Introduction

In general, the economic systems could be described according to coordination mechanism – which can be market or plan coordination and according to ownership, which can be state or private ownership. Each society has a set of production factors that – independent from the social and economic order – should be used for an optimal production and allocation of goods. The main task of any economic and social system is to match production and the preferences of its members. Therefore, it is relevant to decide which goods will be produced and how they will be allocated. To manage this allocation and production decisions, many approaches have been tried in history. There were and still are feudalistic systems without industrial production and an autocratic government that rules economy regarding its own advantage. Besides that there were and still are socialistic systems that used central planning of production to solve the allocation production problems. In addition to the feudal, socialist (or communistic) way of using of the production factors, capitalism is another possible system of providing goods and is formed as a combination of private ownership and market coordination mechanism. Capitalism is described by its elements.

Elements of Capitalism

Capitalism can be described by the following typical elements: private property, freedom, free markets and free competition, private capital and profits, and free prices and wages (Darcy 1970).

The basic of any capitalistic economy is private property and ownership. The production factors are not owned by state, and individuals should decide, with respect to their benefit, whether to demand or supply goods. Therefore, individuals have to determine their offered work force and their accumulation of capital. It is assumed that any individual knows best about their preferences and is able to satisfy them most suitably. Besides that firms produce goods and individuals benefit from the profits. Firms demand labor force and capital to facilitate production and innovations.

In contrast to central planned economies there is no need of a general aggregation of preferences. Therefore, capitalistic economies are based on the sum of decentralized decisions made by individuals. Thus an important characteristic of capitalism is individualism and individual satisfaction of needs.

Other main requirements for capitalistic economies are free markets and free competition, to achieve efficiency and entrepreneurship. Capitalism is based on the functioning of market mechanism, which is built on the principle of the invisible hand. The principle was first introduced by A. Smith, who stated that individualism and meeting individual prospects by every individual lead to efficiency and benefit the whole economy (Smith 2012). Free competition without restriction by access to information, market access, market structure, and interventions of the government leads the firms to invest in new technology, innovation, and new skills (Hodgson 2003). Also prices and wages are determined by the free market. This idea also assumes that markets are well functioning and a significant state intervention isn’t needed. Precondition for free market and private ownership is freedom. For some authoress, this issue is important enough that they equate capitalism and a market system (Lindblom 1980).

In capitalism, societal and social conditions are mainly influenced by capital. This is due to its high mobility and its universal applicability. Moreover, it is possible to accumulate it unlimited in contrary to labor force. Individuals with a negligible amount of capital can only influence production decisions by consuming.

This leads to a main difficulty of capitalism. The market result is highly influenced by initial endowment of an individual. On the one hand this is essential for an individualistic society, on the other hand this can cause unjustified market outcome. Therefore, politics are addressed to avoid societal not accepted market results.

Irrespective of the characteristics above, there is no general definition of capitalism. The explanations of capitalism are highly influenced by ideological background and target group.

Types of Capitalism

First steps of capitalism’s development can be found in the period, which is associated with the development of manufacture production, although simple forms of the so-called protocapitalistic trading appeared already in 3300 BC (Mischer 2014). The exact year of its beginning cannot be specified, but we can subdivide the development of capitalism into three stages: early capitalism, industrial capitalism, and late capitalism (Sombart 2001, 2011). The early capitalism includes the time from the sixteenth century to the beginning of industrial revolution. This period is characterized by absolutist monarchs and mercantilism. Besides that, France is the world’s leading economy. Due to the political absolutism, economy was widely regulated. To avoid another absolutist monarch benefiting from foreign trade, exporting goods was favored over importing. In the absence of foreign trade and a dynamic system, economic growth was negligible. The production was mainly concentrated on agricultural goods, embedded in a rigid and hierarchical feudalism. A well-known theory describing this period by Malthus (2007) connects the absence of economic growth with population growth. The so-called Malthusian trap states that any improvement in technology results in higher population, rather than improving the economic situation. Despite this rigid environment, first small steps were undertaken to improve economy. In this regard, international trade and banking became more important, and besides that, manufactories arose and thereby announced the industrial revolution.

With the beginning of Industrialization, the age of industrial capitalism began and the United Kingdom took over the world economic leadership. Determining an exact beginning depends on point of view; however, the invention of the first spinning machines in the United Kingdom depicted a cornerstone. After that, industrial development spread over continental Europe before attaching America. One can observe multitudes of social and economic changes in this time. Obviously there were technological improvements, for example, the steam engine, industrial use of electricity, and chemical industry. Thus, by replacing agriculture with industrial production, a structural chance in economy occurred. As a consequence, the production factors labor and capital became more important and the factor land became less important. Moreover, people moved from rural areas to cities, in particular towards coastal regions. This was due to a higher productivity of labor in industry production than in agriculture. Selling labor force to a company promised more than working at subsistence farming. In conjunction with the urbanization, a decrease in death and birth rate took place. Beyond this, the institutional background changed to the benefit of the people; especially democratic processes were initiated. Furthermore, public goods as schooling and security were implemented step by step. Moreover, property rights in material and intellectual dimensions were implemented. According to the structure of economies and political systems, many shapes of capitalism took place.

The late capitalism began at the end of the nineteenth century and the USA became the leading economy. Former small firms developed to large companies by taking over competitors and expansions. Thus, the number of monopolies and cartels rose. In addition, the linkages between companies increased in dimensions of business connections and ownership structure. Moreover, large banks were founded and financial markets became more important in corporate finance. Parallel to this, economic crisis took place in recurring periods. International trade was based on the so-called gold standard. This means that a currency rested on a fixed amount of gold. Thus, everyone could convert paper money in gold. Therefore, importing led to an outflow and exporting to an inflow of gold. According to that, the price level was driven by foreign trade. This leads to the so-called impossible trinity in economic theory. It declares that a stable foreign exchange rate, free capital movement, and an independent monetary policy cannot be achieved at the same time. In recent past, there were approaches to ease this impossibility, but they were of limited duration.

At the beginning of the twentieth century, world economy was shocked by the two World Wars and the “Great Depression.” As a result of these shocks and uncertainty about the future, capitalism produced market results that were not commonly accepted. In some countries socialist systems arose, and the iron curtain took place. The capitalistic economies changed into more regulated systems with frequent interventions. However, they managed to preserve the main mechanics of capitalism. The so-called New Deal implemented by Roosevelt in the 1930s depicted the beginning of market regulation. The plan’s aim was to increase purchasing power and restore confidence in economy and included gains in public expenditure. After the World War II, the economies of Western Europe reconstructed their political system by focusing on welfare. To avoid unemployment, public pension schemes and redistribution of money became part of the systems. Moreover, the Asian countries, especially China, improved industrial production. By remembering the expansive foreign trade in gold standard, a modern adaption was implemented in 1944, the “Bretton-Woods-System.” This was intended to raise the efficiency of international trade and thus improve economic welfare. To achieve fixed but flexible foreign exchange rates, the US dollar set as anchor currency that was bound to gold. The other members had to follow the monetary police of the USA to fix the foreign exchange within narrow bounds. But this approach crashed in 1970s followed by regional currency snakes; sometimes this period is referred to as embedded liberalism. With the end of “Bretton-Woods,” political policy tended to liberalization of economies. This includes a slow reduction of subsidies, lower barriers in trade, and reducing market regulations especially in financial markets.

Theoretical View on Capitalism

The modern capitalism based on the “classical” economy represented by Adam Smith and his “Invisible Hand” (Smith 2012), which is used to explain that pursuing own interest promotes the society. Every individual works for their own consumer needs. However, other people are benefiting from this, because they can buy products with higher quality and quantity. Thus, society is promoted by people regarding their own interest and morality. To use full potential from trade he declared the necessity of free markets and the absence of monopolies and cartels.

Karl Marx developed an opposing theory of capitalism (Callinicos A 2012). He established the so-called Historical Materialism to consider society and economy. It states that social and economic change was not driven by ideas but material foundation of people. According to this, human development is a consequence of material equipment and the mode of production. It decomposes history in five parts. These are primitive communism, slave society, feudalism, capitalism, and socialism/communism. To climb up this scale, it is necessary that mode of production is no longer appropriate. The working masses that do not participate in wealth overcome the regime and implement a new system with suitable mode of production and governmental system. This will repeat until communism is reached. A capitalistic society is split in two opposing parts. On the one hand there are owners of capital and on the other hand the working people. Capitalists maximize their income and workers have to sell their working power to them. Marx assumed capitalists selling goods at market price, but workers income is at subsistence level anyway. According to that, capitalists receive the surplus value, and in a competitive environment capitalists have to reinvest it in production. But depending on subsistence wages, the workers do not have enough money to buy all products. Therefore, crises arise and clear the market from overproduction. Thus, Marx predicted that workers, oppressed by frequent crises and increasing social inequality, will overcome capitalism.

Max Weber used a sociological approach to discuss capitalism. He considered capitalism and its characteristics in the Western civilizations (Weber 2008). He works out that rational behavior of individuals increases, but furthermore social acting exists. In addition, he describes that capitalism is driven by expectations over future income from trade. For him, a main character of occidental capitalism is Protestantism. He states that especially Lutheranism and Calvinism lead to another work ethic. In this opinion, this ethic leads to a religious foundation of higher work effort and diligence. Max Weber introduced the concept of “political capitalism” (Holcombe 2015).

Joseph Schumpeter 2008 assumed that capitalism is not a permanent order in economics (Schumpeter 2008). He argued that improvements in efficiency and innovation will lead to monopolies and cartels. As a result from this concentration of economic power, he predicted the destruction of the societal order capitalism is based on. Therefore, similar to Marx he assumed capitalism as not permanent.

The British economist of the twentieth century John Maynard Keynes assumed that the demand is the crucial variable in an economy (Keynes 1997). His theory based on the idea that capitalism is not able to maintain itself. Economic crisis would destroy it if the government does not intervene. In conclusion, Keynes promoted a “strong state” and countercyclical interventions supporting demand, to reduce effects of crises.

Austrian economists Friedrich August von Hayek and Ludwig von Mises partially to Keynes’s theory advocated market economy. Hayek assumed that any public administration is inefficient and expensive. Therefore, he rejected a government policy based on interventions and refused any subsidies to firms or demand. Hayek promoted a “slim state” without interventions, in opposite to Keynes.

Keynes and Hayek were proponents of capitalism and both refused any socialist or feudal economic system. Nowadays, modified versions of their theories are frequently used in economic discussions.

In addition to the Keynesian’s ideas, the monetary school of thought with Milton Friedman was established in the twentieth century. In his opinion, government should provide property rights, competition, monetary constitution, and support for underage and depended people (Friedman 2002). Opposing to Keynes he states a natural rate of unemployment based on structural frictions in labor markets. Besides that, he states a narrow connection between the quantity of money and inflation. Thus, an appropriate central banking could dispose the problems of inflation and deflation (Friedman 2005) and stabilize economy. To reduce unemployment in the long run he recommended reforms that reduce those structural frictions (Friedman 1968). Friedman suggested a “slim state” that drives markets only by monetary policy. Especially the idea of widening the monetary supply in financial crisis goes back to him.

In the past and also nowadays there are discussions if capitalism as a system could be stabile. The reason of capitalism’s crisis is its very nature. Orientation on profit and surplus value means a concentration of money in the hands of a small group of people and also a dissatisfaction of a big group of people, what has to lead to riots and change of the system.

Conclusion/Future Perspective

The undisputed advantages of capitalistic economy are its high productivity, the efficiency, and its adaptability. In the age of capitalism, a level of wealth has been achieved which had never been reached before.

However, there are major challenges that need to be resolved in the future. There are serious problems in environmental pollution due to globalization (Bhagwati 2007). Moreover, there are difficulties in distribution of wealth (Piketty 2014). Besides that, the structure of welfare states is discussed widely with respect to downsize welfare systems. Additionally, durable unemployment is a problem especially in Europe.