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Thursday, December 31, 2009

Is the Name “Capitalism” Worth Keeping? Part I

One of the more interesting developments in the wake of the Great Recession is the use and abuse of the word “capitalism.” You know something strange is going on when you can read articles and op-eds that blame the entire boom and bust on “capitalism” right next to ones that claim “capitalism” had nothing to do with it. Obviously both can’t be true, so a common reaction is to say that one writer or the other is simply wrong about the facts or his interpretation of the facts.

But another possibility should be considered: Both are using the same word (“capitalism”) to mean two different things. The confusion the word generates is a good reason for freedom lovers to consider abandoning it, along with its terminological counterpart–socialism.

There are at least three reasons that the terms “capitalism” and “socialism” are problematic: 1) “Capitalism” was coined by its opponents; 2) Both terms are etymologically loaded in a way that biases them against capitalism; and 3) Because no existing economic system matches either one consistently, the meaning of both has been polluted by being connected with real-world systems that have elements which are not necessarily features of the ideal. This is particularly true of capitalism.

The first and second points are interrelated. The modern usage of “capitalism” dates back before Marx, but it was Marx who popularized it. One will look in vain through the works of the great classical-liberal writers of the eighteenth and much of the nineteenth centuries, such as Adam Smith and the other Scots, for the word “capitalism” to describe the system they favored. Such use by its proponents is largely a twentieth-century phenomenon.

Because the term was coined by opponents, it’s not surprising that it is etymologically loaded. Usually the suffix “ism” refers to “belief in” something. In the case of capitalism and socialism, we can see how looking at the words this way reveals the bias. Its name suggests that “capitalism” is a system in which “capital” is the central feature and motive force. Those who support such a system seem to “believe in” the power of capital, which further suggests that capital’s interests are the ones that are, and perhaps should be, served by the system.

Compare that to the term “socialism,” which puts “society” in the same role. This system is presumed to involve a belief in the power of “society” as a whole, and the term suggests that society’s interests are the ones that are, and should be, served by the system.

Faced with a choice between a system whose name suggests that it serves the interests of only a small fraction of the already wealthy and powerful and one whose name suggests it will serve the interests of society as a whole, which would you find more attractive?

The problem here is that the names beg a whole series of questions of political economy by seeming to imply who benefits from each system. The implied claims that capitalism (that is, free markets) primarily serves the interests of capital and that socialism would serve the interests of society as a whole are not facts but theoretical assertions open to debate and, I would argue, both false. Using these terms tends to obscure the questions of whether either system actually works the way the name seems to suggest. Neither term is useful for understanding what sorts of institutions each system actually entails.

Finally, the word “capitalism” has come to mean a variety of things, largely because of the way the name puts “capital” front and center. (Notice that I had to clarify that I am using “capitalism” to mean “free markets.”) Far too often, capitalism’s opponents use the term to refer to any sort of system in which the interests of capital come first.

So when governments grant favors to private firms, or when firms actively seek such favors, enabling them to control markets to the detriment of us all as consumers, we are told this is “capitalism.” When challenged by free-market defenders on the distinction between “capitalism” and “free markets,” these same critics will simply say, “You’re the ones who talk about how we have a capitalist economy. So why are you objecting to my using it to describe the status quo?”

And that’s a fair response which nicely illustrates the problems that arise when we use a word to mean one thing (capitalism = free markets) but so many others use it to mean something else (capitalism = whatever benefits capital). It also explains the contrasting analyses of the recession I noted at the outset.

So what should freedom lovers do? In next week’s column I offer some suggestions.

Part 2

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.