Economics and the New History of Capitalism

As I tell my students, nothing gets a mainstream economist frothing at the mouth quite like mentioning Karl Polanyi.

Or at least it used to, when mainstream economists actually knew who Polanyi was and grasped—however dismissively—what he wrote about the history of capitalism.

To his credit, Eric Hilt (pdf) appears to know something about the author of The Great Transformation and how his work influenced the new history of capitalism. And his review of ten recent books, including Edward Baptist’s The Half Has Never Been Told and Sven Beckert’s Empire of Cotton: A Global History, is not as dismissive as those of other mainstream economists, such as Alan L. Olmstead.

Much of the research of economic historians focuses on questions originating in economic theory, which tend to be quite narrow. In contrast, these book present expansive narratives and explore questions that may not be amenable to the analytical tools of economists. The authors’ critical perspectives also distinguish their work from that of economic historians and make it relevant to the concerns of many popular readers. The historians of capitalism rightly remind us that economic growth and development can have human costs not captured in average incomes; that our economic history includes no small measure of cruelty, coercion, and expropriation, rather than free exchanges occurring in the context of secure property rights; and that the economic system we have today is not a natural condition, but the outcome of policy choices that could have been made differently.

Hilt is, I think, correct: the new history of capitalism does represent a reminder to—and thus an indictment of—contemporary mainstream economics, precisely because it includes an analysis of the “cruelty, coercion, and expropriation” of the emergence and development of capitalism and the idea that contemporary capitalism is “not a natural condition.”

Generations of economics students won’t have seen or heard either of those propositions. Indeed, what little history has been presented to them emphasizes exactly the opposite: that capitalism emerged both smoothly—without conflict, through voluntary decisions and the spread of markets—and naturally—in a manner that corresponds to human nature.

But then, as if he can’t help himself, Hilt chooses the side of mainstream economists against the new historians of capitalism—because they haven’t demonstrated the appropriate respect. On Hilt’s reading, Baptist, Beckert, and the others haven’t respected capitalism, either historically (because of the role of slavery and its coercive institutions in the history of capitalism) or today (especially after the crash of 2007-08 and the misery it has visited on tens of millions of ordinary citizens, in the United States and around the world). And they don’t respect the “rigor” and “sophisticated analyses” of mainstream economic history, which they “have failed to engage.”

The influence of the recent crisis and the Great Recession in these works. . .creates something of a pitfall for their analysis. Just as poor historical analogies can distort our understanding of the present, modern analogies can produce fallacious or unsound is misapplied. Although financial development often leads to volatility, and although venality and corruption among financiers seems to be as close to a historical constant as one can find, not all finance is harmful. The financial sector performs of vitally important function. . .

Ignoring the economic history literature has led historians of capitalism to make assertions that have been refuted conclusively and to get important elements of their arguments wrong.

In the end, what Hilt can’t seem to abide in the new history of capitalism are two things: first, that historically violence played an important role in the emergence and development of capitalism—rather than, as mainstream economists would have it, that the brutal institutions of slavery and government imposition of market forces are fundamentally incompatible with capitalism; and second, that methodologically the new historians fail to articulate and test “counterfactual” statements.

The fact is, mainstream economists always seek to minimize the role of violence and force in the emergence and development of capitalism and to resort to problematic causal inferences in an attempt to isolate the effects of economic, cultural, political and natural forces within a complex, evolving social totality.

So, no, capitalism didn’t need to resort to “cruelty, coercion, and expropriation” over the course of its history. But it did—and those conditions that are often hidden underneath the “very Eden of the innate rights of man” have stamped both its origins and the way it continues to operate today.

Or, as Polanyi (pdf) himself wrote,

the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organization on society for noneconomic ends.

This post first appeared on Occasional Links & Commentary.