Models of Capitalism: Classical Liberalism

The critique of capitalism as such is a frequent topic in left-wing journalism (though not exclusively). In most cases, authors do not define what model of capitalism they have in mind. This is comprehensible as the kind of simplification found in Internet comments and the press; it can also suggest a hostility to the free market as such, which is entirely understandable in those who consider themselves Marxists. Yet it seems in most cases the concision of the message results from the fervor of the discussion, and, in the long run, this could lead to slogans standing in for serious reflection. Problematically enough, we most frequently find Libertarian comments based on an equally simple Manichaeism (the free market vs. socialism).

The history of capitalism is remarkably complex and scholars themselves have difficulty agreeing on when it has existed, and what should be regarded as proto-capitalist facets of economics based on fundamentally different principles. Even when it comes to the economics of the nineteenth to twenty-first centuries, many definitions remain unresolved in distinguishing between various types of the free-market system.

To simplify considerably, the nineteenth century is considered the time of “classical”² liberalism. In terms of our topic, we should highlight the conviction of the actual impossibility of a long-term economic depression, coming from a special understanding of “Say’s law.”³ This entertained the possibility of a crash, which would mean, of course, that the price of goods would fall. But at a certain point it would reach a level where it would be profitable to begin purchasing again, and then the market would bounce back. Who would do the purchasing? For instance, the person who received money for materials, labor etc. from the manufacturer.⁴ This vision, despite being critiqued by such central figures in the history of economic thought as Jean de Sismondi, Thomas Malthus, and Karl Marx, was widespread until the Great Depression.⁵

Many commentators and politicians learned a vital lesson from this—one ought not to meddle with the economy, because the state’s actions can only lead to wasting resources that should be used “organically” at the next stage, when the system achieves an equilibrium of production.

Absurd as it may seem from today’s perspective, the gold-based financial system of the nineteenth and twentieth centuries suggested this interpretation. Of course, it did not “prove” it, but economic thought comes from observing reality, using abstract intellectual tools and using them to construct certain general premises on society, the world etc.⁶ The conditions we are raised in determine how we appraise reality. And the turn of the century they suggested the existence of a self-regulating market mechanism.

The currencies of various countries were exchangeable for gold. An expansive economic policy would have caused a rise in imports from other countries, causing the outflow of gold. To avoid the risk of a depression, it would be necessary to raise interest rates, which would lure investors (with their gold), but keep the economy from rebounding.

And if the gold standard were abandoned?⁷ This could lead to competition in which states would regulate the rates of their currencies so as to shift the problem onto others (the “beggar thy neighbor” principle). It was better to stick with gold than to risk a breakdown of international trade in the growing chaos…⁸

Moreover, smaller states could have feared the loss of investors if it turned out they could not maintain “sound money.”

Then 1929 gave the world a shock that not only led to a shift in the intellectual climate, but also a fundamental modification of political practice.