Capitalism

Capitalism
Capitalism developed, historically, out of the previous system of feudalism and
mercantilism in Europe.
So, the following is the brief introduction to these to pre-capitalist economic systems:

Feudalism
It is the social, economic and political conditions in western Europe during the Middle
Ages between 5th to 12th century.
Word “feudalism” is derived from Latin words “feudum” and “feodalitas” means
“services connected to fief”.
Fief: It was a piece of property usually land, that was held in return for services, which could
include military services.
When the central political system/authority in western Europe disappeared/weakened,
the local lords expanded their territory and intensified their control over the people living there.

King

Nobles
Knights
Peasants

King: King owned all the land and portioned out that land to his nobles.
Nobles: Nobles in return of this provide protection to the king along with fixed amount of
money to the king on yearly basis.
Peasants: Then nobles use peasants as labors for production and give them food and shelter.
Knights: These were the strong forces to defend nobles and king during external attack.

Mercantilism
• Mercantilism replaced the feudal system in Western Europe.

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• It was first seen in Europe in 1500s.

➢ At that time, England was the epicenter of Europe but with few natural resources.

Its core idea is that world has limited wealth in the form of gold and silver. So, the
nations must build the stores of gold and silver at the cost of others. So, in this system, exports
will have to increase, and imports must be restricted. Along with that the government will
control this whole system means no freedom of choice for people.
Mercantilism centered on the interest of merchants and producers like England’s East
India Company and Dutch.
How to create wealth under this system?
1. Increase supply of gold.
2. Maintain trade surplus.
3. Control on trade routes.
4. Importance of large population.
5. The use of colonies to support wealth.

Capitalism
General understanding:
Capitalism is an economic system in which private individuals or businesses own
capital goods. Capitalists employ workers who only receive wages. Labors don’t own the
means of production but only uses them on the behalf of owner of capital.
Core understanding:
Prof. Carol E. Heim explains capitalism as:
“Capitalism is an economic system dedicated to production for profit and to the
accumulation of value by private business firms. In a fully developed form of capitalism firm
advance money to hire wage laborers and to buy means of production such as machinery and
raw material”.
So, in Capitalism labor is treated as a commodity, and labor markets should exist to
generate capital by using means of production.
The forefather of capitalism was Adam Smith. His assumption was that humans were
self-serving by nature and every individual need to fulfill his own interest. This self-interest is
the driving force to meet the needs of the whole society. He said:
“Every individual neither intends to promote the public interest nor knows how much
he is promoting it. By preferring domestic industry to that of foreign industry, he intends only
his own security and by directing that industry in such a manner as it’s produced may be of the
greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote and end which was no part of his intention”. (Wealth of Nations)
➢ “Invisible hands” means “market forces”.
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So, Smith believed that this force of self-interest brings wealth and prosperity to society.
This is where the concept of private property and market forces comes into the economic
system of Western Europe.
Division of labor and Smith:
The separation of a work process into several tasks, with each task performed by a
specialized separate person or group of persons.
➢ This will make the labor specialized in his task, which increases the efficiency of work.
➢ As a person is specialized in particular type of task, so there is always need of other person
for another task, this reduces the power of labor to negotiate or create on monopoly. As a
single group of persons or person is not completely specialized in whole task.
➢ Division of labor and specialization increases the production volume.
“The main cause of prosperity, argued smith, was increasing division of labor. Smith
gave the famous example of pins. He asserted that ten workers could produce 48000 pins per
day. If each of Eighteen Specialized tasks was assigned to worker. Average productivity: 4800
pins per worker. But absent the division of labor, a worker would be lucky to produce one pin
per day.”
Market forces/ Invisible hand/ Demand and Supply:
• Market forces are the factors that influence the price and availability of goods and services
in a market economy.
• Adam’s Smith invisible hand referred to market forces.

➢ When price increases, the demand (in quantity) decreases.

➢ When price decreases, the demand of quantity increases.

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“It is because Demand depends on consumer’s prospective and customer talks about
affordability.”
➢ When price increase the quantity supplied increase.
➢ When price decrease the quantity supplied decrease.
“It is because the law of supply depends on supplier prospective. Suppliers want to earn
to profit by supplying more goods when price increased.”
➢ Due to this surplus and deficit in goods supply and demand occur.

The point where supply and demand intersect each other is the point of equilibrium. These
forces themselves bring equilibrium into existence.
So, these forces will decide the price of commodity (goods or Services).
➢ This concept of free market helps those with money to establish the Bank (Capitalistic
Banking System). It is well-establish in the British Empire during the time of Adam Smith,
when he introduces the theory of “invisible hands”.
➢ Historically Religious temples act as a bank to store money as they were considering safe.
Temples also got into the business of lending money at interest.
➢ By the 18th century, many governments gave banks a free hand to operate, based on the
theories of Adam Smith.
➢ In 1693 the first-ever Bond was issued by bank of England. Government Bond was
introduced in 1917(The first US Treasury Bond) of 5 billion worth at 3.5 percent interest
per annum.
➢ In 1791, Well-Channelized stock market came into existence. (The US stock exchange and
National Association of Securities Dealers Automated Quotations (NASDAQ) were
formed.)

Misconceptions Regarding Capitalism

➢ Capitalism is not identical with market means if market exist anywhere or even in history
it doesn’t mean it is capitalism. Similarly, it is not identical with money or greed as a
motivation for human action.
➢ These all things exist before the concept of capitalism even interest doesn’t represent
capitalism.

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Criticism
Ideological Problem:
Every ideology organizes three relations of man:
• Man with Creator.
• Man with Man.
• Man with himself.
A comprehensive thought must answer following questions.
• What is man, life, and the universe?
• Where did life come from (What is before life)?
• What happens after death (What is after life)?
• What is man’s purpose in life (What is the relationship of this life with that which preceded
it)?
• What is man’s motivation to fulfil his purpose in life (What is the relationship of this life
with whatever is after life)?
Capitalism is an economic system, and it requires Democracy for ruling and Secularism for
answering the questions (quoted before). But it is very clear that it has completely failed to
manage the man affairs.
Labor-a Commodity:
According to Marx, labor-power becomes a commodity – it is sold and bought in the
market. A worker tries to sell his or her labor-power to an employer, in exchange of a wage or
salary.
Laissez-faire Market:
According to Thomas Hobbes, the presence of absolute autonomy in a state of nature
economy created a situation of chaos for both producers and consumers as it will destroy the
concept of interest of society.
It is even impractical in nature especially when it comes to social security. Governments
are forced to spend on lower class which is against the concept of Laissez-Faire Market. The
following graph shows the increase in social spending as a share of GDP:

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Even, US was bound to intervene during 2008 Economic Recession.

Monopoly:
Capitalism results in economic monopoly where a single seller/producer or a few
numbers of sellers/producers assumes a dominant position in an industry or a sector.
For example: Three big i.e. Suzuki, Toyota and Honda have created monopoly in
automobile sector of Pakistan.
Different ways are used to create and maintain monopoly like funding to political
parties, patents, pricing, grabbing raw materials etc.
Patents:
A patent is the granting of a property right by a sovereign authority to an inventor. This
grant provides the inventor exclusive rights to the patented process design or invention for a
designated period in exchange for a comprehensive disclosure of the invention.
It is said that patents are key to protect the status and privileges of inventor as the
inventor contributes to the larger benefit of society. But it’s very harmful in some cases like
Patents to Vaccine Manufacturing Companies as we observed in COVID-19.
Concentration of Wealth and Economic Inequality:
In capitalism, the gap between the wealth of the Rich and the Poor keeps on increasing.
It is said that Capitalist class keeps sucking the blood of the lower class. Inflation (mainly due
to fiat currency) keeps on increasing the wealth of the Rich and reduce the wealth of the Poor
at the same time.
Similarly, Accumulation of wealth is also another major problem. A few percentage
people of global population own more that the half of total population.
Following Graphs clearly indicate these problems:

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