Capitalism and Its Names

Nothing is more fashionable than to run capitalism down. Capitalism is said to be gravely unequal and to have been based on the exploitation of the weak. It divides society into warring classes. Its progress has destroyed communities and even whole civilizations. It is turning out to be unsustainable, since it pollutes the atmosphere, depletes the seas, and endangers biodiversity. Its unbridled consumptionism undermines the ethics of work and of saving and investment that allowed it to flourish. It has substituted covert regimentation for the natural freedom of the individual. It has poisoned the higher human faculties by reducing them to mere instrumental reason. It sees society as a conglomerate of individual atoms rather than as a harmonious whole. At heart, it is deeply immoral, as it fosters antisocial greed and war-like competition, thus undermining the more fraternal and collaborative inclinations of humankind.

I will leave the defence against such accusations for another day. In this column I want to move on the attack. I do not see the history of capitalism as a tale of unalloyed progress untainted by cruelty: thus, for a number of centuries the merchant societies of Europe and America traded in slaves and exploited them; they were finally emancipated, not for economic reasons but by moral and religious impulse.2 But whatever its blemishes I want to show one of its undoubted achievements. I want to show what capitalism has done for the poor.

The name adopted by all

The name ‘capitalism’ is well established by now and has been adopted even by the friends of individual freedom. The term was initially used as a pejorative for free market economics, coined by no less an enemy than Karl Marx and his friend Friedrich Engels. But slowly it has become a term of appreciation of the motley historical process that is delivering achievements in human well-being that even the blindest dogmatist must recognise.

An example of that newly found respectability is the publication of the two volumes of the Cambridge History of Capitalism in 2014; they are an unexpected scholarly contribution, a welcome ray of light amid the anti-liberal murk discharged by the Great Recession of the beginning of the 21st century. Thus, in the second volume of this collective work, Professor Leandro Prados de la Escosura has written a paper on “Capitalism and Human Welfare,” where he starts with the following assertion:

[In] a longer run comparison, encompassing the last half millennium, […] the evidence suggests that industrialization and globalization had long-term positive effects on well-being, not only because higher income levels, but because inequality declined. (pg. 504)

This is a handsome recognition of the powers of capitalism. However, ‘the capitalist mode of production’ (to use the expression of Marx, its arch-critic) should not be reduced to industrialization and globalization. First, as to the causes of the birth and spread of capitalism, one should dig deeper into the conditions whereby it came into existence. A purely materialistic interpretation of the progress of capitalism, as was that of Marx, is not only incomplete but can even be dangerous; the examples of Imperial Germany, the Soviet Union, and perhaps tomorrow’s China warn us that the authorities may want to deflect the market economy in the direction of heavy industry and exports at all costs because they see capitalist development as an instrument of state power.

Second, as to the social results of the growth and extension of capitalism, highlighting ‘well-being’ and ‘equality’ is again superficial and may also lead public policy in an undesirable direction. Of course, higher income levels all round are one of the welcome consequences of capitalism. Of course, a free and competitive market economy reduces inequality much more than in traditional or planned economies can do. The analysis, however, should go deeper. These welcome results flow from a greater liberty of opportunity under capitalism. With welfarist and egalitarian measures, the authorities may unwittingly blind the road to further social progress. Public policies that suspend the working of competition to enhance well-being and equality may turn out to come at the cost of growth and of individual freedom. We must never forget that it is from individual freedom that all these goods flow—scientific advance, technical progress, capitalist production, reduction of poverty, social mobility, health and longevity, and also political representation—all the traits reflected in the United Nation’s “Human Development Index”.

Definitions of capitalism

Political discussion has traditionally been blighted by an insistence on a previous definition of terms. Aristotle, despite being empirically-minded and observant, thought that knowledge is advanced by the definition of essences of things and by the analysis of the distinctive traits summed in the definition of each essence. Essence chasing is a forlorn pursuit. So-called ‘definitions’ of capitalism should be seen as hypotheses about the conditions for the birth and development of this mode of organisation of society.

In practice, ‘definitions’ of capitalism by historians and institutional economists, under the guise of seeking to clarify the term, really highlight those of its diverse institutional elements that have brought about the obsolescence of traditional or command economies. Thus, when Deepak Lal (2001, pages 71 ff.), when defining capitalism, underlined the traits of individualism, of inquisitive curiosity, of social and legal environments favourable to merchants, and of the recognition of private property by the state, he was implicitly contrasting capitalist traditions and institutions with those of more stagnant societies. When Larry Neal, in his Introduction to volume I of the Cambridge History of Capitalism (page 2) added “markets with responsive prices”, he was contrasting this with the instinctive rejection of market speculation and the hankering after ‘just prices’ of regulated societies. Neal’s addition of “supportive governments” to his conditions for capitalism is distinctive, in that it may surprise more than one free-marketeer, an idea Neal developed in the same book when presenting mercantilism as the historical matrix of free markets and free trade.

More unconventional still is Deirdre McCloskey’s portrait of capitalism. (2006, page 14) To the typical definitions she adds free labour, markets responsive to prices; she substitutes the rule of law for supportive government; and she crowns it with a reminder of the ethical consensus that prevents the sins of envy and of anger from killing innovation. This last element especially is distinctive of her emphasis on the moral and intellectual side of the capitalist revolution. She speaks of “bourgeois rhetoric” as a decisive element in the change towards a hard-working, prudently-saving, for-profit-investing society—first fully deployed in the merchant republic of the Low Countries. Those ‘definitions’, therefore, show some telling differences. So-called ‘anarcho-capitalists’ would reject out of hand Larry Neal’s need for a favourable government as a condition of capitalism; and the same for Lal’s conditions of “supportive governments”. And this last condition clearly becomes a demand for state enforcement and intervention in Prado’s essay, if one reads it in full.

Still, the contrast with the view of capitalism in the above ‘definitions’, with Marx and Engels’ (1848) could not be starker. For those two communists it was the bourgeois class as a whole, not individual people, who created “productive forces more massive and colossal than the sum of all previous generations did in the past”. And for them the accumulation of physical and financial capital was a self-moving engine driven by irresistible historical laws, not as for McCloskey the result of a change in moral values.

All this shows that we are not dealing with definitions but with contending historical hypotheses about the necessary institutional conditions and intellectual and ethical beliefs for the progressive establishments of free markets.

How the poor fare under capitalism

Let me start the debate on possible explanations by recording present-day progress. In the year 2000, the United Nations set the world the task of attaining the “Millennium Development Goals” (MDG). Those goals were:

1. Eradicate poverty and hunger;
2. Achieve universal primary education;
3. Promote gender equality and empower women;
4. Reduce child mortality;
5. Improve maternal health;
6. Combat HIV/AIDS, malaria and other diseases;
7. Ensure environmental sustainability;
8. Develop a global partnership for development.

On all of them there has been progress, as noted in the 2015 Report on MDGs. Let me focus on the eradication of poverty and hunger.

Using dollars corrected for inflation, the first Millennium Goal was “halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day”. In fact, taking the even higher cut-off limit of $1.25 a day, the goal of halving the proportion of the very poor compared with total population was reached five years in in advance, in 2010. For the period 1990-2015, the actual results (illustrated in Graph 1) were:

• Extreme poverty has declined significantly over the last two decades. In 1990, nearly half of the population in the developing world lived on less than $1.25 a day; that proportion dropped to 14 per cent in 2015.
• Globally, the number of people living in extreme poverty has declined by more than half, falling from 1.9 billion in 1990 to 836 million in 2015.

A reduction of the extreme poverty rate from 47% to 14% is a development to be hailed. And so is a reduction of the number of the very poor by 2.44 million. But the authors of the report fairly remark that “despite enormous progress, about 800 million people still live in extreme poverty” (UN 2015, Overview, page 8).

Angus Deaton (2013, pages 249-255) takes World Bank figures and dates: $1.25 in 2005 dollars, which for a family of four means $1,825 a year. On that calculation, the number of those extremely poor people fell from 1.5 billion in 1981 to 8.05 million in 2008. Given a population increase in those years of almost 2 billion people, the proportion of a smaller number of the very poor on a larger population must have fallen even more quickly: so it was—from 42% to 14%.

These figures necessarily must be approximations, given the difficulty of obtaining them across the world and referring them to people in so many different social situations. Poverty can be measured by estimating total income or total spending by two methods: one is by household surveys, by asking families and counting how many live in the home; the other is by national income accounts, which should have figures for the per capita income and spending for each country.3 Whatever their accuracy as regards absolute numbers, these two sources can be used to check each other and, as Deaton underlines, they are more reliable for showing trends. Further, one needs to decide what exchange rate to use when comparing expenditures or incomes between countries with different currencies. Market exchange rates are volatile and reflect many different circumstances, so it is better to define the exchange value by comparing the purchasing power of moneys in their respective countries. Even so, Purchasing Power Parities (PPP) give disputable results. A last thought (Deaton, page 255) is that in countries where the poor make up a substantial proportion of the population, there are millions of people who are just above or below the poverty lines, so that a small change in definition increases or reduces the numbers substantially.

Still, the large and encompassing result is that, despite their approximate character, the numbers do give a reliable indication of betterment. The increase in income per household together with the increase in population is a clear indication of better standards of living. As McCloskey (page 16) recounts, from 1830 to 2000 the population of the world increased “by a factor of six”. Meanwhile, she adds, “[t]he amount of goods and services produced and consumed by the average person on the planet has risen since 1830 by a factor of about eight and a half.” This last means that total production per capita must have increased fourteen and a half times—not by 14.5 per cent but by 1,550 per cent. Thomas Malthus refuted by capitalist productivity!

Individual well-being under capitalism

The phenomenal increase in productivity per head from the time of the merchant city-states of northern Italy in the 13th century to the present day has been the main engine of the betterment of the human condition during the last five centuries. In the explanation of the late progress of humanity, That is why I wish to separate the element of echt Kapitalismus from the social welfare admixtures of our time.

No doubt the welfare capitalism created in the West during the last century has directly or indirectly increased the well-being of mankind. In the above-mentioned essay, Professor Prados follows the example of many other distinguished economists in preferring to measure the progress of capitalist societies by ‘well-being’ rather than by productivity per head. Well-being he defines as does the United Nations with their above-mentioned Human Development Index (HDI), which apart from national income per capita includes life expectancy at birth and schooling and literacy. In some versions HDI is corrected for inequality, thus insensibly affirming the superiority of social-democratic capitalism over laissez faire capitalism.

In no way do I mean to say that well-being as measured by the HDI is not important. Also, the progress of GDP per head is in any case partly influenced by advances in the dimensions reflected in the metrics of the HDI; there is feedback from health, education, ‘agency’, and equality to productivity as measured by the GDP per head. But in greater part these developments are uses rather than causes of growth of the national product. One could even see these redistributive social policies mostly as detractions from the growth brought about by the free market.

The growth of production per head

In sum, we should take the gross domestic product per head as the best indicator of the phenomenal progress of our societies during the last seven centuries. With all its defects as a measure of income4 and the imprecision of the data for remote periods, GDP per head comes nearest to measuring the effect of the capitalist system on society, as if it had been throughout a laissez faire system.

The classical source of the evolution of per capita GDP is the great economic historian Angus Maddison (1926-2010), who died after a life of unremitting research. His disciples and friends have decided to continue his efforts in the “Maddison Project: collaborative research on historical national accounts”, one of which is illustrated in Graph 2. GDP per capita, inflation adjusted:

Graph 2 sufficiently justifies me when I speak of ‘the economic miracle of capitalism’.

The anti-capitalists out in flight

Though born in Scotland, Angus Deaton, 2015 Nobel Laureate in Economics, is by inclination an American liberal rather than a classical liberal. In his nuanced analysis of what he calls The Great Escape (2013) he shows that advances in health in part independent of the market have contributed to improve the fate of humanity. The containment of illness and the extension of life we have witnessed during these last two centuries are no doubt due, at least in part, to government intervention and international policy. I myself many years ago wrote a piece on Edwin Chadwick and John Stuart Mill, where I told the story of their defence of administrative intervention to fight the spread of cholera in some London quarters by having local authorities clean contaminated drinking water. (Schwartz, 1966). Deaton grows eloquent on the contributions of states to life-transforming health care.

Here I call again on the authority of McCloskey when she underlines the spiritual and moral elements in the history of capitalism.5 The purely materialist view of the development of capitalism presented by Marx and Engels is still excessively influential. It is not just that the health improving measures eloquently recounted by Deaton would have been out of reach for the majority without the economic productivity of free markets. More importantly, the advances in knowledge on which the health miracle is based are at bottom the result of freedom of thought and discovery. And so is the free market. Capitalism is but one of the forms of individual liberty.

Deaton, Angus (2013): The Great Escape. Health, Wealth and the Origins of Inequality. Princeton University Press.

Fogel, Robert William (1989): Without Consent or Contract. The Rise and Fall of American Slavery. W.W. Norton, New York.

Harley, C. Nick (2014): “British and European industrialization”, in Larry Neal and Jeffrey G. Williamson, eds.: The Cambridge History of Capitalism, vol. I, pgs. 491-532. Cambridge University Press.

Lal, Deepak (2001): Unintended Consequences. The Impact of Factor Endowment, Culture, and Politics on Long-Run Economic Performance. MIT Press.

Maddison, Angus (2016): http://commons.wikimedia.org/w/index.php?curid=34088252

Marx, Karl, and Engels, Friedrich (1848): The Communist Manifesto. Many editions.

McCloskey, Deirdre Nansen (2006): The Bourgeois Virtues. Ethics for an Age of Commerce. Chicago University Press.

—— (2016): Bourgeois Equality. How Ideas, not Capital or Institutions, Enriched the World. Oxford University Press.

Neal, Larry, and Williamson, Jeffrey G., eds. (2014): The Cambridge History of Capitalism. Vol. I, The Rise of Capitalism: From Ancient Origins to 1848. Vol. II, The Spread of Capitalism: From 1848 to the Present. Cambridge University Press.

Pinkowskyi, Maxim, and Sala-i-Martin, Xavier (2009): “Parametric estimations of the World Distribution of Income”, Working Paper 15433, NBER.

Prados de la Escosura, Leandro (2014): “Capitalism and Human Welfare”, in Neall et al. (2014), pgs. 501-538. Cambridge University Press.

Schwartz, Pedro (1966): “John Stuart Mill and Laissez Faire: London Water”. Economica, N.S. vol. 38, nr. 129, February, pgs 71-83.

United Nations (1916): Report on the Millennium Development Goals. http://www.undp.org/content/undp/en/home/sdgoverview/mdg_goals/mdg1/ and http://www.un.org/millenniumgoals/2015_MDG_Report/pdf/MDG%202015%20rev%20(July%201).pdf

United Nations (yearly): Human Development Index. http://hdr.undp.org/sites/default/files/2015_human_development_report.pdf