One of the major questions of modern historiography concerns the beginnings of “capitalism.” Well-known explanations include Karl Marx’s account of the victory of the bourgeoisie over the feudal class and Max Weber’s tracing of the spirit of capitalism to the Protestant ethic. A key challenge faced by scholars is that capitalism is a rich concept that can refer to an economic system as well as a political ideology or even a worldview. The term can be used both as a neutral term of analysis and as a normative one for either approbation or condemnation.
One often gets the sense that many users of the concept would struggle to define it precisely. At the same time, like obscenity, most people know it when they see it. And one thing is clear: our need to better understand the origins of capitalism is imperative. This is the ambition of recent and very different works: Craig Muldrew’s The Capitalist Self: The Social Origins of Financial Capitalism in Early Modern England and Michael Sonenscher’s Capitalism: The Story Behind the Word.
Muldrew reminds us that “[t]here are few words currently that have more possibilities than capitalism.” Capitalis derived from the Latin for head, which came to refer to a stock of merchandise or money in Renaissance Italy. It was first theorized by the Franco-Irish political economist Richard Cantillon in his 1730 Essay on the Nature of Trade in General, and was made central in the physiocrat Turgot’s 1766 Reflections on the Formation and Distribution of Riches. In the Wealth of Nations (1776), Adam Smith followed up his discussion of labor with a treatment of how the market value of work and commodities was translated into monetary terms, and how this value could be accumulated as capital.
By the early nineteenth century, socialists began to argue that workers should retain more of the value they created through their labor. Notoriously, Marx predicted that the whole system would eventually collapse. But as Muldrew highlights, Marx never actually used the word capitalism in his main work Capital (1867).
The way we think about capitalism can instead be traced to the Bolshevik revolution in Russia and the spread of communist parties in Europe in the early twentieth century. These political challenges impelled the so-called Austrian School of economics to adopt the term capitalism and argue that it was morally and economically superior to socialism. But the word itself, Muldrew claims, was coined by Werner Sombart, member of the German historical school of philosophy and economics, in his Modern Capitalism: A Historical Investigation of Pan-European Economic Life from Its Beginning to the Present (3 vols., 1902-27). For an ostensibly central concept, “capitalism,” in Muldrew’s telling, thus seems surprisingly recent and contingent on debates in Central and Eastern Europe.
Sonenscher tells a different story, according to which the term capitalism was not an early twentieth-century German invention but rather a French mid-nineteenth century one, occurring in the ninth edition of the socialist Louis Blanc’s pamphlet The Organization of Labor from 1850. Intriguingly, Blanc condemned capitalism in the same breath as he celebrated capital: “long live capital! Long may we applaud it and long may we go on to attack capitalism, its mortal enemy, with even more intensity.”
The explanation of this apparent paradox is connected to the origins of the word capitalist, which began as an eighteenth-century French term for someone who lent capital to the French royal government to fund its wars. In other words, capitalism was initially associated with government debt and warfare rather than industry and productivity. It later came to refer to a property system of private ownership. For Blanc, then, capital was necessary, as it could be publicly owned. But capitalism spelled disaster.
Sonenscher carefully distinguishes “capitalism” from what some consider a synonym: commercial society. Commercial society was not related to war and debt but rather to the division of labor, famously theorized by Smith in the first chapter of the Wealth of Nations. Whereas capitalism was a property theory, commercial society denoted a theory of society based on specialization and exchange. In the nineteenth century, however, the two concepts were joined together, leading to one of our current usages of capitalism as a description of market society.
Sonenscher’s story might trump Muldrew’s as a conceptual history, but The Capitalist Self is not a history of a term, but an account of how the financial system centered on circulating capital became dominant in Britain and its North American colonies in the early-modern period. Capitalis Self presents an economic, social and cultural history, in which the records of towns, banks, merchants, and post offices are examined alongside the writings of philosophers such as John Locke, Bernard Mandeville, and, of course, Smith. Muldrew’s dexterity in contextualizing ideas, and connecting theory and practice, is one of the highlights of his learned book.
Attempting to trace the causes of modern economic growth, Muldrew points to the development of large-scale paper bills and notes, promoting what Smith called circulating capital (as opposed to fixed). Modern discussions of capitalism are often framed in terms of inequality, as in the influential but controversial writing of Thomas Piketty. But, as Muldrew argues, capital formation was originally the idea of radical reformers such as the circle around Samuel Hartlib during the English Civil War. Before 1600, most inequality stemmed from the unequal inheritance of land under the “feudal” system rather than market competition. The early history of capitalism, as told by Muldrew, was thus not one of inequality but “rather the formation of new forms of trust that would allow circulating paper instruments to maintain their value beyond only the use of a small elite group of merchants and bankers.”
The spread of capitalism was not only related to institutional transformation but also resulted in a change in the notion of the “self”. Charity continued to be seen as virtuous, but became voluntary rather than the linchpin of the social order. At the same time, economic stability necessitated a system of morality that valued honesty, such as Smith’s moral philosophy, or alternatively religious beliefs. Purely selfish maximization of profit was not intellectually viable in the early-modern world, and many of the assumptions of modern capitalism, including the notion of the rational homo economicus, do not directly stem from Smithian sympathy and sociability. Instead, Muldrew postulates that Jeremy Bentham’s utilitarianism is more plausible as the key inspiration for economic individualism.
In contrast to Muldrew, Sonenscher’s is a more pointillist contribution to intellectual history. His key point is that while Smith wrote about capital, he did not write about capitalism, which was only reified in the nineteenth century. Smith was a theorist, not of capitalism, but of commercial society. The distinction between the eighteenth-century, Enlightenment concept of commercial society and the nineteenth-century, socialist concept of capitalism is at the heart of Sonenscher’s book.
The distinction between commercial society and capitalism has been a central topic of recent historiography. Part of the ambition has been to escape the iron grip of Marx and Marxism. This is an admirable undertaking, as Marx cast a long shadow over economic history and analysis, well beyond Marxists. For example, the free-market economist Lionel Robbins called Marx “probably the best historian of economic thought of this time” in his lectures at the London School of Economics and Political Science (LSE) in the 1980s.
Commercial society, which is predicated on the division of labor, is more expansive than capitalism, Sonenscher suggests. There have been and could be different ownership models than private property: socialism, communism, cooperativism, collectivism, state capitalism, or indeed national socialism. But it is much more difficult to envisage an economic system in the modern world without the division of labor. Communists in the twentieth century believed they had found a solution to the problem of capitalism by nationalizing capital. But they never managed to find a solution to the division of labor; a society where it was possible to do one thing today and another tomorrow, “to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner … without ever becoming hunter, fisherman, shepherd, or critic,” as Marx put it, has remained elusive.
Commercial society understood as the division of labor is fundamentally a theory of society in which “individuals are radically dependent on one another,” Sonenscher concludes. In this way, his story dovetails with Muldrew’s, which argues that capitalism is not about liberty, but social dependence (as well as prudence). Muldrew connects his point to Milton Friedman’s idea of the market as a system of mutual interdependence, while pushing back against radical theories of individual autonomy such as Ludwig von Mises’s.
In his conclusion, Muldrew almost evokes the nineteenth-century pro-capital socialists treated in Sonenscher’s book. “From a moral perspective, capital … is more of a good thing than bad,” he writes, “and its defenders have a point that it is an enabling factor that allows created wealth to be used in ways that were impossible before. This can be used to reduce pain and poverty. But it also permits the accumulation of profits, which can be used to create power for a small number to enrich themselves, but also to exploit, enslave, subjugate, and kill to maintain that power.”
To be sure, Smith could be scathing of the rich and powerful, and sided with the poor and weak, as he eloquently spelled out the negative effects of the division of labor. But it is worth noting that the kind of dependence that commercial modernity under the rule of law fosters is milder than the known alternatives. As Smith observed regarding European history: “commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbors, and of servile dependency upon their superiors.”
While capitalism creates winners and losers, one of Smith’s other key insights was that commercial modernity increased the overall material welfare of the entire population. As he wrote in the Wealth of Nations, “the accommodation of a European prince does not always so much exceed that of an industrious and frugal peasant as the accommodation of the latter exceeds that of many an African king.”
Finally, while we rightly remember Smith as a theorist of the social interdependence created by the division of labor, and of sympathy and good governance, we should also remember him as a defender of the principle of private property as underpinning both stability and economic growth. For him, the protection of private property was indeed the very origin of government, as well as one of its essential tasks under the system of natural liberty. In that sense, capitalism still needs defense.
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