Socio-Economic Review (2011) 9, 83–106 doi:10.

1093/ser/mwq014
Advance Access publication June 5, 2010

A pragmatist theory of capitalism

Christoph Deutschmann *
Department of Sociology, University of Tuebingen, Germany

*Correspondence: christoph.deutschmann@uni-tuebingen.de

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This article explores the potential of pragmatist social theory (Dewey and Mead)
for elaborating and clarifying the classical analyses of capitalism by Marx,
Schumpeter, Sombart and Weber. It shows how a reinterpretation in the
context of pragmatist discourse can overcome the rationalist shortcomings of
Weber’s theory of capitalism and formulate key Marxist concepts like ‘capital’
or ‘reification’ more convincingly. It also outlines a multi-level approach for analys-
ing the dynamics of capitalism, focusing on the interaction between class struc-
tures, individual creativity and the communication of innovative paradigms.
Keywords: capitalism, practice, creativity, economic growth, money, capital,
class, multi-level analysis, institutions, innovation, crises
JEL classification: Z1 economic sociology

1. Introduction
After an extended period of research and discussion on the ‘varieties of capitalism’,
a more concise distinction between the general and the specific appears to be
required. It does not suffice to view ‘capitalism’ as an aggregation of national econ-
omies, each institutionally framed in a particular way, as the ‘varieties of capital-
ism’ literature has done. Rather, capitalism must be understood as a distinct global
entity. Nationally and institutionally divergent paths of economic development
can only be fully explained in the context of this larger system. What are the charac-
teristics of capitalism as a totality beyond liberal and coordinated variants of
national economies? A renewed and sharpened focus on the ‘commonalities’
(Streeck, 2009, p. 1) of capitalism is needed, as this special issue suggests.
Theories of capitalism, of course, are a vast theme with a long history. Most
authors do seem to agree, though, that in spite of the central role of markets
in capitalism, a capitalist system is not simply a ‘market economy’. Capitalism
is not only an economic term, but a sociological one as well. In order to clarify
it, we need a theory of the constitution of society and of the historic changes

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84 C. Deutschmann

in the constitution of society that have occurred in the modern age. I aim here to
explore the potential of pragmatist social philosophy, in particular of the work of
John Dewey and George Herbert Mead, for developing such a social theory of
capitalism. The significance of Dewey and Mead for sociology and economic soci-
ology has been recently rediscovered by Hans Joas (1989, 1992a, b) and Jens
Beckert (2002, 2003). Of course, a fruitful conceptualization of the commonal-
ities of capitalism is impossible without referring to the classical writers in this
field, in particular Marx, Sombart, Schumpeter and Weber. Nevertheless, I
want to show that a critical review of these authors’ interpretations of capitalism
in the light of the pragmatist discourse can help to correct the deficiencies of the
classical approaches and bring the present-day debate a step forward. I will focus

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especially on the critical difference between rational and ‘creative’ action (in the
pragmatist sense) and the societal implications of the capitalist nexus between
money and labour as a ‘creative’ resource. I develop my argument by comparing
action – theoretical concepts in Marx, Dewey and Weber, discussing the paradoxes
of the money – labour nexus and the transformation of money into capital, and
presenting a multi-level analysis of the relationship between institutional and
social structures and individual creativity in capitalism.

2. Marx, Dewey and Weber

I will proceed under the assumption that Marx did not propose a simple ‘base –
superstructure’ theory of society with apparently ‘objective’ economic laws as an
independent variable, and the institutional and cultural superstructure as a
dependent variable. While he did use the terms ‘base’ and ‘superstructure’ in
his introduction to ‘A Contribution to the Critique of Political Economy’
(1859), he used them only as a metaphor for the popular reader. Actually,
there is no systematic place to put the base – superstructure terminology in
Marx’s theory. Under the influence of Engels and later political Marxism, it did
lead, however, to reductionist misinterpretations that are imputed to Marx to
this day. My point here is that Marx’s historical materialism contains pragmatic
elements, as Hans Joas has noted (Joas, 1992a, pp. 128 f.). The core categories of
Marx’s social theory are ‘production’ and ‘practice’, which in the original texts do
not have the narrow economic meaning Marx is often criticized for. I contend
that Marx’s interpretation of these concepts shows remarkable similarities with
Dewey’s pragmatist analysis of experience and nature (Dewey, 1958 [1925]).
Both authors meet in their critique of the nature– spirit dualism of traditional
philosophy, and both emphasize the creative nature of human action and the pro-
cessual and dynamic nature of human experience.
In his early writings, Marx (1964, pp. 339 f.) develops his concept of
production from a double critique of Hegel and Feuerbach: concurring with
 A pragmatist theory of capitalism 85

Feuerbach and in contrast to Hegel, he points to the natural foundations of

human existence. Concurring with Hegel and in contrast to Feuerbach, he
emphasizes the reflective and transformative character of human action, which
is rooted in the social nature of man. Both the material and communicative
elements of the human condition converge in the process of ‘practice’, as Marx
emphasizes in his eighth ‘Thesis on Feuerbach’: ‘Social life is essentially practical.
All mysteries which mislead theory into mysticism find their rational solution in
human practice and in the comprehension of this practice’ (Marx, 1978b, p. 145;
see also the original German, Marx, 1964, p. 341). ‘Practice’, or ‘production’, as
Marx calls it later, implies material life and the social relations it is intertwined
with, including politics, ideology and religion. It always develops in a tripartite

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relation between at least two social actors and nature as a third object. Language-
based communication and nature are relationally rather than hierarchically
linked with each other. The coexistence of both can be conceptualized only in
an open and dynamic way, which Marx also circumscribes with the concept
‘society’. Thus, ‘society’, ‘production’ and ‘practice’ are largely equivalent con-
cepts. On the one hand, collective productive activity results in objectified tech-
nical and social structures (‘relations of production’ in Marx’s terminology); on
the other hand, given structures are transcended by the creative forces of human
work (‘productive forces’). For some time, a given social structure of production
may be stabilized and thus give rise to the illusion of an ontological primacy of
spirit over nature. But such an order cannot last forever, since people can
change it and create a new one. Human practice is ‘revolutionary’ (Marx, 1964,
p. 340) because it does not just implement existing social norms and structures,
but is able to invent and realize new ones as well.
The similarity of this exposition to Dewey’s (1958) approach can hardly be
denied. Marx’s formulae of ‘naturalist humanism’ and ‘humanized nature’ are
almost literally echoed by Dewey, who, without referring explicitly to Marx,
characterizes his own approach as one of ‘naturalistic humanism’(Dewey, 1958,
p. 1a). According to Dewey, there is no such thing as ‘nature as such’ outside
human experience. Nature occurs only within experience; experience, however,
becomes possible only via communication. It is communication which trans-
forms things from brute and isolated facts into meaningful objects. The differen-
tiation between mind and nature is not given a priori, but develops in a process of
controlled practical experience that Dewey calls ‘inquiry’ (Dewey, 1938).
Meaning, on the other hand, is not based on an independent, supra-natural
world of ideas, but on language, which functions as a ‘natural bridge that joins
the gap between existence and essence’ (Dewey, 1958, p. 167). Owing to their
command of language, human individuals can participate in a common symbolic
universe, take the perspectives of others and think reflectively about themselves;
here, Dewey argues similarly to George Herbert Mead (1934). Symbolic orders
86 C. Deutschmann

are not autonomous realities, however, but have an existential dimension, as they
are materially anchored in the location of individual actors in historic time and
space. They do not exist apart from the practice of individual actors but have to
be incorporated and reproduced continuously by the latter. Here, the ‘reproduc-
tion’ of symbolic orders does not mean simply copying them one to one. Rather,
it is based on active interpretations by individuals, which often imply elements of
re-creation and change and may result, at the very least, in a partial negation of
the given order (see also Streeck and Thelen, 2005).
In order to explain the historical change of symbolic and institutional orders,
it is essential to understand the dialectical relationship between institutions and
individuality. As Dewey (1958, pp. 212 f.) points out, individual action is the basis

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for the reproduction of institutions and for their change and transformation. If
something new happens in society, this always goes back to the action of an indi-
vidual. Even in ancient and pre-modern cultures, where individuality seems to be
confined to the mere reproduction of given cultural patterns, creative variations
of these reproductive actions occur (Dewey, 1958, p. 212). In modern societies,
individuality is no longer considered a source of mere ‘deviations’, but is recog-
nized as a potential for innovation and change. Similarly, G. H. Mead emphasizes
the crucial role of the ‘I’ in contrast to the ‘me’ in the generation of innovations
(Mead, 1934, pp. 192 f.). It is only individuals who can be genuinely creative—not
collectives. Creativity is based on practical experience, and only the individual has
a body that allows him or her to experience both the symbolic and the natural
world simultaneously.
Human action can be called ‘creative’, as it is capable not only of performing
roles within given social structures but also of producing and changing these
structures themselves—this is the common position of Marx, Dewey and
Mead. Moreover, creativity is not confined to the generation of new, more uni-
versal social norms and rules, as Habermas argues in line with Mead in his
theory of ‘communicative action’. It also extends to the physical dimension,
where new tools, physical artefacts and material infrastructures are invented.
‘An engineer who is constructing a bridge is talking to nature in the same sense
that we talk to an engineer’, says Mead (1934, p. 185)—the difference between
magic and modern science lying only in science’s awareness that nature cannot
respond in kind. Moreover, creativity is related to the expressive dimension,
where new aesthetic objects are created. Creativity never occurs in a pure form
as a ‘creatio ex nihilo’. It is always based on existing structures, changing or
rearranging them in an intentional or unintentional way. Thus, creativity
cannot be observed as a totality, but only on a case-to-case basis within specific
historical contexts. Creativity is closely associated with historicity; both always
involve a mixture of continuity and change, never just change alone (Koselleck,
2003). An overall abstract theory of creative acts is impossible, as is an overall
 A pragmatist theory of capitalism 87

theory of historicity. To develop such a theory, we would have to know not only
all the past and present inventions but all the future ones as well, which would be
self-contradictory.
In comparison with this pragmatic view, Weber’s concept of rational action
appears to be much narrower. For Weber, the core principle of rational action
is assessing or ‘weighing’ (abwägen) various means and possible ends: ‘Action
is instrumentally rational (zweckrational) when the end, the means, and the sec-
ondary results are all rationally taken into account and weighed. This involves
rational consideration of alternative means to the end, of the relations of the
end to the secondary consequences, and finally of the relative importance of
different possible ends’ (Weber, 1978, p. 26; see also the original German

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version, Weber, 1972, p. 13). In order to assess the ends, means and side
effects, the expected outcomes of action must be principally knowable, at least
in the form of an estimate of the odds. Thus, Weber’s concept of rationality is
applicable only to situations with a relatively high degree of social and material
structuration. This is not incompatible with the pragmatist theory of action.
However, Weber’s concept should not be taken as an ideal type for action in
general, but refers only to particular constellations of action in which a stable
definition of the situation already has been achieved as a result of prior exper-
imentation. It cannot be applied to the process of experimentation itself. If
actors are confronted with conflict and uncertainty, rational action is impossible
by definition, and experimental strategies of trial and error (and sometimes
imagination) are more helpful to cope with the situation.
Upon close examination, Marx’s theory is inconsistent in this point, too, and
partially subject to similar objections. In his early writings, he developed a concept
of production with strong romantic overtones which indeed shows a close affinity
to the pragmatist position, as I already have noted. The mature Marx, however,
tries to combine his original concept of production (which he takes up again in
the introduction to ‘The Grundrisse’, Marx, 1978a, pp. 222 –246; see also the
German original, ‘Grundrisse der Kritik der Politischen Ökonomie’, Marx,
1953, pp. 5– 31) with the labour theory of value he has borrowed from the classical
political economy of Smith and Ricardo. Marx never thoroughly reflects on the
compatibility of these two approaches. The labour theory of value asserts that
the values of commodities are basically calculable on the basis of the amount of
‘socially necessary’ (not actual) labour embodied in them, which in turn
depends on the state of technology, the level of work skills and intensity of
work and, finally, the pattern of market demand (Marx, 1988, pp. 49 f.). This pre-
supposes that technology, skills, work intensity and market demand are factors
that can be treated as given and known. In other words, the common point in
Weber’s concept of rational action and Marx’s labour theory of value is that
both are applicable only to a highly structured economic system that operates
88 C. Deutschmann

according to a given set of technical and economic parameters. It is only on the

basis of this assumption that the determination of values can be reduced to the
dimension of time. While such a steady-state model might have been appropriate
for the economy of Adam Smith’s times, it cannot be applied to the industrial
capitalism that began in the nineteenth century, with its continuous stream of
innovations and technological revolutions. The labour theory of value cannot
be used to understand an innovative process in which technological and economic
parameters themselves are being created and changed.
This does not negate Marx’s assumption that labour plays a key role in the
economic process. However, labour derives its significance from its creativity,
not from its alleged quality as a quasi-measurable ‘substance’. Likewise, one

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may agree with Marx that labour values are determined ‘somehow’ within a capi-
talist system. However, due to the unobservability of creative actions, the system
is a black box. How labour values are determined within the system can never be
transparent for any external observer, because such an observer would have to be
more intelligent than the very sum of creative social intelligence present within
the system itself. It is the social preponderance of innovation combined with
the intransparency of creative action—‘I cannot turn around quick enough to
catch myself ’, says Mead (Mead, 1934, p. 174)—which makes the capitalist
system incalculable as a whole, not simply the ‘anarchy of the market’ stemming
from the fact that production in capitalism is a private activity, as Marx con-
tended. Friedrich A. von Hayek, who described markets as a process of ‘discovery’
(Hayek, 1948, 1969), was undoubtedly much clearer on this point than Marx.
Marx uses the concept of production in an ambiguous way, on the one hand
in the sense of creative social activity; on the other, in that of a calculable ‘sub-
stance’ of value. He did not clarify how these two meanings of production are
related to each other; rather, in his mature work, he postulated a problematic
‘law of value’ based exclusively on objectified labour.

3. Labour, money and capital

Where does the quest for innovation in capitalism, which has recently been
emphasized again by Baumol (2002), come from? An explanation necessarily
will be complex and must operate on different sociological levels. In this
section, I will outline a possible macro-level explanation. However, this alone is
not sufficient, since, as I emphasized earlier, innovation and creativity are genu-
inely individual capacities. An additional analysis is needed which shows how the
transformations in the macro-structure of modern societies underlying the
genesis of modern capitalism changed the institutional and structural framing
of society by stimulating ‘creative’ and ‘innovative’ modes of individual adap-
tation. This will be the subject of the Section 4.
 A pragmatist theory of capitalism 89

In his often-cited empirical analysis of economic growth in the world

economy, Angus Maddison (2001) identified a secular turning point in the long-
term trend of growth in the early nineteenth century, around 1820. Although the
statistical basis of Maddison’s data is necessarily often shaky, the point appears
reasonably clear: while the world economy remained in a more or less stationary
state before 1820—only in Western Europe can a slight growth trend be observed
between 1500 and 1820—economic growth in absolute and per capita terms
became a normality after 1820, first in Western Europe and in the USA, then
gradually in the rest of the world, too. How can this sudden shift of the
economy from a static into a dynamic mode of operation be explained? The the-
ories of the development of capitalism, of course, attribute the genesis of modern

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industrial capitalism to a large variety of factors ranging from advancements in
modern science and technology, and the democratic revolutions to Weber’s Pro-
testant ethic and Sombart’s capitalist spirit. However, there is widespread consen-
sus about the crucial importance of one aspect of the transformation for
triggering the growth dynamics: the liberation of agrarian and urban markets
and the extension of the money nexus from markets for consumer goods and ser-
vices (which have existed at almost all times in history) to markets for free labour,
land and other means of production (which were historically a largely new
phenomenon). Owing to these changes, the market system became pervasive
and universal, involving the total process of social reproduction—primary pro-
duction, distribution and consumption—and making the large majority of the
population dependent on earning their living at the market. Karl Polanyi
(1977) spoke of the ‘Great Transformation’ that put an end to the earlier state
of ‘social embeddedness’ of the economy; conversely, society became a ‘mere
annex’ of the market system, according to Polanyi.
For Polanyi, as well as for Marx, it makes a crucial difference for an economic
system whether the nexus of markets and money includes only the realm of fin-
ished commodities or is larger, extending to the process of production itself. In
the first case, we have an ‘embedded’ economy of the traditional type; in the
second, a capitalist economy emerges. To explain the significance of this differ-
ence, it is helpful to return to the theoretical distinctions made earlier. In an
embedded market economy, the counterpart of money at the market is a finite
and observable set of goods and services. The property claim which money embo-
dies is basically limited and fixed. In a capitalist economy, by contrast, the pur-
chasing power of money extends not only to a set of observable commodities,
but also to the potential of free labour, which cannot be observed as a totality
because of the creative capacities of workers, as described earlier. Whereas
money is always given in a fixed sum, the counterpart of money in the market
now is an open-ended entity of non-definable magnitude. Under these con-
ditions, ‘equilibrium’ is unthinkable. The relentless drive of capitalism for
90 C. Deutschmann

growth and acceleration (Koselleck, 2003; Rosa, 2006) must be distinguished

clearly from the gradual and incremental mode of social change prevalent in
earlier times in history. It stems from the fact that what money can buy is no
longer limited to only a given quantity of objectified commodities—which was
already vast in the eighteenth century, but nevertheless limited—but now
extends to the inexhaustible creative potentials of free labour. Now, money can
buy anything humans can invent and produce, not just what they actually have
produced. More than at any other time in history, the desire for money has
become insatiable. The value of money can never be redeemed definitively, but
only in a continuous, dynamic process of exploiting the potentials of labour.
This has led to a profound change in the nature of money itself that Marx

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recognized much more clearly than Dewey and Mead: the transformation of
money into ‘capital’. Three aspects of this transformation are important to
note: (a) the dynamic nature of capital, (b) the social value of money and (c)
the enigmatic character of the representation of society by capitalized money.

(a) As capital, money is no longer a harmless ‘medium of exchange’, but becomes

a dynamic entity destined not only to facilitate the circulation of commod-
ities, but also to return and accumulate: ‘M-C-M’ in Marx’s terms. Money
that can summon the creative potentials of labour becomes a potential
itself, as it is expressed precisely by the German word ‘Vermoegen’ (which
means ‘wealth’ or ‘fortune’ in English, but literally translated means ‘being
able to’). Since money as capital represents the most fundamental of all
human capacities—creative social labour—it can have its destination only
in itself, i.e. it must be self-perpetuating. Its purpose is to develop the under-
lying potential of labour, rather than any external ‘utility’ or ‘material satis-
faction’, which would be casting pearls before swine. The capitalization of
money therefore sets the stage for a relentless process of economic
‘growth’—not only in the sense of increasing ‘productivity’, as is often
said. Capitalist growth is not confined to the quantitative increase of the
output of a given set of products and services per unit of time. It is charac-
terized instead by the continuous invention of new products, services and
technologies and the corresponding elimination of conventional ones—
‘creative destruction’, as Schumpeter called it. Capitalist growth has a quan-
titative and a qualitative dimension that manifests itself in incessant ‘revolu-
tions’ of technologies, systems of organization and logistics and patterns of
consumption. The core aspect is not the increasingly efficient satisfaction
of a given set of wants, but the continuous creation of new wants, technol-
ogies and forms of social coordination. Finally, since money as capital is
bound to grow, the need for a continuous increase in the supply of money
itself and monetarily based demand arises. This is the point of departure
 A pragmatist theory of capitalism 91

of the modern system of politically guaranteed private credit (Ingham, 2004;

Deutschmann, 2008b).
(b) The transformation of money into capital enhances its social value. Quite
contrary to the common system-theoretic interpretations of money
(Parsons, 1967; Luhmann, 1988), it can no longer be considered to be
merely a functionally specialized medium of the economic system. Money
that can mobilize the creative capacities of social labour takes the character
of an ‘absolute means’ (according to Simmel’s formula; Simmel, 1989,
p. 298), mediating and representing the total process of social reproduction.
For the individual owner, money represents not just material purchasing
power, but individual freedom and utopian promises of absolute wealth as

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well (Deutschmann, 2001). Even non-economic subsystems of society such
as politics, science, art and education become dependent on the money
nexus, since they always need to be financed in spite of the relative autonomy
of their specific codes (Paul, 2004). The commodification of land and free
labour completes the detachment of society from its natural basis and
opens the process of social reproduction as a whole to the disposition of indi-
vidual actors. Now, almost everything can be done differently than it has in
the past, depending only on the ratio of costs and returns. Marx recognized
more clearly than Dewey that the modern concept of society as a ‘product’ of
socialized human actors itself became possible only against this particular
historical background. As a general societal medium, money enters into
competition with religion, since it undermines traditional religious faith in
a divine creator. The latent or manifest competition between money and reli-
gion results from an inner affinity between them since each claims to rep-
resent the unity of society.
(c) In connection with the inner affinity between money and religion, the ques-
tion of how money represents the unity of society becomes relevant. Dewey
(1958, p. 173) compares the functions of money with those of language: just
like language gives things a symbolic meaning and changes their character by
putting them into a relational perspective with other objects, money changes
the character of goods by integrating them into the context of exchange.
Money thus symbolizes goods and their exchange relations. However,
Dewey does not discuss the point that money is not only a symbol of
goods, but embodies the buyer’s private right to appropriate them. Nor
does he discuss what happens when money is related not only to a set of
already real goods and services but also to humans’ creative capacities. In
the latter case, it becomes the representation of and a claim on something
unobservable. Then, money does not only relate visible things to each
other, but points to an invisible potential, i.e. the total reproduction
process of society, including not only its objectified elements but also its
92 C. Deutschmann

underlying subjective capacities. Following Castoriadis (1987, pp. 115 f.),

one could speak of an ‘imaginary’ origin of signification. As a consequence,
the sign and the object of signification merge and can no longer be clearly
distinguished from each other: the sign seems to be what it represents. It
is easy to distinguish the ‘beware of the dog’ sign from the dog himself:
the sign does not bite. In the case of money, however, things are not so
easy: money does not only ‘represent’ wealth, but it is wealth which can be
stored in bank accounts and transferred in precisely defined quantities
from one account to another. Meanings are communicated and shared
between ego and alter, whereas money is transferred in a zero-sum game
where ego loses exactly what he gives to alter. In spite of its nature as a sym-

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bolic construction, money is treated as a natural, quasi-physical fact; simi-
larly, the dynamism of the money as capital is being experienced as a
‘natural law’ beyond human control.

Thus, money does not represent the social reproduction process in the same way
language does. Since the object of signification is basically unobservable, it is rep-
resented in the particularly enigmatic form of a ‘cipher’ (Luhmann, 1992), which
signifies and obscures the object at the same time. In contrast to Dewey, Marx was
well aware of the enigmatic character of money and capital. He tried to concep-
tualize it in his concept of ‘commodity fetishism’, which later was elaborated by
Georg Lukacs (1970 [1923]) into a general theory of capitalist ‘reification’.
According to Lukacs and other orthodox Marxists, capitalism could be overcome
if workers became conscious of their factual key role in the organization of pro-
duction and overthrew the system of private control of the means of production.
They believed that this opportunity was opened by the bureaucratizing and cen-
tralizing dynamics of the capitalist economy itself. What actually happened in
planned economies in the twentieth century showed that the orthodox Marxist
theoreticians grossly underestimated the problems of planning and organizing
modern economies. As I noted already in the preceding paragraphs, their analyses
fell short because they located the source of the problems only in the ‘anarchy of
the market’ due to the contradiction between private property and the social
character of labour. From this background, Postone (1993 [2003]) criticizes the
‘traditional’ Marxist idea that the difference between capitalism and socialism
coincides with the distinction between market and plan, and he tries to elaborate
the nature of capitalism as a ‘historically specific form of social interdependence
with an impersonal and seemingly objective character’ (Postone, (1993 [2003])
p. 3). However, where does the objectivity of capitalist dynamics come from if
capitalism is not simply a ‘market economy’? My argument here is that it has
to do with the paradoxes of both the money – labour nexus and money as a
social representation of the creativity of labour. The creative capacities of
 A pragmatist theory of capitalism 93

labour can never be symbolically represented and politically organized as a total-

ity, since creative individual experience always transcends given symbolic and
institutional orders, as Dewey showed. Therefore, the problem of economic plan-
ning is rooted not only in the anarchic form of the capitalist economy, but also in
its substance: creativity. An organized economy—here, Polanyi’s argument
remains central—could only be an ‘embedded’ economy, where land and
labour are exempt from the market nexus and whose basic law is not growth
but reproduction within a given set of collectively defined economic parameters.
An organized socialist economy therefore could never be superior to capitalism in
developing the potentials of labour, but rather would curb the process of ‘creative
destruction’ and have to restrict itself to a given, collectively agreed-upon path of

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social reproduction. Socialism would mean the return of a steady-state economy
which—if Maddison’s data are correct—was the norm throughout history.

4. Capitalist institutions and individual creativity

My argument so far has been that the dynamic nature of capitalism stems from
the transformation of money into a claim on the creative potentials of labour that
can never be redeemed in a definitive way. The work contract is ‘open’, as March
and Simon have shown in their well-known analysis. While machines and com-
puters have a limited and finite set of programs, workers can develop their skills
and perform more or better; moreover, they can invent genuinely new problem
solutions, technologies and products. The organization of these skills by the capi-
talist employer can multiply these creative potentials further, although even he
can never take full ‘command’ of them.
This is only the first step, however, towards explaining and understanding the
capitalist quest for growth. The institution of the free work contract, which trans-
forms money into capital, constitutes a necessary condition for the growth
dynamics of capitalism, but not a sufficient one. Capitalist development is
based on the creativity of work; creativity, however, is a genuinely individual
capacity, as I have noted earlier. Neither capital is creative, nor are organizations
or workers as an abstract collectivity. Rather, the primary impulse for developing
something new can only come from individuals, as I have emphasized with
Dewey and Mead. The historical success of capitalism would have been unthink-
able without the personal creative commitment of millions of entrepreneurs,
engineers and employees inventing and implementing new products, technol-
ogies, logistics and organizational concepts. Such commitment cannot be
derived from any objective economic or social ‘laws’; it can only be ‘understood’
by an interpretative reconstruction of the historical context of action (‘Verstehen’
in terms of Weber and Schütz). Thus, the macro-analysis of the money – labour
nexus I have outlined so far needs to be deepened by a micro- and meso-analysis
94 C. Deutschmann

of the concrete conditions of individual and collective actions. Technically speak-

ing, a ‘multilevel analysis’ of capitalist dynamics is required in order to show how
the transformation of markets and institutions at the macro-level changes the
social framing of situations in a way that stimulates (rather than ‘causes’) inno-
vative action (Deutschmann, 2009).
The universalization of the money – labour nexus means that workers and
means of production (including land) become separated from each other.
Society divides itself into two classes, one of them owning the means of production,
which now becomes capital, and the other owning nothing except personal labour
power. Beyond the traditional markets for goods and services, markets for capital
and land arise, on the one hand, and markets for free labour, on the other. These

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markets are basically global and constitute the ultimate macro-context for econ-
omic and social action in capitalism—in contrast to the locally, regionally or
nationally bounded character of political and legal institutions. The polarization
of classes is the core phenomenon of the social structure of capitalism—so far,
there is not much to add to Marx’s theory. However, how does the polarization
of classes become transformed into capitalist dynamics?
My point is that, for class conflict to become dynamic, the structural polariz-
ation of classes must be institutionally framed in a way that makes it appear indi-
vidually surmountable. In contrast to traditional class societies, individual
affiliation to a class in capitalist society is not ascriptively fixed. Social advance-
ment from the unpropertied to the propertied classes is possible—at least in prin-
ciple, even though the actual opportunities for advancement may be small.
Capitalism opens a historically new channel of upward social mobility: ‘entrepre-
neurial’ rise, based not on vested privileges, educational certificates or bureau-
cratic rules, but on individual success in the market. In my view, it is
important here not to make a sharp distinction between self-employed ‘entrepre-
neurs’ in the formal, legal sense, and employees, who may develop a desire for
market success and social advancement, too, and in some cases actually change
to a self-employed position. In spite of the high level of social self-recruitment,
entrepreneurs often have a petty-bourgeois background and start from small
origins, as Sombart noted for his time (Sombart, 1955 [1902], pp. 19 f.; Bendix
and Howton, 1978; Kaelble, 1978; Berghoff, 2004). Moreover, not only
self-employed entrepreneurs, but also employees may seek upward mobility in
vocational or internal labour markets. Even workers who have abandoned the
goal of upward mobility for themselves may pin their hopes on the success of
their children. The ‘embourgeoisement’ of the working class, which manifests
itself in the individual quest for social advancement, was a key theme of industrial
sociology after the Second World War (e.g. Goldthorpe et al., 1968). In the recent
literature, Voß and Pongratz have coined the term ‘labour-power entrepreneur’
(‘Arbeitskraft-Unternehmer’; Voß and Pongratz, 1998) in order to characterize
 A pragmatist theory of capitalism 95

the entrepreneurial aspirations of modern employees. In a capitalist society,

where money is the ‘absolute means’ and the key to individual freedom and
social status, the aspirations of the unpropertied must focus on the opportunities
for financial gain. The dynamics of capitalism depends on the individual quest of
the unpropertied—as illusory as ever—to climb socially and cross the class
dichotomy. Lisa Keister describes this as the core of the ‘American dream’:
‘Those who have wealth have every incentive to maintain that wealth, while
those who own little are motivated to acquire wealth. Moreover the notion of
the American dream suggests that such upward mobility is possible’ (Keister,
2000, p. 3).
The paradise of financial wealth is located not in heaven but on earth. To enter

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it, praying and singing alone are no longer sufficient; one has to work. However,
just as the religious believer on his way to salvation cannot depend solely on his
personal intuition but seeks guidance in sacred writings, rituals and priests, the
entrepreneur striving for success in the market needs support from institutions
and experts who spark hopes, provide credit and suggest viable roadmaps. Never-
theless, as in the case of religious expertise, these institutions do not imply that
success is guaranteed, but send inconsistent and contradictory messages. It is
this inconsistency of the institutional framing of situations which—here, I am
following Merton’s (1968) classic theory of ‘anomie’—gives rise to ‘innovative’
and ‘entrepreneurial’ modes of individual adaption. The creative achievements
of entrepreneurs and workers, in turn, nourish the profitability of capital and
the growth of the economy at the macro-level. The profit of capital does not
come simply from the quantitative amount of surplus labour, as Marx contended.
Rather, as I argue with Schumpeter and Sombart, it comes from new products
and technical or logistic combinations based on the innovations of entrepreneurs.
Profit is a premium on the temporary monopoly the successful innovative entre-
preneur enjoys. Moreover, I would expand on Schumpeter and Sombart and
contend that the creative commitment of employees and their thousands of
‘small’ ideas in implementing innovations is vital for profitability and growth
too—here, Marx is right, indeed. Capitalist growth, in other words, is the aggre-
gate effect of the quest of entrepreneurs and workers to cope creatively with the
institutional and structural inconsistencies of their situation.
For a more thorough analysis of the conditions of capitalist dynamics, four
steps are required according to the textbooks of multi-level analysis (Esser,
1993, 1999): first, an analysis of the objective characteristics of the actors’
situation, consisting of the structure of markets, social networks and institutions
and the corresponding availability of resources; second, a reconstruction of
the subjective framing of action, including both the actors’ preferences and
their subjective assessment of opportunities for action; third, an analysis of
the specific action strategies chosen; fourth, a consideration of the aggregate
96 C. Deutschmann

effects of action. Though I cannot address these steps extensively here, I will
outline them briefly.

4.1 Characteristics of the situation

The basic condition of the situation is given, as I have already emphasized with
Marx, by the polarization of classes; the ‘basic’ character of the latter resulting
from the global character of markets for capital and labour. The dichotomy of
classes, however, is overlapped by political power structures, institutional
orders, social networks like the welfare state, the occupational and educational
system, the segmentation of labour markets and personal and family networks,

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all of whose scope is—as a rule—confined to the national, regional or local
level. The signals sent from the sum of all these frames to the actors regarding
their opportunities for market-based social advancement are anything but con-
sistent and vary according to cultural, national and regional traditions, as the
‘varieties of capitalism’ literature has shown. On the one hand, overcoming the
class dichotomy, which is evident in all developed industrial countries today in
the fact that the bulk of private financial and real assets is owned by a small min-
ority of the population, appears impossible for those depending on their labour
power alone. On the other hand, there are institutional structures like the welfare
state or the educational system that may give positive signals to the underprivi-
leged and encourage them to invest in improving their qualifications and, thus,
their position in the market. Contrarily, the same structures, such as a socially
closed and conservative welfare and/or educational system, may cement the
class dichotomy further. A second example for the ambivalent messages emanat-
ing from institutional frames with regard to the opportunities for entrepreneurial
advancement are gender norms which, in the case of the traditional male-
breadwinner model, for example, enable and promote market-based careers for
the male half of the population just by discriminating against the female half.
A third factor is private, family or ethnic networks and the resources they gener-
ate. As the literature on ‘ethnic entrepreneurship’ (e.g. Portes and Zhou 1992;
Granovetter, 2005) has shown, the individual availability of network-based
social capital can compensate negative market conditions to a certain degree
and encourage entrepreneurial careers. It can be assumed that the conditions
are all the more negative for those enjoying little or no network support. Even
at the national level, the inconsistencies of institutional and social framing
provide ample leeway for powerful actors to reinterpret, hollow out or transform
existing rules, as Wolfgang Streeck (2009) has shown in his analysis of the
post-war development of German capitalism. As transnational mobility and
the ‘globalization’ of societies increase, these inconsistencies become more
pronounced.
 A pragmatist theory of capitalism 97

4.2 Framing the situation

Since the institutional and social framework of economic action is complex and
contradictory in capitalist societies, individuals can only develop a consistent atti-
tude towards their situation if they have a minimum amount of personal auton-
omy. The scientific reconstruction of these subjective framings therefore requires
a second, independent analytical step which cannot be ‘derived’ immediately
from the objective situational conditions no matter how relevant they might
be. This applies even to the basic variable itself: attitude towards financial
success. Workers’ and capitalists’ individual attitudes towards financial success
do not necessarily reflect the objective class structure of society; they depend
on partially autonomous factors that are influenced by the cultural context. In

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his seminal work on the rise of capitalism, Werner Sombart has shown how
the ‘capitalist spirit’ of the early merchant classes developed historically under
the conditions of the urban culture in Western European cities long before the
‘Great Transformation’ of the early nineteenth century, and that this had relatively
little to do with the emergence of a class dichotomy in modern capitalism. Reli-
gious beliefs like those contributing to the Weberian ‘Protestant ethic’ were just
one element of this cultural context among many others. Another important
question is how the commitment to financial gain spread within the working
class. Again, there is certainly no automatic connection between the ‘proletarian’
condition of wage dependency and the individual pursuit of financial success. As
E.P. Thompson (1967) has shown in his historical studies, it took a long time for
British workers to become aware of their market interests and develop a conscious
and calculative attitude towards their own working time and labour power. Up to
the present day, the degree of subjective commitment to market rationality and
success is very different among the diverse subgroups of the working class.
Beyond the basic attitude towards financial success, an individuals’ subjective
perception of his or her chances of being successful in a given situation is a key
variable. Similar situational conditions can be perceived by different individuals
as challenging, or contrarily as discouraging or even paralysing. This can be exem-
plified again using the case of ethnic networks. It is not the affiliation to ethnic
networks per se that gives rise to entrepreneurial aspirations. Rather, in many
cases, ethnic communities tend to isolate themselves from the context of the
majority society and develop a self-sufficient lifestyle. In order to perceive their
own affiliation to family or ethnic communities as ‘social capital’ that can be
mobilized for economic success, individuals need to develop a particular capacity
to maintain a ‘balance between coupling and decoupling’, as Granovetter (2005,
p. 174) puts it. While remaining committed to the essential norms and expec-
tations of their community, they must be able to distance themselves from exces-
sive claims of their peers on their resources and to build up their own business
98 C. Deutschmann

networks according to universalist criteria. Where this ability comes from cannot
be explained exclusively by the social and cultural context, but different moral
and religious value systems seem to play a role (McCleary, 2007).

4.3 Logic of action

How do individuals actually react to situational conditions in capitalist class
societies? The answer will vary, of course, depending on whether the conditions
are defined by an outside party or by the individuals themselves. Taking into
account the uncertain and contradictory nature of objective and perceived con-
ditions of action, attempts to explain individual frame selection and action

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based on a nomological rule like the ‘RREEMM’ model (resourceful, restricted,
expecting, evaluating, maximizing man) proposed by Lindenberg (1990, pp. 739
f.; see also Esser, 1993, p. 237) do not appear very promising. In order to be able
to act according to the RREEMM model, individuals need to have a consistent per-
ception of their situation. However, individuals who are confronted with existen-
tial uncertainity and contradictory expectations often cannot postpone action
until they have arrived at a consistent definition of their situation. Rather—and
this is the key point in Dewey’s concept of ‘inquiry’ (Dewey, 1938, pp. 101 f.)—
the determination of the situation becomes a part of the action process itself.
‘Inquiry’, as Dewey characterizes it, is ‘the direct or controlled transformation of
an indeterminate situation into a determinate one’ (Dewey, 1938, p. 117). The
determination of the situation develops in an experimental process of formulating
and practically testing hypothetical problem definitions and problem solutions.
What is changing in this process is not only the symbolic framing of the situation
by the actor, but also the existential characteristics of the situation itself. ‘Rational’
action becomes possible only after a given hypothesis on the problem and its sol-
ution has been repeatedly confirmed and can now be taken for granted (until new
irregularities occur). The pattern of inquiry, as Dewey describes it, applies both to
scientific work and common sense and functions similarly in both spheres. My
point here is that Dewey’s concept of inquiry could thus be a more promising
guideline for conceptualizing the conditions and paradoxes of action in capitalism
than concepts based on rational choice.
In capitalism, actors strive for financial success under conditions of uncer-
tainty. In his classic theory of deviant behaviour, Merton has shown that individ-
uals may opt for ‘innovative’ patterns of action when being confronted with
inconsistencies in institutionalized means and ends. However, while ‘innovation’
is only one possible pattern of action among others (ritualism, isolation or rebel-
lion according to Merton) in society at large, innovation is clearly the dominant
pattern in the economic system. In order to be successful in the market, entrepre-
neurs need to act ‘creatively’, not only ‘adaptively’, as Schumpeter (1991 [1947],
 A pragmatist theory of capitalism 99

p. 411) emphasizes. Success in the market is not something one can only strive for
by systematically perfecting one’s own capabilities, like an athlete preparing for a
sports contest. Of course, money is the ultimate end. However, financial success is
an emergent phenomenon resulting not from sheer willpower, but rather from a
prior process of ‘inquiry’ as described by Dewey. In contrast to the speculator, the
entrepreneur is not interested in accidental profit but in building an opportunity
structure for the continuous generation of profits. In order to have a chance for
success, the entrepreneur first has to create his ‘niche’ (White, 2005, p. 31) in the
market, define his individual ‘model’ of business and build a corresponding local
order. Whether he is ultimately successful or not does not depend solely on his
own efforts, but also on the feedback he gets in the market. Only in special

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cases can he compete based on prices alone. In order to generate a positive
response, the entrepreneur needs ‘social skill’ (Fligstein, 2001) in communicating
his definition of the market situation and his business model. He has to compete
with the business models of other actors and must try to gain supremacy over
them. As he manages to establish his model on the market, the situation
becomes determinable for him.
Not restricted to individual business models, the communication of innova-
tive initiatives follows larger streams of inventions at the sectoral and meso-levels.
Inventions occur in all fields of economic activity, including technology, organ-
ization and consumption. The communication of inventions is structured by
innovative ‘paradigms’ (Dosi, 1983). A paradigm is an innovative artefact
which is symbolically framed by visions of promising lines of further elaboration
and application of the invention. The function of innovative paradigms in capi-
talist dynamics has been a prominent theme in socio-technical research and evol-
utionary economics, which both show a close affinity with the pragmatist view.
Evolutionary approaches combine the concept of path dependence with an analy-
sis of innovative processes (for an overview: Garud and Karnoe, 2001). Inno-
vations are considered ‘path creating’ events that pave the way for a structured
process of social and economic change (Schreyögg and Sydow (eds), 2003).
Rather than developing in a homogenous space with uniform temporal and
social coordinates, economic action—according to these approaches—is charac-
terized by ‘historicity’ in three ways. Earlier events predetermine the range of
possible later events, which in turn can be ‘bifurcations’ for subsequent develop-
ments. Neither rational decision-making nor the generation of economic
‘optima’ or ‘equilibria’ is governed by uniform rules; solutions that may be effi-
cient at one time can be inefficient at others. Theories themselves are influenced
by the historical circumstances of their formulation and therefore must be
marked by a historical index; a theory of the Internet, formulated in the 1980s,
for example, will be completely different from a contemporary theory on the
same subject.
100 C. Deutschmann

The career of an innovation is typically made up of three phases. The first is

usually called the phase of ‘path creation’ (Windeler, 2003), where a ‘basic’ dis-
covery or invention, predetermining later technological or economic develop-
ments, is generated. ‘Making’ an invention is a social process. Based on a
rearrangement of the structures of social relevance, it gives new attention to orig-
inally ‘accidental’ observations and incidents. The starting point is a ‘mindful
deviation’ (Garud and Karnoe, 2001) from routinized practices. In this phase,
not only the invention itself is important, but ideas, utopias and visions as
well, which give ‘meaning’ to the invention and create a horizon of promising
future developments and applications. The individual creativity of inventors
and entrepreneurs plays a key role as does their capacity to persuade, convince

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and mobilize others (Fligstein’s ‘social skill’ as mentioned earlier). Risks are
high in this phase, but so are possible profits. The availability of risk capital
and the willingness of investors to stick to the project are critical factors from
a financial standpoint. If the pioneers are successful at attracting a critical mass
of other key actors to cooperate and invest in the paradigm, which usually
starts out being rather vague, the second phase of ‘path consolidation’ begins.
Now, the success of the paradigm nourishes itself. A win – win game emerges:
more and more actors change from the role of the neutral observer to that of
the engaged participant, investing fresh ideas and capital into the paradigm
and thus creating opportunities for other actors. What began as a vague utopia
now becomes a realistic undertaking. This may lead to an extended period of
credit expansion and economic growth. In the third phase, the paradigm
moves on to ‘institutionalization’. The technology has now reached a high level
of maturity and sophistication; it represents the ‘state of the art’ and is taught
in schools and universities. Its potential appears to have been explored and ela-
borated upon to a large degree, leaving room only for minor cosmetic improve-
ments. As competition now becomes reduced largely to the level of price and
costs, the market becomes highly calculable; on the other hand, profit margins
dwindle. Institutionalization may finally lead to a stage of ‘lock in’, where the
original paradigm has reached its highest degree of crystallization and any
further improvement seems to be blocked. Credit lines will freeze up, and the
economic system will move into a recession. However, paradoxically, lock-in is
the point that can pave the way for new groundbreaking inventions, because it
makes the structural limitations of the old paradigm manifest and can stimulate
the emergence of fundamentally new ideas. What constitutes a dead end for the
majority of actors can be an opportunity for creative minorities—with the poss-
ible result of a new cycle beginning.
Path creation is a process observed not only in the field of technology, where a
broad research literature already exists, but in other fields of the economy as well.
The historical career of organizational paradigms—‘myths’ of organizational
 A pragmatist theory of capitalism 101

rationality, according to the well-known terminology of Meyer/Rowan—shows a

similar pattern of path creation, consolidation, institutionalization and decline; a
prominent example is the rise and fall of Taylorism and Fordism (Piore and Sabel,
1984), and their present-day counterparts such as ‘lean production’ and ‘total
quality control’. Entrepreneurs are active not only in developing new technol-
ogies, but also in inventing and promoting new paradigms of logistics and organ-
ization. Business consultants often play a key role in selecting, formalizing and
diffusing these paradigms (Alvarez, 1998; Kipping and Engwall, 2002). The
same pattern of dynamics applies—last, but not least—to the field of consump-
tion, where the creation of new symbolisms and lifestyles and the continuous rise
and fall of ‘fashions’ are obvious phenomena (Deutschmann 2008a, pp. 72 f.,

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2009).

4.4 Logic of aggregation

Whether a new innovative myth cycle will develop or not cannot be fully antici-
pated. If an innovation is successful, it can develop self-reinforcing dynamics that
promote capitalist growth. Capitalist growth, in other words, emerges as the
aggregate effect of the processes of construction, institutionalization and decon-
struction of innovative paradigms I have described. As I have tried to show, these
processes have a motivational basis in the quest of individuals to achieve upward
mobility by being successful on the market, and a cognitive and social basis in
innovative paradigms. The motivational basis, in turn, depends on the polariz-
ation of classes at the macro-level of society. Only the collective dichotomy of
classes can generate tension strong enough to motivate the unpropertied to
aspire individually to move upwards via the creation and diffusion of innovative
paradigms.
It would be naı̈ve to suppose that there is something like an ‘equilibrium’ prin-
ciple governing these processes. Nevertheless, it follows from my model that capi-
talist dynamics can be interpreted as a balancing act between two horns of a basic
dilemma: on the one hand, the class dichotomy should not be socially closed, or
so extreme as to make it insurmountable. This would discourage the aspirations
of the unpropertied, with probably negative effects on capitalist growth. On the
other hand, not too many people should be successful in moving upwards. This
would mean a collective upward shift of the social structure and an expansion of
the saturated middle classes; structural tension would diminish and individual
entrepreneurial motivation would decline. The financial ‘rentier’ would gradually
begin to dominate over the ‘entrepreneur’. Financial assets are always based on
debts as their necessary counterpart. When middle and upper-middle classes
grow, the relative share of rent-seeking owners of private assets rises, while the
share of solvent, ‘entrepreneurial’ debtors declines. The intergenerational
102 C. Deutschmann

transmission of wealth and educational privileges further exacerbates this effect,

as it tends to close the channels of upward mobility. The descendants of the suc-
cessful may still be career-orientated, but they no longer have a strong motive for
taking the personal risks of an entrepreneurial career. At the same time, individ-
uals in the lower classes and the lower-middle classes feel blocked and discour-
aged from incurring debt for entrepreneurial projects. Thus, a mismatch
emerges between the growing volume of financial assets, on the one hand, and
declining real investment opportunities, on the other. The financial industry
may try to fill this gap by constructing ‘creative’ products like derivatives, secur-
itized credits and other fictitious investment opportunities—a solution that
obviously is not a remedy for the underlying disequilibrium and can work only

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temporarily. The latter scenario could be applied to the situation that developed
in the advanced capitalist economies (North America, Western Europe and
Japan) in the second half of the twentieth century and may help to explain the
present financial crisis (Deutschmann, 2009). Thus, the key problem of capital-
ism may lie in its own success.

5. Summary
This article aimed to explore the potential of pragmatist social theory, especially
as represented by John Dewey and George Herbert Mead, in order to analyse the
commonalities of capitalism as a global entity. I began by arguing that the prag-
matist approach is compatible, to a large degree, with the classic theory of Marx.
It can help to both identify and correct some inconsistencies of the Marxian
approach, in particular the incompatibility of Marx’s early concept of production
with the labour theory of value that he borrowed from Smith and Ricardo. The
pragmatist approach can also be considered a remedy against the rationalist
shortcomings of Weber’s theory. I then discussed the paradoxes of the capital –
labour nexus as the core element of the structure of capitalism. Here, Marx’s
analysis is clearly superior to Dewey’s. Once again, however, the pragmatist per-
spective can contribute to clarifying the meaning of the concept of capital and the
dynamic nature of capital; and, as I tried to show, it can help the Marxian con-
cepts of ‘fetishism’ and ‘reification’ become more transparent than they are in
the Marxist literature. Finally, I tried to demonstrate that a multi-level analysis
is the only adequate way to explain the actual dynamics of capitalism. Starting
from the polarization of classes at the macro-level, I outlined how the inconsist-
ent and contradictory nature of institutions and social networks in capitalism
stimulates creative and innovative modes of individual adaptation, and how indi-
vidual creativity becomes socially structured by the dynamics of innovative para-
digms. Capitalist growth can thus be interpreted as the aggregate effect of the
social construction and deconstruction of economic paradigms. The model I
 A pragmatist theory of capitalism 103

have outlined shows how capitalist development oscillates between the dilemmas
of too little and too much upward entrepreneurial mobility. The latter type of
dilemma seems to have contributed to the present problems of mature capitalist
economies. The conclusion is that the biggest problem of capitalism could be its
own success and its inability to fulfil the hopes it kindles in the unpropertied
majority of society.

Acknowledgements
I would like to thank Fred Block, Heiner Ganssmann and Cynthia Lehmann for

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helpful comments and linguistic advice.

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