n.

An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.

An economic system based on a free market, open competition, profit motive and private ownership of the means of production. Capitalism encourages private investment and business, compared to a government-controlled economy. Investors in these private companies (i.e. shareholders) also own the firms and are known as capitalists.

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In such a system, individuals and firms have the right to own and use wealth to earn income and to sell and purchase labor for wages with little or no government control. The function of regulating the economy is then achieved mainly through the operation of market forces where prices and profit dictate where and how resources are used and allocated. The U.S. is a capitalistic system.

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Economic system in which (1) private ownership of property exists; (2) aggregates of property or capital provide income for the individuals or firms that accumulated it and own it; (3) individuals and firms are relatively free to compete with others for their own economic gain; (4) the profit motive is basic to economic life.

Among the synonyms for capitalism are Laissez-Faire economy, private enterprise system, and free-price system. In this context economy is interchangeable with system.

n

Definition: economic system of private ownership
Antonyms: communism

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In a capitalist economic system most productive assets are held by private owners, and most decisions about production and distribution are made by the market rather than government command. Capitalism thus suggests a system of economic regulation that involves minimal state involvement. Nonetheless, even the most capitalistic economic systems contain some governmental supervision. The government must establish basic institutional rules, such as contract law. The government must also legislate to correct “market failure,” or situations where the unregulated market does not work well. Most importantly, in any democratic system a large number of interest groups continually petition the government for laws that bias market processes in their favor. Perhaps the Supreme Court's most important function as regulator of capitalism is to define the appropriate constitutional limit of governmental interference with individual, market‐driven decision making.

The word “capitalism” does not appear often in Supreme Court opinions. Further, nearly all the references before 1950 are pejorative, appearing in first amendment cases involving the right to make statements attacking capitalism as an institution. Examples include United States v. Debs (1919), where the defendant attacked capitalism as a cause of war, and Abrams v. United States (1919). In addition, Justice Louis D. Brandeis used the term occasionally in dissenting opinions to speak about the evils of uncontrolled capitalism (Liggett v. Lee, 1933; Maple Flooring Manufacturers Association v. United States, 1925).

The Supreme Court has always occupied a central position in the development of American capitalist institutions since the beginning of the nineteenth century. The Constitution's framers envisioned a regime in which most decisions about the allocation of goods and services should be private. The Contracts Clause, the Commerce Clause, the Due Process Clause, and the Takings Clause of the Fifth Amendment are strong examples of that commitment. Through its interpretation of the Constitution and a wide array of federal and state statutes and common law rules, the Supreme Court has defined the balance between individual prerogative and the independence of markets on the one hand, and sovereign power to interfere on the other.

Until the late 1930s the prevailing economic ideology on the Supreme Court was that of the classical political economists, who had a strong bias in favor of the “unregulated” market. This is not to say that there was little regulation. States and local government regulated a great deal. Indeed, the Supreme Court believed that there was too much regulation and that much of it was created in the interest of regulated firms rather than the consuming public.

The historical relationship between the Supreme Court and American capitalism has developed through several controversies concerning the proper scope of federal and state regulatory power.

Recognition of the Business Corporation and Facilitation of Its Development

Modern American capitalism would be unthinkable without the giant, multistate business corporation—a creature whose development was facilitated by a series of Supreme Court decisions.

The Supreme Court both adopted and expanded the common law's view that the business corporation is a “person” entitled to many of the same constitutional protections given to natural persons. Chief Justice John Marshall had clung to the traditional English view of Sutton's Hospital Case (1613) that a corporation was incapable of suing and being sued in its own name. Rather, the suit must name all the shareholders individually. Marshall's view was rejected by his own Court in Bank of United States v. Dandridge (1827). From that point on corporations could freely sue and be sued in federal court. Likewise, the Marshall Court held in Bank of the United States v. Deveaux (1809) that a corporation was not a “citizen” under the Constitution, but should be treated merely as a collection of its individual shareholders. Such decisions limited federal court access, because jurisdiction based on diversity of citizenship did not exist unless every shareholder in the dispute was from a different state than any party on the opposite side. Deveaux was overruled by the Taney Court in Louisville, Cincinnati & Charleston Railroad Co. v. Letson (1844), which held that a corporation should be deemed a “citizen” of the incorporating state. The result was substantially to increase federal protection of corporations.

The Supreme Court recognized the American business corporation as a “person” for federal constitutional purposes in Santa Clara Co. v. Southern Pacific Railroad (1886). Although liberals attacked the Santa Clara decision as biased in favor of big business, the decision's importance should not be exaggerated. Santa Clara was a sensible mechanism for permitting the corporation as an entity rather than its separate shareholders to assert the corporation's constitutional claims. Giving the corporation itself the constitutional claim was more efficient than giving it to the shareholders themselves. After Santa Clara individual shareholders could assert the constitutional rights of the corporation only if they brought a stockholders' derivative suit designed to force the corporation to defend its own rights. Such suits had been approved by the Court in Dodge v. Woolsey (1856).

One of the most important doctrines facilitating the multistate business corporation during the late nineteenth century was that the states lacked the power to exclude “foreign” corporations, or those chartered in a different state, from doing business within their borders. The traditional view had been to the contrary. In Bank of Augusta v. Earle (1839), the Taney Court held that corporations of one state could do business in another state, but only subject to that state's permission and regulation. As late as the 1880s the Supreme Court permitted states to exclude foreign corporations from doing business directly within their borders. However, in Welton v. Missouri (1876) it held that the Commerce Clause forbad states from excluding the products made by out‐of‐state corporations. Under Welton a corporation chartered, for example, in New Jersey could not build a plant in New York without New York's consent, but New York did not have the power to exclude the New Jersey corporation's goods, if the goods could legally be sold by New York's own corporations. The Court gradually narrowed state power to exclude foreign corporations from manufacturing within their borders as well, finally holding in Western Union Telegraph Co. v. Kansas (1910) that a corporation is a “person” within the jurisdiction of a state where it is doing business, and entitled not to be expelled except for violations of state law.

During the nineteenth century the Supreme Court frequently became involved in matters of corporate finance, the extent of limitations on corporate liability, and the scope of a corporation's power under its charter. The result was substantial federal doctrine regulating the inner workings of the corporation, its finances, and its dealings with outsiders. For example, in Sawyer v. Hoag (1873) the Court adopted the “trust fund” doctrine, which held that if a corporation's stated paid‐in capital was larger than the amount the shareholders had actually paid in, the shareholders themselves could be liable for the shortfall. The doctrine was designed to protect creditors from “watered” stock. Likewise, the Court often considered the question whether corporate activities were ultra vires, or unauthorized by the corporate charter—generally adopting a narrower view than that which prevailed in the states. For example, in Thomas v. West Jersey Railroad (1879), the court struck down as ultra vires an effective merger of two railroads when one leased all its track to the other.

The Supreme Court gradually relaxed the strict rule preventing corporations from doing business not authorized in their charters, particularly if the additional business was “necessary or convenient” to the corporation's authorized business. For example, in Jacksonville, Mayport, Pablo Railway & Navigation Co. v. Hooper (1896), the Court permitted a railroad to acquire a hotel in order to accommodate railroad passengers. The result was increased judicial approval of corporate vertical integration, a phenomenon that characterized much of the corporate growth at the turn of the century.

An unanticipated result of the use of business purpose statutes to challenge corporate mergers was that mergers of competitors were generally legal. For example, a corporation authorized to manufacture and distribute fuel oil, such as Standard Oil Company, could legally acquire a competing refinery, for that acquisition would not involve the corporation in unauthorized business. However, if Standard attempted to acquire a shoe factory, the acquisition would have been challenged as outside the scope of Standard's charter. As a result mergers of competitors—usually the most damaging to competition—were generally legal, while “conglomerate” mergers, whose competitive consequences are generally negligible, were forbidden. The result was that American merger policy gradually ceased to be the prerogative of corporate law and entered the domain of the antitrust laws.

In Briggs v. Spaulding (1891) the Court adopted a broad version of the “business judgment” rule, thereby giving corporate directors expansive power to make decisions without concern about liability suits from stockholders. This decision as well as others served to separate the ownership of the American business corporation from its management. The eventual result was a cry for more intensive regulation.

During the New Deal era the Supreme Court gradually accommodated much more intensive regulation of the American business corporation. For example, in Federal Trade Commission v. F. R. Keppel & Bros. (1934), the Court held that the FTC had the power to reach “unfair” business practices even if such practices were not anticompetitive under the antitrust laws.

More recently, the Supreme Court has exhibited a strong tendency to relax certain aspects of corporate regulation. Several decisions have developed the concept that the market for corporate securities is generally efficient; as a result, corporate managers have no special obligation to provide information to buyers and sellers of its securities (Chiarella v. United States, 1980; Basic, Inc. v. Levinson, 1988). Furthermore, the Court has held that at least some people should be able to profit from secret information about corporate illegality by buying and selling of the corporation's stock. Such transactions may encourage the discovery of such information (Dirks v. Securities and Exchange Commission, 1983). The fact that such trading may be “unfair” to people who do not have the information is not as important as the fact that permitting such trades makes the market work more efficiently. More recently, in Central Bank of Denver v. First Interstate Bank of Denver (1994), the Supreme Court greatly limited liability for “secondary” actors such as lawyers or accountants who might be indirectly involved in stock fraud.

Judicial Limits on the Jurisdictional Power to Regulate

Nineteenth‐century political economy was biased in favor of the free market and against regulation. This bias appeared in substantive legal rules as well as procedural and jurisdictional restrictions on state regulatory power. One important device that the Supreme Court has used to protect American capitalism from political interference is legal rules that confined state authority to the state's own territory, and federal authority to activities clearly in the flow of interstate commerce.

The Supreme Court held in Gibbons v. Ogden (1824) that the Constitution's Commerce Clause forbad a state from giving a steamboat company a monopoly of the route between ports in two different states. Gibbons limited the scope of such rights to intrastate activities. In Wabash, St. Louis and Pacific Railway Co. v. Illinois (1886) the Supreme Court held that a state could not impose rate regulation on railroad traffic if any part of the railroad's route lay outside the state. Pennoyer v. Neff (1877) reflected the Court's view that state courts had little power to obtain jurisdiction over people located outside the state.

Perhaps the most controversial limitation on state regulatory power in the nineteenth century was the rule in Swift v. Tyson (1842) that in federal court controversies between citizens of different states, the federal judge was not bound to follow state law but could refer to a “general” common law. Justice Joseph Story's purpose in Swift was unambiguous: interstate markets would work efficiently only if they were governed by a body of uniform rules that entrepreneurs could rely on. If one state engaged in parochial rule making—for example, to protect its debtors from out‐of‐state creditors—merchants would lose confidence in the interstate commercial market. Although Swift itself applied only to common law rules, later decisions such as Watson v. Tarpley (1855) applied the same rule to state statutes. The result encouraged development of a uniform system of commercial rules in federal court long before such transactions were comprehensively regulated by federal statute.

The Supreme Court also limited the states' power to apply their substantive law to activities that occurred outside the state. Allgeyer v. Louisiana (1897) substantially undermined state power to regulate out‐of‐state insurance companies. New York Life Insurance Co. v. Dodge (1918) reduced the power of a state to apply its unique contract law to contracts that had been executed in a different state. Importantly, however, the general common law was not considered “regulatory,” but rather as a body of universal rules that courts need only recognize. As a result, a state could apply the general common law to interstate transactions even if it could not do so by statute (Western Union Telegraph Co. v. Call Publishing Co., 1901). This was consistent with the Court's general position that the common law, if properly applied, did not interfere with markets but rather facilitated them.

The nineteenth‐century Supreme Court's hostility toward state regulation also showed up in severe limitations on state administrative agencies. For example, in Chicago, Milwaukee, and St. Paul Railway Co. v. Minnesota (1890), the Court struck down a state statute that gave a regulatory agency final authority to set railroad rates. Only in the 1920s did the Supreme Court become tolerant of railroad rate making by regulatory agencies rather than court or legislature (Wisconsin Railroad Commission v. Chicago, Burlington & Quincy Railroad Co., 1922).

The Supreme Court was also hostile toward regulatory incursions by the federal government and limited federal power to transactions that clearly involved interstate commerce, narrowly defined. For example, in United States v. E. C. Knight Co. (1895) the Court held that the federal antitrust laws could not be applied to a multistate manufacturing trust because manufacturing itself was not the same thing as interstate movement of goods. Likewise, Hammer v. Dagenhart (1918) struck down a federal child labor statute because the labor itself was performed within a single state. It was not sufficient that the goods produced by the labor were destined to be shipped in interstate commerce.

The New Deal effected a dramatic change in the Supreme Court's philosophy concerning the regulatory power of both the federal government and the states. Swift was overruled by Erie Railroad Co. v. Tompkins (1938). The International Shoe case (1945) greatly expanded state court jurisdiction over outsiders. The limitations on a state's power to apply its substantive law to transactions occurring elsewhere were relaxed in Watson v. Employers Liability Assurance Corp. (1954). On the other side, National Labor Relations Board v. Jones & Laughlin Steel Corp. (1937) greatly expanded federal power to regulate labor relations, provided the employer had any substantial interstate business. Hammer, the child labor decision, was expressly overruled by United States v. Darby Lumber Company (1941). Since the Court's decision in Wickard v. Filburn (1942), federal power to regulate has extended to highly localized activities where the “effect” on interstate commerce seems to be all but trivial.

Monopoly: State Power to Restrict Competition

“Monopoly” has two meanings in the history of American capitalism. Historically, a monopoly was an exclusive right given to a private entrepreneur by the sovereign. Later, “monopoly” came to refer to large firms that were dealt with under the antitrust laws.

Aside from the Gibbons case noted earlier, the Supreme Court's first important brush with state created monopoly was the Charles River Bridge case of 1837. Taking a strictly classicist approach, Chief Justice Roger B. Taney held that, although a state had the basic power to confer monopoly privileges on a business corporation, such rights would not be implied.

Even state power to create monopolies was challenged in the Slaughterhouse Cases (1873), where a bitterly divided Court approved a corporate charter that gave one corporation the exclusive right to operate a public slaughterhouse in New Orleans. The Court found that no clause of the recently enacted Thirteenth and Fourteenth Amendments took the power to create monopolies away from the states. The Slaughterhouse grant has been widely described as a product of the worst kind of special interest legislation. However, it was really a quite sensible mechanism for dealing with an important public health problem that arose when small slaughterhouses deposited animal waste into the Mississippi River, which constituted New Orleans' supply of drinking water.

“Liberty of Contract”: Price Regulation, Protective Labor Legislation, and Regulation of Product Quality

Classical political economy was committed to the belief that people should be able to enter and enforce any lawful contract. In the first half of the nineteenth century the Constitution's Contract Clause became one of the most important vehicles for protecting the market system. A second, quite different version of liberty of contract was not expressly written into the Constitution but was created by the Supreme Court around the beginning of the twentieth century in the doctrine of substantive due process.

Both branches of liberty of contract doctrine reflected hostility against legislation that interfered with private economic decision making. This hostility can be seen in the Court's attitude toward the political process—for example, its conclusion in Marshall v. Baltimore & Ohio Railroad Co. (1853) that legislatures were enslaved to special interests, whose lobbyists “subject the State government to the combined capital of wealthy corporations, and produce universal corruption. …” These “[s]peculators in legislation” would “infest the capital of the Union and of every State, till corruption shall become the normal condition of the body politic …” (pp. 334–335).

Liberty of Contract under the Contract Clause

The Contract Clause forbad the states from impairing the obligation of previously created contracts. During the Marshall period the Supreme Court developed two distinct branches of Contract Clause jurisprudence. A “private” branch generally prevented states from interfering with previous contracts between private parties and was principally a limitation on state power to pass debtor relief statutes. Sturges v. Crowinshield (1819) held that a state could not limit a creditor's recovery to a debtor's existing property, excluding attachment of future wages. Ogden v. Saunders (1827) upheld state insolvency statutes provided they were applied only to debts created after the statute was passed. Later Supreme Courts generally followed the Marshall‐era policy of according strict protection to previously created private agreements. For example, Bronson v. Kinzie (1843) prevented states from making it more difficult to foreclose mortgages that already existed when the statute was passed. And Gelpcke v. Dubuque (1864) forbad states from invalidating municipal bonds that had been sold to out‐of‐state creditors. Not until the New Deal, when constitutional classicism was in its death throes, did the Supreme Court deviate substantially from this course. For example, Home Building and Loan Association v. Blaisdell (1934) sustained a Depression‐era statute placing a moratorium on mortgage foreclosures.

The “public” branch of Contract Clause jurisprudence historically limited a state's power to renege on its own contractual obligations. Fletcher v. Peck (1810) held that a state could not revoke its previously given land grant, and the Dartmouth College case (1819) extended that rule to corporate charters. The public branch of Contract Clause jurisprudence revealed a great tension in Supreme Court liberty of contract analysis. On the one hand, corporate charters were contracts, and belief in the sanctity of contract was nothing less than an article of faith. On the other, early nineteenth century states had given corporations a wide array of monopoly privileges, tax exemptions, and other special prerogatives. These were generally abhorrent to classical political economy's view that the market alone should govern the fortunes of its entrepreneurial participants. The question now was whether to permit the states to renege on some of these promises—thus restoring the fairness and balance of the market—but in the process undermine the sanctity of the contract as corporate charter. The general answer was that even liberty of contract should be subordinated to the greater good of preserving the market.

In other areas the Supreme Court gave the states broad power over their corporations—holding, for example, in the Railroad Commission Cases (1886) that a corporate charter that permitted a railroad to charge “reasonable” rates nevertheless permitted a state agency to determine what rates were reasonable. After about 1850, the Contract Clause was no longer a substantial impediment to state power to limit corporate prerogative.

Substantive Due Process and Liberty of Contract

The Fourteenth Amendment doctrine of substantive due process was a product of a uniquely American version of classical political economy. In England, where land was scarce, labor restive, and social and economic mobility quite restricted, classicism's strict preference for the market had given way by 1850 to much more interventionist views of the role of the state. Economists such as John Stuart Mill and later Alfred Marshall supported some state‐imposed redistribution of wealth.

But America after the Louisiana Purchase (1803) held an abundance of undeveloped land and experienced both rapid economic growth and apparent high mobility for those who were ambitious. Within the classical vision, every laborer could quite easily become a landowner or entrepreneur—never mind that this did not include slaves or, in most states, women. Adam Smith's historical reverence for the unrestrained market persisted in the United States long after it was tempered in England. The Supreme Court justices may not have read the classical political economists directly, but they were quite familiar with Thomas M. Cooley's thoroughly classical Treatise on the Constitutional Limitations Which Rest Upon the Legislative Power of the States of the American Union (1868), which provided the intellectual foundation for substantive due process as a constitutional doctrine.

Substantive due process, unlike Contract Clause doctrine, regulated not merely the sanctity of preexisting contracts, but also the right of people to enter into various kinds of contracts. The era was hardly a period of “dry formalism,” as Roscoe Pound and other Progressive critics suggested, but rather of great judicial creativity. For example, in In re Debs (1895) the Court cut from new cloth the doctrine that the executive branch has the power to protect interstate commerce from labor disputes, even though Congress had not passed a statute authorizing the executive's action. And in Ex parte Young (1908) Justice Rufus W. Peckham held that the sovereign immunity provision of the eleventh amendment did not apply when a private party seeks to enjoin a state official from enforcing an unconstitutional statute, because the official is “stripped of his official or representative character” (p. 160). In this case, the statute was a railroad rate regulation alleged to violate due process of law.

The most controversial of the Supreme Court's substantive due process decisions was Lochner v. New York (1905), which struck down a statute that forbad bakers from working more than ten hours per day or sixty hours per week. The Court also struck down statutes that regulated product quality. For example, in Jay Burns Baking Co. v. Bryan (1924), it upset a statute requiring standardized weights for bread; and in Weaver v. Palmer Bros. (1926), a statute regulating the quality of bedding materials.

One of the most frequent targets of substantive due process analysis was rate regulation. In Munn v. Illinois (1877), which had preceded the substantive due process era, the Supreme Court permitted a state to regulate an unincorporated firm's prices, provided that it operated in a market “affected with a public interest.” These markets included enterprises that traditionally had been accorded monopoly protection or eminent domain power, such as shipping lines, common carriers and—in the case of Munn—grain elevators.

But later the Court made clear that the states lacked a general power to regulate rates; further, the prerogative of deciding what kinds of industries were affected with the public interest belonged to the courts, as in Tyson & Brother–United Theatre Ticket Offices v. Banton (1927). Perhaps the most famous decision involving price regulation is Adkins v. Children's Hospital (1923), which overturned a Washington, D.C., minimum wage law that applied only to women. The Supreme Court, using language borrowed from the classical political economists, concluded that “the right of the owner to fix a price at which his property shall be sold or used is an inherent attribute of the property itself,” and that there is a “moral requirement” of “just equivalence” between the price to be charged for labor and the value the employer places upon it (p. 558).

One of the markets consistently found to be affected with the public interest was the railroads, and the Supreme Court generally upheld state and later federal regulation of railroad rates. However, in Smyth v. Ames (1898), it held that such regulation must provide the railroad with a reasonable return on its investment. The rule that rate regulation is generally permissible, but regulation that deprives a private entrepreneur of a reasonable competitive profit is an unconstitutional taking of property, generally survives to this day.

Progressive Era critics characterized the Supreme Court majority during the early twentieth century (particularly Justices Rufus W.Peckham, James C. McReynolds, Willis Van Devanter, George Sutherland, Pierce Butler, and William Howard Taft) as a probusiness, antilabor group of mediocre intellectuals. But that view both underestimates the justices' intellect and overestimates their favoritism toward business. They were classicists, committed to the unregulated market. As such, they were just as quick to condemn probusiness regulatory legislation as wage‐and‐hour legislation. Progressive critics began with the premise that virtually all regulation was in the public interest and then focused their critique of the Court almost exclusively on protective labor legislation. In fact, however, the Court struck down equal numbers of statutes that were the product of regulatory “capture” by special interest groups within the business class. For example, in Louis K. Liggett Co. v. Baldridge (1928) it condemned a statute that required the licensing of pharmacists, designed mainly to protect druggists from cost‐cutting new competitors. In New State Ice Co. v. Liebmann (1932) it upset a statute that conditioned entry into the ordinary business of manufacturing ice on the applicant's demonstration of “necessity” and inadequacy of existing facilities—another device for protecting existing firms from competition.

Even during the heyday of substantive due process, the Supreme Court did not condemn all regulatory legislation. It upheld legislation it believed corrected an undesirable effect of the unregulated market. Muller v. Oregon (1908) sustained a ten‐hour law similar to that struck down in Lochner (1905), but which applied only to women. Brandeis's famous Brandeis brief cited social science data that women occupy a special position as the bearers of society's future children; and that women were generally unable to represent their own interests responsibly in the contracting process. The Supreme Court accepted these sexist, paternalistic arguments. Likewise, in Village of Euclid v. Ambler Realty Co. (1926) the Supreme Court upheld comprehensive land use planning and zoning—largely on the argument that high density and unplanned development could impose large costs on other members of the community, through increased traffic, noise, congestion, and demand for public services.

In a single year, 1937, substantive due process ended even more quickly than it began, largely as a result of the famous court‐packing plan of the Roosevelt administration, and Justice Owen J. Roberts's change of mind on the subject of minimum wage legislation in West Coast Hotel Co. v. Parrish (1937), which overruled Adkins.

More recently, however, the Supreme Court has been accused of revitalizing the spirit of Lochner by manufacturing other doctrines to limit regulatory power. For example, in Seminole Tribe of Florida v. Florida (1996), which expanded state sovereign immunity from federal lawsuits, Justice David Souter accused the majority of applying a Lochner‐like hostility toward regulation. He repeated that accusation in Alden v. Maine (1999), which held that Congress could not force state courts to entertain lawsuits under federal legislation regulating working conditions and wages. Justice Stephen G. Breyer made a similar accusation in College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board (1999), in which the Supreme Court held that state agencies could not be sued under federal law for false advertising. Unquestionably, the Rehnquist Supreme Court has sought to cut back on federal regulatory power under a variety of constitutional doctrines.

The Supreme Court as Regulator of Business Competition

One of the Supreme Court's most important roles as manager of American capitalism flows from its position at the top of the hierarchy of institutions that regulate the competitive process. Competition is regulated by courts and administrative agencies of both state and federal government. The Supreme Court oversees all of these to one degree or another.

Before 1890, when the Sherman Antitrust Act was passed, business competition was regulated mainly through the common law of trade restraints. The Supreme Court applied this law in diversity of citizenship cases. Oregon Steamship Navigation Co. v. Winsor (1873) upheld a ten‐year covenant not to compete given as part of the sale of a steamship route. The covenant was reasonable because it (1) was ancillary to the sale of a business; (2) was restricted to a reasonable length of time; and (3) covered only the geographic area served by the route itself. But in Central Transportation Co. v. Pullman's Palace Car Co. (1890) the Court condemned a noncompetition covenant contained in a ninety‐nine‐year lease of railroad sleeping cars because the period of protection was unreasonably long. The court also adopted common‐law rules that were completely tolerant of business mergers, and even of price fixing, provided the price fixers did not use coercion or intimidation against others who attempted to undercut their prices. But in Gibbs v. Consolidated Gas Co. of Baltimore (1889) it held that price fixing of an article of “public necessity,” in this case illuminating gas, should be illegal even though price fixing in ordinary items might be protected by liberty of contract.

The Supreme Court's position on price‐fixing changed remarkably with the passage of the Sherman Antitrust Act in 1890. In its first substantive antitrust decision, United States v. Trans‐Missouri Freight Association (1897), it condemned a price‐fixing and traffic pooling arrangement among a group of railroads. The Supreme Court was unpersuaded by the economic argument, adopted by the lower court, that railroads were a network industry in which packages could reliably be transferred from one line to another only if there was a common scheme for scheduling and setting rates. It also rejected the argument that competition was particularly ruinous in the railroad industry. Since Trans‐Missouri, price fixing by competitors has been almost uniformly illegal in the United States, unless an industry is exempted by federal or sometimes state legislation. In Loewe v. Lawlor (1908) the Court applied its new‐found hostility toward price fixing to labor boycotts designed to secure a certain wage. The result was the rise of the federal labor injunction—a powerful union‐busting device until New Deal labor legislation largely exempted labor unions from antitrust law. The new legislation, which greatly increased labor union bargaining power, was upheld by the Supreme Court in National Labor Relations Board v. Jones & Laughlin Steel Co. (1937).

The Supreme Court also used the antitrust laws to develop an American merger policy dictated by principles of competition rather than corporate structure. In United States v. Addyston Pipe & Steel Co. (1899) it approved then‐Judge William Howard Taft's lower court ruling that price “fixing” that is merely ancillary to the combination of businesses into a single enterprise should not be treated as harshly as naked price fixing by firms that continue to hold themselves out as competitors. However, in Northern Securities Co. v. United States (1904), the Court condemned a merger that eliminated all competition between two transcontinental railroads, and in United States v. Union Pacific Railway Co. (1912) it held that the federal antitrust law could condemn a merger even though the merger was entirely legal under state corporation law. From that point on protecting consumers from collusion and high prices became a dominant concern of federal merger policy.

In 1950, however, Congress amended the antitrust laws to reflect a much greater concern with the fortunes of small businesses forced to compete with large firms. The result was a twenty‐year interlude from the 1960s into the early 1980s when the Supreme Court encouraged lower courts to void mergers that made the postmerger firm more efficient, on the theory that such mergers would injure competitors of the merging firms (as in Brown Shoe Co. v. United States, 1962). Only in the 1970s and 1980s did the Court begin to return to a more explicitly consumer‐oriented merger policy.

Between naked price fixing at one end and simple mergers at the other lay an array of business combinations and practices that may contain some attributes of both. Beginning in 1911 with Standard Oil v. United States and United States v. American Tobacco decisions, the Court began to fashion a “rule of reason” for evaluating the great majority of these practices. As described by Justice Brandeis in Board of Trade of the City of Chicago v. United States (1918), the rule of reason required a court to examine the history and development of a particular practice, its likely effects on competition, and any efficiency rationales that the practice might have. The Court later used this approach to approve such things as an agreement of competitors to exchange information about prices (Maple Flooring Manufacturers Assn. v. United States, 1925). However, it condemned concerted boycotts directed against competitors under the per se rule (Eastern States Retail Lumber Dealers' Association v. United States, 1914).

The Supreme Court also became heavily involved in business decisions about how products should be distributed. Dr. Miles Medical Co. v. John D. Park & Sons Co. (1911) condemned resale price maintenance, or agreements under which suppliers specify the price at which their products are to be resold. The much‐criticized rule that resale price maintenance is illegal per se survives until this day. The Supreme Court's position on nonprice restraints, such as clauses in which manufacturers specify store locations, has been far less consistent. Eventually Continental T.V. v. GTE Sylvania (1977) established that vertical nonprice restrictions should be governed by the rule of reason. Since then, most such restrictions are legal.

The Rehnquist Court has played a less prominent role in the making of antitrust policy than earlier Supreme Courts. One explanation is that the 1960s and 1970s were turbulent times for antitrust, as older doctrines favoring small business gave way to a more relaxed set of rules that favored low cost, efficient producers. Most of these rules were settled by 1986, when William H. Rehnquist was elevated to chief justice. In addition, during Chief Justice Rehnquist's term of office the size of the Supreme Court docket has been severely reduced, to roughly half as many cases per year as other recent Courts have heard. The decline in the number of antitrust cases has been even more severe.

The Rehnquist Court's leadership in antitrust has not been particularly strong, and some of the decisions are very hard to defend on economic grounds. For example, in Eastman Kodak Co. v. Image Technical Services (1992), the Court upheld a very dubious claim that a manufacturer of photocopiers with only 23 percent of the market could be a monopolist of its unique repair parts because someone who already purchased the photocopier was “locked in” to purchasing these parts from the defendant. The result has been a wave of monopolization claims against firms that are not monopolists of anything. In sharp contrast, in California Dental Association v. Federal Trade Commission (1999) the Court upheld restrictions on advertising that effectively permitted California dentists to cartelize their market. The pair of decisions creates an indefensible juxtaposition: a very benign attitude toward cartels, which are the most suspicious form of antitrust misconduct; and an overly aggressive attitude toward nonmonopolistic firms acting unilaterally, where anticompetitive results are highly unlikely.

Takings

One constitutional doctrine developed by the Supreme Court to limit state regulatory power is the Fifth Amendment clause providing that private property may not be “taken” without payment of just compensation. The Court first applied the clause to the states in Chicago, Burlington and Quincy Railroad Co. v. Chicago (1897). In Pennsylvania Coal v. Mahon (1922) the Court, speaking through Justice Oliver Wendell Holmes, struck down a state statute that required underground coal miners to support surface property even if the mining company owned a preexisting legal right to cause surface subsidence. Since the 1970s the Supreme Court has looked more closely at state and local regulatory legislation that reduces the value of private property or forces the property owner to accept the intrusion of unwanted objects or persons. During the Rehnquist era it has limited state and local government power to regulate land use by being much quicker to find liability for rules that are thought to have too harsh an impact on land owners. For example, Nollan v. California Coastal Commission (1987) held that a state could not condition the right to develop coastal land on the landowner's grant of an easement to the public. And in Lucas v. South Carolina Coastal Council (1992) the Court held that compensation could be required if a regulation severely reduced the value of property and the land owner could not reasonably have anticipated that the state would have regulated in the manner that it did.

Conclusion

The governance of American capitalism was undoubtedly the primary activity of the Supreme Court in the nineteenth century. During that period the Court was heavily influenced by classical political economy, and this interest shows up in the Court's strong bias in favor of the unregulated market. In the twentieth and early twenty‐first centuries the mixture of decisions has changed somewhat, but overseeing the regulation of economic markets continued to be among the Supreme Court's most important obligations. As regulator of capitalism the Supreme Court has frequently been doctrinaire and has often overruled itself when underlying ideology changed. Unquestionably, however, the Court has been a stabilizing influence on an economy which would have been far less robust had it been subject to every vagary of changing political power.

Bibliography

• Lawrence M. Friedman, A History of American Law, 2d ed. (1985).
• Lawrence M. Friedman, American Law in the Twentieth Century (2002).
• Morton J. Horwitz, The Transformation of American Law: 1780–1860 (1978).
• Morton J. Horwitz, The Transformation of American Law, 1870–1960: the Crisis of Legal Orthodoxy (1992).
• Herbert Hovenkamp, Enterprise and American Law, 1836–1937 (1991).
• J. Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (1970).
• William J. Novak, The People's Welfare: Law and Regulation in Nineteenth Century America (1996)

— Herbert Hovenkamp

In Marxist terms, an arrangement whereby one class—the capitalists, or bourgeoisie—owns the factors of production while the workers possess only their labour, which they sell. According to Marxism, capitalism is a system of social domination which exploits the workers by undervaluing this labour. Accumulation is a key characteristic of capitalism, and a feature of advanced capitalism is the possession of capital by fewer and fewer owners.

A more general usage defines capitalism as a system where the factors of production are privately owned. Sales occur for profit in markets which are free in the sense that, subject to the constraints of the law, entrepreneurs are able to engage in business. The implicit assumption is that individuals are rewarded in relation to their economic contribution. However, some claim that the basic relationships of the capitalist economy are the cause of limits to growth.

Uneven development is one expression of the spatiality of capital; technology is adopted in a spatially uneven way and local labour markets—from trade unions to lawyers—bring about major variations in outcomes. Capitalism exploits the differences between spaces; it can appropriate, dominate, produce, and reproduce space, and render it more, or less, accessible.

A term denoting a distinct form of social organization, based on generalized commodity production, in which there is private ownership and/or control of the means of production. The word ‘capitalism’ is a relative latecomer in social science, with the OED citing its first use in 1854 (‘capitalist’ in 1792). Originally popularized by Marxist writers (Marx preferred to speak of the capitalist mode of production or bourgeois society), it is a term which has increasingly gained credence across the political spectrum, although this has inevitably produced inconsistency in its employment. At least three present-day usages are discernible.

1. The meaning derived from the work of Werner Sombart and Max Weber. Sombart describes capitalism in terms of a synthesis of the spirit of enterprise with the ‘bourgeois spirit’ of calculation and rationality. This geist or spirit is deemed to be an aspect of human nature and is seen to have finally taken a suitable form for itself in the shape of the economic organization of modern society. On this basis, Weber (in The Protestant Ethic and the Spirit of Capitalism) charts how the ‘spirit of capitalism’ transformed other modes of economic activity designated as ‘traditionalist’. A traditionalistic worker does not consider maximization of the daily wage as a primary objective, but opts instead to work to secure an accustomed style of life. The capitalist enterprise, by contrast, is based on a rational reorganization of production and is directed solely towards maximizing productive efficiency. Although Weber stops short of suggesting that the Protestant ethic produced capitalism, he believes that the origins of the capitalist spirit can be traced particularly to the ethics associated with Calvinism. Capitalism is therefore less the result of the introduction of new technology than the consequence of a new spirit of entrepreneurial enterprise. Weber (in General Economic History) develops an account of the rise of modern capitalism in post-feudal Europe, emphasizing characteristics broadly similar to those discussed by Marx. The spirit of rational calculation fosters a capitalist economic system in which wage-labourers are legally ‘free’ to sell their labour power; restrictions on economic exchange in the market-place are removed; technology is constructed and organized on the basis of rational principles; and there is a clear separation of home and workplace. Furthermore, capitalism enables the consolidation of the legal form of business corporation, the expansion of public credit, organized exchanges for trading in all commodities, and the organization of enterprises for the production of commodities rather than simply for trade. Above all, capitalism is characterized by the increased rationalization of social life, and the further advance of bureaucracy is seen as inevitable in the modern world. Capitalism, for Weber, is clearly the most advanced economic system ever created. However, its technical rationality threatens to constrict and extinguish the most distinctive values of Western civilization. Humanity is therefore trapped in an ‘iron cage’ of its own making.

2. The sense which identifies capitalism with the organization of production for markets. This is a usage derived from the German Historical School, with its primary distinction between the ‘natural economy’ of the medieval world and the ‘monetary economy’ of the modern age. This definition of capitalism as a commercial system is commonly buttressed by an emphasis on a certain type of motive, the profit motive. Although this definition has affinities with the Sombart/Weber view, its emphasis on the market economy lends it a substantially different focus.

3. Karl Marx sought the essence of capitalism neither in rational calculation nor in production for markets with the desire for gain (a system termed by Marx, ‘simple commodity production’). For Marx capitalism is a historically specific mode of production, in which capital (in its many forms) is the principal means of production. A mode of production is not defined by technology but refers to the way in which the conditions of production are owned and controlled and to the social relations between individuals which result from their connection with the process of production. Each mode of production is distinguished by how the dominant class, controlling the conditions of production, ensures the extraction of the surplus from the dominated class. As Marx clarifies in a famous passage, the really distinctive feature of each society is not how the bulk of labour is done, but how the extraction of the surplus from the immediate producer is secured: ‘It is in each case the direct relationship of the owners of the conditions of production to the immediate producers … in which we find the innermost secret, the hidden basis of the entire social edifice, and hence also the political form of the relationship of sovereignty and dependence, in short the specific form of state in each case’ (Capital, vol. iii, ch. 47). Capitalism is thus perceived as a transient form of class society in which the production of capital predominates, and dominates all other forms of production (generalized commodity production). Capital is not a thing, not simply money or machinery, but money or machinery inserted within a specific set of social relations whose aim is the expansion of value (the accumulation of capital). Capitalism is therefore built on a social relation of struggle between the bourgeoisie and the working class. Its historical prerequisite was the concentration of ownership in the hands of the ruling class and the consequential and ‘bloody’ emergence of a propertyless class for whom the sale of labour-power is their only source of livelihood. The distinction between the sale of labour and the sale of labour-power (the capacity to labour) is crucial, Marx argues, for understanding how all profit derives from the unpaid and therefore exploited labour of the worker. Capitalism therefore combines formal and legal equality in exchange with subordination and exploitation in production. The existence of trade, rational calculation, production for the market, the use of money, and the presence of financiers is not enough to constitute a capitalist society. For Marx, capitalism is based on a specific form of private property which enables capital to yoke labour to create surplus value in production. Like Weber, Marx portrayed capitalist society as the most developed historical organization of production. Unlike Weber, Marx envisaged that class struggle would intensify and produce an ever-expanding union of workers who, as a self-conscious, independent movement of the majority, would rise up and abolish capitalism.

All periodizations of capitalism are problematical. Whilst Marx claims that in Western Europe bourgeois society began to evolve in the sixteenth century and was making giant strides towards maturity in the eighteenth century, Karl Polanyi concludes that capitalism did not emerge until the Poor Law Reform Act of 1834. Capital existed in many forms—commercial capital and money-dealing capital—long before industrialization. For this reason the period between the sixteenth and eighteenth centuries is often referred to as the merchant capital phase of capitalism. Industrial capitalism, which Marx dates from the last third of the eighteenth century, finally establishes the domination of the capitalist mode of production.

For most analysts, mid- to late-nineteenth-century Britain is seen as the apotheosis of the laissez-faire phase of capitalism. This phase took off in Britain in the 1840s with the Repeal of the Corn Laws, and the Navigation Acts, and the passing of the Banking Act. In line with the teachings of classical political economy (Adam Smith and David Ricardo), the state adopted a liberal form which encouraged competition and fostered the development of a ‘self-regulating’ market society. Liberal and conservative thinkers have been keen to identify this particular phase of capitalism with the essence of capitalism itself. This has encouraged some theorists to dispense with the term completely when describing societies in the post-1945 period. Hence during the post-war long boom (1950-70), an explosion of terms—industrial society; post-industrial society; welfare statism; post-capitalist society—threatened to displace the centrality of the concept of capitalism. The waves of economic and political crises experienced since this period, however, led many commentators to reinstate the term, particularly under the influence of the new right (Hayek and Friedman). In contrast to liberals, writers in the Marxist tradition understand twentieth-century developments in terms of the movement from the laissez-faire phase of capitalism to the monopoly stage of capitalism. On the basis of Lenin's famous pamphlet, Imperialism: The Highest Stage of Capitalism, the monopoly stage is said to exist when: the export of capital alongside the export of commodities becomes of prime importance; banking and industrial capital merge to form finance capital; production and distribution are centralized in huge trusts and cartels; international monopoly combines of capitalists divide up the world into spheres of interest; and national states seek to defend capitalist interests thus perpetuating the likelihood of war (see also imperialism).

Since the extension of the franchise in nineteenth-century Britain there has been a hotly contested debate on the relationship between democracy and capitalism. The experience of the twentieth century, however, shows that there are a variety of political forms—liberal democratic, social democratic, fascist, statist, republican, monarchical—which can accompany capitalist economies. This constitutes the basis for the study of the state in capitalism.

Although the world market has always formed the backdrop to the development of capitalism, a number of recent changes, associated with both the ‘globalization of capital’, and the demise of the Soviet Union, have strengthened the claim that capitalism should now be viewed as a world system. (See also Anglo-Saxon Capitalism, Rhenish Capitalism.)

— Peter Burnham

For more information on capitalism, visit Britannica.com.

Capitalism is the name given to the market economy system, which did not come to full fruition until the restrictive practices of the medieval and mercantilist eras had been eroded. During the past two centuries world economic growth has been achieved very largely through the free market system and mainstream economic theory has provided theoretical justification for it. But it has also been subject to sustained criticism, both in the mild form that its inherent limitations required that it should be modified by government intervention and, at the extreme, that its inherent flaws would ensure its eventual collapse.

The positive case for free market capitalism is based on the liberty of individuals to pursue their objectives subject only to the constraint of law. The competitive environment, idealized in perfect competition, represents the most efficient structure. Such a structure implies that all participants benefit: competition weeds out inefficient producers and ensures that consumers pay the lowest possible price.

It is, of course, generally recognized that this is not an entirely accurate description of either the modern economy or its precursors. A range of obstacles inhibits the free working of markets. Monopoly power constitutes such an obstacle. Another type of perceived imperfection has been the interference of government policy. Monetarist theorists like Friedman have explained inflation as the result of weak control of the monetary system by the state. According to this perspective, the market system is totally satisfactory provided various imperfections can be eliminated. But one area of difficulty lies in the provision of public goods by the state because market failure means they are not adequately supplied by private producers. Examples include transport networks, law and order, welfare benefits, defence, health, and education. The difficulty lies in the fact that payment is indirect, through taxation.

More familiar criticisms have come from those whose vision of capitalism is not of an ideal state marred temporarily by imperfections. The Keynesian tradition, following the work of John Maynard Keynes, made the basic assumption that the market system needs to be managed by the state because it will seldom produce outcomes optimal for society as a whole. Adherents to this tradition believe, for example, that state intervention can reduce unemployment and generate economic growth. A far more radical view of capitalism is taken by Marxists. Marx argued that capitalism was based not on complementarity of interest but upon conflict between the classes. Further, he argued, capitalism contained the seeds of its own destruction through that conflict. The acquisition of colonies was one means of postponing eventual collapse by securing new and additional markets. Others have explained the continued failure of the capitalist world to collapse, as predicted by Marx, as a result of artificial demand created by governments in the form of military expenditure.

Mode of socioeconomic organization in which a class of entrepreneurs and entrepreneurial institutions provide the capital with which businesses produce goods and services and employ workers. In return the capitalist extracts profits from the goods created. Capitalism is frequently seen as the embodiment of the market economy, and hence may result in the optimum distribution of scarce resources, with a resulting improvement for all; this optimism is countered by pointing to the opportunity for exploitation inherent in the system.

Capitalism is an economic system dedicated to production for profit and to the accumulation of value by private business firms. In the fully developed form of industrial capitalism, firms advance money to hire wage laborers and to buy means of production such as machinery and raw materials. If the firm can sell its products for a greater sum of value than that originally advanced, the firm grows and can advance more money for a new round of accumulation. Historically, the emergence of industrial capitalism depends upon the creation of three prerequisites for accumulation: initial sums of money (or credit), wage labor and means of production available for purchase, and markets in which products can be sold.

Industrial capitalism entails dramatic technical change and constant revolution in methods of production. Prior to the British Industrial Revolution of the eighteenth and early nineteenth centuries, earlier forms of capital in Europe—interest-bearing and merchant capital—operated mainly in the sphere of exchange. Lending money at interest or "buying cheap and selling dear" allowed for accumulation of value but did not greatly increase the productive capabilities of the economic system. In the United States, however, merchant capitalists evolved into industrial capitalists, establishing textile factories in New En-gland that displaced handicraft methods of production.

Capitalism is not identical with markets, money, or greed as a motivation for human action, all of which predated industrial capitalism. Similarly, the turn toward market forces and the price mechanism in China, Russia, and Eastern Europe does not in itself mean that these economies are becoming capitalist or that all industrial economies are converging toward a single form of economic organization. Private ownership of the means of production is an important criterion. Max Weber stressed the rational and systematic pursuit of profit and the development of capital accounting by firms as key aspects of modern capitalism.

In the United States the three prerequisites for capitalist accumulation were successfully created, and by the 1880s it surpassed Britain as the world's leading industrial economy. Prior to the Civil War, local personal sources of capital and retained earnings (the plowing back of past profits) were key sources of funds for industry. Naomi Lamoreaux has described how banks, many of them kinship-based, provided short-term credit and lent heavily to their own directors, operating as investment clubs for savers who purchased bank stock to diversify their portfolios. Firms' suppliers also provided credit. Capital from abroad helped finance the transport system of canals and railroads.

During the Civil War, the federal government's borrowing demands stimulated development of new techniques of advertising and selling government bonds. After the war, industry benefited from the public's greater willingness to acquire financial securities, and government debt retirement made funds available to the capital market. In the last decades of the century, as capital requirements increased, investment banks emerged, and financial capitalists such as J. P. Morgan and Kuhn, Loeb and Company organized finance for railroads, mining companies, and large-scale manufacturers. However, U.S. firms relied less on bank finance than did German and Japanese firms, and, in many cases, banks financed mergers rather than New investment.

Equity markets for common stock grew rapidly after World War I as a wider public purchased shares. Financial market reforms after the crash of 1929 encouraged further participation. However, internal finance remained a major source of funds. Jonathan Baskin and Paul Miranti noted (p. 242) that between 1946 and 1970 about 65 percent of funds acquired by nonfinancial corporate businesses was generated internally. This figure included retained earnings and capital consumption allowances (for depreciation). Firms' external finance included debt as well as equity; their proportions varied over time. For example, corporate debt rose dramatically in the late 1980s with leveraged buyouts, but in the 1990s net equity issuance resumed.

Labor for U.S. factories in the nineteenth century came first from local sources. In textiles, whole families were employed under the Rhode Island system; daughters of farm households lived in dormitories under the Waltham system. Immigration soared in the 1840s. Initially, most immigrants came from northern and western Europe; after 1880, the majority were from southern and eastern Europe. After reaching a peak in the decade before World War I, immigration dropped off sharply in the 1920s–1930s. It rose again in the 1940s and continued to climb in subsequent decades. The origins of immigrants shifted toward Latin America, the Caribbean, and Asia. Undocumented as well as legal immigration increased. For those lacking legal status, union or political activity was especially risky. Many were employed in the unregulated informal economy, earning low incomes and facing poor working conditions.

Thus, although an industrial wage labor force was successfully constituted in the United States, its origins did not lie primarily in a transfer of workers from domestic agriculture to industry. Gavin Wright (1988, p. 201) noted that in 1910 the foreign born and sons of the foreign born made up more than two-thirds of the laborers in mining and manufacturing. Sons of U.S. family farmers migrated to urban areas that flourished as capitalism developed, but many moved quickly into skilled and supervisory positions in services as well as industry, in a range of occupations including teachers, merchants, clerks, physicians, lawyers, bookkeepers, and skilled crafts such as carpentry. Black and white sharecroppers, tenant farmers, and wage laborers left southern agriculture and found industrial jobs in northern cities, particularly during World War II. But by the 1950s, job opportunities were less abundant, especially for blacks.

Family farms using family labor, supplemented by some wage labor, were dominant in most areas outside the South throughout the nineteenth century. But in the West and Southwest, large-scale capitalist agriculture based on wage labor emerged in the late nineteenth century. Mechanization of the harvest was more difficult for fruits, vegetables, and cotton than for wheat, and a migrant labor system developed, employing both legal and undocumented workers. In California a succession of groups was employed, including Chinese, Japanese, Mexican, and Filipino workers. Labor shortages during World War I led to federal encouragement of Mexican immigration, and Mexicans remained predominant in the 1920s. They were joined in the 1930s by migrants from Oklahoma and other Plains and southern states. Federal intervention during World War II and the 1950s established bracero programs to recruit Mexican nationals for temporary agricultural work.

An extraordinary home market enabled U.S. capitalists to sell their products and enter New rounds of accumulation. Supported by the Constitution's ban on inter-state tariffs, preserved by Union victory in the Civil War, and served by an extensive transportation and communication network, the U.S. market by the 1870s and 1880s was the largest and fastest-growing in the world. Territorial acquisitions included the Louisiana Purchase of 1803, which nearly doubled the national territory, and the Mexican cession, taken by conquest in 1848 and including the area that became California. Although some acquisitions were peaceful, others illustrate the fact that capitalist development entailed violence and nonmarket coercion as well as the operation of market forces. Growth in government spending, particularly during and after World War II, helped ensure that markets and demand were adequate to sustain accumulation.

According to Alfred Chandler, the size and rate of growth of the U.S. market opened up by the railroads and telegraph, together with technological changes that greatly increased output, helped spawn the creation from the 1880s of the modern industrial enterprise, a distinctive institutional feature of managerial capitalism. Using the "visible hand" of salaried managers, large firms coordinated vast quantities of throughput in a sequence of stages of mass production and distribution. Chandler thought these firms were more efficient than their competitors, but other scholars argued their dominance rested at least partly on the deliberate creation of barriers to entry for other firms. These included efforts to monopolize raw materials and other practices restricting competition, such as rebates, exclusive dealing, tariffs, patents, and product differentiation.

Technological changes included the replacement of handicraft methods using tools and human or animal power by factories with specialized machinery and centralized power sources. Nineteenth-century U.S. capitalism was notable for two industrial processes: the American System of interchangeable parts, which eliminated the need for skilled workers to file parts (of firearms, for example) to fit together as they did in Britain; and continuous-process manufacture in flour mills and, later, factories with moving assemblies such as automobile factories. Public sector institutions played an important role in some technological developments. The Springfield armory promoted interchangeable parts in the early nineteenth century. Government funding of research and development for industry and agriculture assisted private accumulation by capitalist firms in the twentieth.

Organizational and technological changes meant that the labor process changed as well. In the last decades of the nineteenth century, firms employed semiskilled and unskilled workers whose tasks had been reduced to more homogenized activity. Work was closely supervised by foremen or machine paced under the drive system that many firms employed until the 1930s. "Scientific management," involving detailed analysis of individual movements, optimum size and weight of tools, and incentive systems, was introduced, and an engineering profession emerged.

In the early twentieth century, "welfare capitalism" spread as some firms provided leisure activities and benefits, including profit sharing, to their workers, partly to discourage unionization and reduce labor turnover. As Sanford Jacoby documented, higher worker morale and productivity were sought through new personnel management policies such as job promotion ladders internal to firms. Adoption of bureaucratic employment practices was concentrated in times of crisis for the older drive system—World War I and the Great Depression. In the 1930s, union membership also expanded beyond traditional craft unions, as strike tactics and the rise of industrial unions brought in less skilled workers. During and after World War II, union recognition, grievance procedures, and seniority rules became even more widespread. Capitalism rewarded relatively well those in primary jobs (with good wages, benefits, opportunities for promotion, and greater stability). But segmented labor markets left many workers holding secondary jobs that lacked those qualities.

Capitalism, the State, and Speculation

Capitalism involves a combination of market forces, non-market forces such as actions by the state, and what can be termed hypermarket forces, which include speculative activities motivated by opportunities for large, one-time gains rather than profits made from the repeated production of the same item. In some cases state actions created opportunities for capital gains by private individuals or corporations. In the United States, federal land grants to railroad companies spurred settlement and economic development in the West in the nineteenth century. Profits often were anticipated to come from increases in land values along railroad routes, particularly at terminal points or junctions where towns might grow, rather than from operating the railroads.

Similarly, from the mid-twentieth century, federal highway and dam construction and defense spending underpinned city building and capitalist development in the southern and western areas known as the U.S. Sun Belt. In the 1980s, real estate speculation, particularly by savings and loan institutions, became excessive and a threat to the stability of the system rather than a positive force. The corporate merger and takeover wave of the 1980s also showed U.S. capitalism tilting toward a focus on speculative gains rather than on increases in productive efficiency.

In the judicial sphere, the evolution of legal doctrines and conceptions of property in the United States during the nineteenth century promoted capitalist development. As Morton Horwitz explained, in earlier agrarian conceptions, an owner was entitled to absolute dominion and undisturbed enjoyment of a property; this could block economically productive uses of neighboring properties. At the end of the eighteenth century and beginning of the nineteenth century, the construction of mills and dams led to legal controversies over water rights that ultimately resulted in acceptance of the view that property owners had the right to develop properties for business uses. The taking of land by eminent domain facilitated the building of roads, canals, and railroads. Legal doctrines pertaining to liability for damages and public nuisance produced greater predictability, allowing entrepreneurs to more accurately estimate costs of economic improvements. Other changes affected competition, contracts, and commercial law. Horwitz concluded that by around 1850 the legal system had become much more favorable to commercial and industrial groups.

Actions by the state sometimes benefited industrial capitalism as an unintended consequence of other aims. Gavin Wright argued that New Deal farm policies of the 1930s, designed to limit cotton production, undermined the sharecropping system in the U.S. South by creating incentives for landowners to switch to wage labor. Along with minimum wage legislation, the demise of sharecropping led the South to join a national labor market, which fostered the region's development. Elsewhere, capitalist development was an explicit goal. Alice Amsden showed that beginning in the 1960s, the South Korean state successfully forged a reciprocal relation with firms, disciplining them by withdrawing subsidies if export targets were not met. It set priorities for investment and pursued macroeconomic stabilization policies to support industrialization.

State action also affected the relationship between capital and labor. In the United States, federal and state governments fiercely resisted unions during the late nineteenth century with injunctions and armed interventions against strikes. Federal legislation of the 1930s and government practices during World War II assisted unions in achieving greater recognition and bargaining power. But right-to-work laws spread in southern and western states in the 1940s and 1950s, the 1947 Taft-Hartley Act was a major setback for labor, and the federal government turned sharply against unions in the 1980s.

Varying combinations of ordinary market forces, state action, and speculative activity generated industrial capitalism by the late twentieth century in an increasing but still limited group of countries. Western Europe, which had seen a protracted transition from feudalism to capitalism, was joined in the nineteenth and early twentieth centuries by white settler colonies known as "regions of recent settlement," such as the United States, Canada, Australia, and New Zealand. Argentina and South Africa shared some features with this group. Capitalism in regions of recent settlement was less a transformation of existing economic structures than an elimination of native populations and transfer of capital, labor, and institutions from Europe to work land that was abundantly available within these regions.

However, capitalism was not simply imported and imposed as a preexisting system. Scholars have debated whether farmers in New England and the Middle Atlantic region in the seventeenth to nineteenth centuries welcomed or resisted the spread of markets and the extent to which accumulation of wealth motivated their actions. In their ownership of land and dependence on family labor they clearly differed from capitalist farms in England whose proprietors rented land and hired wage labor. Holding the independence of the farm household as a primary goal, these U.S. farmers also were determined to avoid recreating a European feudal social structure in which large landowners held disproportionate economic and political power.

A final group of late industrializers—Japan from the late nineteenth century and, after World War II, Korea, Taiwan, Brazil, India, Turkey, and possibly Mexico—took a path to capitalism based on what Amsden called "industrialization through learning." Like European late-comers such as Germany, Italy, and Russia, these countries took advantage of their relatively backward status. Generally, they borrowed technology rather than inventing or innovating, although Germany did innovate and Japan became capable of innovation in some areas.

Some late industrializers relied heavily on exports and benefited from participation in the international economy. But home markets were also important, and among the most successful Asian countries were those with land reforms and relatively equal income distributions. In this respect they resembled regions of recent settlement that were not dominated by concentrated landownership. For countries in the periphery, moreover, industrial capitalism could be fostered by delinking from the international economy. Some Latin American countries and Egypt saw their manufacturing sectors strengthen when the crises of the 1920s–1930s weakened their ties with the center. Delinking allowed them to follow more expansionary monetary and fiscal policies during the Great Depression than did the United States.

Capitalist and Noncapitalist Forms of Organization

The development of capitalism and free wage labor was intimately bound up with unfree labor forms and political subordination. Coexistence of capitalist forms with noncapitalist forms has continued into the twentieth century. Immanuel Wallerstein argued that during 1450–1640, a capitalist world-economy emerged that included very different labor forms: free labor (including yeoman farmers) in the core, slavery and coerced cash-crop labor in the periphery, and sharecropping in the semiperiphery. From the sixteenth to the nineteenth centuries, the Baltic grain trade provided food for western European cities while intensifying serfdom in eastern Europe. Eighteenth-century sugar plantations in the Caribbean using African slaves bought manufactured exports from Britain and food from the New England and Middle Atlantic colonies, which also then could import British manufactures.

In the United States, slavery, sharecropping, and petty production were noncapitalist forms that interacted with capitalist forms. Petty production is small-scale production that can be market-oriented but is not capitalist. It relies primarily on individual or family labor rather than wage labor, and producers own their means of production. Slavery, sharecropping, and petty production were especially important in agriculture, although some slaves were used in industry and the factory system did not universally eliminate artisan producers in manufacturing. In some sectors, specialty production by petty producers in industrial districts coexisted with mass production of more standardized products. Slaves and, after the Civil War, sharecroppers in the U.S. South produced the cotton that helped make textiles a leading industrial sector in both Britain and the United States. Slave owners purchased manufactured products produced by northern firms. Capitalist production and free wage labor thus depended on noncapitalist production for a key input and for some of its markets.

Petty producers in U.S. agriculture participated in markets and accumulated wealth, but unlike capitalist firms, accumulation was not their primary motivation. According to Daniel Vickers, U.S. farm families from initial settlement to the beginnings of industrialization held an ideal of "competency"—a degree of comfortable independence. They did not seek self-sufficiency, although they engaged in considerable production for their own use. They sold some of their produce in markets and could be quite interested in dealing for profit but sought to avoid the dependence on the market implied by a lifetime of wage labor.

As David Weiman explained, over the life cycle of a successful farm family more family labor became available and farm capital increased, allowing the household to increase its income and purchase more manufactured commodities. Farm households existed within rural communities that had a mix of private and communal social relations, some of which tended to limit market production and private accumulation of wealth. But over time the activities of petty producers contributed to a process of primitive accumulation—accumulation based on pre-or noncapitalist social relations, in which capital does not yet create the conditions for its own reproduction—which ultimately undermined the system of petty production in rural communities.

Noncapitalist forms of organization also include household production by nonfarm families and production by the state. These spheres have been variously conceived as supporting capitalism (for example, by rearing and educating the labor force), financially draining and undermining capitalism (in the case of the state), or providing an alternative to capitalism. Household production shrank over the nineteenth and twentieth centuries as goods and services formerly provided within households were supplied by capitalist firms. Production by the state expanded with defense spending, the rise of the welfare state, and nationalization in Western Europe and Latin America. Some of these trends contributed to the shift from manufacturing to services that was an important feature of capitalist economies in the twentieth century.

In addition to depending on noncapitalist economic forms, capitalism involved political subordination both domestically and internationally. In some countries, labor unions were suppressed. Political subordination of India within the British Empire was central to the smooth operation of the multilateral trade and payments network underlying the "golden age" of world capitalism that lasted from the last third of the nineteenth century to the outbreak of World War I in 1914. India's purchases of cheap manufactures and invisibles such as government services led to a trade deficit with Britain. Its trade surplus with India gave Britain the means to buy from other European countries such as Germany and France, stimulating their industrialization. On the monetary side, control of India's official financial reserves gave Britain added flexibility in its role as the world's financial center.

Uneven Capitalist Development

Both on a world scale and within individual countries, capitalist development is uneven: spatially, temporally, and socially. Some countries grew rapidly while others remained poor. Industrial leadership shifted from Britain to Germany and the United States at the end of the nineteenth century; they in turn faced New challengers in the twentieth. Within countries, industrial regions boomed, then often declined as growth areas sprang up elsewhere.

The textile industry in New England saw widespread plant closings beginning in the 1920s, and employment plummeted between 1947 and 1957. Production grew in southeastern states and was an important source of growth in the 1960s–1970s. But in the 1980s, textile production began shifting to even lower-cost locations overseas. Deindustrialization in the Midwest became a national political issue in the 1970s, as firms in the steel, automobile, and other manufacturing industries experienced competition from late industrializers and other U.S. regions. Growth in Sun Belt states was due to new industries and services as well as the relocation of existing industries.

Similarly, capitalism has been punctuated over time by financial crashes and by depressions with large drops in real output and employment. Epochs of growth and relative stability alternated with periods of