Encyclopedia of Corruption in American Politics


Capitalist theory was first posited as a free enterprise system by Scottish economist Adam Smith in his 1776 treatise An Inquiry into the Nature and Causes of the Wealth of Nations. He envisioned a system in which individuals could pursue private gain to further their own interests as well as the rest of society through the production of goods and services for the larger population. Smith coined the term "the invisible hand" which referred to the unseen market forces of competition and self- interest that were supposed to create a better society. Smith also believed that this system, which he felt to be a "natural economic order" would work best with a minimum of governmental intervention. A capitalistic system with little or no governmental regulation is called "laissez-faire" capitalism.

Capitalism began to take root in England in the 18th century as a result of the Industrial Revolution and the Enclosure Movement. The Industrial Revolution was brought on by mechanical power, steam engines in particular, replacing humans in the production of products. Factories were created to centralize the production of goods. The Enclosure Movement came about in order to turn the public commons into privately-owned land in accordance with the emerging theory of private-property. The Enclosure Movement -- literally the enclosure of lands that had been available for public grazing and farming -- created a class of poor landless peasants with no goods to sell besides their own labor. These peasants became a ready source of labor at the newly created factories. With peasants as a source of cheap labor and machines doing a good deal of the production work, goods and services became available in surplus and at low prices, raising the standard of living for many.

At about this time, capitalism began to come under fire for being exploitative of workers and benefiting a wealthy few at the expense of many. In the late 18th century, Karl Marx published his large indictment of capitalism, Das Kapital. His other works, including The Communist Manifesto -- which became the basis for Communist economic systems in China and Russia -- argues that land and the means of production should be owned collectively and distributed to the population on the basis of need.

Simultaneously, workers' unions were being organized within some of the major industries. Unions are associations of workers that are collectively organized in order to campaign for better working conditions. Early unions in England included textile workers and miners. While these unions were a boon to workers -- allowing them some control over the terms of their labor such as shorter hours and higher pay rates -- factory owners saw unions as an impediment to a completely free market. This was one of the major dichotomies of the free market invisible hand concept: in a labor market with low job availability, workers needing jobs were not free to determine the prices at which they could sell their labor. Hence high unemployment would be detrimental to the working class because they would be out of work or forced to work at low wages, and a boon to the owning or ruling class because they could more easily set low wages and increase profits. A market with low unemployment, a benefit for workers, would be bad for factory owners because it would allow workers too much leverage in bargaining for more favorable working conditions.

In the late 19th century capitalism had spread to the US and corporations -- business organizations with limited liability and large financial powers -- began to dominate entire industries. These corporate entities were thus immune to the market forces of competition and consumer preference. Public outcry over these new conglomerates caused Congress to pass anti-trust legislation such as the Sherman Antitrust Act of 1890 and the Clayton Antitrust Act of 1914, making monopoly business practices illegal and forcing at least a minimum of competition. Despite these new limits, by the 20th century capitalism had become the dominant economic and social system.

Capitalism received another major blow in the Great Depression of the 1930's. The speculative excesses of the wealthy in the stock market and the resultant stock market crash had created vast unemployment and President Franklin Delano Roosevelt stepped in with his economic restructuring plan known as the New Deal, a series of economic reforms which included strengthening labor unions in order to minimize the power inequalities caused by large centralized corporations. It also created the social safety net which evolved into the modern welfare system including social security and unemployment insurance.

These actions represented a departure from the previous capitalist ideal of laissez-faire in which the government stayed out of economics as much as possible. In 1936, the publication of John Maynard Keynes' General Theory of Employment, Interest and Money provided a model of capitalism in which it is possible and even acceptable for a modern government to use its powers to control the money supply through taxation and spending in order to provide a more stable economy. This model would call for increased governmental spending in times of depression or unstable economy and a tightening of the reigns if a booming economy is getting out of hand. In 1946, Congress passed the Employment Act of 1946 guaranteeing high employment and production and officially ending official acceptance of the laissez-faire policies.

Other examples of governmental intervention into the economic system in the U.S include import and export tariffs, subsidies to farmers corporations and others and various tax exemptions. While some of these programs such as welfare and the social security system are intended to benefit the workers and citizens, other benefits and subsidies are provided to businesses specifically, creating incentives for the creation of jobs as well as the creation of further capital to increase profits.

Critics of these governmental perks call the financial benefits "corporate welfare" and argue that the favorable business climate and stock boom of the mid to late nineties is a direct result of preferential treatment of the corporation over the citizen. In other industrialized nations such as Germany and Japan, the governments have policies in place created at a national level in which the various members of the economy including bankers, businessmen, and labor unions all meet to arbitrate wage policies and interest rates. This has an end result of not letting their capitalistic economic system of corporations and profits determine their social system of retirement benefits, health care and working conditions.

Jessamyn Charity West

Bell, Daniel and Irving Kristol, Eds. Capitalism Today. New York: Basic Books, 1971.

Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1963.

Galbraith, John K. American Capitalism: The Concept of Countervailing Powers. Cambridge: Houghton Mifflin Company, 1956.

Harrington, Michael. Decade of Decision. New York: Simon & Schuster, 1981.

Heilbroner, Robert L. The Nature and Logic of Capitalism. New York: Norton, 1986.

Lekachman, Robert and Borin Van Loon. Capitalism for Beginners. New York: Pantheon Books, 1981.

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