Capitalism, economic system in which private individuals and business firms carry on the production and exchange of goods and services through a complex network of prices and markets. Although rooted in antiquity, capitalism is primarily European in its origins; it evolved through a number of stages, reaching its zenith in the 19th century. From Europe, and especially from England, capitalism spread throughout the world, largely unchallenged as the dominant economic and social system until World War I ushered in modern communism (or Marxism) as a vigorous and hostile competing system.
The term capitalism was first introduced in the mid-19th century by Karl Marx, the founder of communism. Free enterprise and market system are terms also frequently employed to describe modern non-Communist economies. Sometimes the term mixed economy is used to designate the kind of economic system most often found in Westernn ations.
The individual who comes closest to being the originator of contemporary capitalism is the Scottish philosopher Adam Smith, who first set forth the essential economic principles that undergird this system. In his classic An Inquiry into the Nature an d Causes of the Wealth of Nations (1776), Smith sought to show how it was possible to pursue private gain in ways that would further not just the interests of the individual but those of society as a whole. Society’s interests are met by maximum prod uction of the things that people want. In a now famous phrase, Smith said that the combination of self-interest, private property, and competition among sellers in markets will lead producers “as by an invisible hand” to an end that they did not inte nd, namely, the well-being of society.
Characteristics of Capitalism
Throughout its history, but especially during its ascendency in the 19th century, capitalism has had certain key characteristics. First, basic production facilities—land and capital—are privately owned. Capital in this sense means the buildings, mach ines, and other equipment used to produce goods and services that are ultimately consumed. Second, economic activity is organized and coordinated through the interaction of buyers and sellers (or producers) in markets. Third, owners of land and capit al as well as the workers they employ are free to pursue their own self-interests in seeking maximum gain from the use of their resources and labor in production. Consumers are free to spend their incomes in ways that they believe will yield the grea test satisfaction. This principle, called consumer sovereignty, reflects the idea that under capitalism producers will be forced by competition to use their resources in ways that will best satisfy the wants of consumers. Self-interest and the pursuit of gain lead them to do this. Fourth, under this system a minimum of government supervision is required; if competition is present, economic activity will be self- regulating. Government will be necessary only to protect society from foreign attack, uphold the rights of private property, and guarantee contracts. This 19th-century view of government’s role in the capitalist system has been significantly modified by ideas and events of the 20th century.
Merchants and trade are as old as civilization itself, but capitalism as a coherent economic system had its origins in Europe in the 13th century, toward the close of the feudal era. Human beings, Adam Smith said, have always had a propensity to “truck, barter, and exchange one thing for another.” This inclination toward trade and exchange was rekindled and stimulated by the series of Crusades that absorbed the energies of much of Europe from the 11th through the 13th centuries. The voyages of d iscovery in the 15th and 16th centuries gave further impetus to business and trade, especially following the vast flood of precious metals that poured into Europe after the discovery and conquest of the New World. The economic order that emerged from these events was essentially commercial or mercantile; that is, its central focus remained on the exchange of goods rather than on their production. Emphasis on production did not come until the rise of industrialism in the 19th century.
Before that time, however, an important figure in the capitalistic system began to emerge: the entrepreneur, or risk taker. A key element in capitalism is the undertaking of activity in the expectation that it will yield gain in the future. Because t he future is unknown, both the risk of loss and the possibility of gain always exist. The assumption of risk involves the specialized role of the entrepreneur.
The thrust toward capitalism from the 13th century onward was furthered by the forces of the Renaissance and the Reformation. These momentous developments changed society enormously and paved the way for the emergence of the modern nation-state, whic h eventually provided the essential peace, law, and order crucial for the growth of capitalism. This growth is achieved through the accumulation of an economic surplus by the private entrepreneur and the plowing of this surplus back into the system f or further expansion. Without some minimum of peace, stability, and continuity this process cannot continue.