Capitalism (Economics)

An economic and social system that encourages private ownership and means of production where personal profit can be acquired through investment of capital and employment of labor. Production is generally led, income distributed, and investments, distribution, and pricing of goods and services determined through the operation of markets. The term is said to have been first cited in 1854, while the term capitalist emerged in 1792 but was first used in its modern sense by Werner Sombart in the early 20th century in his book Der Moderne Kapitalismus (1916). Capitalism is considered synonymous with a laissez-faire economy, private enterprise system, and free-price system.

Along with the institution of private property, capitalism, as a term, is believed to have been brought into formal existence between the late 15th century and the 18th century in Europe. Various economic transformations, including agricultural change, urbanization, industrial development, and commercial expansion, led to the accumulation and productive investment of capital. Labor became more of a commodity and new forms of social organization, used to exploit economic opportunities, emerged. Changes in economic, social, and political form are regarded as fundamental to the transition from feudalism to capitalism. Although such changes led to the emergence of capitalism, noncapitalist forms existed alongside such economic trends and inevitably shaped its formation. During the rise of capitalism throughout this period, John Locke played an important part in the development of associated economic theories. Locke argued that the right to private property is a natural right. Karl Marx, Friedrich Engels, and Max Weber also largely influenced the development of capitalist theories.

Capitalism has evolved over the past 500 years, with various concepts involved in defining capitalism, such as investments, markets, and private ownership, evolving along with changes in theory, law, and practices. Since its inception, theories of capitalism as a coherent economic system have been highly contested and defended. Proponents of capitalism emphasize capitalism's ability to promote economic growth, as measured by gross domestic product (GDP). It is argued that an increase in GDP brings about improved standards of living. It is also asserted that capitalism offers more opportunities for individuals to raise their income than socialist or traditional feudal societies.

Critics of capitalism—primarily coming from the left but some from the right and some from religious elements—argue that market exchange and commodity production are threats to cultural and religious traditions. Other contentions involve a seemingly unfair and inefficient distribution of wealth and power, various other forms of economic exploitation, unemployment, and economic instability. For more information, see Schumpeter (1939) and Sombart (1916).