What is capitalism? Questions of definitions are always somewhat pedantic, especially so when we already have a strong intuition of what a word means. But with capitalism, I’m not sure we do. We use the word everywhere, more often than not pejoratively (the worst economic system, except for all the others). I think it’s important to identify the most salient features of capitalism if we are interested in reforming its excesses. I will focus my discussion on what strike me as two major contradictions or disputes in various definitions of capitalism: stability vs flux, and free exchange vs exploitation.
In common usage, people seem to use “capitalism” to refer to the profit motive. And in fact this is pretty close to where Marx started. Marx’s definition of capitalism revolves around what he labeled the circuit M-C-M’. You come to the market with your money, M. You buy a commodity, C. And then you sell it for more money than you paid: M’. The important thing about this exchange is that you don’t really care about C in and of itself–its “use value.” C could just as easily be a bulldozer or a rubber duck or an hour of mowing the lawn. You only care about C for its “exchange value,” what you can sell it for. If you actually cared about C, the exchange could end after M-C, and indeed this is how most of our exchanges end as consumers. You buy what you want, and then you use it. M-C-M’, on the other hand, is part of a never-ending chain. The accumulation of profit, which is in turn invested to accumulate more profit, is the fundamental element of Marx’s capitalism.
From Marx, we take the image of the unstoppable capital owner, who gets richer and richer over time. In other portraits of capitalism, like Joseph Schumpeter’s, capital is always in flux. The capitalist can no sooner count his profit than be displaced by the next capitalist in line. The point of Thomas Piketty’s book, Capital in the Twenty-First Century, is to adjudicate between Marx and Schumpeter. He does this very elegantly by pointing out a simple race at the heart of capitalism: r vsg, where r is the rate of return on capital and g is the growth rate of the economy, including both population growth and productivity growth. Capitalism is a race, Piketty says, where old money is pitted against new money. If the economy is not growing, old money will pull further and further ahead. When the economy grows rapidly, on the other hand, more and more new money emerges and diminishes the importance of the old.
Piketty investigates the history of r vs g using unprecedentedly rich data on income, inheritance, and capital stock in most of the rich countries over the past 200+ years. In almost every setting, he finds the same trend: both wealth and income inequality reached historic peaks around 1910, then declined dramatically until 1945, and then remained stable until about 1980 before rising, and now once again nearing 1910 levels. The history of industrial society seems to be ever-increasing capital concentration, as Marx predicted, except when broken up by financial crisis and world wars. The wars represent a special one-time destruction of the capital stock; r gets sent back to square one.
In the post-war decades, inequality rose for two reasons, both of which are important in their own right but neither of which seems to fit neatly with Piketty’s overall story about r vs g. First, income inequality skyrocketed, driven almost entirely by growth in the top 1% of the income distribution. This stemmed not from productivity increases but from changes in social norms about appropriate executive salaries. Troubling as this trend is, it doesn’t have much to do with capital accumulation. Second, inequality in capital ownership increased, but this time it was the 15% pulling away, not the 1%. The second half of the 20th century witnessed the creation of a “patrimonial middle class,” a somewhat broad band of people who pass on considerable wealth to their children. In France, for example, 15% of people inherit larger sums than the bottom 50% will earn in a lifetime. This statistic brought inequality closer to home; I expect many of you are also in the 15%.
Piketty argues that the patrimonial middle class has benefited from r, the rate of return on capital. But in an influential critique, Matt Rognlie points out that almost of all the growth in capital’s share of income in Piketty’s data is attributable to growth in housing assets. He cheekily suggests that the book should have been called “Housing in the 21st Century.” If this empirical claim is true, which no one seems to dispute, the question is: is housing subject to the same force, r, that Piketty applies to capital generically? Or do house prices go up for their own particular reasons, like scarcity of urban land and NIMBY-ism in San Francisco? I can’t go all the way into these questions here, but see Ryan Avent for a very thoughtful take. In any case, these questions should go a long way to determining our mental model of capitalism. I would guess that most people don’t envision the most important capitalists as homeowners.
Instead, the typical image of a capitalist is an industrial titan. Rather than sitting idly on land and inheritance, as Piketty’s capitalists do, the industrialist vacuums up land, labor, and money to forge commodities and sell them for profit. This image brings us to the second major dividing line in definitions of capitalism: does capitalism run on free exchange or on exploitation? Marx said that capitalism required wage labor. Piketty doesn’t need to invoke violence and power to explain whyr tends to outrun g. But historians have a different view.
In U.S. historiography at the present moment, one of the hottest areas is “the history of capitalism.” It combines business history, labor history, and political history, adds a global scope, and tends to put colonialism and the slave trade front and center. Sven Beckert may be the don of this academic movement, and his book Empire of Cotton is the leading tome. Empire of Cotton is an exhaustive history of the global cotton trade, but you can skip the details about spindles and thread counts. Cotton is Beckert’s vehicle for showing how industrialization relied on an exploitative relationship between Britain and the Global South. His main theoretical move is to articulate a distinction between “war capitalism” and “industrial capitalism,” or, from a different angle, to reclaim what many historians would call “mercantilism” as “war capitalism.” Industrial capitalism is what you typically picture in 19th century Britain or 21st century China: a new working class migrates from countryside to city, works in sweltering factories, and exports consumer goods to the world. But what about the raw materials? Here Beckert employs “war capitalism” to show how industrial capitalism could never have gotten off the ground without violently coercing African slaves and Indian peasants to grow nothing but cotton and sell it to no one but the British.
Both forms of capitalism require a strong state. War capitalism requires military force to coerce the cotton growers and keep rival European powers out of a particular colony. Industrial capitalism requires protectionism against other cotton-exporting nations. India found itself on the wrong end of both these spears: most obviously as a reluctant workforce (Indian farmers had always grown cotton, but would rather plant it as just one crop among many other edible ones), but also later when some Indian entrepreneurs tried to start their own textile factories and were shut down by the British who demanded they buy only British products. Beckert uses the cases of India and Egypt to argue for a new interpretation of the Great Divergence, or the origins of the present divide between rich and poor countries. Egypt and India tried to industrialize in the late 19th century but were violently kept from doing so.
An important question is whether slavery is essential to Beckert’s argument. He says it is. Indeed, up until 1860, slaves picked most Europe-bound cotton, first in the West Indies and later, after the Haitian revolution, in the United States. But this is evidence that slavery was sufficient to fuel industrialization, not necessary. One of the most interesting chapters in the book takes place during the Civil War, as cotton merchants in Liverpool and Manchester scrambled to figure out where their cotton would come from in a future without slavery. And after a brief disruption, they figured it out! By ramping up the level of violence and coercing peasants into debt bondage, it proved workable to have enough cotton grown in India, Egypt, Kenya, and other colonies. One notable exception was Australia, where farmers successfully refused the imposition.
One of Beckert’s great accomplishments is showing the similarities, from the capitalist’s perspective, in amassing a labor force through slavery or through other methods. John Clegg makes some incisivecomments on this point around the similarity between slavery and wage labor in capitalism. Unlike in serfdom, to which slavery is sometimes compared, the key point is that both slave and wage labor are commodities bought with money. “Indeed, there is something pristinely capitalist about the total commodification of labor under slavery. Slaves are doubly alienated, for they lack property in both the means of production and in themselves,” Clegg writes. Note of course that this is not an argument for any moral parity or similarity of experience between slavery and wage labor, but simply an argument that both are equally compatible with capitalism.
This discussion of slavery is helpful for narrowing down what is distinctive about capitalism. Clegg says it is the state of being dependent on a market for access to inputs (land, labor, and money): “In capitalism, not only do producers have the opportunity to sell their product: they are compelled to do so in order to maintain access to the means of production.” Slaveowners were capitalists, in this sense, because they usually owned slaves on credit. Clegg shares the shocking (to me) fact that in 1840s South Carolina, more than 50% of slaves sold were sold by courts on behalf of creditors–the antebellum equivalent of foreclosure.
Obviously it is immoral to commodify human beings in a market. But the most trenchant critiques of capitalism, like Karl Polanyi’s The Great Transformation, take this same argument one step further and say it is immoral (or at least socially destructive) to commodify the energies of free laborers as well. The market is mostly absent from Piketty’s account, but it seems to me this is where the action is. The important thing to study about capitalism is not capital in isolation but its interaction with resources– both human and environmental–at the nexus of exchange, M-C and C-M’.