Capitalism

In the world today there are many types of theoretical economy structures. Through years of evolving, America has adapted a some what complex capitalist economic belief and practice. In definition, according to the Webster’s Third New International Dictionary; the word capital derives from the Latin word capitalis, which comes from the word caput, meaning head. Head is being referred to ones cattle. One who owns cattle owns capital. Capitalism is an 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 (Wikipedia pg. 1). Capitalism is primarily European and has evolved through a number of stages. The term capitalism was first introduced by Karl Marx the founder of communism. Other terms correlated with capitalism include free enterprise and market systems. Mixed economy is another term used for some economic systems most often found in Western Nations. The philosopher who deserves most credit in developing contemporary capitalism is Adam Smith, who authored the famous piece, An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Capitalism has four major characteristics.

Land and Capital, the basic production facilities are privately owned. Buildings, machines, and other equipment are considered capital when they are used to produce goods or services that are eventually consumed. The accumulation of means of production as property into a few hands; this accumulated property called capital and the property-owners of these means of production are called capitalists (Hooker 1996). Second is that the only organization in this “free market” is set by the interaction of the buyers and sellers themselves. Third according to Encarta online is the principle of self interest. Anyone is free to pursue their own self-interests in seeking maximum gain from the use of their recourses and labor in production. This is also called consumer sovereignty. “If competition is present economic activity will be self regulated therefore only minimum government supervision is required” (Wikipedia Pg. 2).

Capitalism is a result of a long historical process. Feudalism is one of the beginning stages of the capitalist evolution. Although many different definitions exist today, feudalism was the economic system of Europe from the 5th through the 15th centuries. According to Wikipedia feudalism consists of three elements; lords, vassals and fiefs. The lord owned the land, the vassal was granted the land and the land was the fief. In exchange for the fief, the vassal would give the lord military services. These relationships formed the essential theory of feudalism and one of the first stages in capitalism.

During the 16th through 18th centuries the general economic policy was mercantilism. Control of the state was strongly emphasized. Exports over imports were believed to improve national strength. Government exercised control over industry and trade. “Mercantilism might be roughly defined as the distribution of goods to realize profit” (Hooker, 1996). According to Encarta Online, the basic purpose of economic policy in the mercantilist era was to strengthen the government and to promote its goals. In this the state exercised much power over production, trade, and consumption. Government accumulated most national wealth from the massive amounts of gold, silver and other precious metals. In mercantilism the real wealth of the nation was measured in its ability to produce. Eventually mercantilism gradually evolved into practices that would in time become capitalism.

In the later 18th century modern capitalism was forming with the help of two developments. One was the concrete ideas of Adam Smith and the other was Francois Quesnay and the group of the physiocrats. Quesnay believed all wealth originated with the land and that agriculture alone could increase and multiply wealth (Encarta pg. 4). The physiocrats were partisans of free trade and laissez-faire which is free market economics. They believed that the revenue of the state should be raised by a single tax imposed on the land. Adam Smith wrote positively of their ideas and doctrines. An Inquiry to the Nature and Causes of Wealth of Nations was Smith’s first attempt to study the historic growth of industry and capital. Smith saw in the division of labor and the extension of markets introduced almost limitless possibilities for society to expand its wealth through manufacture and trade. Smith also believed strongly in the limited interference of government in the free market. Many of his theories are strongly connected with capitalism today. “His theory of the invisible hand of the market through which the pursuit of individual interest 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” (Wikipedia pg. 2). Smith also agreed with David Ricardo’s 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 production. This principle supports ideas for free trade and introduces competition of markets. “Liberal capitalist thought has generally assumed a clear division between the economy and other realms of social activity, such as the state” (Wikipedia