Capitalism

Perhaps the best-known and most important early exponent of capitalism was the Scottish economist Adam Smith (1723–1790). Smith employed the term capital in technical economic discussions contained in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), but he did not describe his economic system as "capitalism." Rather, the latter term seems to have arisen only in the nineteenth century. Smith preferred to speak about natural liberty, by which he meant simply that if everyone acts freely as they see fit in their own interests, then the welfare of the whole society will be best served. For Smith, the system of natural liberty constitutes a sort of automatic or homeostatic mechanism of self-adjustment (which he sometimes calls the "invisible hand"), so that any attempt (on the part of government or some other agent) to interfere in its operation will lead to greater inefficiency and hence less total welfare. The doctrine of natural liberty thus yields the founding principles of capitalism as an economic system. In turn, Smith applied this discovery not only to the operation of the marketplace but also to all aspects of society, including its educational, religious, and judicial institutions. He narrowly confines the role of government to those functions consistent with natural liberty: foreign defense, regulation of criminal activity, and provision of "public goods" too expensive for any single segment of the private economy to undertake.

The sources for Smith's insight about maximized individual liberty, unconstrained by coercive externalities, have been debated. Certainly, an earlier group of French economic theorists, known collectively as the Physiocrats, may have played a role in the formulation of this idea. Perhaps more importantly, as Albert O. Hirschman and others have argued, many influential political and moral theorists writing in the seventeenth and eighteenth centuries had promoted doctrines of human psychology and action that comported well with Smithian natural liberty. So-called heroic virtues were replaced with more mundane values in the writings of a wide range of early modern thinkers, including Niccolò Machiavelli (1469–1527), Thomas Hobbes (1588–1679), François de La Rochefoucauld (1613–1680), Anthony Ashley Cooper, third earl of Shaftesbury (1671–1713), and Bernard Mandeville (c.1670–1733).

The work of Smith inspired a school of thought known broadly as classical political economy. Its leading members in the nineteenth century, such as David Ricardo (1772–1823) and Thomas Malthus (1766–1834), extended and refined Smith's insights, often drawing in addition on the work of the utilitarian philosopher and social reformer Jeremy Bentham (1748–1832). In its most ruthless form, this position was combined with a reading of Darwinian biology to make the argument that capitalism, as a system of the survival of the fittest, was sanctioned by evolution, as in the Social Darwinism of Herbert Spencer (1820–1903). Nor were devotees of unlimited capitalism limited to the earliest stages of capitalist development. The neoclassical school of economic theory, exemplified by the work of Friedrich von Hayek (1899–1992) and Milton Friedman (b. 1912), continues to exercise considerable influence on all dimensions of social thought into the twenty-first century. The so-called rational choice or public choice economists persist in their belief that the free market relations realized only under capitalism constitute the single legitimate model of all social order.