rkm> The birth of capitalism


Richard Moore


The birth of capitalism 

The story of capitalism begins in the late 1700s in Scotland and northern 
England, with the birth of the Industrial Revolution.  Several particular 
ingredients came together there, which collectively launched the world onto its 
current path. One of those ingredients was an impressive series of mechanical 
inventions (e.g., the steam engine), leading to a multifold increase in the rate
and scale of manufacture. Another ingredient was the nature of the British 
economy - which had for some time been organized around specialization and 

Different regions of Britain had specialized in the production of different 
kinds of goods, first for the London market  and later - as the British Empire 
expanded - for international markets.  What this meant is that a more efficient 
producer could always find a market for his cheaper goods.  Rather than being 
limited by the size of a local market, there was always the opportunity to 
capture a share of the huge trade that flowed through London. Thus when the 
tools of industrial manufacture came along, they could immediately be put to 
very profitable use. An enterprising entrepreneur who saw the potential of a new
invention, and who invested boldly, was able to amass a huge fortune.  He could 
set up a large-scale manufacturing plant, mass-produce goods below the cost of 
earlier methods, and rapidly capture a share of the large existing markets.

A new way of creating fortunes had been born. Instead of slowly amassing wealth 
over a lifetime, or risking a voyage in search of treasure, there was now a 
systematic way to amass wealth relatively quickly.  A person with money to 
invest could seek out the latest leading-edge inventions, develop a still-more 
efficient factory - and steal market share from his now-outdated rivals.  A way 
had been found to use money to transform initiative & innovation into wealth. 
Out with the old methods, in with the new methods - and behind it always the 
investor - driving the process while amassing a fortune. This method of amassing
wealth was eventually given the name capitalism.  A capitalist is someone who 
invests money in an enterprise with the objective of receiving more in return 
than was invested. 

The consequences of these developments were far reaching.  The availability of 
cheaper products, and the wealth of a few entrepreneurs, was the least of it.  
People's livelihoods were destroyed, as their locally based enterprises were 
forced out of business. They moved to towns and became factory employees, 
usually under appalling conditions. The vitality of rural life was undermined 
and industrial cities arose, with their slums, crime, and diseases.  Society is 
a system, and if one part changes, those changes ripple out and effect other 
parts - in ways both intended and unintended.  The goal of entrepreneurs and 
investors was simply to amass wealth, but their initiatives led to profound 
societal changes.

A third ingredient of British society - its hierarchical class system - 
contributed to the way in which these changes unfolded. Those at the bottom of 
the hierarchy were long accustomed to being exploited, and being subject to the 
will of their 'betters'.  Their domestication to hierarchy prepared them well 
for living in slum conditions and working under the thumb of oppressive bosses.
But those at the top of the hierarchy were also affected, and they were in a 
better position to protect their interests against the changes that were being 
brought about by capitalist investors and entrepreneurs.

Although the nature of the British economy served to promote capitalist success,
there were also aspects of the economic regime which placed limits on that 
success.  The dominant economic doctrine of the day was mercantilism, whose 
static definition of wealth did not fit well with the dynamics of capitalist 
innovation. Tariffs, taxes, and various kinds of restrictions hampered the 
growth of capitalist development.  The economic regime was designed to protect 
the wealth and power of the aristocratic class, and capitalist upstarts soon 
began to see the existing regime as an obstacle to their ambitions. The paradigm
of capitalism had been wealth accumulation through initiative & innovation, and 
it was only natural that the creative energies of capitalists would turn 
eventually from technology to politics.  In the early days, when markets seemed 
inexhaustible, the creative focus was on new technologies and larger-scale 
production.  But as markets began to saturate, and growth slowed down, creative 
attention turned to the political barriers that stood in the way of further 
wealth accumulation.  

Capitalism became in part a political movement - lobbying for a new economic 
regime and fewer restrictions  on its operations.   In 1775 James Watt perfected
his steam engine.  In the very next year Adam Smith published The Wealth of 
Nations.  The steam engine opened up whole new vistas of industrial development,
including railroads and powered sea transport.  But Wealth of Nations was of 
perhaps even greater historical significance - it helped turn the tide toward an
entirely new economic regime, a regime that transformed the world and which led 
directly to what we now know as globalization. As economic analysis, Smith's 
work is certainly notable - but as a revolutionary manifesto - although 
unintended as such - his work was perhaps the most successful in all of history.

Wealth of Nations presented one of the earliest examples of what is now called 
systems analysis.  Smith looked at the economy as a system within which buyers 
and sellers were actors, and whose interactions led to an overall system 
behavior.  He sought to identify the motives that guided buyers and sellers, and
to trace out how those motives affected system performance. He examined how 
economic policies and restrictions affected that performance, and sought to 
demonstrate that fewer restrictions would lead to enhanced performance - and 
thus increase the wealth of the British nation.  Smith offered a model of a 
market economy - free of all but a few simple restrictions.  He argued 
persuasively that within such a market economy every buyer and seller could be 
left to pursue their own self-interest - and that the result would lead to a 
healthier, more productive economy.

Smith was guided by noble moral sentiments, and his work was aimed at improving 
the welfare of society.  In the new production methods he saw hope for a more 
bountiful society, and he sought through his work to liberate economics from 
antiquated restrictions.  Smith was not particularly wealthy, and was not 
himself a capitalist, but the main effect of his book was to advance the cause 
of the capitalist movement. Inadvertently, Smith played the role of radical 
propagandist in the struggle for power between the traditional aristocracy, and 
the emerging capitalist class.  By persuasively arguing that a more liberal 
economic regime would benefit everyone, and that it would enhance the wealth of 
the British state, he helped undermine the old aristocracy's resistance to the 
advance of capitalism.

One can only feel sorry for Smith, who must to this day be turning in his grave.
His intention was not to empower a new ruling elite, but rather to promote 
economic benefits for everyone. He was very careful, in his analysis, to point 
out that some restrictions were very necessary - not all restrictions should be 
removed from the marketplace.  Unfortunately, once his work was published, he 
had no control over how it would be used. The capitalist movement embraced 
Smith's central notion of fewer restrictions, but paid little heed to those 
restrictions that were necessary for his market economy to operate effectively. 
While Smith envisioned a free and open marketplace, based on fair competition, 
ambitious capitalists were heading in quite a different direction.  

to be continued,