Capitalism is the economic system in which the means of production are owned by private persons, and operated for profit and where investments, distribution, income, production and pricing of goods and services are predominantly determined through the operation of a free market, rather than by central economic planning. Capitalism is usually considered to involve the right of individuals and corporations to trade, incorporate, employ workers, and use money provided by central banks, in goods, services (including finance), labor and land. In theory, production and distribution in a capitalist system are governed by the free market rather than state regulation, with state action confined to defining and enforcing the basic rules of the market though the state may provide a few basic public goods and infrastructure. Unrestrained capitalism is confined to theory, as "all of the capitalistic societies of the West have mixed economies" with interventionist state regulation, social programs and state ownership of some sectors.
Capitalist economic practices became institutionalized in England between the 16th and 19th centuries, although some features of capitalist organization existed in the ancient world, and early forms of merchant capitalism flourished during the Middle Ages. Capitalism has been dominant in the Western world since the end of feudalism. From Britain it gradually spread throughout Europe, across political and cultural frontiers. In the 19th and 20th centuries, capitalism provided the main, but not exclusive, means of industrialization throughout much of the world.
The concept of capitalism has limited analytic value, given the great variety of historical cases over which it is applied, varying in time, geography, politics and culture, and some feel that the term "mixed economies" more precisely describes most contemporary economies. Some economists have specified a variety of different types of capitalism, depending on specifics of concentration of economic power and wealth, and methods of capital accumulation. The capitalist mixed economy is the main capitalist system, where the state intervenes in market activity and provides some services. Other systems include laissez-faire, where the state plays a minimal role and anarcho-capitalism where the market and private enterprise are completely free from the state which is nonexistent. During the last century capitalism has been contrasted with centrally planned economies, such as Marxian economies.
The term capitalism was most likely coined in the mid-19th century by Karl Marx. Other terms sometimes used for capitalism, include:|
Adam Smith's attack on mercantilism and his reasoning for "the system of natural liberty" in The Wealth of Nations (1776) are usually taken as the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with capitalism today, particularly his theory of the "invisible hand" of the market, through which the pursuit of individual self-interest unintentionally produces a collective good for society. He criticized monopolies, tariffs, duties, and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo, second most important of the classical political economists and one of the most influential economists of modern times. In The Principles of Political Economy and Taxation (1817) he developed the law of comparative advantage, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade. Ricardo was a supporter of Say's Law and held the view that full employment is the normal equilibrium for a competitive economy. He also argued that inflation is closely related to changes in quantity of money and credit and was a proponent of the law of diminishing returns, which states that each additional unit of input yields less and less additional output.
The values of classical political economy are strongly associated with the classical liberal doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods.. Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.
While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public goods. For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll). In addition, he advocated retaliatory tariffs to bring about free trade, and copyrights and patents to encourage innovation.
Following Adam Smith, Marx distinguished the use value of commodities from their exchange value in the market. Capital, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist. This difference in values, he argues, constitutes surplus value, which the capitalists extract and accumulate. In his book Capital, Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers — all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities.
For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. However, this argument is intertwined with Marx's version of the labor theory of value asserting that labor is the source of all value, and thus of profit. This theory is contested by most current economists, including some contemporary Marxian economists. One line of subsequent Marxian thinking sees the centrally-planned economic systems of existing "communist" societies that were still based on exploitation of labor as "state capitalism."
Vladimir Lenin, in Imperialism, the Highest Stage of Capitalism (1916), modified classic Marxist theory and argued that capitalism necessarily induced monopoly capitalism - which he also called "imperialism" - in order to find new markets and resources, representing the last and highest stage of capitalism.
In Marxist thought, capitalism is often linked with patriarchal hegemony. Some 20th century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive. Capitalist class processes, to these thinkers, are simply those in which surplus labor takes the form of surplus value, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers emphasize that capitalism is the mode by which a surplus is generated — the mode of surplus extraction — in modern societies where an absolute majority of the population is engaged in non-capitalist economic activity.
In some social sciences, the understanding of the defining characteristics of capitalism has been strongly influenced by 19th century German social theorist Max Weber. Weber considered market exchange, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a manor.
In his book The Protestant Ethic and the Spirit of Capitalism (1904-1905), Weber sought to trace how capitalism transformed these traditional modes of economic activity. For Weber, the 'spirit of capitalism' began with the Puritan understanding of one’s ‘calling’ in life and their laboring for God rather than for men. This is pictured in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings” and in Colossians 3:23, "Whatever you do, do your work heartily, as for the Lord rather than for men." In the Protestant Ethic Weber further stated that “moneymaking – provided it is done legally – is, within the modern economic order, the result and the expression of diligence in one’s calling…” Thus in Weber's opinion, it was with a devotion to God in the workplace and seeking assurance of salvation described as the Protestant work ethic that the Puritans helped form the basis to the modern economic order.
This 'spirit' was gradually codified by law; rendering wage-laborers legally 'free' to sell work; encouraging the development of technology aimed at the organization of production on the basis of rational principles; and clarifying the apparent separation of the public and private lives of workers, especially between the home and the workplace. Therefore, unlike Marx, Weber did not see capitalism as primarily the consequence of changes in the means of production.
Capitalism, for Weber, was the most advanced economic system ever developed over the course of human history. Weber associated capitalism with the advance of the business corporation, public credit, and the further advance of bureaucracy of the modern world. Although Weber defended capitalism against its socialist critics of the period, he saw its rationalizing tendencies as a possible threat to traditional cultural values and institutions, and a possible 'iron cage' constraining human freedom. This is further seen in his criticism of "specialists without spirit, hedonists without a heart" that were developing, in his opinion, with the fading of the original Puritan 'spirit' associated with capitalism.
In the late 19th century the German historical school of economics diverged with the emerging Austrian School of economics, led at the time by Carl Menger. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter, a forerunner of the Austrian School of economics, emphasized the "creative destruction" of capitalism — the fact that market economies undergo constant change. At any moment of time, posits Schumpeter, there are rising industries and declining industries. Schumpeter, and many contemporary economists influenced by his work, argue that resources should flow from the declining to the expanding industries for an economy to grow, but they recognized that sometimes resources are slow to withdraw from the declining industries because of various forms of institutional resistance to change.
The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of market capitalism against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy. Since a modern economy produces such a large array of distinct goods and services, and consists of such a large array of consumers and enterprises, asserted Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information. Thinkers within Supply-side economics built on the work of the Austrian School, and particular emphasize Say's Law: "supply creates its own demand." Capitalism, to this school, is defined by lack of state restraint on the decisions of producers.
In his 1937 The General Theory of Employment, Interest, and Money, the British economist John Maynard Keynes argued that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment. Essentially rejecting Say's law, he argued that some people may have a liquidity preference which would see them rather hold money than buy new goods or services, which therefore raised the prospect that the Great Depression would not end without what he termed in the General Theory "a somewhat comprehensive socialization of investment."
Keynesian economics challenged the notion that laissez-faire capitalist economics could operate well on their own, without state intervention used to promote aggregate demand, fighting high unemployment and deflation of the sort seen during the 1930s. He and his followers recommended "pump-priming" the economy to avoid recession: cutting taxes, increasing government borrowing, and spending during an economic down-turn. This was to be accompanied by trying to control wages nationally partly through the use of inflation to cut real wages and to deter people from holding money. The premises of Keynes’s work have, however, since been challenged by neoclassical and supply-side economics and the Austrian School.
Another challenge to Keynesian thinking came from his colleague Piero Sraffa, and subsequently from the Neo-Ricardian school that followed Sraffa. In Sraffa's highly-technical analysis, capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, the tendency of capital to seek its highest rate of profit causes a dynamic instability in social and economic relations.
The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Milton Friedman and monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention. Friedman, for example, argued that the Great Depression was result of a contraction of the money supply, controlled by the Federal Reserve, and not by the lack of investment as Keynes had argued. Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.
Neoclassical economists, today the majority of economists, consider value to be subjective, varying from person to person and for the same person at different times, and thus reject the labor theory of value. Marginalism is the theory that economic value results from marginal utility and marginal cost (the marginal concepts). These economists see capitalists as earning profits by forgoing current consumption, by taking risks, and by organizing production.
Private ownership of some means of production has existed at least in a small degree since the invention of agriculture. Some writers see medieval guilds as forerunners of the modern capitalist concern (especially through using apprentices as a kind of paid laborer); but economic activity was bound by customs and controls which, along with the rule of the aristocracy which would expropriate wealth through arbitrary fines, taxes and enforced loans, meant that profits were difficult to accumulate. By the 18th century, however, these barriers to profit were overcome and capitalism became the dominant economic system of the United Kingdom and by the 19th century Western Europe.
Some writers trace back the earliest stages of merchant capitalism even further to the Caliphate during the 9th-12th centuries, where a vigorous monetary market economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organization were introduced by economists, merchants and traders during this time. Such innovations included trading companies, bills of exchange, contracts, long-distance trade, big businesses, the first forms of partnership (mufawada in Arabic) such as limited partnerships (mudaraba) (mufawada partnership possessed features similar to those of the early medieval family compagnia in Europe), and the concepts of credit, profit, capital (al-mal) and capital accumulation (nama al-mal). Many of these early capitalist ideas were further advanced in medieval Europe from the 13th century onwards.
Some economic historians (like Peter Temin) argue that the economy of the Early Roman Empire was a market economy and one of the most advanced agricultural economies to have existed (in terms of productivity, urbanization and development of capital markets), comparable to the most advanced economies of the world before the Industrial Revolution, namely the economies of 18th century England and 17th century Netherlands. There were markets for every type of good, for land, for cargo ships; there was even an insurance market.
In the period between the late 15th century and the late 18th century the institution of private property was brought into existence in the full, legal meaning of the term. Important contribution to the theory of property is found in the work of John Locke, who argued that the right to private property is a natural right. During the Industrial Revolution much of Europe underwent a thorough economic transformation associated with the rise of capitalism and levels of wealth and economic output in the Western world have risen dramatically since that period.
Over the course of the past five hundred years, 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 defense and its rejection, particularly by socialists.
The economic and political system of the early modern period (16th to 18th centuries) from which capitalism evolved is commonly described as merchant capitalism or mercantilism (EB). This period was associated with geographic discoveries by merchant overseas traders, especially from England and the Low Countries; the European colonization of the Americas; and the rapid growth in overseas trade. The associated rise of a bourgeoisie class eclipsed the prior feudal system. It is mercantilism that Adam Smith refuted in his Wealth of Nations which is a recognized treatise of capitalist theory.
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 Polanyi argued that capitalism did not emerge until the establishment of free trade in Britain in the 1830s.
Under mercantilism, European merchants, backed by state controls, subsidies, and monopolies, made most of their profits from the buying and selling of goods. In the words of Francis Bacon, 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 absolutism, the state superseded the local guilds as the regulator of the economy.
Among the major tenets of mercantilist theory was bullionism, 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 subsidies, such as the granting of monopolies and protective tariffs, 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, held the mercantilists, colonies should be prevented from engaging in manufacturing and trading with foreign powers.
Mercantilism declined in Great Britain in the mid-18th century, when a new group of economic theorists, led by David Hume and Adam Smith, 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 Prussia 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 (bourgeois) 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 factory 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 Revolution, the industrialist replaced the merchant as a dominant actor in the capitalist system and effected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Also during this period, capitalism marked the transformation of relations between the British landowning gentry and peasants, giving rise to the production of cash crops for the market rather than for subsistence on a feudal manor. The surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture and the rise of the bourgeoisie.
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-faire (bourgeois) capitalism. Laissez-faire capitalism gained favor over mercantilism in Britain in the 1840s with the repeal of the Corn Laws and the Navigation Acts. In line with the teachings of the classical political economists, led by Adam Smith and David Ricardo, Britain embraced liberalism, encouraging free competition for all classes, and eliminating barriers to the development of a market economy.
Most of the early proponents of a economic liberalism in the United States subscribed to the American School. This school of thought was inspired by the ideas of Alexander Hamilton, who proposed the creation of the First National Bank and the Second National Bank and increased tariffs (e.g. tariff of 1828) to favor northern industrial interests. Following Hamilton's death, the more abiding protectionist influence in the antebellum period came from Henry Clay and his American System.
In the mid-19th century, the United States followed the Whig tradition of economic liberalism, which included increased state control, regulation and macroeconomic development of infrastructure. Public works such as the provision and regulation transportation such as railroads took effect. The Pacific Railway Acts provided the development of the First Transcontinental Railroad. In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872).
Following the Civil War, the movement towards a mixed economy accelerated with even more protectionism and government regulation. In the 1880s and 1890s, significant tariff increases were enacted (see the McKinley Tariff and Dingley Tariff). Moreover, with the enactment of the Interstate Commerce Act of 1887, the Sherman Anti-trust Act, the federal government began to assume an increasing role in regulating and directing the country's economy.
Late 19th and early 20th century capitalism has also been described as an era of "monopoly capitalism," marked by movement from laissez-faire ideology and government policies to the concentration of capital into large monopolistic or oligopolistic holdings by banks and financiers, and characterized by the growth of large corporations and a division of labor separating shareholders, owners, managers, and actual laborers. Although the concept of monopoly capitalism originated among Marxist theorists, non-Marxist economic historians have also commented on the rise of monopolies and trusts in the period. Murray Rothbard, asserting that the large cartels of the late 19th century could not arise on the free market, argued that the "state monopoly capitalism" of the period was the result of interventionist policies adopted by governments, such as tariffs, quotas, licenses, and partnership between state and big business.
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 antitrust laws and regulation of industrial standards for key industries of special public concern. However, contemporary, non-bourgeois economic historians believe these new laws were in fact designed to aid large corporations at the expense of smaller competitors. By the end of the 19th century, economic depressions and boom and bust business cycles had become a recurring problem, although such problems were most likely caused by government intervention (according to the bourgeoisie of the time), not failures in free markets (Rand 1967, Friedman 1962, Bernstein 2005). In particular, the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s affected almost the entire capitalist world, and generated discussion about capitalism’s long-term survival prospects. During the 1930s, Marxist commentators often posited the possibility of capitalism's decline or demise, often in alleged contrast to the ability of the Soviet Union to avoid suffering the effects of the global depression, despite the fact that the Soviet Union represented a nationalist dictatorship rather than a Marxist state.
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 (EB). Similar increases were seen in all bourgeois 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 economies."
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 society and the welfare state. The phase of capitalism from the beginning of the postwar period through the 1970s has sometimes been described as “state capitalism”, especially by Marxian thinkers.
The long postwar boom ended in the late 1960s and early 1970s, and the situation was worsened by the rise of stagflation. Exceptionally high inflation combined with slow output growth, rising unemployment, and eventually recession caused loss of credibility of Keynesian welfare-statist mode of regulation. Under the influence of Friedrich Hayek and Milton Friedman, Western states embraced policy prescriptions inspired by the laissez-faire capitalism and classical liberalism. In particular, monetarism, a theoretical alternative to Keynesianism that is more compatible with laissez-faire, gained increasing prominence in the capitalist world, especially under the leadership of Ronald Reagan in the U.S. and Margaret Thatcher in the UK in the 1980s. In the eyes of many economic and political commentators, collapse of the Soviet Union supposedly brought further evidence of superiority of market capitalism over communism.
After the abandonment of the Bretton Woods system 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.
Economic growth in the last half-century has been consistently strong. Life expectancy has almost doubled in the developing world since the postwar years and is starting to close the gap on the developed world where the improvement has been smaller. Infant mortality has decreased in every developing region of the world, thanks to the work of a handful of charitable bourgeoisie, but the destitute continue to suffer and die while the bourgeoisie increase their profits. 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 World argues that economic growth since the industrial revolution has been very strong and that factors such as adequate nutrition, life expectancy, infant mortality, literacy, prevalence of child labor, education, 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 to the subprime mortgage crisis reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets and going-concern threats to investment banks and other institutions.
Many theorists and policymakers in predominantly capitalist nations have emphasized capitalism's ability to promote economic growth, as measured by Gross Domestic Product (GDP), capacity utilization or standard of living. This argument was central, for example, to Adam Smith's advocacy of letting a free market control production and price, and allocate resources. Many theorists have noted that this increase in global GDP over time coincides with the emergence of the modern world capitalist system. While the measurements are not identical, proponents argue that increasing GDP (per capita) is empirically shown to bring about improved standards of living, such as better availability of food, housing, clothing, and health care. The decrease in the number of hours worked per week and the decreased participation of children and the elderly in the workforce have been attributed to capitalism. Proponents also believe that a capitalist economy offers far more opportunities for individuals to raise their income through new professions or business ventures than do other economic forms. To their thinking, this potential is much greater than in either traditional feudal or tribal societies or in socialist societies.
Milton Friedman has argued that the economic freedom of competitive capitalism is a requisite of political freedom. Friedman argued that centralized control of economic activity is always accompanied by political repression. In his view, transactions in a market economy are voluntary, and the wide diversity that voluntary activity permits is a fundamental threat to repressive political leaders and greatly diminish power to coerce. Friedman's view was also shared by Friedrich Hayek and John Maynard Keynes, both of whom believed that capitalism is vital for freedom to survive and thrive.
Austrian School economists have argued that capitalism can organize itself into a complex system without an external guidance or planning mechanism. Friedrich Hayek coined the term "catallaxy" to describe what he considered the phenomenon of self-organization underpinning capitalism. From this perspective, in process of self-organization, the profit motive has an important role. From transactions between buyers and sellers price systems emerge, and prices serve as a signal as to the urgent and unfilled wants of people. The promise of profits gives entrepreneurs incentive to use their knowledge and resources to satisfy those wants. Thus the activities of millions of people, each seeking his own interest, are coordinated.
This decentralized system of coordination is viewed by some supporters of capitalism as one of its greatest strengths. They argue that it permits many solutions to be tried, and that real-world competition generally finds a good solution to emerging challenges. In contrast, they argue, central planning often selects inappropriate solutions as a result of faulty forecasting. However, in all existing modern economies, the state conducts some degree of centralized economic planning (using such tools as allowing the country's central bank to set base interest rates), ostensibly as an attempt to improve efficiency, attenuate cyclical volatility, and further particular social goals. Proponents who follow the Austrian School argue that even this limited control creates inefficiencies because we cannot predict the long-term activity of the economy. Milton Friedman, for example, has argued that the Great Depression was caused by the erroneous policy of the Federal Reserve.
Ayn Rand was a prominent philosophical supporter of laissez-faire capitalism; her novel Atlas Shrugged was one of the most influential publications ever written on the subject of business. The first person to endow capitalism with a new code of morality (Rational Selfishness), she did not justify capitalism on the grounds of pure "practicality" (that it is the best wealth-creating system), or the supernatural (that God or religion supports capitalism), or because it benefits the most people, but maintained that it is the only morally valid socio-political system because it allows people to be free to act in their rational self-interest.
These thinkers have had a substantial influence on the Libertarian Party, which is the political party that is most closely allied with laissez faire and free market economics in the United States. The Libertarian Party strongly advocates the elimination of most, if not all, state involvement in the marketplace.
Capitalism has met with strong opposition throughout its history. Most of the criticism came from the left, but some from the right, and some from religious elements. Many 19th century conservatives were among the most strident critics of capitalism, seeing market exchange and commodity production as threats to cultural and religious traditions. Some critics of capitalism consider economic regulation necessary in order to reduce corruption, negligence, and numerous other problems caused by free markets.
Prominent leftist critics have included socialists like Karl Marx, Frantz Fanon, Vladimir Lenin, Mao Zedong, Leon Trotsky, Antonio Gramsci and Rosa Luxemburg, and anarchists including Benjamin Tucker, Lysander Spooner, Pierre-Joseph Proudhon, Mikhail Bakunin, Peter Kropotkin, Emma Goldman, Murray Bookchin, Rudolf Rocker, Noam Chomsky, Naomi Klein, and others. Movements like the Luddites, Narodniks, Shakers, Utopian Socialists and others have opposed capitalism for various reasons. Marxism advocated a revolutionary overthrow of capitalism that would lead eventually to communism. Marxism also influenced social democratic and labour parties, which seek change through existing democratic channels instead of revolution, and believe that capitalism should be heavily regulated rather than abolished. Many aspects of capitalism have come under attack from the relatively recent anti-globalization movement.
Some religions criticize or outright oppose specific elements of capitalism. Some traditions of Judaism, Christianity, and Islam forbid lending money at interest, although methods of Islamic banking have been developed. Christianity has been a source of both praise and criticism for capitalism, particularly its materialist aspects. The first socialists drew many of their principles from Christian values (see Christian socialism), against "bourgeois" values of profiteering, greed, selfishness, and hoarding. Christian critics of capitalism may not oppose capitalism entirely, but support a mixed economy in order to ensure adequate labor standards and relations, as well as economic justice. There are many Protestant denominations (particularly in the United States) who have reconciled with — or are ardently in favor of — capitalism, particularly in opposition to secular socialism. However, in the U.S. and around the world there are many Protestant Christian traditions which are critical of, or even oppose, capitalism. Another critic is the Indian philosopher P.R. Sarkar, founder of the Ananda Marga movement, who developed the Social Cycle Theory and proposed a solution called the Progressive Utilization Theory (PROUT).
Some problems said to be associated with capitalism include: unfair and inefficient distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism and various forms of economic and cultural exploitation; and phenomena such as social alienation, inequality, unemployment, and economic instability. Critics have maintained that there is an inherent tendency towards oligolopolistic structures when laissez-faire is combined with capitalist private property. Because of this tendency either laissez-faire, or private property, or both, have drawn fire from critics who believe an essential aspect of economic freedom is the extension of the freedom to have meaningful decision-making control over productive resources to everyone. Economist Branko Horvat asserts, "it is now well known that capitalist development leads to the concentration of capital, employment and power. It is somewhat less known that it leads to the almost complete destruction of economic freedom.
Near the start of the 20th century, Vladimir Lenin claimed that state use of military power to defend capitalist interests abroad was an inevitable corollary of monopoly capitalism. This concept of political economy concerning the relationship between economic and political power among and within states includes critics of capitalism who assign to it responsibility for not only economic exploitation, but imperialist, colonialist and counter-revolutionary wars, repressions of workers and trade unionists, genocides, massacre, and so on.
Some environmentalists claim that capitalism requires continual economic growth, and will inevitably deplete the finite natural resources of the earth, and other broadly utilized resources. Such thinkers, including Murray Bookchin, have argued that capitalist production passes on environmental costs to all of society, and is unable to adequately mitigate its impact upon ecosystems and the biosphere at large.
Some labor historians and scholars, such as Immanuel Wallerstein, Tom Brass and, latterly Marcel van der Linden, have also argued that unfree labor — the use of a labor force comprised of slaves, indentured servants, criminal convicts, political prisoners, and/or other coerced persons — is compatible with capitalist relations.
The relationship between the state, its formal mechanisms, and capitalist societies has been debated in many fields of social and political theory, with active discussion since the 19th century. Hernando de Soto is a contemporary economist who has argued that an important characteristic of capitalism is the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded. According to de Soto, this is the process by which physical assets are transformed into capital, which in turn may be used in many more ways and much more efficiently in the market economy. A number of Marxian economists have argued that the Enclosure Acts in England, and similar legislation elsewhere, were an integral part of capitalist primitive accumulation and that specific legal frameworks of private land ownership have been integral to the development of capitalism.
New institutional economics, a field pioneered by Douglass North, stresses the need of capitalism for a legal framework to function optimally, and focuses on the relationship between the historical development of capitalism and the creation and maintenance of political and economic institutions. In new institutional economics and other fields focusing on public policy, economists seek to judge when and whether governmental intervention (such as taxes, welfare, and government regulation) can result in potential gains in efficiency. According to Gregory Mankiw, a New Keynesian economist, governmental intervention can improve on market outcomes under conditions of "market failure," or situations in which the market on its own does not allocate resources efficiently. The idea of market failure is that markets fail to realize all potential gains from trade. This means that markets fail to deliver perfect economic results. Critics of market failure theory, like Ronald Coase, Harold Demsetz, and James M. Buchanan argue that government programs and policies also fall short of absolute perfection. Market failures are often small, and government failures are sometimes large. It is therefore the case that imperfect markets are often better than imperfect governmental alternatives. While all nations currently have some kind of market regulations, the desirable degree of regulation is disputed.
The relationship between democracy and capitalism is a contentious area in theory and popular political movements. The extension of universal adult male suffrage in 19th century Britain occurred along with the development of industrial capitalism, and democracy became widespread at the same time as capitalism, leading many theorists to posit a causal relationship between them, or that each affects the other. However, in the 20th century, according to some authors, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist regimes, monarchies, and single-party states, while it has been observed that many democratic societies such as the Bolivarian Republic of Venezuela and Anarchist Catalonia have been expressly anti-capitalist. While some thinkers argue that capitalist development more-or-less inevitably eventually leads to the emergence of democracy, others dispute this claim. Research on the democratic peace theory further indicates that capitalist democracies rarely make war with one another and have little internal violence. However critics of the democratic peace theory note that democratic capitalist states may fight infrequently or never with other democratic capitalist states because of Political similarity or political stability rather than because they are democratic (or capitalist).
Some commentators argue that though economic growth under capitalism has led to democratization in the past, it may not do so in the future. Under this line of thinking, authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.
In response to criticism of the system, some proponents of capitalism have argued that its advantages are supported by empirical research. For example, advocates of different Index of Economic Freedom point to a statistical correlation between nations with more economic freedom (as defined by the Indices) and higher scores on variables such as income and life expectancy, including the poor in these nations. Some peer-reviewed studies find evidence for causation.