ELL 313M Social Thought and Philippine Literature La Consolacion University Philippines
Dr. Edilberto C. Cruz, Professor Graduate Studies Department
What Is Capitalism?
Capitalism is an economic system in which private individuals or businesses own
capital goods. The production of goods and services is based on supply and
demand in the general market—known as a market economy—rather than
through central planning—known as a planned economy or command economy.
The purest form of capitalism is free market or laissez-faire capitalism. Here,
private individuals are unrestrained. They may determine where to invest, what
to produce or sell, and at which prices to exchange goods and services. The laissez-faire marketplace
operates without checks or controls.
Today, most countries practice a mixed capitalist system that includes some degree of government
regulation of business and ownership of select industries.
Understanding Capitalism
Functionally speaking, capitalism is one process by which the problems of economic production and
resource distribution might be resolved. Instead of planning economic decisions through centralized
political methods, as with socialism or feudalism, economic planning under capitalism occurs via
decentralized and voluntary decisions.
A. Capitalism and Private Property
Private property rights are fundamental to capitalism. Most modern
concepts of private property stem from English philosopher John
Locke's theory of homesteading, in which human beings claim
ownership through mixing their labor with unclaimed resources.
Once owned, the only legitimate means of transferring property are
through voluntary exchange, gifts, inheritance, or re-homesteading
of abandoned property.
Private property promotes efficiency by giving the owner of resources an incentive to maximize the
value of their property. So, the more valuable the resource is, the more trading power it provides the
owner. In a capitalist system, the person who owns the property is entitled to any value associated
with that property.
For individuals or businesses to deploy their capital goods confidently, a system must exist that
protects their legal right to own or transfer private property. A capitalist society will rely on the use of
contracts, fair dealing, and tort law to facilitate and enforce these private property rights.
When a property is not privately owned but shared by the public, a problem known as the tragedy of
the commons can emerge. With a common pool resource, which all people can use, and none can
limit access to, all individuals have an incentive to extract as much use value as they can and no
incentive to conserve or reinvest in the resource. Privatizing the resource is one possible solution to
this problem, along with various voluntary or involuntary collective action approaches.
B. Capitalism, Profits, and Losses
Profits are closely associated with the concept of private property. By definition, an individual only
enters into a voluntary exchange of private property when they believe the exchange benefits them
ELL 313M Social Thought and Philippine Literature La Consolacion University Philippines
Dr. Edilberto C. Cruz, Professor Graduate Studies Department
in some psychic or material way. In such trades, each party gains extra subjective value, or profit, from
the transaction.
Voluntary trade is the mechanism that drives activity in a capitalist system. The owners of resources
compete with one another over consumers, who in turn, compete with other consumers over goods
and services. All of this activity is built into the price system, which balances supply and demand to
coordinate the distribution of resources.
A capitalist earns the highest profit by using capital goods most efficiently while producing the highest-
value good or service. In this system, information about what is highest-valued is transmitted through
those prices at which another individual voluntarily purchases the capitalist's good or service. Profits
are an indication that less valuable inputs have been transformed into more valuable outputs. By
contrast, the capitalist suffers losses when capital resources are not used efficiently and instead create
less valuable outputs.
C. Feudalism the Root of Capitalism
Capitalism grew out of European feudalism. Up until the 12th century, less
than 5% of the population of Europe lived in towns. Skilled workers lived in
the city but received their keep from feudal lords rather than a real wage,
and most workers were serfs for landed nobles. However, by the late
Middle Ages rising urbanism, with cities as centers of industry and trade,
become more and more economically important.
The advent of true wages offered by the trades encouraged more people to move into towns where
they could get money rather than subsistence in exchange for labor. Families’ extra sons and
daughters who needed to be put to work, could find new sources of income in the trade towns. Child
labor was as much a part of the town's economic development as serfdom was part of the rural life.
D. Mercantilism Replaces Feudalism
Mercantilism gradually replaced the feudal economic system in Western Europe and became the
primary economic system of commerce during the 16th to 18th centuries. Mercantilism started as
trade between towns, but it was not necessarily competitive trade. Initially, each town had vastly
different products and services that were slowly homogenized by demand over time.
After the homogenization of goods, trade was carried out in broader
and broader circles: town to town, county to county, province to
province, and, finally, nation to nation. When too many nations were
offering similar goods for trade, the trade took on a competitive edge
that was sharpened by strong feelings of nationalism in a continent
that was constantly embroiled in wars.
Colonialism flourished alongside mercantilism, but the nations seeding
the world with settlements were not trying to increase trade. Most
colonies were set up with an economic system that smacked of
feudalism, with their raw goods going back to the motherland and, in the case of the British colonies
in North America, being forced to repurchase the finished product with a pseudo-currency that
prevented them from trading with other nations.
ELL 313M Social Thought and Philippine Literature La Consolacion University Philippines
Dr. Edilberto C. Cruz, Professor Graduate Studies Department
It was Adam Smith, a Scottish political economist famous for his book “The Wealth of Nations,” who
noticed that mercantilism was not a force of development and change. He said it was a regressive
system that was creating trade imbalances between nations and keeping them from advancing. His
ideas for a free market opened the world to capitalism.
E. Growth of Industrial Capitalism
Smith's ideas were well-timed, as the Industrial
Revolution was starting to cause tremors that would
soon shake the Western world. The (often literal)
gold mine of colonialism had brought new wealth
and new demand for the products of domestic
industries, which drove the expansion and
mechanization of production. As technology leaped
ahead and factories no longer had to be built near
waterways or windmills to function, industrialists
began building in the cities where there were now
thousands of people to supply ready labor.
Industrial tycoons were the first people to amass their wealth in their lifetimes, often outstripping
both the landed nobles and many of the money lending/banking families. For the first time in history,
common people could have hopes of becoming wealthy. The new money crowd built more factories
that required more labor, while also producing more goods for people to purchase.
During this period, the term "capitalism"—originating from the Latin word "capitalis," which means
"head of cattle"—was first used by French socialist Louis Blanc in 1850, to signify a system of exclusive
ownership of industrial means of production by private individuals rather than shared ownership.
Contrary to popular belief, Karl Marx (German philosopher and founder of Communism) did not coin
the word "capitalism," although he certainly contributed to the rise of its use.
F. Industrial Capitalism's Effects
Industrial capitalism tended to benefit more levels of society rather than just the aristocratic class.
Wages increased, helped greatly by the formation of unions. The standard of living also increased with
the glut of affordable products being mass-produced. This growth led to the formation of a middle
class and began to lift more and more people from the lower classes to swell its ranks.
The economic freedoms of capitalism matured alongside democratic political freedoms, liberal
individualism, and the theory of natural rights. This unified maturity is not to say, however, that all
capitalist systems are politically free or encourage individual liberty. Economist Milton Friedman, an
advocate of capitalism and individual liberty, wrote in Capitalism and Freedom (1962) that "capitalism
is a necessary condition for political freedom. It is not a sufficient condition."
A dramatic expansion of the financial sector accompanied
the rise of industrial capitalism. Banks had previously
served as warehouses for valuables, clearinghouses for
long-distance trade, or lenders to nobles and governments.
Now they came to serve the needs of everyday commerce
and the intermediation of credit for large, long-term
investment projects. By the 20th century, as stock
exchanges became increasingly public and investment
ELL 313M Social Thought and Philippine Literature La Consolacion University Philippines
Dr. Edilberto C. Cruz, Professor Graduate Studies Department
vehicles opened up to more individuals, some economists identified a variation on the system:
financial capitalism.
G. Capitalism and Economic Growth
By creating incentives for entrepreneurs to reallocate away resources from
unprofitable channels and into areas where consumers value them more
highly, capitalism has proven a highly effective vehicle for economic
growth.
Before the rise of capitalism in the 18th and 19th centuries, rapid economic
growth occurred primarily through conquest and extraction of resources
from conquered peoples. In general, this was a localized, zero-sum process.
Research suggests average global per-capita income was unchanged
between the rise of agricultural societies through approximately 1750 when the roots of the first
Industrial Revolution took hold.
In subsequent centuries, capitalist production processes have greatly enhanced productive capacity.
More and better goods became cheaply accessible to wide populations, raising standards of living in
previously unthinkable ways. As a result, most political theorists and nearly all economists argue that
capitalism is the most efficient and productive system of exchange.
Review Questions
Instructions: Write T if the statement is true, and F if the statement is false. If false, underline the word
or phrase that makes it so.
Example: F The production of goods and services based on supply and demand in the general
market is known as a planned economy.
______ 1. Before the rise of feudalism in the 18th and 19th centuries, rapid economic growth occurred
primarily through conquest and extraction of resources from conquered peoples.
______ 2. The economic freedoms of capitalism did not develop alongside democratic political
freedoms, liberal individualism, and the theory of natural rights.
______ 3. Karl Marx did not create the word "capitalism," although he helped popularized its use.
______ 4. The increase in the standard of living led to the formation of a middle class but did not lift
more and more people from the lower classes to swell its ranks.
______ 5. The term "capitalism"—originating from the Latin word capitalis, which means "head of
cattle"—was first used by French socialist Louis Blanc in 1850.
_____ 6. As technology leaped ahead and factories no longer had to be built near waterways or
windmills to function, industrialists began building in the cities where labor supply was plentiful.
_____ 7. Adam Smith, a Scottish political economist famous for his book The Wealth of Nations,
noticed that mercantilism was a regressive system that was creating trade imbalances between
nations and keeping them from advancing.
ELL 313M Social Thought and Philippine Literature La Consolacion University Philippines
Dr. Edilberto C. Cruz, Professor Graduate Studies Department
_____ 8. Most colonies were set up with an economic system that smacked of feudalism, with their
raw goods going back to the motherland and returned to the colonies to be repurchased as finished
goods.
_____ 9. The advent of true wages offered by the trades discouraged people from moving into towns.
_____ 10. A capitalist earns the highest profit by using capital goods most efficiently while producing
the highest-value good or service.
_____ 11. Private property promotes efficiency by giving the owner of resources an incentive to
maximize the value of their property.
_____ 12. Today, very few countries practice a mixed capitalist system that includes some degree of
government regulation of business and ownership of select industries.
Please submit a pdf copy of your answers on or before March 12, 2022.
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