“It is a win-win situation—not the zero-sum world of Marx’s gloomy dystopia. Institutions that reduce transaction costs and enforce well-defined property rights provide an environment in which incentives to economic initiative can thrive.”
ccording to its most famous critic, “capitalism” is defined by a contest between capital and labor for the spoils of economic production. In this ongoing contest, capital usually wins. Except for brief interludes of worker empowerment, the history of capitalism is the history of wealth accumulation for a few capitalists at the expense of many wage laborers on whose backs such wealth is built. Capital carries the weight of a social relation in which the owners of the means of production grow rich by paying workers a wage that is less than the value of the commodities they produce.
To adopt Karl Marx’s lexicon, unpaid labor is designated as “surplus value.” The purportedly “free” laborer must work for the “capitalist,” who dictates the terms of employment under which the laborer earns only a subsistence wage. The most important term of employment is the length of the working day. For capital to accumulate, the length of the working day must exceed the “socially necessary labor time” required for production of commodities sufficient for human subsistence based on the living standards of the day. This can be done by extending the working day in absolute terms. It can also be done by employing technological innovations or intensifying the labor process to reduce the amount of “socially necessary labor time” relative to a fixed number of hours constituting the total working day. Either way, the basic terms of employment under a capitalist mode of production provide for a wage paid to the worker that is equal not to the total value of what he produces but, rather, to the value of commodities necessary for his subsistence.
In a world without capitalism, workers would produce what they need and walk away with what they produce. In the world of capitalism, workers produce more than they need and walk away with less than they produce. Where does the surplus go if not to the workers? To the capitalists, of course. Not because they contribute to production but because the power of their social position ensures that they can extract surplus value (profit) from the workers. Property rights and the “fetish” of commodity exchange, which disguises the social relation underlying production and exchange, protect and preserve the social hierarchy. Capitalism is state-sanctioned theft.
This is, of course, an egregiously erroneous view of the relations of production, ignoring the basic economic insight that wages reflect the marginal productivity of workers. It is also based in a fundamental misunderstanding of how value is created and distributed in production and exchange. More on this below, but to understand how Marx got it wrong, it is helpful to examine Marx’s explanation of how it all got started. In a word, it comes down to the view that profit is theft. Not just the nature but the very origin of capitalism lies in what Marxist scholar David Harvey calls “accumulation by dispossession.” Let us see what this means and why it is wrong.
The Theory of Primitive Accumulation
If Marx is correct, capitalism only works if there is money available to get the circuit of commodity production and exchange running. Capitalists need money to buy the means of production and to hire labor. Only then can the circuit of capital accumulation start to churn, in which money is used to buy the commodities of labor and machinery, which are then used to produce commodities for sale, the receipts of which are then turned back into more money, which can be used both for consumption and further accumulation. This may sound like regular market operations, except there is a difference between using money to generate more money through commodity exchange (M – C – M’) and using money as only a means of exchange (C – M – C).
In the latter case, society engages in production for production’s sake only, with markets available to facilitate the exchange of commodities. There is little, if any, need for a hoard of money to get the circuit of commodity exchange going. Labor puts the means of production to work, produces commodities (with different workers producing different commodities according to their abilities and preferences), and then puts the commodities on the market for sale, with exchanges taking place to enable workers to exchange in accord with what each worker deems sufficient for his subsistence. The medieval labor-sharing agreements between lord and serf might be seen as an example.
It is as if all the means of production, and the know-how to put them to work, are available as free gifts of nature. All one needs to do is get up in the morning and earn the sweat of one’s brow. In Marx’s idyllic view of a non-capitalist communal economy (though he does not explicitly and comprehensively lay it all out), we apparently get together and figure out our special talents, to be applied in production, and our unique preferences, to be applied in exchange. As Marx famously said, “from each according to his ability, to each according to his need.” Unimpeded by greed and corruption, we magically unite in collective harmony, tend to our needs while being attentive to our neighbors, and live in a world of abundance afforded by the admittedly undeniable technological achievements of the capitalist stage of historical development.
This is, of course, a fantasy. Scarcity is a fact of life. Every choice we make means not choosing something else. Opportunity cost means one can never eat his cake and have it too. The nature of economic life is a matter of weighing the costs and benefits of the available set of opportunities and then making the best choice in accord with preferences and prevailing technologies. For example, wages reflect an interplay between what the worker is able to earn in one job relative to another. Although we may live in abundance relative to previous eras in history, we still need to manage abundance efficiently. An embarrassment of riches can easily become an embarrassment of incompetence, as the world observed with the collapse of the former Soviet Union.
Understanding the vital importance of opportunity cost is key to understanding why economics relations are not necessarily zero-sum. M – C – M’ and C – M – C refer to the same thing: people engaged in trade. If markets are efficient, with well-designed property rights and a slew of other institutional arrangements that reduce transaction costs, people enjoy gains from trade. The excess of M’ over M is not theft but, instead, the incremental (social) value generated by mutually beneficial trades. The heart of value creation is gains from trade, which arise from a diversity of resource endowments and a division of labor across a vast network of consumer and industrial sectors.
The key ingredient for making it all work is relative prices, as we will see below when examining how Malthusian cycles of population growth and decline throughout the Middle Ages changed the relative scarcity of labor and land, which was then reflected in the relative prices of labor and land. Scarcity of land or labor relative to labor or land within a given Malthusian cycle was the key factor that explains the trajectory of economic development throughout Europe from the medieval manor to the modern age.
For Marx, however, scarcity is a delusion. We are living in a world of abundance, admittedly created by capitalism but at the expense of M – C – M’ exploitation in which workers are separated from the means of production and compelled to sell their labor power to the capitalist. But for this to succeed, the capitalists need money to hire labor and to purchase the means of production by which workers can obtain their subsistence and capitalists obtain their enrichment through production of surplus value. Where do they get it? Or rather, how did they get it in the first place? Naturally, it is a story of greed and exploitation. As Marx writes in Volume 1 of Capital:
“We have seen how money is changed into capital; how through capital surplus-value is made, and from surplus-value more capital. But the accumulation of capital presupposes surplus-value; surplus-value presupposes capitalistic production; capitalistic production presupposes the pre-existence of considerable masses of capital and of labour power in the hands of producers of commodities. The whole movement, therefore, seems to turn in a vicious circle, out of which we can only get by supposing a primitive accumulation (previous accumulation of Adam Smith) preceding capitalistic accumulation; an accumulation not the result of the capitalistic mode of production, but its starting point.”
For Marx, it is a story of original sin. Just as theft lies at the core of capitalism, theft lies at the origin of capitalism. The story of a “capitalist era [that] dates from the sixteenth century” is one in which an emerging class of rapacious capitalists seized ownership of the means of production and shamelessly impoverished the masses. “So-called primitive accumulation,” he writes, “is nothing else than the historical process of divorcing the producer from the means of production,” in what amounted to “the transformation of feudal exploitation into capitalist exploitation.”
With the end of feudal relations between lord and serf on the medieval manor came the rise of capitalist relations between capitalist and worker in the fire and blood of large-scale machinery and factory production. It was a transformation marked by separation of the worker from the land. “The expropriation of the agricultural producer, of the peasant, from the soil,” Marx tells us, “is the basis of the whole process.” After the “emancipation from serfdom and from the fetters of the guild,” producers transformed into wage laborers, but “these newly freed men became sellers of themselves only after they had been robbed of all their own means of production, and all the guarantees of existence afforded by the old feudal arrangements.” It is this “history of their expropriation, [that] is written in the annals of mankind in letters of blood and fire.”
Unfortunately, Marx culls together a history of facts to construct a distorted Manichean narrative. It is a story of nefarious capitalists acting in concert to dissolve the bond between lord and serf, to abolish feudal land tenures, to seize church property, to rob the land of the state, to turn sheep walks into deer preserves, and to enclose the common lands, casting peasants into the net of capitalist exploitation.
The bottom line was establishment of state-sanctioned private property rights for capitalists and separation of labor from means of production. The result is “an incomparably larger proletariat by forcibly driving the peasantry from the land.” For Marx, “[w]hat the capitalist demanded was…a degraded and almost servile condition of the mass of the people, their transformation into mercenaries, and the transformation of their means of labor into capital.”
In subsequent chapters, Marx takes us on a tour of how “bloody legislation” forced down wages, how the capitalist farmer and the agricultural revolution created “a home market for industrial capital,” as well as how the industrial capitalist came to be. They were all part of an inevitable transition to a capitalist mode of production that begins with “usurpation of the common lands” in order to create the “industrial reserve army” and feed the “historical tendency of capitalist accumulation” that we read about in chapter 25. Imperialism and colonization, which emerged in the wake of the age of exploration, are natural byproducts of the laws of capital accumulation.
This narrative has proved influential. The New History of Capitalism, the 1619 Project, and Ibram X. Kendi’s Stamped from the Beginning are conspicuous legacies of Marx’s theory of capitalism and its origins. Recently at Areo, Ralph Leonard wrote about “the enduring importance of Eric Williams’ ‘Capitalism and Slavery’,” which examined the “relationship between the Atlantic slave trade and the emergence of European industrial capitalism from the sixteenth through the nineteenth centuries,” a thesis influenced by Marx’s theory of primitive accumulation. Also at Areo, Matt McManus picks up on Marx’s view that “social relationships must be viewed in their historical context,” and for Marx, “[m]ass coercion was necessary to create various economic systems.” McManus continues:
“For instance, he (somewhat unfairly) criticizes Adam Smith for regarding capitalist property relations as emerging from a natural process of production and exchange. Instead, Marx insists that capitalism emerged relatively recently, and in its infancy was often dependent on ‘primitive accumulation,’ a phase during which property is seized and old economic relations overturned.”
Given that the annals of history are written by the crooked timber of humanity, it is by no means an impossible task to assemble a collection of facts and make it appear as if the history of capital, as Marx writes with all the rhetorical embellishment and sarcastic wit he brings to bear in his chapters on primitive accumulation, “comes dripping from head to toe, from every pore, with blood and dirt.”
But rhetoric is not dialectic (in the ancient, not Hegelian, sense). Despite Marx’s snide dismissal of Malthusian cycles of population growth as anything more than another excuse for capitalist exploitation, the story of Western economic development hinged crucially on whether European societies could escape the “Malthusian trap” of being caught between population growth and limited resources. England and the Netherlands succeeded, while France and Spain did not.
From the tenth century on, Malthusian cycles of growth and decline in population as a result of wars, pestilence, and famine were the impetus for subsequent economic evolution. In general, population growth over the long run spurred the growth of trade and commerce. The division of labor, regional specialization, and entrepreneurial enterprise arrived on the scene as market-based activities and institutions like regional fairs, urban markets, banking deposits, insurance, and commercial law helped solidify an increasingly interconnected Europe. The customs of the manor slowed down the process, but as the Middle Ages gradually gave way to the modern world, the feudal world broke down as “a natural process of production and exchange” took its place.
The story of Western economic development, as Nobel economist Douglass North and his co-author Robert Paul Thomas show in The Rise of the Western World, is one in which “a growing population created the basis for trade,” expanding the market economy and causing “the medieval economy to react, if slowly, precisely in the manner Adam Smith would have predicted.”
Why Adam Smith Was Right
In the medieval world, the manor was the center of life in a vast virgin wilderness that spanned Europe. Land was abundant, but factor mobility and commercial trade were extremely limited given the relative isolation of manors and the perils of life on the frontier. The self-sufficient manor emerged as an efficient response to this world. The lord provided protection and stability in a life that rarely went beyond the village, and in a world in which the danger of marauding bands of Magyars, Moslems, and Norsemen lurked in the untamed wilderness between villages.
The banditry had declined by the tenth century, but constant conflicts between feudal lords still threatened the security and stability of life on the manor. It was not, however, a world of anarchy. Life was at least safe enough to produce offspring. The resulting population growth over time eventually put pressure on manorial resources, inducing migrations to new lands. As North and Thomas write:
“Spreading out north and west over Europe, the waves of migrants gradually engulfed the wilderness, leaving less space for brigands to hide and bringing more and more area under the protection of lords and their vassals.”
As more areas came under cultivation and control, security improved enough for commercial activity to support mutually beneficial trades between different regions of Europe, especially as “the variety of resources and climatic conditions induced differentiation of crops and livestock.” Meanwhile, towns rose up with their own governance and security measures, while craftsmen “provid[ed] ‘manufactured’ goods to trade for the needed food and raw materials from the countryside.”
It was during these early centuries of the new millennium that migration settled all the best land. The only options left involved working the best land more intensively or settling on the remaining inferior land. “Since land had become much more valuable,” North and Thomas write, “both lord and peasant had reason to seek more exclusive use of land and to place more restrictions on its use by others.” In addition, the price of land-intensive goods rose relative to labor-intensive goods, enhancing the bargaining power of the lord and leading to a decline in labor productivity which reduced the real earnings of labor, as well as the modification of “existing contractual arrangements to permit more exclusive use of land.” Living standards for the worker declined.
This changed after the Black Death in the mid-14th century. The drastic decline in population reversed the relative price of land and labor. “Once again,” North and Thomas write, “land had become relatively abundant and labor scarcer and more valuable.” Real wages rose and rents fell, while “some land was shifted away from crops to the raising of livestock which requires larger expanses of land.” It was in this environment that “the master-servant aspect of manorialism gradually fell away.”
Another Malthusian cycle set in by the end of the fifteenth century. Population growth once again reversed the relative prices of land and labor. But this was the era of exploration, as “[i]mprovements in ships and navigation led to explorations which culminated in discoveries and settlements in the New World.” The New World provided new land for a growing population while productivity increases chipped in to maintain sufficient agricultural output for the growing population.
Meanwhile, “the lands of Eastern Europe were still abundant relative to population, whereas the burgeoning towns and cities of Western Europe had become centers of skilled trades and manufactures.” Trade flourished, bringing with it the “innovation and proliferation of a host of arrangements such as joint stock companies and institutions designed to reduce market imperfection by coping with problems in financing and risk.” It was in this context that “a body of laws developed to provide more efficient property rights in the ownership and exchange of intangible assets.”
The rest is history, and it might seem that Marx would agree with much of this historical account. Indeed, North and Thomas observe that both Smith and Marx “saw successful growth as dependent on the development of efficient property rights.” But Marx went astray in believing “the world was going to progress through successive stages to Communism,” with capitalism a “necessary evil” stage through which history must pass before reaching communal nirvana. A fundamental oversight by Marx is that he “failed to recognize that there is nothing inevitable about economic growth.”
The institutionalization of private property rights was no guarantee of future economic prosperity. The Spanish Crown, for example, gained a substantial chunk of revenue by granting the shepherd’s guild (Mesta) exclusive rights to let their sheep graze pastoral lands across the country. But monopoly privilege undermined the productivity of arable land, as crops could be destroyed by roaming herds of sheep. Meanwhile, the Stuarts reversed Tudor opposition to enclosure in England as crop rotation made arable land relatively more attractive than pastoral land. “A series of successive approximations toward exclusive property rights” after a history of open-field farming facilitated progression towards the country’s agricultural revolution in the eighteenth century.
For Marx, enclosure was a pivotal shift that dumped an army of dispossessed peasants into the cities, where they could be whipped into shape for the production of surplus value in the factories of the Industrial Revolution. He does not consider, as Gerfried Ambrosch does here, “the possibility that many a peasant, in search of better prospects, may have sought work in the newly emerging industrial towns to escape the extreme hardships of peasant life.” But like any change in economic circumstances, we can acknowledge that enclosure was not without its dislocations,
Nevertheless, enclosure cannot be simplified into Marx’s Manichean narrative without glossing over a long, multifaceted history of enclosure that dates back to the Statue of Merton in 1235, long before the sixteenth century when the “capitalist” era emerged. It also overlooks the net gain to society in terms of a rise in living standards due to crop rotation and the resulting rise in agricultural productivity.
Enclosure is one example of how property rights per se provided no guarantees. In the last chapters of their book, North and Thomas provide a more general account of the divergent experiences of France and Spain compared to England and the Netherlands. In the former case, “the monarchy gradually wrested power away from representative bodies and developed a system (and level) of taxation which promoted local and regional monopoly, stifled innovation and factor mobility, and led to a decline in productive economic activity which was relative in the case of France and absolute in the case of Spain.” The consolidation of state fiscal power is taken by Marx as an example of primitive accumulation, but as North and Thomas write, “[t]he fiscal policy of the French Crown, whether intentionally or not, did almost everything conceivable to thwart the spread of an extensive market and thereby surrendered the gains that lay therein.”
Imperialism and slavery are also cited by Marx as classic examples of primitive accumulation, but, in the case of Spain, all the gold from the New World where slavery thrived, and their imperial holdings in the Low Countries, did nothing to stop the decline of Spain as a national power. “As the Crown’s financial difficulties increased,” North and Thomas tell us, “seizure, confiscation, or the unilateral alteration of contracts were recurrent phenomena which ultimately affected every group engaged in commerce or industry as well as agriculture.” In the cases of both France and Spain, it was the absence of secure private property rights that helps explain their decline as economic powers.
England and the Netherlands, however, managed to provide “a hospitable environment for the evolution of a body of property rights which promoted institutional arrangements, leading to fee-simple absolute ownership in land, free labor, the protection of privately owned goods, patent laws and other encouragements to ownership of intellectual property, and a host of institutional arrangements to reduce market imperfections in product and capital markets.”
New Institutional Economics
In short, the design of institutions is crucial. Douglass North is a founder of the New Institutional Economics, which attempts to explain how institutional arrangement facilitates economic prosperity. As economic historian Joel Mokyr writes in Culture of Growth, “much of the literature in economic history that is trying to explain differences in economic performance and living standards, both by economists and historians, has accepted in one way or another Douglass North’s call for the integration of institutions into our narrative of economic growth.” Why institutions?
In his magnum opus, Marx claims that when supply and demand are in equilibrium, they cease to explain anything. In fact, they explain everything. Not in the naïve sense that free market fundamentalism would have us believe. Market equilibrium is not an elixir but a framework for understanding how incentives align the activities of consumers and producers in accordance with preferences, resource endowments, and technology. The question is whether incentives are efficient or not. In many cases, they are not because prevailing institutions do not facilitate the discovery of prices which signal the value that optimizing consumers and producers place on resources.
Transactions costs are a main impediment to efficient trading activity. For example, North and Thomas describe how labor-sharing agreements between lord and serf were efficient for their time because they sufficiently reduced the negotiation costs that would have been incurred by specifying all the terms of fixed wage or rent agreements to offset the enforcement costs of ensuring that labor did not shirk or that the goods produced were of acceptable quantity and quality.
After the tenth century, this arrangement gradually became less efficient as the growth of populations resulted in pioneer migrations spanning previously unsettled areas of Europe. This brought about the growth of cities in different regions of the continent with their own unique resource endowments, giving rise to markets to exploit the opportunity for gains from trade that come with price discovery amid diverse resource endowments. “In the chronology of history,” North and Thomas write, “the growth of cities seems to have followed, with a lag, the expansion of population in a given area and to have been coincident with the establishment of interregional commerce.”
This process was facilitated by the increasing use of money as a substitute for payments in kind. For example, as North and Thomas write, beginning the twelfth century, “[l]ords increasingly, at their discretion, annually commuted the labor dues owed them for a fixed money payment which came to be accepted as the customary price.” Lords “also tended to lease out portions of their demesne for a fixed rent payment.” Money also facilitated the efficient provision of communal defense. North and Thomas explain: “Where previously the payment of a standing army could only have been arranged by difficult and expensive negotiations and perhaps by equally high costs in delivering or adjusting the compensation, a single money payment would now suffice.”
While the expansion of markets helped reduce transaction costs, the development of private property rights helped bridge the gap between private and social rates of return, thus spurring entrepreneurial initiative. When institutions help minimize transaction costs and protect property rights, society is in a position to realize gains from innovation and trade. Consumers have an incentive to shop for the best products at the best price, and firms have an incentive to make the investments necessary to meet consumer demand. It is a win-win situation—not the zero-sum world of Marx’s gloomy dystopia. Institutions that reduce transaction costs and enforce well-defined property rights provide an environment in which incentives to economic initiative can thrive.
As North and Thomas ask, if that is all there is to it, then why doesn’t everyone do it? As they write, “if a society does not grow it is because no incentives are provided for economic initiative,” but “if all that is required for economic growth is investment and innovation, why have societies missed this desirable outcome?” The answer is that property rights per se are no guarantee of prosperity. The definition, arrangement, and enforcement of property rights must be efficient. Only then can trade and entrepreneurial initiative thrive, especially with a boost from what economic historian Joel Mokyr calls a Culture of Growth, in which a fragmented Europe and “Republic of Letters” fueled the spread of ideas which spurred innovation.
The story of how the modern age gradually broke free of feudalism turns on the key factor of population growth, which induced changes in the relative prices of land and labor. This led to pioneer migrations to unsettled areas, the growth of cities and commerce, the expansion of markets, and an increasingly interconnected world of production and exchange. Whether this process would result in economic prosperity or not depended in large part on institutional arrangements that reduced transaction costs and defined property rights in a way that aligned incentives with opportunities. Marx’s alternative theory of “primitive accumulation” is nothing more than a distraction.
Jonathan David Church is an economist and writer. He is a graduate of the University of Pennsylvania and Cornell University, and he has contributed to a variety of publications, including Quillette and Areo.