Capitalism Defined, Part II: In the Beginning Was Adam

Inevitably, any study of capitalism must pay homage to Adam Smith, the reclusive Scottish academic who founded the modern study of economics. Smith was a moral philosopher before he became an economist, and one can divide his writings on early capitalist societies, published in 1776 as The Wealth of Nations, into descriptive observations and normative judgments. This has been true of much economic writing ever since.

Smith was somewhat vague about the definition of capital, because he was reluctant to identify it with any particular substance (such as gold or silver). Rather, he identified capital by its purpose: either to buy goods (food, raw materials, textiles) for resale, or to improve land or purchase machinery and "instruments of trade" (Book II, Chapter 1). The former he identified as "circulating" and the latter as "fixed" capital. Circulating capital mainly generated profits for merchants, fixed capital for masters and landlords.

Smith made it clear (or as clear as he could in a diffuse, rambling, 1000-page brick of a book) that he viewed the owners of capital as the wellsprings of wealth and productivity. They increased the productivity of land through improvements like fertilizer and better breeds of livestock; they increased the output of manufacturing establishments with machinery and the division of labor; and they provided an incentive for both forms of improvement by fostering commerce. The limit on a country's industry, Smith asserted, is "what the capital of the society can employ" (Book IV, Chapter 2). Small wonder he has so long enjoyed a good reputation with entrepreneurs, rentiers, and hack writers for the Cato Institute.

I digress. It's also important to note that Wealth of Nations wasn't a billet-doux to the capitalist class. Smith had normative judgments to pass against them, as well as their antagonists. True, in Books I and V Smith famously argued for limited government intervention in the economy. Governments should, he said, lift existing controls on the circulation of labor and capital, and stop chartering monopolistic corporations that restricted competition. However, he also noted that merchants and masters were themselves frequently responsible for stifling economic productivity and general welfare. Merchants artificially raised prices by keeping smaller market towns ignorant of the existence of competitors, and by withholding goods from the market. Masters, meanwhile, were in "tacit but constant and uniform combination" (Book I, Chapter 8) to hold down wages and thereby maximize profits. The former tactics injured consumers, the latter workers, whom Smith insisted were entitled to fair compensation. Low wages injured productivity, since ill-fed workers had less energy, and inhibited family formation and demographic growth, which Smith regarded as social goods.

Unfortunately, Smith observed, wages and profits tended to move in opposite directions, except in "new colonies" where resources were ample and labor scarce. And since people were primarily motivated, in Smith's worldview, by self-interest, there was little one could do to convince capitalists to pay a just wage*, since this would injure their profits. Removing government controls on the movement and employment of labor was Smith's only solution to this problem: if workers could more easily enter skilled trades and leave their home parishes in search of employment, their bargaining power would increase. Otherwise, Smith had no ready solution to one of the central problems of capitalism: the tendency of capitalists to pile up money at the expense of their employees. In his remarks on the inverse relationship of wages to profits, Smith even prefigured the central argument of Thomas Malthus, who wrote that human populations tended to outgrow their food supply unless curtailed by disaster or dearth, and David Ricardo's Iron Law of Wages. Both of these ideas would, in turn, strongly influence the subject of my next entry in this series, Karl Marx. (Dum dum dum!)

(Above image courtesy of http://www.magixl.com/cliparts/)

* Henry Ford's observation that well-paid workers became well-heeled customers was 150 years away.

Thanks to My Commenters

To celebrate the fifth anniversary of this weblog, I'd like to express my appreciation of my readers, and particularly those who took the time to comment on my posts:

Mssr. Deaf Dionysus (1.28.11)
Susan M. Frey (1.19.11)
Ian Kammann (10.24.10)
Anonymous (9.9.10)
Elena O'Malley (6.23.09, 12.27.08, 9.17.08, 5.10.08, 3.26.08)

Todd Jeffcoat (9.7.09)
Ryan (8.12.09)
Cathy Kammer (12.04.08, 6.8.08, 4.22.08)
Clare Sammells (12.4.08)
Chantal Hachem (8.18.08, 8.9.08, 7.28.08)
Patrick Nichols (4.27.07, 4.20.07)
Robert Bricken (4.20.07)
Yvonne Aburrow (2.21.06)

Your observations have improved this blog's content, and your interest has helped sustain it through sixty months and more than 150 posts. Please accept my thanks.

A Curricular Proposal

In his recent book on the Mexican War, A Glorious Defeat (Hill and Wang, 2007), Timothy Henderson observed that colonial Mexico was a deeply segregated society: whites virtually monopolized the priesthood, public offices, and professions, while the province's Indian majority had its own separate councils, law courts, and taxes. Mixed-race people, or castas, were denied a secure position in either of these two racial worlds, and while one of Mexico's universities, the Colegio de San Juan de Letran, was open to them, it was a third-rate school whose "meager curriculum included courses in how to beg for alms" (p. 9). It occurred to me, though, that given the stagnant economy in the modern United States and the limited job market facing recent college grads, such classes might prove welcome additions to the curricula of some smaller American universities. Perhaps the subject would become popular enough to justify graduate seminars in begging and special training in mendicancy for soon-to-be-cashiered faculty. Just a thought.

Capitalism Defined, Part I: The People Who Have All Our Money

In starting this series, I think it best to prepare a short, introductory definition of capitalism, though I must confess I am magnetically drawn to Kurt Vonnegut's example: "Whatever the people who have all our money, good or bad, drunk or sober, are doing today." One might also be tempted to consult that Cadillac of reference works, the Oxford English Dictionary, which defines capitalism as "A system which favours the existence of capitalists." I think everyone can agree that this isn't very helpful, though the OED is also kind enough to trace the first appearance of the word in English to a novel by William Thackeray.

James Fulcher offers more useful information in his book Capitalism: A Very Short Introduction (Oxford UP, 2004). Fulcher doesn't give a quick-and-dirty definition of capitalism (which helps confirm my suspicion that one doesn't exist), but he does identify the following core features of a capitalist economy:

1) Individuals can freely invest money "to make [more] money" (14). This is the base definition of capital: money that makes more money.

1a) The existence of capital, needless to say, presupposes the existence of money: a commodity (gold, bills of exchange, cowrie shells, Flanian pobble beads) which serves as a readily convertible
medium of economic exchange.

2) Less obviously, investors can freely convert other assets into capital. This means one can freely sell land and labor (14).

3) A correlate of 1 and 2, above, is that labor and capital must be mobile, or fluid, and applicable to whatever enterprises will generate the highest profits (18).

4) Finally, the prices of land, labor, and capital are set in competitive markets, whose fluctuations can be managed - and exploited - by financiers and speculators (ibid).

Fulcher suggests that capitalism will only emerge in countries where there are limited opportunities to enrich oneself through plunder or government largesse, which is why it originated in marginal places - the city-states of northern Italy, the water-logged Netherlands, the cold and rather poor kingdom of England - rather than expansive or strongly-governed ones, like sixteenth-century Spain or early modern China (37). It would therefore have been unlikely to emerge among the subject of my research, the Chickasaws, in the eighteenth century, since they derived much of their wealth from plunder (slaves in the early 1700s, captured European goods thereafter) and, by the end of the century, subsidies from the British government and the United States.

As for the implications of the rest of Fulcher's summary, I shall have more to say in later installments, where I also plan to look at the development of capitalism as a concept from the eighteenth to the twentieth century.