A term rarely used by Karl Marx and not at all until 1877 (Marx favored the adjective “capitalist”), “capitalism” refers to a mode of production characterized by commodity production and the private ownership of capital or the means of production by the capitalist class to the exclusion of the vast majority of the people. The capitalist mode of production, based as it is on the commodity, involves production primarily for exchange or sale rather than for direct use by producers, a market in labor, a monetary rather than barter system, the pursuit of profit by producers and competition between producers. For Marx, capitalism is a stage in history preceded in Europe by serfdom and, he predicts, to be succeeded by communism. Emerging from feudalism, capitalism first took the form in the 15th to 18th centuries of merchant capitalism where overseas trade and colonization was central in its development. In the 19th century the technological advance marked by the industrial revolution saw the industrial capitalism of Marx’s day develop and flourish with the corresponding theories of political liberalism and classical economics typified by Adam Smith and David Ricardo. As capitalism has developed and changed since the time of Marx new terms have been employed to describe different phases, including “monopoly capitalism” (Paul Sweezy), the era of “finance capital” or “organized capitalism” (Rudolf Hilferding), “imperialism” (Vladimir Ilich Lenin), “late capitalism” (Ernest Mandel) and “state capitalism.” Capitalism, according to Marx, is inherently unstable, riven by internal contradictions and liable to collapse at any time. One of its key internal contradictions is embodied in the tendency of the rate of profit to fall. In their pursuit of profit capitalists will increase their use of machinery, making use of any new technology that becomes available, and reduce their use of labor in order to keep costs down and in an effort to gain a competitive edge. However, surplus value, which is the ultimate source of profit, is only created by the labor power of workers, and in making progressively greater use of machinery in place of workers the amount of surplus value generated is reduced, and hence the rate of profit declines. Alongside the fall in the rate of profit there is also a decline in the relative standard of living of the worker. As more workers are replaced by machines so unemployment increases and real wage levels decline as the supply of labor exceeds demand. With profits and wages falling and unemployment increasing, economic crisis inevitably ensues. Production exceeds consumption as demand falls alongside the fall in workers’ incomes, and this leads to goods being dumped on the market and many firms going bankrupt. However the crisis will help to restore the equilibrium between production and consumption, and there will be firms, particularly larger firms, that ride out the crisis and are able to benefit from the bankruptcies of their competitors, and which will gradually employ more workers at lower wages thus increasing the generation of surplus value leading to a restoration of profits. Inevitably, though, the pursuit of profit will see the same cycle repeated again and again, except that the crisis will be worse each time until the entire system ultimately collapses. In other words, capitalism will collapse as a result of its own contradictions; the very forces that drive it forward—competition and the pursuit of profit—will cause it to collapse, having created an agent of revolution in the industrial proletariat and the necessary conditions for the socialist society that will succeed it.

Historical dictionary of Marxism. . 2014.

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