Capitalism or market economy? That may be the relevant question!

“The Financial Times is debating capitalism, but what it is really debating is the future of the market economy….Sloppy language leads to sloppy thinking. By continuing to use the 19th-century term capitalism for an economic system that has evolved into something altogether different, we are liable to misunderstand the sources of strength of the market economy and the role capital plays within it.” John Kay, ‘Capitalism is the wrong target’, Financial Times, January 11, 2012

Karl Marx never used the word capitalism in his seminal text, Das Kapital.  However, following the publication of this book, the noun came to describe the system of business organization that emerged to make the industrial revolution possible. And by the mid-19th century that system was (albeit briefly) central to the economic landscape of the developing nations.

Wealthy individuals – either by themselves or with a small group of active partners – built and owned both the factories and the plants in which a new working class was employed and the machinery inside those premises. Under capitalism, so defined, business leaders exercised economic power from their ownership of capital and from the control that such ownership gave them over the means of production and exchange. 

The economic power thus provided was not unlimited. It was severely constrained by competitive pressures exerted through the wider market process. But economic power surely existed within each such island of conscious power in that wide ocean of unconscious cooperation and  competition.

By the end of the 19th century, capitalism, so defined, was in significant decline.  Legislation passed in Marx’s time permitted the establishment of the limited liability corporation, thus allowing the emergence of businesses characterized by widely dispersed share ownership. By the 1930s, economists were writing about the implications of  a resulting divorce between ownership and control.

The emergence of a cadre of professional managers holding only limited stock in the corporations that they ran, essentially marked the end of capitalism – narrowly defined – for the fastest growing segments of  the economies of industrializing nations.

“The value of raw materials is only a small part of the value of the production of a complex modern economy, and the value of physical assets is only a small part of the value of most modern businesses.  The critical resources of today’s company are not its buildings and machines but its competitive advantages – its systems of organization, its reputation with suppliers and customers, its capacity for innovation.  These attributes are not, in any relevant sense, capable of being owned by anyone at all.” John Kay, ibid.

As always, John Kay’s insights open up fruitful avenues for thought and scholarship. Has the time now come to praise capitalism for its 19th century achievements, while recognizing that it plays only a limited role in the modern corporate economy?  By refocusing our attention on the market economy as a whole, the raw edges of class warfare surely will be blunted, and the relevance of human cooperation and exchange, rather than conflict and war, once again will move center stage.

Such indeed was the case in 1776 when Adam Smith’s great treatise – The Wealth of Nations –  first saw the light of day, long before the word ‘capitalism’ had emerged to redefine market cooperation in terms of alleged class warfare.

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One Response to “Capitalism or market economy? That may be the relevant question!”

  1. Subhendu Das Says:

    What economist say is not the economy. What businesses do is the economy. When Bill gates started his business, he did not open up an Adam Smith book and decided how to run his business. What Bill Gates did, Adam Smith translated that in text books.

    Capitalism is not the correct word. The correct words are the “Central Bank”.

    Class warfare is created not by capitalism, but by the central bank (CB). Money is free for the CB. If the economists cannot openly say that, then they will not solve any problems in the economy. They can get Nobel Prizes, by keeping CB happy, but they will remain in background. Poor people in lower class will never know them. They will be 99%. Even the top 1% will also not know the names of the Nobel Laureates in economics. That prize should be stopped.

    Interest charging, profiting, giving higher salary, creating recessions are all the means of transferring wealth from lower class to top 1% and creating economic classes. All of these create inflation and transfer wealth. CB is responsible for all of them. Read what Keynes said –

    “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. … The process engages all the hidden forces of economic law on the side of destruction and it does it in a manner which not one man in a million is able to diagnose”.

    Note that Government is controlled by the CB. It does not have power, because it borrows free money from the CB. How long you guys want to hide the reality of the CB. One day Hitler-II will come and destroy the CB and free the seven billion people. Just like Hitler-I destroyed imperialism and freed the three billion people of colonies of Africa and Asia. The ocean of blood will be created all over the world, only for the few owners of the CB. They are the King now. It is high time we save ourselves by creating money less economy. For 100 years many economists have been proposing this money less economy idea. Listen to them.

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