Rise of civilization Part 2
Continuation of the story with the development of capitalism
Continued from part 1
Development of capitalism
Capitalism is more than just private enterprise and market exchange. Such economic behavior had been going on for millennia before capitalism appeared in the 17th Century. Economic philosopher Karl Marx identified the accumulation of capital as a key feature of capitalism. Capitalists possess a “growth ethic,” impelling them to grow the capital at their disposal. For Marx, capital is equivalent to the means of production (tools, factories, infrastructure, etc.) under capitalism. These ideas suggest that capitalism involves actions of a specific class of persons, the capitalists, who act to grow the stock of productive capital under their direction. When this capital is combined with labor, it increases labor productivity. The idea that with more people, there is more output (GDP) is easily understood and is captured by the GDP per capita statistic (GDPpc). The addition of capital has a direct positive impact on GDPpc.
Capitalism provided an escape from the Malthusian limits to growth, which served as the primary driver for the agrarian secular cycle. Prior to the invention of capitalism, when all the land became fully occupied the agrarian economy could no longer grow in proportion to population, meaning GDPpc would fall, resulting in immiseration of the bulk of the population and ending any further population increase. This was the Malthusian trap. Figure 4 shows how British GDPpc grew during the late 13th Century as the land filled up, reaching a plateau in the early 14th Century as the population was peaking. The Black Death in 1348-49 produced a labor shortage which increased the amount of land and capital available per worker, increasing labor productivity and GDPpc to a higher level around 1400. For more than 250 years, this level represented the Malthusian limit to economic development. Whenever GDPpc bumped up against it, crises would drive it down. There were spikes downward for the mid-Tudor crisis (1547-58) and the late-16th Century famine. During the second quarter of the 17th Century, per capita GDP was below the Malthusian limit as the country fell into the disintegrative phase of the Tudor-Stuart cycle, leading to the English Revolution and Cromwell’s Protectorate. Then, suddenly, growth took off in the last third of the 17th Century and never looked back. This was the beginning of capitalism as a major force in the Anglo-American world.
Figure 4. Real GDP per capita in Britain 1270-1870
The growth ethic was the key to the release from the Malthusian trap. Before capitalism was invented, successful merchants would spend their surplus profits on lavish living, education for their children, and status symbols like titles of nobility, donations to the Church, or patronage of the Arts. The Italian Renaissance was partly fueled by status-seeking elites using commerce-generated wealth. Renaissance businessmen did not seek capitalistic growth for fear that the competition would drive down prices to the ruination of all. Once capitalism had evolved, businessmen competed for market share in an optimization process that produced many losers in a (cultural) evolutionary process Herbert Spencer called “survival of the fittest.” Austrian-American economist Joseph Schumpeter described how this process, which he called creative destruction, built whole new industries on the carcasses of the old.
The growth ethic is another social scale-up technology, like religion or government, which enabled a polity to become larger and more powerful—to the benefit of their rulers. In the aftermath of the plague-induced population decline in the 14th Century, the consequent high wages and low land prices/rents of the 15th Century created an economically challenging environment for elites. The feudal elite were a political class not naturally inclined to economic matters, but those who paid attention to such matters could flourish. For example, in the 15th Century, Sir John Falstaff, noting the water power resources on his land, arranged for textile manufacturers to set up shop on his property, increasing the income his estates provided. By the 16th Century, landowners had begun a shift to husbandry, fencing off their land and raising sheep for more profitable wool production, rather than renting land to peasants for subsistence farming. Furthermore, since governments derived income from taxes on trade as well as land, monarchs had an incentive to encourage taxable entrepreneurial activity in their realms. Desiring new income streams with which he could secure the loans needed to finance his war plans, Edward III (1327-77) actively encouraged Flemish textile makers to set up operations in England. This assisted in the development of a textile industry, taxation of which would help finance his ambition.
Figure 5 Spanish revenue from American treasure as a percent of English revenue.
Through these actions, English elites, including the monarch, developed a more entrepreneurial mindset. English monarchs, seeing the revenue Spain drew from the “royal fifth” of the treasure extracted from their American colonies (see Figure 5), tried to encourage more English taxable enterprise. For example, Queen Elizabeth I granted Walter Raleigh a royal charter in 1584 authorizing him to colonize for his own profit any lands not already possessed by a Christian country, in return for one-fifth of all the gold and silver that might be mined there.
Another strategy was to issue patents granting monopoly rights to entrepreneurs who introduced new trades or manufactures to England. This can be seen as a way to increase commerce and the tax revenue derived thereof. Queen Elizabeth would go on to issue 55 patents between 1561 and 1603. Patents issued in the first half of Elizabeth’s reign largely served this economic role, but many of the later ones were granted for political patronage and involved already-existing industries, risking the loss of English jobs. The 1602 case Darcy v. Allen involving one of these “crony capitalist” patents ruled that common law held that patents were only legitimate when issued to one who brings a new trade into the realm through their own wit or invention. These ideas were formalized by the 1623 statute of monopolies.
Capitalism combined the desire of the ambitious to acquire the wealth needed to achieve prestige with a new means (entrepreneurship), which was open to a wider class of people than the traditional paths of political connections or military prowess. These developments were only possible because WEIRD psychology (stemming from the Church’s MFP centuries earlier) enabled the sort of thinking behind them.
The beginnings of capitalism involved the organization of the surplus population by an entrepreneurial minority to create livelihoods from pursuing occupations that had not previously existed. Surplus population appears as the population reaches the Malthusian limits to growth. Agricultural wages fall and people leave farming in search of a better life, going to towns where they seek jobs producing goods for the elite. Before capitalism, demand for these goods and the workers who made them were both limited by the fixed amount of land and agricultural output—hence, wages for unskilled urban jobs were low and many immigrants to the town would become paupers and eventually die of disease or malnutrition. This led to what Malthus called positive checks on the population (famine, disease, war etc.). With the appearance of proto-capitalist entrepreneurs, however, new types of economic activities appeared, providing jobs for those who in previous cycles would have become paupers and died. Thus, they did not die, and the population rose beyond the Malthusian limit. The labor of this surplus population that previously had perished was harnessed by these proto-capitalists to produce output and profit, some of which was used to produce more means of production (i.e. capital) and demand for workers. Since the demand for taxable economic activity by the state to fund war-making was limitless, so too was the success (prestige) that could be awarded by capitalist behavior, leading to its spread via the prestige bias.
Once this process got underway, it soon absorbed the available surplus population, necessitating the channeling of accumulated capital into increased worker productivity, as well as more workers and more business volume. This resulted in the rise in GDPpc seen in Figure 4. The degree to which this takes place will depend on the number of people entrepreneurs can mobilize, that is, the surplus population. The surplus population is simply the difference of actual population (N) and the Malthusian limit (NML). The annual rate of capital accumulation (RC) should be proportional to this difference:
1. RC = k (N ‒ NML)
Expressed in per capita terms we have:
2. RC /N = k (N ‒ NML)/N = k(1-NML/N)
The British population began to grow again in a sustained fashion around 1700, indicating release from previous Malthusian limitations. Thus, 1700 will be used for the year NML was reached, and GDPpc(1700) for the per capita GDPpc in the year 1700. Economic growth achieved after this would be due to the accumulation of RC in the years after 1700, for which the following expression can be written:
3. GDPpc(X) = GDPpc(1700) + ∑ RC(i) / Ni for i = 1701 to X
= GDPpc(1700) + ∑ k (1 ‒ NML / Ni) for i = 1701 to X
Here ∑ means “the sum of” and X is the year of interest, and i is the index year. Let X be year 1702, then equation 3 becomes
4. GDPpc(1702) = GDPpc(1700) + k[1 ‒ N1700/N1701] + k[1 ‒ N1700/N1702]
Figure 6 shows a plot of GDPpc against the right-hand side of equation 7.3, for i = 1700 to 1939. The plot shows equation 3 holds reasonably well for over almost two and a half centuries. This serves as evidence that surplus population was being employed in profitable activity that led to an accumulation of capital, permitting population to continue to rise beyond the Malthusian limit and, over time, creating higher GDPpc and better living standards. This analysis shows how the creation of capitalism via cultural evolution gave rise to the economic conditions necessary for the industrial revolution a century later and the modern Western-centric world that it created.
Figure 6 GDPpc as a function of cumulative surplus population