What is capitalism?
Before discussing capitalism, it is necessary to clarify what I mean by it, given the rather loose way this label is often applied. For instance, equating capitalism with the “free market” has become increasingly common. This is highly misleading and manipulative language. Markets existed long before capitalism emerged.[1] Markets imply only a minimal kind of freedom (of buying and selling) and the idea that a market can operate without a socio-cultural and political-economic context is just nonsense, referred to as utopian by Polanyi,[2] although dystopian would be a better label given the damage and dangers associated with the pursuit of this ideology.
The term “capitalism” emerged in the 18th century but remains a highly contested and politically charged concept, subject to various interpretations.[3] Here, my aim is not to discuss the diversity of definitions and views of capitalism, but to make and discuss what I think is an important distinction, namely between capitalism as a practice and as a system. As a practice, I define capitalism simply as the use of money for the primary purpose of making more money (turning it into capital), by whatever means. A capitalist system refers to a set of political and economic institutions that condone and support capitalism as a dominant economic practice.
Origins of capitalism
Capitalism as a practice is much older than capitalism as a system. For instance, in many pre-industrial societies where money was used, moneylenders lent money to make more money by charging interest. Although going back thousands of years, this practice was not always approved of, let alone supported, by the authorities.[4] By contrast, capitalist systems emerged only in the 14th century, particularly with the rise of the Italian city-states, and in subsequent centuries in other European cities, such as Antwerp and Amsterdam. Here, the art of accumulating money was practised by traders and bankers who developed a range of financial mechanisms to facilitate investments (in ships, merchandise, insurance, etc.), particularly for long-distance trade, which was highly profitable.[5] In these cities, authorities condoned and participated in lending and/or borrowing for profit, making what is generally referred to as “merchant capitalism” the dominant economic system.[6]
The difference between money and capital
It is important to emphasise that money and capital are not the same thing. Money, in various forms, has been used throughout the ages to facilitate the exchange of goods and services. Although people may save money to purchase expensive items or to have a reserve for hard times or retirement, this is not building capital or practising capitalism. We speak of capital and capitalism as a practice only if money is used and/or accumulated with the primary aim of generating more money.[7] Capitalism can be practised in many ways, using different means to transform money into more money. As noted above, arguably the oldest practice is money lending, which has occurred in many societies with economic systems that would not be considered capitalist. What form capitalism takes depends mainly on the existing (dominant) system of production, as systems create different opportunities for making money from money by (re-) investing it. While investing money in (long-distance) trade was the main way to build capital in merchant capitalist systems, the development of industrial production systems, which created the need for a continuous expansion of markets and trade, took the opportunities for capitalist investments to a whole new level, from the funding of machinery and other capital goods, including infrastructure (shipping, canals, railroads) to the financing of imports (of the raw materials needed) and for the opening up or creation of new markets. But these developments were only possible with the active support of the state, among other things, by the creation of a political-economic institutional framework (creating and protecting property rights, the protection of investments, market rules, labour relations, and organised military power to facilitate and protect foreign investments and markets). Hence, the development of the industrial production system relied on the state (first in the United Kingdom) to be turned into an industrial capitalist system. This process was followed by other Western European countries and the United States in the 19th century and exported worldwide in the 20th century.
Forms of capitalism
In this context, it is also important to restate the distinction between industrialism and capitalism, as the two are often seen as inextricably intertwined and inseparable. While it is true that, from the 18th century, capitalism and industrialism developed hand-in-glove, creating expanding industrial-capitalist economic systems, capitalism can be practised in agriculture (a practice which preceded and arguably prepared the ground for industrial capitalism) and became the dominant system in countries in which neither agriculture nor industrial production was the most important mode of production. For instance, the service industry (which includes banking and investment services) has become an increasingly important or even dominant sector in many so-called developed countries, institutionally and otherwise supported by states and governments, producing a form of capitalism that is often referred to, for lack of a better term, as “post-industrial”, but which could also be labelled service capitalism or finance capitalism. A capitalist political-economic system can condone and support more than one of these forms of capitalism, to the point where capitalist practices pervade all sectors of an economy and society. Industrialism, on the other hand, is compatible with non-capitalist systems, as demonstrated by the socialist systems created in the 20th century in the Soviet Union, China, and other countries.
Capitalist systems
Similarly, it is important to keep in mind that capitalism can take various systemic forms depending on the specific institutions (rules and organisations) by which it is given shape in a society where ‘making more money from money’ is condoned and supported by the political authorities. Although capitalism, as an economic system, is often defined following the traditional Marxist view as a system in which the means of production are predominantly privately owned, in contrast to a socialist system where public ownership is the rule, this definition leaves scope for interpretation and considerable confusion regarding particular political-economic systems. For instance, in many countries that are generally deemed to have capitalist economic systems, significant amounts of land, water, minerals and other natural resources, as well as large chunks if not most of the physical infrastructure (roads, railways, communications systems) have been or are still owned (formally) by the state. According to this definition, a country like Saudi Arabia, where, until recently, the oil industry and oil reserves were state-owned, was a socialist state, a pertinently absurd assessment. For this reason, it seems wise to broaden the definitions of capitalism and socialism. Given the diversity of really existing systems, it also makes sense to keep the door open for having a category of mixed or hybrid (or even “other”) political-economic systems.
But despite all this variety, as argued earlier, in my view, capitalism’s essence lies in making money from money, whether based on agriculture, industry or any other economic sector or activity. Therefore, as suggested above, a capitalist system is a political-economic system that condones and supports the use of money for the sake of making more money (building and expanding capital), by whatever means. These means do not necessarily have to be productive investments (the production of “use values”).
The growing importance of financial capitalism
Increasingly, it can be argued, capitalist growth has been created by intangible means (including intellectual property rights) and largely speculative investments and practices that have produced nothing but greater wealth for the owners of financial capital. This phenomenon has also been referred to as “rentier capitalism,” which has arguably become the dominant form of capitalism in the 21st century.[8] Although this does not mean that capitalist production is no longer essential and a source of profits, the evolution of the capitalist economic system (condoned and facilitated by governments) has increasingly been built and become dependent on a financial system that is not only detached from the “real” (productive) economy, but that is highly unstable, and socially damaging (for instance as a driver of growing inequality in wealth and income, and of rising house prices that have made houses unaffordable for a large proportion of people in societies). This has also deprived people of the few opportunities that they (sometimes) had to participate in the economic decision-making of the company they worked for, while the accumulation and concentration of financial power have further eroded and undermined liberal-democratic systems. Therefore, if private ownership of the means of production is seen as an element of a capitalist system, at the very least, this should be extended to ownership and control over financial capital, even if financial capital is not, strictly speaking, a means of production.
“Private” ownership
In this context, it should also be pointed out that using the adjective “private” when referring to ownership of the means of production and financial capital is misleading. Traditionally, the term private was associated with the wishes and/or rights of individuals to have control over their personal sphere or space, encompassing the right to do as they wish in their private life without others looking in. This was based on the presumption that what people do in their own space or sphere has little or no adverse effects on other people. Similarly, private property suggests that the ownership and use of such property are of concern only to the owner and have little or no impact on others. However, private ownership of and control over the means of production in a capitalist system, as well as financial capital increasingly concentrated in a relatively small number of individuals, corporations, banks, and financial institutions, affects many thousands or even millions of other people (non-owners). Thus, what big businesses do, or do not do, is very much in the public rather than the private realm. Yet, the notion of private property rights is commonly invoked by capitalists to justify their right to do as they wish with their property and the income derived from it. While it may be challenging to ban the abuse of the term ‘private’ in public discourse, people should be aware of the manipulative nature of this type of language.[9]
Core features of capitalism
This clarification of what I consider to be the essence of capitalism and capitalist systems is just a starting point for identifying and discussing a range of common elements or features that can be regarded as lying at the core of all capitalist systems. Marx, a foremost researcher of capitalism, has been instrumental in identifying these core elements, which provided the basis for his theory of capitalism. Here, I liberally interpret Marx’s views, and those of several other Marxist scholars who built on his ideas, by identifying five features that flow more or less logically from its defining characteristic as described above, the practice of making money from money, but at the stage of what is commonly referred to as industrial capitalism. These features will be referred to as the profit motive, competition, the need for capital accumulation, commodification, and the tendency towards overproduction and crisis.
The profit motive
First, the profit motive arguably is capitalism’s most fundamental driving force. It expresses itself in the age-old practice of charging interest (often at exorbitant rates), referred to as usury. It is debatable whether this practice finds its source in a basic (or natural) human characteristic like selfishness,[10] or whether the practice has emerged because some people appear to be more inclined to take advantage of others when the opportunity arises, and when socio-cultural norms weaken and/or allow this to happen. I am tempted to support the second view, believing that even if all people may be inclined to be selfish, they can also be empathetic.[11] Whether and to what extent such inclinations manifest in a society depends on its dominant cultural norms. History has repeatedly shown that humans are capable of committing atrocious acts against one another. But not all people do so all the time, and arguably most people in most societies behave in more socially desirable ways, encouraged and constrained by society’s prevailing standards and norms. Hence, although it will always remain speculative how money lending or usury arose as an acceptable practice, it is likely that certain conditions had to be present. First of all, money had to exist or be created. Second, creative individuals must have invented the idea and practice of money lending. Third, the society or societies in which this occurred, or their rulers, must have accepted or even approved of the practice.
The latter condition existed in the Italian city-states, where credit and the practice of making money with money by investing it in long-distance trade became the source of growing fortunes, condoned and actively participated in by rulers. By the time capitalism became the dominant economic system, banking, credit and charging interest were already prevalent and institutionally accepted and supported practices. The main difference between industrial capitalism and earlier societies was that the former opened up far greater opportunities for making money with money by investing it in large-scale industry as well as in trade. The primary motivation of those involved in these practices was to make money. Those who invested money in industry did (and still do) so with the expectation not only to recuperate the costs, but also to get a financial return on their investment. For capitalists, profit is income. Being profitable is the bottom line that trumps all other concerns. For industrialists (and traders), the need for profit increases if investments have been financed by borrowed money on which interest needs to be paid. Banks and other institutions that own and control finance (credit) do so only because they also expect a (good) return from lending and investing money, not to serve social needs or purposes. The belief that selfishness and greed are conducive to producing optimal outcomes for everyone was further strengthened by the abuse of Adam Smith’s notion of the “Invisible Hand”.[12]
In a capitalist system, as a rule, multiple traders and/or producers compete with similar products and services in the same market. Competition is a second core feature of capitalist systems, forcing producers and traders to produce goods or services in the most cost-efficient way, by minimising costs and maximising labour productivity, to be able to offer similar products or services at lower prices than competitors. Competition, even if imperfect (in the absence of complete information, and as some businesses enjoy certain advantages), constitutes more than an incentive to minimise costs and increase efficiency: it makes it imperative. Losing the competition battle results in a decline in sales and profits, threatening a company’s financial viability and potentially leading to its demise. Not for nothing, life in a capitalist system is often portrayed in Darwinian terms as a struggle for survival of the fittest or, more colloquially, as a “dog-eat-dog” world. However, this creates a contradiction: it implies that companies that perform best grow at the expense of others, creating a dynamic that ultimately leads to the survival of only a few, or even just one, company—a monopoly or oligopoly, essentially monopoly capitalism.[13] Logically, then, a free market capitalist system leads to the dominance of monopolistic companies that, theoretically, are the most efficient, but that can charge pretty much what they want (depending on the elasticity of demand and/or their success in creating demand) for their products or services. This process also occurs in financial capitalism as reflected in the collapse of, and mergers between, banks and other financial institutions, leading to increasingly bigger financial institutions that, when threatened with collapse, have been deemed by governments (notably the US government and the Federal Reserve Bank) to be too big to be allowed to fail, leading to multi-billion dollars bailouts sanctioned by the state.[14]
Economic growth imperative
Economic growth or expansion is a third essential feature of capitalism, driven by competition and the struggle for survival. Companies compete for market share and hence must be able to expand to increase economies of scale, productivity, and profit more than their competitors. If such opportunities in an industry decline, they must seek new, profitable outlets elsewhere. Capital will flow towards those industries or sectors where the highest rate of return can be obtained. Hence, in a capitalist system, for each company, economic growth (the accumulation of capital; finding new opportunities for profitable investments) is a must, not a choice (“grow or die”).[15] In such a system, economic growth is not simply an addiction, as some analysts argue [16], but a systemic imperative. However, expansion is only viable if demand also increases and if the profits can be reinvested. As the demand for a product is likely to decline when markets get saturated, companies constantly develop new or slightly different products that are presented to potential consumers as superior, even if the changes are minor or mostly cosmetic. Shortening production cycles, in part by incorporating obsolescence and manufacturing non-repairable, disposable products, has become a dominant commercial strategy. Creating consumer loyalty to a brand that is presented as an essential element of an individual’s or group’s identity, needs, or lifestyle induces consumers to keep up with the latest fashion, model, or trend.[17] This is what can be referred to as a created addiction. Getting people addicted to endless consumerism is a means of meeting the imperative for growth.
For the same reason, capitalist systems have been a driving force behind reducing or eliminating the barriers to exporting to other countries (albeit not necessarily barriers to imports from foreign competitors). Historically, capitalist accumulation has been linked with colonialism and imperialism, creating opportunities for investments and new markets (as well as to secure resources and to use free or cheap labour), with governments providing or seeking to provide favourable conditions and offering security guarantees.[18] It has also been the driving force behind economic globalisation.
Everything is a (potential) commodity
A fourth core feature of industrial capitalism, linked to the accumulation imperative, is a world outlook in which everything is regarded as a (potential) commodity. Nature is nothing but a pool of resources that provides the raw materials for production. Humans merely embody labour – a production factor or “human resource”, treated as a commodity traded on the labour market. Everything is prone to being turned into a commodity, a new opportunity for investment (capital accumulation) and a source of profit. This includes all of nature (including plants, animals and their genetic characteristics, water) as well as social services or functions that previously were regarded as public goods and/or collective responsibilities like education, health care, child care, care for the elderly, public transport, waste management, and even security (private security firms, private military contractors), among many other.[19] Personal data and information harvested from electronic media communications and the public realm, as well as gross invasions of people’s private spheres, are also means of producing highly sophisticated services that enable the surveillance and manipulation of individuals for commercial and political purposes.[20]
Prone to crises
A fifth core feature of capitalism is that it is prone to crises. Crises can result from overproduction in a saturated market, especially when multiple companies offer similar products or services with each trying to maximise its market share, and/or from a lack of new profitable investment (capital accumulation) opportunities, slowing down economic growth. Notwithstanding all marketing and branding efforts, there are limits to what people regard as truly innovative, essential, or even desirable “must-have” products or services. Although foreign or global markets may offer seemingly unlimited scope for expansion, this can be hampered by protectionism, trade barriers, and weak demand due to low incomes, not least caused by capitalism’s inherent logic to keep the price of labour down. When, at irregular intervals, overproduction results in losses rather than profits, companies without sufficient financial reserves are forced to contract or close down, which worsens unemployment, lowers incomes and demand, and creates a downward spiral in the economy as a whole.
In addition to overproduction, the financial system is another source of instability and crises. Finance plays a key role in funding economic expansion and, increasingly, the standard operations of companies. From the 17th century, economic growth has been fuelled mainly by credit made available by private banks whose profits (based on charging interest) depended on the ability of commerce, and later of industries, to undertake and expand their operations. If the “real” (productive) economy stagnates and new opportunities for profitable investments dry up, banks are hit by a reduction of demand for credit as well as the risk of companies defaulting on their debts. It has been argued that investment cycles are linked to long-term technological developments (referred to as a process of “creative destruction”) in industries or sectors that have stimulating effects across large parts of economies.[21] Failing such moments of technological transformation, wars have offered alternative opportunities for massive investment during wartime (for the arms industry and national mobilisation efforts) and in their aftermath (rebuilding infrastructure and industrial capacity). The financial sector heavily depends on continuing economic expansion (based on credit). It is at the sharp end of economic downturns and prone to crisis even when expectations of economic growth (and hence the demand for credit) decline.
Increasingly, with the deregulation of the financial sector, speculative investments in financial instruments, such as derivatives like futures trading, currency trading, and commodity trading, as well as in shares and real estate, have provided new opportunities for capital accumulation and profit-making. Investments in these areas have become increasingly attractive and vital for banks, other financial institutions, and large corporations, serving as outlets for accumulated capital and helping to maintain their profitability, often offering higher returns than investments in the real economy. While these new capital investment tools provided alternative opportunities for capital accumulation, generating enormous profits and incomes for investors and capital managers, creating many new billionaires, they have done nothing to diminish capitalism’s proneness to crisis. On the contrary, they have fuelled speculative bubbles, aggravated financial instability, and been a source of financial crises that have serious repercussions on the real economy.[22] These developments further illustrate capitalism’s imperative of continuously finding new capital accumulation (and profit) opportunities, even by producing nothing and investing in thin air (making money with money only), be it at the cost of significantly increasing inequality of wealth and income and the economic vulnerability of millions of people.
Conclusion
It is essential to distinguish between capitalism as a practice (of making more money from money) and a system (a political-economic system that condones and supports capitalism as a practice). Capitalism as a practice has a much longer history than capitalist systems. Capitalist systems emerged in the late Middle Ages with the rise of long-distance trade supported by city-states. Different forms of capitalism developed over time and were linked to the dominant means of capital accumulation (from merchant capitalism to agriculture, industry, and increasingly financial “services”). Yet, all capitalist systems share several core features, including the growth imperative. This makes these systems highly dynamic but also unstable and prone to crises.
Even this brief sketch of capitalism’s main features should make clear that it is fundamentally at odds with environmental protection, even if this is not widely accepted.
References
[1] Braudel, Fernand (1979, 1983 ed.), The Wheels of Commerce. London: William Collins Sons & Co., Book Club Associates.
[2] Polanyi, Karl. The Great Transformation. The Political and Economic Origins of Our Time. Boston, Mass.: Beacon Press.
[3] Braudel, Fernand, The Wheels of Commerce, Chapter 3; Kocka, Jürgen (2016), Capitalism. A Short History. Princeton: Princeton University Press.
[4] Charging interest on loans has long been condemned by the Catholic church and was referred to as “usury”.
[5] Braudel, Fernand, The Wheels of Commerce, Chapter 4.
[6] Wallerstein, Immanuel), The Modern World-System II: Mercantilism and the Consolidation of the European World-Economy, 1600-1750. New York: Academic Press; Heller, Henry (2019), A Marxist History of Capitalism. London: Routledge.
[7] Marx uses the formula M-C-M (Money-Commodities-Money) to refer to this process, by which money is transformed into commodities (goods or services produced to sell them with a profit), with the result of generating more money. However, as Marx acknowledged, money can be used to make more money via purely financial (notably speculative) transactions (depicted by the formula M–M). This practice has become increasingly significant in the capitalist system. But the point to emphasise is that only if money is used to make more money is it referred to as capital, and the user of that money is a capitalist. Marx, Karl (1867; 1887, First English edition ed.), Capital. Volume 1. The Process of Production of Capital. Moscow: Progress Publishers, Chapter 4.
[8] Christophers, Brett (2020), Rentier Capitalism. Who Owns the Economy, and Who Pays for It? London and New York: Verso; Piketty, Thomas, Capital in the Twenty-First Century. Cambridge, Mass.: Belknap Press.
[9] For a similar argument, see Schumacher, E. F., Small Is Beautiful: A Study of Economics as If People Mattered. London: Blond and Briggs, 222. He notes, “When we come to large-scale enterprises, the idea of private ownership becomes an absurdity”.
[10] Argued to be “hard-wired” – rooted genetically, see Dawkins, Richard (1989; 2006, 30th anniversary edition ed.), The Selfish Gene. Oxford: Oxford University Press.
[11] Similarly, Rifkin argues that the human inclination towards empathy is not a natural constant, but has gradually grown with the improvement of socio-psychological conditions for cooperation, as well as advancements in global communication technology. However, human consciousness also remains captured by less inclusive ways of thinking, a tendency fuelled by rising environmental and resource stresses. Rifkin, Jeremy (2009), The Empathic Civilization. The Race to Global Consciousness in a World in Crisis. New York: Penguin.
[12] It must be noted that Smith did not argue that the market mechanism of the Invisible Hand implied that the pursuit of self-interest should be morally condoned and/or that this would ensure that the collective good would be served by it, which is an important distinction. Bishop, John D. (1995), “Adam Smith’s Invisible Hand Argument”, Journal of Business Ethics, Vol . 14, 165-180. The use of this metaphor is an example of how, more broadly, Smith’s work has been abused by free market ideologues. See Sen, Amartya (2011), “Uses and Abuses of Adam Smith”, History of Political Economy, Vol . 43, No.2, 257-271.
[13] Baran, Paul A. and Paul M. Sweezy (1968), Monopoly Capital. An Essay on the American Economic and Social Order. London: Pelican Books.
[14] Tooze, J. Adam, Crashed: How a Decade of Financial Crises Changed the World. United Kingdom: Penguin Random House.
[15] For a good summary of the capitalist growth imperative, see Douthwaite, Richard (1993), The Growth Illusion. How Economic Growth Has Enriched the Few, Impoverished the Many, and Endangered the Planet. Tulsa, Oklahoma: Council Oak Books, Chapter 2. See also Smith, Richard A., Green Capitalism: The God That Failed. World Economics Association, 18-20.
[16] Daly, Herman E., “The Steady-State Economy: Toward a Political Economy of Biophysical Equilibrium and Moral Growth”, San Francisco: W. H. Freeman and Company, 149-152; Hamilton, Clive, Growth Fetish. Crows Nest, NSW (Australia): Allen & Unwin.
[17] Klein, Naomi (2001), No Logo: No Space, No Choice, No Jobs. London: Flamingo.
[18] Baran, Paul A. (1957), The Political Economy of Growth. New York: Monthly Review Press; Barratt Brown, Michael (1974), The Economics of Imperialism. Harmondsworth: Penguin Books.
[19] Lee Peluso, Nancy (2012), “What’s Nature Got to Do with It? A Situated Historical Perspective on Socio-Natural Commodities”, Development and Change, Vol . 43, No.1, 79-104; Harvey, David, A Brief History of Neoliberalism. Oxford and New York: Oxford University Press; Lysandrou, Photis (2005), “Globalisation as Commodification”, Cambridge Journal of Economics, Vol . 29, No.5, 769-797.
[20] Zuboff, Shoshana, The Age of Surveillance Capitalism. London: Profile Books Ltd.
[21] Schumpeter, Joseph A. (1943; 1966), Capitalism, Socialism, and Democracy. London: G. Allen & Unwin; Mason, Paul (2015, ebook ed.), Postcapitalism: A Guide to Our Future. London: Allen Lane, Chapter 2.
[22] Tooze, Adam (2018), “The Forgotten History of the Financial Crisis: What the World Should Have Learned in 2008”, Foreign Affairs, Vol . 97, 199-210; Tooze, J. Adam, Crashed: How a Decade of Financial Crises Changed the World.