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Home » Uncategorized » 20210425 – Capitalism A short History

20210425 – Capitalism A short History




The main idea here is to review classic analysis of  capitalism as presented in works of Marx, Weber, and Schumpeter, history of this economic system as it was developing in the few key representative societies, its current variety of forms, and trends such as globalization, financialization, and symbiosis with government that to significant extent defines contemporary life.


I. What Does Capitalism Mean?
The Emergence of a Controversial Concept
Author begins by discussing origins and history of term capitalism and concludes by stating:” Individualized property rights; commodification on markets for goods, labor, land and capital; the price mechanism and competition; investment, capital, and profit; the distinction between power-holding proprietors and dependent propertyless wage workers; tensions between capital and labor; rising inequality; the factory system and industrialized production—these were, in varying combinations, major characteristics of the concept of capitalism as it emerged in the period leading up to World War I.”

Three Classics: Marx, Weber, and Schumpeter

Here author reviews ideas of three economists of XIX – early XX century that had big impact on understanding of capitalism.

He summarizes Marxian concept of capitalism in four points:

  1. Market with division of labor and money economy
  2. Accumulation of capital
  3. The core of mode of production – tension between owners of means of production and labor
  4. Dynamism of the capitalist system that constantly destroys old and creates new

Then author reviews ideas of Max Weber who treated capitalism as part of modernization with:” economic action was characterized by competition and exchange, orientation to market prices, the deployment of capital, and the search for profit.” Weber also went beyond pure economics linking capitalism to Protestant ethics.

Finally. author discusses ideas of Joseph A. Schumpeter, who defined capitalism this way:” “Capitalism is that form of private property economy in which innovations are carried out by means of borrowed money, which in general, though not by logical necessity, implies credit creation.” He also stressed capitalism’s dynamic development that leads to creative destruction.

Other Voices and a Working Definition
In this last part of the chapter author briefly reviews ideas of Keynes, Polanyi, Braudel, and a few others, and concludes with his own definition:” I propose a working definition of capitalism that emphasizes decentralization, commodification, and accumulation as basic characteristics. First, it is essential that individual and collective actors have rights, usually property rights, that enable them to make economic decisions in a relatively autonomous and decentralized way. Second, markets serve as the main mechanisms of allocation and coordination; commodification permeates capitalism in many ways, including labor. Third, capital is central, which means utilizing resources for present investment in expectation of future higher gains, accepting credit in addition to savings and earnings as sources of investment funds, dealing with uncertainty and risk, and maintaining profit and accumulation as goals. Change, growth, and expansion are inscribed.”

2. Merchant Capitalism
In this chapter author discusses early forms of economy with at least some capitalist characteristics:” economy and commercialization of everyday life in the big cities reached a high level, long-distance trade in foodstuffs and luxury goods flourished, the large latifundia produced for the market at a profit, and economic transactions like the sale or lease of land took place on a contractual basis aided by precise calculations. There was also no lack of more or less free wage workers. Yet on the whole the subsistence economy was predominant, slave labor was widespread, and “the strong drive to acquire wealth was not translated into a drive to create capital” (Moses Finley). The orientation toward secure rents was more widespread than the drive for profit. Productivity growth and macroeconomic growth were kept within limits, and the orientation toward war and booty was still stronger than the orientation toward long-term market success.

China and Arabia

Here author reviews early Chinese form of capitalism under dominance of Confucian ideology: “The Confucianism practiced by the civil servants who exercised political power included such elements as a rejection of pronounced inequality and hence of too much independent wealth, the promotion of agriculture, and state controls over money, the credit system, and trade. These controls extended as far as a willingness to operate estates, supply depots, and workshops under state management. Buddhism, which started in India and spread out from there to places in Asia where it was practiced above all by traders and merchants, had a more positive attitude toward commercial activity.”

Somewhat different development occurred in Arabia, when early form of capitalism was based mainly on the long-distance trade. The trade was encouraged by Islam but hampered by limitation on credit.

Europe: Dynamic Latecomer
Development in Europe was similar to Arabia with main form being long-distance trade, but often in more complex and capital demanding form of maritime trade, which caused development of port cities and variety of financial tools such as insurance. It also prompted creation of trade alliances such as Hanse League. Author discusses European development in more detail, stressing that unlike other places traders were somewhat more interconnected with states:” State formation and the origins of financial capitalism were closely connected, and the nexus provided a way for prosperous urban citizens in high finance, a small elite, to establish their influence on politics while simultaneously making their entrepreneurial success dependent on powerful rulers and their shifting political fortunes.”

Interim Findings around 1500
Here author summarizes his views on developments before 1500 AD and states that:” The merchants who supported capitalism in Europe, or at least their leading representatives, exercised direct influence on politics—in part via a symbiosis with rulers in the city-states and free cities that had civic rule, in part through close ties to those exercising political power and in need of financial support, in part through formal self-organization (guilds). By contrast, merchants in China, as well as in Arabia and India, were confined to the antechamber of power and were much less engaged in financing state formation than was the case in Europe. This explains how, in the final analysis and in spite of many countervailing trends, politics in Europe was decisive for promoting mercantile dynamism and a capitalistic kind of accumulation. By contrast, Chinese politics, although it initially allowed and supported commercial dynamism and major developments in accumulating large amounts of capital to inch forward a bit, then became strong enough and mistrustful enough to restrain both of these trends so that finally, when both domestic and foreign policy changed, these economic forces were ultimately thwarted.”

3. Expansion
The point author makes here is:” The rise of capitalism, the development of powerful territorial states, and the expansion of Europe that led to colonialism were all contingent on each other.”

Business and Violence: Colonialism and World Trade
This is about a very interesting and unusual form of European expansion and colonialism when use of military superiority led to expansion of trade by corporations and individuals, rather than to just plain robbery by the state as was historically the case. Author briefly reviews types of goods traded and geography of goods flow.

Joint-Stock Company and Finance Capitalism
This is about corporate forms and financing of this trade expansion and author uses Dutch United East India Company as representative example. Author also discusses here development of banking as tool necessary to support increasing long-distance trade.

Plantation Economy and Slavery
In his discussion of slavery and plantation author mercifully avoids idiotic claim that western wealth and economies are created by slave labor and provides more or less reasonable point:” Slavery has a long tradition in many regions of the world. In the eighteenth century there were as many slaves in Africa itself as in America. But under the influence of capitalism, slavery not only increased enormously in scope; it also, in connection with the harsh work discipline typically appertaining to this economic system, took on a special brutality. One cannot say that capitalism would not have developed further without its centuries-long connection to slavery. Nor is it a tenable thesis to claim that industrialization since the late eighteenth century was fed by the gigantic profits of the slave trade, as incontestable as the multiplier effects are that emanated from it into other branches of trade, the textile business, shipbuilding, and other sectors of the economy in western European countries. But if one wants to understand what it means to say that capitalism came into the world bloody and dirty, it is necessary to keep an eye on its relationship to slavery and other forms of unfree labor.”

Agrarian Capitalism, Mining, and Proto-Industrialization
Here author discusses initial development of capitalism into agriculture when production shifted away from subsistence level to market oriented monetarized forms, which author traces based of history of Europe when industrialization of England and later Germany was supported by agricultural specialization of East European countries like Poland and Russia. Author limits this by time frame of initial development that he calls proto-capitalism and proto-industrial period.

Capitalism, Culture, and Enlightenment: Adam Smith in Context
This chapter is quite interesting because it connects culture and its change with typical capitalistic development such as freedom of individual movements, speech, property rights, contracts, and foundation of all this – enlightenment ideas and literacy and numeracy necessary for effective functioning of society based on trade and industrial production. From this cultural development author expresses his attitude to ideas of “Great Diversion” between Western Europe and others:

4. The Capitalist Era
This part is about contemporary capitalism and attitudes to it, which fluctuates between acceptance and criticism all the way to rejection.

The Contours of Industrialization and Globalization since 1800
Here is how author characterizes changes inflicted on capitalism by industrialization:

1.  Wage labor on a contractual basis turned into a mass phenomenon.

2.  With factories, mines, and new transportation systems, with mechanization and the expansion of manufacturing plant, the accumulation of fixed capital reached a scale like nothing before. Alongside the numerically dominant small and medium-size businesses, large concerns and mergers came into being.

3.  Technological and organizational innovations became incomparably more important than they had been in preindustrial varieties of capitalism. There was now a faster pace of innovation. In Schumpeter’s analysis, “creative destruction” has been the core component of the capitalist production method… “constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones.” This contributed to the unpopularity of capitalism, and certainly to its continually renewed delegitimization, most apparent during capitalism’s big, recurring crises, such as the ones that broke out in 1873, 1929, and 2008.

4.  These crises usually arose out of excessive speculation and erroneous trends in the financial sector, yet they also affected the “real economy.” They imperiled not only a few speculators but also the life chances of broad sections of the population, and they could lead to profound social and political disruptions. Crises thus brought home another thing that distinguished capitalism in the age of industrialization from previous variants: namely, that it had become the economy’s dominant regulatory mechanism, intensively influencing society, culture, and politics all at the same time.

From Ownership to Managerial Capitalism
Here author reviews consequences of enterprise growth to such extent that they are owned by the multitude of stockholders and run by professional management, rather than owners, consequently completely changing structure of business and motivation of people in control.


Here author discusses financial side changes specifically in three respects:

  • Globalization of finance and cross border capital flows and currencies exchanges
  • Huge growth in outstanding credit, including government debts all over the world
  • Shift of power away from business managers to financial managers

Work in Capitalism 

Author expresses his view on wage labor as the central form of work in capitalism and these reasons for this:

1.  For one thing, the trend toward comprehensive commodification represents a key component of the capitalist system, and wage labor is the most consistent application of this principle to human labor (although not the only one).

2.  For another, in spite of numerous exceptions and countervailing tendencies, in the long run wage labor has become and is becoming more extensive and widespread, and not just in the course of capitalist industrialization in the West but (in the meantime) worldwide. As capitalism, industrial capitalism in particular, has widened and deepened, wage labor became, and is still becoming, step by step, the prevailing form of work, although it appears in many forms and combinations. This had, and still has, something to do with the fact that free wage labor on a contractual basis corresponds best, in principle, to the particular kind of instrumental rationality inherent in capitalist enterprises. For, unlike workers who perform bonded labor with their entire person over long periods of time (such as slaves), wage workers who are contractually obligated to perform certain services temporarily but are otherwise free as well as terminable—wage workers like this allow businesses and employers to recruit, shift, and if need be also quickly dismiss employees with a view toward entrepreneurial objectives. This is advantageous to the company’s interest. Under conditions of developed, differentiated labor markets, and in the face of rapid economic change as capitalist normality, it was and is in the interest of capitalist actors to prefer wage labor to unfree labor.

3. Finally, it should be taken into consideration that an employment relationship under wage labor can be terminated by the worker as well as by the employer. The employment relationship may subjugate the worker’s labor power, but not his or her entire person, to the employer’s order-giving authority and the constraints of the enterprise. This is an important and coveted element of freedom. The transition to wage work could and can have a liberating effect, even though entry into such an exchange relationship of work for wages is frequently a matter of urgency for the worker on sheer grounds of survival, and although the employment relationship, once accepted, is usually characterized by much control and discipline. This social and legal quality distinguished and still distinguishes wage labor, in principle, from the different forms of unfree labor, and this distinction needs to be taken seriously from the standpoint of life histories and historiography.

He then discusses changes in the nature of labor that occur now due to increases in productivity, massive government intervention combined with labor movement fighting business that led to constant vacillation between periods of increasing cost of labor at the expense of business leading to decrease in business activity, and periods of government retreat and weakening of labor movement resulting in increase of business activity. All this also includes new form of employment on “as needed” basis and globalization that allowed foreign cheap labor shifting supply chains away from developed Western countries.   

Market and State 

Here author looks at love-hate relationship between market and state and gives three reasons why state intervention will continue to grow:

  1. Markets, which make capitalistic conduct possible in the first place, presuppose framework conditions that can only be established by political means. Markets cannot do the job of removing barriers to commerce (e.g., feudal obstacles such as guild regulations, trade monopolies and privileges, fines and tolls on travel) that fragment and constrain, of guaranteeing a minimum of peaceful order, and of providing rules to conclude and implement contracts or contract-like agreements. Without the use of political power, capitalism would never have taken off, nor can it take off in the future. Often the preconditions for the existence of supraregional markets resulted from the use of force—in war, for example, or in the course of colonization.

2.  A growing instability of capitalist processes can be discerned, to the extent that these processes have become detached over the last several decades from the restrictive but also stabilizing grounds in which they were once embedded and have, moreover, become internally differentiated. This was illustrated above in the case of two different transitions, first from ownership to managerial capitalism, and then with the shift to capitalism’s current phase of financialization. In the second transition, the investment function has been so powerfully detached from its ties to other functions (such as management of the enterprise or personnel policy) that it has become an independent force, carried away to the point of self-destruction unless the investment function can be recaptured and reembedded. In the search for new ways of embedding finance, state guidelines and controls need not play the only role. Civil society-based arrangements become increasingly relevant, but strong and effective government intervention remains indispensable. (The problem is posed in a somewhat different way, however, outside the North Atlantic area, where widespread clientelism, patronage, and corruption—in other words, special ways of “embedding” economic institutions in community, society, and politics—lead to features of the system that have been characterized and criticized with such catchwords as “patrimonial capitalism” and “crony capitalism.”)

3.  Capitalism, even in its advanced stages, develops in a way that has disruptive and destructive effects on its social, cultural, and political environment and can call into question its social acceptance. Here one need only recall the profound crises, repeated with a certain inevitability, that have a habit of starting out as financial crises, as in 1873, 1929–1930 und 2007–2008, yet leave in their wake serious repercussions for the “real economy,” impair the welfare of broad sectors of the population, and possibly lead to social and political disruptions. In equal measure, though, attention must be drawn to the long-term polarizing effects of capitalism when it has been successful. By this I do not mean only the well-known connection between industrialization, wage labor, and worker protest, which leads to social polarization when not counteracted by welfare state measures. Rather, it is also important to mention what is demonstrated by certain findings from the early modern Netherlands, from the process of industrialization in the nineteenth century, and from experiences over the last several decades. These different findings all show that capitalist growth, if not counteracted with compensatory measures, does not necessarily lead to massive impoverishment—quite the contrary! —but does go hand in hand with increasing income and wealth inequality. Exorbitantly high managerial earnings, whose lead over average incomes in the last several decades has reached dizzying heights, are just a tiny, though quite visible and especially irritating, aspect of an increase in inequality that is quite complex. Especially in democratic political cultures, this surge in inequality is perceived as unjust, and over the long run it can call into question the legitimacy of the system.

5. Analysis and Critique 

Here author discusses the very concept of capitalism, which acquired mainly negative meaning in English and German languages but is perceived as positive by many economists and ideologues. Author also reviews how it changed overtime becoming mainly linked to inequality. He completes the book by noting that:” Capitalism lives off its social, cultural, and political embedding, as much as it simultaneously threatens and corrodes these moorings. It can be influenced by political means and those of civil society when and if these are strong and decisive enough. Seen from this perspective, one could say that, every era, every region, and every civilization gets the capitalism it deserves. Currently, considered alternatives to capitalism are hard to identify. But within capitalism, very different variants and alternatives can be observed, and even more of them can be imagined. It is their development that matters. The reform of capitalism is a permanent task. In this, the critique of capitalism plays a central role.”


It’s a nice and concise review of history and meaning of capitalism as economic system. I find this approach interesting, but I think that the very use of term capitalism is so muddled that it is becoming impossible to communicate between people because everybody has very complex and diverse understanding of the term. I think that this term outlived its usefulness and one should talk about economic relation between individuals in different positions in relation to resources allocation, production and distribution processes rather than between classes in order to understand economic relationships, develop meaningful course of actions, and predict economic outcomes a bit better then demonstrated by previous track record of economists. There is movement in this direction in form of behavioral economics, evolutionary economics, and others but it is still far away from ability of predicting economic outcomes based on analysis of current conditions and expected actions. One big problem that I have is that capitalism often treated with no regard to realities of life, in which it practically never occurs in its theoretical neatness. There is always interference of state and other violent organizations that distort normal processes of market economy, only later to blame this abstraction – capitalism on their failure. Another big problem is treating humans as if they were independent from need for necessities of life and moral pressure by others and therefore could, for example, participate in free labor exchange. Or ideas of using aggregate demand and aggregate supply to control economy via monetary and fiscal policy. These also have colorful and painful history of failure, but still serve as foundation of infinite number of “economic research” papers. Instead of these I’d like to see specific country/time research when economic and extra-economic factors treated as part of one integrated process of resource production and allocation to individual and/or small group levels. I understand that it would be much more complicated process, than current primitive and mainly meaningless analysis of abstract aggregates, but it is the only way to obtain something close to scientific level of understanding for these processes. I believe that with advance of AI processing and increase in computer power it could become reality, but I do not expect it happen very soon.

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