural Mountains, the Ural River, the Caspian Sea, the Caucasus Mountains , and the Black Sea to the southeast...
it featured the wealthiest trading city (
AmsterdamAmsterdam is the capital and largest city of the Netherlands, located in the province of North Holland in the west of the country...
) and the first full-time
stock exchangeThe Amsterdam Stock Exchange is the former name for the stock exchange based in Amsterdam. It merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext, and is now known as Euronext Amsterdam.-History:...
. The inventiveness of the traders led to
insuranceInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
and retirement funds as well as such less benign phenomena as the boom-bust cycle, the world's first asset-inflation bubble, the
tulip maniaTulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...
of 1636-1637, and according to Murray Sayle, the world's first bear raider – Isaac le Maire, who forced prices down by dumping stock and then buying it back at a discount.
Over the course of the past five hundred years,
capitalIn economics, capital or capital goods or real capital are factors of production used to create goods or services that are not themselves significantly consumed in the production process. Capital goods may be acquired with money or financial capital...
has been accumulated by a variety of different methods, in a variety of scales, and associated with a great deal of variation in the concentration of economic power and wealth. Much of the history of the past five hundred years is concerned with the development of capitalism in its various forms, its condemnation and defense, and its rejection, particularly by
socialistsSocialism refers to various theories of economic organization advocating public or direct worker ownership and administration of the means of production and allocation of resources, and a society characterized by equal access to resources for all individuals with a method of compensation based on...
.
Islamic capitalism
The origins of
capitalismCapitalism is an economic and social system in which the means of production are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in technologies and industries; and wages are paid to labor...
and
free marketA free market describes a market without economic intervention and regulation by government except to regulate against force or fraud. The terminology is used by economists and in popular culture. A free market requires protection of property rights, but no regulation, no subsidization, no single...
s can be traced back to the
Islamic Golden AgeThe Islamic Golden Age or the Islamic Renaissance, is traditionally dated from the 9th to 13th centuries for 400 years C.E., but has been extended to the 15th century by recent scholarship...
and
Muslim Agricultural RevolutionThe period from 8th century to the 13th century witnessed a fundamental transformation in agriculture known as the Arab Agricultural Revolution, Medieval Green Revolution, Muslim Agricultural Revolution or Islamic Green Revolution...
, where the first
market economyA market economy is economy based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand....
and earliest forms of
merchant capitalismMerchant capitalism is a term used by economic historians to refer to the earliest phase in the development of capitalism as an economy and social system. The earliest stages of merchant capitalism were developed in the medieval Islamic world from the 9th century, and in medieval Europe from the...
took root between the 8th–12th centuries, which some refer to as "Islamic capitalism". A vigorous
monetary economyThe monetary economy is that part of a society's economic system where products and services are traded in exchange for money.A monetary economy stands in contrast to an economy based on bartering or to an economy where goods are not traded, i.e. where the goods are produced and consumed by the...
was created by Muslims on the basis of the expanding levels of
circulation of a stable high-value
currencyIn economics, the term currency can refer either to a particular currency, for example the US dollar, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply...
(the
dinarThe Dinar is the name of the official currency in several countries. The Gold Dinar was a coin dating back to the early days of Islam, issued by many rulers, and the Islamic gold dinar is a modern revival of it as a coin or unit of account, separate from the currencies listed below...
) and the integration of monetary areas that were previously independent. Innovative new
businessA business is a legally recognized organization designed to provide goods and/or services to consumers. Businesses are predominant in capitalist economies, most being privately owned and formed to earn profit that will increase the wealth of its owners and grow the business itself...
techniques and forms of business organisation were introduced by
economistAn economist is an expert in the social science of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s,
merchantA merchant is a businessman who trades in commodities that they do not produce themselves, in order to earn a profit.Merchants can be of two types:# A wholesale merchant operates in the chain between producer and retail merchant...
s and traders during this time. Such innovations included the earliest trading companies,
big businessBig Business is a term used to describe large corporations, in either an individual or collective sense. The term first came into use in a symbolic sense subsequent to the American Civil War, particularly after 1880, in connection with the combination movement that began in American business at...
es,
contractIn law, a contract is a binding legal agreement that is enforceable in a court of law. That is to say, a contract is an exchange of promises for the breach of which the law will provide a remedy....
s, bills of exchange, long-distance
international tradeInternational trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product . While international trade has been present throughout much of history , its economic, social, and political...
, the first forms of
partnershipA partnership is a type of business entity in which partners share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the...
(
mufawada) such as
limited partnershipA limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
s (
mudaraba), and the earliest forms of
creditCredit is the provision of resources by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources at a later date. It is any form of deferred payment...
,
debtDebt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned...
,
profitAccounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.A key difficulty in measuring profit is in defining costs...
,
lossLoss may refer to:*A negative difference between retail price and cost of production*An event in which the team or individual in question did not win.*Loss , a pitching statistic in baseball...
,
capitalIn economics, capital or capital goods or real capital are factors of production used to create goods or services that are not themselves significantly consumed in the production process. Capital goods may be acquired with money or financial capital...
(
al-mal),
capital accumulationMost generally, the accumulation of capital refers simply to the gathering or amassment of objects of value; the increase in wealth; or the creation of wealth...
(
nama al-mal),
circulating capitalCirculating capital is a term used by classical economists such as Adam Smith, David Ricardo and Karl Marx. It refers to physical capital and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services. This is roughly equal...
,
capital expenditureCapital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year...
,
revenueIn business, revenue or revenues is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Some companies also receive revenue from interest, dividends or royalties paid to them by other companies...
,
chequeA cheque, also spelled check , is a negotiable instrument[Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the payee cannot endorse the cheque in favour of a third party...]
s,
promissory noteA promissory note, referred to as a note payable in accounting, or commonly as just a "note", is a contract where one party makes an unconditional promise in writing to pay a sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms...
s, trusts (see
WaqfA waqf is an inalienable religious endowment in Islam, typically denoting a building or plot of land for Muslim religious or charitable purposes...
), startup companies,
savings accountSavings accounts are accounts maintained by retail financial institutions that pay interest but can not be used directly as money...
s, transactional accounts,
pawnA pawn is a peon, or other powerless person. It is often a word used to describe someone or something that is used or manipulated.It can also refer to:* Pawn , the weakest and most numerous piece in the game...
ing,
loanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
ing,
exchange rateIn finance, the exchange rates between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency...
s,
bankA bank is a financial institution licensed by a government. Its primary activities include borrowing and lending money.Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds...
ers,
money changerMoney changer is a trade involving exchanges of coins in different denomination. It is thought generally to be the origin of modern banking in Europe....
s,
ledgerA ledger or lieger , is the principal book for recording transactions...
s,
depositDeposit may refer to:*Deposit account, the liability owed by the bank to its depositor*Damage deposit taken in relation to rental or an item or property*Deposit , New York*Deposit , New York...
s,
assignmentsAn assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
, the
double-entry bookkeeping systemDouble-entry bookkeeping system ensures the integrity of the financial values recorded in a financial accounting system. It does this by ensuring that each individual transaction is recorded in at least two different nominal ledgers of the financial accounting system and so implementing a double...
, and
lawsuitA lawsuit is a civil action brought before a court of law in which a plaintiff, a party who claims to have received damages from a defendant's actions, seeks a legal or equitable remedy. The defendant is required to respond to the plaintiff's complaint...
s.
OrganizationAn organization is a social arrangement which pursues collective goals, which controls its own performance, and which has a boundary separating it from its environment...
al
enterprisesA business is a legally recognized organization designed to provide goods and/or services to consumers. Businesses are predominant in capitalist economies, most being privately owned and formed to earn profit that will increase the wealth of its owners and grow the business itself...
similar to
corporationA corporation is a legal entity separate from the shareholders and employees. In British tradition it is the term designating a body corporate, where it can be either a corporation sole or a corporation aggregate...
s independent from the
stateA sovereign state is a political association with effective internal and external sovereignty over a geographic area and population which is not dependent on, or subject to any other power or state...
also existed in the medieval Islamic world, while the
agencyAgency is an area of commercial law dealing with a contractual or quasi-contractual tripartite, or non-contractual set of relationships when an agent is authorized to act on behalf of another to create a legal relationship with a Third Party...
institution was also introduced. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.
The systems of
contractIn law, a contract is a binding legal agreement that is enforceable in a court of law. That is to say, a contract is an exchange of promises for the breach of which the law will provide a remedy....
relied upon by merchants was very effective. Merchants would buy and sell on
commissionThe payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
, with money
loanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
ed to them by wealthy
investorAn investor is any party that makes an investment.The term has taken on a specific meaning in finance to describe the particular types of people and companies that regularly purchase equity or debt securities for financial gain in exchange for funding an expanding company...
s, or a joint
investmentInvestment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to...
of several merchants, who were often Muslim, Christian and Jewish. Recently, a collection of documents was found in an
EgyptEgypt , officially the Arab Republic of Egypt, is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Western Asia...
ian
synagogueA synagogue is a Jewish house of prayer....
shedding a very detailed and human light on the life of medieval Middle Eastern merchants. Business
partnershipA partnership is a type of business entity in which partners share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the...
s would be made for many
commercial venturesA joint venture is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise...
, and bonds of
kinshipKinship is a relationship between any entities that share a genealogical origin, through either biological, cultural, or historical descent. In anthropology the kinship system includes people related both by descent and marriage, while usage in biology includes descent and mating...
enabled
trade networkA trade route is a logistical network identified as a series of pathways and stoppages used for the commercial transport of cargo. Allowing goods to reach distant markets, a single trade route contains long distance arteries which may further be connected to several smaller networks of commercial...
s to form over huge distances. Networks developed during this time enabled a world in which
moneyMoney is anything that is generally accepted as payment for goods and services and repayment of debts. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value, and occasionally, a standard of deferred payment...
could be promised by a
bankA bank is a financial institution licensed by a government. Its primary activities include borrowing and lending money.Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds...
in
BaghdadBaghdad is the capital of Iraq and of Baghdad Governorate, with which it is coterminous. Having a municipal population estimated at 6.5 million, it is the largest city in Iraq and the second largest in the Arab World....
and cashed in
SpainSpain , officially the Kingdom of Spain , is a country located in southwestern Europe on the Iberian Peninsula.
[The Spanish constitution does not establish any official denomination of the country, even though España , Estado español and Nación española are used interchangeably...]
, creating the
chequeA cheque, also spelled check , is a negotiable instrument[Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the payee cannot endorse the cheque in favour of a third party...]
system of today. Each time items passed through the cities along this extraordinary network, the city imposed a
taxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law.Taxes are also imposed by many subnational entities...
, resulting in high prices once reaching the final destination. These innovations made by Muslims and Jews laid the foundations for the modern
economic systemAn economic system is the system of production, distribution and consumption of goods and services of an economy. Alternatively, it is the set of principles and techniques by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive...
.
The Crisis of the 14th Century and the "Pre-History of Capitalism"
According to some historians, the modern capitalist system has its origin in the "crisis of the fourteenth century," a conflict between the land-owning aristocracy and the agricultural producers, the serfs. Feudal arrangements inhibited the development of capitalism in a number of ways. Because serfs were forced to produce for lords, they had no interest in technological innovation; because serfs produced to sustain their own families, they had no interest in co-operating with one another. Because lords owned the land, they relied on force to guarantee that they were provided with sufficient food. Because lords were not producing to sell on the market, there was no competitive pressure for them to innovate. Finally, because lords expanded their power and wealth through military means, they spent their wealth on military equipment or on conspicuous consumption that helped foster alliances with other lords; they had no incentive to invest in developing new productive technologies.
This arrangement was shaken by the demographic crisis of the fourteenth century. This crisis had several causes: agricultural productivity reached its technological limitations and stopped growing; bad weather led to the Great Famine of 1315-1317; the Black Death in 1348-1350 led to a population crash. These factors led to a decline in agricultural production. In response feudal lords sought to expand agricultural production by expanding their domains through warfare; they therefore demanded more tribute from their serfs to pay for military expenses. In England, many serfs rebelled. Some moved to towns, some purchased land, and some entered into favorable contracts to rent lands, from lords desperate to repopulate their estates.
The collapse of the
manorialManorialism or Seigneurialism or Feudal Society was the organizing principle of rural economy and society widely practiced in medieval western and parts of central Europe...
system in England created a class of tenant-farmers with more freedom to market their goods and thus more incentive to invest in new technologies. Lords who did not want to rely on rents could buy out or evict tenant farmers, but then had to hire free-labor to work their estates – giving them an incentive in investing in production. This process was encouraged by the “enclosure movement,” which transferred public lands to large landowners, who used the land to graze sheep rather than produce food. As England’s wool exports grew in the fifteenth century, the process of enclosure accelerated, forcing many tenant-farmers to give up farming and seek wage-labor. According to Karl Marx, the rise of the contractual relationship is inextricably bound to the end of the obligatory relationship between serfs and lords. Marx characterizes this transformation as “the historical process of divorcing the producer from the means of production.” It was this “divorcing” that turned the serf’s land into the lord’s capital. According to Marx, this rearrangement led to a new division of classes:
- two very different kinds of commodity owners; on the one hand, the owners of money, means of production, means of subsistence, who are eager to valorize the sum of value they have appropriated by buying the labour power of others; on the other hand, free workers, the sellers of their own labor-power, and therefore the sellers of labour. Free workers, in the double sense that they neither form part of the means of production themselves … nor do they own the means of production” that transformed land and even money into what we now call “capital.”
Marx labeled this period the "pre-history of capitalism".
It was, in effect, feudalism that began to lay some of the foundations necessary for the development of mercantilism, a precursor to capitalism. Feudalism took place mostly in Europe and lasted from the medieval period up through the 16th century. Feudal manors were almost entirely self sufficient, and therefore limited the role of the market. This stifled the growth of capitalism. However, the relatively sudden emergence of new technologies and discoveries, particularly in the industries of agriculture and exploration, revitalized the growth of capitalism. The most important development at the end of Feudalism was the emergence of “the dichotomy between wage earners and capitalist merchants”. With mercantilism, the competitive nature means there are always winners and losers, and this is clearly evident as feudalism transitions into mercantilism.
Merchant capitalism and mercantilism
The earliest stages of
merchant capitalismMerchant capitalism is a term used by economic historians to refer to the earliest phase in the development of capitalism as an economy and social system. The earliest stages of merchant capitalism were developed in the medieval Islamic world from the 9th century, and in medieval Europe from the...
can be traced back to the
medieval Islamic worldThe Islamic Golden Age or the Islamic Renaissance, is traditionally dated from the 9th to 13th centuries for 400 years C.E., but has been extended to the 15th century by recent scholarship...
during the 9th-12th centuries, where a vigorous
monetaryThe monetary economy is that part of a society's economic system where products and services are traded in exchange for money.A monetary economy stands in contrast to an economy based on bartering or to an economy where goods are not traded, i.e. where the goods are produced and consumed by the...
market economyA market economy is economy based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand....
was created on the basis of the expanding levels of circulation of a stable high-value
currencyIn economics, the term currency can refer either to a particular currency, for example the US dollar, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply...
(the
dinarThe Dinar is the name of the official currency in several countries. The Gold Dinar was a coin dating back to the early days of Islam, issued by many rulers, and the Islamic gold dinar is a modern revival of it as a coin or unit of account, separate from the currencies listed below...
) and the integration of monetary areas that were previously independent; and by some scholars,
Rodney StarkRodney Stark is an American sociologist of religion. He grew up in Jamestown, North Dakota in a Lutheran family. He spent time in the U.S. Army and worked as a journalist before pursuing graduate studies at The University of California, Berkeley...
particularly, to medieval Italian and French monastic estates. Innovative new
businessA business is a legally recognized organization designed to provide goods and/or services to consumers. Businesses are predominant in capitalist economies, most being privately owned and formed to earn profit that will increase the wealth of its owners and grow the business itself...
techniques and forms of business organisation were introduced by
economistAn economist is an expert in the social science of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s,
merchantA merchant is a businessman who trades in commodities that they do not produce themselves, in order to earn a profit.Merchants can be of two types:# A wholesale merchant operates in the chain between producer and retail merchant...
s and
tradersA merchant is a businessman who trades in commodities that they do not produce themselves, in order to earn a profit.Merchants can be of two types:# A wholesale merchant operates in the chain between producer and retail merchant...
during this time. Such innovations included trading companies, bills of exchange,
contractIn law, a contract is a binding legal agreement that is enforceable in a court of law. That is to say, a contract is an exchange of promises for the breach of which the law will provide a remedy....
s, long-distance
tradeTrade is the voluntary exchange of goods, services, or both. Trade is also called commerce or transaction. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious...
,
big businessBig Business is a term used to describe large corporations, in either an individual or collective sense. The term first came into use in a symbolic sense subsequent to the American Civil War, particularly after 1880, in connection with the combination movement that began in American business at...
es, the first forms of
partnershipA partnership is a type of business entity in which partners share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the...
(
mufawada in
ArabicArabic is a Central Semitic language, thus related to and classified alongside other Semitic languages such as Hebrew and the Neo-Aramaic languages. In terms of speakers, the Arabic macrolanguage is the largest member of the Semitic language family. It is spoken by more than 280 million people as...
) such as
limited partnershipA limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
s (
mudaraba), and the concepts of
creditCredit is the provision of resources by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources at a later date. It is any form of deferred payment...
,
profitIn economics, economic profit is the difference between a company's total revenue and its opportunity costs. It is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of...
,
capitalIn economics, capital or capital goods or real capital are factors of production used to create goods or services that are not themselves significantly consumed in the production process. Capital goods may be acquired with money or financial capital...
(
al-mal) and
capital accumulationMost generally, the accumulation of capital refers simply to the gathering or amassment of objects of value; the increase in wealth; or the creation of wealth...
(
nama al-mal). Many of these early capitalist ideas were further advanced in
medieval EuropeThe Middle Ages of European history is a period of European history covering roughly a millennium in the 5th century through 16th centuries. More specific starting and ending points are sometimes adopted by scholars to suit their respective specializations or current focus...
from the 13th century onwards.
There is a separate but also related tradition of the emergence of commerce and capitalism related to monastic estates in Italy and France and later the independent city republics of Italy during the late middle ages and into the early modern period. Innovations in banking, insurance, accountancy, and various production and commercial practices linked closely to a 'spirit' of frugality, reinvestment, and city life and promoted attitudes which sociologists have tended to associate only with northern Europe, Protestantism and a much later age. The city republics maintained their political independence from Empire and Church, traded with north Africa, the middle East and Asia, and introduced Eastern practices as well as innovated substantially, producing many links between of culture and commerce. They were also considerably different from the absolutist monarchies of Spain and France, and were strongly attached to civic liberty and anti-monarchical republications. ; ; .
Modern capitalism didn't arise until the
early modern periodIn history, the early modern era of modern history follows the late Middle Ages. Historians refer to the period beginning from approximately 1500 AD and lasting to around 1800 AD. The events include the first European colonies, the rise of strong centralized governments, and the beginnings of...
, between the 16th and 18th centuries, when
merchant capitalismMerchant capitalism is a term used by economic historians to refer to the earliest phase in the development of capitalism as an economy and social system. The earliest stages of merchant capitalism were developed in the medieval Islamic world from the 9th century, and in medieval Europe from the...
and
mercantilismMercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is "unchangeable." Economic assets or capital, are represented by bullion held by the state, which is best increased through a...
were established. This period was associated with geographic discoveries by merchant overseas traders, especially from England, Portugal, Spain and the Low Countries; the
European colonization of the AmericasThe start of the European colonization of the Americas is typically dated to 1492, although there was at least one earlier colonization effort...
; and the rapid growth in overseas trade. Referring to this period in the
Communist Manifesto, Marx wrote:
The discovery of America, the rounding of the Cape, opened up fresh ground for the rising bourgeoisie. The East-Indian and Chinese markets, the colonisation of America, trade with the colonies, the increase in the means of exchange and in commodities generally, gave to commerce, to navigation, to industry, an impulse never before known, and thereby, to the revolutionary element in the tottering feudal society, a rapid development." http://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm
Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods. Noting the various pre-capitalist features of mercantilism,
Karl PolanyiKarl Paul Polanyi was a Hungarian intellectual known for his opposition to traditional economic thought and his influential book The Great Transformation.-Early life:...
argued that "
mercantilismMercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is "unchangeable." Economic assets or capital, are represented by bullion held by the state, which is best increased through a...
, with all its tendency toward commercialization, never attacked the safeguards which protected [the] two basic elements of production - labor and land - from becoming the elements of commerce"; thus with mercantilism regulation was more akin to feudalism than capitalism. According to Polanyi, "not until 1834 was a competitive labor market established in England, hence industrial capitalism as a social system cannot be said to have existed before that date."
Under mercantilism, European
merchantA merchant is a businessman who trades in commodities that they do not produce themselves, in order to earn a profit.Merchants can be of two types:# A wholesale merchant operates in the chain between producer and retail merchant...
s, backed by state controls,
subsidiesA subsidy is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more...
, and
monopoliesIn economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it...
, made most of their profits from the buying and selling of goods. In the words of
Francis BaconFrancis Bacon,1st Viscount St Alban KC , son of Nicholas Bacon by his second wife Anne Bacon, was an English philosopher, statesman, scientist, lawyer, jurist, and author. He served both as Attorney General and Lord Chancellor of England...
, the purpose of mercantilism was "the opening and well-balancing of trade; the cherishing of manufacturers; the banishing of idleness; the repressing of waste and excess by sumptuary laws; the improvement and husbanding of the soil; the regulation of prices..." Similar practices of economic regimentation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of the
absolutismThe term Absolutism may refer to:* Absolute idealism, an ontologically monistic philosophy attributed to G.W.F. Hegel. It is Hegel's account of how being is ultimately comprehensible as an all-inclusive whole...
, the state superseded the local
guildA guild is an association of craftsmen in a particular trade.The earliest guilds were formed as confraternities of workers. They were organized in a manner something between a trade union, a cartel and a secret society...
s as the regulator of the economy.
Among the major tenets of mercantilist theory was
bullionismBullionism is an economic theory that defines wealth by the amount of precious metals owned. Bullionism is an early or primitive form of mercantilism...
, a doctrine stressing the importance of accumulating precious metals. Mercantilists argued that a state should export more goods than it imported so that foreigners would have to pay the difference in precious metals. Mercantilists asserted that only raw materials that could not be extracted at home should be imported; and promoted government subsides, such as the granting of monopolies and protective
tariffA tariff is a duty imposed on goods when they are moved across a political boundary.-History:...
s, were necessary to encourage home production of manufactured goods.
Proponents of mercantilism emphasized state power and overseas conquest as the principal aim of economic policy. If a state could not supply its own raw materials, according to the mercantilists, it should acquire colonies from which they could be extracted. Colonies constituted not only sources of supply for raw materials but also markets for finished products. Because it was not in the interests of the state to allow competition, to help the mercantilists, colonies should be prevented from engaging in manufacturing and trading with foreign powers.
Chartered trading companies
The British
East India CompanyEast India Company was a historical English company, founded in 1600, and chartered with the monopoly of trading with Southeast Asia, East Asia, and India...
and the
Dutch East India CompanyThe Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia. It was the first multinational corporation in the world and the first company to issue stock...
launched an era of large state chartered trading companies. These companies were characterized by their
monopolyIn economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it...
on trade, granted by
letters patentLetters patent are a type of legal instrument in the form of an open letter issued by a monarch or government, granting an office, right, monopoly, title, or status to a person or to some entity such as a corporation. The opposite of letters patent are letters close , which are personal in nature...
s provided by the state. Recognized as chartered joint-stock companies by the state, these companies enjoyed power, ranging from lawmaking, military, and treaty-making privileges. Characterized by its
colonialColonialism is the building and maintaining of colonies in one territory by people from another territory. Sovereignty over the colony is claimed by the metropole...
and
expansionaryIn general, expansionism consists of expansionist policies of governments and states. While some have linked the term to promoting economic growth , more commonly expansionism refers to the doctrine of a nation's expanding its territorial base usually by means of military aggression...
powers by states, powerful nation-states sought to accumulate
precious metalA precious metal is a rare naturally occurring metallic chemical element of high economic value,which is not radioactive . Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...
s, and military conflicts arose. During this era, merchants, who had previously traded on their own, invested capital in the East India Companies and other colonies, seeking a return on investment.
Enclosures and the transition from feudalism
The transition from the feudal organization of society to the earliest forms of capitalism happened in periods differing from country to country. The earliest phase appears to be in North Italy, according to Cambridge political philosopher and historian
Quentin SkinnerQuentin Robert Duthie Skinner is the Barber Beaumont Professor of the Humanities at Queen Mary, University of London.-Biography:...
this development was noticed in the 12th century by German bishop Otto of Friesing, who recorded the growth of town life, the loyalty of landed nobility to town authorities, and the emergence of republicanism and belief in civic liberty .
In
ScotlandScotland is a country that is part of the United Kingdom. Occupying the northern third of the island of Great Britain, it shares a border with England to the south and is bounded by the North Sea to the east, the Atlantic Ocean to the north and west, and the North Channel and Irish Sea to the...
, during the 18th century, peasants were dispossessed of the land to which they were bonded and which allowed them to be self-sufficient. The
LairdA Laird is a member of the gentry and is a heritable title in Scotland. In the non-peerage table of precedence, a Laird ranks below a Baron and above an Esquire.-Etymology:...
s confiscated the land which was property of the
clanScottish clans , give a sense of identity and shared descent to people in Scotland and to their relations throughout the world, with a formal structure of Clan Chiefs officially registered with the court of the Lord Lyon, King of Arms which controls the heraldry and Coat of Arms...
. Between 1773-4, 1500 people emigrated from the county of
SutherlandSutherland is a registration county, lieutenancy area and historic administrative county of Scotland. It is now within the Highland local government area. In Gaelic the area is referred to according to its traditional areas: Dùthaich 'Ic Aoidh , Asainte , and Cataibh...
to the
Colonial AmericaThe term colonial history of the United States refers to the history of the land that would become the United States from the start of European settlement to the time of independence from Europe, and especially to the history of the thirteen colonies of Britain which declared themselves independent...
. Later in the 18th century the
GaelsThe Gaels are an ethno-linguistic group which originated in Ireland and subsequently spread to Scotland and the Isle of Man. They are speakers of the Goidelic languages – Irish, Scottish Gaelic and Manx...
were both driven from the land and forbidden to emigrate. In Sutherland, between 1814-20, the remaining 15,000 inhabitants, about 3000 families, were systematically hunted and rooted out. Their villages were pulled down and burnt, and their fields turned into pasturage. It was reported that "British soldiers enforced this eviction, and came to blows with the inhabitants. One old woman was burnt to death in the flames of the hut, which she refused to leave. Thus this fine lady appropriated of land that had from time immemorial belonged to the clan ... In the year 1835 the 15,000 Gaels were already replaced by 131,000 sheep. A similar disruptive transition took place in England, Germany, Poland and India, though
mercantilismMercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is "unchangeable." Economic assets or capital, are represented by bullion held by the state, which is best increased through a...
was the dominant economic system for many nations as they transitioned from a fully 'state' operated feudal system to capitalism.
For
Paul VirilioPaul Virilio is a cultural theorist and urbanist. He is best known for his writings about technology as it has developed in relation to speed and power, with diverse references to architecture, the arts, the city and the military....
, the transition from feudalism to capitalism was driven not primarily by the politics of wealth and production techniques but by the mechanics of war. Virilio argues that the traditional feudal fortified city disappeared because of the increasing sophistication of weapons and possibilities for warfare. For Virilio, the concept of siege warfare became rather a war of movement. In
Speed and Politics, he argues that 'history progresses at the speed of its weapons systems'.
Industrial capitalism and laissez-faire
Mercantilism declined in Great Britain in the mid-18th century, when a new group of economic theorists, led by
Adam SmithAdam Smith was a Scottish moral philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, challenged fundamental mercantilist doctrines as the belief that the amount of the world's wealth remained constant and that a state could only increase its wealth at the expense of another state. However, in more undeveloped economies, such as
PrussiaPrussia was a historic state originating out of the Duchy of Prussia and the Margraviate of Brandenburg. For centuries this state had substantial influence on German and European history...
and Russia, with their much younger manufacturing bases, mercantilism continued to find favor after other states had turned to newer doctrines.
The mid-18th century gave rise to
industrial capitalism, made possible by the accumulation of vast amounts of capital under the merchant phase of capitalism and its investment in machinery. Industrial capitalism, which Marx dated from the last third of the 18th century, marked the development of the
factoryA factory or manufacturing plant is an industrial building where workers manufacture goods or supervise machines processing one product into another. Most modern factories have large warehouses or warehouse-like facilities that contain heavy equipment used for assembly line production...
system of manufacturing, characterized by a complex division of labor between and within work process and the routinization of work tasks; and finally established the global domination of the capitalist mode of production.
During the resulting
Industrial RevolutionThe Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, and transport had a profound effect on the socioeconomic and cultural conditions in the United Kingdom. The changes subsequently spread throughout Europe, North...
, the industrialist replaced the merchant as a dominant actor in the capitalist system and effected the decline of the traditional handicraft skills of
artisanAn artisan is a skilled manual worker who crafts items that may be functional or strictly decorative, including furniture, clothing, jewelry, household items, and tools...
s,
guildA guild is an association of craftsmen in a particular trade.The earliest guilds were formed as confraternities of workers. They were organized in a manner something between a trade union, a cartel and a secret society...
s, and
journeymenA journeyman is a male trader or crafter who has completed an apprenticeship.-Origin of the title:The word 'journeyman' comes from the French word journée, meaning the period of one day; this refers to their right to charge a fee for each day's work. They would normally be employed by a master...
. Also during this period, capitalism marked the transformation of relations between the British landowning gentry and peasants, giving rise to the production of
cash cropIn agriculture, a cash crop is a crop which is grown for profit.The term is used to differentiate from subsistence crops, which are those fed to the producer's own livestock or grown as food for the producer's family...
s for the market rather than for subsistence on a feudal
manorManorialism or Seigneurialism or Feudal Society was the organizing principle of rural economy and society widely practiced in medieval western and parts of central Europe...
. The surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture.
The rise of industrial capitalism was also associated with the decline of mercantilism. Mid- to late-nineteenth-century Britain is widely regarded as the classic case of
laissez-faireThe general meaning of Laissez-faire is to allow events to take their own course, or to let people do what they choose. The term is a French phrase literally meaning "let it be" or "leave it alone"....
capitalism. Laissez-faire gained favor over mercantilism in Britain in the 1840s with the repeal of the
Corn LawsThe Corn Laws were import tariffs designed to support domestic British corn prices against competition from less expensive foreign imports between 1815 and 1846. The tariffs were introduced by the Importation Act 1815 and repealed by the Importation Act 1846...
and the
Navigation ActsThe English Navigation Acts were a series of laws which restricted the use of foreign shipping for trade between England and its colonies, which started in 1651. At their outset, they were a factor in the Anglo-Dutch Wars...
. In line with the teachings of the classical political economists, led by
Adam SmithAdam Smith was a Scottish moral philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
and
David RicardoDavid Ricardo was an English political economist, often credited systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. He was also a member of Parliament, businessman, financier and speculator, who amassed a considerable...
, Britain embraced
liberalismClassical liberalism is a political ideology that developed by the middle of the nineteenth century in England, western Europe, and the Americas, which provided a coherent vision of how society should be organized. Central to the classical liberalism of the nineteenth century is a commitment to...
, encouraging competition and the development of a
market economyA market economy is economy based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand....
.
Nineteenth century
During the 19th century, capitalism allowed great increases in productivity, whilst triggering great social changes.
The Napoleonic Wars
As the nineteenth century began, the
United KingdomThe United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands...
was locked in a struggle with Napoleonic
FranceFrance , officially the French Republic , is a country located in Western Europe, with several overseas islands and territories located on other continents. Metropolitan France extends from the Mediterranean Sea to the English Channel and the North Sea, and from the Rhine to the Atlantic Ocean...
that did much to define the terms for institutional developments, capitalist and otherwise, in the remainder of the century.
Napoleon sought to introduce a "continental system" that would render Europe economically autonomous, making the Royal Navy's blockading power irrelevant. It involved such stratagems as the use of beet
sugarSugar is a class of edible crystalline substances, mainly sucrose, lactose, and fructose. Human taste buds interpret its flavor as sweet. Sugar as a basic food carbohydrate primarily comes from sugar cane and from sugar beet, but also appears in fruit, honey, sorghum, sugar maple , and in many...
in preference to the cane sugar that had to be imported from the tropics.
The Continental system did cause some mercantile circles within the UK to agitate for peace, but the government was able to resist that agitation, in part because the United Kingdom was well into the
industrial revolutionThe Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, and transport had a profound effect on the socioeconomic and cultural conditions in the United Kingdom. The changes subsequently spread throughout Europe, North...
. The war stimulated the growth of certain industries --
pig-ironPig iron is the intermediate product of smelting iron ore with coke, usually with limestone as a flux. Pig iron has a very high carbon content, typically 3.5–4.5%, which makes it very brittle and not useful directly as a material except for limited applications.The traditional shape of the molds...
output, which was just 68,000 tons in 1788, soared to 244,000 tons by 1806.
Banking after Napoleon
The growth of Britain's industry meant the growth of her system of finance and credit. At the beginning of the century, banking was an affair for clubs of very wealthy families. But gradually, and at an accelerating pace after the collapse of the threat from Napoleon, a new sort of banking emerged, owned by anonymous stockholders, run by professional managers, and the recipient of the deposits of a growing body of small savers.
The new breed of banks was new in prominence, not newly invented. A Quaker family, the Barclays, had been banking in this manner since 1690. But this model of banking became ever more prominent through the nineteenth century.
The UK's growing importance as the center of capitalism in this period benefitted from the great degree to which the business world of Britain was open to talented foreigners, like Johann Baring, who had come from Bremen in 1717 and turned himself into a successful cloth merchant in
ExeterExeter is a city and district in Devon, England; it is the county town of Devon. Exeter is located approximately northeast of Plymouth, and southwest of Bristol, on the River Exe. The city has a population of 111,076 according to the 2001 Census....
. His sons, John and Francis Baring, set up a trading company in
London[]London is the capital of England and the United Kingdom. It has been a major settlement for two millennia, and the history of London goes back to its founding by the Romans, when it was named Londinium. London's core, the ancient City of London, the 'square mile', retains its medieval boundaries...
, and Francis became one of the most influential bankers of his time. By his death in 1810 he was allegedly worth 7 million pounds.
Indeed, the Barings bank that lived on after Sir Francis' death was important enough to become the target of a barb from George Gordon Byron. In 1823, that great poet wrote: "Who makes politics run glibber all?/ The shade of Bonaparte's noble daring?/ Jew
RothschildThe Rothschild banking family of England was founded in 1798 by Nathan Mayer von Rothschild who first settled in Manchester but then moved to London. Nathan was sent there from his home in Frankfurt by his father, Mayer Amschel Rothschild...
and his fellow-Christian, Baring."
The end of expensive hostilities and the rebound in trade after Napoleon's fall led to an expansion in the bullion reserves held by the
Bank of EnglandThe Bank of England is, despite its name, the central bank of the whole of the United Kingdom and is the model on which most modern, large central banks have been based. It was established in 1694 to act as the English Government's banker, and to this day it still acts as the banker for the UK...
, from a low of under 4 million pounds in 1821 to 14 million pounds by late 1824. This was also the period during which the
Erie CanalThe Erie Canal is a man-made waterway in New York that runs about 363 miles from Albany on the Hudson River to Buffalo at Lake Erie, completing a navigable water route from the Atlantic Ocean to the Great Lakes...
was under construction in the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
, and many investors in Europe saw opportunities in America, just as many investors in the developed world look to the
emerging marketsThe term emerging markets is used to describe a nation's social or business activity in the process of rapid growth and industrialization. Currently, there are approximately 28 emerging markets in the world, with the economies of India and China considered to be by far the two largest...
of today.
The end of the Bank of the United States
President
Andrew JacksonAndrew Jackson was the seventh President of the United States . He was military governor of Florida , commander of the American forces at the Battle of New Orleans , and eponym of the era of Jacksonian democracy...
's hostility to the
Bank of the United StatesBank of the United States may refer to:* First Bank of the United States * Second Bank of the United States * Bank of United States , a commercial bank not affiliated with the government-See also:...
was perhaps
the central issue of the election campaign of 1832. The following year, the Bank of the United States ceased to receive public funds.
There were several results of this action—one was an increase in the importance of the London banks to the U.S. economy, and another was an expansion of the state banking systems, amongst which the federal treasury was now splitting its deposits.
The U.S. government also sold huge amounts of
public landIn all modern states, some land is held by central or local governments. This is called public land. The system of tenure of public land, and the terminology used, varies between countries...
in Jackson's second term, lands acquired at the cost of dispossessing their inhabitants. It deposited the proceeds from these sales in its "pet" state banks. As the money supply expanded, asset prices rose, increasing the appetite of Europe's investors, creating a bubble. Between 1830 and 1837, the US trade deficit was $140 million.
By 1839 this bubble burst. The Union Bank of Mississippi collapsed. As credit conditions worsened, American states that had borrowed from London banks proved unwilling to raise taxes to pay, and a wave of defaults (including the default of two of the wealthiest states,
MarylandMaryland is a state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia and the District of Columbia to the south and west, Pennsylvania to the north, and Delaware to the east. It is comparable in size to the European country of Belgium. According to the U.S...
and
PennsylvaniaThe Commonwealth of Pennsylvania , often colloquially referred to as PA by natives and Northeasterners, is a state located in the Northeastern and Middle Atlantic regions of the United States...
) resulted.
A Civil War and the Suez Peninsula
Throughout the early decades of the nineteenth century, capitalism as a financial phenomenon was becoming intertwined with the new methods of
manufacturingManufacturing is the use of machines, tools and labor to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
, especially of textiles.
This intertwining was aided by
Eli WhitneyEli Whitney was an American inventor best known as the inventor of the cotton gin. This was one of the key inventions of the industrial revolution and shaped the economy of the antebellum South. Whitney's invention made short staple cotton into a profitable crop, which strengthened the economic...
's invention of the
cotton ginA cotton gin is a machine that quickly and easily separates the cotton fibers from the seeds, a job previously done by hand. These seeds are either used again to grow more cotton or, if badly damaged, are disposed of...
in 1793. During the
OrleanistThe Orléanists were a French right-wing/center-right political faction or party which arose out of the French Revolution, and ceased to have a separate existence shortly after the establishment of the Third Republic in 1870...
period in France, the financial and manufacturing methods pioneered in England were enthusiastically adopted in
FranceFrance , officially the French Republic , is a country located in Western Europe, with several overseas islands and territories located on other continents. Metropolitan France extends from the Mediterranean Sea to the English Channel and the North Sea, and from the Rhine to the Atlantic Ocean...
.
It came as a great shock to mercantile circles within both of those countries, then, when civil war began in the United States in 1861, and President
Abraham LincolnAbraham Lincoln was the 16th President of the United States, serving from March 1861 until his assassination in April 1865. He successfully led his country through its greatest internal crisis, the American Civil War, preserving the Union and ending slavery...
closed the ports of the U.S. within the area of the rebellion to international commerce, a closure that he (somewhat inaccurately) described as a "blockade."
The textile industries in Britain and France shifted to reliance upon cotton from
AfricaAfrica is the world's second-largest and second most-populous continent, after Asia. At about 30.2 million km² including adjacent islands, it covers 6% of the Earth's total surface area and 20.4% of the total land area. With a billion people in 61 territories, it accounts for about 14.8% of the...
and
AsiaAsia is the world's largest and most populous continent, located in the eastern and northern hemispheres. It covers 8.6% of the earth's total surface area and with approximately 4 billion people, it hosts 60% of the world's current human population.Asia is traditionally defined as part of the...
during the course of the U.S. civil war, and this fact created pressure for an Anglo-French controlled canal through the
SuezSuez is a seaport town in north-eastern Egypt, located on the north coast of the Gulf of Suez, near the southern terminus of the Suez Canal, having the same boundaries as Suez governorate. It has two harbors, Port Ibrahim and Port Tawfiq, and extensive port facilities...
peninsula. That canal opened a little more than four years after the war ended, November 17, 1869. Intriguingly, it was also in 1869 that a railway finally spanned the
North AmericaNorth America is the northern continent of the Americas, situated in the Earth's northern hemisphere and in the western hemisphere. It is bordered on the north by the Arctic Ocean, on the east by the North Atlantic Ocean, on the southeast by the Caribbean Sea, and on the west by the North Pacific...
n continent, as the Union Pacific work crew met that of the
Central PacificThe Central Pacific Railroad was the California-to-Utah portion of the First Transcontinental Railroad in North America.Many proposals to build a transcontinental railroad failed because of the disputes over slavery in Washington; with the secession of the South, the modernizers in the Republican...
in
UtahUtah is a western state of the United States. It was the 45th state admitted to the Union, on January 4, 1896. Approximately 80 percent of Utah's 2,736,424 people live along the Wasatch Front, centering around Salt Lake City. In contrast, vast expanses of the state are nearly uninhabited, making...
. Capitalism and the engine of profit was making the globe a smaller place.
Also, older innovations were made routine, even mechanical, parts of financial life during this century. For example, the
Bank of EnglandThe Bank of England is, despite its name, the central bank of the whole of the United Kingdom and is the model on which most modern, large central banks have been based. It was established in 1694 to act as the English Government's banker, and to this day it still acts as the banker for the UK...
had first issued bank notes during the seventeenth century, yet those notes were hand written. After 1725 they were partially printed, but cashiers still had to sign each note and make them payable to a named person. But in 1844 parliament passed the Bank Charter Act tying these notes to gold reserves, effectively creating the institution of central banking and monetary policy. The notes have been fully printed since 1855.
The Slow Fade of British Hegemony
Through the final decades of the nineteenth century, from the opening of the canal forward, the United Kingdom slowly lost its pre-eminence in manufacturing and finance. There is a lot of debate about the reasons for this; indeed, historian
Paul KennedyPaul Michael Kennedy CBE, FBA , is a British historian specialising in international relations and grand strategy. He has published prominent books on the history of British foreign policy and Great Power struggles.-Biography:...
has called it "one of the most investigated issues in economic history."
There were many elements, including the obsolescence of the personal management style, confrontational labor relations, inadequate capital investment, and the rise of at least three competing industrial giants—Germany, Japan, and the United States. There were also cultural factors such as generational differences and the class-conscious educational system at play.
In 1880, the United Kingdom still contained 22.9 percent of total world manufacturing output, but that figure was shrinking. Also, in 1880, its share of world trade was 23.2 percent—that would be 14.1 percent in 1911 - 1913.
Finance capitalism and monopoly capitalism
In the late 19th century, the control and direction of large areas of industry came into the hands of
trustTrust may refer to:* Trust , relationship of relianceIn law:* Trust law, where money or property is owned and managed on behalf of another...
s, financiers and
holding companiesA holding company is a company that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself, rather its only purpose is owning shares of other companies. Holding companies allow the reduction of risk for the owners and can allow the...
. This period was dominated by an increasing number of oligopolistic firms earning supernormal profits. Major characteristics of capitalism in this period included the establishment of large industrial cartels or
monopoliesIn economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it...
; the ownership and management of industry by financiers divorced from the production process; and the development of a complex system of banking, an equity market, and corporate holdings of capital through
stockIn the investment world, a share of stock represents a share of ownership in a corporation ....
ownership. Increasingly, large industries and land became the subject of profit and loss by financial speculators.
Late 19th and early 20th century capitalism has also been described as an era of "monopoly capitalism," marked by government's movement from
laissez-faireThe general meaning of Laissez-faire is to allow events to take their own course, or to let people do what they choose. The term is a French phrase literally meaning "let it be" or "leave it alone"....
capitalism and
competitive marketsIn neoclassical economics and microeconomics, perfect competition describes the perfect being a market in which there are many small firms, all producing homogeneous goods...
to the concentration of capital into large monopolistic or
oligopolisticAn oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek oligoi 'few' and poleein 'to sell'. Because there are few sellers, each oligopolist is likely to be aware of the actions of the...
holdings by banks and financiers, and characterized by the growth of large
corporationA corporation is a legal entity separate from the shareholders and employees. In British tradition it is the term designating a body corporate, where it can be either a corporation sole or a corporation aggregate...
s and a division of labor separating
shareholderA mutual shareholder or stockholder is an individual or company that legally owns one or more shares of stock in a joint stock company. A company's shareholders collectively own that company. Thus, the typical goal of such companies is to enhance shareholder value.Stockholders are granted...
s, owners, and managers.
By the last quarter of the 19th century, the emergence of large industrial trusts had provoked legislation in the U.S. to reduce the monopolistic tendencies of the period. Gradually, the U.S. federal government played a larger and larger role in passing
antitrustUnited States antitrust law is the body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are designed to encourage competition in the marketplace....
laws and regulation of industrial standards for key industries of special public concern.
By the end of the 19th century, economic depressions and
boom and bustThe term boom and bust refers to a great buildup in the price of a particular commodity or, alternately, the localized rise in an economy, often based upon the value of a single commodity, followed by a downturn as the commodity price falls due to a change in economic circumstances or the collapse...
business cycleThe term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
s had become a recurring problem. In particular, the
Long DepressionThe Long Depression was a worldwide economic crisis experienced in the latter half of the Victorian era, though there is some controversy over whether it should be labeled a depression or a series of recessions...
of the 1870s and 1880s and the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s affected almost the entire capitalist world, and generated discussion about capitalism's long-term survival prospects. During the Great Depression of the 1930s, Marxist commentators often posited the possibility of capitalism's decline or demise, often in contrast to the ability of the
Soviet UnionThe Union of Soviet Socialist Republics was a constitutionally socialist state that existed in Eurasia from 1922 to 1991. The name is a translation of the , tr. Soyuz Sovetskikh Sotsialisticheskikh Respublik, abbreviated СССР, SSSR. The common short name is Soviet Union, from , Sovetskiy Soyuz...
to avoid suffering the effects of the global depression.
Twentieth century
Capitalism in the twentieth century changed substantially from its 19th century origins, but remained in place and by the end of the century was established as the world's most prevalent economic model, after the collapse of the USSR.
Several major challenges to capitalism appeared in the early part of the twentieth century. The
Russian revolutionThe Russian Revolution is the collective term for the series of revolutions in Russia in 1917, which destroyed the Tsarist autocracy and led to the creation of the Soviet Union. In the first revolution of February 1917 the Czar was deposed and replaced by a Provisional government...
in 1917 established the first
communistCommunism is a socioeconomic structure and political ideology that promotes the establishment of an egalitarian, classless, stateless society based on common ownership and control of the means of production and property in general. Karl Marx posited that communism would be the final stage in human...
state in the world; a decade later, the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
triggered increasing criticism of the existing capitalist system. One response to this crisis was a turn to
fascismFascism, , comprises a radical and authoritarian nationalist political ideology and a corporatist economic ideology developed in Italy. Fascists believe that nations and/or races are in perpetual conflict whereby only the strong can survive by being healthy, vital, and by asserting themselves in...
, an ideology which advocated state-influenced capitalism; another response was rejection of capitalism altogether in favor of communist or socialist ideologies.
In the years after
World War IIWorld War II, or the Second World War , was a global military conflict which involved a majority of the world's nations, including all great powers, organized into two opposing military alliances: the Allies and the Axis...
, capitalism was moderated and regulated in several ways. Keynesian economics became a widely accepted method of government regulation; meanwhile, countries such as the
United KingdomThe United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands...
experimented with mixed economies in which the state owned and operated certain major industries.
Other aspects of twentieth century capitalism include the rise of financial markets, quantitative analysis of market trends, and the increasing
globalizationGlobalization describes an ongoing process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of communication and exchange....
of production and consumption.
Capitalism following the Great Depression
The economic recovery of the world's leading capitalist economies in the period following the end of the Great Depression and the Second World War —- a period of unusually rapid growth by historical standards —- eased discussion of capitalism's eventual decline or demise.
In the period following the global depression of the 1930s, the state played an increasingly prominent role in the capitalistic system throughout much of the world. In 1929, for example, total U.S. government expenditures (federal, state, and local) amounted to less than one-tenth of GNP; from the 1970s they amounted to around one-third. Similar increases were seen in all industrialized capitalist economies, some of which, such as France, have reached even higher ratios of government expenditures to GNP than the United States. These economies have since been widely described as "
mixed economiesA mixed economy is an economic system that includes a variety of public and government control, or a mixture of capitalism and socialism.There is not one single definition for a mixed economy, but relevant aspects include: a degree of private economic freedom intermingled with centralized economic...
."
During the postwar boom, a broad array of new analytical tools in the social sciences were developed to explain the social and economic trends of the period, including the concepts of
post-industrial societyA post-industrial society is a society in which an economic transition has occurred from a manufacturing based economy to a service based economy, a diffusion of national and global capital, and mass privatization. The prerequisites to this economic shift are the processes of industrialization and...
and
welfare statismThere are two main interpretations of the idea of a welfare state:* A model in which the state assumes primary responsibility for the welfare of its citizens...
. The phase of capitalism from the beginning of the postwar period through the 1970s has also been variously described as "
state capitalismState capitalism, for Marxists and heterodox economists is a way to describe a society wherein the productive forces are owned and run by the state in a capitalist way, even if such a state calls itself socialist...
" by Marxist and non-Marxist commentators alike.
The long postwar boom ended in the 1970s, amid the economic crises experienced following the
1973 oil crisisThe 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo" in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war; it lasted until March 1974...
. The "
stagflationStagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965...
" of the 1970s led many economic commentators and politicians to embrace
neoliberalNeoliberalism is a synonym of classical economic liberalism. The term was coined in 1938 at the Colloque Walter Lippmann by the German sociologist and economist Alexander Rüstow, one of the fathers of Social market economy. The label is referring to a redefinition of classical liberalism,...
policy prescriptions inspired by the laissez-faire capitalism and
classical liberalismClassical liberalism is a political ideology that developed by the middle of the nineteenth century in England, western Europe, and the Americas, which provided a coherent vision of how society should be organized. Central to the classical liberalism of the nineteenth century is a commitment to...
of the 19th century, particularly under the influence of
Friedrich HayekFriedrich August von Hayek CH , was an Austrian and British economist and philosopher known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought. He is considered by some to be one of the most important economists and political philosophers...
and
Milton FriedmanMilton Friedman was an American economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economics...
. In particular,
monetarismMonetarism is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over longer periods and that objectives of monetary policy are best met by targeting the growth rate of the money supply.Monetarism today...
, a theoretical alternative to Keynesianism that is more compatible with laissez-faire, gained increasing support in the capitalist world, especially under leadership of
Ronald ReaganRonald Wilson Reagan was the 40th President of the United States and the 33rd Governor of California .Born in Tampico, Illinois, Reagan moved to Los Angeles, California in the 1930s...
in the U.S. and
Margaret ThatcherMargaret Hilda Thatcher, Baroness Thatcher LG, OM, PC, FRS served as Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party from 1975 to 1990. She is the only woman to have held either post....
in the UK in the 1980s.
Globalization
Although overseas trade has been associated with the development of capitalism for over five hundred years, some thinkers argue that a number of trends associated with
globalizationGlobalization describes an ongoing process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of communication and exchange....
have acted to increase the mobility of people and capital since the last quarter of the 20th century, combining to circumscribe the room to maneuver of states in choosing non-capitalist models of development. Today, these trends have bolstered the argument that capitalism should now be viewed as a truly world system (Burnham). However, other thinkers argue that globalization, even in its quantitative degree, is no greater now than during earlier periods of capitalist trade.
After the abandonment of the
Bretton Woods systemThe Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
and the strict state control of foreign exchange rates, the total value of transactions in foreign exchange was estimated to be at least twenty times greater than that of all foreign movements of goods and services (EB). The internationalization of finance, which some see as beyond the reach of state control, combined with the growing ease with which large corporations have been able to relocate their operations to low-wage states, has posed the question of the 'eclipse' of state sovereignty, arising from the growing 'globalization' of capital.
While scientists generally agree about the size of global income inequality, there is a general disagreement about the recent direction of change of it. However, it is growing within particular nations such as China. The book
The Improving State of the WorldThe Improving State of the World: Why We're Living Longer, Healthier, More Comfortable Lives On a Cleaner Planet is a 2007 book by Indur M. Goklany, published by the Cato Institute. As per the title, it argues that the state of the world and humanity is rapidly improving.- Contents :The book lists...
argues that economic growth since the Industrial Revolution has been very strong and that factors such as adequate
nutritionNutrition is the provision, to cells and organisms, of the materials necessary to support life. Many common health problems can be prevented or alleviated with a healthy diet....
,
life expectancyLife expectancy is the expected number of years of life remaining at a given age. It is denoted by e
x, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
,
infant mortalityInfant mortality is defined as the number of infant deaths per 1000 live births. The most common cause worldwide has traditionally been due to dehydration from diarrhea...
,
literacyLiteracy is a concept claimed and defined by a range of different theoretical fields. In everyday terms, "literacy" is typically described as the ability to read and write...
, prevalence of
child laborChild labour refers to the employment of children at regular and sustained labour. This practice is considered exploitative by many international organizations and is illegal in many countries...
,
educationEducation in its broadest sense is any act or experience that has a formative effect on the mind, character or physical ability of an individual...
, and available free time have improved greatly.
In 2008, state intervention in global capital markets by the American and other governments was seen by many as signaling a crisis for free-market capitalism. Serious turmoil in the banking system and financial markets due in part to the
subprime mortgage crisisThe subprime mortgage crisis is an ongoing real estate and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe...
reached a critical stage during September 2008, characterized by severely contracted
liquidityIn business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
in the global credit markets and going-concern threats to investment banks and other institutions.
Twenty-first century
By the early
21st century, capitalism has become a widely noticed economic system worldwide, with the collapse of the Soviet bloc in the early 1990s weakening the communist movement considerably. The
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
in particular has continued to push for the global adoption of capitalism, although not as aggressively as was done during the
Cold WarThe Cold War was the continuing state of political conflict, military tension, and economic competition existing after World War II , primarily between the USSR and its satellite states, and the powers of the Western world, including the United States...
. Capitalism still faces rivalry, particularly with the rise of new socialist movements in
Latin AmericaLatin America is a region of the Americas where Romance languages – particularly Spanish, Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,501 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
, most notably
BolivarianismBolivarianism is a set of political doctrines that enjoys currency in parts of South America, especially Venezuela. Bolivarianism is named after Simón Bolívar, the 19th century Venezuelan general and liberator who led the struggle for independence throughout much of South America.-Components:||-|In...
. These movements have also had ties to more traditional anti-capitalist movements, such as Bolivarian
VenezuelaVenezuela , officially titled Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It is a continental mainland with numerous islands located off its coastline in the Caribbean Sea...
's ties to communist
CubaThe Republic of Cuba is an island country in the Caribbean. It consists of the island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the largest city in Cuba and the country's capital. Santiago de Cuba is the second largest city. Cuba is home to over 11 million people and is...
. The
financial crisis of 2007–2009The financial crisis of 2007–2009 has been called the worst financial crisis since the one related to the Great Depression by leading economists, and it contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial...
has also caused a reevaluation of economics, leading to more notable support for socialism or mixed economies.
Future
According to some, the transition to the
information societyAn information society is a society in which the creation, distribution, diffusion, use, integration and manipulation of information is a significant economic, political, and cultural activity. The knowledge economy is its economic counterpart whereby wealth is created through the economic...
involves abandoning some parts of capitalism, as the "capital" required to produce and process information becomes available to the masses and difficult to control, and is closely related to the controversial issues of
intellectual propertyIntellectual property is a number of distinct types of legal monopolies over creations of the mind, both artistic and commercial, and the corresponding fields of law...
. Some even speculate that the development of mature nanotechnology, particularly of universal assemblers, may make capitalism obsolete, with
capitalIn economics, capital or capital goods or real capital are factors of production used to create goods or services that are not themselves significantly consumed in the production process. Capital goods may be acquired with money or financial capital...
ceasing to be an important factor in the economic life of humanity.
See also
- Capitalist mode of production
In Marxian economic discourse the capitalist mode of production refers to the socio-economic base of capitalist society which began to grow rapidly in Western Europe from the end of the eighteenth century, and later extended to most of the world. It is characterised by the predominantly private...
- Ecological impact of colonial Americans before 1877
An ecological impact is defined as the effect of human and natural activities on the living and non-living environment. Before the rise of the Industrial revolution, the peoples of the newly colonized continent caused many ecological impacts on the New World’s land...
- Enclosure
Enclosure or inclosure is the process which was used to end some traditional rights, such as mowing meadows for hay, or grazing livestock on land which is owned by another person, or a group of people. In England and Wales the term is also used for the process that ended the ancient system of...
and British Agricultural RevolutionThe British Agricultural Revolution describes a period of development in Britain between the 17th century and the end of the 19th century, which saw a massive increase in agricultural productivity and net output. This in turn supported unprecedented population growth, freeing up a significant...
- Fernand Braudel
Fernand Braudel , was the foremost French historian of the postwar era, and a leader of the Annales School. He organized his scholarship around three great projects, each worth several decades of intense study: "The Mediterranean" , "Civilization and Capitalism" , and the unfinished, "Identity of...
- Financial crisis of 2007–2009
The financial crisis of 2007–2009 has been called the worst financial crisis since the one related to the Great Depression by leading economists, and it contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial...
- History of capitalist theory
- History of private equity and venture capital
The history of private equity and venture capital and the development of these asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital...
- Primitive accumulation of capital
The concept of original accumulation or previous accumulation or primitive accumulation of capital, was a central concern of classical political economists...
- Simple commodity production
Simple commodity production is a term coined by Frederick Engels to describe productive activities under the conditions of what Marx had called the "simple exchange" of commodities, where independent producers trade their own products...