(pictured in a 16th-century portrait by
Pontormo) built an international financial empire and was one of the first
Medici bankers. , the centre of early capitalism Capitalism, in its modern form, can be traced to the emergence of agrarian capitalism and mercantilism in the early
Renaissance, in city-states like
Florence. Capital has existed incipiently on a small scale for centuries in the form of merchant, renting and lending activities and occasionally as small-scale industry with some wage labor. Simple
commodity exchange and consequently simple commodity production, which is the initial basis for the growth of capital from trade, have a very long history. During the
Islamic Golden Age, Arabs promulgated capitalist economic policies such as free trade and banking. Their use of
Indo-Arabic numerals facilitated
bookkeeping. These innovations migrated to Europe through trade partners in cities such as Venice and Pisa. Italian mathematicians traveled the Mediterranean talking to Arab traders and returned to popularize the use of Indo-Arabic numerals in Europe.
Agrarianism The economic foundations of the feudal agricultural system began to shift substantially in 16th-century England as the
manorial system had broken down and land began to become concentrated in the hands of fewer landlords with increasingly large estates. Instead of a
serf-based system of labor, workers were increasingly employed as part of a broader and expanding money-based economy. The system put pressure on both landlords and tenants to increase the productivity of agriculture to make profit; the weakened coercive power of the
aristocracy to extract peasant
surpluses encouraged them to try better methods, and the tenants also had incentive to improve their methods in order to flourish in a competitive
labor market. Terms of rent for land were becoming subject to economic market forces rather than to the previous stagnant system of custom and feudal obligation.
Mercantilism with the
Nawabs of Bengal after the
Battle of Plassey which began the British rule in
Bengal The economic doctrine prevailing from the 16th to the 18th centuries is commonly called
mercantilism. This period, the
Age of Discovery, was associated with the geographic exploration of foreign lands by merchant traders, especially from England and the
Low Countries. Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist methods. although
Karl Polanyi argued that the hallmark of capitalism is the establishment of generalized markets for what he called the "fictitious commodities", i.e. land, labor and money. Accordingly, he argued that "not until 1834 was a competitive labor market established in England, hence industrial capitalism as a social system cannot be said to have existed before that date". England began a large-scale and integrative approach to mercantilism during the
Elizabethan Era (1558–1603). A systematic and coherent explanation of balance of trade was made public through
Thomas Mun's argument ''England's Treasure by Forraign Trade, or the Balance of our Forraign Trade is The Rule of Our Treasure.'' It was written in the 1620s and published in 1664. European merchants, backed by state controls, subsidies and
monopolies, made most of their profits by buying and selling goods. In the words of
Francis Bacon, the purpose of mercantilism was "the opening and well-balancing of trade; the cherishing of manufacturers; the banishing of idleness; the repressing of waste and excess by sumptuary laws; the improvement and husbanding of the soil; the regulation of prices...". After the period of the
proto-industrialization, the
British East India Company and the
Dutch East India Company, after massive contributions from the
Mughal Bengal, inaugurated an expansive era of commerce and trade. These companies were characterized by their
colonial and
expansionary powers given to them by nation-states. In the mid-18th century a group of economic theorists, led by
David Hume (1711–1776) and
Adam Smith (1723–1790), challenged fundamental mercantilist doctrines—such as the belief that the world's wealth remained constant and that a state could only increase its wealth at the expense of another state. During the
Industrial Revolution, industrialists replaced merchants as a dominant factor in the capitalist system and effected the decline of the traditional handicraft skills of
artisans, guilds, and
journeymen. Industrial capitalism marked the development of the
factory system of manufacturing, characterized by a complex
division of labor between and within work process and the routine of work tasks; and eventually established the domination of the
capitalist mode of production. Industrial Britain eventually abandoned the
protectionist policy formerly prescribed by mercantilism. In the 19th century,
Richard Cobden (1804–1865) and
John Bright (1811–1889), who based their beliefs on the
Manchester School, initiated a movement to lower
tariffs. In the 1840s Britain adopted a less protectionist policy, with the 1846 repeal of the
Corn Laws and the 1849 repeal of the
Navigation Acts. Britain reduced tariffs and
quotas, in line with David Ricardo's advocacy of
free trade.
Modernity formed the financial basis of the international economy from 1870 to 1914. Broader processes of
globalization carried capitalism across the world. By the beginning of the nineteenth century, a series of loosely connected market systems had come together as a relatively integrated global system, in turn intensifying processes of economic and other globalization. Late in the 20th century, capitalism overcame a challenge by
centrally-planned economies and is now the encompassing system worldwide, with the mixed economy as its dominant form in the industrialized Western world.
Industrialization allowed cheap production of household items using
economies of scale, while rapid
population growth created sustained demand for commodities. The
imperialism of the 18th-century decisively shaped globalization. After the
First and
Second Opium Wars (1839–60) by Britain and France and the completion of the British conquest of India by 1858 and the French conquest of Africa,
Polynesia and
Indochina by 1887, vast populations of Asia became consumers of European exports. Europeans colonized areas of Africa and the Pacific islands. Colonisation by Europeans, notably of Africa by the British and French, yielded valuable natural resources such as
rubber,
diamonds and
coal and helped fuel trade and investment between the European imperial powers, their colonies and the United States: From the 1870s to the early 1920s, the global financial system was mainly tied to the
gold standard. The United Kingdom first formally adopted this standard in 1821. Soon to follow were Canada in 1853,
Newfoundland in 1865, the United States and Germany (
de jure) in 1873. New technologies such as the
telegraph,
transatlantic cable,
radiotelephone, steamships, and railways allowed goods and information to move around the world to an unprecedented degree. In the United States, until the 1920s, the term "capitalist" primarily referred to powerful businessmen due to widespread societal skepticism and criticism of capitalism and its most ardent supporters.
traders' floor (1963) Contemporary capitalist societies developed in the West from 1950 to the present and this type of system continues throughout the world—relevant examples started in the
United States after the 1950s,
France after the 1960s,
Spain after the 1970s,
Poland after 2015, and others. At this stage most capitalist markets are considered developed and characterized by developed private and public markets for equity and debt, a high
standard of living (as characterized by the
World Bank and the
IMF), large institutional investors and a well-funded
banking system. A significant
managerial class has emerged and decides on a significant proportion of investments and other decisions. A different future than that envisioned by Marx has started to emerge—explored and described by
Anthony Crosland in the United Kingdom in his 1956 book
The Future of Socialism and by
John Kenneth Galbraith in North America in his 1958 book
The Affluent Society, 90 years after Marx's research on the state of capitalism in 1867. The
postwar boom ended in the late 1960s and early 1970s and the economic situation grew worse with the rise of
stagflation.
Monetarism, a modification of
Keynesianism that is more compatible with
laissez-faire analyses, gained increasing prominence in the capitalist world, especially under the years in office of
Ronald Reagan in the United States (1981–1989) and of
Margaret Thatcher in the United Kingdom (1979–1990). 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". The end of the Cold War and the
dissolution of the Soviet Union allowed for capitalism to become a truly global system in a way not seen since before World War I. The development of the
neoliberal global economy would have been impossible without the fall of
communism. Harvard Kennedy School economist Dani Rodrik distinguishes between three historical variants of capitalism: • Capitalism 1.0 during the 19th century entailed largely unregulated markets with a minimal role for the state (aside from national defense, and protecting property rights); • Capitalism 2.0 during the post-World War II years entailed Keynesianism, a substantial role for the state in regulating markets, and strong welfare states; • Capitalism 2.1 entailed a combination of unregulated markets, globalization, and various national obligations by states.
Relationship to democracy The relationship between
democracy and capitalism is a contentious area in theory and in popular political movements. The extension of adult-male
suffrage in 19th-century Britain occurred along with the development of industrial capitalism and
representative democracy became widespread at the same time as capitalism, leading capitalists to posit a causal or mutual relationship between them. However, according to some authors in the 20th-century, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including
fascist regimes,
absolute monarchies and
single-party states. without making concessions to greater
political freedom. Political scientists
Torben Iversen and
David Soskice see democracy and capitalism as mutually supportive.
Robert Dahl argued in
On Democracy that capitalism was beneficial for democracy because economic growth and a large middle class were good for democracy. He also argued that a market economy provided a substitute for government control of the economy, which reduces the risks of tyranny and authoritarianism. He argued that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion.
Milton Friedman and
Ronald Reagan also promoted this view. Friedman claimed that centralized economic operations are always accompanied by
political repression. In his view, transactions in a market economy are voluntary and the wide diversity that voluntary activity permits is a fundamental threat to repressive political leaders and greatly diminishes their power to coerce. Some of Friedman's views were shared by
John Maynard Keynes, who believed that capitalism was vital for freedom to survive and thrive.
Freedom House, an American
think-tank that conducts international research on, and advocates for, democracy, political freedom and human rights, has argued that "there is a high and statistically significant correlation between the level of political freedom
as measured by Freedom House and economic freedom
as measured by the Wall Street Journal/Heritage Foundation survey". In
Capital in the Twenty-First Century (2013),
Thomas Piketty of the
Paris School of Economics asserted 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. According to
Clara Mattei, capitalism and democracy are "fundamentally incompatible" as real democracy requires a modicum of economic agency, which capitalism inherently undermines by making the majority of people dependent on selling their labor for survival. 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 style of government which, though democratic and consistently one of the least corrupt, operates largely under a one-party rule. Furthermore, it does not vigorously defend freedom of expression as evidenced by its
government-regulated press, and its 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. The term "capitalism" in its modern sense is often attributed to Karl Marx. In
Das Kapital, Marx analyzed the "
capitalist mode of production" using a method of critique that later became known as Marxism. However, while Marx did discuss capitalism extensively, he used the term "capitalism" less frequently than "capitalist mode of production." His collaborator,
Friedrich Engels, played a significant role in popularizing the term in more political interpretations of their work. In the 20th century, supporters of the capitalist system often replaced the term "capitalism" with phrases such as "free enterprise" or "private enterprise" to avoid its negative connotations. Similarly, the term "capitalist" was sometimes substituted with "
investor" or "
entrepreneur" to emphasize productive roles rather than passive wealth accumulation. == Characteristics ==