History of Economic Thought

Chapter One
Capitalism and its Characteristics

Introduction:
Modern economic theory has begun with Adam Smith (1723-
1790). His name is joined with Capitalism.

The main objective is to understand the capitalist economic

system.

1- Capitalism:

- It is a social, political, and economic system.

- First it emerged in Western Europe, then has spread in the

almost the rest of the world.

- To understand Capitalism, it is necessary to:

1- Define it.
2- Review the historical highlights of its emergence.

- Most economists agreed that capitalism is an economic

system that functions very differently from previous
economic systems.

- In our book we define economic system according to the

mode of production on which the system is based.

- The mode of production is defined by:

1- Forces of production.
2- Social relations of production.

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 (Forces of production)

Produced goods and services

Satisfy our basic needs

What is left after satisfying our

needs is called Social Surplus
So
So
The successful economic system, is the one that
produce enough to meet not only the basic
needs, but also an excess (Social Surplus)

The historical development of the Forces of production has

resulted in a continuously increasing capacity for societies to
produce large social surplus.

In this historical evolution, societies have generally divided into

two separate groups:

1- The vast majority of people in every society has toiled to

produce the output necessary to sustain the mode of
production as well as the social surplus.

2- A minority has appropriated and controlled it.

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In this book, social classes are distinguished accordingly, the
social relations of production are defined as the relationship
between these two classes.

Then, a mode of production, is:

- The social totality of the technology of production (the forces

of production)

- And the social arrangements by which one class use these

forces of production to produce all output including the surplus
and other class appropriates the surplus (the social relations of
production).

According to this, capitalism is a mode of production, with

which the economists have been concerned.

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Characteristics of Capitalism:

Capitalism is characterized by four sets of

institutional and behavioral arrangements:

Market- oriented commodity production.

2- Private ownership of the means of production.

3- A large segment of the population that cannot exist

unless it sells its labor power in the market.

4-Individualistic, acquisitive, maximizing behavior

by most individuals within the economic system.

1- Market- oriented commodity production.

 When a commodity is valued for its use in satisfying our

needs, it is said to have use value.
 In capitalism, products are also valued because they can be
sold for money in the market. As products are valued
because they can be exchanged for money, they are said to
have exchange value.

2- Private ownership of the means of production.

This means that society grants to private persons the right to

dictate how the raw materials, tools, machines necessary for
production can be used.

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Such a right, implies that other individuals are excluded from
having these means of production.

3- A large segment of the population that cannot exist unless

it sells its labor power in the market.

Most producers don’t own the means necessary for production

activity. Ownership is concentrated in hands of small segment of
society, i.e. Capitalists.

This ownership of the means of production permitted the

capitalists to appropriate the social surplus.

The dominance of the capitalist implies the third feature of

capitalism, which is, the existence of a large working class that
has no control over the means necessary to carry out their
productive activity.

Most workers in capitalism own only the labor power, that he

sells to capitalist.

Capitalism turns human productive power into a commodity.

In return, the worker receives a wage.

With the wage, the workers are able to buy from the capitalism only a
portion of the commodities that they themselves have produced.

The remainder of the commodities that they produced is the

social surplus, and is controlled by the capitalist class.

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4-Individualistic, acquisitive, maximizing behavior by most
individuals within the economic system.

Consumerism among Capitalists has been important for the

successful functioning of capitalism.

- Consumerism
Capitalists paid low wages that make workers and their families
kept on verge of deprivation.

As capitalism evolved, the productivity of workers increased.

They began to organize themselves into unions to fight for high
wages. These struggles began to have an impact. A new social
group, sometimes called consumerism, has became dominant,
and is characteristic by the belief that more income alone always
means more happiness.

The social mores of capitalism have induced the view that every
subjective felt need or unhappiness can be eliminated if one can
buy more commodities.

- Capitalists
Capitalists have also driven to acquisitive behavior. The most
immediate reason for this is the fact that capitalism has always
been characteristics by a competitive struggle among capitalists
to secure larger shares of the social surplus. In this endless
struggle the power of any capitalist depends on the amount of
capital that he controls.

So continued existence as a capitalist depends on the ability to

accumulate capital at least as rapidly as competitors. Hence,
capitalism has always been characterized by the effort of
capitalists:
- To make more profits
- And to convert these profits into more capital.