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Capital, as a noun referring to the funds individuals or corporations use as the basis for financial operations, is first employed in 1709 within ”An Act for Enlarging the Capital Stock of the Bank of England.” Capitalism, representing a system where capital is advanced to increase wealth, did not come into use until William Thackeray’s 1854 novel, The Newcomes.
Capitalism may refer to an economic, political and/or social system (e.g. feudalism, capitalism, communism), a broad historical period, or specific forms within that period (e.g. mercantile, industrial, finance, monopoly, or late capitalism). It is often politically encumbered through association with Marx’s and other socialist or communist critiques of capitalism (although Marx never used ”capitalism” in The Manifesto or Capital -first employing it in his late-1870s correspondence). Werner Sombart tried to depoliticize the term, maintaining it was an analytical concept applicable to a specific socioeconomic system.
As such, capitalism is a system that provides for needs and wants, animated by a particular ethos, coordinated and organized by established practices, regulations, and laws, privileging particular types of knowledge (e.g. scientific, technical, and instrumentally rational). Capitalism’s ethos involves an historically unique approach to acquisition, positive attitudes towards unfettered competition, and the predominance of goal-rational action (Weber 1927: 352-68). Capitalist production is not directly aimed at human need; it centers on abstract value and potentially unlimited accumulation. Each economic unit competes to extend its economic power as far and advantageously as possible within the existing legal system.
Although forms of capitalism existed in the ancient world, thirteenth-century Italy, and the Low Countries, Weber (1927: 275-8) identified five criteria characterizing capitalism, as a ”pure type,” in the modern era.
First, capitalism exists when ”the provision of everyday wants” is met through capitalist enterprise. The whole economic system would collapse if those enterprises ceased their productive activities.
Second, capitalism depends on rational calculation and precise accounting. It is the first economic/social system aimed at the pursuit of unlimited wealth and everything is viewed in terms of accumulation: people are producers or consumers; nature is a repository of resources; enhancing managerial techniques, technical capacities, and performance outcomes is constantly required; progress involves the creation of new wants, better technology, reduced costs, and increased speeds of capital circulation. Firms calculate the components and costs of production – e.g. raw material, machinery, wages, transport, advertising – and the potential consumer demand to ensure, as much as possible, profit maximization. Enterprises determine when and how far they can extend their economic reach while complying with existing law. Goal-rational action pervades capitalism as people, objects, and events are evaluated in means/ends terms.
Third, capitalism presupposes an enduring, predictable legal system. Entrepreneurs, enterprises, or managers must be certain of property and ownership rights, their easy purchase and sale, and enforceable contracts. Agents of capital must have the legal freedom to undertake the production of any product or service where profit appears attainable and be able to pursue that objective through a variety of organizational forms.
Fourth, capitalism presupposes the presence of individuals ”who are not only legally in the position, but are also economically compelled, to sell their labor on the market without restriction” (Weber 1927: 277). Capitalism could not exist and develop without ”such a propertyless stratum . . . a class compelled to sell its labor services to live.” Living ”under the compulsion of the whip of hunger,” Weber maintained, enabled employers to ”unambiguously [determine workers’ wages] by agreement in advance.”
Finally, capitalism requires the complete commercialization of economic life where the primary goal is gaining and expanding economic advantage while building commercial wealth. Of critical importance is the sale and purchase of shares in an enterprise or particular property. Through share ownership, individuals or corporations gain access to capital resources well beyond a single individual’s wealth, enabling firms to dominate increasingly larger markets and ultimately globalize their activities. The stock market provides the opportunity for wealth through shrewd investment and moves capital to areas of anticipated need and growth; the fluctuation of share values also measures enterprises’ efficiency and profitability over the short and long term.
Capitalism entails a number of dynamic tensions concerning power, control and freedom. Although capitalism has flourished in periods of war, it requires sufficiently long periods of social and political stability for investors, speculators, and producers to make long-term plans with some confidence. Capitalism requires the personal, internal control of individuals’ actions, along with institutional regulation – Michel Foucault’s notion of disciplining docile bodies – with ultimate power residing in the legal system. Thus, despite certain rhetoric to the contrary, capitalism requires a strong, stable state although state powers must be limited. There is a constant tension and shifting of the private sector/public sector balance of power.
State power must be restricted so that individuals or firms may engage in saving, risk-taking, and profit-making activities without the fear of arbitrary state intervention or the confiscation of property. At the same time, particularly after the 1929 depression, private enterprise has depended on the state and public sector for key infrastructural resources, policies, laws and security. The state, even the neoliberal one, plays a major role in managing the financial environment within which corporations act: for example, governments establish the money supply, determine interest rates, influence access to credit, implement budgets (including deficits and deficit financing), set rates for progressive income and corporate taxes, influence currency value, regulate securities exchanges, establish tariff rates and trade policies, legislate on collective bargaining rights, minimum wage, unemployment insurance, fund and oversee education, and are increasingly involved in health care. The state is a major economic actor.
Sociology’s emergence and early development within industrial capitalism is not mere coincidence. Capitalism’s social impact and its analytical ethos provided the substance and form for sociology to develop as an empirically based, theoretically informed, critical discipline.
- Blaug, M. (1997) Economic Theory in Retrospect, 5th edn. Cambridge University Press, New York.
- Weber, M. (1927)  General Economic History, trans. F. Knight. Free Press, Glencoe, IL.