The Mind and the Market: Capitalism in Western Thought – Jerry Muller (2003)


We live in a world shaped by capitalism and market based solutions to economic problems. This book offers an overview of how some influential writers have thought about, not just the economics, but also the moral, cultural and political ramification of embracing capitalism and a market based economy.

The book predates the GFC but I was struck by the parallels between the kinds of issues that these writers were considering as far back as the 18th century and issues being debated today. In particular, the longstanding tension between the benefits to society collectively of adopting a market based economy and the social consequences for the individuals and groups who directly bear the price of progress and are unable to adapt.

Muller’s definition of capitalism includes the role of private property rights but the increasing use of markets to facilitate the exchange of goods and services seems to be the core feature of a capitalist system in his account.

‘[Capitalism is] … a system in which the production and distribution of goods is entrusted primarily to the market mechanism, based on private ownership of property, and on exchange between legally free individuals.” Notice that this definition is not purely “economic, ” for “private” property and legally free individuals exist only because there are political mechanisms that protect individuals from having their persons and property seized by others”

The book considers ideas stretching back to the classical Greek philosophers but its focus is on how ideas about private property and the market developed from the 18th century onward.

“Humans have been exchanging objects with one another since the Stone Age. But it was only in the eighteenth century that one can begin to speak of an economy in which production for trade became more significant than production for subsistence, and in which the market became central to the production and distribution of goods.”


The impact of the GFC on individuals has prompted a renewed debate about how the benefits of a market based capitalist economy should be distributed. It has not however shaken the consensus that the pursuit of wealth, comfort and individual advantage is socially acceptable, and even desirable, so long as it is achieved in an ethical way. Muller reminds us that this was not always so …

“There was no room—or little room—for commerce and the pursuit of gain in the portrait of the good society conveyed by the traditions of classical Greece and of Christianity …. Yet when discussion turned from outlining an ideal society to regulating real men and women through law, accommodating commerce and the pursuit of gain inevitably played a larger role. Roman civil law … served as a reservoir of more favourable attitudes towards the safeguarding and accumulation of wealth.”

The reasons for this generally negative attitude towards commerce and trading varied.

“In the city states of ancient Greece, virtue meant devotion to the well-being of the city and above all to its military defense … “the more men value moneymaking, the less they value virtue,” Socrates tells his interlocutor in Platos’s Republic.”

“The Gospels warned … that riches were a threat to salvation.”

Christian theorists associated commerce with sin and avarice, while those steeped in the civic tradition were more concerned with the potential for corruption and self-interest to  weaken the citizen’s identification with the common good, leading to the decay of political institutions.

One thing the classical Greeks and early Christians had in common, was a belief that trade was a zero sum game in which profit could only be extracted at the expense of others.

“Most classical writers also saw no economic justification for deriving income from the merchant’s role of buying and selling goods. Since the material wealth of humanity was assumed to be more or less fixed, the gain of some could only be conceived as a loss to others. Profits from trade were therefore regarded as morally illegitimate.”

However, classical thinking was not entirely opposed to commerce and trade …

“Alongside the Christian and civic traditions, and sometimes intertwined with them, was the tradition of civil jurisprudence. It too was classical in origin, embodied in the Code of Civil Law, a digest compiled by Justinian in the sixth century. The code reflected a Roman empire that was highly commercial, with a legal system that permitted free bargaining. 64 While the Christian and civic traditions were intrinsically suspicious of commerce, the Roman civil law was not. … ”

“Freedom of property and the rule of law were the hallmarks of this tradition, and the protection of property from arbitrary confiscation by government was a pivotal freedom. Rather than valuing the liberty to participate in government, it valued freedom from government as ensured by law. Its focus was not on virtue—either in the sense of Christian righteousness or civic devotion to the public good—but on rights, intended to protect the subject from coercion by the holders of political power and to safeguard his possessions from confiscation.”

Muller argues that one of the factors that helped create an environment receptive to capitalism and a more individualistic approach was the religious wars beginning in the mid 16th century.

“It was the experience of religious war and religious persecution that led Thomas Hobbes and a host of lesser lights to rethink the relationship between religion and politics. As long as religious factions saw the state as a proper tool for the enforcement of faith, religiously based civil war was a possibility. And as long as the state legitimated itself as guiding its citizens to a single, unified purpose and vision of the good life, the state would be prey to religious civil war.”

A range of thinkers (Hugo Grotius, Thomas Howes, John Locke, Benedict de Spinoza) approached this problem from very different viewpoints but came to see that the solution lay partly in highlighting the weak basis for the theological differences over which Christians were killing each other, but also (and probably more importantly) by redirecting these passions away from eternal salvation and towards earthly well being.

The problem with this solution (focusing on earthly well-being) was that it lacked a higher purpose.

  • In order to abandon the values previously held in high esteem (piety and faith for Christians, honour and glory for the civic republicans), people first needed to be convinced that the old values were tainted (e.g. piety and faith could be reframed as superstition and credulity).
  • The next challenge was to associate a higher purpose with what, at face value, seemed to be vulgar self interest (Mandeville’s “Fable of the Bees: and Adam Smith’s metaphor of the Invisible Hand played a powerful role in this process).


Voltaire and other leading thinkers of the moderate Enlightenment were reacting against a political culture based on manliness and warfare and a religious culture that emphasized piety. Moralists in the civic tradition saw luxury as leading to national decline. Material comfort, it was alleged, made men soft and effeminate; nations that pursued luxury would thus be defeated by the armies of more austere, virtuous, and warlike nations. Christian moralists portrayed luxury as distracting men from the pursuit of salvation.  Voltaire response was to lay out new ways of thinking that justified the pursuit of wealth through market activity and the consumption of wealth so created.

Exchange and Toleration: The Political Argument

“Voltaire’s defense of the market … was political rather than economic. Market activity was valued not because it made society wealthier, but because the pursuit of economic self-interest was less dangerous than the pursuit of other goals, above all religious zealotry.”

“Voltaire defended the market as an antidote to religious fanaticism because of its promotion of the peaceable virtue of self-interested cooperation.”

The Defense of Luxury

Voltaire’s second defence was that commerce promoted material wealth and comfort.

“To us, the argument for material well-being might seem uncontroversial. But in the eighteenth century, material prosperity was frequently condemned as “luxury” by religious and civic moralists. It was not a morally neutral word but a pejorative one, connoting not comfort but excess, the possession of non-necessities. The notion of luxury was intricately connected with the existence of a recognized social hierarchy: what was necessary for those of high status was regarded as excessive for those of low status.”



As a moral philosopher, Smith was concerned about the nature of moral excellence, but like many enlightened intellectuals, he tried to begin by describing humanity as it really is. His project was to take man as he actually is and to make him more like what he should be, by discovering the institutions that made men tolerably decent and might make them more so.”


“The most important argument of The Wealth of Nations is that a market economy is best able to improve the standard of living of the vast majority of the populace …”


“For Smith, the promotion of national wealth through the market was a goal worthy of the attention of moral philosophers because of its place in his larger moral vision. Smith valued commercial society not only for the wealth it produced but also for the character it fostered. He valued the market in part because it promoted the development of cooperative modes of behavior …”

The Consumer Revolution

“The Wealth of Nations grew out of Smith’s reflections upon the real successes of eighteenth-century Britain in producing economic growth.”


“The gradual but unmistakable rise in the standard of living not only of the rich but of the working poor was real enough. But it was hampered, in Smith’s eyes, by some of the protectionist restrictions to which his countrymen attributed their growing riches, and it could be speeded up by expanding the greater market freedom already visible in parts of the economy.”


“The old system of economic regulation of domestic trade—in which the price of goods was set by guilds, and the rate of wages set by justices of the peace—was being increasingly abandoned by the middle of the eighteenth century. But the regulation of foreign trade was actually increasing. Much of Smith’s book was an argument for expanding the freer market regime already dominant in internal trade to the realm of international commerce.”

The author describes international trade at the time as being viewed as a form of warfare in which gains can only be achieved at the expense of the other side; a zero sum game. This is a fair description of the rising contemporary trend to view trade as a, at best a zero sum game, at worst a trade war. Then as now, tariffs were a primary weapon in the trade war. These were initially a pure revenue generating tool (akin to a goods and services tax) but increasingly were used to protect domestic manufacturers (at the expense of consumers)


“Smith’s science of the legislator took from the civic republican tradition the need for the virtuous man to concern himself with the common good. But his view also developed out of a dissatisfaction with the legacy of that tradition. In its focus on the virtue of participation in government, the civic tradition had confined its concern to a narrow, propertied elite capable of participating in government, while neglecting the effects of the political system on “all the different members of the community.” Smith’s concern was to ensure that the political process contributed to the welfare of the nation as a whole. This well-being extended beyond the political elite, and was defined primarily in terms of improving the quality of life in the private realms of the family and of production and consumption. Smith’s emphasis reflected an upward evaluation of the importance of “ordinary life, ” as well as the transformation of the Christian virtue of charity into the Enlightenment virtue of practical benevolence. Thus while Smith continued the civic republican concern for the common good, his understanding of that good placed greater weight on the moral and material well-being of men and women in their daily lives.”

Explaining the Market

“The first principle in Smith’s systematic chain of explanation was the uniquely human propensity to exchange goods in search of self-interest. The second principle was the division of labor. Smith tried to demonstrate to the potential legislator that with properly structured institutions, these two common and well-known principles could be channeled to move the nation toward what he called “universal opulence.”


“The principle that set the market in motion and kept it going was the inclination to satisfy self-interest through exchange. Smith’s basic model of the links between human propensities and the wealth of nations is now complete: self-interest leads to market exchange, leading to the greater division of labor, leading in turn to specialization, expertise, dexterity, and invention, and, as a result, to greater wealth.”

The Legislator and the Merchant

“The market would produce the best possible outcome for consumers under conditions of what Smith called “free competition” or “perfect liberty.” For the market to function most effectively, everyone had to be able to sell labor, invest capital, or rent land with minimal restriction. But as The Wealth of Nations showed, much of European society and government was structured to impede the free movement of labor, capital, land, and goods. Some of these barriers to free competition were attributable to antiquated institutions, but they were due primarily to the effects of self-interest. Smith did not believe that there was a natural harmony of interests in society. He believed that the public interest would be best served if every man channeled his self-interest through the market. But he realized that from the point of view of the individual producer or group of producers, it was most beneficial to circumvent the competitive market with its attendant risks, and use all available means to prevent competition, in order to obtain the highest possible price for their wares. Those with political clout would try to use it to short-circuit the market.”

Adam Smith could be argued to be the patron saint of free markets but he does not appear to recognise the potential for markets to fail because the market price fails to include all relevant costs (e.g. externalities). This is an important caveat that is sometimes missed by people who invoke Smith as their inspiration for free market policies. He did however see the importance of competition as a force which constrained the tendency for individual merchants to seek to take advantage of consumers. Again I suspect there is more nuanced view that understands the ways in which “collective action” problems emerge under pure free competition approaches. Put simply more competition is not always the answer.

The Moral Balance Sheet of Commercial Society

“The conceptual common denominator of Smith’s major works was the analysis of the ways in which social institutions tend to pattern character through their appeal to human passions. Some passions were dangerous, others were benign, and still others could lead beyond the benign to the morally noble. Depending upon the incentives provided by institutions, human passions could be channeled to morally laudable and socially beneficent forms of behavior. In addition to the material benefits of “universal opulence, ” Smith saw the market as an effective institutional mechanism for the encouragement of self-control and the channeling of the passions in directions that benefited society.”

The disciplines and controls Smith identified are an important component of his overall argument on favour of free trade. They beg the question however as to whether they probably work better in smaller societies where interactions were more personal. The consequences of commercial failure were probably also higher at the time Smith was writing to the extent that the limited liability offered by a company structure was less developed

The Visible Hand of the State

Because Smith argued so persuasively against direct government involvement in the economy, the crucial significance of the state in his thought is often overlooked.


“For Smith, the state was the most important institution on which commercial society depended; the authority and security of civil government, he wrote, is a necessary condition for the flourishing of “liberty, reason, and the happiness of mankind . . .” 81 It was to the security of property provided and enforced by law that Smith attributed much of his nation’s increasing wealth, since that security made it worthwhile for every individual to make “the natural effort . . . to better his own condition.” 82 The cost of administering justice increased as society became more commercial. Another function of government that was bound to expand with the advance of commercial society was the provision of what Smith called “institutions for facilitating the commerce of society, ” or what we have come to call “infrastructure”: roads, canals, bridges, and harbors that benefit society as a whole but are too expensive or unprofitable to be undertaken by individuals.”

Virtues Inferior and Superior

“The great strength of commercial society, as Smith describes it, is its tendency to promote the “inferior virtues” typically associated with striving for rank and fortune and with the prudent pursuit of self-interest.”


“Smith appreciated the prudent man, without lionizing him. The prudent man’s pursuit of his own health, fortune, rank, and reputation produces a character worthy of our “cold esteem, ” Smith writes, but these virtues are neither very ennobling nor endearing.”


Yet he also believed that society required other human types if it was to flourish, people who possessed virtues not readily promoted by the market. Another role for the intellectual, as Smith understood it, was to encourage character traits beyond prudence: the superior virtues of wisdom, benevolence, self-sacrifice, and public-spiritedness.


Smith’s work was designed not merely to convince people to regard commercial society as the best regime, but to dramatize the personal qualities of courage, patriotism, and refinement that needed to be cultivated in opposition to the very same regime.


For Adam Smith, the creation of an open market across national borders was a source of hope, leading to more peaceful relations between nations, to liberation from inherited servility, to a rising standard of living, and to a more decent society. But other European intellectuals looked at the spread of the market and saw the ruin of all they cherished and all that gave life meaning


The Virtues of Knowing One’s Place

Justus Möser (1720–1794) was an early proponent of the argument that the market undermines local cultures by striking at their economic basis. One might say that Möser was one of the earliest critics of “globalization.”

Justus Möser saw the international market as pernicious for destroying the particular culture of Osnabrück. It did so, first, by creating new needs that could not be fulfilled by the traditional economy of the region. Second, competition from commodities that could be produced more cheaply abroad was destroying the traditional guild-based modes of production, and the social and political structures with which they were intertwined. The market was thus destroying cultural particularity and hence pluralism.


Time and again he contrasted the claims of rationalist theory with the deeper rationality of local, historical experience. If the intellectual was the voice of the former, Möser was implicitly the voice of the latter. He was the paradigm of a “rooted” intellectual: a man deeply enmeshed in the controlling political and social institutions of his homeland.




Muller argues that Edmund Burke’s Reflections on the Revolution in France (1790) is the single most influential work of conservative thought published from his day to ours. He was an advocate for the the value of established institutions that had stood the test of time as conducive to human happiness and deeply suspicious of role of intellectuals and men of money in political life.

Yet Burke, who emerged as a scourge of politicized men of letters and men of money, was among the most important intellectuals in European politics before 1789, and indeed formulated the rationale for a more intellectualist conception of political life. And Burke championed capitalist economic development from his earliest published writings until his last days, advocating a reliance on the profit motive and the market as the coordinating mechanism of economic life, as did Adam Smith. Why then did the foremost intellectual in politics and the advocate of the market pen one of the most biting critiques of both intellectuals and entrepreneurs? Unraveling this seeming paradox will lead us into the tensions between capitalism and conservatism in a commercial society.

The Intellectual in Politics

The party that Burke helped to forge aimed at government led by a landed aristocracy, open to mercantile and commercial interests, and dedicated to conserving the place of the House of Commons within the British constitution. Burke and the Rockingham Whigs sought to preserve Parliament not only from royal encroachment but also from the undue influence of the unpropertied many, whether expressed through more equal and democratic representation or through the pressure of mob action.

The Critique of Abstract Reason

Bourke appears to have been a skeptic on the power of rational thought to improve things. He emphasised the value of custom and tradition that had proven its utility over abstract ideas about a better future

Burke as Supporter of Commerce

It was the role of the intellectual, he thought, to warn politicians, who, under the influence of the ignorant poor or the misguided powerful, were tempted to tamper with the free market.

Burke’s Analysis of the French Revolution

For Burke, almost everything that makes life worthwhile is a result of society, its inherited codes, knowledge, and institutions. These goods are fragile, and when they are destroyed, the result is human misery.


For Burke, the revolution’s attack on the institutional bases of the Church and the aristocracy threatened to destroy the “manners” on which a decent commercial society depended.

The Noncontractual Basis of Commercial Society

In the generations after Burke, even some of those who found his description of the actual practice of the aristocracy and the Church idealized and implausible (as they certainly were) were to agree on the need for institutions that preserved the culture of the past and offered guidance in the present. That guidance included reminders of the limits of the commercial mentality and the hazards of regarding choice as an end in itself. They recognized that the aristocracy was an unreliable sponsor of intellectual activity, and found the Church too theologically constraining for the cultural message they sought to impart. Some, such as Coleridge or Matthew Arnold, would look to the state itself to provide an institutional home to men of letters, and to provide a counterweight to an overly commercial view of human capacities and obligations. 146


Feeling at Home in the Modern World

For Hegel, the market was the central and most distinctive feature of the modern world, a world he affirmed and sought to explain to his contemporaries. His understanding of the market reflects his reading of The Wealth of Nations, and draws together strands of analysis that we have seen in Voltaire, Möser, and Burke.

Hegel was responding to influential predecessors and contemporaries who insisted that the developing market was irreconcilable with human well-being. Their critiques boil down to three charges:

  1. that commercial society leaves men less happy by increasing their wants faster than the means necessary to satisfy them;
  2. that it leads to a decline in virtue, understood in the civic republican sense of willingness to sacrifice on behalf of the polity, and to a split between private and public interest; and
  3. that the division of labor leads to specialization, and thus fosters one-sided, atrophied personalities.

The Setting of The Philosophy of Right

Hegel regarded himself as part of a cultural elite that looked out for the general welfare of society and was responsible for articulating and transmitting its cultural values. Entrance into that elite was based on educational achievement, and the universities of late-eighteenth-century Germany were its training ground. Its claim to leadership on the basis of education and insight was a challenge to those who believed that leadership should be based upon noble origins or the ownership of large-scale property.

 Individuality and Universality

Hegel sought to explain that, rightly understood, the institutions of the modern world were worth affirming, for modern institutions have their own ethical dimension. By his use of “Sittlichkeit, ” which has its root in the word for custom (Sitte), Hegel meant to suggest that ethical life is only a worldly reality when it is experienced by individuals as an integral part of the institutions in which they live. Though the term “Sittlichkeit” is often translated as “ethics” or “ethical life, ” it is better rendered as “normative institutions.”

Civil Society and Its Discontents

What most distinguishes the modern condition is what Hegel calls “die bürgerliche Gesellschaft.” The phrase can be translated as either “bourgeois society” or “civil society”—Hegel probably intended both connotations. “Civil society” is the realm in which everyone is treated as a self-sufficient individual. Their persons and property are protected by law. Their relations to one another are based on interaction through the market for the satisfaction of their wants


Another problem that Hegel thought intrinsic to civil society was a new form of poverty. By that he did not mean only the existence of people who lacked means of material support. They had been around before market society. But there were two novel aspects of poverty: the systematic creation of groups in the population whose skills left them jobless, and the sense of grievance and resentment that those without work harbored against society as a whole.


It was the inherent dynamism of the market that created unemployment. The division of labor created by the market meant that many workers had work-related skills that were highly specialized, and hence suited for a narrow range of jobs. Because the market was defined by shifting and ever-refined wants, Hegel reasoned, the demand for new products meant a decline in the market for older products. That left workers whose whole working lives had been devoted to their role in the production of the old product without a job, and without the training that would allow them to find new work. In addition, the mechanization of production led to a loss of jobs. The market thus created unemployment, and did so among men who could not easily adapt to new trades.

Beyond Civil Society

Patriotism in its modern sense comes from identifying with the state. That identification may be habitual or emotional, but Hegel’s overriding purpose in The Philosophy of Right is to make it rational, by explaining how the modern state serves the needs of individuals to satisfy both their particularity and their universality as members of communities.


 From Hegelianism to Communism

“… in mid-1843, Marx laid out his critique of Hegel’s conception of the state, its representative institutions, and its civil service. The state’s bureaucracy, he discovered, did not function to guide the state on behalf of the universal interest. Instead, the government protected its own interests by measures such as censorship, which shielded it from criticism. The estates, rather than aiming at the common interest, used their legislative power to promote the economic interests of the groups represented in them, at the expense of the majority of the population, which had no representation.”

Engels’ Critique of Political Economy

The essence of Engels’ critique of political economy was simple. The work of Adam Smith and his disciples obscured what Engels found morally scandalous: capitalism was built on avarice and on selfishness. If the key maneuver of Enlightenment thinkers such as Smith was to call attention to the potential social benefits of what had been previously stigmatized as “greed” and “pride, ” the first countermaneuver of socialist critics such as Engels was to restigmatize self-interest as greed.


Smith had shown, and Burke and Hegel had accepted, that the market produced consequences that were orderly although unintended. For Engels, by contrast, that which was unplanned was disorderly, anarchic. His alternative was socialism, in which the production of the economy as a whole would be rationally planned and centrally organized. This assumption, that only the planned is rational and that only the intentional is orderly, meant the renunciation of the very foundations of political economy as it had developed since the eighteenth century.



Life Among the Philistines and Hebraists

“To a remarkable degree, these Quakers, Presbyterians, Congregationalists, Unitarians, and Baptists formed the backbone of commercial and industrial leadership. The social structure of England was a sandwich, with Anglicans at the top (aristocracy and gentry) and bottom, and with Dissenters in the ever-growing middle. (Methodists, who had begun within the Church of England but were a separate denomination by Arnold’s day, formed a layer socially just below the older Dissenting sects.) Excluded by virtue of their religion from government and from aristocratic patronage, from the great universities of Oxford and Cambridge, and from the army and navy, Dissenters went into trade and industry. Their style of life stressed laboring in one’s vocation, practical education, sobriety, and high moral conduct.”

 Arnold’s Critique

Education, for Arnold, was not just the transmission of information or the learning of basic reading and computational skills: it was to be a civilizing agent.


The “chosen people, ” to which the philistines were contrasted, were neither the Jews nor the Dissenters, whom Arnold referred to as “Hebraists” because of the strictness of their moral code. For Arnold, the “chosen people” were intellectuals like himself, those who strove for “culture” and practiced “criticism.” He used these terms more or less interchangeably.


Time and again, Arnold lamented that the culture of the British middle classes was focused on “machinery, ” by which he meant far more than mechanical devices. “Machinery” connoted means of any sort. Arnold’s complaint was that in a society in which means were increasing, men and women had lost sight of the ends that those means ought to serve. Indeed, they confused the agglomeration of means with the ends of life, and the increase of material wealth with moral improvement.


In Arnold’s analysis, what too many Britons lacked was the sense that there might be more to collective life than liberty from government, the liberty “to do as one likes.” In many ways, his arguments reformulated, in a less ponderous key, Hegel’s distinction between choosing arbitrarily and choosing with good reasons.


Because the English had been taught to value liberty and self-reliance above all, Arnold contended, they gave too little thought and too small a role to the state. The very notion that the state might act in the general interest, rather than in the interest of the particular group that dominated it, was foreign to most Englishmen. The result, Arnold claimed, was both dangerous and tragic.


The underdeveloped British sense of a state capable of pursuing the general interest was tragic because it left unfulfilled the functions that could not be realized by the market or by voluntary activity. Foremost among these was the quantity and quality of education, which were dismal, largely because of suspicion of government and dependence on the market principles of supply and demand.


Weber: Efficiency and Disenchantment

For most of the nineteenth century, liberals followed Adam Smith in arguing that one of the moral advantages of international trade was that it diminished international conflict and promoted cosmopolitan affinities. By the late nineteenth century, that was changing. Like most of his contemporaries in Germany and abroad in the age of imperialism, Weber viewed the relationship between nations through the lenses of social Darwinism. His position was that nations competed with one another for power. Under modern conditions, the prerequisite of power was economic modernization, which was promoted, by and large, by participation in the world economy. But in order to compete successfully in the world economy, governments needed to encourage the development of a dynamic capitalism, and had to refrain from protecting less efficient producers who were harmed by foreign competition.


While liberal nationalism regarded all those within the borders of the nation as equal citizens, illiberal integral nationalists insisted that only those who shared a common past—religious, cultural, and biological—were truly part of the nation. In France, Germany, and much of eastern Europe, integral nationalism portrayed the peasant and the artisan as the heart of the nation and its culture.


He therefore portrayed the Protestant industrialists Krupp and Stumm as exemplars of industrial progress, while holding up Rothschild—the paradigm of Jewish finance—as an example of those who earned income without working. This propensity of religious writers to regard the profits of trade as illicit, Weber remarked, was an antiquated legacy of the traditional prohibition of usury.


Weber insisted that capitalism was the most efficient economic system possible under modern conditions. While he was ambivalent about its cultural effects, he devoted himself to dispelling the most frequent accusations against it.


As Weber used the term, “rationality” was a matter of matching means to ends. He did not mean that the ends themselves were reasonable from the point of view of some substantive purpose, value, or belief. The fact that method X was the most efficient means of getting from A to B did not mean that B was worth getting to. And indeed Weber sometimes suggested that capitalism did not make any larger sense, and that it created people who were so caught up in the pursuit of means that they lost sight of any substantive ends.

 Simmel: Money and Individuality

Thomas Carlyle—and, after him, Marx and Engels—might have scorned the “cash nexus, ” but Simmel explained that money tied modern society together in more positive ways. Like Voltaire before him (and Hayek after him), Simmel reminded his readers that money allowed for the cooperation of individuals who would otherwise have nothing to do with one another.

Sombart: Blaming It on the Jews

If Weber and Simmel were ambivalent but predominantly positive about the prospects presented by capitalism, Werner Sombart viewed it with despair.

But while Weber and Simmel wrote works that brought out the complexity of capitalism, weighing its costs and benefits and trying to rein in their own value preferences, Sombart’s work became increasingly unrestrained, sensationalist, and shrill. According to him, capitalism meant the decline of all culture worthy of the name, and those most responsible for that decline were the Jews. Sombart forged a link between the romantic anticapitalism of Community and Society and the new antisemitism.


 Creativity and Resentment in Schumpeter’s Early Writings

Schumpeter would make the theme of creative leadership central to his conception of capitalism, though he was not the first to do so. But he would develop the implications of creative leadership with greater subtlety than his predecessors and integrate it into existing economics. In the late nineteenth century, W. H. Mallock, a conservative British publicist, had written a string of books arguing that the material progress of the majority of men and women depended on a small talented elite. Economic advance was based on unequal contributions, Mallock argued, and these contributions had economic inequality as their legitimate reward. Inequality was therefore both inexorable and desirable, for it provided the incentive for the talented to apply their potential talents to actual economic improvement.


The entrepreneur not only fulfilled an economic function; he represented a psychological type. That psychology could not be explained by the scheme of motivations usually employed by economists, namely a hedonistic calculus of carefully maximized well-being. For the entrepreneur was more typically motivated by “the dream to found a private kingdom, ” often a transgenerational dynasty; the will to prove oneself superior to others, for which financial gains are “mainly valued as an index of success and as a symptom of victory”; and “the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity.”


The second Nietzschean theme that runs through Schumpeter’s work is that of Ressentiment: the psychological antipathy of the inferior many to the superior few, and the attempt of the resentful majority to devalue the achievements of the creative and successful.


Schumpeter portrayed antientrepreneurial sentiment as inherent in capitalist society. He argued that it was precisely the dynamism injected into capitalist society by the entrepreneur that made him an object of antipathy. For the rise of a new entrepreneur—and, with him, of new means of production and organization—necessarily meant the relative economic decline of those ensconced in the status quo.


This process of downward relative social mobility (Deklassierung), Schumpeter stressed, was an inevitable counterpart of the dynamic side of capitalism—what he would later call its “creative destruction.”

The Birth of Irony from Catastrophe

Socialism would slow down economic development, Schumpeter explained, but that was consonant with its purpose of freeing human energies from economic purposes. But that prospect remained for the future. In the present, he concluded, socialization of the means of production would be disastrous, alienating the most productive citizens, bringing about a decline in the standard of living, and leading to social conflict. Therefore the current policy of any rational socialist must be to encourage the development of capitalism.

From Prosperity to Depression

In the United States as in Germany, observers called attention to the growing scale of economic enterprise, and its concentration into ever larger units. 53 In the United States, “trustbusters” such as Louis Brandeis believed that bigness led to monopoly, or at least to oligopoly, in which a few firms dominated the market for some product.


The task of government, as the trustbusters conceived it, was to break up concentrations of economic power to re-create a more competitive market. Other American observers, such as Charles Van Hise, author of Concentration and Control: A Solution of the Trust Problem in the United States (1912), who saw economic concentration as inevitable and desirable, believed in the need for a more active and powerful state to control such corporations through governmental regulatory bodies. 54

Schumpeter’s Analysis of the Depression and New Deal

The Keynesian analysis of the Depression held that contemporary capitalism suffered from a shrinking of opportunities for investment. Schumpeter concurred, but not for the reasons offered by the Keynesians. The problem, in his view, was that popular and governmental hostility to economic elites had led to a situation in which those who ought to have made the most significant innovative investments were discouraged from doing so.


Schumpeter was skeptical of the government’s antitrust efforts. He defended large corporations, part of his lifelong justification of the creatively superior.


antielitist resentment was killing the capitalist goose, creating “a situation in which neither capitalism nor its possible alternatives are workable.” This was a result of a process that had concerned him for almost thirty years, the fact that “capitalism produces by its mere working a social atmosphere—a moral code, if the reader prefers—that is hostile to it, and this atmosphere, in turn, produces policies which do not allow it to function.”

Capitalism, Socialism, and Democracy

Rewards in the capitalist economy, Schumpeter explained, do not correlate precisely with the “ability, energy and supernormal capacity for work” expended. An element of chance beyond the control of the individual intervenes. But ability and energy still count for a great deal, so that “the game is not like roulette, it is more like poker.” But the system is all the more successful in attracting the energy and ability of the brightest because of the lure of making huge profits.


But the benefits of capitalism were not only economic. Schumpeter argued that much of what is most characteristic about modernity could, at bottom, be attributed to the spread of capitalism, and to the patterns of thought that it promoted. That was the mentality of “rationalistic individualism”: the tendency not to take things for granted, to try to use human reason to weigh advantages and disadvantages in order to calculate what was best for oneself. It was a mental spillover from the habits of mind that characterize market activity, the matter-of-fact, quantitative, numerical weighing of profit and loss. 92 It also led to a belief in the need to judge for oneself, based on conclusions derived from worldly experience, rather than from tradition or supernatural authority.


the argument for capitalism was based on long-term collective interest, an argument with little appeal to those left unemployed by the process of “creative destruction” so central to capitalism, as entrepreneurial innovation led to the obsolescence of existing forms of production and those employed in them.


The Paradox of Keynes

Keynes defended the expansion of the role of government “as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.” 17 His General Theory was an attack not so much on what Smith had actually written as on its reduction to the dogma of laissez-faire. Keynes set out to free the minds of economic policy makers from too rigid an adherence to the belief that the invisible hand of the market was the solution to every economic problem—a belief that Smith himself never held.

The New Affluence and the End of Ideology

Behind the stunning increase in the standard of living was a set of international institutional arrangements drawn from the intellectual legacy of Adam Smith, who had done so much to explain the advantages of an international division of labor based on free trade. “In practice, ” notes the foremost Marxist historian of our age, Eric Hobsbawm, the “Golden Age” of postwar economic growth “was the era of free trade, free capital movements, and stable currencies…” 24 The American planners of the postwar order reacted against the economic protectionism that had preceded the war and helped contribute to its outbreak. They deliberately removed trade barriers in order to stimulate international trade, and urged their western European allies and dependents to lower tariff barriers as well. In the two decades after 1953, world trade in manufactured goods multiplied more than tenfold.

 The European Roots of Marcuse’s Thought 

at home, though in a form that played down its Christian content. It was a family in which the real religion was high culture. As a teenager, Marcuse, like Freyer, joined the youth movement. He was conscripted into the army in 1916, served as a noncombatant, and, like Lukács, was radicalized by the war. At the age of twenty, he participated in one of the soldiers’ councils created at the war’s end, where he saw firsthand how nonrevolutionary the German working class really was. The question of why the working class failed to fulfill the historical role assigned

Domination Through Sex and Affluence

In the eighteenth century, Rousseau asserted that civilization inflames passions without being able to fulfill them, leading to a sense of frustration. Hegel had reformulated this in his notion of “bad infinity, ” the empty feeling that results when consumer goods are chosen merely on the basis of the newly induced wants created by the market, rather than because they fit into a rational life plan. Lukács had picked up the theme, suggesting that capitalism creates ways of life that leave the individual unhappy, but prevents him from imagining an alternative. The novelty of Marcuse’s analysis lay in his insistence that contemporary capitalism was pernicious because it created new needs and then fulfilled them, leaving individuals feeling happy and satisfied. The individual becomes a slave to his passions, but passions that are molded and directed by others who seek to profit from creating the needs for new commodities and inculcating them through the mass media, through advertising, and through the means of entertainment.


The Making of a Liberal

Hayek drew two enduring lessons from his Viennese milieu: that a modern liberal society must be bound together primarily by factors other than shared cultural commitments, 3 and that democracy could pose a threat to a liberal political order.

Viennese Liberalism, the Jews, and the Defense of Creative Minorities

For Hayek, in a capitalist society everybody becomes in some measure an entrepreneur, on the lookout for the more effective use of resources. 49 But not every group would be equal in its resourcefulness. A central theme of Hayek’s liberalism was the role of the innovative few in bringing about historical advance. This notion had an impeccable liberal lineage. Indeed it was fundamental to John Stuart Mill’s conception of historical progress. 50 As we have seen, by 1909 Schumpeter had developed a similar theory, with a more Nietzschean vocabulary, to explain the role of the entrepreneur. Wieser had made the same point in a number of essays, some of which Hayek edited and published after Wieser’s death in 1926.51 Mises restated the theme in his 1922 book, Socialism, a work that Hayek described as a turning point in his own intellectual development.


But the progress created by the resourceful few, while it brought long-term benefits to society at large, came at the expense of some established social groups. Hayek regarded fascism and Nazism as the desperate attempt by social losers in the process of capitalist development to regain through force and ideological special pleading the rewards denied them in the marketplace.

Socialism, Planning, and the Functions of the Market

Mises argued that in an economy without private property and markets the efficient coordination of economic activity was simply impossible. 69 Prices in a market economy conveyed the relationship between the supply and effective demand for goods. Without prices set by free exchange, there was no effective way to plan, since planners could not decide on the relative efficiency of the many possible combinations of physical and human resources that could in theory produce the same product.


Smith portrayed the market as making possible the division of labor, thus increasing human productivity. Hayek now pointed out that the market permitted an ever greater division of knowledge in society, while at the same time it coordinated that knowledge through prices, a system of signals that convey information.

The Critique of “Social Justice” and the Hazards of the Welfare State

The Constitution of Liberty and its successor aimed at a critical, though not entirely hostile, examination of what had come to be known as “the welfare state.”


Hayek’s concern was the tensions between liberty and the welfare state. He defined liberty as the limitation of the coercive power of the state, such that “coercion of some [people] by others is reduced as much as is possible in society.” 97 But Hayek was clear that liberty existed only when protected by the state, which enforced the rule of law, a set of rules that applied equally to all and that assured each individual “a known sphere of unimpeded action.”


Hayek’s criticism of proposals for the welfare state lay not so much with the aims as with the methods of government action. 103 He was suspicious above all of government monopolization of the provision of social, medical, or educational services, since that eliminated the competitive process by which new and possibly better means could be discovered. Hayek tried to show how social security (in the broad sense) could be provided in a manner that did as little damage as possible to individual freedom and to social innovation. 104 What he opposed was government measures that distorted the information system of the market by actually setting wages, rents, or the price of commodities to conform to some social ideal or political expedient. The result of that, Hayek thought, would be a less efficient economy as well as a less free society.


Those who preached the need to restructure the market economy to conform to the standards of “social justice” rarely had a precise sense of what they actually meant by the term, Hayek charged. That is why it was so readily adopted and manipulated by self-interested groups. They claimed that their incomes were not commensurate with the standards of social justice, that government ought to intervene to raise their wages or the prices they received for their services or products, in order to protect their accustomed way of life or to create the standard of living to which they felt they were justly entitled.


For Hayek, the demand for “social justice” derives from conceptions of ethical obligation that made sense when confined to small, face-to-face groups, but that are now obsolete and indeed dangerous. 109 The Great Society did not pretend to reward individuals according to commonly shared standards of merit or virtue, for that would require a consensus of values that simply did not exist. The fact that the rock star was paid far more than the teacher was not because “society” regarded the former as more meritorious than the latter, but simply because of the relationship between supply and effective demand—because more people were willing to pay more for a ticket to see that particular rock star than for the salary of any given teacher. 110 Capitalism, Hayek asserted, does not reward merit in some moral sense, and he thought it dangerous for conservatives to argue as if it did.


Adam Smith believed that the main obstacle to universal opulence through the competitive market came from groups who used their political power to pursue their self-interest in a way that circumvented the market mechanism.


Hayek saw a similar threat to the development of the market and of liberal society, from those best situated to exert political influence for particular purposes. But under the conditions of modern mass democracy, Hayek asserted, that threat came not primarily from merchants (who would always be a small numerical minority) but from other organized interests, especially labor unions.


What Hayek found particularly worrisome was a growing consensus among western politicians that government had a responsibility to maintain full employment, a belief enshrined in the economic doctrine of Keynesianism. Governments committed to keeping down unemployment, Hayek noted, could only do so by increasing the supply of money and credit in the economy. That worked by causing inflation, which decreased the real value of the wages that unions had obtained, temporarily allowing businesses to regain profitability. By selling their products at higher prices while still paying workers at preinflated wages, businesses became profitable again, while the real wages of their employees declined. But that was only a temporary fix, since in order to catch up with inflation, everyone demanded higher wages. The effect was a wage-price spiral,


Hayek was not opposed to democracy, but he thought that its virtues were overrated compared to those of the market and the liberal state, and that its greatest benefit came in allowing for a peaceful transition of power. He feared that unless institutional limits were placed on democratic legislatures, the existing structure of political and ideological incentives would lead one economic interest group after another to make demands upon democratically elected politicians in the name of social justice. The result would be a constant expansion of state intervention in the wage-and price-setting mechanisms of the economy, a steady rise in the state’s share of national income, and a steady diminution of the freedom to engage in economic innovation. Democracy, in other words, could destroy liberalism—


Given the opportunity, most men and women would try to have government protect their existing way of life and sources of income from the “creative destruction” through which capitalism brought about new social and material possibilities.

The Hayekian Moment

All in all, the 1980s and 1990s were a Hayekian moment, when his once untimely liberalism came to be seen as timely. The intensification of market competition, internationally and within each nation, created a more innovative and dynamic brand of capitalism. That in turn gave rise to a new chorus of the laments that, as we have seen, have recurred since the eighteenth century. Community was breaking down; traditional ways of life were being destroyed; identities were thrown into question; solidarity was being undermined, egoism unleashed, wealth made conspicuous amid new inequality; philistinism was triumphant. Yet it also led new groups and nations into the circle of wealth; expanded the peaceable relations of exchange among nations; and created new cultural combinations and, as Simmel had noted, new possibilities for individual development.

The Tensions and Limits of Hayek’s Thought

In the last decades of his life, Hayek’s tone became more conservative in another sense as well. A secularist, he came to regard religious traditions as usefully conveying modes of behavior that were necessary complements to the institutions of the market and the rule of law, even if they were untrue or mythical.

CONCLUSION The Centrality of the Market

This book argues that the market has played a central role in much of modern European thought. This is obvious with respect to economic thinkers such as Smith, Schumpeter, Keynes and Hayek. Muller argues that it is not possible to understand many of the burning concerns of thinkers such as Burke, Hegel, and Arnold without attention to what the market represented for them.

Despite the divergences among the intellectuals we have examined, there are some broad areas of consensus.

  • The first concerns the productivity of capitalism. All analysts, from Voltaire through Hayek, have commented upon the increase in productivity that capitalism has brought about. For most, this has been one of the most telling points in its favor.
  • Virtually every analyst has traced the greater productivity of capitalism, in whole or in part, to its ability to mobilize those self-interested propensities that have variously been termed greed (Marx), avarice (Burke, Keynes), or self-interest.
  • Hayek focused on the market as conveying information, and as facilitating the creation of new knowledge. But he, too, believed that it was self-interest that made the market effective in fulfilling these functions.

Yet, if virtually all analysts have traced the greater productivity of capitalism to its ability to harness self-interest, even those who have been well-disposed toward the market have agreed that the pursuit of self-interest does not inevitably or automatically lead to socially desirable outcomes.

  • Above all, they have agreed on the importance of the rule of law, enforced by the state, in preserving individuals from the depredations of others who, motivated by the desire for gain and unconstrained by law, would be eager to dominate them.

Those intellectuals favorably disposed toward capitalism have tended to emphasize the need for countermarket institutions.

  • For many, the family was the most important extra-market institution, which transformed self-interest into something quite different.
  • Another counterinstitution was the state. To be sure, many analysts, from Smith through Hayek, have emphasized that self-seeking behavior occurs in the political realm as well as in the market, indeed that such self-seeking can become a major barrier to the market’s effective functioning. But precisely because the state was both indispensable for the very existence of the market, yet threatened by organized interests, intellectual analysts thought it necessary to cultivate a real commitment to the public good among at least part of the population.
  • Some of the intellectuals we have examined regarded a concern for the nation—whether conceived as a distinct ethnic or cultural or political entity—as another counterweight to the market, an object of allegiance and duties beyond self-interest.

Intellectuals have also suggested a variety of cultural institutions that would develop sensibilities, tastes, and traits not fostered by the market.

  • For Burke, the Church played such a role, and Arnold, among others, thought that it still might.
  • Arnold, like Hegel and many subsequent thinkers, also looked to the universities as a source of cultural ideals and commitments different from those most readily promoted by the market.
  • And, beginning with Voltaire, they tried to use the world of journalism—the market of ideas—as a forum for what Arnold called “criticism, ” the use of “the best which has been thought and said in the world” to turn “a stream of fresh and free thought upon our stock notions and habits.”
  • A number of thinkers maintained that meaning and direction could also be provided by professional associations, such as unions and professional societies.


The importance of such counterinstitutions was connected to perhaps the most consistent worry of intellectuals: that the market (sometimes in tandem with other forces in modern society, such as science and technology) would lead to a life filled with choices but devoid of meaning. A recurrent theme, at least since Burke, has been the fear of spillover: the notion that values and orientations that were appropriate in the market would spill over to other forms of human association. Burke, like Hegel and then Arnold, warned against viewing the state as just another contractual relationship.

Few have argued for capitalism primarily on the grounds that it increases equality—certainly none of the authors discussed in this book.

  • Those who cared most about equality, from Rousseau on, have tended to be the most antipathetic to capitalism. Though capitalism often diminishes the significance of old sources of inequality based on birth, the argument by supporters of the market, at least since Smith, is not that it creates less inequality, but that it makes inequality more useful to society at large, and above all to the vast majority of the populace who profit from the availability of cheaper goods produced for the mass market.
  • Yet Schumpeter and Hayek draw our attention to another side of the issue of capitalism and inequality, one that remains unfashionable, even taboo. That is the extent to which economic growth may depend on the unequal contributions of the innovative, the gifted, the creative, and the entrepreneurial—qualities only partially captured by the language of “human capital” in which such matters tend to be discussed by economists. In democratic societies (or perhaps in academic precincts obsessed by the quest for equality) the argument that collective prosperity depends on allowing scope for the most driven or talented is likely to be understated.
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