In this article, we explained capitalism, The history of capitalism, covering its development across different periods and global backgrounds.
Definition
Capitalism is an economic system in which private individuals or businesses own capital goods. At the same time, business owners employ workers who receive only wages; labor doesn’t own the means of production but instead uses them on behalf of the owners of capital.
The production of goods and services under capitalism is based on supply and demand in the general market, also known as the market economy. This is in contrast to a planned economy or a command economy, in which prices are set through central planning.
The History of Capitalism:
Capitalism is the leading economic system in the modern world, marked by private ownership, market competition, and the pursuit of profit. Its historical development is not a straight line but rather a complex evolution influenced by social, political, technological, and global forces. Understanding the history of capitalism means tracing its origins, transitions, and transformations through various historical phases.
Early Fundamentals and Pioneers of Capitalism:
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.
In the periods immediately following World War II, the economies of the major capitalist countries, all of which had adopted some version of the welfare state, performed well, restoring some of the confidence in the capitalist system that had been lost in the 1930s. Beginning in the 1970s, however, rapid increases in economic inequality (see income inequality; distribution of wealth and income), both internationally and within individual countries, revived doubts among some people about the long-term viability of the system. Following the financial crisis of 2007–09 and the Great Recession that accompanied it, there was renewed interest in socialism among many people in the United States, especially millennials (persons born in the 1980s or ’90s), a group that had been particularly hard-hit by the recession
Mercantilism (16th–18th Centuries)
Mercantilism marked the transition from feudal economies to capitalist ones. It was defined by: State control over trade: Governments sought to accumulate wealth by maintaining a favorable balance of trade.
Colonial expansion: European powers, such as Britain, Spain, and the Netherlands, established colonies to extract resources and open new markets.
Commercial innovation: Development of joint-stock companies (e.g., the Dutch East India Company), insurance, and more sophisticated credit systems.
While not capitalism in the modern sense, mercantilism fostered the accumulation of capital and the growth of markets, laying the groundwork for the capitalist system.
Industrial Capitalism (18th–19th Centuries)
The Industrial Revolution was a turning point in the history of capitalism. Originating in Britain, it rapidly spread across Europe and North America.
Mechanized Production: Innovations such as the spinning jenny, steam engine, and mechanized looms revolutionized textile production.
Factory System: Production moved from small workshops to large-scale factories, increasing efficiency and output.
Urbanization: Massive rural-to-urban migration fueled the growth of cities and a new industrial working class.
Free Market Ideology: Thinkers like Adam Smith promoted ideas of free competition and minimal government intervention (laissez-faire economics).
Late 19th Century: Monopoly and Global Capitalism
By the late 1800s, capitalism had advanced into a more concentrated and global system.
Monopolies and Trusts: Large corporations, such as Standard Oil, gained dominant control over entire industries.
Vertical and Horizontal Integration: Businesses controlled all aspects of production and distribution to eliminate competition.
Financial Capitalism: Stock markets, banks, and investment institutions became central to economic activity.
Imperialism: European powers extended capitalism through imperial conquest and colonization, integrating vast parts of the world into global trade networks.
Critics like Karl Marx argued that capitalism was inherently unequal and would eventually collapse under its internal inconsistencies.
The 20th Century: Crises, Reform, and Expansion
The Great Depression (1929–1939)
The 1929 stock market crash triggered a global economic crisis, leading to mass unemployment and hardship. It exposed the volatility of unregulated capitalism and led to new economic thinking.
Massive economic collapse exposed the vulnerabilities of capitalism. Led to widespread poverty and unemployment.
Rise of Keynesianism
Economist John Maynard Keynes argued for government spending to stabilize markets and boost demand. Resulted in welfare state policies: public healthcare, education, unemployment insurance.
Post-War Boom (1945–1973)
Strong economic growth in the West.
Expansion of the middle class and consumer economy.
Neoliberal Turn (1980s–1990s)
Shift back toward free-market policies under leaders like Ronald Reagan and Margaret Thatcher. Policies included deregulation, privatization, and globalization.
21st Century Capitalism
Today, capitalism is global and digital: Globalization has integrated markets and supply chains across countries. Financial capitalism highlights investment markets and debt Digital capitalism includes tech giants like Amazon, Google, and Apple dominating data and commerce. Gig economy and precarious work have challenged traditional employment models. Criticism is growing due to rising inequality, climate change, and the erosion of labor rights.
Assessments and Replacements
Over time, many have challenged capitalism: Marxism: Argues capitalism is inherently exploitative and unstable; proposes a classless, stateless society. Anarchism: Rejects both capitalism and state power.
Social democracy: Seeks to reform capitalism with redistribution, labor rights, and public services. Feminist economics: Highlights unpaid labor and gendered dynamics within capitalism. Green economics: Challenges the sustainability of profit-driven growth.
Capitalism and the Revenue Motive
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 in some mental or material way. In such trades, each party gains extra subjective value, or profit, from the transaction.
The profit motive, or the desire to earn profits from business activity, is the driving force of capitalism. It creates a competitive environment in which businesses compete to be the low-cost producer of a certain good in order to gain market share. If it is more profitable to produce a different type of good, then a business is incentivized to switch.
Voluntary trade is another, related 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 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 utilizing capital goods, such as machinery and tools, most efficiently while producing the highest-value goods or services. By contrast, the capitalist suffers losses when capital resources aren’t used efficiently and instead create outputs of lesser value.
The Growth of Industry
Adam 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 labor.
Industrial tycoons were the first people to amass wealth, 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.
Who Benefits from Capitalism?
Capitalism tends to benefit capitalists the most. These include business owners, investors, and other owners of capital. While capitalism has been praised for improving the standard of living for many people across the board, it has provided the greatest benefits for those at the top.
Why Is Capitalism Harmful?
Since of how it is structured, capitalism will always pit business owners and investors against the working class. Capitalists are also in competition with one another and will therefore seek to increase their profits by cutting costs, including labor. At the same time, workers seek higher wages, fairer treatment, and better working conditions. These two incentives are fundamentally at odds, which creates class conflict.
Conclusion
The history of capitalism is a story of dynamic change—marked by innovation, expansion, crisis, and adaptation. From feudal markets to global digital empires, capitalism has shaped modern life in profound ways. While it has driven technological progress and lifted millions from poverty, it has also created deep inequality, labor exploitation, and environmental harm. As the 21st century unfolds, capitalism faces new pressures—from automation and climate change to political resistance—raising questions about its future and the possibilities for transformation.
READ: Capital Growth