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Back in the 1942s, Wilhelm Röpke wrote about the distinction between historical capitalism and market economy.

The gist of his argument was that people too often confused the two, and transferred their negative conceptions of "capitalism" as it had historically evolved in the 19th and early 20th centuries with the idea and ideal of the free market economy.

Historical capitalism had developed into a perverse blend of some degree of open, competitive market forces mixed with favors, privileges, and special protections (monopolies, cartels, tariffs, subsidies, anti-competitive regulations and interventions)for various interest groups at the expense of both taxpayers and consumers.

This had created the impression in the eyes of many in the society that "capitalism" was a politically corrupt economic system that served the interests of some at the expense of others.

Röpke contrasted "historical capitalism" with the ideal of an open, competitive free market order that offered opportunities for all through impartial equality before the law, rising standards of living through market-based innovation and capital formation, and a sense of fairness and justice that each received what he had honestly earned by serving other members of the society through the free play of supply and demand in the social system of division of labor.

What was required of all true friends of liberty and (classical) liberalism, he said, was to clearly distinguish between these two notions, and challenge the corruption and unfairness of much that had developed in "historical capitalism" and make the case for the liberal market order that had never been fully implemented and often was not properly understood.

As Röpke expressed it, we must "make a sharp distinction between the principle of a market economy as such ... and the actual development which during the nineteenth and twentieth centuries has led to the historical foundation of market economy.... If the word 'Capitalism' is to be used at all this should be with due reserve and then at most only to designate this historical form of market economy... . Only in this way we are safe from the danger ... of making the principle of the market economy responsible for things which are to be attributed to the whole historical combination ... of economic, social, legal, moral and cultural elements . . . in which it [capitalism) appeared in the nineteenth century."

(I discussed this further in a short article on "Historical Capitalism vs the Free Market" in "Freedom Daily" [January 1993], http://www.fff.org/freedom/0193b.asp.)

Even having written this, one part of me remains reluctant about giving up the word "capitalism," just as we lost the good word, "liberalism." But at a minimum, it seems that we do our best to make sure that we make clear to others that our conception of free market "capitalism" is very different from "historical capitalism" as it has evolved and is perceived in too many peoples' eyes today.

Richard Ebeling

Misperception of "capitalism" has done incalcuable damage. Arthur Koestler descrbed vividly in one of his autobiographies how he turned communist in disgust and outrage when he read about food being destroyed in the "capitalist" USA while poeple in Europe starved. That was the New Deal, seen from afar as "capitalism".

Michael Novak has done some important work since he converted from socialism to capitalism in the 1970s. He promotes the compatibility of Catholic moral teaching and Austrian economics and the valuable legacy of democratic capitalism in the US. http://www.the-rathouse.com/shortreviews/Novak.html

His account of the American experience as an adventure of classical (non socialist) liberalism identifies several valuable moral traditions which were called forth by democratic capitalist institutions in the early American colonies. These include civic responsibility, personal economic enterprise, creativity and a special kind of communitarian living. He also offers a cogent rejoinder to the critics who accuse capitalism of lacking moral or spiritual depth. He explains that statements on the 'spiritual deficiency' of democratic capitalism spring from a "horrific" category mistake. Democratic capitalism is not a church, a philosophy or a way of life, instead it promises three liberations; from tyranny and torture; from the oppression of conscience, information and ideas; and from poverty. The resulting social order provides space "within which the soul may make its own choices, and within which spiritual leaders and spiritual associations may do their own necessary and creative work".

The most significant achievement of the book is to explain how the common good can be served by the blend of individualism and free-market institutionalism (under the rule of law) that is advocated by von Mises and Hayek.

Haven't you heard? Greenspan's "libertarian" ideology got us into this mess. Bush's "laissez-fair" policy left the markets unregulated. By the way, I think "Laissez-fair" is considered more evil the Capitalism by most people. And "unregulated free market" is even worse.

So Steve, What are you guys trying to do? Trick everybody into a free society?

Capitalism is just fine. The greatest pro-capitalism writers used it proudly. Mises, Friedman, Rand, etc... What are you going to do? Rewrite all of their books? Once people are educated, they love the word Capitalism. You can't sneak in freedom.

I dislike the fact that our words are being taken from us. Capitalism is a fine word. I like being controversial so my blog is "The Daily Capitalist." But I often eschew the "c" word in my writing and use "free market" instead. Marketing is an issue libertarians need to take more seriously.

On the other hand, we should do the same to the left. I have screened leftist articles for adjectives describing that they apply to what they think is capitalism or free markets and apply those same terms to describe interventionist, socialist, or Keynesian ideas. These "trigger" words are (so far): fundamentalist, faith based, partisan, dangerous, left wing, and sordid. Any more suggestions?

The data also shows huge differences between elder's ang youth's attidudes to the term "socialism". From the first sight it would be quite amazing to view "socialism" as popular as "libertarianism" among younger people. How can they come with?
I think, an answer is simple. Youths have more positive feelings towards the simple and bright ideas, whatever they are. And more negative feelings towards boring, conservative, far too complex idea of capitalism. If I am right, in 10 years we could see decline of "libertarianism" as well as of "socialism" popularity among those who are under 30 now.

"I suspect they might generally know the meaning of libertarian, or at least know enough to have a decent idea. But I also suspect that they think "capitalism" describes the status quo in the US."

Maybe. Or maybe they identify with leftist libertarianism in which the state legalizes drugs and pornography, but keeps a lid on corporations.

Why speculate? Haven't you seen the Rasmussen poll?
http://www.rasmussenreports.com/public_content/business/general_business/april_2010/60_say_capitalism_better_than_socialism

I agree with Richard Ebeling. The Rasmussen poll above pits capitalism against socialism. I think there we have capitalism as the lesser of evils.

In any event, why don't we simply call the system, somewhat mysteriously, "the unknown ideal." I can't get my tongue out of my cheek.

Steve, a question for you, Sheldon, Roderick, etc.: If we ditch the term "capitalism," for the reasons you describe, what do we do with the technical economic terms "capital" and "capitalist"? The same arguments you use against "capitalism" seem to apply, with equal force, to "capitalist." For doing theory, we need some term to go with "laborer," "entrepreneur," and "landlord." For doing applied work, we need some word to describe Warren Buffet, John Doerr, etc. If "capitalist" means politically connected crony, what do we call these guys, when highlighting their economic function? "Capital-owners"? "Capital investors"? "Funders"?

That's a great question Peter and not one I've thought about before. My quick reply is that I'm not sure I accept the premise that those technical economic terms have the same baggage. Certainly not "capital," though "capitalist" is more interesting. (I wonder if people react differently to "capitalist" vs. "owner of capital"?)

A very good question that I will ponder some more.

Regarding Peter Klein's point; our critics use "Capitalism" to mean a system where the owners of capital control national politics. We use "Capitalism" and "Capitalist" to mean a system where the owners of capital control their capital.

I don't agree with Steve. I know lots of young people in Ireland, in general they are left-wing and believe in "public healthcare", "strict regulation", welfare and all the rest. Even if they were asked their position on "free markets" I'm sure it would be negative.

Well, there has already been manipulation of words for (free?) marketing purposes. See the replacement of "liberal" with "libertarian," which was a leftist term for a solid century (there were even self-styled "libertarian communists" in the 1920s).

I am old fashioned and think that "capitalism" is a very straightforward word that means private ownership of the means of production. However, it does not rule out corporatist forms of "command capitalism" in which capital remains privately owned, but the capitalists are making decisions on the basis of state orders. So, "market capitalism" straightens that one out. All this "free enterprise" stuff sounds like bumper stickers for Chambers of Commerce.

If the goal is to communicate the 'Austrian' message and move into action, and taking into account the many misconceptions of 'traditional' terms, I believe that one needs to find out the 'proper' value proposition and the communication strategy. In order to do that it is necessary to find out the very deep feelings and thoughts in the target audiences. Something like the ZMET methodology will facilitate the 'solution' to an obvious marketing problem.
The simple fact that we have failed to achieve a better awareness and influence of the Austrian view reveals that we have been quite defficient in the marketing strategy.
It is not only the division of labor, it is also the division of knowledge.

I've been arguing for 20 years that we need to avoid the term capitalism. I only use it when others are setting the agenda. My preference is to speak of the institutions of a free society.

I agree with fundamentalist. I feel a lot of young people today who describe themselves as 'libertarian' actually mean the Noam Chomsky "left libertarian". They all watch that movie Zeitgeist and think that the economic problem can be solved, if only the 'right' people were in charge. I hear that argument so much I'm considering printing out the first part of chapter 15 (http://jim.com/econ/chap15p1.html) of Econ in One Lesson and handing it out to people.

Klein has an excellent point. Röpke is right that we just have to be careful when we use the term. We have to distinguish it from crony-capitalism or corporatism. Clearly "capitalism" denotes an important aspect of the economy of an advanced libertarian social order. We need words and concepts to understand and discuss this.

The left-libertarians who oppose the term "capitalism" do not do so on solely semantic, or even solely on strategic-tactical grounds. It also has to do with different prediction and preferences: some of them predict far less use of hierarchical firms and corporations, employment, and the division and specialization of labor. The debate over predictions can be had--but should not be masqued or muddied by pretending it's really a semantic or strategic discussion. Likewise, if you prefer localism, self-sufficiency, etc., and have a personal aversion to hierarchy, employment, etc., that is again something that can be discussed, but again, arguing over what term should be used to describe an aspect of a free society's economy should not be used as a substitute for this discussion.

This is even more important when we get to substance: some left-libertarians differ from non-prefix libertarians in more than predictions and personal preference: namely, they maintain that various "capitalist" norms and institutions are unjust and unlibertarian--such as absentee/distant ownership and even employment itself (making landlordism and employment almost impossible--the tenants and employees would naturally "own" the facilities they are possessing, and employment could be seen as a violation of certain "inalienable" rights, much like voluntary slavery), laced with other criticism of such a "capitalist" order such as hoary notions of "alienation" and "oppression" and bossism and opposition to "hierarchy" and authority. Such views are indeed substantive--and an innocuous-sounding discussion about whether "capitalism" is pejorative or positive, strategically wise or not, or means free market or corporatism, most certainly should not be used as a proxy or substitute for the more substantive discussion. That discussion, as well as discussions about differences in predictions as well as personal preferences, can only be had if terms are clearly defined so that everyone is communicating clearly.


'We use "Capitalism" and "Capitalist" to mean a system where the owners of capital control their capital.'

It also a system in which workers control their labor, and landowners control their land. Why should we used a word that implies the system favors one group over others, when that is exactly what it does not do?

I am not 100% sure, but I think that what Roepke seems to suggest is not what today's critics have in mind when they talk about the necessity to distance ourselves from the word "Capitalism". Roepke i stalking about the evolution of capitalism during "19th and 20th centuries". I am not sure to what extent he is referring to its evolution from the laissez-faire to the crony, interventionist capitalism. On the contrary, it seems to me that the main problem in his view is laissez-faire! That the term "capitalism" is unsatisfactory exactly because it refers to laissez-faire!

Roepke: "Only in this way we are safe from the danger ... of making the principle of the market economy responsible for things which are to be attributed to the whole historical combination ... of economic, social, legal, moral and cultural elements . . . in which it [capitalism) appeared in the nineteenth century."

So, the problem is how to avoid the identification of the "ideal" of capitalism with the 19th century practice of laissez-faire. This is quite consistent with the Hayek's position who trashed laissez-faire as well, and thought constitution of "liberty" would mean using the "intelligent public policy to improve freedom".

David Tomlin,

That's a good point.

What fundamentalist said. For young people, libertarianism's signature appeal is a minimal intellectual property regime & an end to the War on Drugs. No need to look any harder than that.

It looks like the conservatives on the Texas board of education beat you to the punch Steve:

"Dunbar backed amendments to the curriculum that portray the free enterprise system (there is no mention of capitalism, deemed to be a tainted word) as a cornerstone of liberty and argue that the government should have a minimal role in the economy."

From the 13th paragraph here: http://www.guardian.co.uk/world/2010/may/16/texas-schools-rewrites-us-history

Could I introduce another term to the mix: 'Consumerism'? I've been thinking about this terminology question recently and, not surprisingly, I found my inspiration in von Mises (Bureaucracy, a great essay). I agree heartily with Richard Ebeling and his raising of Ropke. We should also remember who invented the term - one Karl Marx, a man devoted to its destruction(OK, perhaps he didn't, but he made it common parlance).
Clearly, 'Consumerism' is an even more maligned term than Capitalism, although rather more vague at present. Generally it's used in an entirely perjorative sense - to call someone a 'consumerist' is to conjour associations of individuals blindly obsessed with the mere acquisition of goods.
However, we are all consumers, we all must consume, in an economic sense consumption is the end goal of all economic activity. Contrast this to Capitalism which actually describes a means to an end - Capitalism is the system of production by which we satisfy the desires of consumers, but we are not all Capitalists.
Of course, one might argue that 'consumerism' simply describes the human condition so it's meaningless. However, if we ascribe a specific meaning to it, the term could actually be quite a useful one. Here's Ludwig describing the profit orientated mode of production:
"Thus the capitalist (!) system of production is an economic democracy in which every penny gives a right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people's mandatories. If they do not obey, if they fail to produce at the the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight reign on all business activities."
So, who's sovereign? The Capitalist? No. He merely serves. It's the Consumer who's king, the Capitalist is merely the most efficient, therefore best, means of serving his wants (even von Mises ignores this point here, but it's not his main line of interest in this book). This is the true system of 'free markets' we ought to aim for, not - and isn't this Ropke's point? - a system where 'historical capitalists' have utilised government etc. to create dominance and power over consumers.
One often defines meanings relatively. So the opposite to 'Consumerism' would not be 'Capitalism' as Capitalists are a means of production. The opposite of 'Consumerism' is 'Socialism' or 'Etatism' where the state (however constituted) controls not the means of production, but the decisions for consumption, and perhaps 'historical capitalism' where the Capitalist - usually via manipulation of the government - has done so also. Free Consumerism must be a system where consumers decide where to allocate their resources, this is then the precursor for Capitalists to arise to satisfy their wants. The reward to Capitalists for efficient satisfaction is profit.
As an aside - 'free market' is a good term, but people think of market as in 'stock market' not in the broad sense of 'economic interaction'. They also use the term to refer to any market that isn't a state monopoly, even when it isn't 'free' e.g. I commonly hear in the UK the US health market referred to as free when clearly it wasn't anything of the sort.
I'd appreciate views and comments, although I'm certain we're stuck with Capitalism, however it's used!

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That has not been stable for the last several decades - it has steadily declined and it has recently gone negative.

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