A History of Capitalism - Part 3

Earlier I had mentioned that one of the characteristics of Capitalism is the accumulation of the means of production into a few hands. The first steps in this direction took place in England in a process known as enclosure. According to Wikipedia, enclosure was the process whereby common land (defined as land under the ownership of one person but to which others had certain traditional rights like grazing rights etc.) was fully taken into private ownership and use. Thus enclosure led to land that had previously been used by a number of people being used by one person or family.

The process of enclosure had started piecemeal as early as the 13th century; accelerated towards the end of the medieval period and reached its peak in the late 18th and early 19th centuries. While the process of enclosure had many causes, one of the most important ones was the development of a unified market area. Over time, as the central government expanded the area under its effective control, there was an elimination of internal barriers to commerce and this helped in the development of a unified market area. In pre-industrial times, land was the primary generator of wealth. A unified market area with no internal barriers to commerce (like excessive tolls and taxes from one region to the next) created an incentive to increase agricultural production in order to create a surplus that could be profitably sold. Enclosure led to the creation of larger farms that could produce the required surplus. The process also led to the depopulation of villages as people lost their traditional rights to the former common land. Any compensation offered took the shape of land of far poorer quality. So for a large mass of people, the only alternative was to migrate into the urban centers in search of a livelihood. This led to dramatic expansions of the major urban centers which led to further incentive to produce a surplus to feed the growing urban population which in turn created an incentive for enclosure.

The rapid expansion of the urban areas, specially during the peak of the enclosure movement, was fortuitous development from an industrial (and capitalist) point of view. The peak of the enclosure movement coincided with the start of the industrial revolution. The industrial revolution was a complex process invloving many factors. A discussion on the causes of the industrial revolution are beyond the scope of this essay. What is of interest here is the effect the industrial revolution had on the development of the nascent capitalist mindset.

The enclosure movement had displaced a large number of people who were then forced to migrate into urban areas in search of a livelihood. This migration displaced them from their family and social networks rooted in their villages and led them to live amongst strangers. Migrants could no longer rely on immediate and extended family networks that had previously supported them. Thus an indivdiualistic way of thinking became necessary for survival in a strange environment. Another effect was that the migrants became dependent on other people for their livelihood. In other words, they had to find a job in order to survive. Thus in migrating from villages to cities, people became wage earners. This also suited the owners of capital who had established factories utilizing the new systems of production made possible by the industrial revolution. These factories required a workforce that was made available as a result of the enclosure movement. So, by the middle of the 19th century, all the elements of the capitalist system were firmly in place.

A History of Capitalism - Part 2

Nowadays when we think about Capitalism, there are a specific set of associations that come to mind. These associations have all the characteristics of Capitalism as a thought process and as a practice that was discussed earlier. At a minimum, these associations consist of free, unregulated markets, private property and an enforcement mechanism that supports the rights of private property and the existence of corporations. How did these associations come about?

To answer this question, we have to go back into the past. The roots of the present system were forged over centuries. The earliest trading links were forged around the Mediterranean basin with the rise of the first cities and the development of the first formal system of government. Fairly early on, three great trading regions emerged. One was the trading region around the Mediterranean basin. A second one was the trading region encompassed by China and the third one was that encompassed by India. These trading regions were initially geographically limited. However, over time, their geographic scope gradually increased with the rise of successively large empires. In the Mediterranean region, the rise of the Roman Empire and the later development of Christianity played an important role in binding this area together and also served to bring in Western Europe into its ambit. The Chinese trading region increased in size as the central government gradually increased it territory and forged a primitive sense of nationhood through a common set of values. In India, development of the Hindu religion played a similar role in forging a sense of commonality amongst the people. Subsequent invasions by outsiders did little to change the sense of identity that was forged over time within these regions. A fourth great trading region developed later on with the rise of Islam and the establishment of the Islamic civilization from Nothern Africa to the Far East.

All these were pre-capitalist societies; they did not show the signs of a capitalist society. This does not mean that there was no trade between these regions. There was always active trade within these regions in times of peace and stability and this carried over into intra-regional - what we would call international trade today - as well. This was an early version of mercantilism in that trading links were established by individual merchants. Unlike later, there was no state sponsorship of this early international trade. The volume of trade was also relatively low and items traded were scarce, luxury items which were easily transportable and commanded a high price. An example of this was the trade in frankincense carried out between Southern Arabia and the Mediterranean region. This pattern persisted from the earliest times, down the ages until approximately the 16th century. In this period, trade would flourish within each major trading region during times of peace and stability and would tend to decrease if not collapse outright during more turbulent times. This would also be reflected in international trade where the volume of trade would fluctuate depending on the political and economic conditions within each region. The extent of the international trading links connecting each region increased over time as these became more tight knit culturally and the influence of their respective civilizations spread but the pattern of the trading links remained essentially unchanged. It was only from the 16th century onwards, that political, religious, economic and cultural changes within Europe set in motion a series of events that was to dramatically change the course of the world and set it firmly on the capitalist path that we now find ourselves on.

These developments occurred as a result of the Protestant movement against the authority and perceived corruption of the Church. There was a general change in attitude towards religion and the hold of the Church as far as ideas and modes of thinking was broken. One such change is the attitude towards usury. Usury has been denounced down the ages by all major religions. In Europe, this resulted in the attitude that money made by money was sinful. Thus lending money for investment purposes was also looked down upon. With the reformation, this attitude started to change. This process culminated in Calvinism which encourage the purposeful investment of money by presenting luxury and self indulgence as vices and thrift as a virtue. Calvinism even viewed wealth and its accumulation as a sign of God's favor which was in start contrast to the attitude of the Church which tended to view poverty as a virtue.

In the meanwhile, the emergence of the nation state in Europe also led to the emergence of the charter company. A charter was granted by the government in order to encourage large scale undertakings. This charter represented a monopoly on trade with a specific region for a number of years. This development led to the emergence of the great trading companies like the English East India Company. These entities were organized as joint stock companies in which a large number of people could invest their money and receive profits in proportion to their holdings.

By this point, the first elements of the coming capitalist system are in place. England was the first country to go down this path. Development of the capitalist mind set also helped to set in motion the Industrial Revolution which was to decisively tilt the balance of power in Europe's favor.

A History of Capitalism - Part 1

What is Capitalism? There are perhaps as many definitions as there are opinions on this topic; many of them very strongly held. For the purposes of this series of articles, it is useful to have a definition of Capitalism in hand before proceeding to look at its history.

Capitalism evolved gradually from Mercantilism. In its nature, it is profoundly different from other modes of thinking, particularly Feudalism which was prevalent in many parts of the world for a millennium - most notably in Europe, China and Japan. One of the best definitions of Capitalism is given in the European Enlightenment Glossary. Here, Capitalism is defined as both a set of practices and as a method of thinking.

Capitalism as a set of practices is characterized by (points taken from the European Enlightenment Glossary):

• The accumulation of the means of production into a few hands.
• The human work necessary to produce and distribute goods - labor - takes the form of wage labor.
• The means of production and labor is manipulated by the owner of capital using rational calculation to realize a profit.

Capitalism however is not just a set of practices. It is also a particular way of thinking. This involves:

• An individualistic way of thinking.
• A notion of indefinite and continued economic growth.
• Economics, the study of the production and distribution of goods, is divorced from other areas of knowledge. In other words, production and distribution are treated as endeavors separated from areas like religion, politics etc.
• The economic world view has a mechanical view of the economy and society. It assumes that all participants in an economy are rational beings who calculate the cost/benefit of each activity and pursue those that give them the maximum benefit at the least cost.
• The fundamental unit of meaning in capitalist and economic thought is the object i.e. Capitalism relies on the creation of a consumer culture. In other words, in a capitalist society, most people do not produce what they consume.

One thing that immediately stands out is that Capitalism, both as a practice and as a way of thinking, is very different from what came before it. While some of the practices of Capitalism can be traced in some form through the ages, historically there was no wholesale adoption of these practices and ways of thinking. This represents a fundamental discontinuity from the past and has resulted in a world that would not merely be materially strange to people of earlier times. The capitalist viewpoint represents a dramatically different way of viewing the world.

In the next few posts, I will trace economic history as it is a reflection of the history of capitalism. Then I will look at the changes in thinking that were wrought by Capitalism and how they resulted in the world we live in.

How Have We Reached This Pass?

How have we reached our current situation? Are we as a society doomed to repeat cycles of boom and bust forever? What can we do differently? What were our assumptions and how have they changed as a result of the current economic collapse?

These and many other questions of a similar nature are being asked by people around the world. The present crisis did not arise in a vacuum. It may have caught nearly everyone by surprise, but it was years in the making. Infact the connections to our current predicament go right back to our ancient past. We have to remember that the present is a result of decisions made in the past. A different set of decisions would have resulted in a different present. While most people are unaware of it, the future is being determined right now as I write this. The future will be determined by the decisions of the present. In some cases (for example, the environmental consequences of our actions) the course of the future has to a large extent already been determined by our decisions in the past. It is a cliche to say that those who ignore history are doomed to repeat it. Yet this is what has been happening in every boom and bust cycle for over 200 years. Consistently, people have ignored lessons from the past and continued along the same destructive behaviour pattern. Unfortuneately as communications technology has developed, the consequences of each successive boom and bust have become more severe. So if we wish to avoid repeats in the future, we have to examine the past. Only by understanding the past can we understand the present and only by understanding the present can we hope to change our future course.

In the next few posts, I will be examing the history of capitalism to better understand the present. Of necessity, this will also entail examing economic theories for these provide the intellectual underpinnings to the whole capitalist structure.

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Some Thoughts on Capitalism

There is a fatal flaw in the basic capitalist model specially as it is practiced by the Anglo-American world. The flaw is that capitalism assumes infinite growth. The problem is that the world has finite resources. As a result, over the very long term, the capitalist model as it has evolved is inherently unstable.

Whenever I have postulated this thesis, I have encountered strong opposition. The immediate answer relates to the cycle of growth and recession. Ever since the industrial revolution, all capitalist economies have experienced regular periods of boom and bust. In nearly every boom period, the enabling factor has been either technological change or the discovery of a major source of a mineral resource that is in great demand. Examples in the former category are railways in the19th century, automobiles in the early 20th, electricity in the early to mid 20th and internet in the late 20th century. Examples in the latter category are the California gold rush in the mid 19th century, the Alaska gold rush in the late 19th century, the Philadelphia oil boom of the mid 19th century and the Middle East oil boom in the mid 20th century.

The effects of technological change tends to leave economies and people better off than before. Railroads, to take an example, dramatically reduced the cost of transportation from coastal areas to interior areas. They helped form a uniform internal market in countries. by linking interior rural areas to major urban areas that are usually concentrated on the coastal areas. They helped to avert major famines by allowing rapid transportation of food items to affected areas from surplus areas. Similarly electricity made all of us better off by giving us superior lighting thereby extending the amount of time for work and leisure. Electricity also allowed the development of labor saving devices specially in the household arena for tasks which previously were done by hand. Electricity also allowed the development of refrigeration which vastly expanded the availability of food items at a reasonable cost and of course the computer and the Internet would not have been possible without electricity.

All of this is upheld to summarily dismiss my contention. Let me state at this point that I acknowledge the reality of boom and bust cycles in economies. I also know that companies like people have a lifecycle. Unlike people, a mature company has the option of reinventing itself when it finds its growth slowing thereby kicking off a new growth phase and a renewed lifecycle. But therein lies the nub of the problem. Notice an unspoken assumption. A mature company can reinvent itself to kickstart a new growth phase. The assumption here is that growth is necessary for a company to survive. What does it mean for a company to grow? There are two commonly held grounds for company growth. One is year on year increase in sales. The other is year on year increase in profits. Normally the two go together. However there is a possibility of increasing profits in the face of stagnating sales. This can be done by increasing prices and/or aggressively cutting costs. But again notice that the emphasis is on increase.

The question then arises, how can a company keep increasing sales year after year indefinitely? This can only happen if the economy (or economies) in which the company operates grows indefinitely. This in turn means that there has to be an indefinite increase in the amount of goods and services that the economy produces. That in turn implies that end consumers have to consume ever increasing quantities of goods and services. We must keep in mind that all economic activity is ultimately geared towards end consumption. For example, take a rather specialized product like tobacco paper which is used in cigarettes. There are only a few companies in the world which make paper that satisfies the requirements of tobacco companies. But why would tobacco companies need to buy this kind of paper? The reason is that they need it to make cigarettes which are sold to end consumers. Take another example: the material used in manufacturing a Boeing (or Airbus) aircraft. This is ultimately sourced from mining companies. Why would Boeing want this material? Because it is needed to make the aircraft. But why make the aircraft? In order to sell to airlines. But why would airlines want to buy these aircraft? The reason is that there is a demand to transport people (and cargo) from point A to point B in a fast, safe, convenient fashion. So the end result is that there is a consumer demand which needs to be met which makes possible this entire chain. The point of quoting these examples (and there are countless examples that can be similarly quoted) was to show that ultimately there has to be end consumption and this has to grow indefinitely over a long period of time for the current capitalist paradigm to work.

Now, let me return to my basic thesis and the objections to it. As I mentioned earlier, my thesis is that capitalism (in its current form) is inherently flawed because it assumes infinite growth in a world of finite resources.

The first objection is that all capitalist economies experience boom and bust cycles and in the latter, there is a contraction in the output of goods and services in an economy and so therefore the thesis is flawed. I agree that there are boom and bust cycles. However, during a normal course of the cycle, the contraction is not sufficient to permanently depress economic growth. It is assumed that once the economy recovers, it will recover lost ground and forge on ahead. Consequently, when the next bust comes along, it will be from a higher level than the start of the previous bust. Thus over time, the economy will continue to grow.

The second objection is that organizations operating in a capitalist economy have definite lifecycles. There is a continuous process of birth, growth, maturity and death (or sometimes re-birth) of companies. The response to this objection is that I have never made any claims regarding a single company. My claim is about a system. Even if we take an individual company, there are many assumptions that are made. It is assumed that the company will exist forever. No assumption is made regarding the nature of an individual company's business. A company can start in one area and end up in a completely different area within a short time. But it is assumed that during the company's existence, it will show ever increasing sales and profits. Expand this assumption for the totality of companies existing in an economy and you have a situation where it is assumed that the output of goods and services in an economy will grow indefinitely over time. Contractions will occur but each contraction will occur from a higher base than the previous one and the lost ground will be more than covered in the subsequent recovery. As I also discussed above, this continuous expansion over time can only occur if the ever increasing output of goods and services are ultimately consumed.

Now, this assumption runs into the reality of finite resources. Modern civilization rests on a base of industrial agriculture and industrial scale mining. The real problem stems from the mining leg. We need to extract various resources from the ground for our civilization to function. These resources are non-renewable. A ton of aluminium extracted today cannot be extracted tomorrow. It is gone forever. Similarly a barrel of oil extracted today is gone forever. It doesn't help that existing financial models actually encourage maximum extraction for immediate gain. This is because of the concept of Net Present Value (NPV) which essentially states that a dollar today is more valuable than the same dollar tomorrow because of the effects of inflation. There is therefore a basic incompatibility between the inherent assumption of capitalism (infinite growth over time) and the reality of finite resources. Thus the current capitalist system is flawed and ultimately doomed.

Final Point: An immediate objection to this conflict is the effect of technological change. This is a very important factor in mitigating the reality of finite resources. Better extraction and waste reclamation technologies allow us to stretch available resources. But that's the point. The available resources are fixed. They are not increasing. At some point, no improvement in extraction and waste reclamation technologies will enable us to extract any more.

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