Capitalism – searching for a definition

I think "Capitalism" is ill-defined, particularly how it is different from "free market". I think a mushy definition is a recipe for mushy thought. Here is where I will collect quotes from many sources to juxt them all together in attempt to figure out what exactly people mean by this word.

Only a crisis— actual or perceived— produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function:

to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

— Friedman, Milton. Capitalism and Freedom

This book discusses some of these great issues. Its major theme is the role of

competitive capitalism— the organization of the bulk of economic activity through private enterprise operating in a free market—

as a system of economic freedom and a necessary condition for political freedom. Its minor theme is the role that government should play in a society dedicated to freedom and relying primarily on the market to organize economic activity.
— Friedman, Milton. Capitalism and Freedom.

KEYNES: there was no very great change in the standard of life of the average man living in the civilised centres of the earth. Ups and downs certainly. Visitations of plague, famine, and war. Golden intervals. But no progressive, violent change. Some periods perhaps So per cent better than others at the utmost 1 00 per cent better – in the four thousand years which ended (say) in A. D. 1700. ...

This slow rate of progress, or lack of progress, was due to two reasons – to the remarkable absence of important technical improvements and to the failure of capital to accumulate.


Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other. Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity. Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and the development of capitalist institutions. So also did political freedom in the golden age of Greece and in the early days of the Roman era. History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition. Fascist Italy and Fascist Spain, Germany at various times in the last seventy years, Japan before World Wars I and II, tzarist Russia in the decades before World War I— are all societies that cannot conceivably be described as politically free. Yet, in each, private enterprise was the dominant form of economic organization. It is therefore clearly possible to have economic arrangements that are fundamentally capitalist and political arrangements that are not free.
— Friedman, Milton. Capitalism and Freedom.

Exchange can therefore bring about co-ordination without coercion. A working model of a society organized through voluntary exchange is a free private enterprise exchange economy— what we have been calling competitive capitalism. ... Since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence, no exchange will take place unless both parties do benefit from it. Co-operation is thereby achieved without coercion.
— Friedman, Milton. Capitalism and Freedom.

The Reckoning: Financial Accountability and the Rise and Fall of Nations

The first successful capitalist societies developed systems of accounting and corresponding financial and political accountability. ... Accounting brought with it a fundamentally different way of thinking abou tpolitical legitimacy. Balanced books equaled not just good business but also good government. At any moment, the maritime republic knew the state of its finances and could even make plans for future difficulties.

stories. Seen through the lens of the history of financial accountability, then, the history of capitalism is neither simply a history of ascent nor a cycle of booms and busts.

Rather, capitalism and modern government have an inherent weakness:

At crucial moments, accounting and the mechanics of accountability break down, adding to financial and political crises, if not creating them. The success of a society, at least financially, is, in great part, the mastery of accounting, accountability, and the ensuing struggle to successfully manage them. Without double-entry accounting, neither modern capitalism nor the modern state could exist, for it is the essential tool in calculating profit and loss, the basis of financial management. Double entry emerged in Tuscany and northern Italy sometime around 1300. Until then, the great ancient and medieval societies persisted without it. Indeed, the advent of double-entry accounting marks the beginning of the history of capitalism and modern politics.

Over and over again, good accounting practices have produced the levels of trust necessary to found stable governments and vital capitalist societies, and poor accounting and its attendant lack of accountability have led to financial chaos, economic crimes, civil unrest, and worse.

Those societies that have succeeded are not only those rich in accounting and commercial culture but also the ones that have worked to build a sound moral and cultural framework to manage the fact that humans have a regular habit of ignoring, falsifying, and failing in accounting.

In medieval Italy, not only did balanced books mirror the divine aspect of God’s judgment and a tally of sins but also they came to represent sound business and good government. Of course, it is one thing to have a set of values; the challenge is to uphold them, and maintaining financial accountability was and is a constant struggle.

What this book shows is that financial accountability functioned better when accounting was seen not simply as part of a financial transaction but also as part of a moral and cultural framework.

DUSTIN: The erosion of morals would appear to be the problem
From the Middle Ages to the early twentieth century, those societies that managed to harness accounting and long-term traditions of financial accountability and trust did so by full cultural engagement: Republican Italian city-states like Florence and Genoa, Golden Age Holland, and eighteenth- and nineteenth-century Britain and America all integrated accounting into their educational curriculum, religious and moral thought, art, philosophy, and political theory. Accounting became the subject of theological and political works, great paintings, social and scientific theories, and novels, from Dante and the Dutch Masters to Auguste Comte, Thomas Malthus, Charles Dickens, Charles Darwin, Henry David Thoreau, Louisa May Alcott, and Max Weber.

In a virtuous circle, the elevation of practical, business-minded mathematics into the spheres of high and humane thinking allowed these societies not only to maximize their use of accounting but also to build complex cultures of accountability and awareness of the difficulties posed by such a culture.

With this culture of accountability came capitalism and representative government. The delicate interplay between accounting and accountability can decide the fate of a company or, indeed, a nation. Financial history, therefore, is not only about cyclical crises or trends in numbers. It is also a story about individuals and societies that become adept at mastering the interplay between accounting and cultural life, yet often lose this capacity and find themselves in unexpected, avoidable, and sometimes cataclysmic financial crises. In this long history, accounting and financial accountability emerge as both mundane and, at the same time, difficult to control. What is remarkable is that the basic lessons of medieval Italian accounting—that it is essential to wealth and political stability but incredibly difficult, frail, and even perilous—are still as pertinent today as they were seven hundred years ago.