The Three Historic Phases of Capitalism and How They Differ

Understanding Mercantile, Classical and Keynesian Capitalism

Growing balls of money represent the historical evolution of capitalism through three different epochs.
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Most people today are familiar with the term "capitalism" and what it means. But did you know that it has existed for over 700 years? Capitalism today is a much different economic system than it was when it debuted in Europe in the 14th century. In fact, the system of capitalism has gone through three distinct epochs, beginning with mercantile, moving on to classical (or competitive), and then evolving into Keynesianism or state capitalism in the 20th century before it would morph once more into the global capitalism we know today.

The Beginning: Mercantile Capitalism, 14th-18th centuries

According to Giovanni Arrighi, an Italian sociologist, capitalism first emerged in its mercantile form during the 14th century. It was a system of trade developed by Italian traders who wished to increase their profits by evading local markets. This new system of trade was limited until growing European powers started to profit from long-distance trade, as they began the process of colonial expansion. For this reason, American sociologist William I. Robinson dates the beginning of mercantile capitalism at Columbus’s arrival in the Americas in 1492. Either way, at this time, capitalism was a system of trading goods outside of one’s immediate local market in order to increase profit for the traders. It was the rise of the “middle man.” It was also the creation of the seeds of the corporation—the joint stock companies used to broker the trade in goods, like the British East India Company. Some of the first stock exchanges and banks were created during this period as well, in order to manage this new system of trade.

As time passed and European powers like the Dutch, French, and Spanish rose to prominence, the mercantile period was marked by their seizure of the control of trade in goods, people (as enslaved individuals), and resources previously controlled by others. They also, through colonization projects, shifted production of crops to colonized lands and profited off of enslaved and wage-enslaved labor. The Atlantic Triangle Trade, which moved goods and people between Africa, the Americas, and Europe, thrived during this period. It is an exemplar of mercantile capitalism in action.

This first epoch of capitalism was disrupted by those whose ability to accumulate wealth was limited by the tight grasp of the ruling monarchies and aristocracies. The American, French, and Haitian Revolutions altered systems of trade, and the Industrial Revolution significantly altered the means and relations of production. Together, these changes ushered in a new epoch of capitalism.

The Second Epoch: Classical (or Competitive) Capitalism, 19th century

Classical capitalism is the form we are probably thinking of when we think about what capitalism is and how it operates. It was during this epoch that Karl Marx studied and critiqued the system, which is part of what makes this version stick in our minds. Following the political and technological revolutions mentioned above, a massive reorganization of society took place. The bourgeoisie class, owners of the means of production, rose to power within newly formed nation-states and a vast class of workers left rural lives to staff the factories that were now producing goods in a mechanized way.

This epoch of capitalism was characterized by free market ideology, which holds that the market should be left to sort itself out without intervention from governments. It was also characterized by new machine technologies used to produce goods, and the creation of distinct roles played by workers within a compartmentalized division of labor.

The British dominated this epoch with the expansion of their colonial empire, which brought raw materials from its colonies around the world into its factories in the UK at low cost. For example, sociologist John Talbot, who has studied the coffee trade throughout time, notes that British capitalists invested their accumulated wealth in developing cultivation, extraction, and transportation infrastructure throughout Latin America, which fostered a huge increase in flows of raw materials to British factories. Much of the labor used in these processes in Latin America during this time was coerced, enslaved, or paid very low wages, notably in Brazil, where enslavement was not ended until 1888.

During this period, unrest among the working classes in the U.S., in the UK, and throughout colonized lands was common, due to low wages and poor working conditions. Upton Sinclair infamously depicted these conditions in his novel, The Jungle. The U.S. labor movement took shape during this epoch of capitalism. Philanthropy also emerged during this time, as a way for those made wealthy by capitalism to redistribute wealth to those who were exploited by the system.

The Third Epoch: Keynesian or "New Deal" Capitalism

As the 20th century dawned, the U.S. and nation states within Western Europe were firmly established as sovereign states with distinct economies bounded by their national borders. The second epoch of capitalism, what we call “classical” or “competitive,” was ruled by free-market ideology and the belief that competition between firms and nations was best for all, and was the right way for the economy to operate.

However, following the stock market crash of 1929, free-market ideology and its core principles were abandoned by heads of state, CEOs, and leaders in banking and finance. A new era of state intervention in the economy was born, which characterized the third epoch of capitalism. The goals of state intervention were to protect national industries from overseas competition, and to foster the growth of national corporations through state investment in social welfare programs and infrastructure.

This new approach to managing the economy was known as “Keynesianism,” and based on the theory of British economist John Maynard Keynes, published in 1936. Keynes argued that the economy was suffering from inadequate demand for goods, and that the only way to remedy that was to stabilize the populace so that they could consume. The forms of state intervention taken by the U.S. through legislation and program creation during this period were known collectively as the “New Deal,” and included, among many others, social welfare programs like Social Security, regulatory bodies like the United States Housing Authority and Farm Security Administration, legislation like the Fair Labor Standards Act of 1938 (which put a legal cap on weekly work hours and set a minimum wage), and lending bodies like Fannie Mae that subsidized home mortgages. The New Deal also created jobs for unemployed individuals and put stagnant production facilities to work with federal programs like the Works Progress AdministrationThe New Deal included regulation of financial institutions, the most notable of which was the Glass-Steagall Act of 1933, and increased rates of taxes on very wealthy individuals, and on corporate profits.

The Keynesian model adopted in the U.S., combined with the production boom created by World War II, fostered a period of economic growth and accumulation for U.S. corporations that set the U.S. on course to be the global economic power during this epoch of capitalism. This rise to power was fueled by technological innovations, like radio, and later, television, that allowed for mass mediated advertising to create demand for consumer goods. Advertisers began selling a lifestyle that could be achieved through consumption of goods, which marks an important turning point in the history of capitalism: the emergence of consumerism, or consumption as a way of life.

The U.S. economic boom of capitalism’s third epoch faltered in the 1970s for several complex reasons, which we won’t elaborate here. The plan hatched in response to this economic recession by U.S. political leaders, and heads of corporation and finance, was a neoliberal plan premised on undoing much of the regulation and social welfare programs created in the previous decades. This plan and its enactment created the conditions for the globalization of capitalism, and led into the fourth and current epoch of capitalism.

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Cole, Nicki Lisa, Ph.D. "The Three Historic Phases of Capitalism and How They Differ." ThoughtCo, Apr. 5, 2023, Cole, Nicki Lisa, Ph.D. (2023, April 5). The Three Historic Phases of Capitalism and How They Differ. Retrieved from Cole, Nicki Lisa, Ph.D. "The Three Historic Phases of Capitalism and How They Differ." ThoughtCo. (accessed May 31, 2023).