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There is much debate over how to define capitalism. Some proponents of capitalism (like Milton Friedman) emphasize the role of (presumably efficient) free markets, which, they claim, promote freedom and democracy. For many (like Immanuel Wallerstein), capitalism hinges on the elaboration of an economic system in which goods and services are traded in markets, and capital goods belong to non-state entities, onto a global scale. For others (like Karl Marx), it is defined by the creation of a labor market in which most people had to sell their labor-power in order to survive. As Marx argued (see also Hilaire Belloc) capitalism is also distinguished from other market economies with private ownership by the concentration of the means of production in the hands of a few.
According to Karl Marx, the treatment of labor as a commodity led to people valuing things more according to their price rather than their usefulness (see commodity fetishism) and to an expansion of the system of commodities. Marx observed that some people bought commodities in order to use them, while others bought them in order to sell elsewhere at a profit. Much of the history of late capitalism involves what David Harvey called the "system of flexible accumulation" in which more and more things become commodities, the value of which is determined by their exchange rather than by their use. Thus not only are pins commodities; shares of ownership in a factory that makes pins become commodities; then options on shares of stock become commodities; then portions of interest rates on bonds become commodities, and so on. The predominance of commodity speculation in modern capitalism very much shapes its results.
The following example introduces many of the ideas involved in capitalism. When starting a business, the initial owners typically provide some money (the Capital) which is used by the business to buy or rent some means of production. For example, the enterprise may buy or rent a piece of land and a building; it may buy machinery and hire workers ( labor-power). The commodities produced by the workers become the property of the capitalist, and are sold by the workers on behalf of the capitalist. The money from sales also becomes the property of the capitalist. The workers deposit the money into the capitalist's bank account. Once the capitalist receives this money, he or she pays the workers a portion for their labor, pays other overhead costs, and keeps the rest as profit. If more money is needed than the initial owners are willing or able to provide, the business may to borrow a limited amount of extra money with a promise to pay it back with interest -- in effect it may rent more capital. The business is granted a degree of legal authority, and control, over a set of factors of production (as economists call them). The business can register as a corporate entity, meaning that it can act as a type of virtual person in many matters before the law (see Companies for listing of such entities). The owners can pay themselves some of the income derived from the business ( Dividends), sell shares of stock in the company, or they can sell all of the equipment, land, and other assets, and split the proceeds between them.
Traditionally, capitalist economies have had corporations working along the lines of the above example existing in parallel with other types of organisation such as governments, sole traders, partnerships and sometimes cooperatives, credit unions, and other entities. Observers do not always agree which of these organisations, or which features of them are part of capitalism, although most often companies, or many features of their operation, are included as part of the definition.
Additionally, many of the characteristics and techniques of business workings in the above example existed before capitalism, and many have continued to be added. So this leaves much room for debate. However, many people agree that it was around the time when share-trading in corporate bodies became common and widely understood that capitalism can be said to have begun, even though there is often disagreement that it was the share-trading itself that defined capitalism. Such share trading first took place widely in Europe during the 17th century and continued to develop and spread thereafter, although the word "capitalism" itself did not come into use until the 19th century.
One can view shares as converting company ownership into a commodity - the ownership rights are divided into units (the shares) for ease of trading in them. In a similar way, one can view bonds as a commoditisation of debt. Other financial instruments have come into being since the early years of capitalism that have commoditised fluctuations in markets, future prices, classes of items, and many other things. Increases in communications technologies have helped facilitate an increase in the number and availability of financial instruments, and the ease of trading.
In the bulk of capitalist economies, a predominant proportion of productive capacity has belonged to corporate bodies such as companies. Therefore, to a large degree, authority over productive capacity has resided with the owners of companies. Within legal limits and the financial means available to them, the owners of each company can decide how it will operate. This normally includes deciding the following things (among many others):
In larger companies, authority is usually delegated in a hierarchical or bureaucratic system of management. When company ownership is spread among many shareholders, the shareholders generally have votes in the exercise of authority over the company in proportion to the size of their share of ownership.
Importantly, the owners receive any profits or proceeds generated by the productive capacity that they own - sometimes in the form of dividends, other times in the form of profits being re-invested in the capacity that is owned (and " capital gains"). The price at which ownership of productive capacity sells is generally in rough proportion to the profits currently being generated and/or expected to be generated by that productive capacity in the future. There is therefore a financial incentive for owners to exercise their authority in ways that increase the productive capacity of what they own. Various owners are motivated to various degrees by this incentive -- some give away a proportion of what they own, others seem very driven to increase their holdings. Nevertheless the incentive is always there, and it is credited by many as being a key aspect behind the growth exhibited by capitalist economies. Meanwhile, some critics of capitalism claim that the incentive for the owners is exaggerated and that it results in the owners receiving money that rightfully belongs to the workers, while others point to the fact that the incentive only motivates owners to make a profit - something which may not necessarily result in a positive impact on society.
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