History Of Capitalism

by Andrew Beattie (Contact Author | Biography)

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The roots of what are now commonplace activities - such as buying stocks, bonds, and even things like applying for a loan or balancing a portfolio - is the "evolution" of the various economic systems that have supported them. The development of economics across time and continents is neither uniform, nor complete. This article will focus on the systems that have led to our current Wall Street arrangement. (For more insight on economics, read Economics Basics.)

Tooth, Nail and Plants
In the black hole known as pre-history, humans established a complex system of community that includes elements of labor, reward and trade. This eventually included the domestication of plants and livestock, furthering the scope of tradeable goods as well as tying people to the land so economies could develop. The uneven development of ancient economies suggests that many systems were attempted, but the profusion of empires suggests that the rule of powerful elite was the most successful in the early going.

The Spaces Between Empires
The most telling fact about humanity in the ancient world is that when the external controls of a ruler were removed, people reverted to subsistence farming. Although there is only one official dark age in the history text, the disconnected ancient world used to go through dark ages much like the blackouts and brownouts that ripple across energy hungry states. In these dark areas, the people went back to securing enough food for themselves and surviving until the next powerful figure came along to claim them as his own.

Feudalism
Up until the twelfth century, less than 5% of the population of Europe lived in towns. Skilled workers lived in the city but received their keep from feudal lords rather than a real wage, and the farmers were essentially serfs for landed nobles. It took the Black Plague, one of the most devastating pandemics in human history, to shake up the system significantly. By killing scores of people in both town and countryside, the various plagues of the dark ages actually created a labor shortage.

Nobles fought to hire enough serfs to keep their estates running and many trades suddenly needed to train outsiders, as entire guild families were wiped out. The advent of true wages offered by the trades encouraged more people to move into towns where they could get money rather than subsistence in exchange for labor. As a result of this change, birth rates exploded and families soon had extra sons and daughters who, without land to tend, needed to be put to work. Child labor was as much a part of the town's economic development as slavery was part of the rural life.

Mercantilism
Mercantilism is now known as an attempt to create trade imbalances between nations, as well as between colonies and their imperial rulers, so that one nation prospers at the cost of others. It also has a less known usage simply meaning the principles and methods of commerce. Mercantilism started as trade between towns, but it was not necessarily competitive trade. Originally, each town had vastly different products and services that were slowly homogenized by demand over time. After the homogenization of goods, trade was carried out in wider and wider circles: town to town, county to county, province to province, and finally nation to nation. When too many nations were offering similar goods for trade, the trade took on a competitive edge that was sharpened by strong feelings of nationalism in a continent that was constantly embroiled in wars. (To learn more about globalization, read What Is International Trade?)

During the age of colonialism and mercantilism, the nations seeding the world with colonies were not trying to increase their trade. Most colonies were set up with an economic system that smacked of feudalism, with their raw goods going back to the motherland and in the case of the British colony in America, being forced to buy the finished product back with a pseudo-currency that prevented them from trading with other nations.

It was Adam Smith who noticed that mercantilism was not a force of development and change, but a regressive system that was keeping the world from advancing. His ideas for a free market opened the world to capitalism.

Industrial Capitalism and Further
Smith's ideas were well timed for the world, as the Industrial Revolution was just starting to cause tremors that would soon shake the world. It was becoming apparent that colonialism wasn't the gold mine that the European powers thought it would be. Fortunately, a new gold mine was found in the mechanization of industry. As technology leaped ahead and the factories no longer had to be built near waterways to function, industrialists began building in the cities where there were now thousands of people to supply ready labor.

Industrial tycoons were the first people to amass their wealth in their lifetimes, outstripping both the landed nobles and many of the moneylending/banking families. For the first time in history, common people could have hopes of becoming wealthy without being born into it. The new money crowd was as rich as the old money crowd, but they had no interest in the status quo. They built more factories that required more labor while also producing more goods for people to purchase. (For related reading, see Financial Capitalism Opens Doors To Personal Fortune.)

Conclusion
Industrial capitalism was the first system to benefit all levels of society rather than just the noble class. Wages increased, helped greatly by the formation of unions, and the standard of living also increased with the glut of affordable products being mass-produced. This led to the formation of a middle class that began to lift more and more people from the lower classes to swell its ranks.

All over the world, capitalism grew beyond pure industrial capitalism into forms more palatable to the region it settled. The U.S. raised one of the purest types of capitalism with a minimum of government regulation, while Canada and the Nordic countries created a balance between socialism and capitalism. It took a long time to get here, but capitalism is here to stay. As the world becomes more globalized, it is likely that countries who haven't yet adopted this system will jump on the bandwagon as well.

For related reading, see How Influential Economists Changed Our History and An Exploration of the Development of the Market.

by Andrew Beattie, (Contact Author | Biography)

Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.

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