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capitalism
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Also known as: free enterprise economy, free market economy, private
enterprise economy

Written byRobert L. Heilbroner,

Peter J. Boettke

Fact-checked byThe Editors of Encyclopaedia Britannica

Updated: Sep. 12, 2024•Article History

Table Of Contents
Trading floor of the New York Stock Exchange, New York City.

Justin Guariglia—xPACIFICA/Redux

also called:

free market economy or free enterprise economy

Key People:

Frederik Stang

Johan August, Baron Gripenstedt

A.M. Schweigaard

Karl Marx

Max Weber

Top Questions

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capitalism, economic system, dominant in the Western world since the
breakup of feudalism, in which most means of production are privately
owned and production is guided and income distributed largely through the
operation of markets.
History of capitalism
Although the continuous development of capitalism as a system dates only
from the 16th century, antecedents of capitalist institutions existed in the
ancient world, and flourishing pockets of capitalism were present in Europe
during the later Middle Ages. The development of capitalism was
spearheaded by the growth of the English cloth industry during the 16th,
17th, and 18th centuries. The feature of this development that distinguished
capitalism from previous systems was the use of accumulated capital to
enlarge productive capacity rather than to invest in economically
unproductive enterprises, such as pyramids and cathedrals. This
characteristic was encouraged by several historical events.
In the ethic fostered by the Protestant Reformation of the 16th century,
traditional disdain for acquisitive effort was diminished while hard work and
frugality were given a stronger religious sanction. Economic inequality was
justified on the grounds that the wealthy were more virtuous than the poor.
Another contributing factor was the increase in Europe’s supply of precious
metals and the resulting inflation in prices. Wages did not rise as fast as
prices in this period, and the main beneficiaries of the inflation were the
capitalists. The early capitalists (1500–1750) also enjoyed the benefits of the
rise of strong national states during the mercantilist era. The policies of
national power followed by these states succeeded in providing the basic
social conditions, such as uniform monetary systems and legal codes,
necessary for economic development and eventually made possible the shift
from public to private initiative.
Beginning in the 18th century in England, the focus of capitalist development
shifted from commerce to industry. The steady capital accumulation of the
preceding centuries was invested in the practical application of technical
knowledge during the Industrial Revolution. The ideology of classical
capitalism was expressed in An Inquiry into the Nature and Causes of the
Wealth of Nations (1776), by the Scottish economist and philosopher Adam
Smith, which recommended leaving economic decisions to the free play of
self-regulating market forces. After the French Revolution and
the Napoleonic Wars had swept the remnants of feudalism into oblivion,
Smith’s policies were increasingly put into practice. The policies of 19th-
century political liberalism included free trade, sound money (the gold
standard), balanced budgets, and minimum levels of poor relief. The growth
of industrial capitalism and the development of the factory system in the
19th century also created a vast new class of industrial workers whose
generally miserable working and living conditions inspired the revolutionary
philosophy of Karl Marx (see also Marxism). Marx’s prediction of the
inevitable overthrow of capitalism in a proletarian-led class war proved
shortsighted, however
Capitalism, economic system, dominant in the Western world since the
breakup of feudalism, in which most means of production are privately
owned and production is guided and income distributed largely through the
operation of markets.

Classical capitalism is an economic model that emerged from legal,

technological, and socioeconomic advancements. It's characterized
by:
 Free-market ideology
The belief that competition between firms and nations is best for the
economy
Industrialists achieve economies of scale by entering new markets,
launching new product lines, and acquiring customers

 Error! Filename not specified.

 Innovation
Research and development, innovation, and horizontal consolidation
are key tools to enhance value

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The Scottish economist and philosopher Adam Smith's 1776 work An
Inquiry into the Nature and Causes of the Wealth of Nations
expressed the ideology of classical capitalism. The book
recommended leaving economic decisions to the free play of self-
regulating market forces.

 Error! Filename not specified.

Capitalism is an economic system that's based on private ownership
of the means of production. It's associated with a range of
phenomena, including: private property, free markets and trade,
wage labor, and rational economic decision making. Capitalism and
socialism are contrasting political and economic systems that differ
in how the means of production are owned and controlled, how
production is allocated, and how income is distributed:
Ownership
In capitalism, individuals own and control the means of production,
while in socialism, the state owns and manages them.

Allocation
In capitalism, the market allocates resources, while in socialism, the
government centrally plans production.

Income distribution
In capitalism, income is based on private contracts, while in
socialism, income is redistributed equally.

Government role
In capitalism, the government has minimal intervention, while in
socialism, the government has extensive control.

Production
In capitalism, production focuses on what is profitable, while in
socialism, production focuses on what is needed.

Profit
In capitalism, profit is kept individually, while in socialism, profit is
shared.
Capitalism, an economic system where private individuals and
businesses own the factors of production, has several drawbacks,
including:

Inequality
Capitalism can lead to large wealth gaps and social division. Wealth
can be passed down through generations, and those with capital can
generate more capital more easily.

Exploitation
Workers may be exploited for their labor, with wages kept lower
than the true value of the work.

Pollution
Capitalism can lead to negative externalities, such as air and noise
pollution, that are paid for by society, not the producer.

Corruption
Capitalism can incentivize corruption and crony capitalism, where
business people and the state have close relationships that favor
specific business owners.

Lack of social benefits

Capitalism prioritizes profit over social benefits, the environment,
and the community.

Unstable growth
Capitalism can be unreliable and unstable, with economies based on
the market of consumers and producers experiencing growth and
decline.

Lack of solutions to poverty

Capitalism doesn’t offer much of a solution to persistent poverty.
Lack of living wage
Capitalism doesn’t pay a living wage to billions of workers.

Lack of human jobs

Capitalism doesn’t create enough human jobs in the face of growing
automation.

Summary:

Nationalism underwent significant changes between the 1880s and

1914. The period saw a rise in national movements leading to
fragmentation, with language and ethnicity becoming central to
nationalist identity, sparking disputes. National issues became
entwined with domestic politics in multinational states. Minorities
sought language rights, appealing to the petty bourgeoisie. While
nationalism served to bolster loyalty and deter socialism, it could
also stoke discontent among minorities. The USA successfully
assimilated millions of European emigrants in the 19 th century by
offering economic opportunities and greater freedom, attracting
those dissatisfied with conditions in their home countries.

Summary:

- **Italian Unification Factors:**

- **Obstacles:**

- Austrian power and resistance to change.

- Weak national sentiment in Italy.

- **Favorable Factors:**

- Diplomatic isolation of Austria post-Crimean War.

- Rivalry between France and Austria in Italy aiding Italian

nationalism.

- **Key Figures:**

- Camillo Cavour orchestrated Italian unification “from above.”

- Cavour secured French alliance against Austria, leading to

victories in Lombardy.

- **Unification Progress:**

- Revolutions in Romagna and other states aligned with Piedmont.

- Garibaldi’s leadership in southern Italy, culminating in the

takeover of Naples in 1860.

- **Garibaldi’s Success:**

- Skilled in guerrilla warfare, charismatic leader.

- Mobilized Sicilian masses for unification, offered hope for

freedom from oppression.

- Unification efforts gained momentum with successes on the

mainland.

Summary:

- **Italian Unification Overview:**

 - Process to unite Italian states into a single nation in the 19 th
century.

- Started around 1815 and concluded in 1871 after the Franco-

Prussian War.

- Northern regions under Austrian rule, central states influenced by

Austria, Papal States, and the kingdom of Naples and Sicily.

- Piedmont, with a constitution and civil rights, led the unification

movement.

- **Obstacles and Favorable Factors:**

- **Obstacles:**

- Austria’s power and desire to maintain the status quo.

- Weak national sentiment in Italy.

- **Favorable Factor:**

- Diplomacy, a key element in overcoming obstacles and fostering

Italian unification.

Central Idea:

- **Italian Unification Conclusion:**

- **Final Steps:**

- After successes in southern Italy, Rome and Venetia remained to

be unified.

- Victor Emmanuel II proclaimed King of Italy in 1861.

- Cavour's death marked the near completion of his life's work.

- **Further Unification:**

- Leveraged the 1866 Austro-Prussian War and the 1870-71

Franco-Prussian War.

- Alliance with Prussia in 1866 secured Venetia from Austria.

- French troops withdrawn in 1870 allowed Italy to seize Rome,

making it the capital.
 - **Cavour and Garibaldi:**

- Cavour halted Garibaldi's advance in 1860 to ensure the defeat

of the King of Naples.

- The Italian government utilized strategic alliances and conflicts

to achieve complete unification.