Something I’ve learned from even my light reading of history is that there really are no “miraculous origins.” We humans have a tendency to claim that our creations, our governments, our religions, our ways of living, all sprang out of nowhere one fine spring morning as an act of pure genius, if not divine inspiration.
Isaac Newton was hit on the head by an apple, and invented gravity.
This kind of story is never true.
With this in mind, I’ve been pondering where “capitalism” really came from. The miraculous origin story is that when feudalism collapsed in Medieval Europe, capitalism was invented and took over because it was ever so much better than feudalism. A few centuries later, Karl Marx invented socialism, and socialism “lost” to the superior capitalism. Survival of the fittest, onward and upward, and all that.
It’s hard to talk about the origins of capitalism without first knowing what it is. What is capitalism?
As soon as you ask that question, you get some eighteenth-century definition that involves “controlling the means of production.” This doesn’t make much sense in today’s financial capitalism. Nor does it make any sense for the mercantile capitalism that preceded industrial capitalism.
I’m going to propose a surprisingly simple definition of capitalism that not only ties together everything from mercantile capitalism in the twelfth century right through intellectual property rights and high-volume stock trading today, but also eliminates the miraculous origin story, making capitalism just a variant on what people have been doing since we first developed writing.
Capitalism is the idea that ownership, in and of itself, entitles the owner to the work of others, combined with the idea that ownership can be bought and sold.
This ties capitalism directly into Medieval European feudalism: indeed, it’s where the word “entitled” comes from, in that the feudal lords held “title” to the land, and were thus “entitled” to the labors of the people who lived and worked on that land. The major difference between feudalism and capitalism is that feudal ownership — the title itself — could not legally be bought or sold: titles were hereditary, and originally granted by a higher authority, such as the King, who (of course) derived his authority from God.
The mercantile capitalism that developed concurrently with feudalism was not primarily about trade, which had been going on in many forms for millennia. It was instead about how trade was financed and profits distributed. In mercantile capitalism, the wealthy would fund a trading journey and — if it was successful — would be entitled to a substantial piece of the profits, even though their risk in the enterprise never involved a single chilled night in the deserts, or storm at sea. All they put at risk was their money. However, this front-end money entitled them to back-end profits from a successful trading journey in which they did no labor and took no personal risks.
These are not miraculous ideas. We see a similar principle at work in the biblical Parable of the Talents dating from the second or third century in Rome. It is telling that the Master in this story gave the talents (a King James English translation of a word referring to a unit of money) to his own servants, rather than entering into a contractual agreement with a third party — in other words, the money never really left the owner’s hand. But the principle that the master is entitled to the results of his servants’ work is very much present in stories from a thousand years before mercantile capitalism came along.
Skipping over the mad rush of feudal colonization of the New World in the sixteenth and seventeenth centuries under various royal charters, we come to the Industrial Revolution. What distinguished the Industrial Revolution from the Medieval manufacturing guilds that preceded it, was in part the use of the new steam technology and mechanized labor, but the more important change was (again) the shift of ownership from the workers and their guilds, to an ownership class that merely bought the “means of production,” then claimed entitlement to the profits.
The first stock exchanges developed concurrently with industrial capitalism, to facilitate the buying and selling of ownership shares, and this has now evolved into our modern stock market.
The modern stock exchange is perhaps the purest example of capitalism, since it removes any pretense of anything but ownership and entitlement. When stock is first issued by a new company, there’s still an element of barter involved, in which an investor purchases a stock share in the IPO (Initial Public Offering), and the company issuing the stock gets cash. After that, it’s a pure exchange of ownership-based entitlement.
If I buy a share of IBM stock right now, IBM doesn’t see a dime of that money. I’m not paying IBM. I’m paying the previous owner of that share, and what I’m purchasing is his ownership rights. That ownership entitles me to a cut of the hard work of all of the people who try to make IBM profitable. I do no work for IBM. I provide no funds for IBM. I don’t control IBM, nor its means of production. I just get a cut of IBM profits, because I own the stock share.
My purchased ownership of the stock share, in and of itself, entitles me to the hard work and profits produced by others.
That is capitalism.
If there’s still any doubt about this, consider the opposite. Consider any economic system in which, say, the business owner is not entitled to profits derived from that business. It’s hard to imagine how that could be called capitalism. Likewise, if an owner is not allowed to buy or sell his capital assets — an inheritance system, like feudalism, or state ownership of fascist or communist or imperial flavor — the system clearly isn’t capitalism.
Capitalism is a strange method of distributing profits, but not that much stranger than other methods people have tried. We could distribute all the profit to the guy who wears the purple-trimmed toga. We could distribute it to the poor. We could distribute it by lottery to whoever pulls the right Powerball numbers. We could distribute it back to the gods, in a giant potlatch ceremony. We could even distribute it back equitably to the people who actually worked to make it happen.
Capitalism distributes it to the ownership class.
It’s worth also defining a capitalist. As an –ism, capitalism allows us to call a capitalist anyone who believes in capitalism; anyone who supports the practice and possibly the spread of capitalism as an economic system. That would include many beggars living on charity, dreaming of owning their own billion-dollar corporation someday, as well as government or military leaders who are actively involved in spreading capitalism by force of arms, though they themselves live on tax money.
But the more substantive definition is that a capitalist is someone who practices capitalism. So what do you need to practice capitalism?
A capitalist must own something that can bought or sold, that entitles him to the work of others.
If you own an automobile factory, you are a capitalist. If you own a small business with employees, you are a capitalist. If you own rental properties, you are a capitalist. If you own stocks, bonds, or other “financial instruments” that produce income, you are a capitalist. If you own profitable land worked by others, you are a capitalist. If you can live on that income produced by others, you are a full-time capitalist. If you get rich at it, you are a successful capitalist.
Working for a capitalist does not make you a capitalist, regardless of your level of income or prestige. If you are CEO of a company owned by others, you are no more a capitalist than a shop foreman or one of the janitorial staff. You’re just another employee, albeit one who gets a nicer paycheck and parking spot.
Being self-employed does not make you a capitalist. I was a business-of-one contractor for sixteen years, and while I went through all the motions of owning a business, I was not, in fact, a capitalist. I was more like a Medieval artisan: I owned my own tools, and I produced products based on customer requests. What I did was not substantially different from the work of a cobbler or a tinker or a toymaker, though what I produced was not tangible, but instead software baubles for the wealthy capitalists who were willing to pay for them.
On one contract, I negotiated royalties on the product I developed, and in that one case, I acted as a capitalist. It was not terribly rewarding.
It’s perhaps also worth making the point that the capitalist is entitled to income purely on the basis of ownership, not merit. Merit, in general, has nothing to do with capitalism.
Successful capitalists are well-known for claiming that they earned their riches, and most of them seem to actually believe it. In the case of most small businesses, it’s likely even true. But the great capitalist moguls and barons and other royalty most certainly did not earn their wealth. It was the employees of the businesses and properties that they own who earned their wealth for them. They merely collected it, via the entitlement that their ownership offered them.
Consider Bill Gates, founder of Microsoft. According to Google, in 2013 he received almost twelve billion dollars in income, which is around six million dollars per hour, assuming he works a normal laborer’s 40-hour week. By comparison, it would take one of his engineers roughly forty years to make what Bill makes in one hour. Does Bill Gates do forty years of engineering work in one hour? Does he do this five times a week, for fifty weeks of the year? Did he earn his twelve billion in 2013?
Of course not. He is entitled to this money, by virtue of his ownership interest in the Microsoft company. He could simply transfer this ownership to me, and once the ink was dry and the lawyers and tax vultures done with the niceties, I would suddenly be entitled to twelve billion dollars a year, in return for exactly nothing.
I’m not questioning Bill Gates’ entitlement to his wealth. He is entitled to it. That is precisely what capitalism is all about.
In a subsequent post, I’ll explore the core problem with capitalism.