When asked to define capitalism, most people describe a free market system where businesses are left to pursue profits without intervention from governments. That's not all there is to capitalism, however. The system is based on a whole theory of human society with a distinctive history and set of assumptions. Today, virtually every western economy is organized along capitalist lines. Global capitalism occurs when the ideology transcends national borders.
What Is Meant by Capitalism?
Within a capitalist system, private individuals and corporations own the means of production – the land, factories, machinery and natural resources required to manufacture and produce goods. More importantly, they derive income from such ownership by using their wealth to create more wealth. The basic driver for these wealth owners is the pursuit of profit. Under capitalism, the owners of production compete to produce better goods and earn a greater share of the market. It's this level of competition, driven by the pursuit of growth and profits, that helps keep prices from rising too high.
In capitalist corporations, the owners are known as shareholders. They exercise a level of control over the company depending on how many shares they own, and receive a share of the profits in return for their investment. Workers, by contrast, sell their labor to the corporation for a wage. This means that labor is a commodity like any other. In the most basic sense, corporations will seek to extract more value from labor than they pay for it, enabling them to make greater profits. What you see in a capitalist society, then, is a compartmentalized workforce where some workers earn far more than others. That's because some types of labor are understood to have a greater value.
Capitalism cannot function on its own. It needs to operate within a culture and political system that will support and legitimize capitalist values and make this particular worldview seem right. In particular, capitalism needs the support of a free market economy where goods are bought and sold according to the laws of supply and demand. By this law, when demand goes up, prices rise. Capitalists will increase production to get a share of these profits. This keeps people employed and ensures that goods are produced according to consumer need.
Capitalism also needs the support of a consumer society. The system cannot function unless people are willingly consuming the output of all this production.
What Is Meant by Global Capitalism?
Global capitalism is capitalism that transcends national borders. It is known as the fourth epoch of capitalism in recognition of the three periods or epochs that came before it. To give this some context, here's a short history of how capitalism has developed into the global system we have today:
Mercantile capitalism, the first epoch of capitalism, dates back to the 14th century. It was popularized by European traders who sought to increase their profits by looking outside of local markets. During this time, merchants started traveling to distant places where they could cheaply acquire resources and trade with other nations. Banks and governments financed these ventures in return for shares in the mercantile company and its profits. The early American colonies practiced mercantile capitalism, but colonists were only permitted to trade with their mother country, such as France or Great Britain.
Classical capitalism, the second epoch, more closely resembles the system that we recognize today. For the first time, entire countries began to organize on free market capitalist principles, including the United States. Economists like Adam Smith debated the role of the government in the capitalist economy and concluded that economic value came when the marketplace regulated itself through self-interest, competition, and supply and demand without interference from the government. This is known as hands-off, or laissez-faire, economics. The theory is that each person, by looking out for himself, helps to ensure the best outcome for all.
A major component of classical capitalism was the launch of capital markets that set prices for goods, currency, stocks and financial instruments according to the laws of supply and demand. Capital markets allowed corporations to raise funds to expand.
Keynesian capitalism, the third epoch, launched with the dominance of laissez-faire ideologies and the belief that governments should take a hands-off approach to capitalism. However, following the stock market crash of 1929, questions were raised about free market ideology and whether the market could, in fact, self-regulate. Several nations, including the U.S., moved toward government intervention as a way of regulating the excesses of monopolies and maintaining a level playing field for smaller businesses. Policies were introduced to protect national industries from overseas competition and to provide for those who could not sell their labor and were disenfranchised by capitalism, such as the elderly, sick and disabled.
Global capitalism is the fourth epoch of capitalism. It differs from the other epochs in one key way: The system, once organized and regulated within nations to protect them, now transcends national borders. It's based on the same ideology as classical capitalism, only now the holders of the means of production extend their reach to everywhere around the globe, monetizing cheap labor and resources, and profiting as best they can. Integrated globally, this fourth epoch is backed by international policies that support the free movement and trade of goods. This massively increases the flexibility that corporations have to choose where and how they operate.
The Characteristics of Global Capitalism
Five core characteristics underpin global capitalism as it stands today:
- Production takes place on the global stage. Corporations can produce goods in a variety of places around the world. For example, a car manufacturer might make windshields in China and engine parts in India, then assemble the finished item in the United States. Companies can choose locations that hold cheap resources and minimize the impact of import and export tariffs. Thus, they acquire greater wealth. Global corporations like Walmart are an extreme example of globalized capitalism when they source and distribute products from suppliers all over the world without producing a single item themselves.
- Labor can be sourced around the world. As corporations expand their production across borders, they are no longer limited to using labor from their home country. They can draw from an entire globe's worth of labor and locate production wherever workers are cheaper or more highly skilled. This circumvents national government intervention like labor laws and puts downward pressure on the wages of unskilled workers.
- The financial system operates globally. When corporations generate and hold wealth around the world, taxing that wealth becomes very difficult. It is possible for global corporations to develop complex organizational structures and spread wealth across multiple jurisdictions to minimize tax liabilities. Playing the system in this way gives them great power to avoid corporate taxes on accumulated wealth.
Power relations are transnational. There now exists a class of transnational capitalists that have the power to shape the policies of trade, finance and production at a global level –
policies that trickle down to national and state governments. Globalization has expanded the influence that corporations hold in society and that gives them great power to impact the everyday lives of people all over the world.
5. Global system of governance. Global capitalism requires a new system of transnational governance. Core institutions such as the World Trade Organization, the United Nations, the World Economic Forum, the International Monetary Fund, the World Bank and the G20 make the rules and adjudicate global trade. They set an agenda for global capitalism that nations must comply with if they wish to participate in the system.
How Global Capitalism Affects a Business
Every U.S. business operates in the global capitalist economy, so events within that system can affect you both positively and negatively. Some key impacts include:
Global markets: Since goods are sourced and traded internationally, events in the global supply chain can impact your business, even if you operate locally. For example, if the price of fuel increases, and you deliver goods to your customers, your expenses will go up. This cuts into your profits.
The multinational threat: Large multinationals have the ability to source labor wherever it is the cheapest and to forge partnerships with overseas factories. These strategies cut the cost of production. With lower production costs, multinationals can undercut local competitors that are tied to using home-grown labor and resources at a higher cost. Unregulated, the large players can eliminate local competitors in a pricing war. The multinational is then free to raise prices again, having established a monopoly.
Currency exchange: Changes in the exchange rate mean uncertainty for your business if you buy materials from overseas or ship products abroad. For example, if you agree to pay 20,000 euros to your Greek manufacturer for a shipment of goods and the exchange rate sits at 1.16 dollars to the euro, your invoice would be worth $23,200. If the exchange rate moved to 1.18, it would raise the payment to your supplier to $23,600, which means you're paying an additional $400 for the same shipment of goods.
Increased competition: Capitalism demands that businesses provide customers with what they want at the price they are willing to pay. Competition among businesses keeps prices low, so there's a relentless drive to make products as efficiently as possible to increase margins and maximize profit. With global capitalism, competition comes from overseas, as well as from domestic competitors.
Innovation: Because it is competition driven, capitalism will always reward a company's ability to adapt and change. Innovation in the form of technological advances and the development of better products and production methods is essential if you are to increase profit margins, maintain market share and survive financially.
Multiple regulatory environments: As companies trade globally, they need to navigate a complex regulatory environment. Legal standards for labor, health and safety, environmental protection and data protection vary wildly across regions, and corporations must keep abreast of these regulations to avoid any missteps.
Global Capitalism Examples
To be a truly capitalist society, the economy must protect the free market and private ownership rights at all costs. However, government regulation tends to assert itself, which alters capitalism and global capitalism to varying degrees. So, while the United States is an example of a nation that has generally embraced global free trade and free markets, it is not the best example. In fact, it doesn't even rank within the top 10 nations with the freest markets when the tax burden, fiscal freedom, trade freedom and debt levels are taken into account.
According to The Heritage Foundation, the top 10 countries with capitalistic economies as of 2018 are:
- Hong Kong
- New Zealand
- United Kingdom
- United Arab Emirates
While the United States ranks above world averages, it currently sits in 18th place, sandwiched between the Netherlands and Lithuania. Weak spots include a low level of business freedom due to the heavy corporate tax burden and other liabilities that restrict the investing power of corporations. Recent tax reforms could boost business confidence and inwards investment, however, further integrating the U.S. into the global capitalist economy.
- Thought Co: What Is Capitalism, Exactly?
- Thought Co: The Three Historic Phases of Capitalism and How They Differ
- Thought Co: 5 Things That Make Capitalism "Global"
- Investopedia: Main Characteristics of Capitalist Economies
- Heritage: 2018 Index of Economic Freedom, Country Rankings
- Heritage: 2018 Index of Economic Freedom, United States
Jayne Thompson earned an LL.B. in Law and Business Administration from the University of Birmingham and an LL.M. in International Law from the University of East London. She practiced in various “Big Law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com.