defining capitalism

I find the most prominent online definitions of “capitalism” unhelpful. Although I lack sufficient expertise in political economy to define it reliably, this is what I’d offer:

Capitalism is an economic system with a large market for investing in enterprises.

  • A market is a system for exchanging things of value, whether it uses money or not. A few scattered exchanges do not constitute a market; the telltale sign is the emergence of prevailing prices due to many exchanges. Markets emerge in all kinds of systems, including within state communism. The participants in a market may be individuals, states, families, monasteries, firms, or other entities. Things, labor, land, ideas, and people can be exchanged on markets, or not.
  • An enterprise is a relatively durable, specialized, and large organization that produces goods. A company is an example, but so is a state-owned factory, a big farm, or a large family of weavers.
  • Investment can take the form of lending money or goods or purchasing a stake or share.

In capitalism, enterprises are numerous and important–they make most of the society’s goods. (This is in contrast to systems where individuals or families and kinship groups make most goods.) Furthermore, in capitalism, there are markets where people and groups can purchase and sell investments in enterprises. We call these investments “financial capital,” or sometimes just “capital” for short.

In European history, the medieval period offers many prominent examples of markets and a gradual growth of enterprises like guilds, big sheep farms, mines, and trading ships. For instance, the oldest enterprise still active in Poland is the Bochnia Salt Mine, active continuously since 1248. As far as I can tell, it belonged to the king at first, but that didn’t make it any less of an enterprise.

In the late Middle Ages, a market developed for investing in such enterprises, and there were even physical locations where people could make such investments, such as the Beurse in Bruges, built in 1246, which gives its name to stock exchanges in several countries today. However, I think the medieval investment market was dominated by family banks. The Medici and their competitors invested in monarchies, farms (notably, those belonging to monasteries), mines, and ships. It was possible to deposit money with the Medici or the Fuggers and thus reap some of the profits of their investments. (Likewise, today you can deposit funds with Deutsche Bank, which lends to Trump.) But there wasn’t yet a true public market for investments.

The emergence of a full capital market is exemplified by the first truly public corporation, theĀ Dutch East India Company (founded on March 20, 1602), which began to sell both stocks and bonds on the Amsterdam exchange. (Notably, its profits came from slavery and conquest as well as trade.) Soon derivatives were also for sale in Amsterdam, because people sold and resold their investments. Many other public companies formed on the Dutch model.

Capitalism (the exchange of investments in enterprises) developed along with Karl Polanyi’s Great Transformation (1944): the shift to a “market society” in which all kinds of goods, including labor and land, have prices and become fungible.* We could call this process “commodification.”

Capitalism and commodification are analytically distinct and may not have to go together. But it was presumably no accident that they arose in tandem. First, commodification allows well-capitalized enterprises to become highly profitable and increases incentives to invest in them. Second, if everything is subject to market exchange, why not investments? A certain mentality and set of routines and skills develops that is useful for financial markets as for other markets.

By this definition, the Soviet Union was not capitalist. It had many enterprises (often with brand-names and organizational charts not completely unlike US corporations) that bought and sold commodities on international markets. Prices were driven by global supply and demand. But no one except the state could invest in a Soviet enterprise. Sweden, however, is capitalist (notwithstanding relatively high rates of taxing and spending), since Volvo, H&M, Spotify, etc. are listed on stock exchanges. (IKEA belongs exclusively to a nonprofit foundation, which is an interesting anomaly).

If you favor free college or socialized medicine, it doesn’t mean you are against capitalism. Many capitalist countries offer these services. Capitalist countries also vary dramatically in measures of economic equality and mobility, from Slovenia (GINI 24.6) to South Africa (GINI 63.0). The question is whether you favor or oppose having a major market for investments in enterprises.

*Polanyi has current detractors, and I am not competent to assess his argument. Also, he writes surprisingly little about capital markets. His main relevant discussion concerns what he calls haute finance, dating to “the last third of the nineteenth and the first third of the twentieth century” (pp. 10 and following). See also: the Nordic model; the neo-feudalism thesis; a darker As You Like It; the Dutch secret; etc.

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About Peter

Associate Dean for Research and the Lincoln Filene Professor of Citizenship and Public Affairs at Tufts University's Tisch College of Civic Life. Concerned about civic education, civic engagement, and democratic reform in the United States and elsewhere.