Is capitalism intended to work in the long term as an economic or social system?

Karl Marx considered capitalism to be a historically specific mode of production (the way in which the productive property is owned and controlled, combined with the corresponding social relations between individuals based on their connection with the process of production) in which capitalism has become the dominant mode of production. The capitalist stage of development or "bourgeois society," for Marx, represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist or communist transformation of human society as the end of the series of first aristocratic, then capitalist, and finally working class rule was reached. Following Adam Smith, Marx distinguished the use value of commodities from their exchange value in the market.

Capital, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist. This difference in values, he argues, constitutes surplus value, which the capitalists extract and accumulate.

In his book Capital, Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers—all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities. 66 He argues that a core requirement of a capitalist society is that a large portion of the population must not possess sources of self-sustenance that would allow them to be independent, and must instead be compelled, to survive, to sell their labor for a living wage. In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy.

70 For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. This argument is intertwined with Marx's version of the labor theory of value arguing that labor is the source of all value, and thus of profit. Vladimir Lenin, in Imperialism, the Highest Stage of Capitalism (1916), modified classic Marxist theory and argued that capitalism necessarily induced monopoly capitalism—which he also called "imperialism"—to find new markets and resources, representing the last and highest stage of capitalism.

71 Some 20th-century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive. Capitalist class processes, to these thinkers, are simply those in which surplus labor takes the form of surplus value, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted, even if this surplus is not produced by capitalist activity, as when an absolute majority of the population is engaged in non-capitalist economic activity.

In Limits to Capital (1982), David Harvey outlines an overdetermined, "spatially restless" capitalism coupled with the spatiality of crisis formation and resolution. Harvey used Marx’s theory of crisis to aid his argument that capitalism must have its “fixes” but that we cannot predetermine what fixes will be implemented, nor in what form they will be. His work on contractions of capital accumulation and international movements of capitalist modes of production and money flows has been influential.

In social science, the understanding of the defining characteristics of capitalism has been strongly influenced by the German sociologist, Max Weber. Weber considered market exchange, a voluntary supply of labor and a planned division of labor within the entreprises as defining features of capitalism. Capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, were directed toward the rationalization of production, maximizing efficiency and productivity - a tendency embedded in a sociological process of enveloping rationalization that formed modern legal bureaucracies in both public and private spheres.

76 According to Weber, workers in pre-capitalist economies understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a manor. For these developments of capitalism to emerge, Weber argued, it was necessary the development of a "capitalist spirit"; that is, ideas and habits that favor a rational pursuit of economic gain. These ideas, in order to propagate a certain manner of life and come to dominate others, "had to originate somewhere... as a way of life common to whole groups of men".

78 In his book The Protestant Ethic and the Spirit of Capitalism (1904–1905), Weber sought to trace how a particular form of religious spirit, infused into traditional modes of economic activity, was a condition of possibility of modern western capitalism. For Weber, the 'spirit of capitalism' was, in general, that of ascetic Protestantism; this ideology was able to motivate extreme rationalization of daily life, a propensity to accumulate capital by a religious ethic to advance economically through hard and diligent work, and thus also the propensity to reinvest capital. This was sufficient, then, to create "self-mediating capital" as conceived by Marx.

This is pictured in the Protestant understanding of beruf 79 - whose meaning encompass at the same time profession, vocation, and calling - as exemplified in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings”. In the Protestant Ethic, Weber describes the developments of this idea of calling from its religious roots, through the understanding of someone`s economic success as a sign of his salvation, until the conception that moneymaking is, within the modern economic order, the result and the expression of diligence in one’s calling.

Finally, as the social mores critical for its development became no longer necessary for its maintenance, modern western capitalism came to represent the order "now bound to the technical and economic conditions of machine production which today determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt" (p. 80 This is further seen in his criticism of "specialists without spirit, hedonists without a heart" that were developing, in his opinion, with the fading of the original Puritan "spirit" associated with capitalism.

Institutional economics, once the main school of economic thought in the United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. It emphasizes the legal foundations of capitalism (see John R. One key figure in institutional economics was Thorstein Veblen who in his book, The Theory of the Leisure Class (1899), analyzed the motivations of wealthy people in capitalism who conspicuously consumed their riches as a way of demonstrating success.

The concept of conspicuous consumption was in direct contradiction to the neoclassical view that capitalism was efficient. In The Theory of Business Enterprise (1904) Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former often is hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies.

Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power. From the perspective of the German Historical School, capitalism is primarily identified in terms of the organization of production for markets. Although this perspective shares similar theoretical roots with that of Weber, its emphasis on markets and money lends it different focus.

39 For followers of the German Historical School, the key shift from traditional modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monetary economy combined with an emphasis on the profit motive. In the late 19th century, the German Historical School of economics diverged, with the emerging Austrian School of economics, led at the time by Carl Menger. Later generations of followers of the Austrian School continued to be influential in Western economic thought in the early part of the 20th century.

Austrian-born economist Joseph Schumpeter, sometimes associated with the School,81 emphasized the "creative destruction" of capitalism—the fact that market economies undergo constant change. Schumpeter argued that at any moment in time there are rising industries and declining industries. Schumpeter, and many contemporary economists influenced by his work, argue that resources should flow from the declining to the expanding industries for an economy to grow, but they recognized that sometimes resources are slow to withdraw from the declining industries because of various forms of institutional resistance to change.

The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of market economy against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy. Since a modern economy produces such a large array of distinct goods and services, and consists of such a large array of consumers and enterprises, argued Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information.

Thinkers within Supply-side economics built on the work of the Austrian School, and particularly emphasize Say's Law: "supply creates its own demand." Capitalism, to this school, is defined by lack of state restraint on the decisions of producers. Austrian economists such as Murray Rothbard argued that Marx failed to make the distinction between capitalism and mercantilism.

8283 They argue that Marx conflated the imperialistic, colonialistic, protectionist and interventionist doctrines of mercantilism with capitalism. Austrian economics has been a major influence on some forms of libertarianism, in which laissez-faire capitalism is considered to be the ideal economic system. In his 1937 The General Theory of Employment, Interest, and Money, the British economist John Maynard Keynes argued that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment.

Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment. Keynesian economics challenged the notion that laissez-faire capitalist economics could operate well on their own, without state intervention used to promote aggregate demand, fighting high unemployment and deflation of the sort seen during the 1930s. He and his followers recommended "pump-priming" the economy to avoid recession: cutting taxes, increasing government borrowing, and spending during an economic down-turn.

This was to be accompanied by trying to control wages nationally partly through the use of inflation to cut real wages and to deter people from holding money. John Maynard Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation can be effective, and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked.

These changes sought to create more stability in the business cycle, and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression. 86 The premises of Keynes’s work have, however, since been challenged by neoclassical and supply-side economics and the Austrian School.

Another challenge to Keynesian thinking came from his colleague Piero Sraffa, and subsequently from the Neo-Ricardian school that followed Sraffa. In Sraffa's highly technical analysis, capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, the tendency of capital to seek its highest rate of profit causes a dynamic instability in social and economic relations.

Today, the majority of academic research on capitalism in the English-speaking world draws on neoclassical economic thought. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market-based financing rather than state financing. Milton Friedman took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist.

One example of this is his article in the September 1970 issue of The New York Times Magazine, where he argues that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits...(through) open and free competition without deception or fraud.” This is similar to Smith’s argument that self-interest in turn benefits the whole of society. 87 Work like this helped lay the foundations for the coming marketization (or privatization) of state enterprises and the supply-side economics of Ronald Reagan and Margaret Thatcher.

The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention. Friedman, for example, argued that the Great Depression was result of a contraction of the money supply, controlled by the Federal Reserve, and not by the lack of investment as John Maynard Keynes had argued.

Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression. Neoclassical economists, today the majority of economists,90 consider value to be subjective, varying from person to person and for the same person at different times, and thus reject the labor theory of value. Marginalism is the theory that economic value results from marginal utility and marginal cost (the marginal concepts).

These economists see capitalists as earning profits by forgoing current consumption, by taking risks, and by organizing production. Neoclassical economics explain capitalism as made up of individuals, enterprises, markets and government. According to their theories, individuals engage in a capitalist economy as consumers, laborers, and investors.

As laborers, individuals may decide which jobs to prepare for, and in which markets to look for work. As investors they decide how much of their income to save and how to invest their savings. These savings, which become investments, provide much of the money that businesses need to grow.

Business firms decide what to produce and where this production should occur. They also purchase inputs (materials, labor, and capital). Businesses try to influence consumer purchase decisions through marketing and advertisement, as well as the creation of new and improved products.

Driving the capitalist economy is the search for profits (revenues minus expenses). This is known as the profit motive, and it helps ensure that companies produce the goods and services that consumers desire and are able to buy. To be profitable, firms must sell a quantity of their product at a certain price to yield a profit.

A business may lose money if sales fall too low or if its costs become too high.