Capitalism in Europe was preceded by feudalism. Under feudalism, land was overwhelmingly the main means of production. Land was owned by feudal lords, and a large number of peasants bound to the land worked it in small farms. There was also a smaller number of artisans, who owned their meagre means of production. The surplus product of these peasants and artisans, the direct producers, was extracted by law, custom and force by feudal lords.

In order to maintain their power, the feudal lords tried to maximise the rent they extracted from the peasants. The peasants struggled in various ways to end, or at least curtail, this extraction of the surplus, sometimes by open revolt, sometimes by fleeing the land.

Over the centuries of feudal society, as the surplus grew to some extent, trade also grew. Around that trade grew towns where merchants enjoyed some political power. These merchants chafed under certain feudal restrictions and irrationalities. Since trade suffered under the multiple authorities and taxes of various feudal lords, it was in the interest of the merchants to promote a strong central nation-state, as developed from the 15th century. Yet the merchants were hardly an anti-feudal force: they fed off the declining feudal order and prospered under it, enjoying official monopolies and high margins. Merchant capital did not lead to industrial capital through its own development.

Nevertheless, the changes helped germinate far-reaching changes in religious doctrines and philosophy, mathematics and science. On the one hand religious movements, known as the Protestant Reformation, arose against the authority of the Catholic Church (which, located in Rome, was itself a great feudal landlord throughout Europe, irksome to rising nation-states like England). Even more radical was the revolution in mathematics, science and philosophy brought about by Francis Bacon, Copernicus, Galileo, Descartes, Leibniz and Newton: now men learnt that the universe did not revolve around the earth, rather the earth revolved around the sun, and the laws governing its motion were discovered and propagated.

The associated change in the world-view of the intelligentsia has been termed the Enlightenment: in the new ideology, the force of human Reason now unseated established authority, such as the Church and the King.

It was that the British waged a civil war and eventually chopped off the head of their King in 1649; and the French in 1789 began a far more profound revolution, not only decapitating their royalty but sweeping away feudalism much more comprehensively. The French revolution declared “liberty, equality, fraternity” as its motto.

These terrible upheavals were essential to the growth of industrial capitalism:

First, the improved methods of agriculture introduced on consolidated, larger farms by the profit-oriented landowners multiplied output and made it possible to feed a much larger workforce outside agriculture;

Secondly, the huge numbers of peasants thus ousted from agriculture added greatly to the workforce available for manufacturing goods.

As the trade grew, merchants, seeking to increase production, began supplying materials and purchasing the finished goods from the craftsmen; the latter still owned their own tools, but they largely lost their independence and were now working for the merchant.

However, what definitively marked the emergence of capitalism was not simply production for the market, but the system in which all the means of production – the tools/machines, the raw materials, and the location – belonged to the capitalist, and the labourer had nothing to sell but his/her own labour power; labour power had itself become a commodity bought and sold on the market.

Feudalism had needed the use of custom, law and force to extract the surplus from the producers, who possessed plots of land, or artisans’ tools/equipment, but under capitalism it was no longer necessary to rely on such non-economic methods. The worker had the choice of working for the capitalist. Surplus extraction now was carried out by the impersonal laws of the market.

The new capitalists demanded, and got, the abolition of monopolies and privileges in trade and industry on which merchant capital had fattened under feudalism, and thus established free competition at home.

Capitalists also needed to be assured of a market. While the new capitalists established free competition at home, they were happy to use State intervention against external competition. Once again the nation-state came in handy to capitalism. Large imports of cotton textiles from India not only threatened the market of English woollens manufacturers, but showed how profitable manufacture of cotton textiles in England could be – if only it could protect itself against imports of superior Indian cloth.

In England,

(i) The creation of a large uprooted labour force (assuring capitalists a steady supply of workers at low wages even as production grew);

(ii) The pillage from the colonies and the grabbing of the commons; and

(iii) The protection of the domestic market and the forcible prising open of foreign markets, combined to create conditions for new technology.

It was in the 18th century, and particularly after 1760, that the famous series of innovations began that are now termed the Industrial Revolution. The factory system reorganized work, with much greater division of labour, supervision of work and specialization of function. Where land was overwhelmingly the main means of production under feudalism, under capitalism, the main means of production became industry.

Each capitalist was driven to keep increasing the productivity of labour, failing which he would be swallowed by his competitors. Capital not merely reproduces itself, but it must do so on an expanded scale. The purpose of production under capitalism is to accumulate more capital.

With urbanization, various items of mass consumption such as clothing and footwear were now no longer made at home, but had to be bought by workers. The sheer increase in the industrial workforce meant that the purchasing power of the masses multiplied. Thus industry gained a growing internal market for such goods, limited though it was by the fact that the workers were paid such low wages. The growth of capitalist agriculture too was sustained by demand from the growing number of workers absorbed in industry.

In order to compete with one another, capitalists required the constant cheapening of production, one element of which was the cheapening of raw materials. Capitalism brought this about by industrialising agriculture. The differences between the productivity of workers in the two major sectors of the economy, industry and agriculture, tended to narrow in this process.

Capitalism as a social system

The change in the class structure naturally resulted in a change in the dominant social values – which are always the values of the ruling class.

“The hand-mill gives you society with the feudal lord; the steam-mill society with the industrial capitalist.”

The bureaucracy now was thrown open to a wider social section: the French Revolution instituted this by a system of national examinations. In Japan, where till 1868 only the samurai (military nobility) could bear arms or hold public office, all such privileges were abolished, all classes could be conscripted into the army, universal public education was instituted, and education and ‘ability’ were made the basis for recruitment to public office. Hobsbawm indeed claims that “The crucial achievement of the two revolutions (the Industrial Revolution and the French Revolution) was thus that they opened careers to talent, or at any rate to energy, shrewdness, hard work, and greed. Not all careers, and not to the top rungs of the ladder, except perhaps in the USA. And yet, how extraordinary were the opportunities, how remote from the nineteenth century the static hierarchical ideal of the past!”

The new ideology of course helped justify the miserable condition of the labouring masses, workers began organising on class demands, both economic and political. The Chartist movement of 1838-48 in Britain was the first political organisation of the working class; in 1864 the first International Working Men’s Association was born; and 1871 witnessed the first, albeit short-lived, state power of the working class, the Paris Commune. The publication of Marx and Engels’ Communist Manifesto in 1848, followed by Marx’s Capital in 1867, provided what eventually became the dominant ideological basis for working class organisation. Thus capitalist society was marked by the sharp contention between two great classes, the capitalists and the working class.  

Rise of socialism and communism

In this backdrop , a number of competing ideologies emerged which highlighted the illeffects of capitalism and suggested alternative socio-economic and political system. Socialism, which sought economic equality for all, and was very much against the Laissez Faire ideal of capitalism. Socialism looked at the free-market economies of Western Europe in the midst of the Industrial Revolution and saw exploited workers leading miserable existences while manufacturers profited enormously. Socialists wanted to nationalize parts of the economy, such as industrial and financial sectors, giving these areas of the economy over to government control. Thus, the benefits could be distributed more equally to the various members of society. For example, Robert Owen, a manufacturer in Manchester, grew upset at his worker's living conditions and began paying higher wages then other manufacturers did, and he treated his workers well, counseling them against drinking and other vices.

Many 19th-Century socialists rejected the argument that the wealthy deserve their wealth because they have created it, instead believing that wealth is created by the working classes and wrongfully appropriated by the rich who benefit disproportionately from their underpaid labor.

The earliest thinkers to be called "socialists" were the Frenchmen Henri de Saint-Simon (1760-1825) and François-Marie-Charles Fourier (1772-1837) and the Welshman Robert Owen ((1771-1858). All three of them were visionaries with little political sense, hoping to bring about a better society through the voluntary efforts of people of good will. In this they were very much products of the Enlightenment. Among them, Owen was the only one who was able to put any of his ideas into practice, since as an idealistic wealthy industrialist he had the means to do so. Various Owenite communities were founded, especially in America, but none of them lasted long.

Communism's relationship to socialism is a more complex matter. Traditionally, "communism" with a small "c" has been taken to stand for a form of social organization in which people live in groups, sharing labor and property collectively, whether this takes the form of a small commune or a large state. Those forms of socialism which merely emphasize publically financed social programs based on the heavy taxation of private business cannot properly be called "communist."

However, Marxists also consider themselves socialists. For modern Communists (with a big "C"), socialism is the more comprehensive term: Communism is regarded as an advanced stage of socialism, and this definition is adopted in this essay. Theoretically, the socialist state is an interim measure necessary to carry out the reorganization of society, which will then "wither away" to produce very much the same results as are aimed at in anarchism: a moneyless society in which market forces play no role, in which production is for the use of the producers, in which lands and factories are commonly owned by those who work them, and in which the state and with it, war is abolished. Unfortunately for this theory, the modern world has no concrete examples to show.

Well into the 20th Century, labor unions often had at least nominally socialist programs, even in the notoriously conservative U.S. In Europe they routinely organized labor parties which competed in elections on socialist platforms, and sometimes won, though rarely implementing more than a few of their more modest goals, such as nationalizing railroads, mines, and some other industries.

The link between labor organizing and socialism was reinforced by the efforts of capitalists to suppress all labor movements, viewing any form of unionization, no matter how mild, as posing the threat of revolution. Socialists like Marx welcomed these popular movements as providing the only viable vehicle for radical change.

Capitalism is an economic system based on the private ownership of the means of production, with the goal of making a profit. Central elements of capitalism include 

• Money was primarily a standardized medium of exchange, and final means of payment, that serves to measure the value of all goods and commodities in a standard of value
• a social and economic system where capital assets are mainly owned and controlled by private persons
• where labor is purchased for money wages
• capital accumulation, 
• competitive markets, 
• a market determined price system with minimal or no regulation over the pricing mechanism 

There are, however, multiple variants of capitalism, including laissez-faire, welfare capitalism, and state capitalism.

Types of capitalism

Mercantilism: is a nationalist form of early capitalism that came into existence approximately in the late 16th century. It is characterized by the intertwining of national business interests to state-interest and imperialism, and consequently, the state apparatus is utilized to advance national business interests abroad. An example of this is colonists living in America who were only allowed to trade with and purchase goods from their respective mother countries (Britain, France, etc.). Mercantilism holds that the wealth of a nation is increased through a positive balance of trade with other nations, and corresponds to the phase of capitalist development called the Primitive accumulation of capital.

Free-market capitalism: refers to an economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets, private ownership of productive enterprises. Laissez-faire is a more extensive form of free-market capitalism where the role of the state is limited to protecting property rights.

A social-market economy: is a nominally free-market system where government intervention in price formation is kept to a minimum but the state provides significant services in the area of social security, unemployment benefits and recognition of labor rights through national collective bargaining arrangements. This model is prominent in Western and Northern European countries

State capitalism: consists of state ownership of the means of production within a state, and the organization of state enterprises as commercial, profit-seeking businesses.

Corporate capitalism: is a free or mixed-market economy characterized by the dominance of hierarchical, bureaucratic corporations

Criticisms

Critics of capitalism associate it with 

• social inequality and unfair distribution of wealth and power;
• a tendency toward market monopoly or oligopoly (and government by oligarchy); 
• imperialism, counter-revolutionary wars and various forms of economic and cultural exploitation; 
• materialism; repression of workers and trade unionists; 
• social alienation ; 
• economic inequality; 
• unemployment; and
• Economic instability.

Modern socialism originated from an 18th-century intellectual and working class political movement that criticized the effects of industrialisation and private property on society. In the early 19th-century, "socialism" referred to any concern for the social problems of capitalism irrespective of the solutions to those problems. However, by the late 19th-century, "socialism" had come to signify opposition to capitalism and advocacy for an alternative system based on some form of social ownership.  There are a wide range of socialist political philosophies, including Marxism and reformism. Marxism, originating from the works of Karl Marx and Friedrich Engels, argues that socialism is the mid-point between capitalism and communism, with the means of production controlled by the working class but with the state guiding the economy on the workers’ behalf. Reformism, sometimes called social democracy, is focused on changing capitalist societies from within, through the political process and government reform.

Socialism is an economic system characterized by 

• social ownership of the means of production[1] and
• centralized management of the economy 
• consist of a system of production and distribution organized to directly satisfy economic demands and human needs,
• Not private profit driven by the accumulation of capital.
• Accounting would be based on physical quantities, a common physical magnitude, or a direct measure of labour-time in place of financial calculation. 
• Distribution would be based on the principle to each according to his need.
• Emphasis on profit being distributed among the society or workforce to complement individual wages/salaries.

Criticism

• Economic liberals and pro-capitalist libertarians see private ownership of the means of production and the market exchange as natural entities or moral rights, which are central to their conceptions of freedom and liberty; they therefore perceive public ownership of the means of production, cooperatives and economic planning as infringements upon liberty.
• Some of the primary criticisms of socialism are claims that it creates distorted or absent price signals, 
• results in reduced incentives, 
• causes reduced prosperity,
• Has low feasibility in terms of financial and administrative aspects. 

While it is a different economic system, many people confuse socialism with communism. Under communism, everything is owned communally, or by everyone. Communism is concept/ideology proposing a classless, moneyless and stateless society with common ownership of the means of production. As a social, political and economic ideology it aims at the establishment of such social order. 

According to Marx, Socialism does away with private ownership of the means of production. It establishes public ownership of means of production. In such a society the proletariat will jointly own means of production and distribute the produce according to the needs of people. This is the stage of dictatorship of proletariat, which will later on also; do away with the state apparatus leading to a stateless society. This stage of the stateless society will be possible in communism.

Marxist theory holds that communism is a specific stage of historical development that leads to a superabundance of material wealth, allowing for distribution based on need and social relations based on freely associated individuals. The classless, stateless society that characterizes this communism is one in which decisions on what to produce and what policies to pursue are made in the best interests of the whole of society, a society 'of, by, and for the working class', rather than one in which a rich class controls the wealth and everyone else works for the rich on a wage basis.

It is often termed as Utopian concept.

Although, pure communist society has not come into existence but In modern usage, the word "communism" is still often used to refer to the policies of self-declared socialist governments comprising one-party states which were single legal political party systems operating under centrally planned economies and a state ownership of the means of production, with the state, in turn, claiming that it represented the interests of the working classes.