Hellerian Capitalism I: Characteristics and Conditions

Nicholas Roerich 'Everest' 1938

Why theorise capitalism? As Mallory said of Mount Everest, “because it’s there”.

Today begins a new series titled The Economic Sociology of Capitalism (2003) which will draw on my wealth of useful material from adventuresome years as an academic when I trespassed creatively across disciplinary boundaries and wrote continuously but refused either to publish or to perish. 

Below is the first of several extracts I plan to post from an unpublished chapter called Capitalism that I sent to Peter Dougherty at Princeton in October 2003. I think it is good enough to offer here more or less verbatim. Peter wrote to say he liked it and encouraged me to send more chapters, which I could not do until October 2006. Life intervened, as it does even during Everest climbs. 

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Chapter 4: Capitalism by Michael Heller (2003)
Introduction and section 1: Definitional Characterisations

“Progress toward capitalism has been the unequivocal criterion for the modernisation of the economy since medieval times” (Max Weber 1922)

The objective of this chapter is to distinguish between characteristics and conditions of capitalism, and to explore various important implications of that distinction. The positive facts about capitalism are often hidden through the failure to adequately conceptualise capitalism with reference to its conditions of existence. Precise descriptions of the various social and economic characteristics of capitalism are certainly necessary. But they can be dispensed with quickly enough. Only an analysis of the simultaneous reciprocal evolution of capitalism’s ethical, legal, administrative and political conditions can explain the transcendent significance of capitalism in the modern world. 

From this observation also follows the desirability, where possible, of employing a single type of evolving capitalism as a comparative yardstick of social systems. A focus on core commonalities among capitalist experiences, if it is not carefully specified, runs the risk of diverting attention from the relative legitimacy and functional equivalence of different socio-cultural systems. Yet it is preferable to maintain the heuristic value of a universal concept capitalism than to weaken it by claiming the existence of numerous types of capitalism in the world. There are more or less satisfactory ways of viewing diverse sub-system mechanisms for economic and political governance without at the same time losing sight of capitalism’s essence.

An explanation of the components of an ideal universal, relatively crises-free capitalism helps to arrange the argument. We have seen already that the rational management of socio-economic change requires policy agents somehow or another to bring their understandable yet often contradictory motivations into balance during capitalist transitions. In calculating development policies they necessarily evaluate the structural environment in terms of existing institutional capacity, social interests and values, technical constraints, and the logic of economic means-end relationships. At a personal level they struggle to reconcile their self-interest with their morals. Yet in these motivational situations policy makers also seek practical advice which can guide processes of rationalisation and influence large-scale conditions of capitalist transition. To this end, a definition of an ideal type of capitalism can isolate elements deemed to be valid comparatively in different situations, to classify the historical phenomena, and to establish their teleological significance in the modern world. 

The commonplace definitions of capitalism deal with its characteristics rather than its conditions. Capitalism typically is conceptualised as a mode of socio-economic organisation for profit making and private ownership of the means of production bound together by the price mechanism and an ideology of free enterprise. Positive approaches focus on opportunities created for general economic betterment, the legitimacy of institutions, and the spectacular transformational history of societies in transition to advanced capitalism. Hostility towards capitalism, on the other hand, underlines its inherent inequalities, exploitation, the ideological mode of system reproduction, and recurrent crises. 

Whatever their ideological bearing, most accounts of capitalism recognise a system in which structural patterns of asset ownership and administrative organisation produce group conflicts and power constellations of a type which are distinguishable from non-capitalist social systems. My preferred guide to the subject, Max Weber, explains the emergence of capitalism as always and everywhere the outcome of struggle and compromise between interests. 

Such definitions of capitalism usually do not diverge greatly from Weber’s outline in General Economic History (1927/1981). Although Weber never clearly defined what he meant by rational capitalism, evidently his view of the characteristics of industrial capitalist transition were shared in broad terms by both neo-classical and Marxist economists, although his was perhaps the more encompassing historical analysis of relevant elements. 

Specific and general “presuppositions” of modern capitalism are as follows: the means of production and disposable property are mainly in the hands of private entrepreneurs; the market is formally free and is not limited by irrational non-economic restrictions on trading (for example, trade is not hampered by exclusionary monopolies in either production or consumption based on class, community or interest group); prices and the calculation of net income supply the information required for the optimal allocation of resources; credit, stocks and shares are typical “means for the rational assembly of capital”; the money system is geared to capital accounting, i.e. profit making and bookkeeping; labour can be rationally organised in new production units because it is mobile and sells its services like a commodity; technology exists to enable mechanisation and mass production and the provision of necessary physical infrastructure; and there exists a system of rational, predictable and calculable legal adjudication which enforces contracts and property rights unhindered by the personal preferences of rulers (Weber 1927/1981). 

General Economic History, which is Weber’s comprehensive overview of the long transition to Western capitalism, also outlines familiar structural variables or factors that are “favourable” for capitalism’s emergence. Important are the commercialisation of agriculture, the transition from economies based on agriculture to industry, free trade and free labour, the emergence of cities, nation states, public bureaucracies, banks, commercial enterprises, modern science and technology, and modern transport and communications. Joseph Schumpeter’s definition of capitalism as “that form of private property economy in which innovations are carried out by means of borrowed money” is quite easily reconciled with Weber’s discussion of the money form of capital. 

However, while these components or characteristics said to identify capitalism are generally agreed on they must not be confused with the necessary conditions of capitalism’s existence. The latter are not only more controversial but also more difficult to define. 

Simply on the basis of a study of the characteristics of capitalism it may be possible to explore empirically how the behaviour of individuals and groups in a society has produced capitalism. Yet analyses of the institutional conditions of capitalism will generally prove better at explaining why the behaviour arose, where it might lead to, and whether long run behavioural incentives embedded in those institutions are really compatible with capitalism. The distinction is consistent with a difference of methodological approach in the social sciences between analysts who focus on “how actual behaviour of people produces the social phenomena we observe” and those who ask “how that behaviour came to be what it is” (Schumpeter 1954/1994). Schumpeter similarly explains the difference between economics and economic sociology: “economic analysis deals with the questions how people behave at any time and what the economic effects are they produce by so behaving; economic sociology deals with the question how they came to behave as they do”.

In this chapter I endeavour to show why the study of an evolving equilibrium in market societies between ethical systems, legal developments, the organisation of state governance, and mechanisms of political representation, while not ignoring the factors of social conflict which clearly do characterise the system, provides a more precise and more favourable explanation of the functional logic of capitalism than conventional emphases on the economic characteristics of development and structures of ownership. 

A further distinction can be noted. In talking of the interactional institutional dynamics that underpin the progress towards capitalism I am referring to entire social systems being affected in relatively equal measure and at quite a high level of development by: a) widely tolerated ethics of market freedom; b) consistent implementation of written laws embodying relevant rights enforceable by independent judiciaries; c) delimited politically supervised state administrations whose basic monetary, service and welfare functions are added to only in measures that are proportional to the level of socio-economic development and to the evolution of other universal conditions of market functioning; and d) free political representation, i.e. impersonal democracy. 

This conceptualisation excludes all partial, incomplete, or localised conditions which resemble capitalism in only some features. It would not be possible, for example, to include terms such as “East Asian capitalism” or “Senegalese capitalism” if they do not meet the above criteria in every respect. Often we hear about capitalist development when what is really being referred to are pockets of capitalistic economic action in a traditional society. 

In some transitional cases these capitalistic sectors may be characterised by fairly developed property rights, market freedoms in factors of production, autonomous political regulation of economic activities, and by various behavioural ethics which are undoubtedly compatible with advanced capitalism. Such enclaves are likely to be forces for change in a society. It is indisputable that any sort of market situation has the potential to contribute over time to the evolution of new social or economic sub-systems. It is therefore justifiable to emphasise the study of local markets, and to follow their development with hopeful anticipation. 

However, it would not be productive or wise to place too much faith in the developmental potential of local markets per se. An entire market society is on a different level altogether. In the latter case the markets are, to use Mancur Olson’s term, “socially contrived”. Socially contrived markets emerge when a society creates and maintains institutional arrangements like property rights to support an effective transactions. In contrast, “self-enforcing” markets such as bazaars and informal sectors emerge spontaneously in many forms and are found almost everywhere (Olson 2000).

The epithet ‘capitalist’ should therefore be reserved only for the social system in which the major equilibrating institutional domains are dynamically interactional. 

My objective will be to distil the combined elements defining all successful transitional arrangements. For purposes of scientific investigation there can be no ‘diversity of capitalisms’, only a diversity of market types and capitalistic patterns of action. 

There are numerous examples of such misunderstandings in studies of contemporary economic development, which reflect the widespread conceptualisation of capitalism as a phenomenon with predominantly economic characteristics. Even in Weberian studies -- supposedly sensitive to the institutional dimensions of capitalism -- we encounter these problems. Randall Collins has attempted to repudiate Weber’s allegedly “Eurocentric” approach to the history of capitalism, by locating a “Buddhist capitalism” or “Asian route to capitalism” in early modern China and Japan (Collins 1999). 

I will later examine in detail why the religious element of what Collins calls an equivalent “ethical universalism” in Europe and Asia is, in reality, irrelevant to a Weberian conceptualisation of capitalism today. Here we need only observe, once again, that Weber conceptualised rational capitalism in terms of four inseparable conditions of an entire social system - modern ethics, law, administration, and democracy. The mistakes arise from the tendency to conceptualise capitalism as market growth. Collins, for example, shows no evidence of the extent of regulated competition or free political representation in early Asian “capitalism”. 

What Collins can tell us, more usefully, is that at certain stages of their histories both China and Japan were economically on a path which might have led to capitalistic breakthrough, given other conditions. This point has been made many times elsewhere, and is not in any doubt. The development of Japan from the 1300s is particularly interesting from the point of view of ethical, economic and political breakthroughs on an equivalence par with what occurred in Europe since the Renaissance. Such changes swept away a great many traditional impediments to capitalist development. But capitalism did not emerge there.

Even if it could be demonstrated that there did exist free markets, political regulation, property rights, adequate universal ethics, and citizenship, Collins says nothing that would suggest these societies were on route to market freedom, independent judiciaries, impersonal bureaucracies, and competitive democracy. 

Early modern Asian societies were nowhere near to experiencing the fluid interactions between these domains which I will argue are requirements of the impersonal normative and procedural conditions of capitalism. 

It is not controversial to state that the desired qualitative and quantitative development of markets is and has been a function of institutional development. Though it has proved to be a useful foil for counteracting micro-analytic neoclassical economics, it is surprising that the straw man of an institution-less or atomised market ever received as much attention as it did. In reality markets push for or against and respond to the evolution of the conditional institutional domains of capitalism in almost equal measure. This is why social science analyses of market situations found it necessary to disaggregate exchange relationships into a variety of sub-types of consociation and regulation. Parties to economic exchange are coordinated -- sometimes simultaneously in a single transaction -- by multiple public and private, formal and informal, institutional as well as organisational arrangements (e.g. command hierarchies, obligational or promotional networks, associational memberships). In fact markets are only one among several broad and overlapping structures governing economic exchange in capitalist societies. Furthermore, much recent scholarship has been concerned with mapping diverse ways in which markets may be coordinated institutionally. 

Comparative disaggregation models of economic governance have their uses. But when misused or taken to an extreme they inevitably blur the essential institutional conditions of capitalism. Recognition of the multiple governance mechanisms, which are variable in geographic and historical context, cannot substitute for a theorisation of capitalism sustained by interactions between four spheres of institutional rationality. Viewed this way the assumption of a ‘diversity’ of modern capitalisms looks conceptually nonsensical.

It is worth briefly stating what is well known in respect to formal and informal institutional supports for effective markets in capitalism. Markets comprise social networks where informal trust, reliability, discipline, negotiation, and familiarity are important. Weber frequently observes that in healthy markets, being comprised of social as well as economic “consociations”, there is usually no need for partners in exchange to resort to either impersonal law or impersonal administration, even if both law and administration are vital structures upon which personal trust acquires incontrovertible force (Weber 1922/1978). 

Consequently it is legitimate to think of values and ethics as being sometimes non-contractual elements of contract. Modern markets are indeed embedded in networks of long-term personal relationships and social connections which substitute for the equivalent market functions of traditional community relations. Market relations are obviously not disembodied from society, and cannot be understood solely in terms of maximising short term advantages. Utilitarian motivation explains a lot of behaviour in markets, but does not explain all economic behaviour. In addition, much of what goes on in markets in the form of monitoring, signalling, and communication can be conceptualised as social rather than economic action.

Recent attention to the “social embeddedness” of economic exchange originates in the writings of Karl Polanyi, who followed Weber and Schumpeter in explaining the embeddedness of markets with noneconomic institutions. Unlike Weber and Schumpeter, however, Polanyi thought that in capitalism the market constructs the social relations: 

“Instead of economy being embedded in social relations, social relations are embedded in the economic system ... market economy involves a society the institutions of which are subordinated to the requirements of the market mechanism” (Polanyi 1957).

Contemporary Polanyian literature on “embeddedness” has neglected the central fact that when capitalism confronts traditional ethics or governance mechanisms and social relationships it deals with them selectively, preserving the moral basis of fair dealing and peaceful coexistence, and the enduring personal relationships which permit adequate market monitoring and signalling, but eliminating the personalised social norms that hinder economic competition, social mobility and third-party regulation of economic transactions. It would be futile to try and build effective, sustainable markets on social virtues alone. 

Trust may support incipient localised capitalistic transitions or pockets of capitalistic economic action. Generalised trust is also vital for the effective operation of modern private and public organisations. However, localised trust equally coexists with institutional conditions which historically have proved dysfunctional for capitalist modernisation. For the sake of progress it has been functional to destroy some older ‘social order’ foundations of trust in the movement toward regulated competition.

Analyses of the degrees of honesty, empathy, a sense of social obligation, and feelings of shame about transgressing those obligations, are undoubtedly useful in evaluating the nature of the dominant functional relationship patterns in a social system. Yet this is not where we should look for primary variables among conditions of transition to capitalism. 

As I will shortly attempt to show, the prolonged dysfunctional historical articulation between pre-capitalism and capitalism is a consequence of the underdevelopment of universal orientations toward trust-enhancing impersonal procedural norms across the totality of institutional spheres. 

The argument is not that effective markets have no need for informal or personal relations, but rather that where a market order is generalised throughout a society it displays a threshold level and type of supportive interactivity between specified formal institutions over and above informal foundations of social cohesion. The pessimism associated with Karl Polanyi’s writing about the loss of social cohesion and safeguards for a harmonious or supportive social environment greatly exaggerates the problem. Whatever may be lost in the decline of market-functional community and family networks is more than made up for by the interactional evolution of institutional domains where markets are regulated while preserving or recreating spheres of individual autonomy where consensual community and family relations can ultimately be legitimately articulated with no less intensity.

The economic basis of capitalism does not lie in the way markets are embedded in social networks, but rather the background operability of impersonal norms of third-party regulation, and the derivative self-regulation. From a Weberian point of view large scale capitalism is a system within which every individual is relatively assured of being able to undertake secure and lasting transactions in the knowledge that social networks and personal connections are not essential to the furtherance of their own material security.

Returning to the main thread of our discussion, it can be said that the commonplace depictions of capitalism portray an economic system with attendant social institutions rather than, more usefully, a social system with attendant economic institutions. I will draw attention to the ‘social embeddedness’ of capitalism’s economic efficiency in a more positivistic sense than allowed for by most contemporary scholars. Although economies and markets have coexisted since time immemorial, they conjoined in capitalism only since the evolution of a supportive network of symbiotic formal institutions which -- along with other reciprocal functions of these institutions to do with preserving freedom, peace and prosperity -- do actively regulate and service a vast complex of economic transactions. 

In short, the essence of capitalism does not reside in markets, prices, profits, appropriation of private means of production, entrepreneurship, competition and other economic factors, but rather in the social conditions needed for the development of these factors. It becomes obvious that the appellation ‘capitalism’ refers not to a generalised employment of capital, but rather to the social institutions that permit capital to be utilised effectively in the organisation of economic life. When Marx described the social dimension of capital, he said this:

“Capital is not a thing, but rather a definite social production relation, belonging to a definite historical formation of society, which is manifested in a thing and lends this thing a specific social character… Like all its predecessors, the capitalist process of production proceeds under definite material conditions, which are, however, simultaneously the bearers of definite social relations entered into by individuals in the process of reproducing their life. Those conditions, like these relations, are on the one hand prerequisites, on the other hand results and creations of the capitalist process of production; they are produced and reproduced by it.” (Karl Marx, Capital III)

The ‘social character’ of capitalism Marx had in mind is not the one Weber drew attention to, and therein lie some controversies we must now deal with. Marx argued that only “our friend Moneybags” who buys and sells labour power as a commodity will benefit from the capitalist mode of production. Weber held to a more accurate view. He distinguished between distorted or still-born capitalism (terms like “robber” or “adventurer” capitalism) and the ideal capitalism which evolves in the context of adequate institutional conditions. 

Unlike Marx who focused on the material dynamics of capitalism, Weber’s main interest was the institutional conditions giving rise to it. Whereas Marx’s theory proved false with the test of time, Weber’s is as relevant today as it ever was. Randall Collins (1986) was right to call it “the most comprehensive general theory of the origins of capitalism”, and it is upon this superior framework that we may now build a fuller understanding of capitalism.


[Section II to follow... In order to highlight areas of particular relevance to my continuing work on institutional change I have added italics and paragraph separations that were not in the 2003 original sent to Princeton]

Michael G. Heller ©2014