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Introduction:

Capitalism has over the past 500 years been a very dynamic way to organize society. One of the keys to understanding why this is so is to look at the nature of economic competition. The classical liberal economist Adam Smith wrote extensively on this topic in his book Wealth of Nations in 1776. He showed that when many capitalists compete to make a profit on their production the most efficient among them will be able to expand and prosper while others may end up going bankrupt because customers will choose to buy the best products at the lowest price. Adam Smith looked at capitalist production in England and showed that it led to new inventions and more and more efficient organization of production. Adam Smith was no socialist and is still highly regarded among advocates for capitalism but he was a rational man.

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Karl Marx, however, was very inspired by Adam Smith&rsquo;s sharp analysis but went further to show that while capitalist competition drives change it also creates crises. One problem he saw was the tendency of the profit rate to fall which he explained mathematically. He pointed out that an over-production crisis occurs when there are not enough buyers for the products of capitalist production, the reason being that the workers are never paid the full value of what they have produced and therefore are short of money to pay for the goods of all capitalists.

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The 1700s and 1800s in Europe and North America was a time of competitive capitalism with many smaller capitalists pushing to improve their productions. At the same time European nations expanded their colonial empire first in Asia and later in Africa so as to get cheap raw materials, food and other product for their industries. The exploitation of other continents was therefore an important element of this era of competitive capitalism in Europe. Karl Marx himself made a living as a free lance journalist and wrote extensively for American newspapers about British colonial plunder of Asia (he lived before the colonization of Africa).

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