One of the more interesting developments in the wake of the Great Recession is the use and abuse of the word â€œcapitalism.â€ You know something strange is going on when you can read articles and op-eds that blame the entire boom and bust on â€œcapitalismâ€ right next to ones that claim â€œcapitalismâ€ had nothing to do with it. Obviously both canâ€™t be true, so a common reaction is to say that one writer or the other is simply wrong about the facts or his interpretation of the facts.
But another possibility should be considered: Both are using the same word (â€œcapitalismâ€) to mean two different things. The confusion the word generates is a good reason for freedom lovers to consider abandoning it, along with its terminological counterpartâ€“socialism.
There are at least three reasons that the terms â€œcapitalismâ€ and â€œsocialismâ€ are problematic: 1) â€œCapitalismâ€ was coined by its opponents; 2) Both terms are etymologically loaded in a way that biases them against capitalism; and 3) Because no existing economic system matches either one consistently, the meaning of both has been polluted by being connected with real-world systems that have elements which are not necessarily features of the ideal. This is particularly true of capitalism.
The first and second points are interrelated. The modern usage of â€œcapitalismâ€ dates back before Marx, but it was Marx who popularized it. One will look in vain through the works of the great classical-liberal writers of the eighteenth and much of the nineteenth centuries, such as Adam Smith and the other Scots, for the word â€œcapitalismâ€ to describe the system they favored. Such use by its proponents is largely a twentieth-century phenomenon.
Because the term was coined by opponents, itâ€™s not surprising that it is etymologically loaded. Usually the suffix â€œismâ€ refers to â€œbelief inâ€ something. In the case of capitalism and socialism, we can see how looking at the words this way reveals the bias. Its name suggests that â€œcapitalismâ€ is a system in which â€œcapitalâ€ is the central feature and motive force. Those who support such a system seem to â€œbelieve inâ€ the power of capital, which further suggests that capitalâ€™s interests are the ones that are, and perhaps should be, served by the system.
Compare that to the term â€œsocialism,â€ which puts â€œsocietyâ€ in the same role. This system is presumed to involve a belief in the power of â€œsocietyâ€ as a whole, and the term suggests that societyâ€™s interests are the ones that are, and should be, served by the system.
Faced with a choice between a system whose name suggests that it serves the interests of only a small fraction of the already wealthy and powerful and one whose name suggests it will serve the interests of society as a whole, which would you find more attractive?
The problem here is that the names beg a whole series of questions of political economy by seeming to imply who benefits from each system. The implied claims that capitalism (that is, free markets) primarily serves the interests of capital and that socialism would serve the interests of society as a whole are not facts but theoretical assertions open to debate and, I would argue, both false. Using these terms tends to obscure the questions of whether either system actually works the way the name seems to suggest. Neither term is useful for understanding what sorts of institutions each system actually entails.
Finally, the word â€œcapitalismâ€ has come to mean a variety of things, largely because of the way the name puts â€œcapitalâ€ front and center. (Notice that I had to clarify that I am using â€œcapitalismâ€ to mean â€œfree markets.â€) Far too often, capitalismâ€™s opponents use the term to refer to any sort of system in which the interests of capital come first.
So when governments grant favors to private firms, or when firms actively seek such favors, enabling them to control markets to the detriment of us all as consumers, we are told this is â€œcapitalism.â€ When challenged by free-market defenders on the distinction between â€œcapitalismâ€ and â€œfree markets,â€ these same critics will simply say, â€œYouâ€™re the ones who talk about how we have a capitalist economy. So why are you objecting to my using it to describe the status quo?â€
And thatâ€™s a fair response which nicely illustrates the problems that arise when we use a word to mean one thing (capitalism = free markets) but so many others use it to mean something else (capitalism = whatever benefits capital). It also explains the contrasting analyses of the recession I noted at the outset.
As noted above, most supporters of capitalism didnâ€™t use the term until the twentieth century. Moreover, many supporters create confusion by using the word to describe both the current U.S. economy and their desired free-market alternative. You can see this confusion when capitalismâ€™s critics blame it for problems that capitalismâ€™s defenders blame on state intervention.
The deeper problem with the terms â€œcapitalismâ€ and â€œsocialismâ€ is that they donâ€™t indicate the institutional arrangements under which the systems would operate. Perhaps we could get away from the etymologically biased traditional words by substituting more descriptive terms.
For example, we could substitute â€œmarketsâ€ and â€œplanningâ€ for â€œcapitalismâ€ and â€œsocialism.â€ If one believes that the fundamental institutional arrangement for capitalism is the market and for socialism some form of government planning, then this pair of words might more accurately describe each systemâ€™s institutional setting. These two terms are purely descriptive and donâ€™t imply a preference. Normative judgment would require additional arguments.
Using â€œmarketsâ€ instead of capitalism has one advantage and one major disadvantage. The advantage is that it seems to address the concern expressed by Auburn philosopher Roderick Long and other left-libertarians that the term â€œcapitalismâ€ or even â€œprivate ownership of the means of productionâ€ implies that capital must be owned by someone other than workers. This is often a source of socialist objection to capitalism. However, the term â€œmarketâ€ should not carry those implications. After all, an economy is conceivable in which most or all firms are owned by the workers themselves, yet firmsâ€™ relationships with one another and with consumers are conducted entirely through the free market.
The termâ€™s disadvantage is that â€œmarketâ€ alone doesnâ€™t distinguish between free markets and those in which the State, either on its own accord or at the behest of private actors, plays a significant role to the detriment of the public. In the current U.S. economy, markets dominate but are hardly unfettered. So using â€œmarketsâ€ seems like an advance by specifying the primary institutional process of the preferred system, but it may well need a further qualifier to distinguish the unfettered ideal from the fettered reality. Professor Long and others have suggested the term â€œfreed marketsâ€ for the ideal, which has the advantage of making clear that we donâ€™t have free markets now.
Substituting â€œplanningâ€ for â€œsocialism,â€ however, raises some potential problems of its own. Although in the late nineteenth and early twentieth centuries many saw planning as the essence of socialism, that belief was not universal and it has largely disappeared over the last few decades. For many today, socialism is more about improving working conditions than substituting planning for markets. For example, Ted Burczak, in his Socialism After Hayek, would give markets great latitude among firms and between them and consumers, but would prohibit wage-labor contracts, forcing all firms to be worker-owned and worker-managed. Historically this emphasis on worker ownership was also seen as a defining feature of socialism. As noted, it is not incompatible with freed markets as long as it is not enforced by coercion. To this extent, left-libertarians can legitimately say they support both â€œfreed marketsâ€ and â€œsocialism,â€ if by the latter they simply mean worker ownership of the means of production.
So even were we to use â€œmarketsâ€ and â€œplanningâ€ for â€œcapitalismâ€ and â€œsocialism,â€ we would still need additional adjectives. The question is whether the somewhat more tedious circumlocutions that might substitute for â€œcapitalismâ€ are worth it. Given the confusion Iâ€™ve described, I have become increasingly convinced that they are. Even for libertarians like me who do not believe worker ownership or management is essential to our ideal, the problems with the word â€œcapitalismâ€ have become so significant that itâ€™s time for us to think seriously about dropping it as the name for our preferred alternative to the status quo.