{"id":2103,"date":"2024-10-25T19:31:01","date_gmt":"2024-10-25T23:31:01","guid":{"rendered":"https:\/\/blogs.darden.virginia.edu\/brunerblog\/?p=2103"},"modified":"2024-10-30T11:22:35","modified_gmt":"2024-10-30T15:22:35","slug":"what-is-capitalism-why-definitions-matter","status":"publish","type":"post","link":"https:\/\/blogs.darden.virginia.edu\/brunerblog\/2024\/10\/what-is-capitalism-why-definitions-matter\/","title":{"rendered":"What is Capitalism? Why Definitions Matter"},"content":{"rendered":"

\u201cI am a capitalist.\u00a0 I believe in free markets.\u201d\u2014Vice President Kamala Harris.[i]<\/a><\/p>\n

\u201cI am a capitalist, but pay your fair share.\u201d\u2014President Joe Biden.[ii]<\/a><\/p>\n

\u201cI am a capitalist. Come on. I believe in markets. What I don\u2019t believe in is theft, what I don\u2019t believe in is cheating.\u201c \u2013 Senator Elizabeth Warren.[iii]<\/a><\/p>\n

[Representative Roger Williams (R-TX)] \u201cAre you a socialist or are you a capitalist?<\/p>\n

M<\/span>r. Corbat. Capitalist. [CEO of Citigroup]<\/p>\n

Mr. Dimon. Capitalist. [Chairman and CEO JPMorgan Chase & Co.]<\/p>\n

Mr. Gorman. I am a capitalist. [Chairman and CEO, Morgan Stanley]<\/p>\n

Mr. Moynihan. Capitalist. [Chairman and CEO, Bank of America]<\/p>\n

Mr. O’Hanley. Capitalist. [President & CEO, State Street Corporation]<\/p>\n

Mr. Scharf. I am a capitalist. [Chairman & CEO Bank of New York Mellon Corp.]<\/p>\n

Mr. Solomon. I am a capitalist. [Chairman & CEO, Goldman Sachs]<\/p>\n

Mr. Williams. Well, it is a shutout for the socialists today.\u201d<\/p>\n

–Congressional Hearing, House Committee on Financial Services, April 10, 2019.[iv]<\/a><\/p>\n

 <\/p>\n

It takes a big tent to hold such a diversity of people who avow capitalism.\u00a0 What are the dimensions of that tent?\u00a0 What are the attributes of capitalism on which most people would agree?<\/p>\n

It turns out that defining capitalism is not a simple matter.\u00a0 Wikipedia concludes, \u201cThere is no universally agreed upon definition of capitalism; it is unclear whether or not capitalism characterizes an entire society, a specific type of social order, or crucial components or elements of a society\u2026Consequently, understanding of the concept of capitalism tends to be heavily influenced by opponents of capitalism.\u201d[v]<\/a> \u00a0The recent recipient of the Nobel Prize in Economics, Daron Acemoglu, even proposed that the term be forgotten.[vi]<\/a><\/p>\n

How big a problem is this?\u00a0 The dictionary folks at Merriam-Webster report an estimate of some one million words in the English language[vii]<\/a>\u2014surely \u201ccapitalism\u201d isn\u2019t the only slippery word in this tongue.\u00a0 But I would respond that the sheer impact of capitalism in the world today makes it worth parsing the word.\u00a0 But then, where do we look for clarity?\u00a0 Is historical or current usage any help?\u00a0 And can we be more precise about where people disagree about the term?\u00a0 And finally, is there a definition on which to get traction?\u00a0 In this post, I\u2019ll tackle such questions.<\/p>\n

(Un)common usage<\/strong><\/p>\n

Lexicographers tell us that a definition emerges from the way a word is commonly used.\u00a0 In the case of capitalism, the common usage approach presents at least two challenges.<\/p>\n

First, capitalism itself has changed over time.\u00a0 Economist Joseph Schumpeter (1942) wrote that capitalism is a \u201cprocess of industrial mutation\u2026that incessantly revolutionizes the economic structure from within<\/em>, incessantly destroying the old one, incessantly creating a new one.\u201d[viii]<\/a>\u00a0\u00a0\u00a0 In the terms of modern economics, capitalism is a complex adaptive system<\/a>, in which participants respond to changing circumstances in ways that improve their chances of survival and success.\u00a0 Consequently, the incessant mutation of capitalism means that the frame of reference behind a definition of the word will vary over time.\u00a0 It seems likely that \u201ccapitalism\u201d meant something different to Karl Marx and John Stuart Mill, who lived during the Great Industrial Revolution, than it means to those people quoted at the beginning of this post.<\/p>\n

Second, the word, capitalism, seems to attract interest in times of stress. Though the Oxford English Dictionary<\/em> identifies the earliest usage of capitalism in 1854, it took the rise of socialism and communism in the late 19th<\/sup> century for the word to gain broader usage.\u00a0 The following figure is an \u201cNgram\u201d or graph of the percentage occurrence of \u201ccapitalism\u201d in all English language books published annually from 1800 to 2023.<\/p>\n

\"\"<\/a><\/p>\n

Figure 1: Ngram[ix]<\/a> of \u201ccapitalism\u201d<\/strong><\/p>\n

The figure shows very little use of \u201ccapitalism\u201d before 1900, followed by several sharp increases: (a) 1916-1920, coincident with World War I, revolutions in countries such as Russia and Germany, and the rise of radical and anarchist movements in the U.S., Britain, and elsewhere; (b) 1929-1934, a big increase coincident with the onset of the Great Depression; (c) 1944-1947, associated with deprivation after World War II and concerns about return to depression; (d) a long slow rise from 1953 to 1975 coincident with the onset of the Cold War, the Vietnam War, and stagflation; (e) 1997-2002 a rise associated with the financial crises in Mexico, Asia, Russia, and the dot-com bubble and bust; and finally, (f) 2006-2018, a sharp increase coincident with the Global Financial Crisis and Great Recession.\u00a0 It seems that economic hardship and political instability prompt people to write about capitalism, times that challenge the functioning of market-based economies and summon calls for reform and radical change\u2014hence, Wikipedia\u2019s point that \u201cthe concept of capitalism tends to be heavily influenced by opponents of capitalism.\u201d<\/p>\n

Fault lines among definitions today<\/strong><\/p>\n

In my experience, people bring varying notions about capitalism to any discussion\u2014this is likely true for the sample of people quoted at the start of this post.\u00a0 To save you a laborious slog through the attributes of the many definitions, I\u2019ll illustrate the complexity of definitions with a summary of three \u201cfault lines\u201d or debates that a definition tends to generate.\u00a0 Mind you, a definition doesn\u2019t have to be either\/or; it could nod to both sides of a debate.\u00a0 But what a definition emphasizes tends to hint at where the writer is going.<\/p>\n

Fault line #1: Does \u201ccapitalism\u201d apply mainly to social conditions or to economic circumstances<\/u>?\u00a0 Those of radical persuasion tend to come at capitalism from the sociological corner<\/u>, arguing that capitalism values profits over environment, efficiency over equity, and self-interest over the interest of others. In his three-volume Das Kapital,<\/em> Karl Marx never actually defined capitalism, other than to assert that it is a stage in the historical development of society, associated with the advent of economic classes, including the bourgeoisie and the proletariat.\u00a0 He argued that the boom-bust business cycle of market economies revealed internal contradictions that would doom the sustainability of capitalism.\u00a0 Marx today is regarded as a weak economist but an astute sociologist<\/em>, a good observer of social conditions and trends in his day.\u00a0 He needed a foil, against which to critique the social impact of the Great Industrial Revolution and found it in the capitalists who financed it. \u00a0\u00a0Other critics will point to greed as a defining attribute of the system and cite waste, inefficiency, externalities, and market failures as its hallmarks, without recognizing that no other system avoids these either.<\/p>\n

The other view is that capitalism is an economic thing<\/u> motivated by self-interest that promotes efficiency and higher welfare.\u00a0 The godfather of economics, Adam Smith, in his Wealth of Nations<\/em> (1776), wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”[x]<\/a>\u00a0 Some critics misunderstand self-interest to mean greed, but the two are quite different.\u00a0 Greed is a craving, an overwhelming desire, that is intense, excessive, and repellent to society, violating moral norms.\u00a0 We recoil from a greedy person because, as Adam Smith argued in his other classic book (The Theory of Moral Sentiments <\/em>(1759)), greed overwhelms sympathy <\/em>for fellow beings.\u00a0 Self-interest best captures the benign motivation for daily decisions by billions of people in capitalist economies. Self-interest prompts people to use their resources to best effect, meaning most efficiently. \u00a0So Adam Smith argues that when many people behave in their self-interest, the result is a rise in general welfare:<\/p>\n

\u201c\u2026every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. \u2026 he intends only his own gain, and he is in this, as in many other cases,\u00a0led by an invisible hand<\/strong> to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.<\/strong>[xi]<\/a><\/p>\n

Fault line #2: Is capitalism mainly about the private ownership of the means of production, or making a profit, or the voluntary exchange of goods and services in markets?<\/u>\u00a0 \u00a0For instance, many of the modern definitions of capitalism start with the notion of private ownership of the means of production<\/u>.\u00a0 A prime example is the entry in the authoritative Oxford English Dictionary<\/em>: \u201ccapitalism<\/strong> The condition of possessing capital; the position of a capitalist; a system which favours the existence of capitalists.\u201d[xii]<\/strong><\/em><\/a>\u00a0 That\u2019s all?\u00a0 The OED\u2019s definition is a disappointment.\u00a0 It focuses on possession <\/em>of property and neglects so much more that participants in capitalist systems encounter daily, such as buying and selling, competition, investment, and the respect for (or violation of) civil rights.\u00a0 And implicitly, this definition begs a comparison of capitalism with public ownership <\/em>of the means of production (that is, socialism).\u00a0 Is it really necessary to define something by reference to that which it is not?<\/p>\n

Another definition says that \u201cCapitalism is essentially the investment of money in the expectation of making a profit<\/u>.\u201d[xiii]<\/a>\u00a0 Investment is surely an aspect of capitalist activity; and profit-making is surely a desired outcome.\u00a0 But to start <\/em>there?\u00a0 I think not.\u00a0 The estimable Peter Drucker expressed a truth that business people across the world confront daily: the first purpose of a business is to create and keep a customer.[xiv]<\/a>\u00a0 Most savvy investors would not put their money into a business that could not answer the question, \u201cWho is your customer?\u201d\u00a0 To begin with a focus on a customer is to shape a value proposition that will lead to a sale, an exchange of money in return for a good or service.<\/p>\n

This leads to a third possible definition of capitalism that begins with a focus on voluntary exchange<\/u>, without which other defining attributes of capitalism make little sense.\u00a0 The idea of exchange embraces the existence of markets, which are the institutional embodiments of capitalism.\u00a0 But for capitalism to work, exchange needs to be without compulsion\u2014hence, the word, \u201cvoluntary.\u201d\u00a0 In The Godfather, <\/em>a gangster says, \u201cI\u2019ll make him an offer he can\u2019t refuse,\u201d[xv]<\/a> meaning that it would be an in<\/em>voluntary exchange.\u00a0 Markets with voluntary exchange preclude restrictions on price-setting such as price controls, rationing, and exclusionary laws and practices (like the racist Jim Crow laws).\u00a0 However, to ensure the fairness of prices\u2014the mechanism by which resource allocation is determined\u2014requires fair dealing, open competition, easy entry by buyers and sellers, property rights, and the sanctity of contracts.\u00a0 This introduces the necessity of constraints on behavior imposed by norms, laws, civil and commercial rights, standards, and a system of justice, what economists call \u201cinstitutions\u201d\u2014these must be features, not bugs, of daily life in a capitalist system.\u00a0 Even in a world without government, market participants tend to form their own sophisticated systems of contract monitoring and enforcement\u2014such was true, for instance, among merchants on the Silk Road of the 12th<\/sup> century. \u00a0\u00a0As Martin Wolf wrote, \u201cWithout the rule of law, there can be no market capitalism, just larceny.\u201d[xvi]<\/sup><\/a><\/p>\n

The point is that simply defining capitalism by private ownership or profits ignores so much more that constitutes the daily experience of participants in the capitalist system.<\/p>\n

Fault line #3: Does capitalism exist only in this pure theoretical form or can the notion embrace many possible variants seen in the real world today<\/u>?\u00a0 Textbook definitions of capitalism tend to refer to an idealized setting that is absent any imperfections about competition, information, rights, or government.\u00a0 Yet, participants in market economies today will witness variations in what is advertised as a capitalist system.\u00a0 Is the standard definition sufficient, or do very different economic systems reside under the general name of \u201ccapitalism?\u201d<\/p>\n

Consider whether capitalism in the U.S. is the same as capitalism in China. In 2019, Branko Milanovic asserted that capitalism was the dominant and enduring economic system in the world and that countries such as the United States and China were economically equivalent\u2014that there was one system, and that functionally the system was the same from country to country.\u00a0 In reviewing Milanovic\u2019s book a year later, Robert Kuttner (2020) wrote that Milanovic\u2019s \u201cdiscussion is \u2026an oversimplified description of the world\u2019s economies and a misleading summary of China.\u201d[xvii]<\/sup><\/a>\u00a0 The difficulty with abstract definitions of capitalism is that they skirt the possibility of variants.<\/p>\n

Peter Hall and David Soskice[xviii]<\/sup><\/a> argued that nations develop clusters of institutions <\/em>(laws, norms, and cultural practices) that reinforce each other and form \u201cthe way we do things here.\u201d\u00a0 Capitalist economies vary in the extent of government intervention in markets and can exist as sub-economies even within socialist and centrally planned systems.<\/p>\n