Fifteen Eighty Four

In The Cambridge History of Capitalism, you trace the roots of capitalism back to ancient Babylon. To what degree is present day capitalism recognisable from these distant origins? What are the distinguishing features of modern capitalism and how have those changed over time?

While the earliest signs of civilization come from ancient Babylon in the form of monumental architecture and extensive city-systems, these are not necessarily evidence of capitalism. What matters instead is the evidence that has emerged from recent translations of the hundreds of thousands of cuneiform clay tablets uncovered by earlier excavations. Private tablets, as opposed to temple or palace tablets, are overwhelmingly economic records.  These give details of contracts among individuals for long-distance trade, transfers of property, labor arrangements, and interest due on loans.  It appears that prices, even for temple and royal obligations, were not set by fiat, but rather by markets which reflected both prosperity and crisis.

While rulers allocated property, and temples rationed many supplies, it appears that private contracts were enforced by city governments and merchant organizations.  However, even the Greek poleis that spread later throughout the northern and eastern Mediterranean maintained contract enforcement only among their citizens, leaving the protection of their merchants engaged in long-distance trade to reciprocal treaties with other city-states or kingdoms.

While partnerships among individuals engaged in long-distance trade lasted as long as ten years, there are no signs of corporations with legal identity.  The corporation is a defining characteristic of modern capitalism, something that does not appear until medieval Italy. For example, the Casa di San Giorgio was a corporation that took on many projects in its city of Genoa, but it also extended its reach into overseas trade and finance.  This created a model later emulated by the Netherlands (VOC for its East India trade) and England (Bank of England).

True, the East India companies created by the European powers to exploit the possibilities of long distance seaborne trade were important precursors.  But the corporate form used by the British to establish overseas colonies in North America, starting in Virginia, set the stage for making corporations longer-lived and multi-purposed, pursuing both profit and power thereafter.  Ever since, the corporation has evolved as a business form for an increasing variety of projects associated with the rise of capitalism up to 1848 and then its spread up to the present.

The Cambridge History of Capitalism uniquely offers a global account of the spread of capitalism and at best, this spread can be described as uneven. To what extent has geography dictated its impact and endurance as an economic system of growth? If it is possible at all to generalise, where has capitalism been most, or least, successful?

The uneven spread of capitalism raises the question of whether geography or institutions offer the more compelling explanation for the spread of modern economic growth, which we see as going hand in hand with the spread of capitalism. We favor institutions, but with qualifications.  While it is true that the northern temperate zones proved most favorable for the rise of agriculture based on grains, and that this geographic feature helps explain the growth of population and market size, the latter so favorable for the rise and spread of capitalism. However, corporate or state organizational forms have not been very successful in agriculture, save perhaps with some types of animal husbandry.  With its seasonal demands for labor and the importance of monitoring wage labor, crop cultivation performs best under family farm systems. Still, geography dictates specialization, and specialization in commodities has been associated with poor growth performance since the beginning of modern globalization in the early 1800s. It has also been associated with institutions that favor the land and mineral owning elite, who are pro-rent seeking and anti-market. Further, to the extent that geography dictates exposure to disease and frequency of droughts and natural disasters, geography matters. Thus, history does not reject geography as a partial determinant of economic growth and the spread of capitalism, but it suggests that institutions matter more. After all, history shows that non-capitalist institutions can wreak economic havoc on geographically ideal locations, as shown now in North Korea and, earlier, in China and the Soviet Union under collective farms. The question is whether corporate organizations, motivated for profit rather than power, can overcome physical limitations imposed by geography to provide for more people and higher living standards.  Opportunities for the exploitation of natural resources certainly abound, but the contrast between the ability of Norway and Nigeria to exploit offshore oil resources, or Chile and Zimbabwe to exploit copper deposits, should make it clear that capitalist institutions are essential if the benefits of modern economic growth are to be obtained.

The twentieth century was a time of global warfare. In this, the centenary year of WWI, is it possible to say how the world wars of 1914-1918 and 1939-1944 shaped the development of modern capitalism? And more generally, to what degree have military/defence policies impacted on economic growth in the West?

There is no question that wars in general, and especially the two world wars of the early 20^th century, shaped the development of capitalism, just as they did the development of political ideologies and policy. Your question gets confounded with the question of what drives the size of states.  Is it the need for self-sufficiency or self-defense? Volume 2 of Capitalism shows that the increase in economic opportunities created by the spread of capitalism allows more states to form, which also creates more possibilities for interaction, whether trade or war.  Also, the technological advances that come with capitalism have continued to reduce the cost of destroying cities, as well as the cost of diversified trade.  But it is the political system that determines the outcome. Authoritarian regimes are more likely to favor war. Capitalists will certainly try to make the most profit once the war is fought, but capitalist systems open to trade with a variety of partners are more likely to avoid wars, and, if unavoidable, win them.

But what were the lessons drawn by the victors and the defeated in each case?  As in so many examples from human history, both winners and losers drew the wrong lessons in the 20^th century.  Before WWI, Germany and Austria were convinced they needed larger, self-sufficient markets under their political control, using the British global empire as the example to emulate.  The victors, in turn, tried to make their overseas colonies pay for the war, and grabbed German colonies and the remains of the Ottoman Empire. Imperial expansion was also reinforced for other winners like Belgium, Japan, and the United States. 

In the wake of mistaken international policies imposed at the end the First World War, the Great Depression intensified the efforts of political leaders to create economically self-sufficient empires. Aggressive imperial action by Hitler’s Germany and Tojo’s Japan led to World War II.  Even when the war ended in 1945 some winners then drew the wrong lessons.  One winner, Russia, flexed its imperialist muscles. Other winners, like the UK and France, tried to retain prewar possessions, which delayed economic recovery and progress of capitalism for both.  In contrast, the US, “the reluctant hegemon,” provided the political impetus, military protection, and economic support to sustain peaceful capitalism in western Europe and Japan, and its eventual global spread.

For many around the world, we are richer today than we ever thought possible. Can the level of economic growth that we have seen since the mid-19^th Century be sustained in the 21^st century? And with that, capitalism itself?

We certainly think that the level of economic well-being enjoyed by the world’s population will continue to rise, provided political forces allow capitalism to continue making innovations in the way goods are produced and delivered to markets. But it is unlikely to maintain its current rate of growth. Miraculous growth in the Third World will certainly diminish, as these late-comers catch up with the leaders by exploiting their technologies, institutions, and governance. Population growth is also declining everywhere, and the aging associated with it will drag down growth. In addition, rising inequality in the leaders and even followers – like China and India – may reinforce anti-capitalist, anti-market, and populist feelings.

Will an inevitable slowdown in per capita income growth and rising inequality lead to a retreat from capitalism and a resumption of experiments with isolation, fascism and communism that flourished from the 1930s to the 1970s? As long as the leading countries continue to have significant steady-state growth rates, we think this is unlikely, in spite of the certain decline in aggregate world income per capita growth rates.

Continued innovation and creative destruction has been the feature of capitalism since the beginning and it will continue to be the essential feature of capitalism. Our guess, however, is that in the future it will focus more on the quality of the environment than on the quantity of goods and services delivered.

Larry, you specialise in Financial History and European economies and Jeffrey, you in development, inequality, globalization and history. How did you come to work together as editors of The Cambridge History of Capitalism and what were the main challenges you faced in managing a history of this scale, with a large, international team of contributors?

Chris Harrison, now Publishing Development Director, Social Sciences, for Cambridge University Press, approached Larry with the idea of editing The Cambridge History of Capitalism about ten years ago. Larry was the obvious choice given his extensive research in financial history and his focus on Europe where, after all, modern capitalism has its roots. But it wasn’t until Rafael Pardo, Executive Director of the BBVA Foundation, was convinced to fund the conferences of the team of scholars that would be needed to make the project worthy of Cambridge University Press that it became feasible.

All agreed that there should be two volumes, and that the break between them should be both chronological and thematic. The theme of the first volume would be why capitalism took so long to materialize, comparing possible precursors that had arisen around the world before Britain’s Industrial Revolution.  The second volume then would explore the spread of capitalism from all aspects: industry, agriculture, services, trade, business firms, labor organizations, political regimes, and other policy issues. In 1848, Marx and Engels in The Communist Manifesto and John Stuart Mill in Principles of Political Economy both predicted that capitalism would have global consequences, but their respective visions were radically different.  Their contrasting diagnoses and prognoses for capitalism motivated both volumes.

Once 1848 was chosen, it was clear that Jeff should edit the second volume since so much of his work on his own and with collaborators has been to show the effects of modern economic growth globally. It was also clear that the second volume would have to dwell on the resistance to capitalism and the global integration of capital, labor, and goods markets, well served by Jeff’s specialization in development and international topics. Both of us have spent most of our careers doing comparative history, so we had plenty of experience with international scholars to help our search for the best authors. The positive response of so many colleagues from different specialties, however, was a pleasant surprise and immensely gratifying. We have been close friends for more than four decades, but collaboration on the project was smoother, as well as more productive and stimulating than either of us imagined.