capitalism

50 Capitalism
other forms of market economy. Closely related to this
notion is another distinctive feature of capitalism, the organization
of much large-scale production through large firms,
which is based on the two principles of limited liability and
perpetual succession. Again it is instructive to compare capitalism
with the mercantile type of market economy that was
predominant before the mid-18th century. There were large
firms in medieval and early modern Europe (such as the
Medici and the Fugger), but these were essentially large
family businesses built around kinship connections and
alliances between merchants. In capitalism, the firm increasingly
becomes a structured and impersonal organization of
the kind described by a number of authors, such as Peter
Drucker and Alfred Chandler. These organizations may be
run by actual owners/investors, but often it is professional
managers who perform this function. The key figure in capitalism,
either as a manager or an owner/investor, is the
entrepreneur, who notices gaps in the market and by exploiting
them both coordinates supply and demand and, more
important, drives the process of “creative destruction” or
constant innovation, which also is a marked feature of capitalism.
The fourth feature of capitalism is mass consumption
and production, made possible in part by the increased efficiency
that results from the first two features. Finally,
hugely important, but little noticed, the predominant part
played in labor markets by wage labor constitutes another
crucial aspect of capitalism. Historically, while paid
employment was common, as opposed to slavery, serfdom,
and other forms of unpaid labor, it usually took the form of
indentured labor with long-term and highly prescriptive
contracts between the employer and employee. Today, it is
only highly paid professional athletes and entertainers
whose work is organized in this way—European soccer
players and American motion picture actors being prominent
examples.
The capitalist form of market economy first developed in
northwestern Europe between about 1720 and 1860. It grew
out of the preexisting mercantile market economy, which
was in a process of gradual change, but that nevertheless
eventuated in a radical transformation of several existing
economic institutions. Two crucial aspects were the appearance
of capital markets from the 1690s onward and the
emergence of the modern corporation after the 1720s and
especially after passage of the British Companies Act in
1862. These changes were possible because of the earlier
period of European history, which produced a range of institutions
that favored economic innovation, saving, investment,
and, above all, secure and enforceable property rights
and a rule of law that bound and limited political power.
However, the transition from a mercantile market economy
to a capitalist one was not inevitable, and we should not
think of the modern economy as a goal toward which all earlier
European history was directed. Such a transition had not
occurred in other market-based economies such as China’s,
and one critical factor seems to have been Europe’s continued
political division in the face of several attempts by
particular states to establish themselves as the predominant
power. This political division led to competition
among states, including institutional competition, and prevented
one power from checking economic change, as
happened in China.
One thesis, which has recently enjoyed a renewed popularity,
holds that the emergence of capitalism involved a
truly radical break with all previous social systems. This
argument, which derives ultimately from Karl Polanyi’s
The Great Transformation, consists of two elements. The
first is the claim that, before the late 18th century, the role
of trade or exchange relationships (i.e., of markets) was
limited, with all market exchange being “embedded in”
(i.e., subordinate to) other kinds of social relations. In particular,
this theory argues, land and labor were not freely
traded commodities. Empirical research shows that this
assumption is clearly untrue. As I have already indicated,
markets and exchange relations have been a central feature
of most of the world’s cultures and civilizations for most of
recorded history. Free exchange in both land and labor can
be found in medieval England and the Low Countries, as
well as in other parts of the world, such as Song China
(960–1279 A.D.). The second claim is that the rise of a capitalist
economy involved the appearance of a new kind of
human rationality, of a way of thinking about and perceiving
the world that had not existed before. According to this
way of thinking, European society before the late 18th century
(and by extension other societies elsewhere in the
world) did not employ “economic rationality” and thought
rather in terms of a “moral economy” dominated by
noneconomic considerations. Again, this idea is contradicted
by empirical research that suggests rather that people
before the 19th century were more, rather than less, concerned
with economic calculation. The novelty of the capitalist
type of market economy should not lead us to
exaggerate that novelty nor to believe that it somehow burst
on the scene fully formed.
In general, libertarians are strongly supportive of capitalism.
They hold this view in part because they see capitalism
as superior to any of the alternatives on offer, but their
support is more positive than simply regarding capitalism
as “the worst system, apart from all the others.”
Libertarians regard modern capitalism as an essential or
necessary condition of both liberty and a good life. They
also argue that it is a virtuous and morally defensible economic
system that articulates a body of moral values or
virtues every bit as coherent and admirable as any other
one. Some libertarians see support for a capitalist system as
the necessary consequence of certain given axiomatic
beliefs, such as the existence of a body of inherent natural
rights. Others prefer to emphasize the beneficial consequences
of capitalism. The most obvious is the remarkable