Postscript to the National Conventions: “You Didn’t Build That” and the History of American Capitalism

It’s great to be back guest blogging here this month. Thanks to Solangel Maldonado and the other bloggers on Concurring Opinions for making this happen.

Both parties’ national conventions are over, after significant fanfare. And each sought to outdo the other on praise for capitalism. At the Republican National Convention, speakers repeatedly pushed back against Pres. Obama’s “you didn’t build that” remark. (By now, everyone knows he wasn’t referring to owners building their businesses, themselves, but instead was talking about the public infrastructure that businesses rely on – right?) At both conventions, speakers time and again lauded the virtues of capitalism, and linked businesses with democracy and freedom.

 I’ve been reading about the historical transition to capitalism for a project on capitalism and families. The historical record at the very least undercuts any easy association among capitalism, democracy, and freedom. It also backs Obama’s point in spades about the critical necessity of government action to support a market economy. A few choice points from historians on these issues:

Capitalism succeeded in spite of — not because of — democracy. As historian Charles Sellers points out in his excellent Market Revolution, until the nineteenth century America was largely an agrarian society, and its path toward industrial capitalism was by no means pre-ordained. Through the first half of the nineteenth century, voters repeatedly sought to halt the progress of capitalism and preserve a subsistence economy. A market economy, they thought, would subvert a focus on the basics in favor of a focus on luxuries; cause citizens to be overly dependent on banks, who would encourage them to borrow in good times, then relentlessly demand payment in hard times; and eat up citizens’ free time by encouraging relentless accumulation. Capitalists found ways to subvert anti-capitalist electoral mandates, including by using the two-party system to focus the public’s interest on other controversies while quietly accomplishing their objectives. (Sound familiar?)

Wage labor was seen as bondage rather than freedom. At the birth of the U.S., owning and working one’s land was equated with freedom and independence; wage work and capitalism were seen as inducing a harmful dependency on others that was considered undesirable in a free and equal country. How the meaning of wage labor became associated with freedom rather than bondage is a complex story, parts of which are laid out both in Joyce Appleby’s Capitalism and a New Social Order and Amy Dru Stanley’s illuminating From Bondage to Contract.

Development of capitalism in the U.S. required massive government support. At the beginning of the nineteenth century, most of the country was beyond the viable reach of markets because it was too expensive to move goods over land. Almost all the funds needed to build the great canals that allowed market access to the nation’s interior came from public funds, as well as a major proportion of the money for the highways and railroads that linked up much of the rest of the country to markets. Government action was also required to stabilize money and credit, to legalize the corporate form, and to adopt laws that favored economic development and capital accumulation (see Sellers, Market Revolution on these points). And of course, as Morton Horwitz points out in Transformation of American Law, the transformation to capitalism couldn’t have happened without courts rewriting the common law in favor of capitalists, including by abolishing entails (limiting property to one’s descendants) so that land could be freely sold; simplifying the requirements for transferring ownership; rolling back the enforcement of equity and fair value in contracts in favor of a policy of enforcement of contracts and “caveat emptor;” limiting the liability of stockholders for corporate debts and protecting corporations from interference by the state. It’s no wonder that Charles Sellers called judges the “shock troops” of American capitalism.

I recognize the political realities that impede a more nuanced discussion of capitalism and its history, but can we do any better than the one we’ve been having? Can we, for example, accept that with the many benefits that capitalism brings (including a higher average standard of living, more consumer choice, more incentive for productivity), come certain risks (of increased income inequality, of too much attention to market goods and not enough to non-market goods, of the risk of government capture by capitalist interests), that good government should address? The Democrats have done slightly better on this than the Republicans, but not by much.

Photos:  (Obama) By Blake Coughenour ( [GFDL ( or CC-BY-SA-3.0 (], via Wikimedia Commons from Wikimedia Commons; (Romney) By c.berlet/ (Own work) [CC-BY-SA-3.0 (], via Wikimedia Commons

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5 Responses

  1. A.J. Sutter says:

    I sympathize, but I suspect the political realities will win out over nuance. Another nuance: “capitalism” has become a misleadingly monolithic term — it includes both the economy of goods and services and the financial economy. Only between 1% and 3% of the value of annual sales on equity markets around the world represents new capital to issuers; the other 97%-99% represents, essentially, gambling proceeds changing hands between investors. The value of annual trades on the NYSE plus NASDAQ has exceeded US GDP every year since 1997 — even including the years since the Lehman Shock; and the value of global equity trades has been between 95% and 105% of global GDP during recent years as well. Add in bonds, commodities, derivatives, forex, etc., and you get a financial economy many times bigger than that of goods and services. This is possible because capital gains aren’t included in GDP.

    Nor is there any necessary connection between stock price and operating results in the real economy. E.g., Apple had a $6.6 billion profit in the quarter ending in September 2011, along with sharp rises in both profits and revenue over a year previously — but the stock price went down 7% on the announcement, because profits were below analysts’ expectations.

    The benefits of this sort of capitalism aren’t shared widely. Over 90% of capital gains go to the wealthiest 10% of taxpayers, with 49% of all capital gains going to the wealthiest 0.1%. And those folks don’t necessarily buy American: Alan Greenspan proposed there is a “wealth effect” on GDP caused by a rising stock market, as tycoons spend more in the real economy, but GDP statistics don’t bear this out.

    The upshot is that one can be a “capitalist” without having anything constructive to do with the real economy of goods and services. Do you think either party will call attention to this development anytime soon? Especially when Goldman Sachs provides our Cabinet with temps?

  2. PrometheeFeu says:

    The role of the government in the stabilization of money and credit has historically been very negative. The legal environment in which banking operated prior to the Great Depression was just downright de-stabilizing preventing diversification and forcing the holding of very poor assets. (state and local bonds)

    I’m not sure which specific laws and regulations you are referring to when you speak of “to adopt laws that favored economic development and capital accumulation”. But some of it, far from being the government helping capitalistic expansion was simply the government refraining from hindering capitalistic expansion. Not exactly the same thing.

    When it comes to the corporate form, the vast majority of it could simply be embodied in contracts. In effect, a corporation would have to append to every contract it signed a gigantic appendix detailing limited liability. Not always practical, so the corporate form is helpful, but not as much as people think.

  3. Maxine Eichner says:

    Certainly the government adopting laws that favored economic development and capital accumulation is not the same thing as the government refraining from hindering capitalistic expansion. When I claimed the latter, I meant the latter. Beyond taking action to secure the nation’s transportation infrastructure, and approving over 200 state-chartered banks, Congress passed tariffs to protect domestic manufacturing from competition from cheap British imports. Federal and local governments used takings of private property to further economic development. The creation of the independent treasury, with all its problems, helped stabilize the chaotic banking system that was developing in states.

    The contention that the corporate form does little more than could be embodied in contracts assumes, among other things, a contract law that tilts heavily in favor of the enforcement of contracts. This, of course, isn’t some natural feature of U.S. law, but rather a shift made by our pro-business courts in the nineteenth century as they modified the common law’s enforcement of equity and fair value in contracts, in favor of a policy of enforcement of contracts and “caveat emptor.” Further, some critical part of the advantages of the corporate form comes from the protection it yields against state action, which also emerged as doctrine from pro-business courts in the nineteenth century, and which could not be embodied in private contracts. In the wake of the Citizens United decision, the advantages this yields for corporations should be clear.
    Max Eichner

  4. A.J. Sutter says:

    Nice rebuttal to the contracts argument about corporations, a favorite of libertarians embarrassed by their reliance on government largesse. Some other points overlooked in that argument are that (i) companies wouldn’t necessarily be able to get away with simply tacking on an appendix to every contract, since some exceptions might be negotiated or even become customary, and more importantly, (ii) such appendices wouldn’t limit tort liability as to plaintiffs not in contractual privity with the company, while the corporate form does.

  5. PrometheeFeu says:

    @Maxine Eichner:

    Approving bank charters is not an affirmative action by the government that favors economic development. It’s just the government not denying businesses the right to provide financial services. Tariffs against cheap imports have generally been harmful to economic development. Takings weaken property rights which has long been accepted as a barrier to economic development.

    @AJ Sutter:

    You’re quite correct that a corporation might not be able to append its corporate form to every contract. In practice this happens today. If you are starting a business, it is unlikely you will be able to get a loan in the name of the business alone. You will probably have to personally pledge your personal assets.

    Even when it comes to torts, the “corporation” could contract with its employees and agents agreeing to reimburse them if they lose a torts lawsuit. Of course, that would not be of any help if the corporation ran out of money. So as I easily granted, you cannot reproduce the whole of the corporate form through contracts, but you can get a big chunk of it.