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This is the story of Capitalism. Almost all excerpts (with edits) from Sapiens by Yuval Noah Harari. Not a part of the overarching book notes because it doesn’t fit in too well. But still, super interesting and thus warrants its own notes.


Birth of Capitalism

In the medieval era, money could represent and convert only things that existed in the present. This imposed a severe limitation on growth, since it made it very hard to finance new enterprises.

Without a bakery, she can’t bake cakes. Without cakes, she can’t make money. Without money, she can’t hire a contractor. Without a contractor, she has no bakery.

Humankind was trapped in this predicament for thousands of years. As a result, economies remained frozen.

We discovered the way out only in the modern era, with the appearance of a new system based on trust in the future. In it, people agreed to represent imaginary goods – goods that do not exist in the present – with a special kind of money called ‘credit’. Credit enabled us to build the present at the expense of the future. It’s founded on the assumption that our future resources are sure to be far more abundant than our present resources.

A host of new and wonderful opportunities open up if we can build things in the present using future income.

The problem in previous eras was not that no one had the idea or knew how to use it. It was that people seldom wanted to extend credit because they didn’t trust that the future would be better than the present. They believed that times past had been better than their own times and that the future would be worse, or at best much the same.

Adam Smith made this novel argument in The Wealth of Nations: “when a landlord, a weaver, or a shoemaker has greater profits than he needs to maintain his own family, he uses the surplus to employ more assistants, in order to further increase his profits. The more profits he has, the more assistants he can employ. It follows that an increase in the profits of private entrepreneurs is the basis for the increase in collective wealth and prosperity.”

Smith’s claim that the selfish human urge to increase private profits is the basis for collective wealth is one of the most revolutionary ideas in human history – revolutionary not just from an economic perspective, but even more so from a moral and political perspective. What Smith argues is that greed is good, and that by becoming richer I benefit everybody, not just myself. Egoism is altruism.

Capitalism began as a theory about how the economy functions. It was both descriptive and prescriptive – it offered an account of how money worked and promoted the idea that reinvesting profits in production leads to fast economic growth. But capitalism became far more than just an economic doctrine. It now encompasses an ethic – a set of teachings about how people should behave, educate their children and even think.

Its principal tenet is that economic growth is the supreme good, or at least a proxy for the supreme good, because justice, freedom and even happiness all depend on economic growth.

Capitalism and Science

The history of capitalism is unintelligible without taking science into account. Capitalisms belief in perpetual economic growth flies in the face of almost everything we know about the universe. A society of wolves would be extremely foolish to believe that the supply of sheep would keep on growing indefinitely. The human economy has nevertheless managed to grow exponentially throughout the modern era, thanks only to the fact that scientists come up with another discovery or gadget every few years – such as the continent of America, the internal combustion engine, or genetically engineered sheep. Banks and governments print money, but ultimately, it is the scientists who foot the bill.

A society of wolves would be extremely foolish to believe that the supply of sheep would keep on growing indefinitely.

Over the last few years, banks and governments have been frenziedly printing money. Everybody is terrified that the current economic crisis may stop the growth of the economy. So they are creating trillions of dollars, euros and yen out of thin air, pumping cheap credit into the system, and hoping that the scientists, technicians and engineers will manage to come up with something really big, before the bubble bursts.

Everything depends on the people in the labs. New discoveries in fields such as biotechnology and nanotechnology could create entire new industries, whose profits could back the trillions of make-believe money that the banks and governments have created since 2008. If the labs do not fulfil these expectations before the bubble bursts, we are heading towards very rough times.

Capitalism and Imperialism

Capitalism played a decisive role not only in the rise of modern science, but also in the emergence of European imperialism.

The feedback loop of imperial capitalism drove expansion: credit financed new discoveries; discoveries led to colonies; colonies provided profits; profits built trust; and trust translated into more credit. War emperors like Nurhaci and Nader Shah ran out of fuel after a few thousand kilometres. Capitalist entrepreneurs only increased their financial momentum from conquest to conquest.

The empires built by bankers and merchants in frock coats and top hats defeated the empires built by kings and noblemen in gold clothes and shining armour. The mercantile empires were simply much shrewder in financing their conquests. Nobody wants to pay taxes, but everyone is happy to invest.

Credit is deeply intertwined with progress. In 1568, the Dutch were under the rule of Spanish lords. Yet, within 80 years, they overthrew the Spanish, set up a global Dutch empire, and became the richest state in Europe.

The secret of Dutch success was credit. The Dutch burghers, who had little taste for combat on land, hired mercenary armies to fight the Spanish for them. The Dutch themselves meanwhile took to the sea in ever-larger fleets. Mercenary armies and cannon-brandishing fleets cost a fortune, but the Dutch were able to finance their military expeditions more easily than the mighty Spanish Empire because they secured the trust of the burgeoning European financial system at a time when the Spanish king was carelessly eroding its trust in him.

Financiers extended the Dutch enough credit to set up armies and fleets, and these armies and fleets gave the Dutch control of world trade routes, which in turn yielded handsome profits. The profits allowed the Dutch to repay the loans, which strengthened the trust of the financiers. Amsterdam became not only one of the most important ports of Europe, but also the continent’s financial Mecca.

The Dutch were able to build trust due to two reasons -

  1. They were sticklers for repaying their loans on time and in full.
  2. Their judicial system enjoyed independence and protected private rights.

The Spanish capitalists under their king, too, realised that if they want to keep their money and use it to gain more wealth, they are better off investing it where the rule of law prevails and where private property is respected – in the Netherlands, for example. In such ways did the king of Spain squander the trust of investors at the same time that Dutch merchants gained their confidence.

Birth of the stock exchange

One way the Dutch financed their exploits was to sell “shares” of their company. The bigger the share you buy, the bigger the share of profits you get from the exploit.

If you thought a company was going to make a big profit but it had already sold all its shares, you could buy some from people who owned them, probably for a higher price than they originally paid. If you bought shares and later discovered that the company was in dire straits, you could try to unload your stock for a lower price.

The resulting trade in company shares led to the establishment in most major European cities of stock exchanges, places where the shares of companies were traded.

Fall of the Dutch

As the seventeenth century wound to an end, complacency and costly continental wars caused the Dutch to lose their place as Europe’s financial and imperial engine.

They grew too big to balance the credit and the exploits.

Doing as the Dutch did wasn’t easy. Some failed to reach this state.

The Mississippi Bubble was one of history’s most spectacular financial crashes. The royal French financial system never recuperated fully from the blow. The way in which the Mississippi Company used its political clout to manipulate share prices and fuel the buying frenzy caused the public to lose faith in the French banking system and in the financial wisdom of the French king. Louis XV found it more and more difficult to raise credit. This became one of the chief reasons that the overseas French Empire fell into British hands.

Capitalism induced wars

In the 19th century, traders had learnt from the Dutch - instead of hiring armies themselves, they counted on the state to enforce their interests. They were influential and pulled the strings of power in London, Amsterdam and Paris.

The most notorious example of how governments did the bidding of big money was the First Opium War, fought between Britain and China (1840–42). In the first half of the nineteenth century, the British East India Company and sundry British business people made fortunes by exporting drugs, particularly opium, to China. Millions of Chinese became addicts, debilitating the country both economically and socially. In the late 1830s the Chinese government issued a ban on drug trafficking, but British drug merchants simply ignored the law. Chinese authorities began to confiscate and destroy drug cargos. The drug cartels had close connections in Westminster and Downing Street – many MPs and Cabinet ministers in fact held stock in the drug companies – so they pressured the government to take action.

In 1840 Britain declared war on China. The overconfident Chinese were no match for Britain’s new wonder weapons – steamboats, heavy artillery, rockets and rapid-fire rifles.

War itself became a commodity, just like opium. In 1821 the Greeks rebelled against the Ottoman Empire. The uprising aroused great sympathy in liberal and romantic circles in Britain. But London financiers saw an opportunity as well. They proposed to the rebel leaders the issue of tradable Greek Rebellion Bonds on the London stock exchange. The Greeks would promise to repay the bonds, plus interest, if and when they won their independence.

The bondholders’ interest was the national interest, so the British organised an international fleet that, in 1827, sank the main Ottoman flotilla in the Battle of Navarino. After centuries of subjugation, Greece was finally free. But freedom came with a huge debt that the new country had no way of repaying. The Greek economy was mortgaged to British creditors for decades to come.

After the Battle of Navarino, British capitalists were more willing to invest their money in risky overseas deals. They had seen that if a foreign debtor refused to repay loans, Her Majesty’s army would get their money back.

This is why today a country’s credit rating is far more important to its economic well-being than are its natural resources. Credit ratings indicate the probability that a country will pay its debts.

Criticism of Capitalism

Belief in the free market is as naïve as belief in Santa Claus. There simply is no such thing as a market free of all political bias. The most important economic resource is trust in the future (as we see from history - it began the credit era), and this resource is constantly threatened by thieves and charlatans. Markets by themselves offer no protection against fraud, theft and violence. It is the job of political systems to ensure trust by legislating sanctions against cheats and to establish and support police forces, courts and jails which will enforce the law. When kings fail to do their jobs and regulate the markets properly, it leads to loss of trust, dwindling credit and economic depression

There is an even more fundamental reason why it’s dangerous to give markets a completely free rein. Adam Smith taught that the shoemaker would use his surplus to employ more assistants. This implies that egoistic greed is beneficial for all, since profits are utilised to expand production and hire more employees. Yet what happens if the greedy shoemaker increases his profits by paying employees less and increasing their work hours? The standard answer is to switch jobs.

But if there is a single corporation controlling all shoe factories in a country, or if all factory owners conspire to reduce wages simultaneously, then the labourers are no longer able to protect themselves by switching jobs.

Even worse, greedy bosses might curtail the workers’ freedom of movement through debt peonage or slavery. At the end of the Middle Ages, slavery was almost unknown in Christian Europe. During the early modern period, the rise of European capitalism went hand in hand with the rise of the Atlantic slave trade. Unrestrained market forces, rather than tyrannical kings or racist ideologues, were responsible for this calamity.

The catalyst? Sugar. The annual sugar intake of the average Englishman rose from near zero in the early seventeenth century to around eight kilograms in the early nineteenth century.

However, growing cane and extracting its sugar was a labour-intensive business. Few people wanted to work long hours in malaria-infested sugar fields under a tropical sun. Contract labourers would have produced a commodity too expensive for mass consumption. Sensitive to market forces, and greedy for profits and economic growth, European plantation owners switched to slaves.

The slave trade was not controlled by any state or government. It was a purely economic enterprise, organised and financed by the free market according to the laws of supply and demand. Private slave-trading companies sold shares on the Amsterdam, London and Paris stock exchanges. Middle-class Europeans looking for a good investment bought these shares. Relying on this money, the companies bought ships, hired sailors and soldiers, purchased slaves in Africa, and transported them to America. There they sold the slaves to the plantation owners, using the proceeds to purchase plantation products such as sugar, cocoa, coffee, tobacco, cotton and rum.

Credit solved the chicken and the egg problem.

This is the fly in the ointment of free-market capitalism. It cannot ensure that profits are gained in a fair way, or distributed in a fair manner

Another criticism is that the human species and the global economy may well keep growing, but many more individuals may live in hunger and want.

Capitalism has two answers to this criticism. First, capitalism has created a world that nobody but a capitalist is capable of running. The only serious attempt to manage the world differently – Communism – was so much worse in almost every conceivable way that nobody has the stomach to try again. In 8500 BC one could cry bitter tears over the Agricultural Revolution, but it was too late to give up agriculture. Similarly, we may not like capitalism, but we cannot live without it.

The second answer is that we just need more patience – paradise, the capitalists promise, is right around the corner. True, mistakes have been made, such as the Atlantic slave trade and the exploitation of the European working class. But we have learned our lesson, and if we just wait a little longer and allow the pie to grow a little bigger, everybody will receive a fatter slice.

But how big can the pie grow?

The modern economy grows thanks to our trust in the future and to the willingness of capitalists to reinvest their profits in production. Yet that does not suffice. Economic growth also requires energy and raw materials, and these are finite. When and if they run out, the entire system will collapse.

The Present

The modern capitalist economy must constantly increase production if it is to survive, like a shark that must swim or suffocate. Yet it’s not enough just to produce. Somebody must also buy the products, or industrialists and investors alike will go bust. To prevent this catastrophe and to make sure that people will always buy whatever new stuff industry produces, a new kind of ethic appeared: consumerism.

Story to buy is sold along with capitalism

The capitalist and consumerist ethics are two sides of the same coin, a merger of two commandments. The supreme commandment of the rich is ‘Invest!’ The supreme commandment of the rest of us is ‘Buy!’ The capitalist-consumerist ethic is revolutionary in another respect. Most previous ethical systems presented people with a pretty tough deal. They were promised paradise, but only if they cultivated compassion and tolerance, overcame craving and anger, and restrained their selfish interests. This was too tough for most.

But the Capitalist-consumerist ideology system is in line with peoples present desires. No wonder millions of people live with zero savings.

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