What’s the difference between capitalism and free markets?

This market doesn’t look too bad. (pexels.com)

I’m a cultural historian. I’m not a theorist, a philosopher, nor a political scientist. But I’m intensely interested in the question of how people got so confused about the difference between capitalism and a “free market economy.” The question gets to the heart of confusion over other definitions: capitalism, anti-capitalism, and socialism, specifically. And it thus raises broader questions about language and who has the power to shape narratives and epistemes. So I think it’s worth diving into.

So here are my thoughts on why it’s wrong to conflate capitalism and “free markets.” Fair warning: these are in some ways a repetition of and an extension of thoughts I posted here a few years ago, so it’s not entirely new.

I: The definition of capitalism

Capitalism, I like to tell my students, is a society or economic system characterized by, shaped by, or driven by, capital.

That sounds almost tautological, I know. So what do we mean by capital? Marx understood capital to be value in motion. If I earn some money and put it under my pillow, that money isn’t capital. But if I use the capital in a way that circulate it and cause it to (ideally) return to me again, that’s capital. It’s money or value that is invested in an enterprise.

So a capitalist society is one in which this is going on enough so that the capital itself takes on a kind of recognizable power or influence. Capital has the tendency to concentrate—it’s easy to make money if you’ve got money—you can use banks for leverage, undercut your economic competitors, buy off influence, etc. Capital accumulates, and this means that more and more of it inevitably ends up in fewer hands. Those fewer hands, naturally, then have more and more power.

I think it’s important to make a simple distinction—when we’re talking about capitalism, we’re generally talking about private, concentrated capital—not the capital of a liberal state’s public coffers. Certainly, “state capitalism” is a thing, as is fascism and corporatism, but let’s set those aside for now. (And we’ll also return to why it’s important to distinguish private concentrated capital as opposed to public capital later.)

II: Where do markets come in?

Historians and social theorists generally agree that markets have existed long before capitalism. If I grow some beans, and you grow some rice, we can come together in a market so that each of us gets what we need. There are all sorts of reasons why pre-capitalist societies had markets but didn’t develop into capitalist societies. But for whatever reasons, traditions, social forces, and environmental ones tended to create equilibrium conditions in which what we would today call investment and speculation didn’t really happen. (It’s important to note that exploitation, on the other hand, certainly did occur in pre-capitalist societies, and it took different forms in different times and places.)

It’s only when the environmental and technological conditions are ripe, and people are encouraged or unfettered enough to do so, that capital accumulation happens. And how does it happen? Let’s say that I, a bean farmer, end up with some extra capital. I might decide to buy some land and grow some rice, undercutting yours and perhaps even selling at a loss, in the hopes that I put you out of business before I run out of extra dough. Or maybe I might buy the land upstream from you, and divert the water away from your rice and towards my beans, so that I can come up with bigger harvests at your expense.

The more I do this, the more I’m able to do more of it. That’s what’s bad about capitalism. It’s not about markets per se, it’s about power.

III: So how did we get so confused about markets?

I have done absolutely no research on this, but I have a hunch that the phrase “free market” was a liberal—and by liberal, I mean it in the “classical” sense—response to the critical analysis of capitalism that saw it as a problem of power. Just like the rhetorics of “free enterprise,” “political correctness,” and “climate change,” the very term “free market” was presumably a right-wing invention. And it was successfully adopted as the terrain on which the battle would be fought. The result is that anti-capitalism became weakened by a muddy definition of its antagonist.

Consider this exchange that occurred between Elizabeth Warren and a reporter recently. She was asked if she was against capitalism. She returned by saying that she was “pro market.”

It only takes a minute to think about how silly this is. Who is anti-market? Are there really people in this world who would oppose a society that facilitates one’s ability to get basic goods and services through exchange? The substitution of market for capitalism swaps a word that historically (though not absolutely) has had a negative connotation with a word that has a more positive one. Warren added some nuance to her response, but taken by itself, the response that one is for or against markets says nothing about power. We all like stuff. We all like freedom—even Marx was a fan. But his critique of capitalism was not that it facilitated a realm of free market exchange, but rather that it constituted a realm of exploitation. 

Marx was also decidedly pro-democracy—regardless of what you’ve heard. And there’s a broad consensus among philosophers and theorists of all stripes—Adams, Jefferson, Tocqueville, Marx, etc—that democracy doesn’t work in societies that are extremely unequal. If I, a bean farmer, have so much capital that I can do all of the things I’ve described above, what also stops me from influencing elections and the press? This is all to say that markets aren’t the problem. The problem is the power of private, concentrated capital.

IV: But didn’t Marx say “The circulation of commodities is the starting-point of capital”?

Yes, but Marx also makes a distinction between two different market contexts. The first, which he describes as “C-M-C”, is the simple context by which commodities are traded. The second, “M-C-M” is the context of capitalism. Here, the end of a transaction isn’t getting goods to the people that find use in them, but in accumulating money.

V: But what about the “marketization” of society that we’ve seen under neoliberalism?

I think it’s fair to make a caveat here—that market thinking has suffused our daily lives in a way that has been driven by, and that benefits, capital. It is in the interests of capital to make us think like “entrepreneurs” or to use “market logic” in our daily lives. One of the ways that capital works is through “commodity fetishism”—the identification of goods and practices solely with their market values, and the inequality and exploitation that capitalism breeds promotes the idea that social relations are to be solely based on our own market worth.

I think it’s okay to separate the way that capitalism drives us to internalize market logic on one hand, and the institutions of markets themselves on the other. But we should certainly keep in our minds the problem with understanding everything solely in terms that make sense to capital—that is, in market terms.

VI: So how do we benefit from this more nuanced understanding of the difference between capitalism and markets?

One benefit is that we can refuse the preposterous notion that capitalism works because the government is “hands off.” If a government introduces pro-capital policies—like deregulation, suppressing inflation rates by restricting money supplies, regressive taxation, funneling the benefits of public research into private hands—we can say decidedly that this is the working of capitalism, but it is not a free market. Such a distinction helps us dispel the conservative idea that governments do not, and should not, engage in directing or regulating economic systems.

(Indeed, monetarist theorists like Milton Friedman proposed unfree market actions—like the careful regulation of monetary policy—in order to assist the concentration of capital.)

Another benefit is that we define socialism in a way that is more true to how 19th century socialists understood it. To be anti-capitalist is to be against inequality, to be opposed to the private concentration of wealth, and to be pro-democracy. Socialism was intended to accomplish the mandate of anti-capitalism by putting power in the hands of the people, and by doing this a couple of different but related conceivable ways. First, socialist ideas developed alongside modern liberal democracy. Socialism was understood to be a fulfillment of the democratic promise that liberalism itself could not make. If in a truly democratic state, the people are equally represented, and have meaningful power over their lives, then public capital is a manifestation of the people’s will. I like to say that anarchy doesn’t get you the Brooklyn Bridge. Nationalization of the economy works so long as the state is democratic, and the results in terms of public works could fulfill our utopian dreams. Second, socialism calls for the people to own the means of production. Alongside nationalization, this can mean all sorts of things—worker coops, for example. What it doesn’t mean, however, is the abolition of markets.

VII: So if you’re pro-markets, does that mean you’re a Social Democrat and not a Democratic Socialist?

In short, no. Social democracy distinguishes itself from socialism by stopping short of giving people power—it might offer economic security, or a “floor,” but it keeps hierarchy in existence by allowing the presence of concentrated private capital. I’ve been arguing that a society can distribute power, prevent the concentration of private capital, and still have markets.

VIII: Ok, you’ve convinced me. Am I a Market Socialist Now?

I dislike the term “market socialism.” It reminds me of a time when Gregg Allman was asked what he thought about the term “Southern Rock.” He said it was redundant, that all rock had southern roots, and that it was akin to saying “rock rock.”

I think that adopting the term “market socialist” might be useful in the short term, but it’s acceding to the idea that normal socialism doesn’t imagine a role for markets, and for that reason, I think it’s wrong to use.

* * *

So those are my quick thoughts on the matter. I’ll end with a short list of some of the books I’ve encountered recently that also make the distinction between markets and capitalism in one way or another:

  • James Parisot, How America Became Capitalism
  • Nancy Fraser and Rahel Jaeggi, Capitalism: A Conversation
  • Terry Eagleton, Why Marx Was Right

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