July 20, 2020 Reading Time: 8 minutes
modern city

Is capitalism modern? To ask this question is to attract puzzled looks and incredulity, from people of all persuasions. Surely, they will say, the answer is yes? For many it is the advent of capitalism that marks the advent of modernity, for good or ill so the two in some sense are the same, or at least inextricably connected. Another way of looking at the matter is that for over two hundred years the big argument has been whether there can be a form of modernity that is not also capitalist, with many arguing that all the evidence is that there cannot be such a beast.

The reality though is more complex and thinking about that reality makes us more aware of our own historical fortune and also of how fragile that good fortune may be.

The actual term capitalism is definitely modern and is not found as a term of either description or analysis before then. If asked most people would guess that Marx originated the term or at least popularised it, but this is not so. According to the Oxford English Dictionary the first person to use the word in English was William Makepeace Thackeray, in his comic novel The Newcomes (1854). Marx himself only used the word a couple of times towards the end of his life, in correspondence. He spoke frequently of capital and capitalists but seldom of capitalism.

On reflection this should not surprise us because the ending of the word suggests an ideology or culture or state of consciousness, rather than a material economic system and relations. So, where did it come from and how did it come to have its present meaning?

The person who actually popularised the concept and gave it its contemporary meaning was not Marx but Werner Sombart. A great economic historian, he was also a passionate opponent of liberty. He began life as a radical socialist and ended it a convinced Nazi – as Mises remarked, the one constant in his life was his aversion to liberty. He took the newly created word and fleshed it out in a series of works, most notably the monumental Der Moderne Kapitalismus.

For Sombart capitalism was as much a culture or set of beliefs as a system of economic relations but the culture and ideas were, he thought, both produced by the economic relations and shaped by them in turn. He thought that it had existed for a long time in various forms, since the twelfth century at least but had evolved and changed over that time. Thus, for him it was not specifically modern or recent, although its form had changed in the modern world.

What happened in the early twentieth century was that Sombart’s portrayal and analysis of capitalism was incorporated into Marxist thought (without acknowledgement, for obvious reasons). For Marx history was understood as a series of stages, each marked by a particular mode of production in which the key productive resource was owned and controlled by a specific class – in the ancient world slaves (slaveowners), subsequently land (landowners), presently capital (capitalists).

Sombart’s portrayal of capitalism, which combined economic, cultural, and psychological analysis, was taken to be an account of the form it took in the modern world where capital was the key resource. His longer backstory was relegated to being an account of the emergence of capitalism or the transition from feudalism to capitalism. This combination of ideas came to have a huge influence on later historiography.

It also ran into increasing problems, as the empirical historians did their work. The problem was that historians kept on turning up examples of practices and individuals that fit the models of capitalism and capitalists but which were very hard to fit into any kind of stadial account of history such as Marxism. It was hard enough when people uncovered examples of capitalism in the thirteenth century – this could just about be covered by stretching the idea of a transition from feudalism to capitalism that made the transition last longer than either of the supposed actual modes of production. Much more difficult was discovering ones in the Ancient Mediterranean or Middle East or in parts of the world such as China and India that, according to Marx, had not undergone the transition because they had gone off down the blind alley of the ‘Asiatic mode of Production.’

As well as being a challenge for Marxists, these findings were also a problem for most supporters of capitalism. From the 1920s at least the main response to socialists of all kinds and particularly Marxists was to point to the extraordinary wealth of the modern world and to argue that this was the result of capitalist forms of economic organisation. Because economic growth of this kind was clearly a feature of the modern world and not earlier periods, this approach also tied capitalism as an economic system into modernity and gave it a specific chronological location, as well as a geographical one (at least initially). If capitalism and capitalists had been around long before modernity, that connection was much harder to make. Unfortunately for both supporters and critics of contemporary capitalism, the empirical findings kept on accumulating.

One response, which I have used myself, is to make a distinction between the wider category of market economies and the narrower and more specific one of capitalism. In this way of thinking market economies (where most production is for sale in markets and which therefore have production and distribution shaped and driven by market exchange) are widespread both geographically and chronologically. Capitalism is then understood as a specific kind of market economy, that is found only in certain times and places; in other words the modern world.

This manoeuvre retains a market economy with private ownership of the means of production as the key driver of the wealth and transformation of the modern world, once some critical additional elements were added (such as the company, capital markets, and true labour markets). It also can be used to patch up Marxism, although there is the problem that limiting the capitalist system to the last three hundred years does make the notion of a feudal economy seriously incoherent – one reason why medievalists have moved in recent years to ditch it.

However, as I have come to realise more recently, this does not really solve the problem of chronology. Even if you define ‘capitalism’ in more limited terms there is still the challenge of accounting for things that on the ‘looks like a duck, etc” principle should count as capitalist but which are not even remotely modern. Several people have argued that we should simply abandon the concepts of capitalism, socialism, and feudalism and with them the idea of a mode of production.

This was the position of the well-known Marxist scholar Andre Gunder Frank while from the classical liberal side Deirdre McCloskey has also argued that the term is not helpful and we should focus more on innovation (given that is what has transformed the world) and its enabling preconditions. Her view does suggest a way forward, if we combine it with the work of other scholars, above all the French historian Fernand Braudel.

If innovation is what has transformed the world in modern times, and if the form that innovation by free and unconstrained people in the economic sphere takes the concrete forms that we call capitalism then what can we say about earlier periods? Given that the basic nature of human beings does not change between different times and places, variations in innovation are explained by the effects of things like institutions and culture, and the relations between voluntary relationships and those based upon power differentials. 

Market exchange is also a constant of human societies historically, although the degree to which economic activity is market driven varies. Braudel argued, in his work Material Civilisation and Capitalism, that the total of economic life in all historical periods can be divided into three parts. The first is activity that does not involve money or market exchange, most of it happening in the home or the locality. (This is historically the greater part). The second is market exchange and commerce, marked by innovation and competition but restrained by social norms and overt power. The third is what he calls capitalism. This is trade, exchange and production that is large scale or long distance and which involves the systematic use of credit and capital markets. It grows out of the world of market exchange and innovation but is different. This is because of the interplay of exchange and power or politics: capitalists for Braudel are usually monopolists or privileged – they do productive things but are also rent-seekers (frequently also tax-collectors through being tax farmers).

If you combine Braudel’s picture with McCloskey’s and add in the work of the empirical economic historians, this picture emerges. Throughout history, there are periods of openness and dynamism. During these, innovation becomes more intense and widespread. This leads to economic growth and also results in some people becoming seriously wealthy. Political elites may try to stop this or to prey upon the successful. What happens more often though is that the economically successful and astute elites strike a deal.

A key part of this is entrenching the position of the already rich and protecting them from upstart competitors (trying to replicate what the now wealthy did in their younger days). Another is the appearance of what we may call a politicised market where favouritism and political contacts are crucial for success. Because of the centrality of credit this often takes the form of a speculative financial market. 

There are many examples, from the market for contracts to supply the armies and collect revenues under the Roman Republic and early Empire, to railroads in the nineteenth century, and several cases today. This can create enormous gains for both business figures and politicians but historically it always ends badly, sooner or later. All of this has the effect of checking the dynamism and innovation and bringing a reaction – this is why the periods of innovation do not last.

Capitalism in the sense of a dynamic system of innovation, that grows out of private ownership and exchange relations, and involves the use of credit, capital markets, and large-scale commercial organisation, is a recurrent phenomenon in human history. For it to happen, the forces that normally constrain widespread experimentation have to be weakened. It leads to accelerated innovation, growth and a rise in wealth.

However, once established, it attracts predators and leads those who have succeeded to look to convert their success in the whirlwind of competitive innovation into something more permanent by cutting deals with the predators. This in turn produces what we would now call ‘crony capitalism’ which is still very dynamic but increasingly diverts productive activity into a series of rent-seeking scams or speculative booms. The end result is a ‘crisis of capitalism.’ We can reasonably speak of such a crisis in the third century Roman Empire, thirteenth century China, and globally in the 1930s. The outcome of these crises has typically been bad, certainly not the fond hopes of revolutionaries who may try to take advantage of them. 

The modern world has seen a different pattern. The phenomena described are still very much with us but the level of competition and innovation in economic life since the mid-eighteenth century has been so high that the efforts of elites and the already successful have not been able to contain it or stop it. The much wider spread of economic integration makes it more difficult for rulers who control only a part of the planet’s surface (and only a part of what is increasingly a single economy) to do the kind of destructive stitch up described – when they do it has local rather than systemic effects. The behaviour of elites both economic and political has also been affected by ideas and ideology as liberals have persuaded many that they should not go down the wide and well-trodden road that leads to really bad things. For all of these reasons, although we have seen crises of the kind described they have not stopped the process or brought down the system in the way they did before.

Capitalism in this account is not truly modern, inasmuch as something we can describe with that word has existed repeatedly in history. It has usually come to a bad end, because of the way private wealth and fear of losing it has interacted with predatory power, but in the modern world we have avoided that. Only so far however, which is why we must be constantly in campaign mode to keep the show on the road.

Stephen Davies


Dr Steve Davies, a Senior Fellow at AIER,  is the Head of Education at the IEA. Previously he was program officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from the UK where he was Senior Lecturer in the Department of History and Economic History at Manchester Metropolitan University. He has also been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio.

A historian, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He has authored several books, including Empiricism and History (Palgrave Macmillan, 2003) and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991).

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