Capitalism and free markets: Two sides of the same coin?
Capitalism is by far one of the most widely used and most widely defined terms in the social sciences, maybe also next to globalization, society and state. Contemporary economic and political debates would be unthinkable without it. However, especially the wide range of definitions of capitalism has lead to many misinterpretations and subsequently several academic problems, starting from different ideas behind the term up to interdisciplinary misconceptions when working with it in theory and in practice. One prominent example is the negligently equation of capitalism with the concept of free markets or a free market economy. Orthodox and heterodox economics as well as political scientists are often equating both concepts when describing and analysing the post-industrial-revolution economic system and its social dynamics, as some prominent academic works throughout the history show.1 But are capitalism and free markets really two sides of the same coin? After trying to circumnavigate around the problem of terminology in economics and political science for quite a while, the debate around this question became more and more popular in recent years, particularly in regards of seemingly cyclical crisis phenomena, growing state interventions in economies, and other phenomena’s like financialization, globalization and so on. And a trend in academics is recognizable: That, although both terms are not mutually exclusive, a differentiated and more profound conception is urgently needed to help prevent conceptual confusion and to clarify scientific outputs.
The aim of this text is therefore to bring new insights into the current debate, as a lack of critical discussion and examination can be identified especially in the libertarian and individual anarchist movement regarding this research issue. What is needed is a more interdisciplinary and critical look on the historic roots and modern dynamics of capitalism in its interplay – not to say symbiosis - with the state and in contrast a more comprehensive definition of free markets and their absence of authority, coercive power and interventionism. Therefore, libertarian and individual anarchist scholars should pay more attention to critics of capitalism and take concepts like the three-level-conception on capitalism of Fernand Braudel more into consideration, which I will try now in this paper.
A more precise distinction between capitalism and free markets can help us in the end to reduce the inflationary and uncritical use of the term capitalism in social sciences and at the same time increase the scientific quality of researches.
Capitalism = the free market?
Recent researches in sociology, economics and political science try to show the vulnerability of the idea capitalism=free market and currently work out the inherent differences between both concepts, offside from purely classic liberal or marxist conceptions and based on historical derivation and current developments. Important contributions in this field were made from historian Fernand Braudel and his works on the history of capitalism.2 But in recent times also anarchist and libertarian scholars are beginning to (re-)identify increasingly differences between capitalism and a free market economy, although their motivation for this either lays in an attempt to find a new meaning for the negatively occupied word capitalism and every misconception it stands for or to point out the differences between capitalism and state or corporate capitalism.3
I am therefore trying to find a new way in thinning the jungle of definitions by combining Braudels three-level-conception and the libertarian critic of state and corporate capitalism, showing that both have a lot in common when it comes to a distinction between the free market and capitalism.
Braudel´s concept of capitalism and the libertarian critic on state/corporate capitalism
Since capitalism popped up as a vague description of some sort of appropriation or accumulation of wealth in the late 18th century and was made popular in the works of political economists like David Ricardo4 and Louis Blanc and later the anarchist Pierre-Joseph Proudhon or novelist William Makepeace Thackeray5 in the 19th century, scholars are struggling to find a universal, common and mostly important a neutral definition of it. Because of its origin in socialist and marxist theories and thinking’s, the idea of capitalism - beside its mostly negative connotations, resulting in a pejorative usage of the term – is subjected to historical determinism.6 Moreover, the struggle to find a sufficient definition lead to a simplification that said capitalism is basically a market-driven economic activity, resulting in the equation capitalism=free market (economy).
But this widely used and understood definition involves a number of problems, however. It is to some extent an “ideal type” that does not reflect the messier and complicated reality of economic dynamics and realities. More seriously, it makes capitalism almost a synonym for market economy—that is, for any economic system based on private property and exchange. All of this leads to a concealment of power relations and dependencies behind the modern capitalist economic system. This is where the theory of Braudel meets with the libertarian critic of state and corporate capitalism.
Let’s start with Braudel. In his concept of capitalism, he sees three different spheres or stages: the material life, the economic life and “true capitalism” or the “anti-market” itself.7 In the first sphere we have the domain of production and immediate consumption and we find phenomena that are economic inasmuch as they involve manipulation of scarce resources to increase wealth, but that do not involve trade, exchange, or money. The second sphere called economic life or “micro-capitalism” involves economic activity linked to ordinary work such as trade and exchange, with transparency, only small profits and horizontal communications between the different markets. The third sphere is the anti-market, where Braudel sees impersonal, long distance connections between markets and their members, the realm of investment and of a high rate of capital formation, speculation, corruption, inequality and a monopoly on money by certain groups of privileged actors that were engaged in circuits and calculations that ordinary people knew nothing of.8
The similarities between this three-stage-concept and the libertarian critic on state and corporate capitalism arise mainly in the third sphere, the “anti-market”. Where Braudel sees capital formation, speculation, inequality and monopolism, libertarians such as Murray N. Rothbard saw the phenomena of state capitalism as “the partnership of government and big business in which the state intervenes on behalf of large capitalists against the interests of consumers”.9 The tools therefore would be state interventionism, regulation, legislation and central bank policies, leading to distorted competition and, what Braudel said, a “zone of concentration, the zone of a relatively high degree of monopolization”.10 And the similarities continue. What libertarians in general understand and tend to favor under the idea of a free market, where voluntary exchange and fair, open competition based on property rights are given, can be equated with the “micro-capitalism” sphere of Braudel, where economic activities are truly competitive and defined by transparent communication and fair exchange based on true supply, demand and price. Libertarians like Herbert Agar therefore criticized the dynamics of modern capitalist systems, saying that the institution of private property as a basic requirement for voluntary exchange had been largely supplanted by thoroughgoing capitalism. This leads to overlapping ideas of the social function both Braudel and classic liberals like Adam Smith11 as well as libertarians attribute to the free market. Braudel sees the second sphere, the basic economic life, as a tool of liberation and capitalism, in contrast, as a tool of hegemonic power, creating inequality and privilege for only a few. Libertarians like Ludwig von Mises, Friedrich A. von Hayek or Murray N. Rothbard also saw the free market as a tool of liberation for the individual. Although they call it “state capitalism” or “corporatism” and not capitalism per se, they criticized that centralized power leads to inequality which accumulates over generations.12 People in power will always club together to support the conditions that make them wealthy and build a state-like entity to keep that privilege (corporations, central banks, etc.) over time, even if the power of a state or government declines or will be limited in some sort of way.
In the final analysis, the positive logic libertarians see behind free markets is mutual benefit when it comes to exchange and transactions. This idea can also be found in Braudels work, when he writes: […] the market spells liberation, openness, access to another world. It means coming up for air” […].13
Although we saw quite a few similarities and intersections between the libertarian school and Braudels work on capitalism, there are still some differences between the two concepts, which due to the brevity of the text can’t be analyzed in detail here.14 This could be a task for further investigations.
Capitalism and free markets: Two different coins
So what this short comparison shows us is that we have a sound foundation for a differentiated view on capitalism and the free market. Capitalism is a sphere above the free market, where coercive powers and privileged actors like states, governments and cartels manage the economic system as well as create and enable monopolies by enforced legislation, regulation and interventionism. Or as libertarian scholar David S. D’Amato wrote: “It [capitalism, editor’s note] is a creature of government power, rooted in inegalitarian special treatment for big business and systematic attacks on individual rights.” 15 Capitalism may require some sort of free market mechanisms, like private property rights and exchange, but the free market does not need capitalism to function. A look back in history shows that.
1 Milton Friedman in his book “Capitalism and Freedom” is a prominent example for equating the terms capitalism and free market, when he writes about “free market capitalism”. See: Friedman, Milton (1962): Capitalism and Freedom. as well as Bachinger, Karl/Matis, Herbert (2008): Konzeptionen und Analysen von Adam Smith bis Amartya K. Sen. in: Sozioökonomische Entwicklung, Band 3074. pp. 76
2 Braudel, Fernand (1976): Material Civilization and Capitalism
3 Early libertarians and classic liberals like William B. Green criticized capitalism as “industrial feudalism”, a system of tribute and economic subjugation and the legal and political repudiation of liberal free market ideals, not the expression of those ideals. See: D’Amanto, David (2018): Should Libertarians Abandon the Word “Capitalism”?
4 Although Ricardo used the term in his 1817 published book “On the Principles of Political Economy and Taxation”, popularity of “capitalism” rose 1902 after the german sociologist Werner Sombart wrote “Der Moderne Kapitalismus”.
5 See: The Encyclopedia of Libertarianism: „Capitalism“, under: https://www.libertarianism.org/encyclopedia/capitalism, retrieved on 24.03.2019
6 Marxists see capitalism as a discrete stage in economic history. However, empirical research reveals that markets and privately owned accumulations of productive assets (capital) are found in most times and places, and it becomes almost impossible to give any kind of date to the periodization. E.g. Graeber, David (2011): Debt, the first 5000 years
7 Howard, M.C. (1985): Fernand Braudel on Capitalism: A Theoretical Analysis. In: Historical Reflections/Réflexions Historiques. Vol. 12, No. 3, pp. 469-483. as well as: Wallerstein, Immanuel (1991): Braudel on Capitalism, or Everything Upside Down. In: The Journal of Modern History, Vol. 63, No. 2, A Special Issue on Modern France, pp. 354-361.
8 Wallerstein, Immanuel (1991): Braudel on Capitalism, or Everything Upside Down. In: The Journal of Modern History, Vol. 63, No. 2, A Special Issue on Modern France, pp. 355-356
9 Rothbard, Murray (1973). A Future of Peace and Capitalism. In: James H. Weaver. Modern Political Economy. Boston: Allyn and Bacon. It should be also noted, that in recent years state capitalism more and more transformed into corporate capitalism, again enabled by the state.
10 Braudels statement: “What is clear [...] is that the really big profits were only attainable by capitalists who handled large sums of money-their own or other people's. [...] Money, ever more money was needed: to tide one over the long wait, the reverses, the shocks and delays.” comes really closely to the libertarian critic on central banks and their monopoly on money, granted by the state. See: Wallerstein, Immanuel (1991): Braudel on Capitalism, or Everything Upside Down. In: The Journal of Modern History, Vol. 63, No. 2, A Special Issue on Modern France, pp. 356
11 For Adam Smith, the market was the superior means for the abolition of class, inequality, and privilege. See: Smith, Adam (1776): An Inquiry into the Nature and Causes of the Wealth of Nations. Chapter I
12 See: Von Mises, Ludwig (1979). Socialism: An Economic and Sociological Analysis. Indianapolis: Liberty Classics.; Von Hayek, Friedrich A. (..): Road to serfdom.
14 Braudel has a different and certainly positive definition of the state and its role in a free market economy. He attributes the state a role as guarantor of freedom via his ability to regulate prices. Libertarians like Hayek would highly disagree with that logic. Ibid.
15 D’Amato, David S. (2016): Liberalism, Equality, and the Modern Corporation, under: https://www.libertarianism.org/columns/liberalism-equality-modern-corporation, retrieved on 24.03.2019