The free movement of goods, capital and labour

Capitalism confirmed and extended the benefits from free movement of goods and services, capital and labor. Initially mostly at the national level, but progressively also at the international level.

Throughout the middle ages internal trade was not only risky due to the shortage of transport infrastructure and lack of protection against robbers, but also because of the many tolls required to enter cities, navigate the rivers, use bridges or the right of way over the nobles land. For instance, in 1250 there was 12 tolling stations on the Rhine river between Mainz and Cologne, which are only 170 km apart.

By then slavery had been generally replaced by serfdom. But, about half of the population still continued tied to the lord’s land through bondage and had to provide a certain number of labor services. Serfs were forbidden to live outside the seigniorial territory, had to pay fines to marry serfs of another lord and were subject to a number of fees.

Craftsman and artists enjoyed more freedom but were progressively organized in Guilds which restricted severely their training, trade and mobility. So, the concept of free labor mobility was basically unknown.

Likewise, there was very little capital mobility because the sale of land (the main asset at the time) was severely restricted through seigniorial and inheritance laws. Financial investments were equally very limited and lending was typically provided only to royalty by Jewish merchant- bankers. So, apart from travel and trade-related payments, the transfer of financial capital was too little and mostly to pay for ransoms and tributes.

However, the advent of the commercial revolution in the XIII century and the Renaissance changed dramatically the situation in Europe. By the late XVII century international banking and trade had achieved a significant development in Northern Italy, London and Amsterdam. Yet, its driving forces were still the spices and other exotic merchandise made available through the Spanish and Portuguese sea voyages, which were necessarily limited.

It was up to capitalism, with its focus on manufacturing, to change dramatically the growth of international trade through the export of manufactured goods to the colonies and the import of the raw materials used to produce them. This process contributed to the rise of London as a major international clearing and financial center, where it became possible to borrow and invest internationally.

In turn, the financing of major railways and other ventures in the Colonies in North and South America required massive labor migration.

Of course major human migration had been around since the early days of the homo sapiens. He moved out of Africa some 80 millennia ago, and spread across Eurasia 40 millennia ago. Migration to the Americas took place about 20 to 15 millennia ago and, about one millennium ago, all the Pacific Islands were colonized. Later, significant population movements included the Neolithic revolution and the Indo-European expansion.

Throughout history, most major migrations were caused by the collapse of empires, slavery or religious persecution. For instance, it is estimated that before 1830 2.75 million Europeans left to settle overseas, mostly convicted and fugitives from religious persecution.

The difference under capitalism was that migration accelerated not only substantially, but its motivation also became essentially economic. For instance, between 1835 and 1935, the number of European emigrants rose to 75 million who left voluntarily to America and other continents in search of a better life. With a bit of exaggeration, one may say that with capitalism the labor market transformed from a local market into a global market.

Nevertheless, the dismantling of the barriers preventing the free movement of goods, capital and labor was a slow process. Governments had become addicted to customs tariffs as a source of revenue, wanted to force national savers to lend their money only to them or did not wish to extend their social services to immigrants.

In general, capitalists have a duplicitous approach to the freedom of movement. They support free trade as long as it opens up new markets for their products and supplies, but are against when it means direct competition with their products. Likewise, they welcome financing from foreign investors but do not appreciate it when national banks lend to foreign companies. Similarly, they welcome foreign workers as a way of keeping wages lower but do not like it when foreign companies poach their own employees.

Ultimately, the question remains one of knowing whether restrictions to the free movement should be acceptable as temporary or permanent to avoid major disruptions in the three markets. History has shown that the abolition of barriers has been faster in relation to goods and services, somewhat rapid in relation to long term capital but very slow in relation to labor movement.

In general, and especially in large countries, capitalism can live with movement restrictions, as long as they are not excessive. However, to reach its full potential restrictions must be progressively abolished. Indeed, as our analysis of business cycles has shown, programs of accelerated liberalization usually have been associated with an acceleration of economic growth.

To conclude, capitalism not only accelerates the freedom of movement but it is equally needed to keep the momentum for international free movement of goods, capital and labor.

The origins of capitalism

The origins of capitalism go as far back as the XI century when Pope Gregory VII dictated the Dictatus Papae letters asserting that the deposal of an emperor was under the sole power of the pope and excommunicated Henry IV to reinforce the power of the Church. Unintentionally, he created the church-state with most of the legal and administrative institutions necessary for the subsequent commercial revolution. However, capitalism only overtook the feudal system in the early XIX century.

During this long period of eight centuries the following events represent important milestones: the Champagne fairs in France (XII-XIII centuries), the banking and Italian Renaissance (XV century), the Portuguese and Spanish discoveries connecting Europe with the rest of the world (XIV-XVI centuries), the establishment of chartered companies and stock exchanges (1555,1652), the rise of mercantilism (XVI-XVII centuries), the scientific, transport and industrial revolutions (XVI-XVII centuries), the enlightenment (XVIII), the publication of Adam Smith’s Wealth of Nations (1776) and the emergence of joint stock companies (XVIII century).

The creation of a commercial economy at the beginning of the XIII century, initially in the eastern Mediterranean, but quickly extended to the Italian city-states and the rest of Europe brought not only new products (spices, etc.) but new developments in business practices. For instance, the Champagne annual fairs revived the international trade between France and Italy and led to the development of merchant law (Lex mercatoria) and the creation of an international payment system based on bills of exchange.

The development of a new class of rich merchants and bankers in Northern Italy enabled the development of the double-entry accounting system and new banking techniques. This new class was essential for the development of the new trade made possible by the Portuguese and Spanish maritime voyages of discovery and the cultural renaissance in Italy.

Foremost in the development of capitalism was the expansion of credit. This was permitted by the progressive abandonment of the usury laws initiated with the English law of 1550. At the same time, another important progress in terms of company law was the establishment of Charted companies that latter led to the joint stock company.

Mercantilism, as an economic theory, is the opposite of market capitalism. It advocates the role of the state to protect infant industries and domestic markets while trying to control the main trading routes to secure a balance of payments surplus. Nevertheless, paradoxically, by promoting a new form of imperialism based more on trade supremacy than on pure conquest, it was initially a major driver of the international trade that preceded the industrial revolution. But, its nationalistic and protectionist policies led inevitably to wars and inefficiencies that could only be solved by the rise of free trade and the progressive abandonment of mercantilism. However, today, in countries like China and other transition economies, mercantilism is still evident in their new type of state capitalism.

The birth of the so-called scientific revolution can be said to have started with the publication in 1543 of Nicolaus Copernicus's De revolutionibus orbium coelestium or with Newton's 1687 Principia. The subsequent debate on rationalism and empiricism revived the interest in science and the progressive development of experimental research that led to the subsequent revolutions in transportation and manufacturing.

First, long-distance transportation of coal and other heavy materials between the mining regions and the cities became possible due to the canal mania in England between 1790 and 1810, which was driven by financial speculation. This was continued by a new railway mania that followed the design by George Stephenson of first steam locomotive in 1814. Meanwhile, based on Watt’s 1794 improved steam engine, steam-powered beam engines stimulated the construction of more sophisticated power looms and increased the scale of production in textile mills in the early years of the so-called first industrial revolution.

On a doctrinal level, the enlightenment philosophers promoted the idea that God expressed his purpose through the laws of nature so that the legitimacy of the ruler’s power was no longer granted by God but by the enlightened elected men. And, most importantly, replaced the heaven paradise by the pursuit of prosperity on earth.

Among them, Adam Smith’s 1776 Wealth of Nations refuted mercantilism and advocated free trade as the basis of classical economic theory.

Finally, the English Joint stock companies act of 1844 and the Limited liability act of 1855 completed the institutional requirements needed to consolidate capitalism as the dominant economic system.

By then the six basic pillars of capitalism – private property, the profit motive, free markets, the rule of law, joint stock companies and limited liability – had been largely adopted in Western countries and capitalism began its process of globalization.