People in the West are confused about capitalism because they don’t know enough about socialism. Karl Marx had a greater respect for capitalism than do modern socialists or conservatives.
Karl Marx fabricated the term “capitalism” and defined it as the private ownership of the means of production. He did not conflate capitalism with commerce, as do most historians today who see shoots of capitalism sprouting throughout human history. Neither did the monasteries of medieval Europe birth capitalism as some historians claim. Is it really necessary to remind historians that monks owned no property and took vows of poverty? Monasteries were closer to the many small socialist experiments, like the kibbutzim of Israel. Marx saw the origins of capitalism in the 17th century.
Marx pretended to have discovered the secret forces of history that had led mankind from tribal economies through feudalism to capitalism and ultimately will usher in socialism. And he insisted that society must follow that sequence. They could not jump from feudalism to socialism because only capitalism could produce the wealth necessary for its socialist heirs to live in abundance. Trying to shorten the path would perpetuate poverty and misery. That’s why Marx was skeptical about the possibility of backward nations such as Russia succeeding with socialism.
Marx got everything else wrong, but he wasn’t so stupid that he couldn’t see the explosion of wealth created by capitalism since the 17th century and the poverty of backward nations that had not enjoyed the capitalist revolution. Deirdre McCloskey calls it the hockey stick of per capita income in his trilogy on the bourgeois virtues because according to economic historians, income had remained stagnant from the beginning of history until the rise of capitalism. Below is a chart depicting the magnitude of that increase. World GDP didn’t begin to rise until the industrial revolution, but it began centuries earlier in the Dutch Republic, which was too small to impact world figures.
Reverse engineering Marx’s definition of capitalism it’s clear that he had in mind the economic system that caused the explosion of wealth in the UK and Western Europe since the 17th century and drove the rapidly rising wages of English workers of his day. If capitalism is just commerce, as historians write, then we don’t have a word for the system that caused the hockey stick wealth effect. What was that system and how did it come about?
The economic system in the UK that Marx wrote about resulted from the attempt to instantiate Adam Smith’s notion of a “system of natural liberty.” Marx relied on Smith for much of his knowledge of capitalism and derived his labor theory of value from Smith. But Smith didn’t invent capitalism. He was the last in a long line of scholastics dating back to Thomas Aquinas who studied “economics” as a sub-discipline of ethics. Smith’s first book was A Theory of Moral Sentiments. Smith inherited his economics from the Catholic theologians at the University of Salamanca, Spain of the 16th and 17th centuries. Possibly inspired by the Reformation, the Salamancan theologians ruptured 1,500 years of Church teaching on wealth and business. But the Church had not derived its economics from the Bible or the Judaism from which Christianity sprung, but from pagan philosophers such as Plato, Aristotle, Cicero, and the Cynics, all of whom held commerce in contempt. Plato’s Republic deploys the Spartan system and Sparta was the first socialist state.
The Salamancan scholars abandoned the pagan philosophers and distilled their market principles from the Bible and natural law. Beginning with the Biblical sanctification of private property, they reasoned that property can exist only in a free market because property requires control by the owner and only free markets allow that control. Property and free markets also require limiting the state to only the protection of the life, liberty and property of the citizens.
The ideas of the Salamancan scholars were radical for their day, so radical that no country adopted them except the Protestant Dutch Republic. The Dutch had such a limited state that many observers claimed they didn’t have one. The great economic historian Angus Maddison said that the Dutch were the first people in European history to enjoy real protection for private property. As a result, the Dutch quickly became the richest nation in the world with the most powerful military. The French and British regularly attacked the Dutch for two hundred years but the Dutch successfully defended their tiny nation in every war. The Dutch were still a major power when Adam Smith wrote his Wealth of Nations and he cites the Dutch as having most fully implemented that system of natural liberty.
A first attempt at a definition of capitalism would say it is the system that makes property rights real through free markets and limitations on state intervention into the economy. But that is only a necessary condition, not a sufficient one. A system could protect property and still not be capitalist or enjoy rising wealth. Several other institutions are needed to make a system capitalist and create the explosive growth the West has enjoyed. Respect for business by most people, mass production and individualism are also necessary. I’ll write about those next week.