Explainer Features of Capitalism
Accumulation and Investment of Capital
It’s probably not a surprise that capital is a defining feature of capitalism. Capital can refer to money, plain and simple. But, it’s more helpful to think of capital as money that’s used to make more money – money that you invest in a project or business with the goal of growing your pile of coins.
John’s money becomes capital when it is used to rent a space, buy espresso machines, and purchase supplies.
Imagine someone – we’ll call him John – saves $10,000 and uses it to open a small coffee shop.
John’s goal is not simply to spend the $10,000, but to earn more than $10,000 back through coffee sales. If his business succeeds, the original money – the capital – has generated more money.
John can use his profit as capital to invest back into his business, with the intention to increase profits even more.
John’s money becomes capital when it is used to rent a space, buy espresso machines, and purchase supplies.
1
Imagine someone – we’ll call him John – saves $10,000 and uses it to open a small coffee shop.
John’s goal is not simply to spend the $10,000, but to earn more than $10,000 back through coffee sales. If his business succeeds, the original money – the capital – has generated more money.
4
John can use his profit as capital to invest back into his business, with the intention to increase profits even more.
Imagine someone – we’ll call him John – saves $10,000 and uses it to open a small coffee shop.
John’s money becomes capital when it is used to rent a space, buy espresso machines, and purchase supplies.
John’s goal is not simply to spend the $10,000, but to earn more than $10,000 back through coffee sales. If his business succeeds, the original money – the capital – has generated more money.
4
John can use his profit as capital to invest back into his business, with the intention to increase profits even more.
This cycle – invest, earn profit, reinvest – is at the heart of how capitalism works.
He takes the money that the shop earns and puts it toward opening a second location.
Let’s say that after a year, John’s first shop is profitable.
The business grows from a single shop into a small chain.
John might borrow some additional money from a bank, or he might bring in outside investors who give him money in exchange for a share of future profits.
He takes the money that the shop earns and puts it toward opening a second location.
Let’s say that after a year, John’s first shop is profitable.
The business grows from a single shop into a small chain.
John might borrow some additional money from a bank, or he might bring in outside investors who give him money in exchange for a share of future profits.
Let’s say that after a year, John’s first shop is profitable.
He takes the money that the shop earns and puts it toward opening a second location.
John might borrow some additional money from a bank, or he might bring in outside investors who give him money in exchange for a share of future profits.
The business grows from a single shop into a small chain.
At this larger scale, capital is used in more complex ways. John might invest in better equipment, a larger building, advertising, delivery trucks, or even software to manage inventory and payroll. Each of these purchases is meant to increase productivity and sales. If the new investments succeed, they generate more for John and his investors than the original amount invested.
The same pattern appears in much larger businesses. A manufacturing company might invest millions of dollars in a new factory or in advanced machinery that can produce goods faster and more cheaply. A technology company might invest heavily in research and development, hoping to create a new product that will dominate the market. In both cases, money is used for expansion and future gain.
As businesses grow, they often hire more workers, produce more goods or services, and compete with other firms. Competition pushes businesses to keep reinvesting their profits – into better technology, more efficient production, or new products – so they can keep or attract new customers. Those that successfully accumulate and reinvest capital tend to grow. Those that fail to do so may shrink or go out of business.
This constant reinvestment of profits is what drives economic growth in a capitalist system. Over time, accumulated capital leads to larger enterprises, more production, and new industries. In theory, as capital builds and is reinvested, the overall economy expands: more goods are produced, new services are created, and total wealth increases.
Just how much have the world’s economies grown under capitalism?
To answer this, we can look at how the world’s gross domestic product, or GDP, has changed over time. GDP represents the monetary value of all of the goods produced and services offered across the world’s economies.
Global GDP by Year
$150 trillion
100
50
0
1500
1600
1700
1800
1900
2000
Source: Our World in Data
Just how much have the world’s economies grown under capitalism?
To answer this, we can look at how the world’s gross domestic product, or GDP, has changed over time. GDP represents the monetary value of all of the goods produced and services offered across the world’s economies.
Global GDP by Year
$150 trillion
100
50
0
1500
1600
1700
1800
1900
2000
Source: Our World in Data
Just how much have the world’s economies grown under capitalism?
To answer this, we can look at how the world’s gross domestic product, or GDP, has changed over time. GDP represents the monetary value of all of the goods produced and services offered across the world’s economies.
Global GDP by Year
$150 trillion
100
50
0
1500
1600
1700
1800
1900
2000
Source: Our World in Data
John’s coffee shop begs a question: Where did his original $10,000 come from?
Adam Smith referred to this as previous accumulation – the original money or assets, like land, that entrepreneurs use to launch a business in the first place.
A weaver cannot apply himself entirely to his peculiar business, unless there is beforehand stored up somewhere, either in his own possession or in that of some other person, a stock sufficient to maintain him, and to supply him with the materials and tools of his work, till he has not only completed but sold his web.
Adam Smith, The Wealth of Nations, Book II, Chapter 1
Maybe John earned $10,000 by working a job. Or, maybe he received a $10,000 check from his grandma as a graduation gift.
The first explanation fits comfortably within Smith’s idea: individuals need some initial stock of money or resources in order to begin production and investment. But the second possibility raises a question that interested Karl Marx. How did some people come to possess wealth and property in the first place – wealth that could be invested, passed down, and used to generate even more wealth?
Marx argued that understanding capitalism requires examining the origins of wealth and property. He used the term primitive accumulation to describe the historical processes through which land, labor, and resources were concentrated in the hands of some people, while others were separated from accessing them.
At the individual level, wealth is often transferred through inheritance, gifts, family networks, and unequal access to opportunity. This enables further investment and accumulation to be passed down across generations. As a result, the initial assets compound over time, widening the wealth gap between people with access to capital and those without.
Marx and many later historians and economists have also highlighted how these patterns appear at larger scales, and in deeply harmful ways. Historically, for example, some global powers were able to accrue massive wealth by claiming control over land, resources, and labor on faraway continents. Through reinvestment and expanded exploitation, the wealth acquired through colonization and enslavement grew, contributing to patterns of global inequality that persist today.
Episode Connections
- Episode 3: Ships, Swords, and Fences: As Europe moves from feudalism to capitalism, European powers take to the seas, colonizing lands on faraway continents, transporting and enslaving millions of Africans, and accumulating massive amounts of wealth in the process.
- Episode 5: A New Thing in Human History: In the century after America’s founding, industrialists take advantage of new technologies and systems of mass production to turn their money into a lot more money, establishing the new nation as an economic powerhouse.
- Episode 9: At the Tipping Point: In the early 1970s, a team of young scientists explores what might happen if we pursue endless economic growth on a planet with finite resources — and it’s not good. Surprisingly, few people heed their advice.
- Episode 10: The Extracted: The effects of colonization linger in today’s cocoa trade: European chocolate manufacturers reap massive profits while African growers struggle to eke out a living.