Adam Smith is erroneously associated with the invention of Capitalism. As is the corpulent theorist, Karl Marx. However, neither of them invented the term nor popularized it. That being said, Marx is the originator of the idea of capitalism. This article will look at the term and the idea as brief overviews.

While the term capital was coined in the mid-19th century as a strawman against freedom, the pejorative term ‘capitalism’ arose much later. Capitalism as a term was created by Pierre-Joseph Prudhon, but was not made popular until Werner Sombart’s Der Moderne Kapitalismus in 1902. From there it spread first in academic circles then into the chattering and media classes before becoming more widespread.

Capitalism became further embedded in the mindset of modern man by Max Weber with his book The Protestant Ethic and the Spirit of Capitalism. It is rather ironic, that while capitalism is a strawman woven into the fabric of modern society via Marxism, it is a term that was not coined by Karl Marx. Furthermore, while he wrote Das Kapital with Engels, Marx does not seem to have used the term capitalism or at least is not responsible for popularizing its use.

Who invented capitalism?

Understanding the growth and development of capitalism is attempting to understand a number of different elements. I will break these down as:

  1. Origins of the term
  2. Origins of the socialist theory of capitalism
  3. What capitalism is actually a strawman for
  4. How did liberals end up accepting capitalism

These histories overlap and intersect with one another at various points in history. It’s a story of how debunked ideas can come back from the dead and infect a successful one and utterly corrupt it to the point where the bad idea is seen by huge swaths of society as the good one. 

No one individual invented capitalism. Like many systems and ideas it grew out of others and grew into new ones. However, we can say that the most important person in its creation is Karl Marx along with Engels and to a lesser extent Adam Smith (more as a poster boy). 

Who invented the term capitalism

As with so many negative philosophical ideas, capitalism owes its origin to a Frenchman. In this case the curious incident of the individualist socialist (IE anarchist) Pierre-Joseph Proudhon. The man of paradox, who quite correctly notes few people can be consistent with themselves over a 25-year period, 

Oddly, Proudhon has influenced both socialists and libertarians as well as anarchists in general. To him, everything was contextual and contingent, which means he’s not easy to pin down. On a personal note, I like people like this – they are real and they are complex. If someone simply fits into a neat bubble they’re either a facade or an ideologue who has not thought things through at all. He was a Hegelian who liked the Bible and Adam Smith. Fascinating.

Proudhon’s ideas on socialism seem to be formed in a Hegelian dichotomy – socialism versus political economy. As with many dichotomies, it may prove a false one. In this, we have tradition (right wing political economy – as in conservatism at the time) and utopia (socialism). 

He also believed that to achieve the latter utopia, you needed an extreme form of the former – this is where libertarianism came in. In his quest for balance, he sees the necessity for free and equal opportunities and interactions which leads to no role for government. However, he is the originator of the socialist term “property is theft.” 

This is to say he sat between the socialists on one side and the economic liberals on the other. In this he worked on his philosophy of mutualism. It’s while working on this – a just property system which guaranteed freedom, he used capitalism as a critical term for economic liberalism (What is Property?, 1940). 

How the term capitalism became socialist

So from the outset it was a critical term, but was not a socialist term. In fact it was a mutualist term. Yet it would be embraced by socialists first. Still, the term was not so popular and was concurrent with Karl Marx’s theories on capital.

As noted in my introduction/summary at the top, capitalism was then popularized by German economist and sociologist Werner Sombart. Between 1902 and 1927 he published three volumes of his magnum opus, Der Moderne Kapitalismus which covered the four stages of capitalism – well, his theory and opinion on them. 

In his early career, Sombart was acknowledged by Friedrich Engels as the only man who understood Das Kapital and was a renowned Marxist though not a blind one. He would later admit Marx’s mistakes and seek to develop his own theories. 

He later championed German National Socialism as a means for putting the “welfare of the whole above the welfare of the individual” and that a “planned economy in accordance with state regulations” would usher in the utopia needed (Deutscher Sozialismus, 1934). In this book he equated capitalism with “the Jewish spirit” and equated English people and their love of freedom with the same spirit. 

Sombart often worked with his friend and colleague, Max Weber who further popularized capitalism as a term. Weber was a sociologist, philosopher, and political economist who is best known for theorizing on the development of western society.

His seminal work, The Protestant Ethic and the Spirit of Capitalism, first published in 1905, around the same time as Sombart’s works, looks at how the sociology of religion and economic sociology help one understand how capitalism came to be. In that, protestantism came first and it led to capitalism – rather than perhaps the other way around. He, like Sombart, was influenced by Marxism though passed away prior to the rise of National Socialism in his country.

What was Capitalism called before Karl Marx?

Karl Marx clearly had a big effect on the popularization of the term Capitalism even though not directly, but through those he inspired in Germany. That being said, it seems clear from the above information that Marxists took the word from Proudhon’s works and melded it into their Marxist theories and ideas.

So really the question is what was capitalism called prior to Proudhon and Marx, and to a certain extent William Makepeace Thackery? Well, Proudhon himself called it economic liberalism but again it’s a construct. The best we can say is that it was called liberalism though I’ll argue (below) that it’s freedom and liberty. 

To be honest, I’m not sure which section to go with next. There’s two things to look into – why the term capitalism was invented and what it was invented to misrepresent. They are sides of the same coin in many ways. I’ll go with the latter first.

If it’s not capitalism, then what is it?

One of my recent pieces was on the nature of conservatism. In it I lay out how it is not a distinct or rigid ideology, but more of a feeling and a series of practical, contextual decisions and evolutions. To certain types of logical minds, it is illogical to have such an unsystematized series of notions and actions. 

The same is true for freedom and liberty. There is no grand narrative for it nor is there a bone fide ideological superstructure supporting it. Feudalism evolved out of a range of system failures in individual/familial/tribal farming as well as the consequences of might, of conquest, of protection, and so on. England became a truly feudal society with zero freedom in 1066 when it was conquered by the Franco-Normans.

However, feudalism was not ideological, it was practical in certain senses and could shift. It seems the Black Death combined with the Peasants Revolt and the unending (until this century) English need for freedom, led to a slow crumbling of feudal society. 

This was natural anyway. A three-tier system established in 1066 could not last forever. You had the king, the nobility, and the peasants (let’s ignore the clergy). The king would have children, but not all could be king. Same with the nobles. Eventually sub-classes would be created. The upper nobility related to the king and the middle to lower nobility became the middle classes. 

After the Black Death it became apparent the peasants could find better deals if they shopped around with different nobles. This helped to slowly break down these bonds. The lower classes began to gain more freedoms. Various things happened here and it was quite ad hoc. 

The English Civil War, for example, helped remind people (though they might not be conscious of it given the Normanisation of history and culture) that the King and the people were natural allies against the nobility (middle classes). This is an old Anglo-Saxon idea found in laws which ensured no man stood between a free man and the King. That is to say nobles could not exert control over free people.

Industrialisation changed all that. It was not a top-down governmental decree, but a series of innovations and inventions by curious individuals. Protestantism, the breakdown of feudalism, and other forces allowed individuals to be more free. The Enlightenment provoked more discussions and thoughts on ideas too. They ushered in the ability for people with the time on their hands to consider improvements.

Up until this point, technological limits meant that farming was labour intensive. This is why feudalism and slavery were needed by various societies. The invention of better machines meant less people were needed to farm the land and to produce the food. This in turn meant idle hands could be turned to creating other products, tools, and so on. 

It also created a free labour market. So we have moves in the 18th and early 19th centuries toward greater individual freedom – freedom of association, of work, of trade, of religion, and so on. It was not a straight path – there were collectivists of various hues, conservatives who liked the old system, and so on. 

Now we get to the great Scotsman, Adam Smith. How he must turn in his grave to see the current Scottish government. Anyway, he stood up for individual liberty as a cornerstone for a moral, prosperous, and free society. At the same time America’s founding fathers were declaring independence and drafting their constitution. For the first time in modern history, a philosophy of freedom was being embedded in society. And it’s just after this that socialism rises again and the term capitalism is coined.

Why was it necessary to invent capitalism?

So we have a problem. Any notion of capitalism as a thing is not the same as Smith’s philosophy of freedom and how personal liberty enriches all in all areas of life. The natural question is why, if we have a growing philosophy of freedom with economic elements, why was capitalism invented?

As noted above, I believe capitalism to be a strawman invented to trash freedom. There are two aspects to this:

  1. To set up a term that could be used as a pejorative.
  2. To set up an idea that can be challenged effectively.

This is why it is a kind of strawman. The term comes, probably, from training warriors. Before they fight with a sword against a fellow human, even to spar, it’s good for a trainee to fight a straw human – learn to wield the sword by stabbing, slashing, a fake man of straw. In philosophical terms a strawman is a fake opponent that does not represent the true opponent, but one which is easy for you to defeat.

As Ludwig von Mises notes in the preface to the German edition of his Socialism: an Economic and Sociological Analysis, socialism had been roundly defeated prior to Karl Marx. Free trade showed localized socialism did not work. From this socialism as a concept expanded to cover districts then nations, and then the world. They were theoretical utopias and at each point of contact with liberty, lost.

This is where Karl Marx comes in. Like with Proudhon, he was an adept Hegelian dialectician. However, while Proudhon loved paradoxes and the balancing of opposites through the old idea of thesis, antithesis and synthesis, Marx used Hegelian dialectics to build false opposites to prove his thesis.

Both science and logic ran counter to socialism. On top of that Smith and the American founders had won the moral arguments for individual liberty, prosperity, and the benefits of freedom – even if their systems were not perfect. We humans are, after all, flawed and prone to errors. Marx needed to change the battlefield.

To achieve this, Marx did three things:

  1. Argued logic was not universal for all men and all times and in fact it was class-based. Logic and reason were therefore bourgeois.
  2. Argued the aim of all history was the socialization of the means of production.
  3. No one should put forward a concrete plan for the said socialization of the means of production nor what the socialist utopia looked like.

This tripartite structure has allowed Marxist theory to linger on and thrive long after it should have been put to bed. It also created the conditions for the construction of capitalism as the opposite, evil system that stood in the way of the socialization of the means of production.

The new structure also meant the previous debunking no longer stood. Even though it was an old idea, Marx’s theories of socialism and capital could not be argued with a framework that made it seem fresh while hampering criticisms.

Naturally this led to the fact that while socialism itself was not new, the ideas it opposed should now be seen through the lens of the Marxist theory of history. This allowed the ideas of freedom and liberty as espoused by Smith et al to be warped and twisted. They went from being the ideals of free people to the enemies of the liberation of socialism.

The problem they had was the opposite system was still called freedom and liberty. Imagine trying to overtly argue against freedom and liberty? Tyrants managed this throughout history using the pretext of safety; especially collective safety under the rule of a strongman who could keep chaos at bay.

In order to effectively campaign against such a system, they needed a new term. Now, this might have been a conscious act by the devotees of Marx or it might have grown organically. All we can say is that while capitalism originated in a French anarchist, it was adopted and popularized by a pair of German socialists, one of whom went on to support Nazism.

How did Capitalism come to be embraced by liberals?

The term liberal is a bit difficult these days. It grew out of the old centre-left populist idea of classical liberalism which is closely aligned with the ideas of freedom and liberty, but with a constitutional or legal framework to back it up. Libertarianism has less of this and relies on good will and communal acceptance of libertarian principles or individual/familial self-protection.

Classical liberalism continued on through the 19th century and stood in opposition to socialism as well as conservatism of the old order. It did not do well after the Great War. It’s around this time that socialism rose via communism in Russia and then in other nations as socialism (Labour party) or as fascism in Italy. It really upsets lefties, but fascism and nazism are left-wing offshoots of Marxism. Get over it.

By the 1950s and 1960s the term liberal was battered and bruised. It’d been attacked non-stop by the left and thanks to Stalin and his useful idiots in the west, a new false dichotomy had been built up whereby socialism was left wing and fascism was right wing (see Goldberg, 2007). This was a classic Marxist move in the sense of all of history being about Marxism – now the left-right axis was too. It also helped squeeze out freedom by lumping it in with anti-freedom pro-socialist fasicsm (Mussolini’s idea of fascism was as a stepping stone between capitalism and socialism).

It seems that during the 1950s a change happened. Liberals decided to take on the mantle of capitalists, but in doing so capitulated to Marxist theories. In 1962, Milton Friedman published Capitalism and Freedom then in 1966 Ayn Rand published Capitalism: The Unknown Ideal. From then on, capitalism changed from a pejorative to a compliment. 

This was an unprecedented move and ushered in an era where Marxist theory could run rampant through all areas of life almost unhindered. Even those opposed to it are now using Marxist terms and Marxist frameworks. Prior to that William Buckley and the Foundation for Economic Education were using terms like “free market” and “free-enterprise.” The use of the term capitalism was used only in relation to socialism.

Unfortunately, this adoption of Marxist terms lies with von Mises. In debunking socialism, he adopted their terms and methods. Rather than go back to classical liberal and liberty-minded terminology, he attempted to co-opt Marxist terms for his own uses. In doing so he actually helped Marxism win the linguistic, terminological war. Here’s what von Mises said about capitalism as seen by Marxists:

“The terms “Capitalism” and “Capitalistic Production” are political catchwords. They were invented by socialists, not to extend knowledge, but to carp, to criticize, to condemn. Today, they have only to be uttered to conjure up a picture of the relentless exploitation of wage-slaves by the pitiless rich. They are scarcely ever used save to imply a disease in the body-politic. From a scientific point of view, they are so obscure and ambiguous that they have no value whatever. Their users agree only in this, that they indicate the characteristics of the modern economic system. But wherein these characteristics consist is always a matter of dispute. Their use, therefore, is entirely pernicious, and the proposal to extrude them altogether from economic terminology, and to leave them to the matadors of popular agitation, deserves serious consideration.”

Mises’ student Hayek further tried to bring the term capitalism into usage for freedom. It did face some backlash from proponents of freedom such as Murray Rothbard. Sheldon Richman went further and suggested that ‘capitalism’ should be the pejorative for what libertarians oppose – crony capitalism which is not the same as true freedom. This is something to which I agree.

How do we save freedom and liberty?

We need to stop using the word capitalism as it is a term created within an ideological framework that seeks to distort what it is purporting to cover. It is therefore vital that the terms freedom, free market, free exchange, liberty, classical liberal, individual liberty, and so on are used instead. We cannot allow them to be used as pejoratives by Marxists. We must break out of their framework and produce an honest, realistic account of the world, of history, of how freedom and prosperity are achieved. If we use their terminology, they win.