The Emergence Of Capitalist Thought, Thoughts On Capitalism

Capitalism was like Topsy—it just grew. Without foresight or plan, in Western Europe and England a social organization emerged and developed into what Marx called capitalism. Previous societies were substantially past-bound: tradi­tion and authority in the form of religion and political forces prevented change. One essential ingredient in the emergence of capitalism was the freeing of individuals from the church, the guilds, and the state. New categories of economic goods emerged with capitalism—labor, land, and capital, which people were free to buy and sell.

The land was owned by landowners who received rent; labor was controlled by workers, who received wages; and capital was controlled by capitalists, who received profits. These groups constituted distinct social as well as economic groups and served as the basis of classical analysis. What were the forces that determined the distribution of income among these groups? What were the dynamics of growth of the system? The capitalist owners of production were seen as providing the dynamics of growth—hence the name, capitalism.

Under feudalism the uses of labor, land, and capital were determined not by market activities but by tradition and authority. With the rise of the new form of social and economic organization appeared a new actor, the entrepreneur, who became the agent of change under capitalism. What was crucial is that capitalism, as contrasted with feudalism, had embedded in its system the machinery for further change. This is one of the most important insights one achieves in studying those great students of capitalism: Adam Smith, Karl Marx, and Joseph Schumpeter.

Although the entrepreneur was the causal factor in the dynamic change in capitalism, there was another element that permitted, if it did not initiate, evolutionary reformation. Under feudalism and mercantilism, one of the func­tions of the state had been to constrain the forces that produced change. Under mercantilism the state had been extensively used by special interest groups to protect vested interests, particularly of business groups. With the growth of markets there also occurred a significant restructuring of political life, and more democratic political arrangements coupled with the changing economy produced democratic capitalism. Democracy was important because it permitted change but preserved the underlying political and institutional structure. The revolu­tionary changes that have recently occurred in socialist societies are partly explained by this lack of an institutional structure that would tolerate small changes while protecting the basic integrity of the system.

The new society that replaced feudalism had two interesting elements: one, the entrepreneur, which gave the system dynamism; and another, democ­racy, which facilitated new arrangements without tearing the basic fabric of the society.
Markets coordinate, given a property rights structure. Markets allow people to trade and thereby increase the value of their initial endowment of rights. But markets do not solve the problem of initially unacceptable or unjust property rights or of allocation when property rights have not yet developed. Democracy is a system of government that allows people to vote to determine governmental policy and to modify existing property rights in order to keep the system sufficiently just that people will accept it. Under capitalism we have seen enormous modification of property rights through taxation, regulation, and empowerments, while the basic market framework was maintained.

The precursors of classical political economy, the classicals, and the neoclas­sical examined this emerging and changing system and gave us a theoretical understanding of capitalism from a particular ideological perspective. As the market system began to emerge, prices played a larger role as coordinators of individual economic activities. This vision of the function of markets was faintly seen by the preclassicals, seen with great clarity by Adam Smith and the classicals, and expressed by the neoclassical not simply as a vision but in formal models detailing conditions that would result in an efficient allocation of resources. Neoclassical economic theory developed into a theory that explained how markets operated, given the institution of private property. In this sense the resulting neoclassical economic theory is capitalist economic thought. Neoclas­sical economic theory takes the system as given; it does not address broad-brush questions such as the advantages of capitalism over socialism, how private property came about, or what structure of property rights is the best. Socialist and Austrian economists considered these broad-brush questions.

Actually, the distinctions among schools are not so clear. Neat dividing lines among schools of thought are pedagogical crutches developed by authors to clarify differences in approaches and views. As we will discuss below, Austrian economic theory and some socialist economic theory evolved out of neoclassical economics. Thus, their views could be seen as a subdivision of neoclassical thought. In the case of the Austrians, that would be correct. But over time, mainstream economics and Austrian economics have parted. By focusing on the early distinctions that set the two groups on separate paths, it becomes easier to understand the current distinctions.

Let us begin with a brief discussion of the evolution of Austrian economic thought.