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Capitalism and the Free Market, Part 1

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Writing in the Guardian last January under the headline “Caribbean Communism v. Capitalism,” respected journalist Stephen Kinzer began his article like this (http://tinyurl.com/y8wfrxb):

Visiting unhappy Cuba is especially thought-provoking for anyone familiar with its unhappy neighbours. Cubans live difficult lives and have much to complain about. So do Jamaicans, Dominicans, Haitians, Guatemalans, Hondurans, Salvadorans, and others in the Caribbean basin who live under capitalist governments. Who is worse off? Does an ordinary person live better in Cuba or in a nearby capitalist country?

Many people would read this without pause, but presumably not libertarians. Are Jamaica, the Dominican Republic, Haiti, Guatemala, Honduras, and El Salvador capitalist countries? Kinzer’s matter-of-fact statement seems to conflict with other evidence. For example, the Heritage Foundation Index of Economic Freedom (which overstates countries’ degree of economic freedom) rates the Dominican Republic, Jamaica, El Salvador, and Guatemala “moderately free” (and not “free” or “mostly free), and Honduras and Haiti “mostly unfree.” So how can they be “capitalist” — unless capitalism and freedom are two different things?

One may infer from Kinzer’s article that he classifies any country “capitalist” as long as Marxist socialism is not its official ideology. So he states, “Comparing the two political and social systems also reminds us that for many people in the world, a truly fulfilling life is unattainable…. The best hope for longtime communist Cuba and its longtime capitalist neighbours would be to learn from each other.”

My purpose here is not to focus on Kinzer’s curiously positive statements about Cuba and its “social safety net” but rather on his use of the word “capitalist.” He apparently regards that designation so uncontroversial that he feels no need to justify it or even to define the term.

Kinzer, however, is not an anomaly. Consider Richard Posner’s book about the recent financial debacle, A Failure of Capitalism. Posner is no left-leaning journalist. He’s a federal judge with a long association with the University of Chicago and the market-oriented law-and-economics movement. Yet here he is, blaming “capitalism” for the current economic troubles and, as a result, embracing Keynesianism. He writes in his preface, “We are learning from it [the “depression”] that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience — the self-healing powers — of laissez faire capitalism.”

Posner is hardly a lone wolf on his side of the political spectrum. Tune in to the financial programs on the Fox News Channel and Fox Business Network any day and you’ll hear Lawrence Kudlow, Ben Stein, or any number of other economic conservatives warning that Barack Obama’s policies threaten to undermine “our capitalist system.” That certainly implies there is today a capitalist system to undermine.
What is capitalism?

What, then, is this system called “capitalism”? It can’t be the free market because we have no free market. Today the hand of government is all over the economy — from money and banking to transportation to manufacturing to agriculture to insurance to basic research to world trade. If the meaning of a concept consists in how it is used (there’s no platonic form to be divined), “capitalism” can’t mean “the free market.” Rather it designates a system in which the means of production are de jure privately owned. Left open is the question of government intervention. Thus the phrases “free-market capitalism” and “laissez-faire capitalism” are typically not seen as redundant and the phrases “state capitalism” or “crony capitalism” are not seen as contradictions. If without controversy “capitalism” can take the qualifiers “free-market” and “state,” that tells us something. (This is true regardless of what dictionaries say. From at least the time of Samuel Johnson, lexicographers have understood dictionaries to be descriptive not prescriptive. New editions routinely modify definitions in light of current usage.)

This is not just a semantic point — one wonders about the value of spending time arguing whether what we have is “really” capitalism or not — and it is more than a matter of rhetoric, or the art of persuasion — important as that is. It is a matter of historical understanding, for although Ludwig von Mises and Ayn Rand tried mightily to have “capitalism” understood as “the free market,” they were swimming upstream. As historian Clarence Carson wrote in The Freeman in the 1980s, “‘Capitalism’ … does not have a commonly accepted meaning, proponents of it to the contrary notwithstanding. As matters stand, it cannot be used with precision in discourse.”

Carson wondered why one would call a system in which production and exchange are carried on privately “capitalism.” “So far as I can make out,” he wrote, “there is no compelling reason to do so. There is nothing indicated in such arrangements that suggests why capital among the elements of production should be singled out for emphasis. Why not land? Why not labor? Or, indeed, why should any of the elements be singled out?”

There are other curious features of the word. “When an ‘ism’ is added to a word it denotes a system of belief, and probably what has come to be called an ideology,” Carson writes. But a capitalist is not one who advocates capitalism in the way that a socialist is one who advocates socialism. He is rather one who owns capital. A capitalist can be a socialist without contradiction.

It is also useful to bear in mind that the word was not initially embraced by free-market advocates; that was apparently a 20th-century phenomenon. According to the Oxford English Dictionary, the word “capitalist” came first and was used pejoratively in the late 18th century. Of course, Marx used it and related words as condemnation. But it was not only opponents of private property who used the words that way. Most notably, Thomas Hodgskin (1787–1868), a free-market liberal and Herbert Spencer’s mentor, preceded Marx in this usage. By “capitalist” he meant one who controlled capital and exploited labor as a result of State privilege in violation of the free market.
A short history of capitalism

As important as economic theory is to understanding history, it is no substitute for history. Knowing how free markets work cannot in itself tell us that the free market existed in any given historical period. Mises and Rand notwithstanding, from early on historical capitalism has been associated with government intervention in behalf of landowners and factory owners. Capitalism of course is linked to the Industrial Revolution, which began in England, but the rise of industrialism in England followed massive expropriations of yeomen from lands they had struggled to acquire de facto rights over for generations. As another Carson, Kevin Carson, wrote in The Freeman,

In the Old World, especially Britain … the expropriation of the peasant majority by a politically dominant landed oligarchy took place over several centuries in the late medieval and early modern period. It began with the enclosure of the open fields in the late Middle Ages. Under the Tudors, Church fiefdoms (especially monastic lands) were expropriated by the state and distributed among the landed aristocracy. The new “owners” evicted or rack-rented the peasants.

The process continued with land “reforms” and Parliamentary Enclosures into the 19th century, turning tillers of the soil (those who mixed their labor with the land) into tenants.

Commons were “privatized” by the State (that is, given to the privileged) at the expense of people who previously had long-standing customary rights in them. Independent subsistence farmers and artisans were left no choice but to farm for someone else or to work in the new factories, with some of their income skimmed off by landlords and employers. The proletariat was born, as F.A. Hayek acknowledges. By libertarian standards, that constitutes exploitation because State power lay behind the worker’s plight. The opportunity to work in the factories is often presented as a blessing, but it looks less benign when the land-theft is recognized. Further there is evidence that the new factory owners obtained some of their capital from “old money” interests, but even if that were not so, the industrialists benefited from the State’s interference with the yeomen’s land rights. Members of the ruling class and observers frequently expressed concern that no one would choose to work for someone else in an unpleasant factory if he could work for himself on the land or as an artisan. They shared the view of the early 19th-century British writer E.G. Wakefield: “Where land is cheap and all men are free, where every one who so pleases can obtain a piece of land for himself, not only is labour very dear, as respects the labourers’ share of the product, but the difficulty is to obtain combined labour at any price.”

In no way did laissez faire begin at this point. Kevin Carson writes,

In addition, factory employers depended on harsh authoritarian measures by the government to keep labor under control and reduce its bargaining power. In England the Laws of Settlement [decried by Adam Smith] acted as a sort of internal passport system, preventing workers from traveling outside the parish of their birth without government permission. Thus workers were prevented from “voting with their feet” in search of better-paying jobs….

The Combination Laws, which prevented workers from freely associating to bargain with employers, were enforced entirely by administrative law without any protections of common-law due process….

Thus the interventionist State tainted the emergence of the industrial age. (It would have emerged spontaneously otherwise.)

As Albert Jay Nock wrote,

The horrors of England’s industrial life in the last [19th] century furnish a standing brief for addicts of positive intervention. Child-labour and woman-labour in the mills and mines; Coketown and Mr. Bounderby; starvation wages; killing hours; vile and hazardous conditions of labour; coffin ships officered by ruffians — all these are glibly charged off by reformers and publicists to a regime of rugged individualism, unrestrained competition, and laissez-faire. This is an absurdity on its face, for no such regime ever existed in England. They were due to the State’s primary intervention whereby the population of England was expropriated from the land; due to the State’s removal of land from competition with industry for labour….

Thus, as Kevin Carson writes,

Capitalism, arising as a new class society directly from the old class society of the Middle Ages, was founded on an act of robbery as massive as the earlier feudal conquest of the land…. From the outset of the industrial revolution, what is nostalgically called “laissez-faire” was in fact a system of continuing state intervention to subsidize accumulation, guarantee privilege, and maintain work discipline.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.