Capitalism is not a fixed system with well-defined, unchanging rules of operation. Rather, it covers a lot of different economic practices over history in a lot of different places. Capitalism as a term describing a system, if you will, came into use in the eighteenth century with the Enlightenment. Today we use it to describe not just economic forms, but to name a particularly European-U.S. kind of thinking about human economic activity. Capitalism as an economic system plays a pivotal role in Enlightenment and post-Enlightenment western societies, especially in the United States.
As a mere descriptive word, generally connoting mercantilism capitalism applies to societies that existed long before and outside of Europe and the United States. In that context, it connotes trade for some kind of profit, or to the traders' advantage, and it existed, before the Enlightenment, at one time or another, in many parts of the world. In West Africa, in what were still the Middle Ages in Europe, there was a large trade network which enriched the Empire of Ghana and the Empire of Mali. Ultimately, this trade reached Europe and Arab countries. The great Silk Road, the trading route of Asia along which Buddhism traveled, carried a mercantilist, or capitalist, trade. More familiar is the fact that the Mediterranean area was a focal point for trade long before the Enlightenment, for, among others, Phoenicians, Greeks, Romans and Arabs. These market systems were not just means for families to survive, but essential to the acquisition of wealth and the survival of entire societies. Among these societies were empires in India, Asia, the Middle East and the Americas which far surpassed western European societies in learning, technology, agriculture, architecture, art, and in over all grandeur in addition to commerce.
Early capitalism, or mercantilism, however, was not universal, nor did all societies evolve in the direction of capitalism.
But we are here interested in the U.S. of A., so I will try not to go too far afield. Be warned, however, we need a historical perspective to refine our understanding and our arguments for confronting today's issues, so it will be incorporated.
Capitalism, as conceived by whom we might call the earliest "official" philosopher/describer of capitalism, Adam Smith, was a system which, in a sense, provided a stage on which actors played their predetermined roles and acted in certain more or less predetermined ways. It, thus, was a system theorized to work no matter what individual humans did, a system which existed independent of human direction: mechanical, predictive and descriptive. When economists get together today in the U.S. to try to keep us out of too deep a recession or to control inflation, they try to determine how to tinker with the system just enough to keep it from going into a painful recession or inflation. Many believe that the system would right itself in time without any intervention because of its nature: we only make minor adjustments because of the immediate problems for us humans.
Today in the U.S. many of us, especially non-economists, seem to believe that this system is sacrosanct, that its laws are almost divine, that it is inextricably entwined in "democracy" which we cannot have unless we have capitalism, or in the now-interchangeable term, the free market system. This is a big problem and not characteristic of the beliefs of its great architects and critics.
There are some basic "laws" or "governing principles" of capitalism. I have compressed a few centuries of thought into much of this. There are multilple themes and variations.
The first and simplest concept is that of supply and demand. One can consider that there is both a supply of goods and a demand for those goods. For instance, there is, at the supermarket, a supply of milk and a demand for it: the supply is the product, the demand is what customers want. When there is more milk than people want, the prices for the milk go down. At its simplest, the principle is that when there is less than people want, the prices go up.
To the idea of supply and demand we can add the concept of scarcity. That is, the notion of not enough. People go to try to find something when they don't have enough of it. The trip to the store in the middle of the night for diapers is an example of this. Today marketsin the United States and much of the "developed" world depend on people not only needing things, but wanting them. Since in our world a large number of us have more than enough of what we need to live on and more than enough of most things, capitalists try to create scarcity by creating demand, getting us to feel we need stuff we don't have like the latest fashion, a better toothbrush, or an SUV.
So scarcity fits right in with the notion of supply and demand.
Producers will try to sell their goods at the highest price they can get. This depends on there being some scarcity. Parents and doting grandparents rushing frantically to Toys-R-Us at Christmas time to get the latest Elmo is an example of at least perceived scarcity. The same thing happened with Beannie Babies and Cabbage Patch Dolls. It happens more subtly when food producers rush lo-carb spaghettie to the supermarket.
Consumers, on the other hand, like it when there is more than can be sold easily...when the prices come down. This happens obviously when a fad loses momentum: the boxes of low-carb spaghetti pile up in carts with marked down merchandise at the front of the supermarket.
Competition provides a brake on runaway high prices. If more than one company is making a product, all will have to try to figure out how to attract customers. And of course all of them want to make more money than that limited to covering their production costs because a value of capitalism is to make money, and certainly to make more than you spend. So producers will have to either figure out a cheaper process for making their stuff, thus being able to make more money at the going rate in the market or how to make their products more desireable than those of their competitors. This leads to innovations in production and/or product. And ads that say things like, "Ford is the Best in Texas."
As innovations generalize, that is, as a whole bunch of producers make things the new way or in the new style, prices will again fall and new innovations will become necessary to stimulate demand (bigger and bigger SUVs). If a product is made to last forever (like in the "good old days") the market for that particular product will wither and not only will the producer lose his profits, but workers will lose their jobs.
The essentials of a capitalist system are traditionally considered to be land, labor and capital. Labor itself is a commodity, too, something which the producers absolutely depend on. A scarce labor market in the pre-industrial days meant workers could demand more wages, an overloaded labor market meant they had to take what the producers offered. Similarly, the land on which producers would build their production facilities is subject to the laws of supply and demand. Landlords and the rent they charge come in for some special treatment by capitalist theorizers. Capital itself, money, is a market commodity as we all are aware if we have money in money market accounts. It becomes very important as businesses try to expand or change significantly. They have to, basically, buy money -- pay interest -- to make the necessary investments in their means of production. Or maybe we should say, they need to rent money.
Most theorists of capitalism did not assume it would go on forever. Adam Smith thought it would go on at least long enough to "raise all boats," for instance, but not necessarily longer than that. He also thought that as people became wealthier, they would have more children, more demand would be created for the basics and the increasing numbers of children would provide the needed new workers.
The capitalist system makes assumptions about human nature that weren't really made before or outside of the European Renaissance and Enlightenment. While humans weren't any kinder as a bunch before it, it wasn't until the Renaissance and most especially the Enlightenment that they came to identify themselves as individuals first and members of a society second. That is, it was, and in many places still is, more the norm to think of the demands of their groups first, themselves second. I'm not celebrating the virtues of community here. Today in negative terms, you see this loyalty to community first in kamikaze pilots and of course suicide bombers. A community loyalty can lead to unquestioning acceptance of all kinds of persecution, physical hardship and the like, and similarly, kings and chiefs and priests justify their positions and their actions as justified by community norms.
Capitalists do think of people as interested in themselves first. Many think that people are by nature imbued with the profit motive, that is, that all of us, if left to our own devices and with time on our hands will turn to trying to make more wealth for ourselves.
Another belief is that people will always act in their self-interest. Individualism as we think of it has its roots in this belief: people not always will, but should act in their self-interest and shouldn't expect other people to do it for them.
A third, but not universal, capitalist belief is that people will act rationally in their own interest.
In a capitalist society, being productive and consuming are the highest virtues. Leisure was shunned early on by self-respecting people in the capitalist system. This industrious economic unit, the working man, was given characteristic advice by Benjamin Franklin: "Remember that time is money. He that can earn ten shillings a day by his labor, and goes abroad or sits idle one half of that day, though he spends but sixpence during his diversion or idleness ought not reckon that the only expense; he has really spent, rather, thrown away, five shillings [more that he would have earned had he worked the whole day]."
Though expecting tremendously individualistic behavior from people, capitalism's theorists see people as impersonal units whose behavior can be described and predicted.
In sum, we see in much capitalist thought origins of the notion of individualism and the notion that people are compelled most of all by their own self-interst. We see, too, the capitalist value of working hard and long well past the time needed to meet our necessities. This is often framed in the context of self-interest: making more money for oneself and seeming virtuous in the eyes of potential creditors needed to, for instance, grow a business. We can also see that it is easy to move from the idea that the seller will try to make the most money he can and the buyer to buy something for the least possible to the belief that we are all trying to cheat each other, especially car salesman. Pronouncements about human nature like these latter ones which are not inherent in capitalism end up shaping behavior, of course. But I would argue that this behavior is not inevitable because other sorts of belief shape behavior just as effectively. And there are always stubborn folks among us who will not be unthinkingly shaped by the general expectations of those around us.
Today a lot of Americans seem to believe that capitalism is some kind of God-given system for total human development and is in its last best stage: that there is nothing better or different that would work, there is no variation that can come along. They consider globalization to be capitalism's greatest flowering. A lot of those same people see socialism as the only and evil alternative : as the enemy of capitalism, kind of like the Fallen Angel constantly nipping at the heals of God. This is a false dichotomy premised on dangerous dogma. As some all-too-often quoted anonymous person said, "change is the only constant." I suspect we will find ourselves in somewhat unfamiliar territory in the future. Nonetheless, capitalism and the rise of the west are inextricably entwine d and certainly capitalism has been a force for much that is wonderful as well as much that is not.
