The history of capitalism dates back to early forms of merchant capitalism practiced in the Middle East and Western Europe during the Middle Ages, though many economic historians consider the Netherlands as the first thoroughly capitalist country. In early modern Europe it featured the wealthiest trading city (Amsterdam) and the first full-time stock exchange. The inventiveness of the traders led to insurance and retirement funds as well as such less benign phenomena as the boom-bust cycle, the world's first asset-inflation bubble, the tulip mania 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, 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 socialists.
The notion that capitalism can be divided into early, middle, and late eras is itself extremely controversial. Scholars have found capitalism, or elements thereof, in very early times. Some philosophers and most neoclassical economists consider capitalism not a time-bound practice or a historical era at all, but the recognition of some timeless elements of human society like private property and market prices.
Nonetheless, the division into eras is often made on the presumption that there was a uniquely notable explosion of capitalistic practice in early modern Europe.
Since pre-Roman times goods have been bought and sold on markets throughout Europe, and local trading networks have enabled goods to make their way onto European markets from places as far away as China and India. Much of the expansion of the Roman Empire was at least partially driven by the desire to obtain control of the sources of goods being traded with the Romans (such as Tin and cement), and thus obtain these goods more cheaply by cutting out the middle-men.
In the sixteenth century, merchants of Antwerp developed the idea of shareholdership, to facilitate the building of larger ships, and to make possible more extensive trade. The northern Netherlands became a Republic in 1581, and when Antwerp fell in 1585, many of these merchants went north to Amsterdam. The new Republic was largely controlled by its merchant class rather than by the nobility, and had an economy based on early capitalist principles rather than feudal ones. Specifically, the Republic was an early proponent of Free Trade ideas (e.g. Grotius). Its model of colonization was characterized by a strong belief in the bottom line and was entirely based on private enterprise rather than state control.
Many economic historians regard the Netherlands as the first thoroughly capitalist country in the world. In early modern Europe it featured the wealthiest trading city (Amsterdam) and the first full-time stock exchange. The inventiveness of the traders led to insurance and retirement funds as well as such less benign phenomena as the boom-bust cycle, the world's first asset-inflation bubble, the tulip mania of 1636-1637, and the world's first bear raider - Isaac le Maire, who forced prices down by dumping stock and then buying it back at a discount.
Britain and France, which each applied a mercantilist approach to economic policy, were unable to outcompete the Dutch Republic, because in their model, long term politically motivated investments by the state were possible. One consequence of this failure was a crash in the speculative trade in tulips (the 'windhandel') in 1637. See tulip mania.
The earliest stages of merchant capitalism can be traced back to the medieval Islamic world 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 organisation 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), 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.
Modern capitalism didn't arise until the early modern period, between the 16th and 18th centuries, when merchant capitalism and mercantilism 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 Americas; 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."
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-balanacing 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 regimentatation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of the 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 subsides, 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 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 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.
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 capitalism. Laissez-faire 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 competition and the development of a market economy.
In the late 19th century, the control and direction of large areas of industry came into the hands of financiers. This period has been defined as "finance capitalism", characterized by the subordination of the processes of production to the accumulation of money profits in a financial system. Major features of capitalism in this period included the establishment of huge industrial cartels or monopolies; 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 stock 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-faire capitalism and competitive markets 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, 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 antitrust 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 bust business cycles had become a recurring problem. 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 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 Union to avoid suffering the effects of the global 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 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 welfare statism. The phase of capitalism from the beginning of the postwar period through the 1970s has also been variously described as "state capitalism" by Marxist and non-Marxist commentators alike.
The long postwar boom ended in the 1970s, amid the economic crises experienced following the 1973 oil crisis. The "stagflation" of the 1970s led many economic commentators and politicians to embrace neoliberal policy prescriptions inspired by the laissez-faire capitalism and classical liberalism of the 19th century, particularly under the influence of Friedrich Hayek and Milton Friedman. In particular, monetarism, a theoretical alternative to Keynesianism that is more compatible with laissez-faire, gained increasing support in the capitalist world, especially under leadership of Ronald Reagan in the U.S. and Margaret Thatcher in the UK in the 1980s.
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 globalization 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 system and the strict state control of foregin 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.