Throughout modern history a variety of perspectives on capitalism have evolved based on different schools of thought.
Overview Adam Smith was one of the first influential writers on the topic with his book The Wealth of Nations, which is generally considered to be the start of classical economics which emerged in the 18th century. Karl Marx took a different approach, seeing capitalism as a historically specific mode of production and as a phase of economic development that would pass and be replaced by communism. In conjunction with his criticism of capitalism, Marx believed that exploited labor would be the driving force behind a social revolution to a socialist-style economy.Wheen, Francis Books That Shook the World: Marx's Das Kapital. 1st ed. London: Atlantic Books, 2006 For Marx, the cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle.
This argument is intertwined with Marx's version of the labor theory of value, asserting that labor is the source of all value and thus of profit. Max Weber considered market exchange rather than production as the defining feature of capitalism. In contrast to their counterparts in prior modes of economic activity, capitalist enterprises feature rationalization of production, directed toward maximizing efficiency and productivity; a tendency leading to a sociological process of enveloping rationalization. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a manor.
Institutional economics, once the main school of economic thought in the 20th-century United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. In the late-19th century, the German Historical School of economics diverged from the emerging Austrian School of economics (which originated in 1871), led at the time by Carl Menger (1840-1921). Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter (1883-1950), a forerunner of the Austrian School, emphasized the creative destruction of capitalism — the fact that market economies undergo constant change.
The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of market economy against 20th-century proponents of socialist planned economies. Among Mises's arguments were the economic calculation problem, which was first proposed by Mises in 1920 and later expounded by Hayek.F. A. Hayek, (1935), "The Nature and History of the Problem" and "The Present State of the Debate," in F. A. Hayek, ed. Collectivist Economic Planning, pp. 1–40, 201–43. The problem referred to is that of how to distribute resources rationally in an economy. The free market solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. Mises and Hayek argued that only market capitalism could manage a complex, modern economy.
Partially opposed to that view, the British economist John Maynard Keynes argued in his 1937 The General Theory of Employment, Interest, and Money that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment. Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation can be effective and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked.
These changes sought to create more stability in the business cycle and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression.Erhardt III, Erwin. "History of Economic Development." University of Cincinnati. Lindner Center Auditorium, Cincinnati. 7 Nov. 2008.
Supply-side economics developed during the 1970s in response to Keynesian economic policy and in particular the failure of demand management to stabilize Western economies during the stagflation of the 1970s in the wake of the oil crisis in 1973.Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.), p. 780. Prentice-Hall. . It drew on a range of non-Keynesian economic thought, particularly Austrian School thinking on entrepreneurship and new classical macroeconomics. The intellectual roots of supply-side economics have also been traced back to various early economic thinkers such as Ibn Khaldun, Jonathan Swift, David Hume, Adam Smith and Alexander Hamilton. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally.
, the majority academic research on capitalism in the English-speaking world draws on neoclassical economic thought. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market-based financing rather than state financing.
Milton Friedman took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of The New York Times, where he claims that the social responsibility of business is "to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud". This is similar to Smith’s argument that self-interest in turn benefits the whole of society.Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits." The New York Times Magazine 13 Sep. 1970.
Work like this helped lay the foundations for the coming marketization (or privatization) of state enterprises and the supply-side economics of Ronald Reagan and Margaret Thatcher. The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention.
Classical political economy
The classical school of economic thought emerged in Britain in the late 18th century. The classical political economists Adam Smith, David Ricardo, Jean-Baptiste Say and John Stuart Mill published analyses of the production, distribution and exchange of goods in a market that have since formed the basis of study for most contemporary economists.
In France, Physiocrats like François Quesnay promoted free trade based on a conception that wealth originated from land. Quesnay's Tableau Économique (1759) described the economy analytically and laid the foundation of the Physiocrats' economic theory, followed by Anne Robert Jacques Turgot who opposed tariffs and customs duties and advocated free trade. Richard Cantillon defined long-run equilibrium as the balance of flows of income and argued that the supply and demand mechanism around land influenced short-term prices.
Smith's attack on mercantilism and his reasoning for "the system of natural liberty" in The Wealth of Nations (1776) are usually taken as the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with capitalism today, particularly his theory of the "invisible hand" of the market, through which the pursuit of individual self-interest unintentionally produces a collective good for society. It was necessary for Smith to be so forceful in his argument in favor of free markets because he had to overcome the popular mercantilist sentiment of the time period.Degen, Robert. The Triumph of Capitalism. 1st ed. New Brunswick, NJ: Transaction Publishers, 2008.
He criticized monopolies, tariffs, duties and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo, second most important of the classical political economists and one of the most influential economists of modern times.
In The Principles of Political Economy and Taxation (1817), Ricardo developed the law of comparative advantage, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade. Ricardo was a supporter of Say's law and held the view that full employment is the normal equilibrium for a competitive economy. He also argued that inflation is closely related to changes in quantity of money and credit and was a proponent of the law of diminishing returns, which states that each additional unit of input yields less and less additional output.
The values of classical political economy are strongly associated with the classical liberal doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods.Eric Aaron, What's Right? (Dural, Australia: Rosenberg Publishing, 2003), 75. Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.
Marx and critique of political economy
Karl Marx considered capitalism to be a historically specific mode of production. Marx's critique of political economy encompasses the study and exposition of the mode of production and ideology of bourgeois society, that is, the fundamental "economic" and social categories present within what for Marx is the capitalist mode of production. In contrast to the classics of political economy, Marx was concerned with lifting the "ideological veil" of surface phenomena and exposing the norms, axioms, social practices, institutions and so on, that reproduced the social phenomenon of capital. The central works in Marx's critique of political economy are Grundrisse, A Contribution to the Critique of Political Economy and Das Kapital. Marx's companion Friedrich Engels also critiqued the economy in his Outlines of a Critique of Political Economy (1844), which helped lay down some foundation for what Marx was to take further, and Engels just like Marx also compared economists with theologians, e.g by referring to Adam Smith as the economic Luther.
Some foundational concepts in Marx critique of political economy are the following:
Labour and capital are historically specific forms of social relations, and labour isn't the source of all wealth. Labour is the other side of the same coin as capital, labour presupposes capital, and capital presupposes labour. Money is not in any way something trans-historical or "natural" (which goes for the other categories of the economy as well), and gains its value due to social relations rather than any inherent quality. The individual doesn't exist in some form of vacuum but is rather enmeshed in social relations.