Critical Issues in History

Series Editor: Donald T. Critchlow

Editorial Advisory Board

Paula Baker, University of Pittsburgh; Paul Bushkovitch, Yale University;
Jane DeHart, University of California, Santa Barbara; William
Rorabaugh, University of Washington; James Tracy, University
of Minnesota

The British Imperial Century, 1815-1914: A World History Perspective by

Timothy H. Parsons

The Great Encounter of China and the West, 1500-1800 by D. E. Mungello

Europe’s Reformations, 1450-1650 by James D. Tracy

The Idea of Capitalism before the Industrial Revolution by Richard Grassby

Turning Points: A Short History of the Modern Labor Movement by Steven
Babson

A Concise History of the Crusades by Thomas F. Madden

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Grassby, Richard.
The idea of capitalism before the Industrial Revolution / Richard Grassby.
p. cm.—(Critical issues in history)
Includes bibliographical references and index.
9781461644446
1. Capitalism. 2. Industrial revolution. 3. Economic history.
I. Title. II. Series.
HB501.G642 1999
330.12’2—dc21 99-34932
CIP

Printed in the United States of America

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Table of Contents

Critical Issues in History

Title Page

Copyright Page

SERIES EDITOR’S FOREWORD

1 - WHAT IS CAPITALISM?

2 - PRODUCTION AND EXCHANGE

3 - FROM STATUS TO CONTRACT

4 - THE SPIRIT OF CAPITALISM

5 - IDEOLOGY AND THE RISE OF CAPITALISM

BIBLIOGRAPHICAL ESSAY

INDEX

ABOUT THE AUTHOR

SERIES EDITOR’S
FOREWORD

The nature of capitalism and of free-market economies, as Richard Grassby

explains, presents the student of economic history with a complex set of
problems: What is the definition of capitalism? Are free-market economies
the same as capitalist economies? What is the significance of capitalism to
our understanding of economic development, social and political order, and
culture? Indeed, when did capitalism first emerge? Finally, is capitalism
good or bad?
In this book, Professor Grassby, a historian of seventeenth-century
England, answers these questions by framing capitalism as a historical
process that has changed over time. In providing this context for our
understanding of capitalism, he posits that the idea of capitalism has
symbolic importance but little historical reality or explanatory power when
applied categorically to every economy, society, political regime, or culture.
As a consequence, the significance of the idea of capitalism is that it is a
creature of myth rather than historical reality. The development of
economies, including market economies, is not predetermined but is
conditioned by human action and the balance of power. Economic change
occurs continuously and proceeds at an uneven pace. This change is not
universal or absolute and therefore needs to be studied within the
particularities and relative context of each society and historical period.
In stating his case that capitalism needs to be explained within specific
historical contexts, Grassby reexamines the rich historical debate over the
meaning of capitalism, the nature of production and exchange, the nature of
contract, and the “spirit” of capitalism and its ideological rise in the
industrial period. He offers to the reader a general definition of capitalism
in terms of the market economy and the growth of financial markets and
consumerism, but he qualifies this definition by arguing that these attributes
must be located historically within each society. Moreover, he warns that
many of the characteristics attributed to capitalism, including the concept of
“modernity,” were a consequence of the Industrial Revolution, which
transformed the economic basis of society with its new technological and
energy sources. Social scientists and historians, he adds, have focused their
greatest attention on the transition from feudalism to capitalism, not on the
transition to industrialism.
Readers of this terse study will find Grassby’s work challenging and
controversial. By arguing that capitalist development is an uneven historical
process, without determined attributes or consequences, he challenges
marxist, neoclassic, feminist, monetarist, rational-choice, and institutionalist
theorists who have imposed deterministic, abstract models on historical
developments unique to each given society. He accuses these theorists, both
marxists and nonmarxists, of assuming the existence of the capitalist system
and then looking to the historical record for illustrative examples. Instead,
he calls for students of capitalism to grapple with the diverse and
contradictory sources found in the historical record. Societies, he concludes,
develop piecemeal and can continue to function even when certain sectors
of the economic, political, and cultural sectors no longer function properly.
Outcomes are not predetermined.
In the end, Grassby finds that central to understanding economic and
social development is the importance of individual agency. Because
societies are composed of individuals whose behavior cannot be predicted,
all social systems are potentially unstable. Even capitalism with its great
benefits (and costs) appears to have its own life cycle, falling victim to old
age, lack of direction, disagreement over priorities, and incompatible ends.
Yet neither its rise nor collapse can be determined. The task of the student
of history is to examine the process of uneven and nonlinear development
within specific localities by keeping in mind the importance of societal
peculiarities and individual action. Perhaps one of the ironies of this
conclusion is that Grassby agrees in the end with Karl Marx’s observation
that humankind makes its own history.

Donald T. Critchlow
Series Editor
1

WHAT IS CAPITALISM?
There are few characteristics of the modern world that have not been
attributed to or blamed on capitalism. It is a concept invoked
indiscriminately by everyone, from neomarxists to neoconservatives, from
literary critics to political scientists and feminists, as an explanation for
innovations in every field of human activity—economic, social, and
cultural. Few have been able to agree, however, on what the term actually
means. Within and between each school of thought, the debate, often in
unintelligible jargon, over what constitutes the essence and significance of
capitalism has been continuous and intractable. As early as 1918, Richard
Passow listed 111 definitions of the term. Little consensus exists as to when
capitalism first appeared, what form it assumed, or how it may have
changed over time.
Capitalism is a system of ideas that owes little to the theoretical and
ahistorical constructs of classical and neoclassical economics. Although it
can function as a model of the relationships between different factors in an
economy, it has been used primarily by socialists, sociologists, and
historians and not by economists. When the term is featured in the works of
John Maynard Keynes or Milton Friedman, it serves as a polemical label
rather than as an analytical tool.
The idea of capitalism, like the notion of a world-system, is a composite
or ideal type. Ideal types are neither theoretical postulates nor empirical
categories, but fictive generalizations about the predominant characteristics
of a particular society, projected from selected historical facts and intended
to serve as a basis for universal analysis. The German sociologist Max
Weber, for example, constructed the nature of capitalism from actual
historical experience, concentrating on mentalities and on what the action of
individuals and social groups would be if directed rationally to a given end.
His ideal type was neither literal nor completely abstract, neither a
hypothesis to be verified nor a general concept, but what capitalism would
be under ideal conditions.
Weber’s contemporary, the historian Werner Sombart, employed a similar
but less precise ideal type. Sombart invented and was the first to popularize
the idea of capitalism as both a historically constructed actuality and a
conceptualized ideal. Karl Marx, in contrast, believed that history was an
aid to understanding capitalism (an expression that he never used, but that
can be equated with his “economic system”); however, the scientific laws of
history had to be deduced by theorizing. In marxism, the capitalist system
develops not in response to external stimulus but through its own inner
logic.
Although manifested in history, capitalism is fundamentally a theoretical
concept defined largely in terms of its opposite, socialism, with no physical
reality or empirical base. It is best treated as a metaphor, like the Industrial
Revolution or feudalism, both vague and amorphous terms invented long
after the events that they purport to describe. What is essentially a passive
model has, however, acquired a personality and life of its own and is
frequently regarded as a real force with the capacity to effect change.
Capitalism is credited with a sense of the future and has even been accorded
emotions and a sense of irony.

ECONOMIC CONSTRUCTS
Capitalism is most commonly identified with the free enterprise system as
distinct from both a traditional, collective economy and the modern,
centrally administered, command economy of socialism. In everyday usage,
the term capitalism has become a synonym for the market economy, which
in its theoretically perfect form is autonomous and self-regulating. Supply
and demand under conditions of free competition determine the price and
quantity of goods and labor. Opportunity and risk regulate the level of
investment. Resources are not allocated by gift exchange or through social
and political institutions, but by impersonal exchange between buyers and
sellers seeking to maximize their utility. The market, which can function in
principle without any physical site, converts inputs into outputs, clears
prices, and extends itself though integration of different sectors and
functions. The market mechanism alleviates scarcity and, subject to
constraints of time and information, satisfies the maximum possible selfish
choices of the sovereign consumer at least cost. In contrast to a self-
sufficient household economy, all production is geared to the market;
distribution is in the hands of middlemen who buy both raw materials and
finished goods for resale. The market defines status, creates obligations,
distributes surpluses, promotes specialization of function, and systematizes
value.
Market capitalism of this kind has been postulated as the dynamic force
in the early modern European economy since the publication of Adam
Smith’s Wealth of Nations. To Smith, the founder of Classical Economics,
the division of labor, both within and between economies, increased
efficiency and productivity, improved the quality of production, and
lowered costs. To the historical geographer Fernand Braudel, the mobility
of capital has been able to conquer both time and distance. He is, however,
idiosyncratic in that he distinguishes between the market economy and
capitalism. In his hierarchy of three economic systems, which coexist but
do not overlap, the bottom level is perceived as an unchanging, cyclical,
self-sufficient barter economy and the middle level as a simple exchange
economy. Capitalism before the Industrial Revolution is then identified with
a world economy of complex commodity and financial markets dominated
by a succession of great cities—Venice, Antwerp, Genoa, Amsterdam, and
London.
The American sociologist Immanuel Wallerstein has postulated a similar
concept of a world economy stratified into zones. But his world-system,
although it transcends national economies, is based on nation-states rather
than on cities. Although early world economies, like that of Venice, are
classified in his theory as precapitalist, he argues that a capitalist world
economy emerged between 1450 and 1640 in the wake of geographical
expansion and colonial settlement by Europeans, though some areas of the
world were not incorporated until later. The windfall profits of the new
markets and the import and circulation of American bullion created the
necessary surplus of capital for investment. A tripartite geographical
division of labor, linked by international trade, was established between a
number of core states (with different political systems) and a dependent
periphery and semi-periphery of primary producers.
 As a neomarxist, Wallerstein argues that the world economy was based
on the capitalist mode of production and on class differentiation; the surplus
production of the periphery drains to the core. But his theory of core and
periphery, each with a different mode of labor and type of production,
allows feudalism to coexist with capitalism. Whereas in traditional marxist
theory, free labor is a prerequisite of capitalism, Wallerstein treats the
coerced labor of slaves as a capitalist institution and envisages a world
economy supplied by seigneurial production. In contrast to earlier marxists,
Wallerstein demotes the importance of wage labor and emphasizes external
market forces rather than internal production factors.
Other theorists have focused on capital investment rather than on the
market. A capitalist economy is defined simply as one in which capital
predominates and is invested in production rather than in consumption. This
presupposes a money economy with a standard measure of value (in
contrast to a natural or subsistence economy) and a sufficient surplus to
cover current needs while exchanging that surplus. The direction and timing
of investment is determined by relative yield and by the cost/benefit ratio.
An economy is regarded as capitalist when it has a high ratio of fixed to
circulating capital and a high capital/output ratio with an increasing
proportion of capital goods. The essence of capitalism is defined as
continuous reinvestment; the standard of measurement becomes the ratio of
net investment to Gross National Product.
A capital-intensive economy presupposes a high rate of saving and a
rapid rate of aggregate capital formation. Investment capital can be
accumulated from income and profits or by expropriation. Marx thought
that primitive accumulation was achieved by extracting surplus labor value
from the peasantry through ground rents and that the more efficient
capitalists accumulated at the expense of their weaker competitors. Later
marxists have emphasized the windfall profits of colonial expansion,
especially the profit inflation supposedly generated by the influx of
American silver. But investment capital can also be borrowed and some
theorists have identified capitalism with the growth of private and public
credit. The American economist, Joseph Schumpeter, although somewhat
vague when he came to define capitalism, identified it with the private
ownership of capital, profit making, and credit creation that disturbs the
normal circular flow of the economy; he regarded the financial world as the
command center.
Marx, on the other hand, focused not on the relations of exchange or on
investment, but on the relations of production—that is, the social structure
that was necessarily created by commodity production undertaken for
profit. Marx defined capitalism as a mode of production. Exchange value
only became dominant after productive relations had been alienated. Once
the means of production had been appropriated and were owned by those
with capital, those without capital had only their labor to sell. Labor became
a commodity for hire and the workforce became a proletariat of wage
contractors.
In marxist theory, social relations distinguish capitalist from precapitalist
societies. Feudalism is regarded as a system of coerced labor; capitalism
requires the abolition of serfdom and the monetarization of all obligations
in a free labor market. Some differences exist between marxists as to the
respective modes of production in the ancient world and in feudal Europe;
one view is that two separate modes merged in the Renaissance. But
orthodox marxists still argue that under feudalism production was for use or
geared to local markets. They do not regard wealth as capital until it
controls the means of production. Merchant capital is classified as
precapitalist and subordinate to feudal overlords even after the growth of
long-distance trade and the rise of the fiscal state.

SOCIAL AND POLITICAL STRUCTURE

Capitalism has also been equated with a particular system of social
stratification. It is assumed that a market economy will create a market
society in which roles are not ascribed by birth, that those with the best
qualifications will be automatically selected. To liberal theorists, the new
social order created by capitalism is hierarchical, but open, finely
graduated, mobile, and meritocratic.
Other sociologists have, however, theorized that capitalism increased
social tension, that greater inequality in the distribution of wealth and a
more differentiated social system created role or class conflict. The French
sociologist Emile Durkheim emphasized the loss of self-sufficiency and
solidarity that resulted from the division of labor. By eliminating household
production, Marx argued, capitalism depersonalized and alienated the
workforce. The occupational status of the independent, self-employed
craftsmen, who owned their tools and shop, was depressed and the wage
laborers who replaced them were divorced from the means of production. In
marxist theory, capitalism polarizes wealth and creates new antagonistic
classes; civil society is dominated by the bourgeoisie who enjoy both
economic and political power while peasants and artisans are reduced to a
proletariat.
At the same time, capitalism has been identified with a broader change in
the structure of society from gemeinschaft (community) to gesellschaft
(association), in the classic terminology of the German sociologist
Ferdnand Tonnies. In this model, precapitalist societies are defined as
totally integrated, immobile, homogeneous, organic communities based on
custom, reciprocity, status, and kinship, on a social rather than an economic
division of labor, with no distinction between the individual and the social.
These are superseded under capitalism by an impersonal market society,
based on individualism, heterogeneity, contract, and private property rights.
Customary obligations acquire a cash value and the fabric of community
life is destroyed. Social transfers are replaced by individual exchange
without regard for social costs. Market capitalism, based on individual self-
interest and efficiency, defeats the moral economy, which is concerned with
equity and communal values. Honor triumphs over interest, wants triumph
over needs, and the market triumphs over society.
Since urbanization is virtually synonymous with civilization and with the
market, capitalism has long been associated with towns rather than with the
countryside. The high population density and the social fluidity of cities is
thought by some to have favored the division of labor and economic
individualism; urban contacts, it is argued, are secondary, segmental, and
utilitarian. Urban populations and land use have been analyzed in marxist
terms by historical geographers. According to location theory, towns with
water communications are more likely to have distant markets and be
market-oriented than landlocked towns, which are more authoritarian and
less capitalist.
But most urban theories emphasize the administrative, ritualistic, and
political roles of cities rather than their capitalistic function. Neomarxists
have embraced the notion of agrarian capitalism and have dethroned the
urban bourgeoisie. Central place theory argues that institutions and
occupations that do not require space concentrate in cities and create new
demand for goods, but the spatial relations between cities are interpreted
more in social and cultural than in economic terms.
Capitalism has also been equated with the nuclear conjugal family and
with the decline of traditional, group-based kinship. It is argued that the
divorce of capital from labor eliminates household production and reduces
the family to a unit of reproduction and consumption. The household
becomes a domestic retreat, separate from the workplace, in which
autonomous individuals with absolute property rights jealously guard the
privacy of their separate spheres against community-based interference. The
system of lineage and kinship, which in the past had provided some
measure of social control in the absence of effective government, is
destroyed because it is incompatible with a capitalist society. Weber thought
that capitalism could only develop after business had been divorced from
the household. In marxist theory, the survival of kinship and bureaucratic
centralization obstructed the growth of a bourgeoisie and capitalism in Asia.
A similar theory holds that the introduction of individual private property
rights transformed personal relations. Both the notion of romantic love and
the exercise of free choice in marriage are attributed to capitalism. To
Weber, romantic love was a cultural oddity (the opposite of rational,
controlled capitalism); yet it served as an antidote to capitalist alienation
and was necessary for the perpetuation and mental stability of an
individualist society. An increase in illegitimacy has been linked to the
emergence of wage labor; the growth of commodity production has been
hypothetically linked with enhanced sexual freedom.
Theories of gender relations also connect capitalism with patriarchy.
Friedrich Engels argued that the subjugation of women was a consequence
of the introduction of private property, that the capitalist mode of
production isolated women from the process of production and made them
economically and emotionally dependent on their husbands and fathers.
Capitalism divided wives into either idle bourgeois or proletarians. Feminist
theorists, defining patriarchy broadly in physical, emotional, and spiritual
terms, have differed on the questions of whether or not patriarchy preceded
capitalism and how women were affected by the emergence of contract as
an organizing principle. In capitalist society, some have argued, women are
identified with and attacked as symbols of capital accumulation.
 Capitalism has also been defined in terms of institutions rather than the
market. Both at the micro level of the business firm and the macro level of
the whole economy, emphasis is placed more on collective norms of
behavior than on unbounded rationality. Business decisions are thought to
depend on the internal power structure within firms as well as on prices in
the market. Douglas North has constructed a theoretical model of economic
development around a historical trend from high to low transaction costs;
institutions create the incentive to channel effort into activities that bring
the private rate of return close to the social rate of return.
To institutional theorists, the capitalist system rests on contract law and
on an unabridged right to hold, assign, and exchange all types of private
property. Contract is a cost-minimizing method of generating information
about several opportunity choices for scarce resources. An autonomous
market presupposes peace, a legal mechanism other than oaths to enforce
bargains, private control of the means of production, free circulation of
goods and labor, and the legal right both to exclude others and to alienate
property. Owners must decide how assets should be employed, because they
bear any losses incurred in the search for higher value from use. A capitalist
society views all rights as property rights and rejects communal ownership,
though the term state capitalism (a seeming contradiction in terms) is
sometimes used to describe market-style economies in which the majority
of fixed assets are owned and invested by the state, either directly or
indirectly.
Capitalism has also been equated with specific business institutions such
as the joint-stock company, with financial instruments such as the bank
note, and with managerial techniques such as accountancy. The joint-stock
company can indeed be regarded as the ancestor of the modern corporation;
it both spread investment and risk among many shareholders and separated
ownership from management. Sombart singled out double-entry
bookkeeping (in which all transactions are recorded as a credit to one
account and a debit to another) as the hallmark of early capitalism.
Accountancy had to assume an objective economic reality that could be
abstracted, classified, and measured; the move from narration to tabulation,
as accounting developed, depersonalized the economic process.
Finally, capitalism is identified with the transition from a “domain” to a
“tax” state, from household to national government. So long as government
was patrimonial, there could be no clear distinction between public and
private or between the state and society. Weber thought that the institutional
structure of capitalism was created by the universal legal system of the
bureaucratic state.
A capitalist economy cannot function without a unified, secure market
and this requires a centralized polity that can maintain order, support a
sound currency and fiscal policy, and codify and enforce the law. Even an
uncompromising liberal like Friedrich Hayek recognized that the market
needed rules and that states supplied necessary services. Others have argued
that capitalist societies are ruled by politics and not by the market.
Some marxists have emphasized state formation as essential to
capitalism. The political upheavals of the seventeenth century have been
represented as a failure to overcome obstacles to capitalism and as the last
phase of the transition from feudalism to capitalism. The Civil War in
England is conceded to have been an aristocratic revolution, but the culture
is still regarded as moving in a bourgeois direction. Political conditions
were secured, it is argued, that allowed capitalism to operate through
inflection of older forms and allowed the bourgeoisie to emerge within the
nation. The feudal-aristocratic character of absolute monarchy has been
much debated among marxists. France presents a particularly difficult
problem because feudalism was not officially abolished until the Revolution
and because capitalism can only triumph after the bourgeoisie have carried
out their political revolution.

CULTURE AND MENTALITIES

To most theorists, capitalism is more than just an economic and social
mechanism; it is an ideology whose ideals can motivate individuals to act.
Capitalism can be defined as an imposed culture with prescribed patterns of
behavior; the mode of production becomes a pluralistic lifestyle that
commodifies all things. Some historians have argued that a national
capitalist culture was created in England by the secularization of religion
and the fragmentation of the customary moral economy. Capitalism has also
been identified with psychological drives, with a unique attitude of mind,
and with specific ends. Schumpeter thought that capitalism created a
mentality compatible with itself.
 George Simmel argued that in a capitalist society money is more than a
medium of exchange and a repository of purchasing power; it is the
measure of all things and the only measure of worth. Individuals have
complete freedom, but all relationships and qualities are expressed in the
common denominator of money, in quantitative and not qualitative terms,
since only the measurable is regarded as real. Value is objectified by
exchange that converts substantive values into divisible money values.
Marx and the critical theorists argued more broadly that capitalism made
a fetish of money and goods and regarded the production of goods not as a
means, but as an end in itself. Man is alienated from his essence and the
relationship between humans and their labor is treated as a material
relationship between things. Capital itself is alienated labor, objectified and
reified as an external force. Value becomes intrinsic to every commodity
without regard for the labor content in its production. Goods can be
possessed at a distance and have more value as symbols than in use. Later
versions of this theory identify capitalism with commercialized mass
culture, with a world dominated by commodities and bereft of personal or
public meaning.
The transition from feudalism to capitalism has been detected in every
facet of culture. Capitalism is alleged to have generated the mental attitude
of modern science and medicine. Literature, it has been argued, was
dominated by awareness of the capitalist experience. Book production in
England is alleged to have passed from an archaic economy of gift
exchange and aristocratic patronage to a bourgeois culture of print in a self-
regulating literary marketplace. The content and themes of drama are
interpreted as allegories of the market; the theater replays the struggle
between a customary and a capitalist culture. Literary theorists discuss the
“poetics of nascent capitalism” and interpret the lists of traded commodities
in the commercial manuals as icons bearing a subliminal message that they
be acquired. The rise of the novel is directly attributed to economic
individualism. Capitalism is alleged to have commodified both time and
space; the universe became mechanical instead of organic, and the
uncertainty of linear evolution replaced the security of cyclical
development.
The most famous idealist theory of capitalism is Weber’s Protestant
Ethic. Weber believed that events could have intellectual causes, that a set
of beliefs could determine both the outlook and the conduct of a society.
Capitalism could only emerge after the idea had been invented. Weber’s
spirit of capitalism had initially been formulated by Sombart, who equated
capitalism with both rational profit-maximizing and a system of production
that revolutionized the work patterns of traditional society. Sombart also
regarded the end of capitalism as noneconomic; however rational the
means, the objective was not the utilitarian satisfaction of economic wants
but the irrational pursuit of power and moral status. Weber and Sombart
both equated capitalism with two, not altogether compatible, attitudes—
rationality and asceticism.
Where Weber differed from Sombart was in his emphasis on religion,
that the spirit of capitalism was a secularized by-product of Calvinist
teaching on predestination and the calling. He freely admitted that
acquisitiveness was an ancient human trait, but he argued that endless
accumulation acquired a new and more effective motor in the early modern
period, that it became a duty, an end in itself. Profit was maximized through
rational calculation, not through speculation, entrepreneurial adventurism,
privileges, or monopoly. Free labor was organized rationally for the
irrational end of acquisition. Worldly asceticism—that is, thrift, self-denial,
and awareness of time—bene—fited both production and accumulation.
The most important change in mentality, in Weber’s view, was the
introduction of the work ethic, which countered the elasticity of effort and
preference for leisure that in the past had reduced output at the margin.
Weber conceded that precapitalist societies had accounting methods,
rationality, and acquisitive entrepreneurs; what they lacked, he argued, until
after the Protestant Reformation was the notion of work as a vocation or
duty.
In later life in his General Economic History, Weber played down the
role of ideas in permitting and encouraging capitalism and recognized the
importance of many other factors, including the growth of demand for
goods. To modern theorists, more concerned with demand than with supply,
the essence of capitalism is not frugal asceticism, but hedonistic
consumerism, driven by fashion rather than necessity. It has been argued
that in the eighteenth century Weberian deferred gratification collapsed into
spending, into an insatiable, single-minded, irrational desire for goods. The
consumption that was intrinsic to capitalism was based not on social utility
but on individual sentiments, dreams, and delusions. In this theory,
capitalism created a consuming public composed of isolated individuals
who wished to display purchasing power, acquire personal meaning and
social identity, and win the approbation of third parties.
Weber also recognized in his later work that capitalism was a historical
continuum, that the market was created over time by profit-seeking
entrepreneurs, not by ascetic bureaucrats. All theories of capitalism
emphasize the importance of individualism—individual rights, the idea of
self, the pursuit of self-interest. In an enterprise culture, Weberian
rationality has to be combined with boldness and imagination. Some
theorists have therefore emphasized the willingness to take risks; others
have regarded profit not as expropriation of surplus labor but as a premium
for innovation earned by those willing to write off old fixed assets.
Schumpeter combined Austrian marginal utility theory with the traditions of
the German Historical School to produce a dynamic theory of capitalism.
He deplored the separation of economics and sociology and applauded
Weber’s efforts to combine the two subjects as sozialokonomik; the
individual, he stressed, decides when and where to invest even though
society produces the surplus. Clusters of entrepreneurs in bursts of
innovation create new production functions by destroying old routines. To
later theorists of entrepreneurship, only the free capitalist market can
provide an opportunity for discovery.

CAPITALISM AS PROCESS
The core element of most theories of capitalism is economic change. When
historians and sociologists talk about the rise of capitalism, they usually
have in mind the economic development of the West. The idea that
economic growth occurred in progressive evolutionary stages dates back to
the Enlightenment. The first chronicler of the transition from primitive,
self-sufficient feudalism to mercantile capitalism was, in fact, Adam Smith,
who, of course, wrote before the Industrial Revolution. Marx retained
Smith’s growth model virtually intact, though he identified each stage with
a change in the mode of production and in the relationship between capital
and labor. Because he wished to highlight the role of capital and downplay
the role of technology, Marx regarded industrialization as the final stage of
capitalism.
 The theory of evolution through stages was adopted by the German
Historical School in preference to the ahistorical abstractions of Classical
Economics; specific epochs were identified with a total economic system,
each based on a distinctive institution. Sombart, for example, distinguished
chronologically between early, high, and late capitalism, allocating to each
stage its own value system, worldview, organization, and productive
process.
Henri Pirenne believed that national economies grew out of urban
economies, but his stages of growth were equated not with economic
systems, but with individual capitalists, by which he meant rootless,
calculating, speculative entrepreneurs. Pirenne thought that each stage of
historical development had its own group of entrepreneurs, because the
successful always abandoned business for rentier-ship, and because
societies oscillated continuously between phases of economic freedom and
interventionism. Pirenne’s thesis of entrepreneurial discontinuity can be
applied to the economic leadership of nations whose rise and decline
relative to each other has a distinctive curve. According to Cardwell’s law
of interrupted progress, no society can sustain its technological or economic
leadership forever. N. S. B. Gras, who identified capitalism with
businessmen employing capital productively, also envisaged a progressive
increase in the scale and sophistication of business organization from petty
trade to commerce, industry, and finance.
Although stage theories are linear, they are not necessarily continuous or
progressive. Marx prophesied that capitalism would eventually succumb to
its own internal contradictions, to a falling rate of profit, to over-production
and under-consumption. Ricardo’s law of diminishing returns
metamorphosed into the law of diminishing marginal utility. Schumpeter
considered that stationary capitalism was impossible, that capitalism was
inherently unstable and cyclical while able to absorb shocks and transform
itself. His theory of entrepreneurship was in essence a theory of punctuated
equilibrium with short bursts of rapid change rather than incremental
growth. Conflict theory envisions a continuous struggle to preserve
equilibrium in a capitalist economy.
The question of when, where, and how capitalism emerged has primarily
been a concern for marxist theorists, among whom it has provoked a long
debate. It is generally agreed that England became the first capitalist society
in the seventeenth century, even though London was not the quintessential
bourgeois city. The United Provinces, on the other hand, are classified by
Eric Hobsbawm as an economy of feudal business, even though they
dominated the world economy. Some marxists have conceded that
capitalism was not a historical imperative and that the transition to
capitalism may only have occurred in England. As a small concession to the
undeniable growth of agricultural production and the long-lived supremacy
of the landed class, some contemporary marxists have embraced the
concept of “agrarian capitalism.” Others, following Hilferding, have
advanced theories of finance or state monopoly capitalism.
A more important issue is the relationship not between feudalism and
capitalism but between capitalism and that other great discontinuity in
orthodox histories of the Western world—the Industrial Revolution. This
transition has attracted less debate and many have chosen to blur the
distinction between capitalism and industrialization. Ernest Gellner, for
example, has envisaged a leap directly from an agrarian to an industrial
society. The United States, it has been alleged, moved from barbarism to
decadence without becoming a civilization. To Pirenne, the Industrial
Revolution was just a more intense form of earlier commercial
development. One school of economic historians has replaced the old model
of rapid industrialization driven by technological innovation with a model
of gradual reduction over time in the proportion of the population engaged
in agriculture. Others have discovered several Industrial Revolutions and
postmodernists employ the term postindustrial capitalism.
In short, many concepts of capitalism have emerged with both real and
symbolic attributes, each based on different formulas and many of them
deliberately vague and ambiguous. Whether defined as an economic
system, a social structure, or a set of attitudes, capitalism is a process rather
than an event, defined in terms of function and values rather than in
quantitative terms. It constitutes both a pattern of economic behavior and a
set of ideas governing that behavior.
Does the idea of capitalism in any of its overlapping forms serve as a
useful tool for comprehending the transition to modernity? Do any of the
variant theories, when tested against empirical evidence, describe historical
reality or explain the comparative development of the world? If not, then
why has the idea survived so long and been so widely employed?
2

PRODUCTION AND EXCHANGE

The main problem with the idea that capitalism emerged at a particular
historical moment is that it is hard to find a precapitalist economy. All
human societies exchange surplus commodities, invest capital, and
maximize returns in terms of their specific cultural values. Land, tools, and
knowledge—all essential elements of the economic infrastructure—can be
regarded as capital assets. Although the influence of the market can be
restrained by geographical isolation, political interference, or cultural
inhibition, it has rarely been totally suppressed or ignored. Market
capitalism appears as old as civilization and is recognizable even in
primitive societies.
Nor do economies fit into easily defined historical stages of development
such as agricultural, commercial, industrial, and financial capitalism. To
Marx, the feudal economy was distinguished from a capitalist economy by
self-sufficiency and by production for the household, not the market.
Peasants held their land by service, not for a money rent. In fact, most
features of preindustrial capitalism can be found in the medieval economy
and many at a much earlier date. Nor did one type of capitalism supersede
another as a dominant form; they all coexisted, overlapped, and were
interdependent.
Capitalist institutions were not, however, equally important in all periods
and cultures. Both quantitative and qualitative changes in economic
organization occurred over time. The market might be ubiquitous, but its
degree of integration and dominance has varied. Some financial practices
and methods of production date only from the modern era. Capitalism may
be an abstract economic construct, but if it is manifested in history, it can be
measured and empirically tested.
MARKET EXCHANGE
A central theme throughout human history is the continuous extension of
the division of labor and the widening, deepening, and sectoral integration
of the market. The exchange system is not rigid or monolithic in structure.
Markets can function by barter without a bullion-based currency and
without the value of goods being expressed in self-regulating prices; in their
search for equilibrium, markets are inherently unstable, oscillating between
glut and scarcity and subject to short-and long-term cyclical fluctuations.
Yet the general principles of the market are timeless. Specialization by
function allows producers to increase output at lower cost and to achieve
economies of scale. Market centralization improves communications
between buyers and sellers and thereby reduces transaction costs.
Competition matches supply to demand and equalizes prices. Uncertainty
creates opportunity for profit. Trade permits the substitution of resources.
One school has argued that the market did not dominate preindustrial
societies. To Karl Polanyi, markets were peripheral in early economies that
exchanged goods through symmetrical reciprocity, not through centralized
redistribution. Resources were allocated by social and political institutions;
householders produced for their own use without reference to market price.
Other scholars have, however, demonstrated that primitive societies were
familiar with the concept of exchange value. Market exchange has been
discovered in all the ancient civilizations, from Mesopotamia onward. It has
been shown that prices were not always fixed by the polity, that private
capital did exist alongside public assets. Ancient Athens and Rome had a
full-fledged market economy with durable economic institutions. The
markets created by Islam and the medieval Italian and German cities
embraced the whole known world and exchanged cheap, bulky
commodities such as timber, salt, grain, wine, and minerals as well as
luxury silks and spices.
Nonetheless, the development of the market in stages over time was
uneven, erratic, and incomplete. A hierarchy of different markets existed—
regional, national, and international. Early societies, like medieval England,
could have active commodity markets but weaker factor markets allocating
land or labor. Preindustrial economies did not really have autonomous
markets. Monopolistic institutions weakened or eliminated competition.
Markets were too separated by distance and time to provide adequate
information to participants. Labor costs were high, diffused, and inelastic.
Before the Industrial Revolution, markets could not operate in the classical
sense; the premodern world was less rational and optimistic. Medieval
landed estates were commercialized, but they were managed as political and
social entities, not as businesses. In preindustrial societies, the market
economy coexisted with payments in kind, self-sufficiency, and forced
allocation of resources; they were dual economies that were not fully
integrated.
The structure of international trade was changed by massive European
colonization of the world from the sixteenth century onward and by the
geographical transfer of commodities and centers of production.
Capitalism’s center of gravity shifted from the Mediterranean to the
Atlantic. Regional and national economies were tied to distant markets by
complex multilateral trading patterns. The volume of international
transactions increased and the price to consumers of several staples fell. In
England, the gains from trade at the margin were substantial: by 1700,
exports represented 8 to 9 percent of the National Income and supported 20
percent of the population. But there was no world economy until the
twentieth century. So long as transport costs remained high, goods produced
locally (even imitations) always had a price advantage. Regular needs could
only be satisfied regionally by rural industry.
The most important market was in fact the domestic market. In England
the towns became large-scale distribution centers for food, fuel, raw
materials, and discretionary consumer goods and had sophisticated housing
markets. The metropolitan market was a national market. The main
difference between the medieval and the modern economy was not
employment of capital but a more focused and less intermittent demand.
The slow growth of aggregate income always limited the level and rate of
growth of demand. In a labor-intensive economy, real wages could not
simultaneously be low enough to keep the production cost of goods
competitive and high enough to stimulate demand. In England, the domestic
market was sufficiently unified and large by the eighteenth century to
justify specialization of production and distribution. But it was the social
and economic structure that determined income distribution, which in turn
determined purchasing power and consumption—not the market.

FINANCE
A capitalist economy presupposes both that sufficient capital has been
accumulated to meet needs and that financial institutions have the capacity
to transfer that capital to entrepreneurs to float new businesses. Without
capital markets to manage capital flows and hire and sell productive assets,
savings cannot be converted into investment capital and there can be no
rentier capitalists. The essence of finance capitalism is the creation of
fictitious money through the advance of credit.
Capital formation has been continuous throughout history, and there has
always been a capitalist class in the sense that a tiny minority of any
population owned or controlled the majority of capital assets. A low level of
profits and savings and a low net reproducible capital-output ratio
combined with a high cost of maintaining fixed assets to slow the rate of net
capital formation before the Industrial Revolution. The view of the price
historian Earl J. Hamilton, that the monetary inflation of the sixteenth
century generated high profits as wages lagged behind prices, is no longer
tenable. But a steady decline in the level of interest rates in early modern
England and France suggests both a reduction in risk and growth in the
capital supply. In the Netherlands, the capital stock increased by a factor of
fifty between 1500 and 1650 and the rate of interest fell from 10 percent to
under 4 percent. The growth of capitalism was delayed less by shortages of
capital than by limited opportunities for profitable investment.
The credit system, including the use of financial instruments like the bill
of exchange (which transferred funds through third parties), was of great
antiquity. The trading systems of the Islamic and medieval world had a
highly sophisticated remittance system. By the sixteenth century, the
provision of credit was a dominant feature of most transactions. What
changed in the seventeenth century was the efficiency and scope of the
mechanism by which resources were borrowed or anticipated. The
introduction of stock markets during the seventeenth century, with
assignable shares and specialized brokerage services, improved the liquidity
and mobility of capital and created the possibility of permanent funded
public debts and of arbitrage between prices in different markets. As
transactions became more secure and the level of confidence rose, capital
assets were represented by paper instruments rather than by commodities.
Now, subject to speculative crises such as the South Sea Bubble and Law’s
Scheme, it was possible to create credit on the basis of expectations.
The most visible instrument of financial capitalism was the bank.
Banking functions can be identified in early societies, and medieval Italian
financiers invented and refined many of the core features of modern banks.
Most early deposit banks in Europe were, however, exchange institutions
with an urban and not a national base. The Wisselbank of Amsterdam did
not issue notes and was conservative in its expansion of credit. Although
anticipated in various ways, the foundation of the Bank of England in 1694
after the establishment of Parliamentary sovereignty in 1688 created a
different financial institution that was tied to the fiscal needs and the taxing
power of the state. In preindustrial economies, however, bankers were
neither promotional nor speculative capitalists. They were more active in
collectively underwriting public loans than in providing unsecured
advances to industry for fixed and working capital.
Joint investment with active or sleeping (simple investors) partners is
also a practice of great antiquity. Complex companies of shareholders with
huge capital assets and multifarious business interests date from the
thirteenth century in medieval Italy. The legal fiction of the corporation
gave companies institutional, if not economic, permanence. Individuals
could buy, sell, and transfer shares without dissolving the business entity.
The scale of enterprise increased continuously; the leading international
company of each era was larger than its predecessor. During the seventeenth
century, water companies, public banks, and giant trading corporations, like
the English and Dutch East India Companies, emerged with permanent joint
stocks and an ever-changing body of shareholders drawn from the general
population. Public insurance corporations date from the eighteenth century.
Ultimately, the economy would be dominated by giant firms run neither by
capitalists nor by the market but by bureaucracies of specialized executives.
Such institutions, which divorced ownership from management, were,
however, the exception even in the early decades of industrialization. Even
highly capitalized industries, like coal mining, functioned without public
stockholders. The majority of joint-stock companies that were floated (often
fraudulently) by promoters failed. It was not until the Railway Age that
shares became a form of property in their own right and that the corporation
acquired a life of its own. Only slowly did control of the means of
production pass from individual capitalist owners to technocrats and
professional managers. A corporate culture based on institutional loyalty
and internal discipline emerged late as a long-term consequence of
industrialization.
Early historians of capitalism, like Sombart, placed great emphasis on the
adoption of double-entry accounting as an instrument of rational profit
maximization. Weber identified capitalism with rational, permanent
enterprises governed by methodical routines. Without question, most
accounting methods and numerous other business techniques were invented
in medieval Italy with some borrowings from Islam. Tuscan accounting by
the fourteenth century was able to distinguish the capital of a partnership or
firm from the wealth of the partners. These facts are hard to reconcile with
the view that capitalism developed in the sixteenth century. Sombart, who
was aware of Italian precocity in this respect, had to argue rather
disingenuously that the Italians did not seek to maximize their profits.
In fact, there is no obvious connection between double-entry accounting
and capitalism, which owed much more to developments in public finance.
Few businessmen employed the technique or knew how to define real cost
or verify the current value of their resources or project future cash flow.
Preindustrial firms did not employ budgeting, forecasting, market research,
or inventory control as management tools. The accounts of the joint stock
companies reveal little understanding of the term capital. Early
accountancy was not really mathematical and it played a passive and
symbolic role in business. Information was gathered and displayed for ritual
assurance, to create myths, and to bolster decisions that had already been
made on inadequate knowledge.

PRODUCTION
Although economic growth is usually identified with industrial production,
no economy can expand without an efficient agricultural sector. Even a
heavily urbanized economy like that of the Netherlands had a capital-
intensive agriculture. In sixteenth-century England, land appreciated in
value as the population increased and common fields were enclosed. From
the seventeenth century onward, helped by greater investment, the
productivity of English agriculture improved continuously. As early as
1700, England had no peasants and only half the workforce was employed
in agriculture; despite some pockets of subsistence agriculture, farmers
produced for the market, land was treated as a commodity, and there was an
integrated rural market. These changes have been categorized as agrarian
capitalism.
Neomarxists have come to accept the idea that agriculture can be
capitalist and produce a bourgeoisie. It has been applied both to England
and to the English colonies in America, which, to some historians, never
passed through a precapitalist stage. But the notion of agrarian capitalism is
not easy to reconcile with traditional marxist teaching on the relations of
production and the formation and conflict of classes. English agriculture
was in fact transformed by demographic pressure and by the market with
some government support rather than by any basic change in the mode of
production. Many landowners were neither feudal lords nor active
capitalists, but rentiers who did not control agricultural production.
Although some towns had a parasitic role as centers of administration
and leisure, others retained their importance as centers of manufacture and
of consumption. Demand was projected outward from the resident
population; export industries could be founded initially on the consumption
of luxury goods by urban elites. But town and country developed in unison;
the desire of farmers for goods supplied by the towns acted as an incentive
to improve their income from agriculture.
Before the Industrial Revolution, commerce served as the catalyst for
economic change. Production was controlled by merchants, not by
industrialists. The capitalist acted as a middleman between producer and
consumer, supplying raw materials to artisans both in the towns and in the
countryside. The rural workforce, particularly in pastoral regions, combined
industrial with agricultural occupations. In preindustrial England, with its
limited technology and small-scale production, agriculture and industry
were linked through the domestic system. In all but a few specialized
trades, the merchant capitalist undermined the self-sufficiency of the artisan
and the guild structure of manufacture. The principal concern was
efficiency of organization, not growth of output.
 Most commodities, including capital goods like housing, were produced
on a small scale by small units. By the end of the seventeenth century
smelting, dyeing, brewing, and alum and salt manufacture were fueled by
coal; the blast furnace and the slitting mill had transformed the iron
industry. Piecemeal technological innovation, often by immigrants, had
improved the manufacture and processing of textiles, sugar, and paper. But
most industries were organically based, dependent on water power and
vegetable products. Although the location of raw materials and channels of
communication encouraged some regional specialization, production was
concentrated in fixed plants only in a handful of industries, such as naval
shipbuilding, smelting, and alum manufacture.
Whereas agriculture was limited by supply, industry was limited by
demand. Without mass consumption, only the state could provide a
consistent, large-scale market for a particular commodity, whether guns or
butter. Nor was the technology yet available to systematically mechanize
production or increase output per capita. Costs were not reduced through
innovation nor was productivity increased by substituting capital for labor.
A distinction can be drawn between commercial and industrial
capitalism. Land constituted the main long-term capital asset before the
Industrial Revolution. Fixed capital was relatively unimportant except in
land reclamation and drainage, shipbuilding, mining, and heavy industry.
Working capital usually circulated in stocks of raw materials, unfinished
goods, inventory, and credit. Merchant capitalists were prepared to take
risks and they acknowledged the importance of putting money to work. But
success was unpredictable and so they often chose to hedge their bets rather
than maximize their returns. The primary purpose of business organization
was to pool and limit risk. Investors preferred short-term and liquid
investments; inertia slowed their response to investment opportunities and
they were reluctant to shorten the life of fixed assets by innovation.
Through misallocation and underutilization of resources, capitalists
deviated from the optimum path of development. The struggle for markets
meant that capital flowed where it could make the best marginal return, not
necessarily where it was most productive. Often it was employed in usury,
purchase of office, or lending to governments rather than in trade or
industry. Profit levels, adjusted for risk, were often no higher than the
prevailing rate of interest, and social overhead investment did not yield an
immediate return on investment. The growth of capitalism might depend on
a rise in net investment and on reinvestment in productive facilities, but
investment opportunities were limited and the costs often exceeded the
benefits.

RELATIVE CHANGE
The idea that capitalism emerged only in early modern Europe does not
square with the historical facts. If it is equated with a functioning market for
goods or credit, it is visible at an early date in practically all cultures. Even
isolationist societies, like Tokugawa Japan and Ming China, had cities,
mines, specialized markets, paper money, a credit system, and bills of
exchange. Mughal India had huge foreign and internal markets, double-
entry bookkeeping, financial instruments, and large-scale manufacturing.
The long-term trend was certainly away from simple self-sufficiency and
communal distribution toward a sophisticated market economy. This was an
unavoidable consequence of the search for greater efficiency, for a higher
ratio of output to input of energy. But different economies evolved at
different rates of speed and without sudden or permanent discontinuities.
The extension of the market, the division of labor, and the creation of a
credit system were all products of a continuous and incremental process of
evolution. Over the centuries, the scale and structure of economic activity
was transformed more than once with a consequential increase in levels of
wealth.
Before the Industrial Revolution, however, this represented more of the
same—larger companies, wider markets, a more complex payments
mechanism, greater concentrations of capital, and the faster circulation of
goods. Unlike industrialization, which can be defined and periodized in
terms of output and productivity, capitalism is difficult to standardize and
quantify. Nor is it always clear when quantitative change should be
regarded as qualitative, since only the former can be measured objectively.
Capital was, moreover, only one of many factors in economic development,
some of which, such as population and technology, were exogenous to the
economy. The scale of economic activity certainly increased over time, but
the changes were relative rather than absolute, changes of degree, not of
kind. The fundamental character and direction of capitalism remained the
same, even though it grew stronger and developed at a faster pace.
 The economic growth of nations has not been linear, regular, uniform, or
balanced. Some early capitalist economies failed to industrialize and others
deindustrialized or decentralized in response to competition and market
risk. In the seventeenth century, Italy gave up banking and the manufacture
of textiles for export and became an agricultural economy, because it lacked
the capacity to compete with the Atlantic powers; the Dutch followed a
similar path in the eighteenth century. Others diverged from the norm:
England and Holland were little affected by the demographic and economic
crisis that hit much of Western Europe in the seventeenth century. Some
societies experienced a retrogressive cycle of development. In Eastern
Europe, which had a different land/labor ratio from its Western counterpart,
feudal services were reimposed in the early modern period; the Junkers
became agrarian capitalists with serf labor.
It is not unreasonable to associate the rise of capitalism with the
preindustrial European economy. The world economy was, for example,
created by European exploration and colonization, which sharply
differentiated the economic development of the West from that of Islam and
China. The Great Discoveries reduced the man-land ratio in Europe and
indirectly monetized the fiscal and international trading system with
American bullion. But preindustrial economies had few defenses against the
Malthusian specter of population exceeding resources, and they were labor-
intensive and poor. Their commodity and financial markets might be
capitalist, but with limited sources of energy, low productivity, and a
predominately agricultural workforce, they could not achieve mass
production and consumption.
Full-fledged capitalism had to be based on an increase in demand as well
as supply; on a larger volume of continuous, standardized production; on
higher real incomes; and on discretionary purchasing power, economies of
scale, lower unit costs, and the separation of retail distribution from
production. Mass markets, rapid technological change, and the divorce of
ownership from management are all modern developments. If a capitalist
economy is defined as one in which total economic output is produced by
capitalist methods, then capitalism must be identified with the Industrial
Revolution.
3

FROM STATUS TO CONTRACT

The earliest societies with their limited resources had to restrain individual
desires; they could only survive through cohesive action and mutual aid. It
was taken for granted that society was an indivisible and organic whole;
land and labor were allocated by kinship and by political obligation, not by
the market. In stages, however, over a long period of time, the economy was
separated from society; social and political institutions were more subjected
to market forces. New social groups emerged wherever and whenever trade,
urbanization, government favor, or war created new wealth. Those societies
that embraced capitalism became more mobile; their members were
differentiated by merit and performance as well as by birth because the
market recognizes no distinction of persons. In the West, the conjugal,
nuclear family became more private and domesticated while group-based
kinship and communal obligations declined in importance; individuals
eventually acquired the right to choose freely whom they married.
The community increasingly took second place to a new conceptual
entity—the nation-state-which was governed by a centralized bureaucracy
drawing on the resources of an integrated fiscal system. If the early modern
period witnessed the birth of capitalism, it also witnessed the universal
growth of bureaucracy, the military revolution, and in some states a
financial revolution, which enabled governments to anticipate revenue on a
massive scale. Both in theory and in legal practice, individual rights
acquired greater recognition and force; in England, the concept of private
property was clarified while government interference to protect the moral
economy became less common.
The transition to a capitalist society was not, however, completed
smoothly. The new society was still legitimated by old values and the
patriarchal system survived the triumph of contract. Kinship connections
retained their importance, and national interests did not supersede those of
community and region. The claims of merit still had to compete with
inherited status and privilege. The role of capitalism in state formation was
also equivocal. It is difficult to determine whether the state created the
market or the market created the state; whether stability was created by
government or vice versa. Bureaucracy was to prove stronger than
individualism; property rights were far from absolute.

SOCIAL DIFFERENTIATION
Undoubtedly, higher levels of capitalization did reduce the number of self-
employed craftsmen who merely owned their tools and a shop and did
increase the number of wage earners. Entrepreneurial middlemen divided
production from distribution and undermined the cooperative guild system,
with its monopolistic tendencies and restrictive practices. The expansion of
the market created an international division of labor; new technologies
made old skills redundant. The capitalist was sometimes a financier without
roots operating in a disembodied market.
Yet it was not so much intensified capitalization of the economy as the
division of labor that, by promoting functional specialization and
diversification, destroyed the organic society and the integrated community.
Industrialization, rather than urbanization, created anomie, fragmentation,
the loss of occupational status, and a proletariat. Towns, it is true, had
greater occupational mobility and frequency of contact with outsiders than
tightly knit, homogeneous, rural communities. But the stability and
cohesion of agrarian society was also undermined by demographic change
and migration.
All societies differentiate their members and allocate them both specific
and discretionary roles; social and economic inequality is well nigh
universal. Economic growth and greater prosperity can reduce the unequal
distribution of resources. But ruling elites usually strive to maintain the old
distribution of income between groups, even when real income increases.
Simon Kuznets has argued that economic growth increases inequality of
incomes because the rewards of improved productivity are unevenly
distributed to those whose particular skills match demand. Conflict over the
allocation of benefits occurred in all societies, but it was accentuated by the
growth of capitalism, whose very success highlighted social divisions and
economic differences and generated new wants and expectations. The
doctrine of an overall harmony of interests lacked conviction when social
groups were clearly polarized by earnings and economic function as well as
by gender and age.
In preindustrial societies there was from an early date an independent
middle group (of farmers as well as artisans) between the wealthy landed
and business elites and the mass of families living at or just above
subsistence level. The middle class, as has often been said, is always rising,
at least in Western Europe. But the rate of social change accelerated in early
modern Europe, parallel with the development of capitalism, and this
created new tensions and new social identities. The history of the
Netherlands demonstrates that a bourgeoisie could emerge and dominate a
culture without an Industrial Revolution.
In England, the first industrial nation, it can be argued, however, that the
industrial bourgeoisie never wrested political or social hegemony from the
landed class. Class formation was never as simple as the marxist model
would suggest. The infinite gradations of property ownership in a capitalist
society blurred class distinctions. Wealth was rarely accepted as a self-
justifying end, and it did not necessarily serve as the only or even the most
important criteria for social differentiation. Capitalists sought prestige
rather than profit and welcomed absorption through gentrification into the
old order. Salaries, as distinct from profits, identified the service industries
as well as the proletariat. The professions based their independent, self-
governing status not on capital, but on intellect, training, and formal paper
qualifications that were impartially assessed, universally recognized, and
ubiquitously enforced.
The relationship between capitalism and the basic unit of society, the
family, is equally uncertain. The nuclear family has a long history in
Western Europe and Alan MacFarlane has associated it with the early
growth of individualism and capitalism in England. It is true that the
nuclear family encouraged delayed gratification and capital accumulation,
that both the separation of the household from work and the retreat from
community into the domestic family promoted business enterprise. Loyalty
to the family was less obstructive to economic individualism than loyalty to
a fraternity, a craft, or kin, any of whom might be competitors. Individual
members were mobile and could articulate and negotiate their interests
rationally and efficiently without community interference. The decline in
arranged marriages and the greater role played by affection in choosing a
spouse did coincide with the successful assertion of individual property
rights. Market forces and social mobility destroyed ties of lineage even in
sheltered societies, like Japan.
On the other hand, bourgeois families tended to practice partible
inheritance and disperse their communal assets, whereas landed families
accumulated and transferred their estates from generation to generation.
The greater the prospects for individual mobility and advancement with
security, the weaker the family. The nuclear family always coexisted with
kinship; kin networks were not eliminated by either individualism or by the
growth of industrial cities. The extended family was not only compatible
with, but helped to create, the market economy. Increased mobility
enhanced the value of kin, as individuals migrated toward economic
opportunities and away from their families of birth.
Usually, the common interests of the preindustrial family took
precedence over the interests of individuals; most decisions were group
decisions. But the marxist notion that love could only occur in bourgeois
social relations is easily refuted. The idea of romantic love predates and
does not require a capitalist economy. Nor did the development of
capitalism fundamentally alter the theoretical structure of the family. The
doctrine of male dominance and female submission was frequently
challenged and often ignored in particular marriages; the duties of
parenthood were shared between husband and wife while widows exercised
considerable power. But European societies remained patriarchal in
principle, if not in practice, even after industrialization. In the long run, the
role and functions of the family were transformed less by capitalism than by
the growth of the state, which gradually usurped many of the family’s
traditional functions—from education to welfare.

PUBLIC POLICY
It is important to remember that economics was originally termed political
economy. The state has been as much a benefactor as a beneficiary of
capitalism; politicians propose and markets dispose. Only an organized
polity can unify and centralize the economy; guarantee order, security of
communications, and property; and maintain the infrastructure, the
currency, and the credit system. Governments formulate and codify laws,
reduce interpersonal and intergroup conflict, bridge internal divisions, and
reconcile differences.
Although they have on occasion acted like capitalists seeking maximum
returns, governments have usually defined their objectives and
responsibilities more widely. Until the eighteenth century the English state
was paternalistic, upholding the family values of the household and the
corporate values of the guilds. Because its very survival was threatened by
disorder, the monarchy protected its subjects from starvation and
unemployment, regulated the prices and quality of goods, allocated labor,
prohibited or regulated usury, and discouraged disruptive actions by
entrepreneurs. In sixteenth-century England, for example, Sir Thomas
Smith recognized the role of self-interest, that the economy was driven by
private vices, but he did not regard the economy as self-regulating and
argued that the Crown must act as arbiter. This remained the dominant view
until Adam Smith launched his attack on what he termed the mercantile
system. Few economic historians now subscribe, however, to the view,
initially propagated by the German Historical School, that mercantilism
constituted a coherent ideology or system. Government intervention in the
economy usually had little impact. Paternalistic policies were jettisoned in
England once food supplies became more secure and once faith in the
market increased at the end of the seventeenth century. Government
regulation of the economy continued, but it was now intended to help, not
to resist capitalism.
Capitalism is traditionally associated with representative government and
with decentralized, maritime nation states, rather than with autocracy or
with landlocked, pluralistic, territorial empires. The earliest centers of
capitalism were the politically independent city-states that were controlled
by businessmen and not subject to an external, regulatory bureaucracy. In
Europe, the modern state is usually identified with the bourgeoisie, with
liberty and property, natural rights, and equitable taxation; political and
constitutional reform is postulated as a precondition of capitalism.
Before the Revolution of 1688 in England, the threat of arbitrary action
raised the level of risk; kings could repudiate government debts and debase
the currency. Once Parliament achieved political and financial supremacy, a
national economy was able to emerge, governed by contract. In absolutist
France, on the other hand, a full-fledged market economy was obstructed by
regionalism and aristocratic opposition, though Charles Tilly has also
argued that heavy taxation of the peasantry forced them into the market and
that state fiscalism created a bourgeois officer class.
Political stability was certainly essential for economic development;
government by consensus was more efficient than populist or
confrontational politics. But capitalism could flourish without either laissez-
faire attitudes or participatory democracy. Only those countries with an
entrepôt trade, like the Dutch, or with a clear lead over all their competitors,
like the English, were likely to favor free trade. All the free cities and urban
republics were eventually absorbed by nation-states and territorial empires.
The dominant form of the fiscal state in ancien regime Europe was absolute
monarchy.
Even England benefited from having strong, centralized government.
Although the East India Company was virtually an independent power in
India, with its own military muscle, the company had to share its profits
with the political elite in England. The bourgeois state of marxist theory is
little in evidence before the Industrial Revolution. The agents of political
change were the landed and professional elite rather than the urban or
industrial bourgeoisie. Meiji Japan built a capitalist economy on
nationalism without a competitive market and without changing
fundamental traditions.
No capitalist society could have emerged without political help. Only the
state could safeguard private property, provide tariff protection, and finance
the infrastructure of the economy through taxation. Governments created
monopolies to avoid excess capacity and losses and to sustain the rate of
return on invested capital. When the fixed costs of business were high, the
state attempted to control markets by regulating the supply of raw materials
as well as labor. It ventured where individual investors feared to tread and
was expected to resolve the conflicts and mitigate the effects of structural
economic change. In order to finance expensive global wars, governments
had to anticipate and raise revenue through direct taxes on land and indirect
taxes on consumption. This certainly enriched financiers and tax farmers,
but it also circulated capital and redistributed wealth through transfer
payments to receivers of interest. In England, businessmen had always been
heavily involved in the collection and anticipation of public revenue. But it
was the Financial Revolution of the 1690s, by creating a durable and open-
ended system of public credit, that can be said to have capitalized the
patronage and party system.
Nonetheless, close regulation of the economy by the state, as in Prussia
or Colbertian France, was often counterproductive. Closed markets and
cartels fostered inefficiencies; group decisions and divided responsibility
discouraged innovation and alternative ideas. The political system had an
inherent bias toward economic and social stagnation, because too many
stood to lose from change; each interest group fought to maintain the
conditions that had originally created it. Most states were able to mobilize
greater resources when they discouraged corporate monopolies and
encouraged capitalists to compete freely in the economy.
Weber and Schumpeter expected that capitalism would ultimately be
stifled by either corporate or state bureaucracies. Weber in his later works
emphasized the importance of institutions rather than ideas; in particular, he
believed that bureaucracy and capitalism were both rooted in the
rationalization of action and that this process was irreversible. Weber
credited full time administrators with effecting the transition from
feudalism, freeing land and labor, eliminating internal barriers,
standardizing the currency, raising armies, advancing literacy, and annexing
the cities. But he also thought that bureaucracy would reintroduce
patrimonialism and that control of the state by a military bureaucracy was
incompatible with commercial capitalism, as was demonstrated by the
history of Islam and China.
The impersonal, formal, and universal character of bureaucracy and the
addiction of corporations to monopoly certainly conflict directly with
individualism and the free play of the market. When elites are autonomous,
creative individuals tend to join those specialized cadres where their talents
are most in demand. Large-scale, centralized administrations, on the other
hand, offer less scope for initiative and flexibility and favor the long-term
security and prestige of a predictable corporate ideology. Administrative
skills do not vary much over time and most impersonal institutions develop
covert structures that preserve intimacy. But the bureaucratic compulsion to
systematize creates a self-perpetuating order.
 The aims and methods of bureaucracy are different from those of the
capitalist or entrepreneur. The bureaucrat does not welcome competition or
the market but tries to reach a consensus and a balance between interest
groups. He prefers to determine priorities by regulation; to ration by need;
to distribute rather than create; to foster loyalty to the institution rather than
to the individual or family; to emphasize discipline, precision, and duty; and
to maintain continuity rather than to effect change.
Political support was essential to compete in the world economy because
markets had to be captured and defended. Through privateering as well as
open warfare the English invaded the spheres of influence and seized the
trade of Spain, Holland, and France. The great imperial powers, like Spain
in the late sixteenth century, were also great economic powers. Geopolitical
conditions continuously altered world markets, which were subject to
control by state monopolies and governed by a global balance of power.
Even nominally independent states could be effectively subordinated by the
terms of trade.
All the colonizing powers—Portugal, Spain, Holland, England, and
France—wielded a big stick in America and Asia and annexed territory as
booty. The Netherlands might have a federal system of government, but
strong, aggressive support at the center was necessary to create and sustain
the Dutch commercial empire. The great trading companies raised and used
their own military and naval forces for both attack and defense, but they
fundamentally relied on state protection against their enemies. England was
unusual in that it established both a commercial and a territorial empire and
was prepared to make a huge, long-term investment in sea power with a
network of bases.
Capitalism was not necessarily advanced by either the military revolution
or by imperialism. The gradual establishment of large permanent,
professional, and technologically advanced armies and navies increased the
authority of state bureaucracies and cleared the way for European
domination of the world, but war was still labor-intensive and a drain on
resources. Although governments were sometimes prepared to adopt
economic policies and new technologies in order to win wars, they were
driven by a desire to maximize their power and prestige, not the profits of
their economies. States annexed the lands discovered by explorers and
transplanted their domestic social institutions and population. The old
attachment to community metamorphosed into nationalism. Most wars were
fought to extend or defend territorial frontiers, not to produce wealth.
Although the overall benefits of empire are difficult to assess, their
profitability was short-lived; eventually, the cost of maintenance exceeded
the returns.

PROPERTY AND CONTRACT

All theories of capitalism posit private property rights, that individuals can
exclude others and legally own, exploit, alienate, and transfer their assets
without restriction. A capitalist society by definition is one in which a
majority of resources are controlled by individual property owners, not by
society or the state. States, whether ancient or modern, that own all the land
and are run by an all-powerful bureaucracy do not qualify as capitalist, even
when they have exchange markets. When property is insecure and contracts
cannot be easily enforced, transaction costs become too high for the market
to function.
Property rights as well as loans and contracts were recognized as far back
as Mesopotamia. Alan MacFarlane has argued against heavy opposition that
rights of ownership and alienation (and thereby individualism) were
established very early in English rural society. In England, the Common
Law preferred efficiency to equity and was hostile to monopolies; the
development of contract law and better remedies for creditors allowed
market forces to operate efficiently. The doctrine of caveat emptor served as
an alternative to regulation and protection.
This created some problems for Weber, who believed that Roman law
had systematized and created the concept of ownership and the rational
legal state whereas the English legal system did not meet his standards of
rationality. He was obliged to argue that the law was adapted by judicial
reasoning to legitimate a pecuniary system controlled by capitalist
functionaries. Even so, property was as much a political as an economic
right; property rights were often defended more vehemently by the poor
than by the rich. The assertion that individuals have exclusive rights to
property and should be free from external interference is relatively modern.
Only in the nineteenth century was the paternalism of judges replaced by a
laissez-faire approach and contract based on free choice.
 Political society was originally seen as a corporate entity, a
commonwealth of individuals sharing a common end, not as an aggregate
of individuals with rights. Indeed, rights of ownership generated a conflict
of values between the claims of the individual and those of the group. If
capitalism was to survive, the new social and political structure had to be
legitimized by credible arguments. Intellectual defenses of individual
entitlement to property, as distinct from possession at the discretion of the
state, can be found as early as the ancient world, but the classic, hedonistic
doctrine that property is natural, not because it fulfills a final purpose, but
because it is driven by human needs and desires, really dates from the
seventeenth century. A restricted technical term was transformed into an
abstract right; the machinations of the legal conveyancers were elevated by
theorists into a blueprint for society. The most celebrated defender of
property, John Locke, was indeed opposed to endless accumulation. Only in
the first age of the world, he argued, was property appropriated by labor on
the basis of natural right and subordinated to the right to life; after money
had been introduced, property was based on utility and had to be regulated
and restricted. But the liberal political theorists in practice sought to justify
the inequalities of market society; the cultural hegemony of landowners
created a law of property that protected the group but whose benefits
flowed to individual families.
In fact, private property rights were always hedged with restrictions.
Capital assets were usually held by institutions or families, not by
individuals; exclusive rights were granted to groups. In the Middle Ages,
the holding of markets and the hunting of game were prerogatives of
lordship; the freedom to trade or even to work were privileges that excluded
others. In England, the Common Law made primogeniture the dominant
mode of transfer of real property and landed testators tried to bind their
descendants to maintain the integrity of the family estate.
But the law of inheritance limited freedom of devise; both customary and
civil law recognized the concept of community property and distributed
movables more equally. Partible inheritance was the norm in America and
in urban society. A reverence for private property did validate market
forces, but the claims of distributive justice were not dismissed but simply
deferred.
 It would be a mistake to equate capitalism with any single legal system.
The English Common Law, for all its virtues, was slow to address crucial
issues at the heart of capitalism such as rights of assignment and the
liability of passive investors in stocks. The rigidities of the law with regard
to debt obligations had to be remedied by the equity courts. Since the
principal beneficiaries of individual rights and the sanctity of contract were
men, women had to seek protection from Chancery. Japan managed to build
a capitalist society by relying on personal and group obligations instead of
on contract.

CHANGE AND CONTINUITY

Human history has been shaped by contradictory forces that simultaneously
seek and destroy equilibrium. The “civil society” created by capitalism was
riven by numerous internal conflicts—between domesticity and work,
between privilege and merit, between power and plenty, between dispersal
and concentration, between maintenance and growth, between the creation
and the distribution of wealth. The private sphere was never completely
separated from or reconciled with the public sphere. There was constant
tension between freedom and regulation, between allowing private
individuals to make choices and intervening in the economy to promote the
public interest. One inevitable consequence of the accumulation of
resources in private hands was increased pressure for social justice and
public welfare.
Capitalist societies did not conform to a simple, consistent model; they
were hybrids of variant forms whose relative importance fluctuated. There
was no linear progression from the simple to the complex; despite the
addition and adaptation of new norms and methods, one social system did
not replace another. Several sets of attitudes and values were current at the
same time. Old practices and procedures were continued, sometimes under
new names, and survived so long as they remained functional and
competitive with new alternatives. Contractual relationships, which
appeared well before the early modern period, modified but did not
supersede a system based on status, patriarchy, and kinship. Although land
ceased to be the only form in which major assets could be held and
although the concept of private property emerged more clearly, England
remained a traditional society in which the family remained the basic unit.
 The scale of social and political change did increase dramatically over
time, parallel with the economy. The naval and demographic power needed
to sustain an empire in the eighteenth-century Atlantic was much greater
than in the fourteenth-century Adriatic. The inclusive and consensual city-
state gave way to the confrontational nation-state. But the real
transformation of society came with industrialization, not capitalism. The
world was controlled by power networks, not by capital.
Structural change was built into the system. Nothing lasts in the market
or in politics, because needs and opportunities change and destabilize the
system. Communal societies could only survive under conditions of
demographic, political, and technological stagnation. The life span of
empires, as of dominant economies, is finite. Sooner or later, the cost of
defense and administration cannot be financed by expropriating new
territory or taxing the inhabitants; bureaucratic lethargy overwhelms
imperial administration. Few societies, whether capitalist or not, voluntarily
embrace change. Established elites are fundamentally conservative and
wish to perpetuate the status quo. The effects of capitalism were delayed,
concealed, and diluted because people acted as though nothing had
changed. What made the emergence of a capitalist society acceptable was
the passage of time. Eventually, a generation matured that had no personal
experience of any other way of life.
4

THE SPIRIT OF CAPITALISM

Capitalism has been credited with its own ethos and mentality, with specific
traits of personality, and with learned, socially sanctioned behavior. Adam
Smith, like others writing before the Industrial Revolution, thought that
civility had displaced gentility in England, that mercantile concepts of
justice and trust had superseded the military values of honor, chivalry, and
heroism characteristic of a feudal regime.
The famous or infamous “spirit of capitalism” propagated by Sombart
and Weber is more complex. It really combines three different attributes:
the bourgeois ethos of thrift, work, discipline, and respect for time; the
rational calculus of economic individualism; and the entrepreneurial
willingness to innovate and take risks. Later historians have introduced the
notion of a culture of capitalism in which the motivation and social roles of
individuals are determined by material self-interest. Henri See thought that
capitalism created Renaissance individualism.
In any culture, it is the value system that sanctions behavior, defines
expectations, and provides a rationale for life. The cumulative impact of
culture is subtle and deceptive, because the unconscious assumptions that
operate only become the grounds for judgment when individuals have a
choice between alternatives. But it is culture that gives meaning to the
anonymous abstraction of money and that influences the rate of innovation
and the disposal of income.
Nonetheless, it is extremely difficult to demonstrate the mechanism by
which social values become individual aspirations, to link values to actual
behavior either in time or place. Personality is harder to duplicate than a
role; changes in sentiments over time cannot easily be identified and
calibrated. Different cultures might express emotions in different ways and
accord them different degrees of importance, but the elementary human
passions and drives have not changed fundamentally over time. The concept
of individual identity has been detected as early as the fourteenth century.
All cultures borrow and incorporate many aspects of the systems that they
absorb or replace. Value systems relate to whoever values, not to the
subject; they usually establish and then replicate the interests and
preoccupations of the elite.
Projections of ideal communities cannot be equated with actual,
historical societies. Even when what individuals ought or have to perform is
formally expressed and enjoined in written custom or laws, it cannot be
assumed that these rules were either accepted or obeyed. Usually, what was
normally expected has to be inferred from isolated practices and literary
sources, which are both contradictory and anecdotal. The bane of marxists
are those historical characters who think like feudal lords or peasants, but
behave like capitalists.

ETHOS
The numerous bourgeois virtues did not all appear at the same time or with
the same intensity. Honesty, diligence, frugality, and asceticism were moral
imperatives in precapitalist societies; the Benedictine Order promulgated
these economic virtues in the ninth century. Preindustrial societies with
their limited resources were concerned with maximizing output and
minimizing consumption. Attitudes toward saving certainly differ between
cultures, some of which adopt a short-term approach and do not emphasize
postponement of desires and sacrifices for the future. But thrift and the
accumulation of property are found in most cultures, even in matrilineal
societies with communal ownership of land, such as the Tolai of Melanesia.
The work ethic and greater consciousness of the value of time are,
however, more recent developments. In preindustrial societies, the seasons
determined the rhythm of work, which was constantly interrupted by
voluntary and involuntary idleness. Even when improvements in technology
relaxed constraints on an economy, the gains could be taken in leisure rather
than in goods. The ritual cycles of agrarian communities outlived the
economic and social circumstances that had originally created them. The
transition to capitalism involved some degree of secularization of the
religious impulse; individuals now strove to perform good works in this
world rather than content themselves with the expectation of reward in the
next world.
Several difficulties arise, however, when Weber’s moral asceticism is
equated with the spirit of capitalism. First, the work ethic was quite
different from the profit motive. Hinduism, for example, never regarded
exchange or usury as intrinsically immoral, but it did not esteem labor. The
work ethic was more relevant to the Industrial Revolution, which needed
disciplined, continuous factory labor, than to mercantile capitalism.
Second, Weber in later life identified rational asceticism more with
bureaucracy than with capitalism. His ideal type of capitalism has been
equated with the personality structure of the Prussian bureaucrat. Capital
accumulation (which itself is subject to depreciation and redundancy of
assets) cannot be simultaneously a means and an end. Weber posed too
many paradoxes: that change was automatic and induced, that a sense of
helplessness fortified the will to strive, that spontaneous conviction was
compatible with objective self-awareness.
Third, it is doubtful whether economic actions can be closely associated
with any specific ethos or motives. Weber conceded that religion was only
one factor in promoting capitalism and that the principal role of ideas was
to remove cultural obstacles to change. In fact, insofar as Protestant
theology did accommodate capitalism, it was responding to and not
initiating change. The principal reason why aliens and religious dissenters
were disproportionately important in business is simply that they were
excluded from alternative professions and occupations.
Some features of a market-based morality emerged at an early date.
Although the medieval Church espoused the celebrated doctrine of the just
price and denounced usury, the Scholastics often equated the just price with
the market price under conditions of free competition and usury was
permitted for charitable uses and when the return on capital was not free of
risk. A few secular writers in the sixteenth and seventeenth centuries began
to justify economic conduct in terms of a utilitarian, commercial ethic.
In the eighteenth century, however, the culture of the market visibly
moved away from virtue toward envy, competition, consumption, and self-
regard. The Stoic and Christian ethics fell out of fashion, despite a
continuing fear of private interests. Bernard Mandeville, in his Fable of the
Bees, could equate commercial society with civility, happiness, and
progress and proclaim the sovereignty of the private consumer and his
wants. Adam Smith believed that moral sentiments constituted a
precondition of exchange, which was not impersonal but predicated on
social interaction and the natural gregariousness as well as the selfish
passions of humans. Laymen now felt that their material interests as
individuals provided a better guide to conduct than obedience to civil
society. In the new capitalist society morality rested less on conviction or on
a sense of social responsibility and more on the market, which attached cost
to violations.
Nonetheless, few writers, not even political arithmeticians like Sir
William Petty, were enthusiastic apologists for capitalism. It is difficult to
accept Locke as even an agrarian capitalist; he advocated neither ceaseless
accumulation, nor a labor theory of exchange, nor a free-market economy.
The emergence of a monied interest in England did little to shake the
predominance of agrarian, anticapitalist values. Few were prepared to
accept the logic of capitalism that money was the common denominator and
the only determinant of worth because that leveled social distinctions.
Chivalric values survived among the European nobility until the killing
fields of World War I. In fact, an independent code of ethics, such as
fiduciary obligations to investors, was essential to regulate behavior and
sustain the market, which could not be governed solely by the search for
maximum efficiency.
The majority of societies are achievement-motivated even when roles are
ascribed and the economy is not capitalist. Actions by individuals need
goals, which have to be evaluated and chosen. Value systems may be
contradictory, but the interplay between individuals and the prevailing
culture has regularities that determine social roles. Individual autonomy can
be reconciled with social conditioning by keeping the same goals but
changing the means.
The anxiety that fosters self-denial and discipline can be generated by
either guilt or shame. An extended system of loyalties and obligations, as in
Japan, can produce the same effect as the desire for individual self-
realization. Pride can have the same impact on motivation as
acquisitiveness, though the desire to preserve order and dignity can nullify
the healthy challenge of competition and lead to uncritical, complacent
consensus.

ECONOMIC INDIVIDUALISM
The great majority of cultures have condemned both individualism and
acquisitiveness. They have rejected merit and achievement as formal
criteria for ranking individuals, because talent is randomly distributed and
likely to violate hierarchical conventions. Wealth has likewise been
considered a fallible guide to social worth because it could be acquired by
outsiders. The original meaning of the Latin word pretium was not “price”
or “monetary value,” but “personal esteem. ”
In theory, European societies equated value with production for use, not
with abstractions like money. Philosophers, like Aristotle, and theologians,
like St. Thomas Aquinas, advocated self-sufficiency and condemned usury
because it allowed money to breed money. Preindustrial societies were not
receptive to the idea that calculated self-interest should govern all
transactions, many of which were expected to serve other ends. Even
apologists for the trading world, like Daniel Defoe, recognized the futility
of endless accumulation.
The propensity to buy and sell is, however, ubiquitous, if not universal.
Even the earliest cultures proved unable to prevent and in practice tolerated
a measure of individualism and acquisitiveness. In the early modern period,
however, what had been vices became virtues; the burden of original sin
was replaced by a belief in the perfectibility of man and a rationale that
sanctioned economic self-aggrandizement. Judgment of behavior was
relegated to the realm of private conscience and sin ceased to be a matter of
public concern.
The early political economists developed a theory of an automatic
harmonious market in which selfish individualism could create wealth for
all—an intellectual innovation that resolved the inner conflict between
individual and social values. The classical economists ignored social costs
and made individual greed respectable by calling it an interest. Because
market society was clearly more productive than any alternative, the
intelligentsia were willing to commodify the world and accept that some
would gain at the expense of others.
 Weber thought that rationality was the essence and the end of modern
society. Capitalism was not speculative investment, but long-range planning
based on calculation rather than impulse. To Weber, the spirit of capitalism
only had to appear once and then economic factors took over; it was a
collective, not an individual force. Sombart, when he examined the role of
the Jews in the development of capitalism, repeated the standard anti-
Semitic rhetoric about usury and added the preposterous notion that the
Jews succeeded by sublimating their erotic feelings.
In fact, the cult of rationality was much earlier than Weber recognized.
Contrary to the beliefs of the early anthropologists, non-Western societies
and pastoral economies were conceived and organized in rational terms.
The ancient Greeks were pioneers of natural law theory and rational
thought; although they never regarded exchange as a dominant institution,
they were familiar with the hedonistic calculus and with exchange theory.
Without the invention and adoption of Arabic numerals, it would have been
impossible to develop sophisticated methods of calculation and analysis.
The businessmen of the medieval Italian towns were as rational as their
descendants in the Renaissance or the Industrial Revolution.
It is extremely doubtful, however, whether rationality can be equated
with capitalism. Rational choice can be defined as ordering alternatives in
terms of relative desirability. But rationality is neither a formal technique
nor an approach that is uniform across society. Rational conduct is possible
without rational motives. Within the market, it is limited by constraints of
information about commodities and transaction costs, by the vagueness of
expected utility, and by uncertainty and time pressures. Rational choice
theory and games theory have made explicit the complexity of optimal
decision making in the market. Many choices are collective because
individuals cannot guess how they will fare. Modern behavioral theories of
the firm assume that capitalist organizations constitute a network of
relationships.
Rational choice presumes two guesses: about the consequences of a
current action and future preferences should those consequences occur.
Economic rationality does not specify when to stop searching for
consequences. Even though assets were traded and recorded in abstract
forms for convenience from the eighteenth century onward, businessmen
usually preferred to deal in concrete and tactile entities that had not been
separated from social reality. Investment in the future has always been
based more on faith than on calculation.

INNOVATION
The West did not acquire global supremacy through investing capital but by
exporting and exploiting men, ideas, and technology. Economic change was
driven by the growth of population and its diffusion through global
migration and settlement. What distinguished European expansion in the
world from previous migrations, like those of the Mongols or the Muslims,
was that it was accompanied by a shift in knowledge.
If capitalism had a spirit, it was what Keynes called “animal spirits,” the
willingness to invest in new, risky undertakings. Capitalism could only be
advanced by innovative entrepreneurs whose talents could not be inherited
or learned and whose responses to economic opportunity could not be
predicted or uniquely determined. The Industrial Revolution in England
was in one sense a natural outcome of a free-market economy, whose
opportunities attracted entrepreneurs who emerged spontaneously to satisfy
demand; each phase of growth had its own set of entrepreneurs.
The market was itself created by autonomous, individual entrepreneurs
who raised the capital and allocated resources. The entrepreneur is
fundamentally different from the capitalist, who is concerned with return on
capital, not with innovation; some marxists have equated capitalists with
timid bureaucrats who were more to be pitied than envied. Growth has
always depended more on the competitiveness, efficiency, and risk-taking
of entrepreneurs than on capitalists, who were often cautious rentiers or
corporate functionaries concerned with maintaining, not expanding, the
economy. The incentive to maximize profits does not necessarily arise out
of ownership.
The development of capitalism is inseparable from the growth of literacy
and education. The ability to read and write is essential to extend the
market, establish accounting procedures, and urbanize the economy. Oral
societies certainly practice logic, but written formulations reduce the
importance of subjective constructions and generalize explicit norms.
Greater literacy devalues the importance of oral and visual culture and
broadens the range of experience and contact. In capitalist societies, where
knowledge and skill are recognized as a form of capital, education is
formalized; it becomes a training process rather than a means of confirming
status.
It is technology that above all divides the modern world from all that
came before; the Industrial Revolution can be seen as primarily a
technological revolution. Only technological innovation, particularly more
effective utilization of new sources of energy, could reduce the cost of
production and distribution, provide substitutes for scarce raw materials,
raise productivity and output per capita, and solve the problems of
Ricardian diminishing returns and Malthusian predictions about the
consequences of population growth. Without improvements in
transportation and means of communication, no global economy would ever
have emerged. Despite time-lags in the rate of innovation between
countries, most technology once perfected has been transferred easily and
cheaply between cultures.
Technological innovation is distinct from and (from one point of view)
shapes scientific advance. Technology is fundamentally a mechanical
means of achieving objectives conceived in advance. The instinct for
invention has always been present in human society. Improvers have existed
ever since the idea of invention was invented, though they have usually
functioned within a general structure of knowledge and most often have
worked to complete unfinished and refine existing techniques. But in the
early modern period, new concepts and more efficacious methods of
computation began to transform human behavior and accelerate the
potential for change. In Francis Bacon’s utopia, the New Atlantis, the
businessmen ally with the progressive intellectuals to ameliorate the human
condition. A more detached, dispassionate scientific attitude appeared in
which the universe was viewed as independent of and indifferent to man.
Marxists are unsurprisingly hostile to both technological and
demographic determinism because they believe in economic determinism.
Several different arguments have been advanced to link science and
invention with capitalism. One view downplays technology and the market
in favor of the entrepreneur; it argues that investment in applied science
only acquires importance when it is translated and diffused through
innovation. Schumpeter linked capitalism with mathematics and
experimental science, equating the rugged individualism of Galileo with the
individualism of the rising capitalist class.
 Technology, though in practice irreversible, is a dependent variable
driven by the relative costs and availability of raw materials and labor.
Inventions can be either demand- or cost-induced, but they will only be
implemented when the time period and initiation costs are manageable and
when the market offers opportunity for profit. Monopoly prices drive the
search for alternatives.
While technology is the most distinctive feature of Western history, its
link with capitalism is weak. Major technical changes have been
successfully introduced in primitive economies with a limited resource base
and tested by trial and error. War has proved a greater stimulant than the
market because those who wage war are more concerned to win than to
contain costs. Nor can any industry continue to grow at a constant
percentage rate, because a constant rate of technological innovation cannot
be maintained. Refinements are continuously introduced after a major
theoretical breakthrough, but additional knowledge acquired from practical
experience does not necessarily improve the theory.
Culture is in fact more important than capitalism. Technology usually
marches ahead of human society, which is not always willing to adjust to
new ways. Once an idea or invention appears, it cannot be undone, but it
can be ignored. Although the impact of new technology is usually
experienced as a revolution, most inventions exist long before they are
used. A highly developed Japan banned the gun because it was considered a
threat to the dominant culture. Advanced cultures are not always the most
efficient or the most durable. The pressure of conformity can rigidify
scientific knowledge. Changes in environment certainly stimulate new
ideas, but much invention is a random succession of acts of insight leading
to a cumulative synthesis. Cultural restraints on knowledge and lack of
opportunity have always proved greater obstacles to progress than lack of
ideas.

A PECUNIARY CULTURE
The linkage between capitalism and the arts is well illustrated by the history
of painting in Holland during its cosmopolitan Golden Age. Spurred by
technical innovations, which reduced costs, and responding to demand
boosted by economic expansion, the output of paintings increased
dramatically. Although still organized within a traditional guild structure,
artists now produced for the domestic market rather than for individual
patrons. Art became a commercial commodity that both promoted and was
nurtured by realism and the idea of self. Some artists followed their
consciences and expressed disquiet and critical doubts about contemporary
social and economic conditions. But many others celebrated Dutch
achievements and economic progress; their paintings described in abundant
detail the capitalist world that provided a market for their talents.
Conspicuous consumption is found in most cultures, usually in ritualistic
behavior associated with rites of passage, such as weddings and coming of
age. But real consumerism—the inflation of wants and high levels of
spending first recognized by Mandeville—was a late development, though
it definitely preceded the Industrial Revolution. Markets were limited and
expanded very slowly with little advertising of goods until the eighteenth
century. Cultural sanctions, such as sumptuary laws, protected the social
hierarchy and regulated display of new status. The elite tried to direct and
restrain expenditure by the lower orders and was more concerned with how
wealth was used than how it was made.
What is open to debate is whether capitalism (and industrialization) was
driven by supply or by demand, by production or by consumption, by
voluntary choice or by compulsion. One school of thought has argued that
open-ended expectations will always rise beyond supply, that social
competition and emulation within and between groups will directly or
indirectly sustain demand without danger of satiation. Another school has
argued that mass production requires one-dimensional consumers
conforming to fashion rather than ranking preferences; consumers are not
sovereign, but are manipulated by producers who always have the
advantage. Demand is not necessarily self-reinforcing because, as goods
increase in availability, their character changes and the pleasure that they
yield declines.
The traditional marxist argument that capitalism carries within it the
seeds of its own destruction has been given several new twists. Capitalism
is alleged to destroy itself by undermining the moral values that had
originally brought it to life; self-centered and self-interested individualism
combine with ceaseless mobility and self-indulgence to destroy the
cooperative basis of society and reduce the level of savings and investment
necessary to sustain the economic system. Prosperity is followed by
institutional rigidity and by economic and technological stagnation as the
pioneers age and their children become lazy or change their priorities and
turn their talents to other activities. Change follows a generational cycle—
from work to play, from thrift to consumption, from entrepreneur to rentier,
from bourgeois to aristocrat.
The eighteenth century freed the West from its past; the nineteenth
century freed individuals from each other. Although the concept of
individualism may sound human, it is in fact an abstract concept. In
classical theory, the rational, profit-maximizing, impersonal optimizer is,
moreover, always male; women are usually imagined as selfless and
cooperative. Ironically, individual preferences did not acquire social
momentum until the economy had grown large enough to make each
individual unimportant.
The cult of individualism and the pursuit of self- interest are as much a
consequence as a cause of economic growth; prosperity created the desire
for individuality. In this as in other aspects of capitalist development, it is
impossible to separate cause from effect. Some of the alleged linkages, like
that between capitalism and religion, turn out to be largely coincidence.
Sombart and Weber’s “spirit of capitalism” emerges as more of an attribute
than a cause; it describes both an attitude that resulted in capitalist behavior
and that behavior itself, which led to a shift in incentives. The process of
social and economic change was usually two-way and any causal
connection can easily be reversed.
5

IDEOLOGY AND THE RISE OF

CAPITALISM
All models of capitalism, even the most refined, suffer from
oversimplification, ambiguity, and inconsistency. They fail to describe
either the structure or the process of preindustrial societies; nor do they
explain why or how change occurred over time. The term capitalism has
been given so many meanings that it has lost all meaning. It has symbolic
importance but little historical reality or explanatory power. When we try to
understand the evolution of the modern world, the idea of capitalism
constitutes the problem, not the solution.
Ideas have special properties; they can be discredited or can change their
meaning over time, but, unlike physical phenomena, once they exist they
cannot be destroyed, no matter how absurd. Even erroneous and opaque
ideas become facts in their own right, which can be (re)presented and have
real and residual consequences. Theories of change identify, label, and then
influence the future course of actual changes in society. It is difficult to
challenge a system of ideas, like marxism, without employing its
terminology and thereby tacitly recognizing the assumptions of the theory.
The interesting question is why so vague and misleading a concept as
capitalism was first invented and why it has persisted in current usage for so
long. There are two different modes of explanation—intellectual and
emotional. On the one hand can be perceived the seductive lure of grand
theory; on the other hand, the pressing need to explain the injustices of the
world and to express the primordial feeling that capitalist societies exploit
and enslave their members. In the final analysis, capitalism is a creature of
myth rather than of history.

THE HISTORICAL CONTEXT

Historians have adopted descriptive rather than theoretical models to order
and impart meaning to the flow of events over time. Although they often
concede that some factors of change are indeterminate, if not random, their
traditional chronological approach orders individual facts into significant
patterns that cohere and recur. Historians recognize the momentum of
events and the pressure of external forces, but they also try to account for
individual choice and identify the alternative options that are created by
human action. Qualitative changes cannot be predicted. Human history is
not predetermined but is conditioned by human will and by the exercise of
power. Change occurs continuously, but it can be suppressed or delayed and
it proceeds at an uneven pace, often transforming one sector
disproportionately without affecting the basic culture. It is not universal or
absolute, but particularist and relative.
The main division between historians occurs over speed. The
evolutionists believe in gradual and piecemeal change with substantial
continuity; the revolutionaries, in sudden and irreversible discontinuities.
Evolutionary change (though not biological evolution in the traditional
sense, whose time span is too extended) provides a satisfactory explanation
for much of human history, but not for occasional discontinuities, especially
in conceptual knowledge, when one mind-set replaces another.
There has been no single pattern of capitalist development. Although
related in marxist theory to the factors of production and in sociological
theory to values and behavioral patterns, capitalism is a vague concept that
can be applied to any society that has developed beyond subsistence
agriculture into a market economy. It is easier to imagine the precapitalist
economy than to find a specific historical example. Capitalism can be
defined in terms of the market economy, the growth of financial markets,
and consumerism, all of which clearly preceded industrialization. But most
of the characteristics attributed to it, including those of modernity, were
clearly a consequence of the Industrial Revolution, which, though battered
as a concept and stretched chronologically, still has some merit because it
was largely driven by new technology and energy sources that transformed
the economic basis of society. Ironically, the literature has always focused
on the transition from feudalism, not on the transition to industrialization.
The capitalist development model has been applied universally over huge
stretches of time, even though the chronology, speed, direction, and extent
of development has varied in different parts of the world. The temptation to
find in premodern history whatever changes the abstract model predicts has
proved irresistible, even in the face of empirical evidence. Economic and
social models can be true in form and serve as useful similes, even when
they are not true in content or context. But no theory is ever accurate in an
absolute sense and inductive research has consistently undermined the
validity of general theories of society.
Some theorists, both marxist and nonmarxist, reject empiricism
completely and flaunt their contempt for facts. They assume the existence
of the capitalist system and then look to the historical record for illustrative
friendly examples. It is noteworthy that the most dogmatic and simplistic
theorists do not cite archival documents but instead other historians, usually
of the same ideological persuasion and selectively and out of context. The
primary sources are ignored because they are too diverse, ambiguous, and
contradictory for those looking for certainties.
Capitalism has to be studied in a functional context. Cultures are not
monolithic and cannot exist in a vacuum. All social systems have rigidities
and if they fail to adapt, they perish. But they also develop piecemeal and
can continue to function even when some sectors have collapsed. The
selective process is imperfect and many obsolete elements survive. The rate
and direction of change are determined by many economic, social, and
political forces apart from ownership of the means of production.
Capitalist societies have not emerged in a linear progression. Whether at
the microscopic level of individual relations or the macroscopic level of
global exchange, the history of capitalism has been less a relay race than a
game of snakes and ladders. All social systems are potentially unstable
because they are composed of individuals whose behavior cannot be
completely predicted. In human history, every trend is eventually reversed,
every advance stopped, every victor toppled. Although biological
metaphors can easily develop into false analogies, capitalist economies do
seem to have their own life cycle, falling victim to old age, lack of
direction, disagreement over priorities, and incompatible ends.
Capitalism cannot be defined in ways that make its empirical existence
demonstrable or valid. Like a gene, it is known by its performance, not by
its substantive properties. It cannot serve as a benchmark for operational
analysis because it is not quantitative and because its functional mechanism
is never described. The minimum amount of capital, for example, which
distinguishes a capitalist from a noncapitalist economy, is never stipulated.
Whether regarded as an economic system or a system of values, capitalism
can at best be only a passive structural model, not an agent of change. It
cannot move in any direction—up, down, or sideways. It cannot explain
anything, when it contains elements of what has to be explained. Indeed, the
concept, because it begs so many questions, is an obstacle to analysis.

THE SEDUCTION OF THEORY

Whether expressed as economic, social, or cultural theory, capitalism is
fundamentally an ideological construction. Like theology, it can prompt
debates akin to Scholastic arguments about the number of angels who can
dance on the head of a pin. To marxists, bourgeois ideology has a material
basis in the market economy; Weber has been dismissed as a bourgeois
ideologue who dissolved real history in spirit. But in fact, marxism is itself
a doctrine of the mind, an intellectual abstraction. The failure of all the
historical predictions of marxism have made it a purely academic discourse.
Alternative ideologies have produced different versions of the truth, all
consistent with their assumptions and objectives and all prone to systemic
errors.
The social sciences, founded on the human instinct to observe, collect,
measure, classify, objectify, and name, were intended to put an end to
ideology. They aspired obsessively to generate logical, macro-theories akin
to theories in the natural sciences with the analytical power to predict and
control human actions. They sought to build a theoretically based, value-
free understanding of the underlying external regularities and invisible
processes that generate observed behavior. They were interested in final,
not in efficient, causes; in pursuit of a moving human target, they
anticipated the trajectory of social evolution.
Social scientists might long for, but they cannot emulate the certainties of
the natural sciences. Natural scientists, of course, have difficulty escaping
from the assumptions and biases of the mental systerns in which they have
been trained. They can be blind to new evidence or read it incorrectly or
dismiss it until it cannot be ignored. Despite the dethronement of
Newtonian physics and the introduction of the principles of uncertainty,
indeterminacy, and randomness, science can still, however, explain
phenomena at least at the level of secondary causes. Anything that
functions without human intervention can be reduced to principles and
predictions that, if not universal, apply in a high percentage of cases with a
high degree of probability. Theories must withstand repeated experimental
testing.
But the human sciences, including economics, deal with humans and
infinite variables. Patterns of behavior can be discerned, but because they
are not universal, they cannot serve as laws. As the new historicists have
pointed out ad nauseam, positivists and social scientists have never
succeeded in attaining objective knowledge of social reality. Their grand
theories have been based on subjective assessment and a biased
methodology. It has been falsely assumed a priori that human nature is
constant. The evidence of empirical facts that are independent of a
theoretical framework has been rejected, thereby reducing human history to
philosophy teaching by examples.
The popularity of an abstraction, such as capitalism, derives from a
fondness for model building and for rationalizing from general
propositions. Model builders abhor exogenous factors and doubt. It is true
that phenomena have to be distinguished before their relationship can be
explained, that categorization is the basis of most intellectual thought. But
the insistent appeal of connective systems, which reduce the world to order,
reflects deep emotions. Intellectuals seek for total answers; they fear the
irrational, the chaotic, and the inexplicable. They refuse to accept the
random and the accidental in history and they prefer to believe that culture
is immutable. They need a cognitive and moral map of the universe in order
to assert human authority. They expect certainty and assurance—whether
perfection in the present or a utopia in the future. They are drawn to blanket
explanations and to single causes in their search for the prime mover, the
motor of change. The philosophical rebellion against the universalism of the
enlightenment has had little impact on the status of political economy.
For those deterred by the technical complexities of the new economic
history, the idea of capitalism provides a comprehensive account of how
change is promoted, stabilized, and sanctified. It offers an all-embracing
explanatory system that reduces the incoherence of human history to an
intelligible, orderly progression of events with dramatic watersheds. A
simple thesis with few qualifications can be argued with greater force and is
easier to understand and to propagate. Capitalism is a convenient short-hand
expression that provides a snappy title and a framework for writing. It is
much easier to construct a book around a model with familiar parameters
and a captive audience. Stagnant disciplines have been able to postpone
extinction by spicing up their standard fare with the fashionable sauce of
capitalist interpretation.
It is important to recognize, however, that what purports to be an
explanatory structure is in fact a belief system, in which individuals can
indulge the fantasy of final causes. They are seduced by the notion of one
absolute, one simple explanation for everything; once converted and
committed to an exclusive goal, they feel no need to stoop to collect facts,
because they already know the truth. Intellectual laziness and cowardice
breed ignorance, complacency, and conformity.
Unlike a scientist, the theorists of capitalism are not looking to be proved
wrong. Once the initial premise is accepted, any challenge can be explained
away in terms of the system by deduction from overriding principles.
Theories of capitalism can be as rarefied and metaphysical as any religion.
Marxist apologists are really the last of the Schoolmen, if there is likely
ever to be a last Schoolman. The true believer has no reason to keep an
open mind and seeks only for confirmation. He is content to retreat from
reality and concentrate on harmonizing inconsistencies in his belief system.
Reputations have frequently been built on calculated flights of
imagination, on the willingness to generalize speculatively from the
evidence, to draw conclusions that seem to be important and relevant, even
if they are also wrong. The most acclaimed historians have been those who
have been able to condense the historical record into a brief and coherent
narrative. Unfortunately, abbreviation leads to distortion. The past can only
be reconstructed by taking a small slice, but there is no foolproof way in
which this slice can then be related to the whole. Historians of capitalism
are only able to generalize about huge periods of time because they have a
predetermined view of the world and because they are interested in
representing, not in documenting, reality. Inevitably, the categories take
over and become divorced from what they purport to describe. Truth
becomes simply whatever the model predicts. In the quest for a meaningful
universe, the complexity of human history is reduced to binary categories.
Change is categorized as the victory of one culture or stage of culture over
its polar opposite, either directly or indirectly through a dialectical process.
In fact, history is a mess; the events of the past never fit neatly into a perfect
model. No theory allows anyone to deduce the facts; models do not test, but
simulate, historical reality. The idea that society moves as a totality is a
holistic confusion.

A CONVENIENT SCAPEGOAT
The idea of capitalism did not exist before the Industrial Revolution and it
acquired currency as the essential Manichean bogeyman of socialist theory.
It was a retrospective invention by intellectuals (primarily, but not
exclusively, marxists) who hated modern, technology-driven, industrial
society and who wished to predict its destruction. The Institutional
economists denounced what they considered an obsession with the market
economy as a capitalist conspiracy fomented by big business corporations
and by technology. Although closely linked by its detractors with
colonialism, capitalism was nonetheless a Eurocentric concept that could
only have emerged in the society that it alternately justified, explained, and
accused.
The ideology of capitalism is fundamentally an ideology of discontent
based on personal belief rather than social consciousness. Hostility to
capitalism was fueled by egalitarianism and by frustration at the injustices
of life, by a sense of loss of community and dignity, and by the deep-rooted
feeling that economic growth was achieved at the expense of the masses.
Even those who have recognized the benefits of capitalism have been
disappointed that its full potential has never been realized.
Why, it was asked, is the world not what it might have been? The social
reformers adopted a normative methodology, reading their ideal society
back into the past and displaying a greater interest in the distribution than in
the creation of wealth. In one respect Marx was trying to reconstitute a
world in which the whole economic process was controlled by the
community, in which society was the family writ large. Those who wished
to put the clock back forgot that it was the market and a contractual society
that had fostered humanitarian values, that communal societies and their
value systems are repressive. As N. S. B. Gras put it, the precapitalist age
was not a golden age in which man walked with God. Agrarian societies are
stratified and inegalitarian with coercive deference. The alleged wholeness
of life in precapitalist society and the mutuality and solidarity of the
“traditional” family are both inventions. The fundamental conflict between
individual choice in the market and socially and ethically determined needs
has made current theories of market socialism somewhat implausible.
The enemies of entrepreneurial and rentier capitalism were driven by
moral repugnance and distrust of the profit-maximization of economic man
and by aesthetic and spiritual unease with commercialization. Their
approach was qualitative, not quantitative and utilitarian; they feared the
loss of humanity itself. Man, not money, they believed, should be the
measure of all things. Others reacted against the machine and its products,
which had replaced creative human labor. They adopted as their ideal an
agrarian society in which consumption was limited by supply.
Consumerism was denounced (often hysterically) for aggravating
inequality, for polluting human sensibility, and for subordinating or
destroying weaker, but morally superior, cultures. The more successful the
new economic order, the louder the opposition.
Schumpeter, in his pessimistic later years, came to believe that capitalism
would be destroyed by its own success, that it created an inimical social and
political climate. Entrepreneurship, he thought, would be undermined by
bureaucrats, who tolerated but never appreciated innovation. The young and
the idealistic would vent their emotional and intellectual dissatisfaction and
attack the economic foundations of the capitalist culture. The political
traumas of youth would eventually become the ruling academic ideology,
since scholarship had little connection with reality.
It is true that a majority of both intellectuals and bureaucrats on the right
as well as the left have been no friends of capitalism. Although it was
industrialization that largely created and funded an intelligentsia of
professionals, they chose to vigorously oppose money making, particularly
in the private sector. This was partly the result of a guilty conscience,
because they were the prime beneficiaries of the new economic order. One
of the many ironies of capitalist culture is that the anticapitalists are often
financed by educational institutions and charitable foundations endowed by
capitalists. It was partly because capitalism provided a scapegoat on which
all the insoluble ills of the world, such as war, irreligion, philistinism, and
poverty, could be blamed. To imagine Western high culture without
capitalism to attack is to imagine the novel without adultery.
It was partly pique; the intellectuals felt that their status and talents were
not properly recognized. The market value of intellectual output is in fact
far below factor input. The goals of intellectuals in a market economy are
likely to be ignored, because they are not shared by the masses, whereas
they have more power and importance in a planned economy. In the eyes of
the intelligentsia, the market was too egalitarian and threatened both moral
freedom and professional virtues. In fact, the service norms of the
professions were careerist, monopolistic, and self-serving, virtually
indistinguishable from the alleged value system of capitalism.
In one sense, too, the idea of capitalism was a product of romantic
longing for a utopian alternative to industrialization, urbanization, and the
alienation of the workforce from any real purpose. Now that the artisan has
been virtually eliminated, for example, his past has been idealized by
postindustrial moderns. Successive generations of bohemians have
denounced the boredom and lack of passion of the bourgeoisie.
Paradoxically, as marxism has lost its political credibility and appeal in the
real world, its historical sociology has been widely embraced as an
explanatory system among intellectuals always prone to seduction by lost
causes. As Seneca once said, innocence comes from ignorance.

THE POWER OF MYTH

No one would dispute the convenience of abstract archetypes or deny that
they can be useful tools when ordering and reconstructing events. The “rise
of capitalism” does serve a limited purpose as a short-hand expression for
the real changes in wealth, organization, and scale of economic activity that
took place in early modern Europe. Historians shape historical facts for
their readers and make them comprehensible by selection. The past is
created, not found; it can only be interpreted through the eyes and
prejudices of the present. To paraphrase Heisenberg, what we observe is not
history but the past exposed to our method of questioning.
The idea of capitalism has, however, been borrowed, often by those who
lack any knowledge or understanding of economic history or economic
principles, to try to explain all facets of preindustrial society—social
change, shifts in political power, the role of bureaucracy, empire building
and recurrent warfare, legal innovations, religious dissidence, enthusiasm
and secularization, gender relations, the restructuring of the family,
innovations in science and technology, the evolution of new literary forms,
and the expansion of the fine arts.
To explain the whole of human history by reference to capitalism is no
different or more convincing than evoking Providence or the Oedipus
complex as the magic wand. Through manipulation and abuse, the idea has
acquired a life of its own. But capitalism has neither a destiny nor a
personal identity. The disciples of Leopold von Ranke succeeded in taking
the theology out of history only to have it creep back in the form of the
great secular religions.
Concepts do not constitute evidence or explanations or “real forces”; they
are tools that compress bulky empirical data. Nor is any factor completely
autonomous; in real life there are no independent variables and cause and
effect cannot be separated. Capital formation, for example, is both a cause
and a result of capitalism. Although what actually happened looks
inevitable in hindsight, in fact there are an infinite number of alternative
scenarios. To designate the flow of history in one direction is tempting, but
mistaken. Despite efforts by historians to construct tidy patterns from
events, to identify distinctiveness rather than just differences, the past really
has been one damned event after another. Even the emphasis on explaining
change may be misdirected, since, in the absence of constraints, change is
the normal state and the interesting question is why it does not occur when
it might be expected.
It is pointless, though understandable, to yearn for what has been lost.
The past can be imitated but never restored, partly because it is already a
matter of record. But consciousness of the past provides the perspective
necessary to appreciate what is worth keeping in the present. It gives each
generation a sense of tradition and a place in time. Some have doubted the
authenticity of historical accounts and, if there are impenetrable barriers
that make it impossible for a modern sensibility to understand past cultures,
then nobody would have a history. But an intelligent reading of the sources
brings to light the same problems, the same mistakes, the same human
strengths and failings—an exponential growth of knowledge without a
corresponding increase in wisdom.
 All societies prefer myths to the truth. Historical events transcend reality
to become myths and then revert to events. History has always been used
for propaganda and for reinforcing myths and justifying or attacking
political and economic and religious systems. But knowledge is not
advanced by generating fantasies, no matter how entertaining. There is a
past that can be understood in its own terms, even if historians gravitate
toward what is fashionable, important, or much discussed in their own day.
Reinterpreting the past has to be continuous, but if historians are trapped in
a theoretical or ideological swamp and if the bedrock of facts is not secure,
they have not advanced any further than their predecessors in the eighteenth
century.
BIBLIOGRAPHICAL ESSAY

The best brief introduction to the idea of capitalism by a historian is Ronald

Max Hartwell, “The Origins of Capitalism,” in Philosophical and Economic
Foundations of Capitalism, Svetozar Pejovich, ed. (Lexington, Mass.:
Lexington Books, 1983), pp. 11—23, supplemented by several contributors
to Capitalism and the Historians, Frederick August von Hayek, ed.
(Chicago: University of Chicago Press, 1954). The special case of America
is reviewed by Robert E. Mutch, “Colonial America and the Debate about
the Transition to Capitalism,” Theory and Society 9 (1980): 847—863. The
early history of the term is discussed by the eminent medievalist Frederic
Chapin Lane, “The Meaning of Capitalism,” Journal Economic History 29
(1969): 5—13.
Many of the best-known studies of capitalism are in effect potted
histories of the world constructed around a metatheory. They include
numerous works by the German historian Werner Sombart, selections from
whose principal work have been translated and published as The
Quintessence of Capitalism, translated and edited by M. Epstein (New
York: M. Fertig, 1967). France is represented by the historical geographer
Fernand Braudel, Afterthoughts on Material Civilization, translated by
Patricia M. Ranum (Baltimore: Johns Hopkins University Press, 1977), and
Civilisation and Capitalism: 15th to 18th Century, translated by S.
Reynolds (Berkeley: University of California Press, 1992), 3 vols. The
North American candidate is the radical sociologist Immanuel Maurice
Wallerstein, The Capitalist World Economy (New York: Cambridge
University Press, 1979); The Modern World System (New York: Academic
Press, 1974, 1989), 2 vols.; and Historical Capitalism (London: Verso,
1983).
Although these authors acquired in their lifetime temporary guru status,
none of their works are reliable as histories and they now have mainly
antiquarian interest as tracts for their times. A more prosaic, but now dated,
narrative approach was taken by Henri Eugene See, Modern Capitalism, Its
Origins and Evolution, translated by Homer B. Vanderblue and Georges F.
Doriot (New York: B. Franklin, 1968), and by Norman Scott Brian Gras,
Business and Capitalism (New York: A. M. Kelley, 1971).
There are numerous recent general surveys of change in the early modern
period, including John Greville Agard Pocock, “Early Modern Capitalism”
in Feudalism, Capitalism and Beyond, Eugene Kamenka and R. S. Neale,
eds. (New York: St. Martin’s Press, 1975); Theodore K. Rabb, “The
Expansion of Europe and the Spirit of Capitalism,” Historical Journal 17
(1974): 675-689; Robert J. Holton, The Transition from Feudalism to
Capitalism (New York: St. Martin’s Press, 1985); and Robert S. Duplessis,
Transition to Capitalism in Early Modern Europe (Cambridge: Cambridge
University Press, 1997).
An economist’s overview is provided by Robert L. Heilbroner, The
Nature and Logic of Capitalism (New York: Norton, 1985). A monistic
interpretation of world history by a neoclassical economist is Douglas Cecil
North, The Rise of the Western World (Cambridge: Cambridge University
Press, 1973). Some perceptive insights are also offered by the historian of
technology David S. Landes, “What Room for Accident in History,”
Economic History Review 47 (1994): 637-656.
Two intellectual traditions, which still have their followers, derive from
the philosopher Karl Marx and the sociologist Max Weber. Weber is famous
for The Protestant Ethic and the Spirit of Capitalism, translated by Talcott
Parsons, revised by R. Collins (Los Angeles: Roxbury Publications, 1998),
which should, however, be contrasted with his mature General Economic
History, translated by Frank H. Knight (1927; reprinted New Brunswick:
Transaction Books, 1981). Among the better commentaries on Weber are
Randall Collins, Weberian Sociological Theory (Cambridge: Cambridge
University Press, 1986), and Robert J. Holton and Bryan S. Turner, Max
Weber on Economy and Society (New York: Routledge, 1989). See also
Hartman Lehmann, “The Rise of Capitalism,” in Weber’s Protestant Ethic,
H. Lehmann and Guenther Roth, eds. (Cambridge: Cambridge University
Press, 1993), pp. 195-208, and Gordon Marshall, In Search of the Spirit of
Capitalism (New York: Columbia University Press, 1982).
 Some useful preliminary guides to the marxist historiography of
capitalism are Maurice Herbert Dobb, Studies in the Development of
Capitalism (New York: International Publishers, 1964); Harvey J. Kaye,
The British Marxist Historians (New York: St. Martin’s Press, 1995);
Alastair MacLachlan, The Rise and Fall of Revolutionary England (New
York: St. Martin’s Press, 1996); Ellen Meiksins Wood, The Pristine Culture
of Capitalism (New York: Verso, 1991). Two brilliant commentaries on
capitalism in the marxist tradition, now available in English, are Rudolph
Hilferding, Finance Capital, Tom Bottomore, ed., translated by Morris
Watnick and Sam Gordon (Boston: Routledge and Kegan Paul, 1981) and
Georg Simmel, The Philosophy of Money, D. Frisby, ed., translated by Tom
Bottomore and D. Frisby, 2d edition, enlarged (New York: Routledge,
1990).
The stages by which capitalism developed have attracted many different
responses ever since the famous article of the Belgian historian Henri
Pirenne, “The Stages in the Social History of Capitalism,” reprinted in
Class, Status and Power, Reinard Bendix and Seymour Martin Lipset, eds.,
2d edition (New York: Free Press, 1966), pp. 97-107. A survey of the
debate over agrarian capitalism is provided by R. Allbritton, “Did Agrarian
Capitalism Exist?” Journal Peasant Studies 20 (1992-1993): 419-444.
Mercantile capitalism is discussed by Patrick O’Brien, “European
Economic Development,” Economic History Review, 2d ser. 35 (1982): 1-
18. The debate on the connection between capitalism and slavery is
surveyed in Capitalism and Slavery Fifty Years Later, H. Cateau and S. H.
H. Carrington, eds. (New York: Peter Lang, 1999). The links between
capitalism and the Industrial Revolution are explored in Failed Transitions
to Modern Industrial Society, Frederick Krantz and Paul M. Hohenberg,
eds. (Montreal: International Center for European Studies, 1975), and
Donald Cuthbert Coleman, Myth, History and the Industrial Revolution
(Rio Grande, Oh.: Hambledon Press, 1992).
The orthodox view of markets, as outlined by Israel M. Kirzner, The
Meaning of Market Process (New York: Routledge, 1992), has been
challenged by Karl Polanyi, The Great Transformation (Boston: Beacon
Press, 1985), and by Karl Gunner Persson, Pre Industrial Economic Growth
(Oxford: Blackwell, 1988). In contrast, the precocity of markets has been
argued by M. Bailey, “The Commercialization of the English Economy
1086-1500,” Journal of Medieval History 24 (1998): 297-311, and by
several contributors to The Market in History, Bruce Louis Anderson and A.
J. H. Latham, eds. (London: Croom Helm, 1986). The intellectual debate
over the ethics of capitalism in the early modern period is neatly dissected
by Albert O. Hirschman, Rival Views of Market Society (Cambridge, Mass.:
Harvard University Press, 1992).
The classic economic theory of entrepreneurship is Joseph Alois
Schumpeter, The Theory of Economic Development, translated by R. Opie
(1934; reprinted New Brunswick, N.J.: Transaction Books, 1983). A useful
starting point in the vast literature on the history of individualism is Alan
MacFarlane, The Culture of Capitalism (Oxford: Blackwell, 1987), and
Joyce Oldham Appleby, Capitalism and a New Social Order (New York:
New York University Press, 1984). On other connections between
individualism and capitalism, see R. Cotterell, “The Development of
Capitalism and Contract Law,” in Law State and Society, ii, Bob Fryer et
al., eds. (London: Croom Helm, 1981), pp. 54-69; N. Folbre and H.
Hartman, “The Rhetoric of Self Interest,” in The Consequences of
Economic Rhetoric, Arjo Klamer, Donald N. McCloskey, and Robert M.
Solow, eds. (Cambridge: Cambridge University Press, 1988), pp. 184-203;
Paddy Ireland, “Capitalism without the Capitalist,” Journal Legal History
17 (1996): 41-73.
Theories of capitalism have been applied to histories of women and the
family and to gender theory by Roberta Hamilton, The Liberation of
Women: A Study of Patriarchy and Capitalism (Boston: George Allen and
Unwin, 1978); Margaret George, Women in the First Capitalist Society
(Urbana: University of Illinois Press, 1988); Carole Pateman, The Sexual
Contract (Stanford: Stanford University Press, 1988); Constance Jordan,
Renaissance Feminism (Ithaca: Cornell University Press, 1990); Sylvia
Walby, Theorizing Patriarchy (Oxford: Basil Blackwell, 1991).
A typical example of the school of criticism that analyzes literary
productions in terms of market exchange is Douglas Bruster, Drama and
the Market in the Age of Shakespeare (Cambridge: Cambridge University
Press, 1992). L. Haskell, “Professionalism versus Capitalism,” in The
Authority of Experts, T. L. Haskell, ed. (Bloomington: Indiana University
Press, 1984), probes the conflict between bureaucracy and capitalism. The
birth of consumerism is analyzed by several contributors to Consumption
and the World of Goods, John Brewer and Roy Porter, eds. (New York:
Routledge, 1993).
The most famous exponent of the view, initially espoused by Marx, that
capitalism has inherent contradictions is Joseph Alois Schumpeter, whose
arguments are to be found in his Capitalism, Socialism and Democracy
(reprinted Boston: Unwin Paperbacks, 1987); The Economics and Sociology
of Capitalism, Richard Swed-berg, ed. (Princeton: Princeton University
Press, 1991). See also S. Haberle, “Schumpeter’s Capitalism,” in
Schumpeter’s Vision, Arnold Heertje, ed. (Eastbourne, Sussex: Praeger,
1981), pp. 69-93; Tom B. Bottomore, Between Marginalism and Marxism:
The Economics and Sociology of J. A. Schumpeter (New York: St. Martin’s
Press, 1992). A variation on the same theme is Daniel Bell, The Cultural
Contradictions of Capitalism (New York: Basic Books, 1996). The inherent
instability of capitalist economies over time is well illustrated by Charles
Poor Kindleberger, World Economic Primacy 1500 to 1990 (New York:
Oxford University Press, 1996).
The reader who tires of the smoke and mirrors of overblown theories
should turn to the rich variety of empirical studies produced by traditional
economic and social historians who have based their analyses on archival
sources. One guide through this literature and the substantive issues is
Richard Grassby, The Business Community of Seventeenth Century England
(Cambridge: Cambridge University Press, 1995).
INDEX

acquisitiveness. See profit

America
ancient world
Aquinas, St. Thomas
aristocracy
Aristotle
artisans. See also labor
arts
asceticism
Asia

Bacon, Francis
banks. See financial institutions
barter
bill of exchange
bourgeoisie
Braudel, Fernand
bureaucracy
capital
capital formation
capitalism: agrarian; as process; contradictions of; cultural definitions of; economic definitions of;
rise of; social definitions of; stages of; transition to
Cardwell’s law
centralization
cities
Civil War, English
classical economics
colonial settlement
commodities
community
consumption
contract
corporations
credit
critical theorists

Defoe, Daniel
demand. See also consumption
discontinuity
division of labor
domestic market
double-entry accounting
Durkheim, Emile

East India Company

economic development
economic return. See also profit
economic virtues
efficiency
empiricism
Engels, Friedrich
Enlightenment
entrepreneurship
equilibrium
evolution

family
feudalism
financial institutions
financial revolution. See also funded debt
fiscal state
France
free enterprise
Friedman, Milton
funded debt

Gellner, Ernest
gender
German Historical School
Gras, Norman

Hamilton, Earl J.
Hayek, Friedrich
Heisenberg, Werner
Hinduism
historical geographers
Hobsbawn, Eric
Holland. See United Provinces
household

ideal type
ideology
imperialism. See colonial settlement
individualism
industrial revolution
inheritance
intellectuals
interest, rate of
international trade
investment
Islam
Italy
Japan. See Asia
Jews
joint-stock company

Keynes, John Maynard

kinship
Kuznets, Simon

labor
law: English; natural; Roman
literacy
literature
location theory
Locke, John

MacFarlane, Alan
Malthus, Thomas
Mandeville, Bernard
market economy. See also free enterprise
Marx, Karl
marxism, marxists
medieval economy
mentalities
mercantile system
military revolution
mode of production
modernity
monarchy
money
monopolies
moral economy
myth

North, Douglas

opportunity costs

Passow, Richard
patriarchy
Petty, Sir William
Pirenne, Henri
Polanyi, Karl
population
power
precapitalism
professions
profit
property rights
Protestant Ethic
Ranke, Leopold von
rationality
religion
representative government
Ricardo, David
risk
romantic love
romanticism

savings
Scholastics
Schumpeter, Joseph
See, Henri
self-interest
Seneca
Simmel, George
Smith, Sir Thomas
Smith, Adam
social differentiation
social sciences
Sombart, Werner
South Sea Bubble
Spain
state. See also fiscal state
stock market
Stoicism

taxation
technology
theoretical models
Tilly, Charles
Tonnies, Ferdnand
transaction costs
United Provinces
usury. See interest, rate of

value systems

Wallerstein, Immanuel
war. See also military revolution
Weber, Max
women
work ethic
world economy
ABOUT THE AUTHOR

Former Oxford historian, Woodrow Wilson International Center Fellow, and

current member at the Institute for Advanced Study, Richard Grassby has
written several books on social, economic, and art history, including The
English Gentleman in Trade (Oxford, 1994) and The Business Community
of Seventeenth Century England (Cambridge, 1995). His most recent study,
Kinship and Capitalism: Marriage, Family and Business in the English-
Speaking World 1580-1720, will be published by the Woodrow Wilson
Center Press.