Ideology: a system of ideas and ideals, especially one which forms the basis of economic or political theory and policy.
What is Capitalism?
Capitalism: an economic system in which the means of production are privately owned and goods and services are produced for profit in a free market
Free Market: people are free to use/sell their private property without outside interference
Profit Motive: the desire to produce goods in order to gain more wealth
Advantages of Capitalism
Disadvantage of Capitalism
Who created modern Capitalism?
History of Capitalism
o Mercantilism/Merchant Capitalism (14th-18th)
o Industrial Capitalism (18th-20th)
o Modern Capitalism (19th-20th)
The Feudal Economic System
The Feudal System
Result of Feudal System: the Feudal System actually prevented capitalism from growing. The feudal manor was self-sufficient which limited the growth of free-market
How did the Feudal System end?
Black Death and Famine meant there was severe shortage of labour for agriculture
· Peasants could now demand real wages instead of servitude because they were needed
· Peasants became wage earners who could rent their own land, invest in their own capital and had an incentive to innovate production methods to make more money
· New technologies and exploration opened up the world to trade the 15th century.
Merchant Capitalism
Mecantilism: a system of trade for profit. European merchants, backed by governments, made profits from the buying and selling of goods
· Under Mercantilism, the state became the regulator of the economy, not the local guild
· Merchant invested capital in companies like the British East India Company, seeking a return on investment
End of Merchant Capital
· These government-woned and protected merchant companies became very wealthy and dominated international trade
· Made the governments very rich
· Competition was non-existent as governments tried to keep all profits to themselves
o No ‘free market’’
· The industrial revolution would soon bring an end to government control of the economy and its Merchant system
Industrial Capitalism
Industrial Capitalism: an economic system that relies on investment of capital in machines and technology that are used to increase production of marketable goods
· Adam Smith and other economic liberals realized that more wealth could be created with less not more government interference in the economy.
· Government owned merchant companies held monopolies in trade and production. There was little competition therefore no desire to innovate production
· The industrial revolution enabled a new class of entrepreneurs to invest in new production methods. The only thing that held them back was government regulation and control
· Sheer speed of revolution meant that competition grew exponentially
· Governments decided to help this grow by removing government barriers to trade as suggested by Adam Smith
· Banks also grew as industry needed more investment and finance than governments could provide
Modern Capitalism
· Private businesses could now create more wealth than the governments themselves
· The need for big, strong governments was reduced.
· Government roles was now to ensure the smooth operation of free markets
· State was now just a vehicle for improving business conditions, securing foreign markets and gaining access to resources
Need for an alternative
· By the 20th century, it was clear that capitalism, while making businesses wealthy, wasn’t working for everyone
· Laissez-faire economic policies reduced government protection for workers
· Wage earners lived and worked in terrible conditions with wages reduced by factory owners keen to boost profits
· Capitalism was another method of exploitation, benefiting a small minority who owned all the capital
· People who owned wealth owned the government through political parties and pressure groups
What is Capitalism?
Capitalism: an economic system in which the means of production are privately owned and goods and services are produced for profit in a free market
Free Market: people are free to use/sell their private property without outside interference
Profit Motive: the desire to produce goods in order to gain more wealth
- People set up businesses using capital (land, factories, wealth) in order to produce goods/services to make money, thereby creating more capital for themselves (profit motive)
- Prices and distribution of goods are determined by competition between producers in a free market (supply/demand)
- Capitalism relies on the voluntary exchange of labour in return for wages/capital.
- Individual pursue their own self interest by working for wages
- Capitalism is based on greed and self-interest
- Capitalists believe that governments should NOT interfere with government
Advantages of Capitalism
- Best wealth creation tool known to man
- Is the most efficient system with less waste, produces only what people demand
- Increases the standard of living for many
- Is natural as humans naturally form capitalist economic relations based on human nature. Human nature includes the desire for self-preservation and greed
Disadvantage of Capitalism
- Capital can accumulate in the hands of the few who control production (monopoly)
- Profit Motive forces wages down, poor working conditions
- Can also lead to overproduction/recession and unemployment
- Reduces the worth of a human to a monetary value, because it is a system based on greed.
Who created modern Capitalism?
- Adam Smith attacked government interference in the economic process
- Government restrictions on trade caused inefficiency and high prices
- Laissez-faire was needed with the idea of letting the free market do what it wants
- Thus Capitalism was born
History of Capitalism
- Evolved naturally
- Europe first developed modern capitalism
- Historical analysis of Capitalism shows it developed in 4 key stages
o Mercantilism/Merchant Capitalism (14th-18th)
o Industrial Capitalism (18th-20th)
o Modern Capitalism (19th-20th)
The Feudal Economic System
- In Medieval Europe, a hierarchy of King, Lords/Barons and Knights ruled all the land and means of production
- Wealth came from ownership of land
- Peasants forced to work for their lord, they had no interest in technological innovation.
- Peasants produced to sustain their own families they had no interest in cooperating with one another
- Peasants had no power, money or free time to invest in their own capital
The Feudal System
- As Lords owned the land, they relied on force to guarantee that they were provided with food
- There was no competitive pressure to innovate production
- Lords spent all their wealth on military equipment or lavish consumption
- No incentive to invest in developing new productive technologies
Result of Feudal System: the Feudal System actually prevented capitalism from growing. The feudal manor was self-sufficient which limited the growth of free-market
How did the Feudal System end?
Black Death and Famine meant there was severe shortage of labour for agriculture
· Peasants could now demand real wages instead of servitude because they were needed
· Peasants became wage earners who could rent their own land, invest in their own capital and had an incentive to innovate production methods to make more money
· New technologies and exploration opened up the world to trade the 15th century.
Merchant Capitalism
Mecantilism: a system of trade for profit. European merchants, backed by governments, made profits from the buying and selling of goods
· Under Mercantilism, the state became the regulator of the economy, not the local guild
· Merchant invested capital in companies like the British East India Company, seeking a return on investment
End of Merchant Capital
· These government-woned and protected merchant companies became very wealthy and dominated international trade
· Made the governments very rich
· Competition was non-existent as governments tried to keep all profits to themselves
o No ‘free market’’
· The industrial revolution would soon bring an end to government control of the economy and its Merchant system
Industrial Capitalism
Industrial Capitalism: an economic system that relies on investment of capital in machines and technology that are used to increase production of marketable goods
· Adam Smith and other economic liberals realized that more wealth could be created with less not more government interference in the economy.
· Government owned merchant companies held monopolies in trade and production. There was little competition therefore no desire to innovate production
· The industrial revolution enabled a new class of entrepreneurs to invest in new production methods. The only thing that held them back was government regulation and control
· Sheer speed of revolution meant that competition grew exponentially
· Governments decided to help this grow by removing government barriers to trade as suggested by Adam Smith
· Banks also grew as industry needed more investment and finance than governments could provide
Modern Capitalism
· Private businesses could now create more wealth than the governments themselves
· The need for big, strong governments was reduced.
· Government roles was now to ensure the smooth operation of free markets
· State was now just a vehicle for improving business conditions, securing foreign markets and gaining access to resources
Need for an alternative
· By the 20th century, it was clear that capitalism, while making businesses wealthy, wasn’t working for everyone
· Laissez-faire economic policies reduced government protection for workers
· Wage earners lived and worked in terrible conditions with wages reduced by factory owners keen to boost profits
· Capitalism was another method of exploitation, benefiting a small minority who owned all the capital
· People who owned wealth owned the government through political parties and pressure groups
How Capitalism works – Questions/Answers
1. ‘The essence of Capitalism is economic freedom’. What do you understand this to mean?
a. Freedom to choose and pursue your own financial goals without any involvement of the government.
2. What are the two basic approaches to a modern economic system?
a. One is the free market economy, which is what we understand as capitalism. The other is planned economy, which is also known as command economy or a Marxist economy.
3. What does Layton mean by ‘true’ or ‘real’ capitalism?
a. True capitalism would not include things like child labour laws, Social Security etc. The ‘real’ capitalism is what capitalist countries use today which is a mixed economy
4. What is a ‘mixed economy’?
a. A mixed economy is a capitalist nation who incorporates certain aspects of capitalism and planned economy.
5. What does ‘individualism’ mean?
a. Individualism is the belief that every human being is individually unique and valuable. The idea that every one matters led to capitalism.
6. Give an example of how someone’s ‘individual wealth’ could lead to an overall improvement in the ‘wealth of society’.
a. Individual wealth is a self-interest goal, which leads to widespread personal wealth. Individual welfare leads to overall social welfare, which will increase the wealth of society.
7. What two concepts did Adam Smith, introduce in his book, ‘Wealth of Nations’?
a. The two concepts he suggested were
i. Because self interest guides producers to create exactly what people want, the pursuit of personal gain eventually benefits society
ii. An economy will regulate itself; the economy will work the way it's supposed to if it’s not disturbed by religion, politics, the government etc. This way everyone will benefit.
8. What does Smith mean by an ‘invisible hand’?
a. It means that a balance guides economy between self-interest, private ownership and competition. This balance will increase social benefit.
9. Why does Capitalism thrive in a consumer culture?
a. Capitalism creates the consumer culture. Individual wealth is represented on how much you can own and buy. Capitalism creates competition for wealth which means it thrives in a consumer culture. If no one buys anything, the whole system will collapse. Companies have to keep growing however this is not sustainable because we have limited resources.
10. Define what the owner class and working class are.
a. Owner class is when a few people own the means of production. This is machines, factories and land etc
b. Working class is the labourers who use capital to produce goods and have no ownership of that capital. Labourers are paid with wages and not the products they produce.
11. According to Smith, what guides production and why?
a. Production is guided by an ‘invisible hand’ which guides the economy through a combination of self-interest, private ownership and competition. It guides production because in the end, everyone benefits.
12. How does Smith’s model of Capitalism improve society’s standard of living?
a. Because the more profit the capitalists bring in, the more goods they produce. The more goods produced, the lower the price of those goods. Lower prices mean more people can afford to buy which raises the standard of living through society.
13. What should be the role of government according to Smith?
a. The role of the government is to maintain peace and order so the economy can work without interruption. Government should stop wars, crimes etc. Anti-trust laws were set up to keep capitalism and competition growing.
14. Explain what laissez-faire system of economics is.
a. Laissex-faire system of economics relies on interconnected, self-regulating networks of producers, consumers and markets that operate on the principles of supply and demand.
15. What is meant by ‘supply and demand’?
a. When more people want something supply does down and price goes up, when fewer people want something, supply goes up and prices go down. It principle is to find a way to turn something into a profit.
16. What is Mercantilism?
a. Getting profit results from obtaining or producing goods for less than you sell them for. It is based on the concept of profit. You sell something for more than you paid for it.
17. How are Capitalist, Socialist and Fascist economic systems basically different?
a. In capitalist system, the owner of production is the individual, in a socialist, the owner of production is the state, in a fascist system, the owner of the production is the state. The difference between a fascist and socialist is that in a socialist the benefactors of production are society while in fascist it is the state then society.
18. Why didn’t true capitalism work in history?
a. The inequality between the working class and the owning class continued to grow and labourers got frustrated as they were depending on capitalism for their livelihoods. The exclusion of the government from economics didn’t work.
19. Why did governments begin to intervene in the Capitalist economies in the early 20th century?
a. To protect the working class from the owner class. They passed laws that made child labour illegal, capped the length of the workday and banned monopolies. This stopped the owner class taking advantage/exploiting the working class.
20. What changes did the economist Keynes believe should be made to Capitalism in the 1930s?
a. Keynes believed that government intervention can help stabilize a capitalist economy. By varying taxes and spending and manipulating interest rates, the government can keep the money supply level and protect the economy from the “boom and bust” periods inherent to the capitalist systems.
1. ‘The essence of Capitalism is economic freedom’. What do you understand this to mean?
a. Freedom to choose and pursue your own financial goals without any involvement of the government.
2. What are the two basic approaches to a modern economic system?
a. One is the free market economy, which is what we understand as capitalism. The other is planned economy, which is also known as command economy or a Marxist economy.
3. What does Layton mean by ‘true’ or ‘real’ capitalism?
a. True capitalism would not include things like child labour laws, Social Security etc. The ‘real’ capitalism is what capitalist countries use today which is a mixed economy
4. What is a ‘mixed economy’?
a. A mixed economy is a capitalist nation who incorporates certain aspects of capitalism and planned economy.
5. What does ‘individualism’ mean?
a. Individualism is the belief that every human being is individually unique and valuable. The idea that every one matters led to capitalism.
6. Give an example of how someone’s ‘individual wealth’ could lead to an overall improvement in the ‘wealth of society’.
a. Individual wealth is a self-interest goal, which leads to widespread personal wealth. Individual welfare leads to overall social welfare, which will increase the wealth of society.
7. What two concepts did Adam Smith, introduce in his book, ‘Wealth of Nations’?
a. The two concepts he suggested were
i. Because self interest guides producers to create exactly what people want, the pursuit of personal gain eventually benefits society
ii. An economy will regulate itself; the economy will work the way it's supposed to if it’s not disturbed by religion, politics, the government etc. This way everyone will benefit.
8. What does Smith mean by an ‘invisible hand’?
a. It means that a balance guides economy between self-interest, private ownership and competition. This balance will increase social benefit.
9. Why does Capitalism thrive in a consumer culture?
a. Capitalism creates the consumer culture. Individual wealth is represented on how much you can own and buy. Capitalism creates competition for wealth which means it thrives in a consumer culture. If no one buys anything, the whole system will collapse. Companies have to keep growing however this is not sustainable because we have limited resources.
10. Define what the owner class and working class are.
a. Owner class is when a few people own the means of production. This is machines, factories and land etc
b. Working class is the labourers who use capital to produce goods and have no ownership of that capital. Labourers are paid with wages and not the products they produce.
11. According to Smith, what guides production and why?
a. Production is guided by an ‘invisible hand’ which guides the economy through a combination of self-interest, private ownership and competition. It guides production because in the end, everyone benefits.
12. How does Smith’s model of Capitalism improve society’s standard of living?
a. Because the more profit the capitalists bring in, the more goods they produce. The more goods produced, the lower the price of those goods. Lower prices mean more people can afford to buy which raises the standard of living through society.
13. What should be the role of government according to Smith?
a. The role of the government is to maintain peace and order so the economy can work without interruption. Government should stop wars, crimes etc. Anti-trust laws were set up to keep capitalism and competition growing.
14. Explain what laissez-faire system of economics is.
a. Laissex-faire system of economics relies on interconnected, self-regulating networks of producers, consumers and markets that operate on the principles of supply and demand.
15. What is meant by ‘supply and demand’?
a. When more people want something supply does down and price goes up, when fewer people want something, supply goes up and prices go down. It principle is to find a way to turn something into a profit.
16. What is Mercantilism?
a. Getting profit results from obtaining or producing goods for less than you sell them for. It is based on the concept of profit. You sell something for more than you paid for it.
17. How are Capitalist, Socialist and Fascist economic systems basically different?
a. In capitalist system, the owner of production is the individual, in a socialist, the owner of production is the state, in a fascist system, the owner of the production is the state. The difference between a fascist and socialist is that in a socialist the benefactors of production are society while in fascist it is the state then society.
18. Why didn’t true capitalism work in history?
a. The inequality between the working class and the owning class continued to grow and labourers got frustrated as they were depending on capitalism for their livelihoods. The exclusion of the government from economics didn’t work.
19. Why did governments begin to intervene in the Capitalist economies in the early 20th century?
a. To protect the working class from the owner class. They passed laws that made child labour illegal, capped the length of the workday and banned monopolies. This stopped the owner class taking advantage/exploiting the working class.
20. What changes did the economist Keynes believe should be made to Capitalism in the 1930s?
a. Keynes believed that government intervention can help stabilize a capitalist economy. By varying taxes and spending and manipulating interest rates, the government can keep the money supply level and protect the economy from the “boom and bust” periods inherent to the capitalist systems.