My Road to Capitalism

So there is my hammer, and soon I will wield it, but not before offering you a brief description of my own road to capitalism. As a European, and a woman to boot, I hesitated to embark on a personal prologue to my presidential address, but you have two people to blame for what is to come. Last year, when Walter Friedman gave his presidential address, he allocated approximately one half of a short sentence to his own personal life, but that did not stop him from pestering me over the last year to tell you something about myself.^{Footnote 9} I might have fobbed Walter off had it not been for the even more formidable Mary Yeager. In her presidential address, Mary noted that female presidents of the BHC hardly ever divulge personal details about themselves.^{Footnote 10} I shared their instinct, but as soon as I chose the title of my address, I started to worry that Yeager would heckle me from the floor if I did not come through with something.

If you look up 98, Ranelagh in Dublin on Google Maps, you will see what remains of the place where I spent most of my childhood.^{Footnote 11} When I was not at school or sleeping, I sold sausages and milk over the counter at Lily’s Dairy, my father’s grocery shop. We never knew the Lily who gave the shop its name, but the woman who had built the business was my father’s mother and another Mary O’Sullivan. She was a local legend, being known to fling full-grown men, literally drunk on the fruits of their labor, into the street. My grandmother’s facility with belligerent drunks reflected the fact that some of our most important customers were the inebriated men who rolled out of the pub across the street, keen to buy a peace offering to take home. The following morning, their long-suffering wives would come into the shop, often sporting a black eye that their loving husband had bestowed upon them, begging for credit to buy bread and milk to feed their children.

I learned many lessons for life in that shop, swearing off Irish men early in my life, and vowing to become a financially independent woman before I was even a teenager. At the time, I was less interested in what was to be learned about business and economics, but the lessons were there for the taking. We sold goods over the counter—typically on credit to people who paid laconically—and often delivered groceries to customers’ homes. It was a high-cost operation, one that was characteristic of the Irish grocery business when I was born, and one that became harder to sustain as I grew up in the 1970s and 1980s. Supermarkets brought what they brought everywhere else in retailing history—self-service and lower prices—and a veritable revolution in the Irish grocery trade. There was little profit to be made by small grocery businesses, and they persisted only because they did not have to pay for the labor they used. The story would be a tragic one were it not for its banality—my life as a statistic if you like—but it seemed tragic at the time because it was my life.

We never lived in a corridor or in an old water tank on a rubbish tip, and certainly not in a hole in the ground covered by a piece of tarpaulin, but I did grow up with a morbid fear of running out of money. If that never happened, it was in no small part due to my mother—another woman called Mary O’Sullivan, and long before she ever heard of my father—who knew how to manage money because she had grown up without it. Still, in light of the financial uncertainty that marked their existence, my parents had one overriding goal for all of their children: to get the best education available in Ireland and to monetize it in the form of a steady, well-paid job. Having reluctantly accepted that I would not be the nun she wanted, my mother earmarked me for a position as an accountant or an actuary. The problem in the late 1980s was that such jobs were not to be had in Dublin and, like many young Irish people, I headed to London to start a new life.

When I left Ireland, I had strong convictions, but they were about patriarchy and religion rather than capitalism. Strictly speaking, of course, I came from a petit bourgeois background but, since my father had labored so much to make money out of money, he did not seem like much of a capitalist to me. The Irish economy struggled too, with unemployment above 15 percent in the late 1980s and GDP per capita at about 70 percent of the European Union average, but it was difficult to situate capitalism in a diagnosis of the country’s economic problems.^{Footnote 12} In the Republic of Ireland, as in other postcolonial states, there was debate about whether capitalism itself was at fault or the way it had been imposed. So I had more questions than answers about capitalism, and my open mind on the matter was one reason, despite our shared background, that I never aspired to be the woman below, although I admit that the hairdo played a role too (Figure 2).

Figure 2

Photo of Margaret Thatcher, circa 1975.

Source: Library of Congress.

Besides, I had more pressing things to do as a young woman than sit around thinking about capitalism since I needed to support myself. When I found a fancy job in London, working for McKinsey & Co., the consulting firm, I thought I would do that in style. Some of the allure wore off once I calculated my hourly wage, but what really distressed me was the fact that my initial assignment took me to the shops of a leading retail chain all over Britain. The irony of finding myself back in the world I had just left seemed almost too cruel to bear until I realized that I had landed on a different planet. My task was to hang around these shops, surreptitiously measuring their surface area and calculating the number of people who bought goods. Then I was told to divide one number by the other to measure capital turnover, a concept that had never occurred to me, despite all of my years as a shopkeeper’s daughter. It soon struck me that there was an entire world out there populated by enterprises that worked very hard to understand what they were doing with their capital and how it affected their profit. And when McKinsey sent me to the Harvard Business School to do an MBA, the extent and influence of this world became clearer still.

I arrived in Cambridge, Massachusetts, as Michael Jensen was penning and publicizing some of his most influential work on shareholder value.^{Footnote 13} His course at Harvard Business School was conceived of as an introduction to price theory for MBA students. But no course on price theory ever had the kind of success that Coordination, Control and the Management of Organizations (CCMO) enjoyed, with students flocking in their hundreds to hear Jensen rail against “fat and lazy” U.S. corporations and advocate the downsizing of their workforces and the distribution of their profits to their shareholders. His course was a performance that showcased Jensen’s sartorial slick, his undoubted charisma and, above all, his analytical acumen and agility. There was much to admire in all of that, but sitting in Jensen’s classroom, surrounded by his acolytes, my stomach turned. I started to take issue with what he preached, arguing every point with him, back and forth, until he snapped one day and told me that if I ever wanted to make my arguments persuasive I should go and get myself a PhD in Economics.

Naïve as I was, I followed his advice and trotted across the river to the Harvard Economics department. What a rude awakening that turned out to be! Very few people can say they were truly radicalized by an MBA and a PhD in Economics, but that is what happened to me. No one wanted to talk about capital or profit in the Harvard Economics department. Instead, they spoke about the “free market economy” and the “competitive market economy,” and, well, you know what they say about a lie. If you repeat it often enough, it becomes politics, and that is when capitalism began to intrigue me.

Capitalism in Theory and History

As a student of economics, I got into bad company without even trying. I read economists who talked about phenomena that seemed important to the way the economy operated. Such bad company included a few clever fellows like Marx and Veblen and Schumpeter and Keynes, as well as highly intelligent women like Luxemburg and Robinson and Penrose. So much for the dead people, but there were some live ones too in the bad company I kept. My doctoral advisor, Stephen Marglin, played a crucial role for me, helping me discover the intellectual richness of economics that so many of his colleagues worked to conceal. And he soon told me that if I wanted to understand what capitalism meant, then I needed to understand capital.

On the face of it, his advice was sensible enough and seemed to echo something that prominent Swedish economist Eli Heckscher had said decades earlier. Referring to “that unwholesome Irish stew called ‘modern capitalism,’” Heckscher suggested, “if those two words have a distinct meaning, it ought to be connected with what is called in economic science ‘capital.’”^{Footnote 14} So off I went to read about the economic “science” of capital, and what I discovered was not what Heckscher had in mind, but what Marglin knew I would find. Economists had made sustained, though sporadic, efforts over more than two centuries to develop an economic theory of capital. However, their efforts had spawned enormous contention and confusion within the discipline as exemplified by successive “capital controversies.”^{Footnote 15} Indeed, the mess was such that the economic “science” of capital might itself be deemed Heckscher’s unwholesome Irish stew.

That stew appealed to me, and still does, so that the reopening of old debates about the nature of capital is a welcome development from my perspective. In recent years, we have seen a surge of research that revives the “Is it a bird, is it a plane?” question about capital, with contributions from, inter alia, Francesco Boldizzoni, Thomas Piketty, Geoffrey Hodgson, and, most recently, Jonathan Levy in the Business History Review.^{Footnote 16} Indeed, if there is anything to worry about in this new literature, it is the tendency of some contributors to try to resolve the confusion about capital by proposing their own definitions of it. In this regard, I think that what Louis Hyman said about capitalism makes a good deal of sense for capital: the immediate challenge is not to define it, but to understand why it is so resistant to simple definitions.^{Footnote 17}

Yet, whatever the interest and importance of these debates about capital, I soon learned that if capitalism is to have a distinct economic meaning, it does not stem from the mere existence of capital (whatever that might mean), but from capital’s relationship to profit. Compared with the term “capital,” the notion of capitalism is a relative newcomer and, when one looks at the earliest conceptual usages of the term, it is clear that it meant more than the economic use of capital. Indeed, Louis Blanc, the French socialist who is often credited with inaugurating the modern use of the term capitalism, attacked the “sophism … of perpetually confusing the usefulness of capital with what I shall call capitalism.”^{Footnote 18} Most scholars who have made a serious effort to conceptualize capitalism, to understand what it signifies as an economic system that is distinct from other systems, have attributed capitalism’s distinctiveness not only to the presence of capital but to capital’s relationship to profit.

That some people might make profit at the expense of other people’s losses has been understood for centuries. But the idea of sustained profit, the possibility that profit might be a systemic feature of the economic system, that profits for some would not necessarily be cancelled out by the losses of others, comes much later, perhaps as recently as the middle of the eighteenth century.^{Footnote 19} From then on, the potential significance and persistence of profits garnered attention in the emergent field of political economy. Now, if economists have struggled to understand capital, their debates about profit are messier still. As prominent Chicago economist Frank Knight observed in his entry on “profit” in the Encyclopaedia of the Social Sciences in the early 1930s: “Perhaps no term or concept in economic discussion is used with a more bewildering variety of well-established meanings than profit.”^{Footnote 20} The only concept that comes close, of course, is capital, and that is hardly surprising since the challenges of understanding profit and capital are so closely intertwined.^{Footnote 21}

At least that was true until the consolidation of neoclassical economics as the mainstream of the discipline. The founding fathers of neoclassical economics took a firm stand on the issue of profits as exemplified by the writing of Léon Walras. “So far as profit is concerned, in the sense of profit of enterprise,” he insisted, it was “the correlative of possible loss, that it is subject to risk, that it depends upon exceptional and not upon normal circumstances, and that theoretically it ought to be left to one side.”^{Footnote 22} If profit was so tricky, so bewildering, it seemed better to cast it out beyond the margins of economic theory. Of course, no serious mainstream economist, writing in the twentieth or twenty-first century, could possibly believe that what Walras said was a reasonable approximation of the reality of profits. Still, not having any theory to explain profit meant that its generation and erosion was treated the way the nuns who taught me treated the Immaculate Conception: the less that was said about it was very much the better.

Once I understood that, I moved on from the mainstream of my discipline to become what in tolerant circles is called a heterodox economist and in less genteel company is no economist at all. I read and I read and I read everything I could find on capital and profit, enjoying a kind of intellectual stimulation and freedom that I had never imagined would be mine. Still, you cannot make a silk purse from a sow’s ear overnight, and my flights of intellectual fancy were dogged by a recurrent fear that economists’ blathering about capital and profit was just intellectual posturing. I acknowledged, at least to myself, that I could not distinguish between a good and a bad theory of profit for the simple reason that I did not know much of anything about the economic behavior of profit in capitalism. I was drawn to the few heterodox economists I met—like Bill Lazonick and Jane Humphries and Mike Best and Michael Piore and Alice Amsden—who pursued their heterodoxy through history. And I wondered if there might be something to learn about the relationship between capital and profit in capitalism by looking to the past and, specifically, to the history of enterprise.

It was my curiosity about the historical dynamics of capitalism that brought me to the Business History Conference in the mid-1990s, and thanks to many of the people in this room and some who are no longer with us, I learned a great deal. Still, the challenge of understanding what it was about capital and profit that might make capitalism distinctive turned out to be much more difficult than I had envisaged. Indeed, what I discovered is that many historians of economic life—whether they be economic historians, historians of capitalism, or, perhaps most surprising of all, business historians—were remarkably reticent in grappling with the history of profit.

One could illustrate the point by focusing on any number of controversies in the history of capitalism: debates about the origins of capitalism in different parts of world, the transition from merchant to industrial capitalism, the historical dynamics of capitalism and socialism. All of these debates have been greatly hampered by historians’ lack of attention to how profits are generated and appropriated. Since I cannot possibly convince you of such a claim for all of them, let me illustrate the larger problem by focusing on one debate: the debate on capitalism and slavery. It has generated seemingly endless controversy and, today, contention is focused on the relationship between capitalism and slavery in the antebellum United States. I shall direct my attention there and, specifically, to the increasingly hostile clash between historians of capitalism and economic historians about the relationship between slavery and capitalism.

Capitalism as Rhetoric or Scholarship?

Slavery features so prominently in the recent history of capitalism, especially in its interpretation of U.S. capitalism, that Sven Beckert and Seth Rockman claim it has fostered a fundamental recasting of the country’s history of economic development until the Civil War as “slavery’s capitalism.”^{Footnote 23} They identify “the most ambitious books on this front,” as their critics do too, as Walter Johnson’s River of Dark Dreams, Greg Grandin’s The Empire of Necessity, Edward E. Baptist’s The Half That Has Never Been Told, and Sven Beckert’s Empire of Cotton.^{Footnote 24} Taken together, these books make two claims about the relationship between slavery and capitalism in the ante-bellum United States: on the one hand, slave plantations were run according to capitalist principles; on the other hand, slavery in the South played a crucial role in the larger history of U.S. capitalism.

These claims have attracted a great deal of favorable attention from historians in the United States—although not everyone is convinced of their merits—as well as in the public sphere. Among economic historians, however, the reaction has been less favorable and seems increasingly hostile as time goes by. In an early review of Walter Johnson’s book in the Journal of Economic Literature, Gavin Wright, a noted specialist of the economic history of U.S. slavery, made his reservations quite clear. He acknowledged that “reminders of the human reality of slavery are valuable for economic historians,” but insisted on the importance of getting “both parts of the history right,” and suggested that “the book’s economic analysis is unfortunately not particularly strong.”^{Footnote 25} Wright’s criticism was tempered, but as other economic historians piled on they took a more severe tone. In 2017, in the Journal of Economic History, Eric Hilt observed that there is economic analysis in Johnson’s book, but it “often falters,” and with regard to Baptist’s book, he suggested, “As has been said of other polemical but problematic works, The Half That Has Never Been Told is perhaps best understood as ‘history as rhetoric’ rather than ‘history as scholarship.”^{Footnote 26}

In the most recent and comprehensive article on the new literature, “Cotton, Slavery, and the New History of Capitalism” in Explorations in Economic History, Alan Olmstead and Paul Rhode emphasize that the new history of capitalism (NHC) tells a “barbarous story” and that there is much in the “big picture” with which to agree. However, they claim that “much that is true in the NHC story has long been commonplace,” and that it “makes spectacular but unsupported claims, relies on faulty reasoning, and introduces many factual inaccuracies.” They conclude: “Neither the NHC’s evidence nor its methodology supports its major conclusions.”^{Footnote 27}

The overall message of these reviews is quite clear: insofar as slavery and capitalism is concerned, the new history of capitalism combines bad economics with bad history. What galls economic historians more than anything is that the new historians of capitalism pay so little attention to the extensive literature in economic history on slavery. The clear implication is that immersion in that literature would have prevented historians of capitalism both from vaunting the originality of claims that economic historians have been making for years and from reaching erroneous conclusions that economic historians have long rejected.

There are many lines of fire in economic historians’ attack on historians of capitalism, but given its relevance to my overall theme, I want to focus on the character and operation of slave plantations in the antebellum southern states.^{Footnote 28} The new historians of capitalism characterize slave plantations as profoundly capitalist in nature, with planters portrayed as being, in Ken Lipartito’s words: “As rational, entrepreneurial, and grasping as any factory titan.”^{Footnote 29} Economic historians have taken umbrage at this characterization, not because they disagree with it but because they insist it has been common knowledge among economic historians for decades. As Olmstead and Rhode put it: “The NHC has touted its findings that slavery was profitable, that slave owners were capitalists,” but that “for economic historians, most thoughts of an unprofitable plantation economy were put to rest by Alfred Conrad and John Meyer’s 1958 path-breaking analysis.”^{Footnote 30} Insofar as the operation of slave plantations is concerned, in contrast, there is profound disagreement between new historians of capitalism and economic historians. The controversy turns largely on how to explain the enormous increase in the productivity of raw cotton production in the United States between 1820 and 1860. Economic historians accuse historians of capitalism of attributing productivity increases largely to the exploitation of slaves despite the fact that the economic history literature emphasizes other factors, including technological improvement, not least biological innovation.^{Footnote 31}

Capitalism as Economic Rhetoric

Given the forceful nature of these criticisms, it seems important to take a careful look at what the economic history literature really tells us about the character and operation of antebellum slavery in the United States. In asking what it is that historians of capitalism might have learned from that literature, it makes sense to start with “The Economics of Slavery in the Ante Bellum South,” published in 1958 by Alfred Conrad and John Meyer.^{Footnote 32} As Olmstead and Rhode observe, the article represents the seminal contribution in economic history on the capitalist character of slavery; it was, moreover, a pioneering paper in the establishment of cliometrics. Thus, the paper is worth reading and rereading for a variety of reasons, but especially to understand what it reveals about slavery as capitalism.

Since economic historians often emphasize the political, even polemical, character of the new history of capitalism, they would do well to reread the opening paragraphs of the Conrad and Meyer paper. There the authors laid out their challenge to historians like U. B. Phillips, who argued that slavery was so unprofitable that it “would have toppled of its own weight,” and they made it quite clear that their motivation was to challenge the political implication of Phillips’s reasoning that “the Civil War, far from being an irrepressible conflict, was an unnecessary blood bath.”^{Footnote 33} Conrad and Meyer acknowledged that there were historians before them who had argued that slavery was profitable, but they explained that it had proven difficult to overturn Phillips’s view since the evidence employed “has been provided by the few, usually fragmentary, accounting records that have come down to us from early plantation activities.”^{Footnote 34}

In light of this observation, one might have expected their contribution to depend on the marshalling of new evidence, but their study relied on existing historical data, some of it drawn from Phillips’s own work. Nor did Conrad and Meyer pioneer in the application of advanced quantitative methods for analyzing these data. What was new, as Conrad and Meyer explained, was their theoretical approach to the profitability of slavery: “We shall attempt to measure the profitability of southern slave operations in terms of modern capital theory. In doing so, we shall illustrate the ways in which economic theory might be used in ordering and organizing historical facts.”^{Footnote 35}

What they meant by “modern capital theory” is contained in the formula below. One might think that only a twit would show a mathematical formula during a presidential address, but I do so only to emphasize the simplicity of its logic, for therein lies its powerful and problematic character. All the formula says is that the rate of return on any capital asset can be calculated by comparing the amount invested in that asset with the expected profits that it generates over its lifetime. What Conrad and Meyer did was to apply that logic, which was just filtering into empirical studies of capital investments, to the historical analysis of slavery in the antebellum United States.

$${\rm{Value}}\,{\rm{invested}}\,{\rm{in}}\,{\rm{capital}} = \Sigma {{\left( {{\rm{annual\ revenue - annual}}\,{\rm{cost}}} \right)} / {{{\left( {1 + i} \right)}^n}}}$$

where summation is from n = 1, 2, 3,…..T

To be a bit more concrete, let us focus on male slaves, who presented an analytically simpler challenge than female slaves since they did not give birth. The cleverness of Conrad and Meyer’s approach can be seen in just how little historical information they needed to plug into their model to generate estimates of the profitability of slavery. First, they computed the investment in slavery, on the left hand side of the equation as shown below, as the average market price of a slave ($925), and the cost of acquiring the land on which to grow cotton ($450). Second, they calculated the annual returns that an average slave generated by multiplying his physical output of cotton by its market price: 3.75 bales or 1,500 pounds of cotton produced per year and sold at an average price of $0.075 per pound to give annual revenues of $112.50. Third, they estimated the average cost of maintaining a slave on a cotton plantation in the antebellum South as $20.50 per year. These assumptions generated an estimated profit on a “prime field hand” of $92.00 per year, and Conrad and Meyer assumed he was productive for thirty years. On an initial investment of $1,375, therefore, a slave owner could generate an internal rate of return, or profit rate, of 5.25 percent, but Conrad and Meyer played around with a range of possibilities before concluding that profit rates between 4.5 and 6.5 percent were the “most typical” of U.S. slavery. It was on this basis that they concluded: “Negro slavery was profitable in the ante bellum South” and “southern plantation agriculture was at least as remunerative an economic activity as most other business enterprises in the young republic.”^{Footnote 36}

$$\$ 925 + \$ 450 = \sum {{{{{\left( {112.50 - 20.50} \right)} / {\left( {1 + i} \right)}}}^{30}}}$$

Given that their conclusion confronted what Phillips had said about the economic unattractiveness of slavery, it is worth asking where the difference came from, especially since Phillips used the same kind of reasoning as Conrad and Meyer, albeit without applying their formula. The basis of the disparity can be seen in the data shown in Figure 3. Phillips focused on the rising market price of slaves in the nineteenth century, on the one hand, and the falling price of raw cotton, on the other hand, to conclude that slave owners’ profits were being squeezed from both sides. Rising slave prices and falling cotton prices played a central role in Conrad and Meyer’s analysis too, but it was their estimate of physical productivity that made the difference. They knew, as Figure 3 shows, that average physical productivity on cotton plantations increased a great deal in the antebellum United States. In contrast, Philips assumed there was no change in the physical productivity of U.S. slaves in the nineteenth century; had he been correct, slavery would have looked unprofitable based on the formula proposed by Conrad and Meyer. Instead, the estimate of physical productivity they plugged into their formula, which was nearly four times the productivity recorded at the beginning of the century, largely drove the difference in their analysis of the economics of antebellum slavery compared with that of Phillips.

Figure 3

Different histories of U.S. antebellum slavery.

Source: Author’s analysis based on data in Conrad and Meyer, “The Economics of Slavery in the Ante Bellum South.”

So much for the numbers that Conrad and Meyer used, but what of their method? The justification they offered for the theoretical approach they took to slavery was that “from the standpoint of the entrepreneur making an investment in slaves, the basic problems in determining profitability are analytically the same as those met in determining the returns from any other kind of capital investment.”^{Footnote 37} Perhaps the most striking implication of modeling the economics of slavery as if it resembled an investment in a bond or a stock was that it allowed Conrad and Meyer to talk about the profitability of slavery without saying anything at all about operating a slave plantation. They portray slaveowners as “purchasing” and “maintaining” and “selling” slaves. Nowhere in their article is there a hint of exploitation or indeed any other method of generating productivity in the production of cotton. Instead the higher physical output per slave seems to bubble up miraculously over the course of the nineteenth century.

If one can raise moral objections to the way that Conrad and Meyer went about their task, there are economic problems with it too. All of their analysis is based on averages of slave prices, physical production, and cotton prices from 1830 to 1860 for the entire cotton-producing plantation sector of the U.S. economy.^{Footnote 38} The problem of approaching their task in this fashion is readily seen if we take our minds off slave plantations in the southern United States and imagine performing a similar exercise for the U.S. iron and steel industry from 1865 to 1895. We find echoes of the economic story that Conrad and Meyer recount, given the rising costs of building Bessemer steel mills, the declining iron and steel prices, and the rising average productivity of a steel worker. By estimating averages for these variables, and applying the logic that Conrad and Meyer used, we could calculate an average rate of return for the iron and steel industry. Yet, whether that average return would be 5 percent or 4 percent or 9 percent, it would tell us little or nothing about the profitability of actual U.S. capitalists in the iron and steel industry during this period.

One reason why the logic used by Conrad and Meyer is so problematic in such settings is that time matters when you invest in fixed capital. When you build your steel mill and when you sell your output matters a great deal to your profitability. We know, for example, that Andrew Carnegie benefitted greatly from the fact that he completed his factory after the panic of 1873. His investment expenditures were lower in a depressed economy than for his more precocious competitors. Moreover, by the time his factory was built, the prices of iron and steel were about to recover from their low point, allowing Carnegie to generate crucial revenues in the early years of his operation.^{Footnote 39} So time mattered in iron and steel, not in the sense of n identical periods, as Conrad and Meyer characterize it in their model, but time in the sense of when you invest and when you sell. Dealing with temporal variation was a major challenge for slaveowners too, as we can see, for example, in the correspondence of John Couper about his Hopeton plantation on the Altamaha River in Glynn County, Georgia.^{Footnote 40} And there is no surprise there since cotton prices were among the most volatile of all commodity prices in the nineteenth century.^{Footnote 41} It seems more than a little strange, therefore, to imagine you can understand what it meant to invest in an industry with such a volatile price for its output by averaging cotton prices over a thirty-year period; furthermore, it is important to consider the variation over the same period in the prices of slaves and, therefore, in slaveowners’ so-called fixed capital, rather than suppressing it through averaging.

That is not, however, all the interesting history that Conrad and Meyer’s approach destroys, since their averaging eliminates variation across slave plantations, too. In principle, you could calculate the average rate of profit from investing in a steel mill over the period from 1865 to 1895, but it would have little economic or historical meaning. An investment in a Bessemer steel mill was not enough to give an entrepreneur access to the fabulous returns being generated in the post-bellum U.S. iron and steel industry since only some companies made spectacular profits. Similarly, you could not take advantage of the rising productivity of slave plantations in the United States just by buying a slave. You had to devise methods, cruel and clever, to make him produce cotton, and we know that some plantations were better, much better, at doing that than others. Interestingly, Conrad and Meyer knew that too, but that did not stop them taking questionable shortcuts that downplayed variation across slave plantations.^{Footnote 42}

It is clear, therefore, that serious questions can be asked about the appropriateness of the model that Conrad and Meyer used to assess the profitability of slavery, but they received little attention when their paper was published.^{Footnote 43} Conrad and Meyer did face a barrage of criticism, mainly from likeminded economic historians, but it focused almost exclusively on the empirical estimates of cotton prices, maintenance costs, and slave longevity that they plugged into their model. That meant that, more than fifteen years later, when Robert Fogel and Stanley Engerman presented their analysis of the economics of slavery in the antebellum United States, they felt no pressure to rethink what had become the accepted approach to assessing “the capitalist character of slavery.” All they added was the rhetoric—since Conrad and Meyer did not use the term “capitalist”—but their evidence was calculated on the same conceptual basis as Conrad and Meyer’s findings and implied still higher rates of profit from slavery.^{Footnote 44}

What was strikingly original about Time on the Cross, in contrast, was its analysis of the operation of slavery as capitalism and, specifically, its claims that slave-based cotton plantations were highly productive; that larger plantations were more productive than smaller ones; and that the source of their efficiency was their “highly disciplined, highly specialized, and well-coordinated labor force.”^{Footnote 45} To support these claims, Fogel and Engerman relied on data for a large sample of U.S. cotton plantations from the 1859 census that had been compiled by fellow economic historians William Parker and Robert Gallman. The real novelty of their contribution stemmed, as for Conrad and Meyer, on their reorganization and reordering of the historical facts collected by someone else.

While Conrad and Meyer relied on averages, Fogel and Engerman were interested in variation across slave plantations and, in particular, variation by size of plantation. They calculated extremely simple measures of productivity, computed by dividing the overall output of cotton plantations by the inputs they thought were used to produce it, for plantations of different sizes, as shown in Table 1. They interpreted their key results to mean that there were economies of scale in cotton production. But they went further still, to describe how planters on medium and large plantations organized and disciplined their labor force, and concluded, “This feature of plantation life appears to be the crux of the superior efficiency of large-scale operations on plantation.”^{Footnote 46}

Table 1.

The relationship between Total factor productivity and farm size in each region (index of free farms in each region = 100)

Source: Fogel and Engerman, Time on the Cross, 139, Table B.24.

Such confident statements are characteristic of Fogel and Engerman’s discussion of the productivity of slavery, but when you look for the basis on which such statements are made, you will find an astonishing vacuum. There is little to be found in the usual academic footnotes, since there are none, but there is an extensive discussion of evidence and methods in a second volume of their book. Fogel and Engerman provide a great deal of information there on how they measure productivity but they cite no sources for their claims about the importance of scale for productivity or the role of organization and discipline in generating it. In the end, the only historical evidence for these claims, including those about the gang system that they emphasize so much, comes down to Table 1. And, as a little scrutiny suggests, that table offers rather meager pickings as evidence, since it does not even show a consistent relationship between scale and productivity, never mind support for any assertions about the reasons that larger operations might be more productive than smaller ones.

Clearly, the foundations for the provocative claims made in Time on the Cross are rather flimsy, and they drew fire from economic historians as soon as the book was published. In a lacerating review in the Journal of Economic History, Paul David and Peter Temin asked whether “the key empirical propositions advanced by Fogel and Engerman—those regarding the comparatively favorable material conditions of life, and the greater efficiency of slave labor—possess an objective ‘scientific’ status that derives from the methods employed in securing them?” Their answer was a resounding no, and based on a “detailed examination of the authors’ evidence and methods,” they sought to show “just how unwarranted it is to accept their empirical ‘findings’ as scientifically incontrovertible.”^{Footnote 47} Their review ran to nearly fifty pages and identified numerous statistical errors and technical problems with Fogel and Engerman’s analysis. They followed up three years later with an edited volume, on which they collaborated with other historians, to show that Time on the Cross is so “seriously flawed … that [it] is likely to mislead readers as often as it enlightens them.”^{Footnote 48}

However, these critics’ unrelenting focus on statistical errors and technical problems turned out to be a huge mistake, since it allowed the more egregious problem, the fact that Time on the Cross rests on little direct evidence, to be lost in the shuffle. By getting down to the level of whether Fogel and Engerman had made due allowance for the number of frost-free days in the south in calculating labor inputs, they seemed to suggest that there was a discussion worth having. And that allowed Fogel and Engerman’s book not only to survive but to become an integral element of the canon of economic history with respect to slavery.^{Footnote 49} Everyone acknowledges that criticisms were made, of course, not just by David and Temin but by others too, such as Gavin Wright.^{Footnote 50} Still, the tone was set early on by Claudia Goldin in her review of the edited volume of David et al. when she said that “a good many of the factual discrepancies found do not undermine the analysis.”^{Footnote 51} Lost in the discussion was the fact that Fogel and Engerman had so few facts of any kind—historical or economic—to support their claims.

Indeed, it is only recently, thirty-four years after the publication of Time on the Cross, and one Sveriges Riksbank Prize later for one of the authors, that economic historians have carefully examined its claims against historical and econometric evidence. In an article published in the Journal of Economic History in 2008, Alan Olmstead and Paul Rhode investigate the key assertions that Fogel and Engerman make, notably their argument that larger slave plantations were more productive than smaller ones, and that “slave plantations had a significant efficiency advantage because of their ability to exploit the ‘gang system.’” They test these claims based on plantation data for the period 1801 to 1862, rather than the widely used Parker and Gallman data from 1859, and find no effect of plantation size once they control for other plantation characteristics. Furthermore, they report that:

In fact, the use of the term gang was rare in discussions of picking operations in the hundreds of cotton books and plantation journals that we reviewed, usually occurring with reference to a trash, house, or children’s gang performing some unusual activity. More generally, we have seen almost no slave era testimony extolling the productivity system (under any name) in any cotton production activity.^{Footnote 52}

These conclusions are devastating for the claims that Fogel and Engerman made about the operation of U.S. slavery in Time on the Cross. The way I read them, although the authors do not put it this way, is that insofar as its claims about scale and gangs are concerned, Time on the Cross is built on a foundation of bad economics and bad history.

The good news is that some economic historians out there are doing better history and better economics insofar as U.S. antebellum slavery is concerned, with Olmstead and Rhode in the lead. Based on their new historical evidence for a large sample of plantations over a long period of time, they identify improved cotton seeds as a primary cause of productivity growth in the antebellum cotton industry. Their findings have attracted a great deal of attention and deservedly so. However, they are far from representing the last word on the matter of U.S. slavery as capitalism since they raise as many questions as they answer.

It is hard to think of an innovation that would diffuse more easily than a better seed, especially at a time when they were not subject to any patenting restrictions. So something else must be going on if we see what Olmstead and Rhode show us, which is a widening dispersion of daily picking rates per worker by plantation. Indeed, they recognize the significance of the puzzle themselves, noting:

The high and increasing variance in mean picking rates is an important phenomenon calling for further investigation and interpretation. Focusing on the 1850s and early 1860s … there was a one-standard-deviation spread of roughly 40 percent in the average productivity per worker performing the key task in the production of a relatively standardized commodity trading in world markets.”^{Footnote 53}

As good economic historians, Olmstead and Rhode are modest and careful in presenting the results of their own research. The same cannot be said when it comes to their assessment of what new historians of capitalism ought to have learned from economic history about capitalism and slavery. What my review of that literature suggests is that some of the most basic questions about the character and operation of slavery as capitalism remain wide open. In particular, we know hardly anything about the profits that U.S. slave plantations did or did not make from slavery, especially once we acknowledge that profits must have varied a great deal over time and across plantations. Insofar as the generation of these profits is concerned, moreover, we remain unsure about what features of the operation of slave plantations were crucial. We have new findings on the importance of better seeds in facilitating productivity growth, but we do not know how better seeds interacted with other factors, including exploitation of slaves, to generate the increasing variation in productivity, and presumably of profits, that Olmstead and Rhode observe across plantations. The fact that these fundamental questions about the character and operation of slavery as capitalism remain unanswered and, therefore, ripe for further research is the message that economic historians should be communicating to historians working on slavery. To pretend otherwise is to use economics as rhetoric rather than scholarship.

Hamlet Without the Prince

I have made the case that to understand if, when, and how slave-based economies operated as capitalism, we need to know much more about the relationship between capital and profit within them. But the challenge that I see for historians goes far beyond understanding that relationship for slavery. Historians of economic life have been slow—downright reluctant really—to grapple with the historical complexities and dynamics of profits in capitalism and, as a result, we know very little about the history of profit in general. Historians’ reticence in this regard has proven to be a major handicap since trying to tell the story of capitalism without exploring the relationship between profit and capital is like performing Hamlet without the prince. As Jean Bouvier, François Furet, and Marcel Gillet put it:

Bouvier and colleagues emphasized both the importance of profit to an understanding of capitalism as well as its historical elusiveness. They outlined the challenge for historians in overcoming their neglect of profit in the following terms: “It will be seen that there are two stages in the analysis of profit: on the one hand, the measurement of its level—or, rather, its levels—and the identification of its movements, that is, its acceleration and deceleration; on the other hand, the explanation of these quantitative elements by looking for all possible associations [with profit].”^{Footnote 64} Still, the task of measuring profit over the long run proved to be so daunting that it absorbed most of their efforts.^{Footnote 65} And, as a general rule, the historical studies of profit that we have at our disposal tend to focus on measuring profits as much or more than on explaining them.

Typically, these studies begin from a specific definition of profitability, with profit as a percentage of invested capital or total assets (return on assets) being the standard one. Economists of different persuasions—Marxist, post-Keynesian and neoclassical—have generated a plethora of studies of corporate profit rates, but they tend to rely on highly aggregated measures and to focus on the decades after World War II. Some historians have taken on the challenge of going further back in time and studying profits at finer levels of detail. However, since the widespread use of return on capital or assets for analyzing profits—both by enterprises themselves as well as those who study them—is of relatively recent origin, ready-made estimates of profits as a percentage of capital are usually not available to historians, even from internal sources.^{Footnote 66} Instead, they have to generate estimates themselves through historical reconstructions based on data that were never intended for this purpose. The challenge is illustrated, for example, in Will Hausman’s study of the profitability of English colliers in the eighteenth century, or in J. R. Ward’s analysis of the profitability of British sugar plantations from 1650 to 1834, and that challenge surely accounts for the limited number of these studies.^{Footnote 67} Moreover, given that these historical reconstructions depend on numerous, often heroic, assumptions, “the data on profits need to be treated with a great deal of caution,” as Michael Hiscox put it in his recent study of interindustry profit rates in the United States in the nineteenth and twentieth centuries.^{Footnote 68} More problematic still, the methodology underlying these studies supposes that there is a definition of profit—in most cases, as I noted, return on assets—that makes economic sense over long periods of time. As we shall see, that assumption is open to serious challenge based on what we have learned from the history of accounting.

Besides historical studies that are predominantly focused on measuring profits, historians have generated strikingly little evidence on the history of profitmaking, that is, on the process through which profits are generated and eroded and appropriated and deployed, either in capitalist economies or in their counterparts. For business historians, in particular, the neglect of profits is surprising given their preoccupation with the organizations that have been largely responsible for generating and deploying profits in the history of capitalist economies. While there is no question that one can find useful evidence on profit in the research generated by business historians,^{Footnote 69} it remains rare to find sustained attention to the generation and erosion of profit or its appropriation and redeployment in their research.

Rare does not mean nonexistent, of course, and there are important books by business historians that offer fascinating insights about the historical process of profit making. It is worth highlighting a few of them—Naomi Lamoreaux’s The Great Merger Movement, Philip Scranton’s Proprietary Capitalism, Robert Freeland’s The Struggle for Control of the Modern Corporation, Susie Pak’s Gentlemen Bankers, and William Lazonick’s Business Organization and the Myth of the Market Economy—to show that exploring the history of profit is possible based on a rich variety of methodological approaches.^{Footnote 70} We can look to more recent work, too, such as Shaun Nichol’s dissertation, “Crisis Capital: Industrial Massachusetts and the Making of Global Capitalism,” which was a Krooss Prize finalist in 2017. Were I to add articles to my list, I might mention Dan Raff’s “Making Cars and Making Money,” the research of Leonard Reich, Shigehiro Nishimura, and Maggie Levenstein on market control, Christine Rosen’s research on environmental issues in the meatpacking industry, Mark Wilson’s article on making profits from goop, a series of articles by Peter Scott and James Walker on retailing, as well as a slew of research on financialization, including Bill Lazonick’s recent work on U.S. pharmaceutical profits and Hartmut Berghoff’s research on Siemens.^{Footnote 71}

For the most part, however, you have to dig deep into the business history literature to find evidence on profit making, and what you find fades into insignificance compared with what we could know or, as I see it, what we ought to know. The potential of business history as a laboratory for understanding profits is extraordinarily rich. The possibilities go far back in time to include the long-distance trading companies of the seventeenth and eighteenth centuries as well as slave traders, planters, and financiers from the seventeenth to nineteenth centuries. We might consider, too, the porcelain makers of the eighteenth century, the Meissens and Sèvres just as much as the Wedgwoods, not to mention their Chinese competitors.^{Footnote 72} There are, of course, the textile mills of the late eighteenth and early nineteenth centuries to consider, all the way up to the retail and tech giants of the twenty-first century, along with everything in between. Given the richness of the laboratory for the study of profit—and the possibilities go far beyond what I have explicitly mentioned—it seems hard to deny that what we know about the history of profits falls far short of its potential.

The truth of the matter is that for business historians, just as for most historians of economic life, the history of profit is not high on their agenda. You can sense that if you do something that every BHC president does before making her address, which is to read what past presidents of the BHC have said when faced with a similar challenge. There are many interesting aspects of these addresses, but all I want to draw attention to here is how few of them use the word “profit.” For one prominent BHC president, for example, the word “profit” is mentioned only once in his address, and only to say: “I loved history, but it never occurred to me that a historian might profitably study business.”^{Footnote 73} That president was Alfred Chandler, the world’s most renowned business historian, and he probably had as much to say about profit in his scholarly work as any other business historian. Nevertheless, it was clearly not a central concept for him. Nor was it a keyword for most of the other past presidents of the BHC whose speeches I read; although the words “capitalism” and “capitalists” and “capital” crop up in some of the addresses, references to profit are more limited and often nonexistent.

For most BHC presidents, the word “profit” or its derivatives appears somewhere between zero and eight times. There are, however, two exceptions, and both of them are women with surnames that begin with an L. In fact, one of them mentions “profit” or its derivatives a total of thirty-one times.^{Footnote 74} Once you know who it was—and I am referring to Maggie Levenstein, who was BHC president in 2011–2012—her identity should come as no surprise. Not only is she a highly intelligent woman but, as the author of Accounting for Growth: Information Systems and the Creation of the Large Corporation, her intellectual trajectory is linked to the history of accounting. And that is the one field that represents a significant exception to the general neglect of capital and profit by historians of economic life.^{Footnote 75}

Accounting for Capitalism

There is a long-established literature, inspired by Werner Sombart and Max Weber, which explores the origins and evolution of capitalism through the history of accounting for capital and profit. Werner Sombart was a pioneer in positing an important historical relationship between accounting and capitalism, arguing that the development of double-entry bookkeeping activated and stimulated the “rationalistic pursuit of unlimited profits” that he regarded as an essential element of the “capitalistic spirit.”^{Footnote 76} In a similar vein, Max Weber postulated: “A rational capitalist establishment is one with capital accounting.”^{Footnote 77}

However, when historians looked for evidence that capital and profit were accounted for in ways deemed by Sombart and Weber to be typical of a capitalist enterprise, they found that such practices diffused relatively late in history. As Basil Yamey explained in a pioneering contribution, merchants hardly ever called on double-entry accounting as a tool for calculating profit on their capital or for guiding their business objectives or strategies.^{Footnote 78} Other accounting historians followed a similar trail and reached much the same general conclusion based on a steady accumulation of historical evidence. The consensus that formed among accounting historians was that most merchants and manufacturers took limited advantage of the double-entry system for centuries after it was developed, and, when they did, it was not to establish checks and controls for their business activities. As Sidney Pollard explained:

In recent years, early modern historians have taken an interest in accounting practices in their efforts to understand how merchants thought and acted.^{Footnote 80} Their findings, based on studies of merchants’ calculations, are very much in line with accounting historians’ claims, confirming that even when balance sheets were used, it was rarely to provide the information needed to compute merchants’ profits on their invested capital.^{Footnote 81} There would seem to be good reason, therefore, to question the claim that merchants in the early modern period understood, calculated, and used profit on capital in the rationalistic way that Sombart and Weber imagined. Indeed, even as late as the nineteenth century, few industrial firms “showed, in their accounting practice, an understanding of the meaning or concept of capital, particularly fixed capital.”^{Footnote 82}

Although there may be a widespread consensus that accounting for profit and capital in a systematic and regular fashion developed late in the history of business, there is less agreement about what these historical findings imply for the origin and evolution of capitalism. To some historians, they suggest that the “rationalistic pursuit of unlimited profits,” as Sombart put it, is not deeply rooted in our past, and that capitalism emerged much more recently than we usually allow. The implications of this perspective can be seen in debates about the origins of capitalism in various places with the ongoing dispute about the transition to capitalism in the early American economy as a prominent example.^{Footnote 83} In a recent contribution to the debate, accounting historian Rob Bryer makes the dramatic claim that if we associate capitalism with a particular “accounting signature,” and specifically with the calculation of a return on capital, then full-blown capitalism is only about a century old in the United States.^{Footnote 84} Indeed, Bryer goes so far as to question even Andrew Carnegie’s credentials as a capitalist based on his reading of accounting history.^{Footnote 85}

Not all historians are willing to go in this direction, however, and for good reason in my view. In an article on capitalism in early America, Naomi Lamoreaux—the other female president whose surname begins with an L and talked about profit in her address—warned against characterizing capitalists as acting according to stereotypical models of economic behavior.^{Footnote 86} In the domain of accounting history, a similar view is reflected in the claim that the pursuit of profit by capitalists is associated with a wide variety of “calculative mentalities” that enterprises have used in the past.^{Footnote 87} In plain English, what that means is that profits had different meanings in the past, meanings that may bear little resemblance to what profits mean to capitalists today.

The fact that early modern merchants did not measure profit as a return on capital does not mean that they ignored profit, rather that when they discussed or measured it, they had something else in mind. In the earliest uses of the term “profit,” merchants seem to have meant an advance or improvement in their business that was not exclusively, or even primarily, economic. Over time, however, we observe a growing concern with a more specific notion of profit. In a recent article entitled “The ‘Particular Gain or Loss Upon Each Article We Deal In,’” Yamey shows: “Merchandise accounts for each category of goods, voyage or venture are a prominent feature of many ledgers of the period 1300 to 1800,” and that “the separate merchandise accounts in the ledger for different categories or lots of goods treated each category or lot as a kind of profit centre, to use modern terminology.”^{Footnote 88} What profit in such contexts seems to have implied is analogous to what we would today call gross profits, and Yamey cites several examples of merchants’ preoccupation with such profits from the fifteenth to the eighteenth centuries.

What is especially interesting is that even for the minority of merchant enterprises that had substantial amounts of capital invested in their businesses, they too were preoccupied with profit margins on sales rather than their return on capital.^{Footnote 89} The important case of the Dutch East India Company (the Vereenigde Oostindische Compagnie, or VOC), which Yamey mentions, is notable in this regard. The accounting system of the VOC “in spite of several attempts never attained to a central bookkeeping including the whole of the concern.”^{Footnote 90} That meant that the company did not have any clear grasp of what it had at stake in terms of its capital invested, which has led some historians to conclude that the VOC’s profit calculations were “of the very most primitive kind.”^{Footnote 91} However, that is an appropriate conclusion only if one believes that profit can have only one meaning, that is, profit on capital.

In fact, the VOC carefully calculated its profits, but it understood them to mean the gross margins on the sales of the commodities in which it traded. Glamman argues: “It is no exaggeration to say that calculations of the gross profit on each commodity was the Alpha and Omega of the Company’s trade,” even if these calculations were not necessarily to be found in the company’s formal accounts.^{Footnote 92} Some historians are skeptical of the value of such calculations for decision making, since they did not include all operating costs and they were often unreliable guides to future profit rates. Certainly, there is more historical research to be done to understand how merchants in the early modern period used calculations of profit in the operation of their businesses. But the example shows us that we need to be attentive to different meanings of profit in the past and to the fact that some of the crucial information used by businesses to track profit may be found outside the formal accounts and in qualitative as well as quantitative forms.

That even rudimentary systems of accounting, as well as other sources of information, may be sufficient in certain business contexts to facilitate the pursuit of profit opportunities is echoed in research for more recent periods. An important implication of this stream of research is that the meaning of particular types of accounting and other forms of calculation can be understood only by analyzing how they were used by business enterprises.^{Footnote 93} What that implies, of course, is that the history of keeping books and doing business do not tell the same stories. As Judith McGaw concluded from her study of papermakers in nineteenth-century Berkshire, Massachusetts: “Properly interpreted, surviving account books can reveal much about how early manufacturers made decisions,” but such interpretations can only be made if the historian understands what manufacturers were trying to do, what their business strategies were, and consequently what the information they collected meant for them.^{Footnote 94}

That brings me back to Maggie Levenstein’s book, since it is highly unusual in systematically linking the history of accounting to the history of business. As Levenstein herself puts it, it offers “a chronology that focuses on the relationship between changes in the use of accounting data and changes in firm organization, market structure, and technology, rather than on changes in accounting technique per se.”^{Footnote 95} And what we learn from it is that “in each phase of Dow’s strategic development, the information system changed to provide managers with data necessary to implement that strategy.”^{Footnote 96}

Unfortunately, there is still limited historical research of this kind on the use of accounting, of numbers and estimates of all types, even for prominent manufacturing sectors. If we turn to the slave plantations with which I started, Conrad and Meyer’s reference to the “few, usually fragmentary, accounting records” of slave plantations reflected a widespread sense of their accounting as rudimentary, with Chandler echoing that view in claiming: “Neither the overseer nor the planter himself kept detailed financial accounts.”^{Footnote 97} Only recently, however, have systematic studies of accounting in slavery systems been conducted, and they suggest a much more nuanced view. In the most comprehensive study to date, Fleischman, Oldroyd, and Tyson show that accounting for slavery in the British Caribbean was highly developed as compared with the United States, a pattern they attribute to the different characteristics of these two plantation economies.^{Footnote 98} As yet, however, there is hardly any research on the “use” of accounting on slave plantations, although Caitlin Rosenthal’s recent “From Memory to Mastery” represents a pioneering effort in trying to uncover how various forms of calculation were employed by planters and overseers in the pursuit of higher output from slaves.^{Footnote 99}

What Are the Questions?

If there are elements of the existing historical literature on which we can build—notably the history of accounting—there is still no denying that we are very far from having a comprehensive understanding of profit in the history of capitalism. And, having begun with Joan Robinson, the least I can do is to point toward some of the questions that historians of economic life might address were we to apply ourselves to the challenge of developing a history of profit. Given my concern with capitalism in this address, I am especially interested in identifying the questions we need to answer to understand how profits behave in capitalist systems.

Lest that statement might seem to be an oxymoron, it is worth emphasizing that there is no reason to assume that the phenomenon of profit is specific to capitalism. The point could be illustrated by going back in time to delve into discussions of profits in economic systems that predate capitalism. Of particular importance in this regard is the rich literature that discusses medieval scholars’ debates about the moral and economic justifications for profit.^{Footnote 100} Still, the problem with this approach is that historians disagree about when capitalism began, so it is difficult to reach a consensus on what is and is not “precapitalism.” It seems better, therefore, to illustrate the point that profits do not suppose the existence of capitalism by focusing on profits in socialism, an economic system built on a logic that is expressly opposed to capitalism.

In February 1965, Time magazine ran a cover story on “The Communist Flirtation with Profits” to discuss a series of reforms to the Soviet economy, advocated by Evsei Liberman, an economist who proposed introducing a profit incentive for Soviet enterprise. Liberman had initially outlined the possibility of using enterprise profits as a benchmark for productive efficiency almost twenty years earlier and mooted the possibility again in the mid-1950s, but it was only in the early 1960s that such ideas gained traction in the Soviet Union. Predictably, Time portrayed the Communists as “Borrowing from the Capitalists”—the title of its cover feature—but Liberman went into print in the English language to challenge what he regarded as the magazine’s misinterpretation of his ideas.^{Footnote 101}

In an article entitled “Are We Flirting with Capitalism?,” Liberman argued that it was a mistake to believe, as many Western economists did, “that private enterprise stands for profit while socialism ‘denounces’ it.” Profits, he insisted, were possible in both types of economic system, being merely “the monetary form of the surplus product, that is, the product which working people produce over and above their personal needs.” He emphasized that there was a difference between capitalist and socialist profits, but argued that it could be understood only by going “rather deeply into the essential character of profits.”^{Footnote 102}

Liberman sought to persuade his readers that profits differed fundamentally between capitalism and socialism in the way they were generated and spent. Insofar as the generation of profits was concerned, for example, he explained that capitalist profits might stem from improvements in technical and organizational efficiency but could “indicate anything under the sun over and above” it, given the possibilities that capitalism offered for profit from “advantageous buying of raw materials … [to] raising the prices of stocks on the stock exchange.”^{Footnote 103} Liberman argued that in socialism, in contrast, many of these sources of profits were ruled out by the way the economy was organized, so that socialist profits could come only from improvements in technical and organizational efficiency. For Liberman, therefore, profits in capitalism could “smell” of price fixing and exploitation and speculation, while socialist profits could come only from technological and organizational improvement.

Whatever we might think of Liberman’s claims about profits in capitalism (or socialism, for that matter), we would have to acknowledge that it would be hard to prove him wrong. We only have to focus for a minute on one of the best-known figures in the history of capitalism to see that. Ask yourself how Andrew Carnegie made and sustained profits in his steel business and then go and read everything that has been written about him. You will find yourself spoiled for choice and you will learn a great deal about his mother and his brother, his philanthropy, his obsessiveness, his pacifism, and his ruthlessness. But, having done your homework, sit yourself down and write a lecture on profits and capital to show how this wee Scot became one of the richest men in the world. I guarantee that you will not be able to do it. Of course, all of us have our pet theories about Carnegie’s profits, and they run the gamut from exploitation of his labor force, to process and product innovation, to the development of cheaper sources of raw materials, and more besides. But I challenge anyone to show me, nay to prove to me, which of these factors was more important in explaining the pattern of profits that Carnegie generated based on the existing historical literature.

What this example suggests is that Liberman’s article is insightful not so much for the answers it offers but for the questions it asks about profits. Indeed, we might well ask ourselves if, as historians, we are really grappling with the historical dynamics of capitalism if we do not go “rather deeply into the essential character of profits.”^{Footnote 104} And what digging deeply into the character of profits would mean is exploring some basic questions about profits in capitalism that are essential to understanding their historical behavior.

First, we need to ask how business people understood what it meant to profit in different temporal, spatial, and economic contexts. One of the serious limits of existing historical research on profits is that it has assumed that there is some “true” definition of profit that can be applied to the past. However, if we are interested in understanding the role of profits in the motivation and behavior of historical actors, it makes much more sense to ask how it is that these actors conceived of profit rather than deciding how they ought to have understood it. Although there is some pioneering research in this area, it only scratches the surface of what needs to be done.^{Footnote 105} It seems especially important that we explore changes as well as continuity in actors’ conceptions of profit, notably during periods that have been posited as crucial transitions by historians and social scientists. In this regard, studies that focus on conceptions of profit in the emergence of merchant capitalism, the transition from merchant to industrial capitalism, the emergence of postindustrial capitalism, and the development of financial capitalism could offer important insights into whether scholarly ideas about temporality are borne out in actors’ conceptions and behavior.

A second question concerns the processes that business people pursued to generate profit and the extent to which capital featured in these processes as well as the roles it played there. There are numerous different ways in which business enterprises can generate profits, but we know little about their relative importance, even in well-known cases such as Carnegie. Indeed, the extent of our ignorance is suggested by the frequent resort to concepts such as “economies of scale,” “technology,” and, more recently, “network economies” to explain sustained profits, even though none of them actually does so. The limits of our knowledge represent a major obstacle to understanding the operation of economic dynamics in the past, with the elusiveness of the historical meaning of capitalism itself being a striking case in point. In this regard, the challenge is not only to identify how profits have been generated in the past but also to understand to what extent and in what ways capital has been involved in the process of profitmaking.

That profits are generated in a particular time and place does not guarantee, of course, that they will be sustained. At least since Adam Smith, economists of various persuasions have emphasized that competition in capitalism will tend to equalize profits within and across industries. However, until well into the twentieth century, it was impossible to know if this widely accepted characterization applied to the historical functioning of capitalism. As Ralph Epstein observed in 1925, in one of the pioneering empirical studies of profit rates: “About all we know is that the variations [in business profits] exist. We have had practically no information concerning their distribution or size.”^{Footnote 106} Writing a few years later, he emphasized: “[Probably] in no part of the entire field of economic theory is there more need for inductive evidence which will enable a set of sound generalizations to be built up than in that of business profits.”^{Footnote 107} Once evidence began to accumulate, moreover, it seemed to confront widely held views about profit rates and suggested a great deal of enduring heterogeneity in profits within and across industries.^{Footnote 108}

While economic studies of profit rates are useful in showing that certain questions about the functioning of capitalist economies are more open than economists have been wont to admit, they typically offer little help in explaining why profits vary so much across company and industry. Moreover, once we observe profits over time, we find that even successful enterprises and industries display a great deal of volatility in the profits they generate. To understand the dynamics of capitalism, therefore, we need to explain why there is so much variation in profits across firms and industries, as well as over time. To do that requires digging into the history of enterprises and industries, into the history of capitalism, to understand how profits are sustained or eroded over time and, again, how capital has featured in the processes of shoring up or undermining profits.

The final set of questions that are essential to an historical study of profits concern the appropriation and redeployment of profits: Who appropriated the profits that were made in the past, and what did they do with them? Largely due to interest in recent trends toward “financialization,” there has been a burst of research on the changing distribution of profits by large corporations. As a result, we have a good grasp of the dramatic changes that have occurred since the 1980s, notably the sharp rise in payouts to shareholders and the decline in the percentage of corporate profits used for reinvestment. This research focused initially on the United States, but has been extended to show rather similar developments in other advanced economies, and in some developing economies too.

Researchers have interpreted these dynamics as evidence of a systemic shift in the history of capitalism. Much ongoing discussion centers, therefore, on the developments that brought about this shift, as well as its implications for the enterprises at the core of the dynamics of financialization. The result is a vibrant debate about the history (and future) of capitalism that is interdisciplinary in nature, drawing in historians as well as economists and sociologists.^{Footnote 109} Valuable as the research in this area has been, there is plenty more to be done on the appropriation and redeployment of corporate profits in recent history. Indeed, it should be said that the redeployment, as compared with the appropriation, by shareholders of the corporate payouts they receive in the form of dividends and stock repurchases has received hardly any attention in the financialization literature. That reflects, no doubt, the difficulties of conducting such research, but it is essential to “follow the money” a little further to have a comprehensive understanding of the dynamics—social, political, and economic—of the current phase of capitalism.

For the United States, at least, what that implies for the recent past is tracing corporate dividends and stock repurchases to the 10 percent of households that own 84 percent of the total value of corporate stocks to see what they do with them.^{Footnote 110} Advocates of “disgorging the cash” to the shareholders, to use Michael Jensen’s evocative phrase, have defended their exhortations on the grounds that shareholders will put profits to more productive use than the corporations that generate them.^{Footnote 111} They are right that it matters what shareholders do with the money, but they have never felt any compulsion to defend their view with evidence. And, certainly, evidence is needed since the rich may be tempted to spend their money on antique ceramics, fine wines, Swiss watches, and mega-mansions as well as investing in startups. Given that these various possibilities for redeploying profits have quite different implications for the dynamics of capitalism, it is crucial that we study the ends to which they are put.

Yet, whatever the limits of existing research on the most recent phase of capitalism, they are nothing compared to the enormous gaps in what we know about the appropriation and redeployment of profits in the more distant past. That can be seen most readily, perhaps, in a discussion initiated by Fernand Braudel and then developed by Giovanni Arrighi about the historical dynamics of capitalism.^{Footnote 112} Braudel took issue with a commonly held view among historians that the “specialization” of capitalism in the nineteenth century, when it “moved so spectacularly into the new world of industry,” represented “the final phase which gave capitalism its ‘true’ identity.” Braudel proposed a rather different view, even a contrary one:

In The Long Twentieth Century, Arrighi built on Braudel’s observation to argue that recent financialization has much in common with earlier phases of “financial expansion” in capitalism, beginning with fifteenth-century Italy when finance came to dominate economic and political activity.^{Footnote 114}

Other scholars have made related arguments that capitalism’s flexibility—its capacity to transform itself from one form into another—is essential to its identity. The pioneer of neoclassical economics in the United States, John Bates Clark, also emphasized that flexibility and attributed it to the purported facility with which capital moved from one use to another. In an article in the Quarterly Journal of Economics in 1895, Clark argued: “A whaling ship cannot be made to spin cotton; but capital has, in fact, transferred itself from the whale fishery of New England to cotton spinning. Ships were allowed to decay, and mills were built in place of them.”^{Footnote 115}

When it came to explaining the process through which capital was transferred, however, Clark had little to offer other than a vague and mystical reference to “the miracle of transmutation,” a miracle that ostensibly allowed capital to adapt itself perfectly to the needs of different economic contexts.¹¹⁶Such statements proved highly dissatisfying, even to Clark’s economist colleagues; for historians, they are an invitation to explore just how capital stays and moves to determine to what extent its flexibility and adaptability can be seen as a defining feature of the history of capitalism.^{Footnote 117} Interestingly, when it comes to the history that Clark evokes—the mobility of capital from whale fisheries to cotton spinning in New England—it is possible to grasp some of the complexity that capital mobility entailed based on the research of Shaun Nichols and Eric Hilt.

Nichols emphasizes the fabulous profits that whaling seemed to offer to capitalists, but he underlines too “the ups and downs of one of the most chaotic of extractive industries.” The risks of their business certainly gave whalers an interest in looking for alternative ways to invest their enormous profits, and spinning mills featured as one of their options. Nevertheless, whaling ships were not “allowed to decay” while the initial cotton mills were being built in New Bedford. Even as whaling profits began to decline and their risks remained high in the period from 1815 to 1860, whalers in New Bedford ploughed their profits back into the industry, increasing the number, tonnage, and value of whaling ships many times over. It was the Civil War that brought decisive change to the whaling industry, given the destruction and requisitioning of its ships, plunging it into a decline from which it never recovered.^{Footnote 118}

Nichols’s analysis suggests that John Bates Clark was too sanguine in speaking of capital transferring through a miracle of transmutation. He tracks a process that was much more drawn out than Clark suggested and, perhaps most importantly, depended on factors other than capitalists’ flexibility, notably the construction of a municipal water system by the city of New Bedford, not to mention a momentous political shock. Eric Hilt’s analysis raises further doubts about miraculous transmutation, at least by New England whalers, in his article, “Investment and Diversification in the American Whaling Industry.” What his analysis suggests is a striking degree of inflexibility by these whalers even when it came to transferring their capital regionally within the whaling industry in ways that would have raised their profits and reduced their risks.^{Footnote 119}