Ed. note: The piece below is excepted from Chapter 1 of the book Ecosystems as Models for Restoring our Economies to a Sustainable State, 2nd Edition, written by John H. Giordanengo, and published by Anthem Press.
Capitalism’s Seven-Century March, from Medieval City-States to a Global Market Economy
Excellent bodies of work exist on the history of capitalism, including the career works of Adam Smith, Karl Marx, Alfred Marshall, Joseph Schumpeter, John Maynard Keynes, Fernand Braudel, and others. Readers interested in that history should study these authors directly, as the purpose of this section is merely to provide context.
During his tenure at Johns Hopkins University, Giovanni Arrighi detailed the evolution of capitalism in The Long Twentieth Century.10 Arrighi recognized four major epochs of capitalism spanning nearly seven centuries, summarized in Table 1.1.11 He believed the roots of capitalism could be traced back to a nascent system of trade in northern Italy. During periods of deadly rivalry between medieval city-states—Florence, Siena, Lucca, Genoa, Milan, Venice—a shrewd body of merchants realized a truism most businesses and consumers take for granted today. Profit could be made simply by shipping goods from areas where production was cheap to communities where consumers would pay a premium.
But there was an obstacle. Great risk existed in conducting trade with lands and seas far beyond a merchant’s borders. The assurance merchants needed to make foreign trade less risky was eventually secured by a system of laws and novel mechanisms such as double-entry bookkeeping, marine insurance, and holding companies.12 A great leap toward global market capitalism.
Capitalism’s initial form, mercantile capitalism, defined European commerce the day Columbus set sail for the Americas. The Dutch East India Trading Company and others dominated sea routes, profiting from Europe’s insatiable appetite for exotic spices from distant lands. The 400-year-span of mercantile capitalism was first centered around Genoa, due to its banking savvy and expansive port. The Dutch eventually gained the upper hand in global finance, and then power over sea routes. The Dutch, British, and other European nations began to build a global system of resource acquisition via a system of colonial expansion. That expansion is often equated with the exploitation of colonies providing the natural and social capital that fueled it. Besides the history of slave revolts that ensued and the continual raiding and pillaging by pirates, tension among sovereign nations and colonies began to build. Geopolitical shifts across a growing global trade network could not be tempered.
Source: Data from Arrighi and Braudel, with duration reflecting time between signal crises. Signal crises occur in periods of comparatively stable governance.
The blossoming of classical capitalism in the 1700s stoked fundamental changes not only in the means of production but also in the global financial systems required to manage an increasingly complex trade network. Great volumes of metal, cotton, sugar, tobacco, and other resources were channeled into Europe from remote corners of the Earth. This included the budding American colonies, whose cheap cotton and tobacco were in high demand by Europeans.
Concentrations of wealth grew quickly throughout Europe and North America, fueling the Industrial Revolution. It was at this moment that Adam Smith, the “father” of classical economics, challenged the common belief that the world’s wealth was constant. If wealth was constant, Smith argued, the only way one country could increase its wealth would be for another country to lose some of its wealth.
Even before the Industrial Revolution reached its peak, a climax of global tensions erupted into the French, Haitian, and other revolutions. This included the American Revolution, which gave birth to the United States of America the year Adam Smith published his globally famous book, An Inquiry into the Nature and Causes of the Wealth of Nations, often referred to as The Wealth of Nations. Those revolts, not Smith’s book, constituted a socioeconomic backlash that would forever change the course of capitalism.
Laissez-faire policies were fervently promoted by Adam Smith and others who argued for free markets, or self-regulating markets. Interference in trade or other natural business processes was condemned. To put these policies in context, the Industrial Revolution was an age when powerful monopolies defined industry, and when a governmental web of tariffs, bounties, and other interferences was commonplace.
This same industrial system caused a great extinction of skilled artisans, as production scales increased to meet the needs of global markets. Attaining those scales of production required coal, and the most productive coal reserves were in England. This scenario allowed the British Empire to grab the reins of global production and distribution from the Dutch.
Free trade across national borders was championed as a means of lowering the cost of living for Europeans. In theory, this would raise their standard of living. The reality was different. European wages from 1800 to 1860 were as low as—or even lower than—in the preceding centuries, according to an analysis by the French economist Thomas Piketty.13 As Piketty points out, the Industrial Revolution did not translate into higher real wages for laborers until the 1870s. That said, deep disagreements remain over the impact the Industrial Revolution had on the standard of living for Britain’s working class.14
What does remain clear is that the Industrial Revolution’s peak was followed quickly by the Long Depression in the final decades of the nineteenth century. The depression rippled across oceans, reaching the shores of the very nations upon which Britain’s wealth had been built. Britain’s control over capital was even shorter than that of the Dutch, whose control was briefer than Genoa’s. In great irony, while Americans were exploring western tribal lands on horseback, industrialists in its bustling east coast harbors—Boston, New York, Baltimore—were assimilating the dearest lessons of Britain’s industrial progress. Confidently, America grabbed the torch of global capitalism from its former ruler.
A brief surge in productivity erupted again, in lockstep with global tensions that fomented Earth’s first global war. The allied nations claimed victory and swiftly erected trade barriers to protect the wealth of each nation. Even as partiers were rattling American and European dance halls in the 1920s, economic failure was imminent. The wisest of investors could not foresee the decline, save one man. “Sooner or later a crash is coming, and it may be terrific!” proclaimed the American statistician Roger Babson, just weeks before the Great Depression.15 “Factories will shut down […] Men will be thrown out of work,” he warned, only to be ridiculed by the tycoons of Wall Street. In hindsight, the looming depression was evident as early as 1927, when rural banks began failing across the Midwest and flour mills began filing for bankruptcy.16
From the depths of impoverishment emerged a new brand of state intervention, epitomized by the New Deal and other federal actions to rebuild economies in a post-Depression world. So potent were the philosophies of economist John Maynard Keynes at the time that this epoch would be defined as Keynesian capitalism. Keynes believed the market economy was suffering from low demand for goods, so he advocated for low interest rates and easy credit. In his defining work, The General Theory of Employment, Interest and Money,17 Keynes insisted that government action was necessary to stabilize economies, essential to spurring consumer spending. This would lead to greater production, which would put an end to rampant poverty. In the United States, this translated to vast military-industrial spending during World War II.
In the thick of the war, delegates from 44 nations convened in Bretton Woods, New Hampshire, USA. There, they would forge new rules for a post–World War II monetary system. The result was the Bretton Woods Agreement, which established the US dollar as the stable global currency. The Bretton Woods Agreement also included the architecture for two new global entities: the World Bank and the World Trade Organization, charged with governing global finance and trade in a postwar world. Global trade and wealth accumulation surged once again.
This growth occurred alongside Joseph Schumpeter’s popular views in Capitalism, Socialism and Democracy.18 Schumpeter, a notable Austrian economist, argued that a restraint of foreign trade would produce steadier growth for a nation, as well as greater total output, compared to a system of uncontrolled global trade, which cannot fail to be “studded with catastrophes.” Keynes’s views persisted, for a moment.
America’s solitary reign over the global market economy ended with the 1970s oil crisis and recession.19 Emerging from the recession was global market capitalism, or simply globalization. Dictating much of our lives today, global market capitalism exists as a vast network of central banks and multilateral trade agreements. The United Nations, the International Monetary Fund, the World Bank, the Group of 20 (G20), and the World Trade Organization have become key players in the global control of money and capital. Together, these institutions comprise the transnational state, tasked with combating the volatile nature of a global market economy. The transnational state also includes global corporations whose interests lie not in the health of the countries that gave them birth, but in the accumulation of capital for stakeholders, no matter their country of birth.
A common thread to the transnational system is the Society for Worldwide Interbank Financial Telecommunications (SWIFT). Among the many services rendered by SWIFT is the facilitation of global mergers and acquisitions, as well as automation services that facilitate and secure trades on stock exchanges. SWIFT is so influential that the United States and its allies threatened to remove Russia from it in 2022, should Russia invade Ukraine. However, Russia had been stockpiling cash for decades while forging close trade ties with China, so the threat failed. How long the Russia-China ties last is questionable, for global market capitalism requires nations and corporations to maintain the loosest of connections with one another via naturally frail global supply chains.
Frail supply chains and market volatility are not the only by-products of global market capitalism. The degree of global consumption under the current system far exceeds any previous epoch, and wealth has become concentrated into even fewer hands.
To clarify, the concentration of wealth is not a problem in and of itself. There are thresholds to consider, however. For instance, when concentrations of capital are so great that control of media, banking, and other institutions falls into the hands of fewer and fewer entities, whose primary interest is in maintaining the very system that gave rise to their wealth. Or when the concentration of wealth results in diminished productive capacity, decreased productivity, or high unemployment levels across entire regions. Then it is a problem.
Notes
10 Arrighi, G. 2010. The Long Twentieth Century: Money, Power, and the Origins of our Time. Verso Books.
11 Braudel, F. 1984. Civilization and Capitalism, 15th-18th Century: The Perspective of the World. Harper & Row.
12 Spufford, P. 2002. Power and Profit: The Merchant in Medieval Europe. Thames & Hudson, Inc.
13 Piketty, T. 2014. Capital in the Twenty-First Century, Trans. Arthur Goldhammer. Harvard University Press.
14 de Zwart, P., B. van Leeuwen, and J. van Leeuwen-Li. 2014. Real Wages since 1820. In J.L. van Zanden, et al. (Eds.), How Was Life?: Global Well-being since 1820. OECD Publishing. http://dx .doi .org /10 .1787 /9789264214262 -8 -en.
15 Galbraith, J.K. 2009. The Great Crash 1929 (2nd ed.). Houghton Mifflin Harcourt.
16 Schauer, N.L. 1962. A History of Oakdale, Nebraska. Student Work, 545. Accessed on 19 November 2020. https://digitalcommons .unomaha .edu /studentwork /545.
17 Keynes, The General Theory of Employment.
18 Schumpeter, J.A. 1950. Capitalism, Socialism, and Democracy (3rd ed.). Harper and Brothers.
19 Arrighi, The Long Twentieth Century.