Deirdre Nansen McCloskey from the January 2018 issue of Reason Magazine
Capitalism is what the Dutch call a geuzennaam—a word assigned by one’s sneering enemies, such as Quaker or Tory or Whig, but later adopted proudly by the victims themselves.
The word is a Marxist coinage. Karl Marx himself never used the word capitalism, but let’s not get pedantic: He freely tossed around capitalist to describe the bosses who were busily reinvesting surplus value on top of their original accumulations of capital.
Like economists and others before and after, Marx claimed that the accumulation of capital was the watchspring of wealthy modernity. The Marxian sociologist Immanuel Wallerstein, for example, wrote in 1983 that “the word capitalism is derived from capital. It would be legitimate therefore to presume that capital is a key element in capitalism.”
Actually, it wouldn’t. That we insist on ruminating on something called “capital” does not prove that its accumulation was in fact unique to modernity. And it is not. Romans and Chinese and human beings back to the caves have always accumulated capital, abstaining from consumption to get it. What made us rich were new ideas for investing it, not the investments themselves, necessary though they were.
I frequently find myself defending my peculiar form of anti-capitalism to my libertarian friends. Mark Skousen, who hosts the FreedomFest conference every year in Las Vegas, voices typical objections: “You must have capital to advance the economy,” he wrote to me in an email recently. “Entrepreneurs have plenty of great ideas and budding technology to change the world, but unless they get financing, they will remain unfulfilled.”
That’s right, but as Skousen admitted, the financing is merely a necessary condition, not a sufficient one. The explosion of human ingenuity after the turn of the 19th century, by contrast, was sufficient. The ideas were so good that financing was seldom a problem. Necessary conditions are endless, and mostly not pertinent—”having liquid water at the usual temperatures” and “the absence of an active civil war” are necessary too, but nobody wants to call it waterism or peaceism.
The necessary conditions were shared by a great many societies. Those nonetheless did not have anything approaching the Great Enrichment that started in northwestern Europe in 1800, bringing with it a 3,000 percent increase in the living standard of the poorest among us.
Consider China in 1492, which had long peace, excellent property rights, enforcement of law, absence of crushing intrastate tariffs (a contrast to Europe), and plenty of capital. China built the Great Wall and the Grand Canal with ease, putting even Roman capital projects into the shade. Yet it did not see the explosion of ingenuity that would ultimately enrich northwestern Europe, which was little more than an appalling, quarrelsome backwater in 1492.
What China lacked was not capital or institutions or science or coal, but Adam Smith’s “liberal plan of equality, liberty, and justice.” Liberating ordinary people inspired them to extraordinary ideas, which in turn redirected the capital, the labor, the liquid water, and all the other necessaries.
Skousen told me that “the scarcity of investment capital has kept us from advancing as fast we could.” No, it hasn’t. Such a notion was popular at the World Bank during the long reign of what the New York University development economist Bill Easterly calls “capital fundamentalism.” Yet the historical and economic evidence tells against this thinking. Pour capital into Ghana, yet it fails. Don’t give China a cent, yet it succeeds. The liberating ingenuity in human minds is what mattered, as in the Chinese economy after 1978 and the Indian after 1991. Give people liberty and you give them life.
Capitalism is a scientific mistake compressed into a single word: a dramatically misleading coinage of our enemies, and of the sadly misguided among our friends.
Deirdre McCloskey is emerita professor of economics, history, English, and communication at the University of Illinois at Chicago and the author most recently of Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World