Even when economists bother to “name” the economy they are studying, they usually use a euphemism instead of the “C-word.” They don’t call it capitalism. They call it a “market economy.” This implies that what is unique about capitalism is its reliance on markets and market signals (like supply, demand, and prices) to organize the economy. But that is wrong, too.
Markets of various kinds do indeed play a major role in capitalism. A market is simply a “place” where various buyers and sellers meet to haggle over price and agree on sales of a good, a service, or an asset. (By “place,” I do not mean that a market has to have an actual physical location – it just needs to provide a way in which buyers and sellers can communicate and strike deals. In the internet era, markets can exist in cyberspace, not just at a community hall or
Markets usually (but not always) imply some kind of competition, in which different buyers and sellers compete with each other to get the best deal.
But capitalism is not the only economic system that relies on markets. Pre-capitalist economies also had markets – where producers could sell excess supplies of agricultural goods or handicrafts, and where exotic commodities (like spices or fabrics) from far-off lands could be purchased. Most forms of socialism also rely heavily on markets to distribute end products and even, in some cases, to organize investment and production. So markets are not unique to capitalism, and there is nothing inherently capitalist about a market.
Just as important, there are many aspects of modern capitalism that have nothing to do with markets. Within large companies, for example, very few decisions are made through market mechanisms. Instead, relationships of command, control, and plan reign supreme. (Remember, some corporations are economically larger than many
countries, so these internal non-market relationships are important.) And there are other ways in which capitalism reflects powerful non-market forces and motivations – like tradition, habit, politeness, reciprocity, altruism, coercion, even (sometimes) brute force.
By pretending that capitalism is a system of “markets,” economists imply that it is based on relationships between essentially equal parties. Neoclassical economists study two main kinds of markets: markets for FACTORS OF PRODUCTION (things that are used in production, like labor, land, and natural resources), and markets for the final GOODS and SERVICES produced with those factors. Neoclassical economists even describe the relationship between a large company and its workers as a form of market exchange. Everyone comes to the “market” with something to sell, and in theory, they’re all better off (than they were in the first place) as a result of trading in that marketplace.
Imagine a bustling bazaar, to represent the whole economy. In one corner of the hall is General Electric, which brings US$500 billion worth of capital assets to the market. In the other corner are some workers, with only their brains and brawn – their intelligence and their physical strength – to sell. Will a trade between these two sides be equal or voluntary, in any meaningful sense of those words? Not at all. And neoclassical economics doesn’t bother explaining the historical process by which one stall at the bazaar is stocked with US$500 billion in the capital, while another is stocked with just hard-working human bodies.
By pretending that capitalism is just a system of “markets,” neoclassical economics deliberately blurs the real power relationships, and the often-violent historical processes, which explain the economic system we actually live in. Yes, we must study markets when we study capitalism – their flaws, as well as their virtues. But markets are not the idealized institutions portrayed in economics textbooks. And capitalism is equally shaped by other, non-market forces and structures, too.
So capitalism is not a “market economy.” Capitalism is a system in which most production occurs for private profit, and most work is performed by wage labor.
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