capitalism

Capitalism 49
the argument in equal measure. One important milestone
in this process was the publication in 1962 of Milton
Friedman’s Capitalism and Freedom, one of the first popular
books to employ the term in an unabashedly positive
way. Another important landmark was the 1969 collection
of essays, Capitalism: The Unknown Ideal, by Ayn Rand
and several other authors, including Alan Greenspan.
Since about the 1920s, capitalism has meant—in broad
terms—a system that combines private property in the
means of production with the shaping of economic activity
by market exchange. This usage reflects its origins in the
debate between advocates of various kinds of socialism
(who argued for doing away with one or both of the two
elements) and those who opposed socialism for a variety of
reasons. However, this usage is deeply problematic. When
not used simply to mean “the way things are,” it makes capitalism
the same thing as a market economy, and, indeed,
many authors treat the two terms as synonymous. There are
two problems with this implication. The first, relatively less
important, is that the definition given earlier does not correspond
to the actual messy reality of existing modern economic
life. In particular, it ignores the frequently prominent
role of the state and the ways in which the owners of
resources capture and use political power for their own
advantage and frequently respond to political signals as
much as market ones. This is true, but it does not call into
question the usual use of the term as a Weberian ideal type,
contrasted to the equally abstract ideal type of socialism or
command economy.
The much more serious difficulty is that the contemporary
use of capitalism is largely ahistorical. This comment
may sound strange given the now extensive historiography,
but it is broadly true. If capitalism is the combination of private
property and market allocation and thus much the same
as market economy, then the problem is to locate it historically.
Both private property and markets have existed in
almost every period of recorded history; in fact, it is those
episodes where one or both have been absent that stand out.
The difficulty is that differences between, for example, the
medieval or early modern European economy and today’s
are so great that to use the same term to describe them both
makes that word almost meaningless. Marxists try to avoid
this problem by using capitalism as the label for one of the
successive stages of economic development in Marx’s
schema of history. They argue that primitive communism is
followed by ancient economies based on slavery, then by
feudalism, based on fealty relations, which in turn is succeeded
by capitalism, which is based on market relationships.
In each stage, there is a ruling class that controls the
dominant factor of production (i.e., slave owners/landowners/
capitalists). This schema makes capitalism a discrete stage
in economic history. However, the escape is only apparent.
Empirical research reveals that markets and privately owned
accumulations of productive assets (capital) are found in
most times and places, and it becomes almost impossible to
give any kind of date to the periodization. Marxist historians,
following Marx, have variously located the change
from feudalism to capitalism in the 14th, 17th, and 18th centuries.
Non-Marxist historians have attempted to distinguish
between the industrial capitalism of the modern world and
earlier variants, described as agrarian or mercantile capitalism.
Again, it proves extremely difficult to locate these
forms chronologically and this ambiguity makes capitalism
no more than another term for exchange-based economic
activity.
The solution to this conundrum, which gives the term
capitalism a more precise meaning and also enhances our
understanding of the modern world, is to distinguish among
the categories of market, market economy, and capitalism.
The best example of this kind of analysis is in the monumental
three-part work of Fernand Braudel’s Material
Civilization and Capitalism. Economic activities that
involve trade and exchange have existed throughout human
history. However, they are not the only kind of economic
activity. There also is the range of phenomena that are economic
inasmuch as they involve manipulation of scarce
resources to increase wealth, but that do not involve trade,
exchange, or money. Such activity belongs to the sphere of
domestic or everyday life and is the predominant feature of
a subsistence economy, such as that of Carolingian Europe.
An economy where trade relations are widespread or even
dominant is a market economy. However, the class of market
economies or, to put it another way, of market-based
economic systems is large and diverse, both in theory and
regarding real historical examples. Thus, the mercantile
market economy of the classical Islamic world is different
from both its ancient predecessor and the modern kind of
market economy. In this way of thinking, capitalism is a
specific kind of market economy with distinctive features.
It also is historically located inasmuch as it appeared in a
particular and identifiable time and place.
If all kinds of market economy feature private ownership
and exchange, what then are the distinctive features of the
capitalist variety? If we look at the modern economy as it
has developed, initially in northwestern Europe but latterly
more widely, certain institutions are prominent. It is these
distinctive and historically specific institutions that define
the kind of market economy that came to be called capitalism.
The most important is the existence of a market for
investment. It is historically common for there to be institutions
that allow individuals to invest in an enterprise and so
establish a fiduciary claim to a portion of the wealth or
income created by that enterprise. In capitalism, these
claims (shares or equities) are fully tradable, can be bought
and sold like any other commodity, and are traded through
sophisticated markets. This process creates a market in
investment, which historically has led to much higher levels
of investment and accumulation of capital than is the case in