DEFINITION: In a broad sense, “capitalism” is a social and economic system which permits individuals to participate freely in market exchanges and to accumulate wealth from their economic activity.
Such accumulated wealth may be termed “capital,” whence the name of the system.
In this broad sense, “capitalism” is synonymous with “freedom” in relation to the economic dimension of human social interaction.
In a narrower sense, “capitalism” is the specific form that free economic activity took during the Renaissance and Early Modern periods of European history, beginning in Italy, Portugal, and Spain, and then shifting northward to France, the Netherlands, and England.
ETYMOLOGY: The term “capitalism” derives from the word “capital,” in its economic sense, meaning “accumulated wealth.”
The word “capital,” in turn, derives, via either French or Italian, from the Latin adjective capitālis, which in turn derives from the noun caput, capitis, meaning “head.”
Capitālis took on a variety of meanings, from “mortal” and “dangerous” to “first,” “chief,” or “distinguished.”
However, the meanings of capitālis of greatest relevance to us here are “relating to the head,” a “living thing” (as in a “head of cattle”), a “person,” a “person’s social status,” and, finally, “possessions” or “money.”
USAGE: One might suppose that the term “capitalism” is more or less synonymous with any highly stratified socioeconomic system, with a wealthy class at the top and a majority at the bottom living in poverty.
However, that is not correct.
Nearly all human societies have been stratified, with richer and pooper classes, at least since the invention of agriculture and the beginning of the division of labor some 10,000 years ago.
In many of those societies, wealth, prestige, and power did not arise from successful economic activity, but rather from military conquest or the violent imposition of political control.
Obviously, the wealth of raiding societies such as the Visigoths or the Vikings had nothing to do with economic activity in the usual sense.
Similarly, in communist countries wealthy and powerful classes certainly existed, but they were a function of an individual’s position within the Communist Party apparatus, not his economic activity.
Therefore, capitalism should be understood as the accumulation of wealth as a result of successful economic activity, as opposed to the others means of wealth accumulation just mentioned.
As such, the phenomenon of capitalism—in the broad sense mentioned above—is probably coeval with human settled life and civilization. Even in its narrower sense, the phenomenon of capitalism is between five and six hundred years old.
In contrast, the word “capitalism” is of relatively recent vintage.
The word from which “capitalism” derives—namely, “capital,” in its economic sense—is first attested in English in the early seventeenth century, while the English term “capitalism” itself turns up during the 1850s.
In this article, we will focus on the narrow sense of the term, meaning “capitalism” as a description of the Industrial Revolution.
During the course of the eighteenth century, industrialists gradually replaced long-distance traders and other merchants as the primary engine of economic activity, first in England, and then spreading to the European continent, to North America, and, eventually, throughout the world.
Following upon the invention of the steam engine, the agricultural and textile manufacturing sectors were the first to become highly mechanized.
Then, the nineteenth century brought with it an incredible series of brand-new inventions, from the telegraph to the railroad to public sanitation, public gas lighting, and, by century’s end, the introduction of electrical power.
All of these startling transformations in the everyday life of tens of millions of individuals were made possible by the accumulation of capital and the growth of a financial infrastructure for investing the accumulated capital in new projects.
In short, capitalism was the engine that drove the modern world.
In more granular economic terms, capitalism can be analyzed as consisting of the following characcgeristics:
- Capital accumulation: the primary goal of economic activity is earning a profit and accumulating wealth
- Commodity production: most economic activity is aimed at production for market exchange
- Private ownership: of the means of production
- Investment: of capital reserves for the purpose of future production, profit, and wealth accumulation
- Economic efficiency: the use of raw materials and other factors of production is aimed at the optimization of the production process
- Wage labor: is employed on a large scale
- Market prices: determine the allocation of resources
- Freedom: of individuals to act in their own self-interest, both in managing their business and in investing their capital