September 9, 2019 Reading Time: 9 minutes

The “new history of capitalism” is a relatively new field of study among historians. Scholars in this field have two goals. The first is to document when “capitalism” emerged. The second is to understand the legacy of the early forms of capitalism. 

The field emerges out from other subfields of history and economics that flourished  from the 1960s to the 1990s: labor history, social history, moral economy and the study of “market revolutions”  All these subfields had a similar hypothesis. At some point in history, they argued, a new economic system emerged (the “market”, “capitalism” etc.) that marked a break with previous sets of institutions.  Scholars working on these topics largely assumed that economic behavior differed between the phases before and after the arrival of this system. 

In essence, this is the resurrection of an old thesis – that of Karl Polanyi’s Great Transformation. Writing in the 1940s, Polanyi argued that individuals are “embedded” in their contexts. The systems in which individuals were embedded before the Industrial Revolution, Polanyi argues, were hostile to markets. Self-interest, utility maximization and profit maximization not being natural instincts of mankind, markets played no role in these societies. Instead, reciprocity and redistribution governed social relations. 

These mentalities changed with the introduction of capitalism, the story goes.  Capitalism, furthermore, required impetus from the state, and the state eventually became the enforcer of a new market mentality. The new mentalities that emerged with the rise of capitalism were those that are now embedded in neoclassical theory. 

This is eerily similar to what new historians of capitalism claim. At one point, capitalism came and changed everything. On each side of that divide is a particular economic mentality. The assumptions of economists and economic models are based on the mentalities of the new system and they are thus ahistorical. As such, they argue, utility-maximization, profit-maximization, rational choice theory and all their intellectual cousins should be thrown in the dustbin. 

According to the new historians of capitalism, like their Polyanian forbearers, neoclassical economics is – at best – useless. Rather, to explain the transition from one mentality to another, power and class theories are needed. Indeed, if the state became the enforcer of the new mentalities (because the state brought about a capitalist order), we need to understand what group was responsible for promoting capitalism. This, the historians argue, is impossible for economists because their tools do not take into account class and power. 

A major problem for this crowd  is that there is no evidence that mentalities changed. Contexts do matter, but they matter inasmuch (insofar?) as they affect the constraints and incentives that people face. The changing choices we observe people making throughout history are the results of changes in constraints, incentives and contexts, not changes in human nature. Thus, when someone asks “when and how” did capitalism emerge, they are asking a question that begs the answer. The correct question is “when and how” did contexts, constraints and incentives change in ways that explain the choices that we observe people making.  In fact, once the question is reformulated, we can see that economic theory is potent in explaining even class and power relations in ways that speak to the second goal of the new historians of capitalism: explaining the long shadow of institutional changes. 


The new historians of capitalism attempt to demonize economists and economic historians in two ways. First, they point out that economists adhere to the belief that individuals are rational. Second, they point out that economists eschew power relations or class relations because they are unable to explain them. This is meant to show that these scholars, who work generally within the neoclassical economic framework (which is often mentioned with a certain scorn), can be safely ignored. 

Both Polanyi and the new historians of capitalism argue that economic mentalities are antithetical to human nature. “Gain and profit,” they suggest, never played an important part in human history before sometime in the modern era (the date is always vaguely defined). But, then, one might ask, what is it that governed human activity? Reciprocity and redistribution! Two concepts, they argue, that poorly fit in economic theory (i.e. neoclassical theory).

This picture is largely untrue. We are predisposed to trade with each other because of the gains that specialization through trade allows us. However, we are also born cheaters and we think that others will cheat on us because we know that there are short-term gains from cheating. The problem is that cheating comes at long-term costs (ending future trade relations). These two tendencies are in a tug-of-war when we make choices. For people to thrive, there must be institutional arrangements that deter cheating.This is why we develop norms, reputations, customs, signals etc. All of them are designed to elicit trust in others in order for trade to be sustained. This can include practices that fall into the “reciprocity” and “redistribution” categories. 

For example, gift exchange allows us to signal to others that we are willing to pay an upfront cost to secure an exchange. It signals that one wants and can be trusted as a trading partner. There is a large body of economic literature – including from Nobel laureates – on how this fits very well in rational choice theory. Economists have, for a very long time now, shown that basic neoclassical theory can explain not only gift-exchange, but also egalitarian norms, risk-pooling, redistribution schemes in small communities etc. 

These rebuttals to Polanyi  appeared early and frequently. For example, Robin Law showed that one of Polanyi’s favorite examples of his theory, the absence of prices in  the Dahomey kingdom in West Africa, was heavily flawed. With the use of price data, Law showed that households did respond to price. The kings of Dahomey also responded to incentives as the rules they set were meant to extract more revenues from the population to finance lavish lifestyles. The rebuttals were so strong that this example from Polanyi is now taught in economic history departments for purely pedagogical purposes

Consider also an example from my own research on Canadian economic history. Historians have often written that French-Canadians in Quebec were “pre-capitalist” before the 1850s while English-Canadians immigrants to the colony were already well-embedded in capitalist mentalities. Thus, many have tried to explain a prolonged economic crisis (which the data suggest never actually existed) on the back of traditionalist outlooks held by French-Canadians who were reluctant to adopt new production techniques. In contrast, the English-Canadians were less affected by the crisis because they held more capitalist mentalities. The logical extension is that the French-Canadians were poor while the English-Canadians were rich (a claim for which there is empirical evidence). 

This is fertile ground to test the claims of Polanyi and the new historians of capitalism. On one side of our historical example, the French-Canadians are embedded in a pre-capitalist system while, on the other side, English-Canadians are embedded in a capitalist (market) system. If this is correct, we ought to observe differences in economic efficiency across the two groups with the French-Canadians being “less efficient”. 

Since the 1980s, multiple articles have investigated this. A first wave of research by economists Frank Lewis and Marvin McInnis found no significant gaps in efficiency between the two groups. A second wave of research, to which I contributed, found that that this result was valid at different points in time, even after accounting for differences in land quality and other geographical advantages. Both groups did the best they could with what they had – which is to say that they left no dollar bills on the sidewalk. The two groups had the same “maximizing” mentality. 

However, one should not equate  “maximizing” with a belief that “all is great”. Maximization occurs under constraint and constraints may be different. In the case of the French-Canadians, they may have been maximizing, but they lived under a different set of institutions than the English-Canadians. The British, when they conquered Quebec in 1760, preserved the existing French land tenure system there. Under that system, the French-Canadians faced numerous duties and obligations to their landlords. These landlords, in turn, were given important monopoly rights and rights to erect entry barriers in certain industries in which they were active. 

In the 1790s, the British decided to freeze the boundaries of the French land tenure system and allow all new settlements to be settled under British land tenure laws – under which none of the aforementioned obligations existed. There was thus an institutional frontier that, when crossed, brought one from a more constrained (the French law side) regime to a less constrained one (the English law side). Given differing constraints, you get different outcomes after maximization. Those with the loosest constraints fare best. 

In recent research with Vadim Kufenko and Alex Arsenault Morin, I found that the English law areas had higher wages and higher levels of industrial development. They had better living standards because the constraints were not as tight as in the French law areas. Individuals under both regimes were still maximizing but one group of individuals was dealt a worse hand. 

This example from French Canada is meant to convey one important thing: that the views about rationality which economists hold are quite nuanced. It is possible to view a particular institution as profitable. However, to say that does not require saying that it made things better for the individuals living under it.  

To explain why, at some point in the 18th or 19th centuries, there was an acceleration of economic growth that led to massive improvements in living standards, one needs to consider what made constraints change. Rather than invoking a vaguely-defined “capitalism”, the focus on constraints allows scholars to concentrate on institutions. This opens the door to clearly-defined questions. For example, why did landlords in Quebec lobby the British crown to preserve the land tenure system (?)even though it clearly made the majority of people worse off? There is no need to invoke “different mentalities”.

A Caricature of Economics

The second claim that the new historians of capitalism make is that economists are unable to explain how the “deep roots” of capitalism took hold because they fail to explain class power. In fact, some historians go as far as to claim that economists and their acolytes simply ignore class relations. 

To claim that economists ignore power relations because they don’t have the tools to apprehend them hinges on a misunderstanding of economic theory. A sizable portion of classical political economy did consider as relevant the topic of class and power. Neoclassical economics did relegate this study to a more minor role during the early decades of the 20th century, but many of these insights were later included into neoclassical economics. One of the points economists routinely make is that there are individuals who have lower transaction costs than others. Because of that, they can invest more efforts and energy into redefining property rights (and other institutions) in ways that favor them. The actions of these individuals will alter the constraints under which others labor. 

Consider the example of slavery – which is a system of property rights in humans. Those who are best able to produce violence can offer a choice to their victims: work at no wage or die by my sword. These victims, if they are unable to resist, will pick the options that they think is best. Not the option that they wished had existed but rather the best option available. 

The most important thing to notice in this bleak example is that the tools of basic economic theory explain power relations while also explaining the more mundane topic of utility maximization. From the perspective of the economist, all that happened is that the action of the slave-owner set the constraint under which the slave had to maximize. 

However, slave-owners are a class. As a class, they often pushed for the same policies that delegated costs of enforcing slavery on those who did not own slaves. As a class they often pushed for laws that prevented some owners from acting in ways that could have harmed their collective interest. As long as class is explained as the outcome of individuals solving problems of collective action, economists have no problem explaining the topic of class and power.  

Thus, economic theory can speak to classes of powerful individuals who manipulate the rules in ways that favor them. Modest extensions of this basic model can yield powerful explanations that explain the rise of mercantilism in the 17th century, the rise of violence against Native Americans, the rise of inequality in the 20th century, the persistence of slavery in the United States, the emergence of Jim Crow laws, etc.  

There Are Breaks In History

Once freed from the mischaracterizations of economic theory that the new historians of capitalism have imported from Karl Polanyi, it is easy to see the foolishness of their endeavors. The concept of capitalism they invoke requires stating something about human nature that is untrue. As such, any answer they derive from this assumption will be as flawed as the assumption itself. 

However, there is value to their goals if things are restated in a way that links with economic theory. There were momentous institutional changes that took place in the 19th century which fueled the rise of liberal democracies more respectful (but not entirely respectful) of individual rights than kings and other lords were. These are “breaks” in history. They are worth explaining and many economists do devote efforts to explaining these breaks (this is my favorite example of recent work on that topic). 

Consequently, we can also study the shadow of these institutional changes. For example, the rise of liberalism in Britain came with the paradoxical expansion of the British Empire. This meant an extension of British rule in places like India. The form that British colonialism took in India affected economic outcomes well after the British formally granted the country independence. Economic theory explains the persistence of these institutions just the same way as it can explain why they were set up as they were in the first place. Similar statements can be made about the legacy of Reconstruction era politics in the United States or the persistence of Spanish colonial institutions in Peru etc. 

However, preserving these goals of the new historians of capitalism (which would promote academic discussion) requires that they dismiss the notion of changing mentalities and drop the strawman version of economic theory they inherited from Polanyi. In other words, they have to stop trying to resurrect Polanyi’s ideas.

Vincent Geloso

Vincent Geloso

Vincent Geloso, senior fellow at AIER, is an assistant professor of economics at George Mason University. He obtained a PhD in Economic History from the London School of Economics.

Follow him on Twitter @VincentGeloso

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