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Process toward capitalism: how idea of capitalism was, at first developed

Understanding capitalism with different approaches :

Five centuries of capitalism: history of expansion and adjustment

The future and capitalism: where are we heading to?


Understanding capitalism with different approaches: Smith, Keynes, and Marx

Right<--------- liberal------>left
Adam Smith     Keynes       Marx

Adam Smith (1723-1790):


As new thoughts or innovations constantly challenged existing authorities, old institutions faced a decline and threats of a new system within society. The phenomenon of the industrial revolution in 18th century brought about not only a new social system in Europe but also a shift in the paradigm in human history. Adam Smith analyzed a newly emerging political system, capitalism, and claimed the powerful idea of economic individual freedom at the dawn of the industrial revolution. His analysis of free market capitalism was brilliant in terms of reflecting and satisfying the need of a belief system for the surging era. It influenced the European view on the value of individuals economically and also inspired many present mainstream economists.

The free market is the market that solely decides wages and prices and does not contain government intervention (“Free Market.”). Adam Smith claimed that an intervening government would   distort the market’s ability to place people where they can be the most productive. In his book, the Wealth of Nations, he exemplifies that people in an imaginary village work hard on what they are specialized in pursuing their self interest and incentive without any intervention. They are well off by trading their specialized goods with others. Overall, people are satisfied and the society benefits as a whole.

However, Adam Smith did not consider a class gap between capitalists who hold a lot of power or employers who hold little power. He only assumed that everyone in that village was an independent producer. For example, in reality, the working class did not have the luxury to pursue their self interests. Rather than trading their specialized goods, workers provide labor to capitalists in order to attain a sustainable living. Therefore, Adam Smith’s idea is not entirely valid. However, despite the errors, his theory of free market was powerful and supported by many, because it seemed that economy worked well under the capitalism until the Great Depression. 


John Keynes (1883-1946):


Keynes came along during the Great Depression and pointed out the cause of the economic downfall. He argued that the circular flow of money stopped and that the government should, therefore, intervene in order to restart the flow. He believed that a large amount of government spending will stimulate the money flow by helping the aggregate demand to meet the equilibrium point with supply, ultimately alleviating the economic problem. His theory was ‘proven’ when the economy in the United States revived as the government spent a tremendous amount of money during the World War II.


At this point, the readers should be aware of two different economic theories under the same system, capitalism. It influenced different eras: the Industrial Revolution and the Great Depression. Keynesianism and Adam Smith’s idea are very different in terms of government intervention. This may imply that capitalism needs to correspond to different situation by adjusting itself; however, it does not have consistency due to its complexity. The consequence of the Industrial Revolution and the cause of the Great Depression are the same, providing an overflowing supply to the society, which is inevitable under capitalism. However, enormous surplus values during the Industrial Revolution had a place to expand with the colonies, while surplus values during the Great Depression, when all capital flowed into the United States due to the World War I, did not have a sufficient market to invest, in other words, to expand upon. Therefore, it needed an external force, in this case— the government, to provide a demand to meet the supply. Overall, the difference between the idea of Adam Smith and John Keynes had to follow in those special circumstances.

Karl Marx: (1818-1883):


While observing capitalism carefully, Marx came to the conclusion that capitalism has to expand in order for it not to collapse. In his model of transformation of money to capital, he explains how capitalism expand as capital is invested to create more value.

Capitalists cannot profit in the stage of the market, because no one would voluntary participate in market capitalism, if trading is unfairly and unequally done.  Systems are driven as money is transformed into capital, invested in labor, machinery, and equipment for the purpose of creating more values. Due to the added values, output of capital is greater than the input of capital. Therefore, the market became bigger than the prior to the transformation. In this type of market, the value created is bought, bringing the profit to capitalists who will repeat the process not only to pursue their self interest but also to survive through the competitions.


A Marxist economist, Robert Heilbroner, argues in his writing Beyond Boom and Crash that the nature of capitalism, lying on expansion, leads itself to the cycle of booms and crashes. Historically, Europe under capitalism during the Industrialization Period expanded tremendously not only because of the rapid growth in technology but also because of the nature of capitalism, which in this case is expansion.  For example, capital is invested in labor, machinery, equipment and so forth for the sole purpose of making larger profits. During the process of capital input transforming into capital output, more value is created. The market will have more valuable goods and services available leading private individuals to invest even more with a larger amount of capital. The driving forces behind this system, self-interest and competition, will cause the process to repeat itself, expanding output: its upmost level. Many significant worldwide phenomena such as imperialism and colonialism originated from these forces are great examples of capitalism leading societies to expand well beyond national borders seeking cheaper inputs and finding new markets.


Because the capitalist system produces expansions within itself, booms are inevitable. However, as societies experience a rapid economic growth, they also encounter potential sources of crisis: the discrepancy between households and businesses as employees and employers and the difference between capability of businesses in supplying and of household in consuming. Firstly, workers submit to become industrial detailed laborers in order to make living. As societies flourish, the bargaining power of the workers begins to increase. They ask for better working conditions and higher wages by organizing strikes which then reinforce absenteeism among workers. Therefore, the economic growth may encourage workers to express their dissatisfaction with their current circumstances and intensify the tension between capitalists and labors. Secondly, the speed of the goods produced from the assembly line exceeds the speed of demand. Therefore, as market fills up with surplus goods, the market’s attempt to rearrange these goods and adjust to the changing pattern of demand become very difficult. As the market attempts this, businesses are not able to meet their expected revenue from selling and this may induce them to reduce their amount of the production which may ultimately leads to a crash.


Crashes are inevitable because all the necessary steps to operate capitalism lead the system to downfall. For example, booms develop as societies flourish. Demand for goods and services go up which leads to a rise in the prices of input to produce goods. In this scenario, more demand leads more supply, letting businesses invest more in input. However, because input prices go up due to competitions, prices of the finished products go up as well. Therefore, demand will decrease. Lower demand will decrease the revenue of businesses and they will lose the confidence to invest. As a consequence, society will face a recession or an economic crisis.

Crises under capitalism play both constructive and destructive roles simultaneously. First a crisis help oversaturated societies to restore back to equilibrium and to get back to normal operation. In other words, when individuals are reluctant to produce, the surplus goods on the market are finally absorbed by demand. As a consequence, this may spur production. However, at the same time, repeated crisis also help monopolies to form, as certain firms which withstand the crises, take the places of the small firms who are not as competitive.

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