Capitalism

Capitalism is an economic system characterized by private property and freely functioning markets without central planning. Prices in capitalist economic systems are determined by the free and open exchanges of buyers and sellers guided by self-interest but constrained by both an ethical consensus and the rule of law. While capitalism is widely viewed as the most effective system for generating wealth and higher material standards of living, capitalist economies also go through periods of instability, some of which have raised concerns about the overall appeal of the system.

In addition to concerns rooted in these periodic cycles, other concerns have been raised regarding broader social issues such as the distribution of income. Most economists believe that the benefits of capitalist systems have far outweighed the costs but this article will present both sides of the argument. To understand capitalism in its present form also requires that we consider the historical developments, both intellectual and material, that gave rise to the modern capitalist system.

Historical Development

Capitalist economic systems are relatively new developments in the broad span of human history and gradually evolved over time in response to previous economic systems. Yet the fundamental driving force of market capitalism, self-interested exchange between buyers and sellers, is as old as humanity itself. M. M. Postan and H. J. Habakkuk described evidence that mammoth hunters of the Russian steppes and the Cro-Magnon hunters of central France both obtained Mediterranean shells through long-distance trading. The late Robert Heilbroner wrote of how the Tablets of Tell-el-Amarna described lively trade in 1400 B.C. between the Levantine kings and Egyptian pharaohs. Large-scale enterprise, buttressed by financial systems, was a part of Ming China (13681644). In addition, Avner Greif has described how the Maghribi traders, a group of Jewish traders from parts of northern Africa and from Muslim Sicily and Spain, were engaged in long-distance trading throughout the Mediterranean by the 11th century. These traders seem to have enforced contracts, a critical requirement for any successful long-distance trading to emerge, through private coalitions composed of merchants and the agents who worked for them.

While there was little formal enforcement of business agreements at the time, these private coalitions enforced contracts themselves through the sharing of information; in effect, they relied on reputation mechanisms and punished those who violated business agreements. Since the emergence of long-distance trading was an important development on the long, slow path toward capitalism, these institutional developments that made distant trading possible are of central importance.

While important stepping stones on the path toward modern capitalism, none of these examples of early exchange were conducted within the economic system we call capitalism. The term itself was first used in the late 19th century and did not become common parlance until the early 20th century. However, most economists would view capitalism as an economic system that emerged out of the demise of mercantilism in the late 18th century. The mercantilist system had emerged alongside the nation-states of Europe and is generally dated to the early 16th century.

These powerful nation-states grew out of the demise of the highly structured medieval feudal society in which economic activity was centered around a manor, which was a district controlled by an elite member of feudal society called a lord. The manorial system was one in which lords owned property that was worked by landless serfs. This system was one of stagnation and lack of exchange, which contrasts nearly completely with the modern capitalist systems that are identified by constant change and the cen-trality of the free exchange process. Eventually, medieval feudal society broke down in part because of the [Page 230]Black Death that killed at least one-third of Europe's population beginning in 1348.

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