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The term capitalism is most commonly defined as an economic system in which capital is privately owned and managed for private profit. It is often used as a synonym for the term market economy. The 18th century economist Adam Smith is sometimes thought of as the greatest defender of capitalism.


History of the term capitalism

The esteemed French historian Fernand Braudel traces the history of the use and development of the term capitalism in volume II of his three volume history of capitalism, Civilization and Capitalism. According to Braudel, the first identified use of the term capitalist was in 1633. By the late 1700s it had come into use as a name for private handlers of money for private financial gain.

In 1850, Louis Blanc defined capitalism as "the appropriation of capital by some to the exclusion of others." Proudhon later defined it as an "Economic and social regime in which capital, the source of income, does not generally belong to those who make it work through their labour."

Adam Smith published his seminal thesis The Wealth of Nations in 1776. Clearly the term capitalism was unknown to him. Furthermore, since Smith had a strong aversion to financial speculation and any concentration of monopoly power he would have been a strong critic of capitalism.

Capitalism vs state control of the economy

Conventional wisdom has it that capitalism is the only alternative to communism, or state control of the economy. In fact most economies feature some mix of private and state ownership. Beyond ownership, all economies depend on the state to set a framework of rules for economic life and to order many aspects of social existence which fall outside the realm of exchange (see externalities). The financial and economic collapse of 2008 demonstrates the consequence of inadequate governmental oversight and regulation of capitalist markets.

Ambiguities in the definition of capitalism tend to obscure the nature and implications of the variety of economic models that are available from which a nation may choose. By the classic definition of capitalism, it refers specifically to a concentration and abuse of the power of money.

Capitalism and concentration of ownership

The more contemporary definition of capitalism ignores the essential issue of concentration. An economic system in which private ownership is broadly distributed such that almost every person has an ownership stake in in his or her home and the business on which his or her livelihood depends is one thing. An economic system in which ownership is concentrated in the hands of a few thousand people is quite another. The first provides a solid foundation for true "one person-one vote" democracy. The latter is the foundation of a form of privatized authoritarian rule lacking any semblance of public accountability. It is also anti-market because it favors monopoly pricing and the externalization of costs, both of which are antithetical to efficient market allocation.

The ambiguities and confusion are abetted by the fact that economists subscribe to a very broad definition of the term market economy that includes pure competition at one end and pure monopoly at the other, thus blurring the essential distinction between distributed and concentrated economic power. Market fundamentalists persistently ignore the fact that the magical invisible hand of Adam Smith to which they pledge their faith applies only to the pure competition end of the spectrum.

Capitalism, understood as a concentration of economic power, is a form of social pathology to which market economies are prone in the absence of proper public oversight and regulation to assure that the foundational principles of market efficiency are honored. The equitable distribution of economic power, which means it must be dispersed and locally rooted, is one of the most fundamental of these principles.

See also


Author: David Korten