Who Put the “Capital” in “Capital-ist”?

January 16, 2009

When you ask most capitalists what a capitalist system is, they will usually say a system of free markets and private property.

I confess to being perplexed by this. I’m certainly no expert in philology but it seems a very strange choice of root word for such a definition. It is important, I think, to remind ourselves of the real economic meaning of capital.

Capital is a factor of production.

This commonly understood sense separates capital from land and labor, the other factors of production. It also separates it from similar things used for gratification. The common meaning of capital is, simply put, wealth devoted to producing more wealth. Adam Smith correctly expresses this common idea when he says: “That part of a man’s stock which be expects to afford him revenue is called his capital.” The capital of a community is therefore the sum of such individual stocks. Said another way, it is the part of the aggregate stock that is expected to procure more wealth.

Wealth, then, may be defined as natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion to fit them for the gratification of human desires.

But though all capital is wealth, all wealth is not capital. Capital is only a particular part of wealth — that part devoted to aid production. We must draw a line between wealth that is capital and wealth that is not capital. If we keep this in mind, we can eliminate misconceptions that have led even gifted thinkers into a maze of contradiction.

The key, it seems to me, is whether or not the item is in the possession of the consumer. Wealth yet to be exchanged is capital. Wealth in the hands of the consumer is not.¹

So it seems clear if you accept this that capital is not synonymous with private property. You can have production without private property. You simply lack an owner of the capital, not the capital itself. Also, in a private property system, all capital is property but not all property is capital.

Might it then be the defining aspect of markets? I think the answer is clearly no. Markets do not require the generation of wealth from capital. They simply require exchange of goods, services or information.

Furthermore, as Henry George reminds us, “capital is not required to pay wages or support labor during production” despite it being very useful to increase “the power of labor to produce wealth”.

So capitalism seems a poor choice of descriptor for a free-market, private property system. So the question that arises is why, of the three factors of production, does capital get the spotlight? Why not “laborism” or “landism”? Or better yet, why not “marketism” or “propertarianism”?

Kevin Carson wonders the same thing:

In neoliberal orthodoxy, supposedly, labor and capital are just coequal “factors of production.” So why name an economic system after one of the factors of production, in particular?  What we’re seeing is that, beneath the ideological veneer of “free contract” and all the rest of it, some “factors of production” are more equal than others.  That’s why, when Costco pays its workers above-average wages for the retail industry, business analysts squirm with the same undisguised moral disapproval that some people reserve for diamond-studded dog collars.  But when a Bob Nardelli or Carly Fiorina gets a retirement package worth tens or hundreds of millions, after gutting their companies to massage the quarterly numbers and game their own bonuses and stock options, that’s just the way “our free enterprise system” rewards them for “the value they created.”

What the politicians and journalists are for, behind all the “pro-market” rhetoric, isn’t the market at all.  It’s the interests of capital.

I think a underlying reason might lie in the myth shared by many a capitalist and socialist alike: that the ownership rights of capital include the right to be the residual claimant. This myth is clearly seen for what it is when you consider any arrangement where capital is rented.

Contrary to the fundamental myth, “capitalism” is not based on any special “divine rights of capital.” The point of capitalism is not that capital has more rights than people but that people have no more rights than capital. Both capital and people are equally rentable.

All input services, the actions of persons like the services of things, are legally transferable. Capital can hire labor or labor can hire capital. It is the question of who hires what or whom, namely the direction of  the  hiring contract, that  determines  who  is  the  firm (residual claimant). Thus, the ill-named “capitalist” system has a certain universality based on the free marketability of all input services. Thus, anyone, by becoming the hiring party, the nexus of the hiring contracts, can become the firm. That nexus could itself be an artificial legal person, the conventional corporation, which also has the universality of being property freely marketable to any and all buyers or even gifted to any and all beneficiaries regardless of any functional role they may or may not play.

Labor management, laborism, workplace democracy, or economic democracy is thus not symmetrical to capitalism. The “capitalist” system was misnamed by the author of Kapital, and the misconception has persisted ever since.²

A system that works so hard to make the factors of production equal is “double-dipping” when it goes one step further to demonstrate “undisguised moral disapproval” toward labor. Cries of “socialist” and “Marxoid” abound. But the next time someone calls you “Marxoid” for being a “Laborist”, remind them who put the “capital” in “capital-ist”.*

¹ Henry George, Progress and Poverty, Abridged and Edited by Bob Drake

² David Ellerman, “On the Role of Capital in “Capitalist” and in Labor-Managed Firms”

* Technically, Marx and Engels refer to the “capitalist form of production” (“kapitalistische Produktionsform”) and in Das Kapital to “Kapitalist”, “capitalist” (meaning a private owner of capital). The first use of the word “capitalism” is by novelist Thackeray in 1854, by which he meant ownership of a large amount of capital, not a system of production. However, the first person to use the word “capitalism” as it is commonly used today was Werner Sombart in his Modern Capitalism in 1902. (LibertarianWiki)

Reader Marja points out that William B. Greene used the word “capitalism” in the title of an essay in his Equality (1849).

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5 Responses to “Who Put the “Capital” in “Capital-ist”?”

  1. Marja Says:

    Actually, in 1849, in his *Equality,* William B. Greene uses the term “capitalism” as a synonym of “plutocracy.”

  2. Neverfox Says:

    Great reference, Marja. Thank you. It looks like Greene beat out the others. It is interesting to note that he never used it in the essay, only in the headings. But it is a fascinating piece.

  3. Dan Clore Says:

    The term “capitalism” originally meant the “condition of a capitalist”, where “capitalist” meant an “owner of capital” where “capital” meant “means of production worked by someone other than the owner”. The meaning was then extended to be “an economic and political system favoring the condition of capitalists”, such as those of 19th-century Germany, UK, and USA, which became the traditional meaning. It is thus practically synonymous with “plutocracy”.

    At some time it was later re-defined to mean an “economic system characterized by private property and free markets”. I don’t know who first re-defined the term this way, Ludvis von Mises seems to be one of the most important in popularizing it. This has the practical effect of divorcing the term from its etymology, making the presence of “capital” in it difficult to understand. It has also led to countless misunderstandings and proclamations of misuse.

    It is truly unfortunate that those who advocated an “economic system characterized by private property and free markets” did not coin a new term rather than one in common use with a new definition.

  4. […] out, opposed and associated with this sort of definition. Centralizing the importance of just one factor of production is narrow, short-sighted and unhelpful for advocates of liberty in the long […]

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