The growth implications of structural change are ambiguous. Institutions like property rights, law and money are allocative institutions that maximize exchange in a given economic structure. Though property rights have non-trivial effects on production, Reinert notes that these are largely used to facilitate arbitrage. For instance, Reinert explains that the history of innovation is largely written by state support and accident rather than the enforcement of patent laws property rights.
Industrial polices tariffs, subsidies, etc. Also, this article posits that a given economic structure can be reproduced under different formal institutional settings—democracy or dictatorship. Therefore, if production structures are the same, economic performance can be the same in different countries with different political systems.
But our theory of economic structures explains that differences in economic performance lie in the different patterns and rates of structural change, not in the differences in institutions. The debate on institutions and development is centred on the direction of causation. While new institutional economists argue that institutions cause growth, the literature on industrial policies Chang ; Khan and Jomo ; Reinert , among others, contend that growth and development determine the direction and rate of institutional change.
In this article, we make two claims: 1 there is bidirectional causality between institutions and economic structures and 2 the type of economic structure determines the performance or efficacy of formal institutions. The structural adjustment programs of the IMF and the second-generation reforms of the World Bank are major institutional changes that revise the rules governing business and social interactions.
These reforms affect economic performance because they change the structure of economies. While it is true that their productive capabilities were not on the global technological frontier, it is also true that the growth rates in many African and LAC countries were higher in the s and s as compared to the post-reform period Chang ; Khan ; McMillan and Rodrik But the reverse line of causation is also valid: structural transformations ignite institutional changes Ancochea ; Chang ; Reinert The discovery of gold in California led to what is popularly known as the California gold rush.
This discovery changed both the sectoral distribution of GDP and the type of economic activities produced. As is the case with institutions, the exploitation of this natural resource does not exist in abstraction; it has to be regulated under a new institutional framework. Similarly, institutional changes are needed when oil is discovered. It is instructive to remember Robinson Crusoe on his island. He hardly has need for the institution of limited liability or a central bank; these institutions are simply irrelevant for the production structure on the island.
The key point is that one cannot understand institutions and their causal effects in isolation of production structure. But even new institutional economists understand the importance of economic structure and its relation to institutions. Their emphasis on property rights and the rule of law, etc. The focus on exchange is because of an implied and too often ignored assumption that the problem of production has been solved. It is as if new institutional economists assume an increasing returns production structure.
But one cannot make development policy with the assumption that the problem of production has been solved. A shrewd observer would argue that the principal problem in poor countries is the absence of production capabilities.
When this problem is binding, the concern with imperfect exchange becomes immaterial. The view that institutions are the rules that shape human interaction North does not capture the nexus between institutions and economic structures. This definition allows for one direction of causation—from rules to consequence. It follows that the declaration of the primacy of institutions over all else and its one direction of causation, as in Rodrik et al. Khan contends that institutional performance differs across time and space because of differences in political and economic structures.
He explains that developed countries have a larger ratio of private sector production to GDP as compared to underdeveloped countries. This structural difference affects the costs and effectiveness of institutional enforcement. In developed countries with advanced production structures composed of economic activities with increasing returns , allocative institutions are readily enforced since the proceeds from these economic activities are sufficiently high to cover the costs of enforcement. But in poor countries with little production capabilities and a plethora of commodities with diminishing returns, the gains from private contracting are hardly sufficient to cover the costs of enforcing property rights.
This fundamental insight illustrates the dominance of economic structures over institutions. At a general level, as the production of economic activities with increasing returns grow relative to diminishing returns the gains from private contracting exceed the costs of enforcing allocative institutions. Thus, in countries with advanced or increasing returns production structures, institutions of exchange perform as expected.
But in the absence of these conditions, institutions of exchange are inadequately enforced. Consider the implications for poor countries. In diminishing returns production structures, the gains from private contracting are not sustainable. A great share of economic transactions is undertaken through extra-market institutions for one principal reason—the monetary gains from diminishing returns activities are not sufficient to cover the costs of enforcing formal institutions or private contracts. Extra-market institutions range from black-markets, gifts to political patronage and these can explain the prominence of corruption and poor enforcement of the rule of law observed in many less developed countries.
To illustrate this further, consider the political dimensions. Unlike rich countries, there is no collective or political interest in protecting and developing the private sector in poor countries. This lack of political interest explains the frequency of populist policies and continuous rule violating behaviour.
The relatively small private sector necessitates a narrow tax base and a low employment premium. Inevitably, the state becomes the largest source of employment and, by extension, represents a formidable political force. Countries across Africa, Asia and LAC with diminishing returns production structures are well known for being highly corrupt with weak institutions and enforcement of the rule of law Khan , , In our view, the different forms of political organizations limited access orders or open access orders are the outcomes of different economic structures.
Private enterprises are unlikely to maintain market share and influence if they are tainted with corruption scandals. This explains why consumer protection codes, fire and other safety regulations, etc. This is hardly an argument to defend poor governance or corrupt business practice, but from a policy standpoint, it is imperative that we fully understand the structural reasons why institutions perform differently across geographies. Given this insight, the claim that institutions determine the rate of economic growth becomes trivial.
Institutions can perform differently due to different economic structures. Any variation in economic growth can only be explained by the factor that causes variation in institutional performance—this factor is economic structure. Through the forces of globalization, institutional diversity is on a downward trend—consider the rise of democracies across the world, the adoption of independent central banks and anti-corruption bureaus, etc. Nonetheless, the argument presented here explains why expected and actual institutional performance can diverge. It is therefore important to differentiate between effective institutions and institutions as commonly understood.
Institutions become effective only when they are adequately enforced. The implication is that transferring the formal political and economic rules of successful Western economies to third-world and Eastern European economies is not a sufficient condition for good economic performance. The connection between economic structure and the allocation of talent has not been explored within the literature. But we argue that a given economic structure has a given structure of occupational rents that determines the allocation of talent. For instance, FIRE 1 economies demand financial entrepreneurs, while largely agricultural economies have a labour market structure that corresponds to its economic system.
Why occupational rents rather than occupational remuneration? The former refers to the income earned by key players of a certain economic structure well above what their entrepreneurial talent justifies. In a given economic structure, there is a small group of what we may call rentiers that benefit disproportionally from the production structure and the occupational rents become the regulatory mechanism for the labour market.
Consequently, occupational rents serve as a source of de facto political power that one can potentially transform into de jure political power. The latter is used to enforce economic institutions that support the production structure and by extension, occupational rents. This generates an equilibrium that explains both structural and institutional rigidities. This equilibrium is unlike the stability between reward structures and the allocation of talent proposed in Acemoglu Acemoglu explains that the past allocations of talent influence future reward structures and shape the future allocation of talent—note that economic structure is missing from this equilibrium process.
But as explained earlier, institutions are underpinned by production structures, thus, the equilibrium is among economic structure, political power and institutions. There can be great political interest in creating structural rigidities in economic systems as long as this is beneficial to powerful groups.
The financial entrepreneurs in the FIRE economy have a large cohort of lobbyists to ensure that the sector remains under-regulated and to perpetually justify an unfair tax code. In poor countries, the rural population represents a greater share of the total political constituency and this creates political incentives to maintain an unjustifiably large rural economy.
While modernization is always the central objective of poor countries, the rural—urban divide is a formidable political constraint to any modernization project. Further, political entrepreneurs benefit from the rural—urban divide and enact policies to fortify this division. The contention that economic structures determine the structure of occupational rents is a thesis about the structural origins of the distribution of income.
Economic structures determine the pre-tax income across various occupations. In the absence of redistributive transfers, the distribution of income across sectors and occupations affect economic performance, to the extent that these reinforce the economic structure. The latter has become the principal regulator of growth in the USA and other developed countries Lapavitsas and Powell This structural change has manifested itself in a labour market geared towards finance, which reinforces the FIRE economy.
Over time, this equilibrium engenders Minsky cycles Minsky and lead to financial crises. Distributional conflicts are essentially a struggle over property rights to the gains from growth. This means that the rise of inequality is not only structurally determined but also represents an increasing concentration of property rights. If a broad cross section of society has property rights, then the gains from growth must be shared among a broad cross section of society.
In our view, there are limitations on both fronts. The central aim of Political Economy is to emphasize the importance of politics for economic outcomes. It is important to differentiate between liberal and electoral or illiberal democracies Zakaria Besides regular elections, electoral democracies violate civil liberties, censor the media and fundamentally establish an authoritarian form. Can economic structures predict political transitions? The latter is defined as either land or capital intensive and though this view is different from ours, the difference can be easily reconciled.
Among the economic activities located at the periphery of the product space are natural resources like oil, gold and land. Whether a country transitions to or consolidates democracy depends on whether the source of income of the elites is easily taxed Acemoglu and Robinson Elites in these economic structures choose repression instead of democracy to forgo the redistributive burden. In contrast, industrial elites facilitate a democratic transition since it is harder to tax capital income and entrepreneurship in capital intensive economic structures. In short, economic development towards a capital intensive economic structure promotes democracy Acemoglu and Robinson Inclusive political institutions democracy and inclusive economic institutions property rights, etc.
Given this examination, it is economic structure that is the fundamental cause of long-run growth. But our framework provides a richer analysis of the link between economic structure and democracy. An increasing returns economic structure produces commodities with longer career ladders and creates a mechanism to climb the ladders across social classes. This provides the means to larger lifetime earnings for an individual, which can improve the distribution of income.
As explained earlier, in increasing returns production structures both wages and profits are sustained for longer periods. This is a recipe for the creation or maintenance of a strong middle class, an important ingredient to the creation and maintenance of democracies Acemoglu and Robinson It is important to underline the difference between our theory of political transitions and the modernization hypothesis Lipset , which claims that growth in per capita income causes the creation and consolidation of democracies. There are many non-democratic countries with high per capita incomes but with diminishing returns economic structures—Equatorial Guinea is a case in point.
Per capita income is not economic structure. Khan argues that democratic transitions become more likely when private sector production to GDP expands. Khan explains that entrepreneurs pay more taxes and thus have more at stake in the political system and consequently demand a greater say. This line of thought is consistent with our work: as an economy transitions to an increasing returns production structure, democratic transitions are more likely.
They posit that: 1 a rule of law for elites, 2 civil society organizations and 3 a centralized and consolidated control of violence are necessary, though not sufficient prerequisites for democratic transitions. But we have already demonstrated that the performance of conditions 1 and 2 depend on economic structures, making these less than robust conditions for democratic transitions.
Also, condition 3 is a necessary factor for stability in democratic and non-democratic states, which makes this a less than interesting necessary condition for democratic transitions. The critical junctures hypothesis Acemoglu and Robinson ; Moore ; Eggertsson and Sokoloff among others explains that historical events like colonialism are a better explanation for divergent paths.
We agree that critical junctures are important. Some colonial strategies deliberately prevented colonies from producing commodities with increasing returns and by extension, prevented growth-enhancing structural change. In Acemoglu , the author highlights the political origins of technological change—in less democratic societies, political elites create entry barriers into different economic activities oligarchic property rights , but in democratic societies, there is free entry and exit democratic property rights.
Over time, as comparative advantage changes in favour of the excluded groups, oligarchic property rights reduce efficiency and slow down technical progress. While democratic property rights may diffuse the technical knowledge across society, these democratic property rights are irrelevant in diminishing returns production structures with a low technological base. This is the key difference between our view and Acemoglu Just as private property rights in the absence of productive capabilities are insufficient to increase production, democratic institutions without a technological base can hardly diffuse or promote technological progress.
The observation in Acemoglu and Robinson is simply reflective of differences in economic structures, and this explains the different political institutions and rate of technical progress. Building on Acemoglu , we now have two routes through which economic structures determine the rate of technical change and economic growth: the economic route, which we have already explained, and now the political route—from economic structures to political transitions to technical change.
Schematic of economic structures, institutions and economic performance. During structural transformations, the distribution of income and de jure and de facto political powers change and this facilitates the enforcement of new institutions to regulate the new economic structure. Specifically, growth-enhancing structural changes are observed when institutions of production are effectively enforced by the state.
This can potentially ignite democratic transitions or consolidation and increase the transmission of technology across the economy. In contrast, economic stagnation and growth accelerations and collapses are observed in many parts of the world and these economies are usually embedded in electoral democracies. The origin of their failure to strengthen their democracies and provide a sustainable base for economic growth lies in their diminishing returns economic structure.
We review the relevant changes in the US economy since the agrarian transformation to provide empirical support for our theory. The US economy is chosen because of the recent financial crisis. They argue that the present crisis is the outcome of a stalled transformation from manufacturing to services. We agree with the central theme of this analysis but with the aid of our theory, we are able to provide insights into the roles inequality and institutions played in the great depression and recession. But farm productivity shocks and expanded cultivation substantially reduced agricultural prices and incomes in the early s League of Nations ; Timoshenko , and this affected the structure of the economy in important ways.
One important implication of this secular decline is the shedding of agricultural employment that led to massive joblessness, since new sectors and economic activities failed to fully utilize the growing pool of the unemployed. This depressed demand in both the rural and urban economies paved the way for a secular stagnation.
This period of structural change inevitably altered the distribution of occupational rents against rural labour, which increased rural-urban inequality and exacerbated the deflationary tendencies of the transformation. To fully grasp the distributional implications, it is useful to remember that during this period initial levels of inequality were already high. In agrarian economies, the ownership of capital was highly concentrated leading to significant inequalities of wealth and income. Though some landowners had lost private wealth during the agrarian transformation, the loss of agricultural employment countered any tendency to reduce wealth inequality.
During this transformation, manufacturing, construction and trade services were the newly emerging sectors, which demonstrated a structural change towards the centre of the product space or to an increasing returns production structure. In other words, labour market forces alone were insufficient to facilitate the necessary rural—urban migration.
Therefore, the structural transformation was not growth enhancing, especially in consideration of the deflationary tendencies. World War I WWI served as a temporary boost to economic growth in the US economy and accelerated the transformation to an increasing returns economic structure but the process remained incomplete.
Based on our theory, we expect institutional reforms to follow that serve only the interests of economic elites. Increase in rural—urban inequality and mass agricultural unemployment alter de facto political power, which influenced de jure political power to reduce top income tax rates, among other things, and this worsened inequality. High inequality and forced savings during WWI created a large pool of loanable funds that did not find profitable avenues in agriculture, and the newly emerging industrial sector was insufficient to exploit the excess savings.
These gave way to the unfortunate idea of cheap credit or buy now and pay later. Consequently, this created a debt-induced growth model since consumption expenditures exceeded the declining agricultural and urban incomes. It is difficult to sustain economic growth based on high inequality and an incomplete structural transformation. As opposed to a structural change to an increasing returns production structure with longer career ladders and lower inequality, the economic elites chose to fuel a consumption boom based on cheap credit, which facilitated financial speculation and the growth in household debt.
Collectively, these created a stock market bubble that led to the great depression. The latter was a non-market intervention aimed at industrializing the USA to manufacture airplanes, weaponry and armours. Unlike the earlier period of structural change, the newly industrialized USA forced labour off the farms and absorbed idle labour into factories.
What an extraordinary episode in the economic progress of man was that age which came to an end in August In this period, the global financial system was mainly tied to the gold standard.
The United Kingdom first formally adopted this standard in Soon to follow were Canada in , Newfoundland in , the United States and Germany de jure in New technologies, such as the telegraph , the transatlantic cable , the radiotelephone , the steamship and railway allowed goods and information to move around the world at an unprecedented degree. In the period following the global depression of the s, the state played an increasingly prominent role in the capitalistic system throughout much of the world.
The postwar boom ended in the late s and early s and the situation was worsened by the rise of stagflation. Public and political interest began shifting away from the so-called collectivist concerns of Keynes's managed capitalism to a focus on individual choice, called "remarketized capitalism". According to Harvard academic Shoshana Zuboff , a new genus of capitalism, surveillance capitalism , monetizes data acquired through surveillance. The relationship between democracy and capitalism is a contentious area in theory and in popular political movements.
The extension of universal adult male suffrage in 19th-century Britain occurred along with the development of industrial capitalism and democracy became widespread at the same time as capitalism, leading capitalists to posit a causal or mutual relationship between them. Moderate critics argue that though economic growth under capitalism has led to democracy in the past, it may not do so in the future as authoritarian regimes have been able to manage economic growth using some of capitalism's competitive principles   without making concessions to greater political freedom.
Milton Friedman , one of the biggest supporters of the idea that capitalism promotes political freedom , argued that competitive capitalism allows economic and political power to be separate, ensuring that they do not clash with one another. Moderate critics have recently challenged this, stating that the current influence lobbying groups have had on policy in the United States is a contradiction, given the approval of Citizens United.
This has led people to question the idea that competitive capitalism promotes political freedom. The ruling on Citizens United allows corporations to spend undisclosed and unregulated amounts of money on political campaigns, shifting outcomes to the interests and undermining true democracy. According to Hahnel, there are a few objections to the premise that capitalism offers freedom through economic freedom.
These objections are guided by critical questions about who or what decides whose freedoms are more protected. Often, the question of inequality is brought up when discussing how well capitalism promotes democracy. An argument that could stand is that economic growth can lead to inequality given that capital can be acquired at different rates by different people. In Capital in the Twenty-First Century , Thomas Piketty of the Paris School of Economics asserts that inequality is the inevitable consequence of economic growth in a capitalist economy and the resulting concentration of wealth can destabilize democratic societies and undermine the ideals of social justice upon which they are built.
States with capitalistic economic systems have thrived under political regimes deemed to be authoritarian or oppressive. Singapore has a successful open market economy as a result of its competitive, business-friendly climate and robust rule of law. Nonetheless, it often comes under fire for its brand of government which though democratic and consistently one of the least corrupt  it also operates largely under a one-party rule and does not vigorously defend freedom of expression given its government-regulated press as well as penchant for upholding laws protecting ethnic and religious harmony, judicial dignity and personal reputation.
The private capitalist sector in the People's Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government. Augusto Pinochet's rule in Chile led to economic growth and high levels of inequality  by using authoritarian means to create a safe environment for investment and capitalism. Similarly, Suharto 's authoritarian reign and extirpation of the Communist Party of Indonesia allowed for the expansion of capitalism in Indonesia.
Peter A. Hall and David Soskice argued that modern economies have developed two different forms of capitalism: liberal market economies or LME e. Germany, Japan, Sweden and Austria. Those two types can be distinguished by the primary way in which firms coordinate with each other and other actors, such as trade unions. In LMEs, firms primarily coordinate their endeavors by way of hierarchies and market mechanisms.
Coordinated market economies more heavily rely on non-market forms of interaction in the coordination of their relationship with other actors for a detailed description see Varieties of Capitalism. These two forms of capitalisms developed different industrial relations , vocational training and education , corporate governance , inter-firm relations and relations with employees. The existence of these different forms of capitalism has important societal effects, especially in periods of crisis and instability. Since the early s, the number of labor market outsiders has rapidly grown in Europe, especially among the youth, potentially influencing social and political participation.
Using varieties of capitalism theory, it is possible to disentangle the different effects on social and political participation that an increase of labor market outsiders has in liberal and coordinated market economies Ferragina et al. This signals an important problem for liberal market economies in a period of crisis. If the market does not provide consistent job opportunities as it has in previous decades , the shortcomings of liberal social security systems may depress social and political participation even further than in other capitalist economies.
In general, capitalism as an economic system and mode of production can be summarised by the following: . In free market and laissez-faire forms of capitalism, markets are used most extensively with minimal or no regulation over the pricing mechanism. In mixed economies, which are almost universal today,  markets continue to play a dominant role, but they are regulated to some extent by the state in order to correct market failures , promote social welfare , conserve natural resources , fund defense and public safety or other rationale.
In state capitalist systems, markets are relied upon the least, with the state relying heavily on state-owned enterprises or indirect economic planning to accumulate capital. Supply is the amount of a good or service that is available for purchase or sale. Demand is the measure of value for a good that people are willing to buy at a given time. Prices tend to rise when demand for an available resource increases or its supply diminishes and fall with demand or when supply increases.
Competition arises when more than one producer is trying to sell the same or similar products to the same buyers. In capitalist theory, competition leads to innovation and more affordable prices. Without competition, a monopoly or cartel may develop. A monopoly occurs when a firm is granted exclusivity over a market. Hence the firm can engage in rent seeking behaviors such as limiting output and raising prices because it has no fear of competition. A cartel is a group of firms that act together in a monopolistic manner to control output and prices.
Governments have implemented legislation for the purpose of preventing the creation of monopolies and cartels. The profit motive , in the theory in capitalism, is the desire to earn income in the form of profit. Stated differently, the reason for a business's existence is to turn a profit. The profit motive functions according to rational choice theory , or the theory that individuals tend to pursue what is in their own best interests. In capitalist theoretics, the profit motive is said to ensure that resources are being allocated efficiently.
For instance, Austrian economist Henry Hazlitt explains: "If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself".
Theoretically, in free and competitive markets maximising profit ensures that resources are not wasted. The relationship between the state , its formal mechanisms and capitalist societies has been debated in many fields of social and political theory, with active discussion since the 19th century. Hernando de Soto is a contemporary Peruvian economist who has argued that an important characteristic of capitalism is the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded.
According to de Soto, this is the process by which physical assets are transformed into capital, which in turn may be used in many more ways and much more efficiently in the market economy. A number of Marxian economists have argued that the Enclosure Acts in England and similar legislation elsewhere were an integral part of capitalist primitive accumulation and that specific legal frameworks of private land ownership have been integral to the development of capitalism. In capitalist economics, market competition is the rivalry among sellers trying to achieve such goals as increasing profits, market share and sales volume by varying the elements of the marketing mix : price, product, distribution and promotion.
Merriam-Webster defines competition in business as "the effort of two or more parties acting independently to secure the business of a third party by offering the most favourable terms".
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Smith and other classical economists before Antoine Augustine Cournot were referring to price and non-price rivalry among producers to sell their goods on best terms by bidding of buyers, not necessarily to a large number of sellers nor to a market in final equilibrium. It is a condition where "buyers tend to compete with other buyers, and sellers tend to compete with other sellers". Similarly, sellers bid against other sellers in offering goods on the market, competing for the attention and exchange resources of buyers.
Competition results from scarcity —there is never enough to satisfy all conceivable human wants—and occurs "when people strive to meet the criteria that are being used to determine who gets what". Historically, capitalism has an ability to promote economic growth as measured by gross domestic product GDP , capacity utilization or standard of living. This argument was central, for example, to Adam Smith's advocacy of letting a free market control production and price and allocate resources.
Many theorists have noted that this increase in global GDP over time coincides with the emergence of the modern world capitalist system. Between and , world economy grew fold, a much faster rate than the population growth, so individuals enjoyed on average a 9-fold increase in income. In the Third World , there was an increase, but only 5-fold per person. The capitalist mode of production refers to the systems of organising production and distribution within capitalist societies.
Private money-making in various forms renting, banking, merchant trade, production for profit and so on preceded the development of the capitalist mode of production as such. The capitalist mode of production proper based on wage-labour and private ownership of the means of production and on industrial technology began to grow rapidly in Western Europe from the Industrial Revolution , later extending to most of the world. The term capitalist mode of production is defined by private ownership of the means of production , extraction of surplus value by the owning class for the purpose of capital accumulation , wage-based labour and at least as far as commodities are concerned being market-based.
Capitalism in the form of money-making activity has existed in the shape of merchants and money-lenders who acted as intermediaries between consumers and producers engaging in simple commodity production hence the reference to " merchant capitalism " since the beginnings of civilisation.
What is specific about the "capitalist mode of production" is that most of the inputs and outputs of production are supplied through the market i. Essentially, capital accumulation comes to define economic rationality in capitalist production. A society, region or nation is capitalist if the predominant source of incomes and products being distributed is capitalist activity, but even so this does not yet mean necessarily that the capitalist mode of production is dominant in that society.
In capitalist economic structures, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market , the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers at the current price will equal the quantity supplied by producers at the current price , resulting in an economic equilibrium for price and quantity. The four basic laws of supply and demand are:  : Although it is normal to regard the quantity demanded and the quantity supplied as functions of the price of the goods, the standard graphical representation, usually attributed to Alfred Marshall , has price on the vertical axis and quantity on the horizontal axis, the opposite of the standard convention for the representation of a mathematical function.
Since determinants of supply and demand other than the price of the goods in question are not explicitly represented in the supply-demand diagram, changes in the values of these variables are represented by moving the supply and demand curves often described as "shifts" in the curves. By contrast, responses to changes in the price of the good are represented as movements along unchanged supply and demand curves.
A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied. Under the assumption of perfect competition , supply is determined by marginal cost. That is: firms will produce additional output while the cost of producing an extra unit of output is less than the price they would receive. A hike in the cost of raw goods would decrease supply and shifting costs up while a discount would increase supply, shifting costs down and hurting producers as producer surplus decreases.
By its very nature, conceptualising a supply curve requires the firm to be a perfect competitor i. This is true because each point on the supply curve is the answer to the question "If this firm is faced with this potential price, how much output will it be able to and willing to sell? If a firm has market power, its decision of how much output to provide to the market influences the market price, therefore the firm is not "faced with" any price and the question becomes less relevant.
Economists distinguish between the supply curve of an individual firm and between the market supply curve. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price, thus in the graph of the supply curve individual firms' supply curves are added horizontally to obtain the market supply curve.
Economists also distinguish the short-run market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the short run: the availability of one or more fixed inputs typically physical capital and the number of firms in the industry. In the long-run, firms can adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long-run potential competitors can enter or exit the industry in response to market conditions.
For both of these reasons, long-run market supply curves are generally flatter than their short-run counterparts. A demand schedule, depicted graphically as the demand curve , represents the amount of some goods that buyers are willing and able to purchase at various prices, assuming all determinants of demand other than the price of the good in question, such as income, tastes and preferences, the price of substitute goods and the price of complementary goods , remain the same.
According to the law of demand , the demand curve is almost always represented as downward-sloping, meaning that as price decreases, consumers will buy more of the good. Just like the supply curves reflect marginal cost curves, demand curves are determined by marginal utility curves. The demand schedule is defined as the willingness and ability of a consumer to purchase a given product in a given frame of time.
While the aforementioned demand curve is generally downward-sloping, there may be rare examples of goods that have upward-sloping demand curves. Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods an inferior, but staple good and Veblen goods goods made more fashionable by a higher price.
By its very nature, conceptualising a demand curve requires that the purchaser be a perfect competitor—that is, that the purchaser has no influence over the market price. This is true because each point on the demand curve is the answer to the question "If this buyer is faced with this potential price, how much of the product will it purchase?
If a buyer has market power, so its decision of how much to buy influences the market price, then the buyer is not "faced with" any price and the question is meaningless. Like with supply curves, economists distinguish between the demand curve of an individual and the market demand curve. The market demand curve is obtained by summing the quantities demanded by all consumers at each potential price, thus in the graph of the demand curve individuals' demand curves are added horizontally to obtain the market demand curve.
In the context of supply and demand, economic equilibrium refers to a state where economic forces such as supply and demand are balanced and in the absence of external influences the equilibrium values of economic variables will not change. For example, in the standard text-book model of perfect competition equilibrium occurs at the point at which quantity demanded and quantity supplied are equal.
This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes and the quantity is called "competitive quantity" or market clearing quantity. Partial equilibrium, as the name suggests, takes into consideration only a part of the market to attain equilibrium. Jain proposes attributed to George Stigler : "A partial equilibrium is one which is based on only a restricted range of data, a standard example is price of a single product, the prices of all other products being held fixed during the analysis".
The supply and demand model is a partial equilibrium model of economic equilibrium , where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets. In other words, the prices of all substitutes and complements as well as income levels of consumers are constant. This makes analysis much simpler than in a general equilibrium model which includes an entire economy.
Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium , efficiency and comparative statics. The stringency of the simplifying assumptions inherent in this approach make the model considerably more tractable, but it may produce results which while seemingly precise do not effectively model real world economic phenomena. Partial equilibrium analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any.
Demand and supply relations in a market can be statistically estimated from price, quantity and other data with sufficient information in the model. This can be done with simultaneous-equation methods of estimation in econometrics. Such methods allow solving for the model-relevant "structural coefficients", the estimated algebraic counterparts of the theory. The parameter identification problem is a common issue in "structural estimation". Typically, data on exogenous variables that is, variables other than price and quantity, both of which are endogenous variables are needed to perform such an estimation.
An alternative to "structural estimation" is reduced-form estimation, which regresses each of the endogenous variables on the respective exogenous variables. Demand and supply have also been generalised to explain macroeconomic variables in a market economy , including the quantity of total output and the general price level.
The Aggregate Demand—Aggregate Supply model may be the most direct application of supply and demand to macroeconomics, but other macroeconomic models also use supply and demand. Compared to microeconomic uses of demand and supply, different and more controversial theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. Demand and supply are also used in macroeconomic theory to relate money supply and money demand to interest rates and to relate labor supply and labor demand to wage rates. According to Hamid S. Hosseini, the power of supply and demand was understood to some extent by several early Muslim scholars, such as fourteenth-century Mamluk scholar Ibn Taymiyyah , who wrote: "If desire for goods increases while its availability decreases, its price rises.
On the other hand, if availability of the good increases and the desire for it decreases, the price comes down". John Locke 's work Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money  includes an early and clear description of supply and demand and their relationship. In this description, demand is rent : "The price of any commodity rises or falls by the proportion of the number of buyer and sellers" and "that which regulates the price The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the Principles of Political Economy , published in In The Wealth of Nations , Smith generally assumed that the supply price was fixed, but that its "merit" value would decrease as its "scarcity" increased, in effect what was later called the law of demand also.
In Principles of Political Economy and Taxation , Ricardo more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand. Antoine Augustin Cournot first developed a mathematical model of supply and demand in his Researches into the Mathematical Principles of Wealth , including diagrams. During the late 19th century, the marginalist school of thought emerged.
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The key idea was that the price was set by the most expensive price—that is, the price at the margin. This was a substantial change from Adam Smith's thoughts on determining the supply price. In his essay "On the Graphical Representation of Supply and Demand", Fleeming Jenkin in the course of "introduc[ing] the diagrammatic method into the English economic literature" published the first drawing of supply and demand curves therein,  including comparative statics from a shift of supply or demand and application to the labor market. In a capitalist system, the government does not prohibit private property or prevent individuals from working where they please.
The government does not prevent firms from determining what wages they will pay and what prices they will charge for their products. However, many countries have minimum wage laws and minimum safety standards. Under some versions of capitalism, the government carries out a number of economic functions, such as issuing money, supervising public utilities and enforcing private contracts.
Many countries have competition laws that prohibit monopolies and cartels from forming. Despite anti-monopoly laws, large corporations can form near-monopolies in some industries. Such firms can temporarily drop prices and accept losses to prevent competition from entering the market and then raise them again once the threat of entry is reduced. In many countries, public utilities e. Government agencies regulate the standards of service in many industries, such as airlines and broadcasting as well as financing a wide range of programs.
In addition, the government regulates the flow of capital and uses financial tools such as the interest rate to control factors such as inflation and unemployment. In his book The Road to Serfdom , Friedrich Hayek asserts that the economic freedom of capitalism is a requisite of political freedom. He argues that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion.
Friedman claimed that centralized economic operations are always accompanied by political repression. In his view, transactions in a market economy are voluntary and that the wide diversity that voluntary activity permits is a fundamental threat to repressive political leaders and greatly diminish their power to coerce. Some of Friedman's views were shared by John Maynard Keynes , who believed that capitalism is vital for freedom to survive and thrive.
There are many variants of capitalism in existence that differ according to country and region. They vary in their institutional makeup and by their economic policies. The common features among all the different forms of capitalism is that they are based on the production of goods and services for profit, predominantly market-based allocation of resources and they are structured upon the accumulation of capital.
The major forms of capitalism are listed hereafter:. Advanced capitalism is the situation that pertains to a society in which the capitalist model has been integrated and developed deeply and extensively for a prolonged period. Various writers identify Antonio Gramsci as an influential early theorist of advanced capitalism, even if he did not use the term himself. In his writings, Gramsci sought to explain how capitalism had adapted to avoid the revolutionary overthrow that had seemed inevitable in the 19th century.
At the heart of his explanation was the decline of raw coercion as a tool of class power, replaced by use of civil society institutions to manipulate public ideology in the capitalists' favour. Habermas observed four general features that characterise advanced capitalism:. In their critique of capitalism, Marxism and Leninism both emphasise the role of " finance capital " as the determining and ruling-class interest in capitalist society, particularly in the latter stages.
Rudolf Hilferding is credited [ by whom? Fernnand Braudel would later point to two earlier periods when finance capitalism had emerged in human history—with the Genoese in the 16th century and with the Dutch in the 17th and 18th centuries—although at those points it developed from commercial capitalism. Mercantilism is a nationalist form of early capitalism that came into existence approximately in the late 16th century.
It is characterized by the intertwining of national business interests to state-interest and imperialism; and consequently, the state apparatus is utilized to advance national business interests abroad. An example of this is colonists living in America who were only allowed to trade with and purchase goods from their respective mother countries e. Britain, Portugal and France. Mercantilism was driven by the belief that the wealth of a nation is increased through a positive balance of trade with other nations—it corresponds to the phase of capitalist development sometimes called the primitive accumulation of capital.
Free market economy refers to a capitalist economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets and private ownership of productive enterprises.
Laissez-faire is a more extensive form of free market economy where the role of the state is limited to protecting property rights , or for plumbline anarcho-capitalists, property rights are protected by private firms and market-generated law. A social market economy is a nominally free market system where government intervention in price formation is kept to a minimum, but the state provides significant services in the area of social security, unemployment benefits and recognition of labor rights through national collective bargaining arrangements. This model is prominent in Western and Northern European countries as well as Japan, albeit in slightly different configurations.
The vast majority of enterprises are privately owned in this economic model. Rhine capitalism refers to the contemporary model of capitalism and adaptation of the social market model that exists in continental Western Europe today. State capitalism is a capitalist market economy dominated by state-owned enterprises, where the state enterprises are organized as commercial, profit-seeking businesses.
The designation has been used broadly throughout the 20th century to designate a number of different economic forms, ranging from state-ownership in market economies to the command economies of the former Eastern Bloc. According to Aldo Musacchio, a professor at Harvard Business School, state capitalism is a system in which governments, whether democratic or autocratic, exercise a widespread influence on the economy either through direct ownership or various subsidies.
Musacchio notes a number of differences between today's state capitalism and its predecessors. In his opinion, gone are the days when governments appointed bureaucrats to run companies: the world's largest state-owned enterprises are now traded on the public markets and kept in good health by large institutional investors.
Contemporary state capitalism is associated with the East Asian model of capitalism , dirigisme and the economy of Norway. In Socialism: Utopian and Scientific , Friedrich Engels argued that state-owned enterprises would characterize the final stage of capitalism, consisting of ownership and management of large-scale production and communication by the bourgeois state. Some economists and left-wing academics including Richard D. Wolff and Noam Chomsky argue that the economies of the former Soviet Union and Eastern bloc represented a form of state capitalism because their internal organization within enterprises and the system of wage labor remained intact.
The term is not used by Austrian School economists to describe state ownership of the means of production. The economist Ludwig von Mises argued that the designation of "state capitalism" was simply a new label for the old labels of "state socialism" and "planned economy" and differed only in non-essentials from these earlier designations. The debate between proponents of private versus state capitalism is centered around questions of managerial efficacy, productive efficiency and fair distribution of wealth. Corporate capitalism is a free or mixed-market economy characterized by the dominance of hierarchical, bureaucratic corporations.
A mixed economy is a largely market-based economy consisting of both private and public ownership of the means of production and economic interventionism through macroeconomic policies intended to correct market failures , reduce unemployment and keep inflation low. The degree of intervention in markets varies among different countries. Some mixed economies, such as France under dirigisme , also featured a degree of indirect economic planning over a largely capitalist-based economy. Most modern capitalist economies are defined as "mixed economies" to some degree.
The accumulation of capital is the process of "making money", or growing an initial sum of money through investment in production. Capitalism is based on the accumulation of capital, whereby financial capital is invested in order to make a profit and then reinvested into further production in a continuous process of accumulation. In Marxian economic theory, this dynamic is called the law of value.
Capital accumulation forms the basis of capitalism, where economic activity is structured around the accumulation of capital , defined as investment in order to realize a financial profit. In mainstream economics , accounting and Marxian economics , capital accumulation is often equated with investment of profit income or saving, especially in real capital goods.
The concentration and centralisation of capital are two of the results of such accumulation. In modern macroeconomics and econometrics , the phrase " capital formation " is often used in preference to "accumulation", though the United Nations Conference on Trade and Development UNCTAD refers nowadays to "accumulation".
Accumulation can be measured as the monetary value of investments, the amount of income that is reinvested, or as the change in the value of assets owned the increase in the value of the capital stock. Using company balance sheets , tax data and direct surveys as a basis, government statisticians estimate total investments and assets for the purpose of national accounts , national balance of payments and flow of funds statistics.
The Reserve Banks and the Treasury usually provide interpretations and analysis of this data. Standard indicators include capital formation , gross fixed capital formation , fixed capital , household asset wealth and foreign direct investment. Other useful sources of investment information are business magazines such as Fortune , Forbes , The Economist , Business Week and so on as well as various corporate " watchdog " organisations and non-governmental organisation publications.
In the case of the United States, the "Analytical Perspectives" document an annex to the yearly budget provides useful wealth and capital estimates applying to the whole country. In Karl Marx ' economic theory, capital accumulation refers to the operation whereby profits are reinvested increasing the total quantity of capital. Capital is viewed by Marx as expanding value, that is, in other terms, as a sum of capital, usually expressed in money, that is transformed through human labor into a larger value, extracted as profits and expressed as money.
Here, capital is defined essentially as economic or commercial asset value in search of additional value or surplus-value. This requires property relations which enable objects of value to be appropriated and owned, and trading rights to be established. Capital accumulation has a double origin, namely in trade and in expropriation , both of a legal or illegal kind.
The reason is that a stock of capital can be increased through a process of exchange or "trading up", but also through directly taking an asset or resource from someone else without compensation. David Harvey calls this accumulation by dispossession. The continuation and progress of capital accumulation depends on the removal of obstacles to the expansion of trade and this has historically often been a violent process. As markets expand, more and more new opportunities develop for accumulating capital because more and more types of goods and services can be traded in. However, capital accumulation may also confront resistance when people refuse to sell, or refuse to buy for example a strike by investors or workers, or consumer resistance.
According to Marx, capital has the tendency for concentration and centralization in the hands of the wealthy. Marx explains: "It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals. The cheapness of commodities demands, caeteris paribus , on the productiveness of labour, and this again on the scale of production.
Therefore, the larger capitals beat the smaller. It will further be remembered that, with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, therefore, crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of.
Here competition rages [ In Marxian economics , the rate of accumulation is defined as 1 the value of the real net increase in the stock of capital in an accounting period; and 2 the proportion of realised surplus-value or profit-income which is reinvested, rather than consumed. This rate can be expressed by means of various ratios between the original capital outlay, the realised turnover, surplus-value or profit and reinvestments e. Other things being equal, the greater the amount of profit-income that is disbursed as personal earnings and used for consumptive purposes, the lower the savings rate and the lower the rate of accumulation is likely to be.
However, earnings spent on consumption can also stimulate market demand and higher investment. This is the cause of endless controversies in economic theory about "how much to spend, and how much to save".
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In a boom period of capitalism, the growth of investments is cumulative, i. In a stagnating, decadent capitalism, the accumulation process is increasingly oriented towards investment on military and security forces, real estate, financial speculation and luxury consumption. In that case, income from value-adding production will decline in favour of interest, rent and tax income, with as a corollary an increase in the level of permanent unemployment.
The more capital one owns, the more capital one can also borrow. The inverse is also true and this is one factor in the widening gap between the rich and the poor. Ernest Mandel emphasised that the rhythm of capital accumulation and growth depended critically on 1 the division of a society's social product between " necessary product " and " surplus product "; and 2 the division of the surplus product between investment and consumption. In turn, this allocation pattern reflected the outcome of competition among capitalists, competition between capitalists and workers and competition between workers.
The pattern of capital accumulation can therefore never be simply explained by commercial factors as it also involved social factors and power relationships. Strictly speaking, capital has accumulated only when realised profit income has been reinvested in capital assets.
As suggested in the first volume of Marx' Das Kapital , the process of capital accumulation in production has at least seven distinct but linked moments:. All of these moments do not refer simply to an "economic" or commercial process. Rather, they assume the existence of legal, social, cultural and economic power conditions, without which creation, distribution and circulation of the new wealth could not occur.
This becomes especially clear when the attempt is made to create a market where none exists, or where people refuse to trade. In the second volume of Das Kapital , Marx continues the story and shows that with the aid of bank credit capital in search of growth can more or less smoothly mutate from one form to another, alternately taking the form of money capital liquid deposits, securities and so on , commodity capital tradable products, real estate and the like , or production capital means of production and labor power.
His discussion of the simple and expanded reproduction of the conditions of production offers a more sophisticated model of the parameters of the accumulation process as a whole. At simple reproduction, a sufficient amount is produced to sustain society at the given living standard ; the stock of capital stays constant. At expanded reproduction, more product-value is produced than is necessary to sustain society at a given living standard a surplus product ; the additional product-value is available for investments which enlarge the scale and variety of production.
The bourgeois claim there is no economic law according to which capital is necessarily re-invested in the expansion of production, that such depends on anticipated profitability, market expectations and perceptions of investment risk. Such statements only explain the subjective experiences of investors and ignore the objective realities which would influence such opinions. As Marx states in the second volume of Das Kapital , simple reproduction only exists if the variable and surplus capital realised by Dept.
Such equilibrium rests on various assumptions, such as a constant labor supply no population growth. Accumulation does not imply a necessary change in total magnitude of value produced, but can simply refer to a change in the composition of an industry p. Ernest Mandel introduced the additional concept of contracted economic reproduction, i.
Balanced economic growth requires that different factors in the accumulation process expand in appropriate proportions. However, markets themselves cannot spontaneously create that balance and in fact what drives business activity is precisely the imbalances between supply and demand : inequality is the motor of growth. This partly explains why the worldwide pattern of economic growth is very uneven and unequal, even although markets have existed almost everywhere for a very long-time.
Some people argue that it also explains government regulation of market trade and protectionism. This interpretation emphasises that capital ownership, predicated on command over labor, is a social relation: the growth of capital implies the growth of the working class a " law of accumulation ". In the first volume of Das Kapital , Marx had illustrated this idea with reference to Edward Gibbon Wakefield 's theory of colonisation:. Wakefield discovered that in the Colonies, property in money, means of subsistence, machines, and other means of production, does not as yet stamp a man as a capitalist if there be wanting the correlative—the wage-worker, the other man who is compelled to sell himself of his own free-will.
He discovered that capital is not a thing, but a social relation between persons, established by the instrumentality of things. Peel had the foresight to bring with him, besides, 3, persons of the working-class, men, women, and children. Once arrived at his destination, 'Mr. Peel was left without a servant to make his bed or fetch him water from the river.
Peel, who provided for everything except the export of English modes of production to Swan River! In the third volume of Das Kapital , Marx refers to the "fetishism of capital" reaching its highest point with interest-bearing capital because now capital seems to grow of its own accord without anybody doing anything:.
The relations of capital assume their most externalised and most fetish-like form in interest-bearing capital. The result of the entire process of reproduction appears as a property inherent in the thing itself. It depends on the owner of the money, i. In interest-bearing capital, therefore, this automatic fetish, self-expanding value, money generating money, are brought out in their pure state and in this form it no longer bears the birth-marks of its origin.
The social relation is consummated in the relation of a thing, of money, to itself. Instead of the actual transformation of money into capital, we see here only form without content. Wage labour refers to the sale of labour under a formal or informal employment contract to an employer. In Marxist economics, these owners of the means of production and suppliers of capital are generally called capitalists. The description of the role of the capitalist has shifted, first referring to a useless intermediary between producers to an employer of producers and eventually came to refer to owners of the means of production.
Production is the act of making goods or services by applying labor power. Critics of the capitalist mode of production see wage labour as a major, if not defining, aspect of hierarchical industrial systems. Most opponents of the institution support worker self-management and economic democracy as alternatives to both wage labour and to capitalism. While most opponents of the wage system blame the capitalist owners of the means of production for its existence, most anarchists and other libertarian socialists also hold the state as equally responsible as it exists as a tool utilised by capitalists to subsidise themselves and protect the institution of private ownership of the means of production.
As some opponents of wage labour take influence from Marxist propositions, many are opposed to private property , but maintain respect for personal property. The most common form of wage labour currently is ordinary direct, or "full-time", employment in which a free worker sells his or her labour for an indeterminate time from a few years to the entire career of the worker in return for a money-wage or salary and a continuing relationship with the employer which it does not in general offer contractors or other irregular staff.
However, wage labour takes many other forms and explicit as opposed to implicit i. Economic history shows a great variety of ways in which labour is traded and exchanged. The differences show up in the form of:.
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War typically causes the diversion, destruction and creation of capital assets as capital assets are both destroyed or consumed and diverted to types of production needed to fight the war. Many assets are wasted and in some few cases created specifically to fight a war. War driven demands may be a powerful stimulus for the accumulation of capital and production capability in limited areas and market expansion outside the immediate theatre of war.
Often this has induced laws against perceived and real war profiteering. The total hours worked in the United States rose by 34 percent during World War II, even though the military draft reduced the civilian labor force by 11 percent. War destruction can be illustrated by looking at World War II. In Germany in , when air attacks were heaviest, 6.
In Europe, the United States and the Soviet Union enormous resources were accumulated and ultimately dissipated as planes, ships, tanks and so on were built and then lost or destroyed. Germany's total war damage was estimated at about In the Berlin area alone, there were 8 million refugees lacking basic necessities. However, by the first quarter of European rail traffic, which was given assistance and preferences by Western appointed military governors for resources and material as an essential asset, regained its prewar operational level.
In retrospect, the rapidity of infrastructure reconstruction appears astonishing. Truman 's directive had been that no steps would be taken towards economic rehabilitation of Germany. In fact, the initial industry plan of prohibited production in excess of half of the level; the iron and steel industry was allowed to produce only less than a third of pre-war output. These plans were rapidly revised and better plans were instituted. The first big strike-wave in the Ruhr occurred in early —it was about food rations and housing, but soon there were demands for nationalisation. However, the United States appointed military governor Newman stated at the time that he had the power to break strikes by withholding food rations.
The clear message was "no work, no eat". As the military controls in Western Germany were nearly all relinquished and the Germans were allowed to rebuild their own economy with Marshall Plan aid things rapidly improved. By , German industrial production had overtaken the prewar level. The Marshall Aid funds were important, but after the currency reform which permitted German capitalists to revalue their assets and the establishment of a new political system much more important was the commitment of the United States to rebuilding German capitalism and establishing a free market economy and government, rather than keeping Germany in a weak position.
Initially, average real wages remained low, lower even than in , until the early s while profitability was unusually high. So the total investment fund, aided by credits, was also high, resulting in a high rate of capital accumulation which was nearly all reinvested in new construction or new tools. This was called the German economic miracle or Wirtschaftswunder. In Italy, the victorious Allies did three things in they imposed their absolute military authority; they quickly disarmed the Italian partisans from a very large stock of weapons; and they agreed to a state guarantee of wage payments as well as a veto on all sackings of workers from their jobs.
In modern times, it has often been possible to rebuild physical capital assets destroyed in wars completely within the space of about 10 years, except in cases of severe pollution by chemical warfare or other kinds of irreparable devastation. However, damage to human capital has been much more devastating in terms of fatalities in the case of World War II, about 55 million deaths , permanent physical disability, enduring ethnic hostility and psychological injuries which have effects for at least several generations.
Critics of capitalism associate the economic system with social inequality ; unfair distribution of wealth and power; materialism ; repression of workers and trade unionists ; social alienation ; economic inequality ; unemployment ; and economic instability. Many socialists consider capitalism to be irrational in that production and the direction of the economy are unplanned, creating many inconsistencies and internal contradictions. Marxian economist Richard D. Wolff postulates that capitalist economies prioritize profits and capital accumulation over the social needs of communities and capitalist enterprises rarely include the workers in the basic decisions of the enterprise.
Some labor historians and scholars have argued that unfree labor —by slaves , indentured servants , prisoners or other coerced persons—is compatible with capitalist relations. Tom Brass argued that unfree labor is acceptable to capital. And when they are talking about capitalism, they are talking about slavery. Baptist and Sven Beckert , assert that slavery was an integral component in the violent development of American and global capitalism. According to Immanuel Wallerstein , institutional racism has been "one of the most significant pillars" of the capitalist system and serves as "the ideological justification for the hierarchization of the work-force and its highly unequal distributions of reward".
Many aspects of capitalism have come under attack from the anti-globalization movement , which is primarily opposed to corporate capitalism. Environmentalists have argued that capitalism requires continual economic growth and that it will inevitably deplete the finite natural resources of Earth and cause mass extinctions of animal and plant life. Some scholars blame the financial crisis of — on the neoliberal capitalist model. The whole intellectual edifice, however, collapsed in the summer of last year",  and that "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in firms [ Many religions have criticized or opposed specific elements of capitalism.
Traditional Judaism , Christianity , and Islam forbid lending money at interest ,   although alternative methods of banking have been developed. Some Christians have criticized capitalism for its materialist aspects and its inability to account for the wellbeing of all people. In his page apostolic exhortation Evangelii gaudium , Catholic Pope Francis described unfettered capitalism as "a new tyranny" and called on world leaders to fight rising poverty and inequality: .
Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.
Meanwhile, the excluded are still waiting. Proponents of capitalism argue that it creates more prosperity than any other economic system and that its benefits are mainly to the ordinary person. The term capitalism in its modern sense is often attributed to Karl Marx. However, Marx himself rarely used the term "capitalism" while it was used twice in the more political interpretations of his work, primarily authored by his collaborator Friedrich Engels.
In the 20th century, defenders of the capitalist system often replaced the term capitalism with phrases such as free enterprise and private enterprise and replaced capitalist with rentier and investor in reaction to the negative connotations associated with capitalism. The majority of criticisms against the profit motive centre on the idea that the profit motive encourages selfishness and greed, rather than serve the public good or necessarily creating an increase in net wealth. Critics of the profit motive contend that companies disregard morals or public safety in the pursuit of profits.
Free market economists counter that the profit motive, coupled with competition, actually reduces the final price of an item for consumption, rather than raising it. They argue that businesses profit by selling a good at a lower price and at a greater volume than the competition. Economist Thomas Sowell uses supermarkets as an example to illustrate this point: "It has been estimated that a supermarket makes a clear profit of about a penny on a dollar of sales.
If that sounds pretty skimpy, remember that it is collecting that penny on every dollar at several cash registers simultaneously and, in many cases, around the clock". American economist Milton Friedman has argued that greed and self-interest are universal human traits.
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On a episode of The Phil Donahue Show , Friedman states: "The world runs on individuals pursuing their separate interests". He continues by explaining that only in capitalist countries, where individuals can pursue their own self-interest, people have been able to escape from "grinding poverty". Wage labor has long been compared to slavery. Similarities between wage labor and slavery were noted as early as Cicero in Ancient Rome, such as in De Officiis.
Before the American Civil War , Southern defenders of African American slavery invoked the concept of wage slavery to favorably compare the condition of their slaves to workers in the North. According to Lawrence Glickman , in the Gilded Age "references abounded in the labor press, and it is hard to find a speech by a labour leader without the phrase".
According to Noam Chomsky , analysis of the psychological implications of wage slavery goes back to the Enlightenment era. In his book On the Limits of State Action , liberal thinker Wilhelm von Humboldt explained how "whatever does not spring from a man's free choice, or is only the result of instruction and guidance, does not enter into his very nature; he does not perform it with truly human energies, but merely with mechanical exactness" and so when the laborer works under external control, "we may admire what he does, but we despise what he is".
According to Graeber, such arrangements were quite common in New World slavery as well, whether in the United States or Brazil. James argued in The Black Jacobins that most of the techniques of human organisation employed on factory workers during the Industrial Revolution were first developed on slave plantations. Adam Smith noted that employers often conspire together to keep wages low: . The interest of the dealers But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate… It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms.
Aristotle made the statement that "the citizens must not live a mechanic or a mercantile life for such a life is ignoble and inimical to virtue , nor yet must those who are to be citizens in the best state be tillers of the soil for leisure is needed both for the development of virtue and for active participation in politics ",  often paraphrased as "all paid jobs absorb and degrade the mind". To Marxist and anarchist thinkers like Mikhail Bakunin and Peter Kropotkin , wage slavery was a class condition in place due to the existence of private property and the state. This class situation rested primarily on:.
For Marxists, labor as commodity, which is how they regard wage labor,  provides a fundamental point of attack against capitalism. Marx considered capitalism to be a historically specific mode of production the way in which the productive property is owned and controlled, combined with the corresponding social relations between individuals based on their connection with the process of production. The "capitalistic era" according to Karl Marx dates from 16th-century merchants and small urban workshops. For Marx, the capitalist stage of development or " bourgeois society" represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist or communist transformation of human society as the end of the series of first aristocratic, then capitalist and finally working class rule was reached.
Following Adam Smith , Marx distinguished the use value of commodities from their exchange value in the market. According to Marx, capital is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism and the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist.
This difference in values, he argues, constitutes surplus value , which the capitalists extract and accumulate. In his book Capital , Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers—all prior class societies had extracted surplus labor , but capitalism was new in doing so via the sale-value of produced commodities.
In conjunction with his criticism of capitalism was Marx's belief that the working class, due to its relationship to the means of production and numerical superiority under capitalism, would be the driving force behind the socialist revolution. In Imperialism, the Highest Stage of Capitalism , Vladimir Lenin further developed Marxist theory and argued that capitalism necessarily led to monopoly capitalism and the export of capital—which he also called "imperialism"—to find new markets and resources, representing the last and highest stage of capitalism.
To these thinkers, capitalist class processes are simply those in which surplus labor takes the form of surplus value, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes predominate. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted, even if this surplus is not produced by capitalist activity as when an absolute majority of the population is engaged in non-capitalist economic activity.
In Limits to Capital , David Harvey outlines an overdetermined, "spatially restless" capitalism coupled with the spatiality of crisis formation and resolution. His work on contractions of capital accumulation and international movements of capitalist modes of production and money flows has been influential. Sociologists such as Ulrich Beck envisioned the society of risk as a new cultural value which saw risk as a commodity to be exchanged in globalized economies.
This theory suggested that disasters and capitalist economy were inevitably entwined. Disasters allow the introduction of economic programs which otherwise would be rejected as well as decentralizing the class structure in production. Scholars argue that the capitalist approach to environmental economics does not take into consideration the preserving of natural resources. At least two assumptions are necessary for the validity of the standard model: first, that supply and demand are independent; and second, that supply is "constrained by a fixed resource". If these conditions do not hold, then the Marshallian model cannot be sustained.
Sraffa's critique focused on the inconsistency except in implausible circumstances of partial equilibrium analysis and the rationale for the upward slope of the supply curve in a market for a produced consumption good. Samuelson 's comments and engagements with it over many years, for example:. Aggregate excess demand in a market is the difference between the quantity demanded and the quantity supplied as a function of price. In the model with an upward-sloping supply curve and downward-sloping demand curve, the aggregate excess demand function only intersects the axis at one point, namely at the point where the supply and demand curves intersect.
The Sonnenschein—Mantel—Debreu theorem shows that the standard model cannot be rigorously derived in general from general equilibrium theory. The model of prices being determined by supply and demand assumes perfect competition. However, "economists have no adequate model of how individuals and firms adjust prices in a competitive model.
If all participants are price-takers by definition, then the actor who adjusts prices to eliminate excess demand is not specified". Market failure occurs when an externality is present and a market will often either under-produce a product with a positive externalisation or overproduce a product that generates a negative externalisation.
Buchanan , argue that government programs and policies also fall short of absolute perfection. Austrian School economists have argued that capitalism can organize itself into a complex system without an external guidance or central planning mechanism. Friedrich Hayek considered the phenomenon of self-organisation as underpinning capitalism. Prices serve as a signal as to the urgent and unfilled wants of people and the opportunity to earn profits if successful, or absorb losses if resources are used poorly or left idle, gives entrepreneurs incentive to use their knowledge and resources to satisfy those wants.
Thus the activities of millions of people, each seeking his own interest, are coordinated. The novelist and philosopher Ayn Rand made positive moral defenses of laissez-faire capitalism, most notably in her novel Atlas Shrugged and in her collection of essays Capitalism: The Unknown Ideal. She argued that capitalism should be supported on moral grounds, not just on the basis of practical benefits. Although the term "liberalism" retains its original meaning in most of the world, it has unfortunately come to have a very different meaning in late twentieth-century America.
Hence terms such as "market liberalism," "classical liberalism," or "libertarianism" are often used in its place in America. From Wikipedia, the free encyclopedia. This is the latest accepted revision , reviewed on 25 June For the video game, see Capitalism video game.
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A Contribution to the Critique of Political Economy. Economic and Philosophical Manuscripts of The Theory of Capitalist Development. Cambridge Journal of Economics. International Journal of Political Economy.