Capitalism is a way of life. It is a way of life that we in the United States take for granted. In a capitalist system, private entrepreneurs advance a certain amount of capital. With this capital they build, buy, or rent production facilities, purchase raw materials, and hire laborers to work for them. The finished product is sold on the open market, and the income from the sale of the product returns to the entrepreneur who started it all. The entrepreneur consumes a part of this income and the rest is used to repeat the productive process anew, to expand the process of production, or to begin a new productive venture.
This way of life presupposes a number of institutions. It presupposes the existence of entrepreneurs in possession of sufficient capital to begin the production process. It presupposes the availability of production facilities and raw materials that can be purchased or rented. It presupposes the availability of workers willing to sell their labor power for a fixed duration of time. It presupposes the existence of markets in which the means of production, labor time, and finished products can be purchased or sold. And it presupposes a stable political structure strong enough to protect and maintain the property rights of buyers and sellers in these markets.
In a capitalist system individuals depend on other people to produce the goods and services each needs to survive. Survival depends on the ability of these individuals to exchange the goods each has to sell for the goods each needs to survive. Production is production for sale. Each producer specializes in some particular product: food, blankets, shoes, or bicycles, for example. And within the production process itself, each worker specializes in some particular task: tanning the leather, cutting the leather, sewing the seams, or attaching the soles or heels of shoes, for example. Adam Smith, the great champion of capitalism as a way of life, saw in this division of labor the potential for an enormous increase in
human wealth. He wrote, “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour."1
This division of labor is impossible without the existence of some system for exchanging products. Within a capitalist system of production, competitive markets provide the institutional structure that makes such exchange possible. Within such markets the exchange ratios between various products, their relative prices, are regulated by the forces of demand and supply. Neither individual buyers nor individual sellers can set the prices for commodities bought or sold. Each must accept the market price. “The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay."2
Adam Smith thought that production for sale within such competitive markets worked to reduce the price of every commodity to the lowest possible level. He contrasted the price of a commodity monopolized by one seller with the prices of commodities sold under conditions of competition between sellers:
The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give: The other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.3
A seller may upon some occasion secure a price higher than that necessary to sustain his or her business. If, for example, an entrepreneur discovers a more efficient way to produce shoes, then that entrepreneur’s unit costs of production will be lower than average, and hence the entrepreneur could afford to sell beneath the market price. This lower unit cost gives the entrepreneur leeway as to how to price the product. Either the price can be set at the market price, in which case the entrepreneur secures greater-than-average profits, or the price can be set
at below-market prices, in which case competing producers will be forced to lower their prices or face extinction. In either case, competitive pressures will force an adjustment in supply and in the market price of the commodity produced. If the product is sold at below-market prices, producers who cannot meet the competition of lower prices will drop out of the industry, and the market price will fall to a level that is the lowest that sellers can commonly afford to take. If the product is sold at the market price with resulting higher-than-average profits, entrepreneurs will be attracted into the industry, the supply of the commodity will increase, and consequently, the price will fall to the lowest level sellers can afford. It is in this sense then that prices in competitive markets are, as Smith says, “for any considerable time together,” the lowest possible prices for the commodities produced.
This example of the effects of the discovery of a more efficient technique of production illustrates three interesting features of competitive markets. The first feature is the tendency of prices in such markets to gravitate toward the lowest possible price sellers can afford. A second feature is the self-regulative capacity of such competitive markets. Changes in production techniques, in the supply of raw materials, or in the demand for consumer goods automatically induce corrections in the quantities of particular commodities produced, and in the prices of these commodities, thus achieving a new equilibrium around the lowest price sellers can afford. Third, the example illustrates an incentive to innovation inherent in the pressures of competitive markets. Each producer has an incentive to come up with more efficient techniques of production--for the discovery of such techniques lowers the unit costs of production for that producer and makes possible a higher-than-average rate of profit for that producer. To be sure, this advantage is temporary. Eventually competitors will adopt the new and more efficient techniques, and the price of the commodity will fall. But even temporary advantages result in a greater accumulation of wealth, and incentives remain to seek out other production efficiencies as well. Since these incentives work on every producer, the result is a systematic tendency of competitive markets to encourage innovation and greater efficiency in the process of production.
Capitalism is a way of life that has not always been with us. It has a relatively late appearance in the history of humankind. Before capitalism, for a period of roughly one thousand years between the fall of the Roman Empire and the emergence of capitalism, life in Europe was organized according to the system of feudalism. Under feudalism, the land was divided into large estates, which belonged to the church, the crown, or members of the feudal aristocracy. These estates were, for the
most part, preserved and passed intact with the death of one feudal lord to an eldest son or nearest male relative. The ruling lord was surrounded by a system of subordinate nobles, some of whom were granted control over parts of the higher lord’s estate or held control over smaller estates of their own. The feudal aristocracy was organized into a pyramidal structure of relations of service and subordination. At the bottom of the feudal class structure, beneath the aristocracy, was the peasantry, a class that included the vast majority of the people of feudal Europe. The peasants lived in villages on the feudal estates. They farmed the land, both in plots allotted to their own use and in the fields of the feudal lord. From time to time they were also called upon to help in the building of roads and fortifications and in the performance of whatever other work might be required to maintain the estate.
Life in feudalism differed in many ways from life in capitalism. In the feudal system almost all production was done for local consumption. Trade, exchange, and markets were not central to the provision of the bulk of the goods necessary for consumption and renewed production. As late as the early part of the twentieth century, remnants of the feudal nobility in Russia continued to pride themselves on the self-sufficiency of their estates. Unlike the wage laborers of capitalism who sell their labor power on the open market and are free to travel wherever they like in search of better pay or a better job, feudal peasants were legally bound to the estate of their birth. They performed work for the feudal lord, not in exchange for wage payment, but in response to the direct coercive threat of the ruling aristocracy. For the most part, peasants lived and died on the estates of their birth. The tasks they performed were predominantly agricultural or directly related to the requirements of agriculture. Production and the way of life organized around the tasks of production remained largely the same for generation after generation. In contrast to the dynamic, innovative character of capitalism, feudalism was characterized by a repetitive and static way of life.
There was no single cause responsible for the transformation from feudalism to capitalism in Western Europe. No attempt will be made here to explain that transformation.4
But whatever the ultimate causes,
the transformation involved at least the following factors. First, there appeared a class of what might be called protocapitalists. For the most part, these protocapitalists did not come from the landed nobility. Instead, they emerged from the ranks of medieval merchants and artisans who had established themselves in various European cities where they had some independence from the domination of the landed aristocracy. Second, there appeared also a class of wage laborers available to be employed by the protocapitalists. These wage laborers came from two distinct groups. Some were artisans and apprentices who, because of the breakdown of the feudal guilds, were in need of gainful employment. Others were peasants forced off the estates of the landed nobility.
Capitalism began with the development of a system of manufacturing in which protocapitalists paid wages in exchange for the use of the labor power of these dispossessed peasants and artisans and then sold the commodities produced in open markets that had developed in the cities as a result of increasing trade. In its earliest forms this system of manufacturing involved simply this change in the organization of production. The technology employed remained the same as the technology employed in earlier times. In many cases workers were not even united under one roof. The key change turned on the introduction of wage labor as the relation of production connecting workers and capitalists. Subsequent to the introduction of this system of manufactures, several factors-increasing division of labor, technological innovation, and the bringing together of workers into large and interconnected facilities for production—vastly increased the productive powers of labor and started the capitalist system on the road to a revolutionary transformation of life in Western Europe.
With its inherently dynamic character and productive efficiency, capitalism pushed aside the old feudal ways of life. With the spread of capitalism went the growth of the distinctive social classes of capitalism: the owners of capital (the bourgeoisie) and the free sellers of labor power (the proletariat). The bourgeoisie, this growing class of wealthy and enterprising men, included many individuals who were not of the hereditary nobility. They were excluded from positions of political power reserved for members of the nobility. In addition, numerous restrictions imposed by and in the interests of the nobility hampered their business ventures, whereas a patchwork of special privileges and
benefits, paid for by taxes imposed on the rising bourgeoisie, showered down on the ruling aristocracy. In a relatively short period of time the rising bourgeoisie demanded an elimination of the privileged status of the nobility and an equal share in political power. The result was a contest for political power between the feudal aristocracy and the newly created bourgeoisie. In England this contest, complicated by a clash between conflicting religious sects, led through civil war and dictatorship to the “glorious revolution” of 1688 in which the ascendancy of the bourgeoisie was established. One hundred years later this same conflict led to the great French Revolution, to civil war, and to revolutionary war throughout much of Western Europe.
The revolutionary bourgeoisie proclaimed the natural equality of all men and the consequent equality of rights belonging to all men by nature. It demanded that careers be open to talent rather than reserved for the nobility. And it demanded the subordination of kings and the hereditary nobility to parliaments elected by the people. Capitalism, in which each individual is free to trade as he sees fit and in which the will of political superiors is replaced by the market forces of supply and demand, seemed well suited to the needs of free and equal men. And in lowering prices and increasing output capitalism held the potential for making men rich as well as free. Adam Smith had argued that the framework of capitalism served as an “invisible hand” by which the effort of each to secure his own happiness was turned to the benefit of society as a whole.5
Smith’s argument came after capitalism had firmly taken root and after the political struggle for power in England. But in showing how capitalism contained within it the prospect of increasing wealth for all, Smith linked utilitarian considerations for the happiness of all with the revolutionary appeal to natural equality and natural rights that had accompanied the rise of capitalism. The result was the powerful ideology of classical liberalism that saw in capitalism both the realization of human freedom and the prospect of human happiness.
In his tempered and rational optimism Adam Smith personified the spirit of the Enlightenment, which proclaimed both the emancipation of humankind from its past and the bright prospects of its future. But if Adam Smith saw in capitalism the vision of a better world, others found in it a nightmarish degradation of human life. As we have seen, capitalism required the existence of a class of free laborers who offered their labor power for sale. These wage laborers, the proletariat, did not appear out of nowhere. The great bulk of them were farmers who had
been forced off the land. In England, which became the leading center of the development of capitalism, most of the population in the late fourteenth and early fifteenth centuries lived as small farmers on land to which they had some right of use deriving from the traditions of feudal law. From the fifteenth to the seventeenth centuries many of these people were driven off their land. The feudal lords, hard pressed for cash, began to convert the land from the production of grain for human consumption to game preserves and sheep farms that produced wool for sale. This enclosure movement, which involved fencing off the land for sheep, brought also the conversion of farmed land into pastures and the destruction of peasant homes, villages, and churches. Repeated attempts were made to stem the tide of enclosures by royal decree.6
But the nobility’s need for cash prevailed, and by 1750 the small farmer had largely disappeared from the English countryside.
However curtailed his rights may have been in feudal times, the common peasant at least had access to the land he needed to grow his food and to a house to shelter his family. With the enclosure movement the peasant farmer was deprived of his house and cut off from the land that had heretofore provided his means of survival. Thus liberated from feudal ways, large numbers of these dispossessed rural folk roamed the English country side, some begging, some in search of work, and some as bandits. Beginning with the reign of Henry VII (1485*1509), laws were passed designed to curtail this vagabondage. According to an act of Henry VIII (passed in 1530), beggars old and unable to work were to be granted licenses to beg. Those able to work were to be “tied to the cart-tail and whipped until the blood streams from their bodies, then to swear an oath to go back to their birthplace or to where they have lived the last three years and to put themselves to labor."7
Later, the act was strengthened to include provisions for second and third arrests for vagabondage. “For the second arrest for vagabondage the whipping is to be repeated and half the ear sliced off; but for the third relapse the offender is to be executed as a hardened criminal and enemy of the common weal.”8
During the reign of Henry VIII, 72,000 of these people were hanged.9
Subsequent legislation provided for condemning these vagabonds as temporary slaves to anyone willin...