Since the fall of communism, Russia has become again a case study on the loss of freedom in non-capitalist systems, this time the result of a system of oligarchic state capitalism developed in the country.
I am not an expert on Russia, a country I visited only twice and briefly. I visited Moscow in 1991 and S. Petersburg in 2013. The last time, during the visit to the over-crowded Hermitage Museum I seated for a while wondering what had struck me more and it was not the museum.
Mostly, I wondered why after more than 20 years this beautiful imperial city still looked dilapidated and decrepit, and people in the streets and tourist shops still looked fearful, nationalistic and resentful of westerns. It also struck me how limited was the offer of products beyond the babushkas, amber and other semi-precious stones and communist memorabilia.
Having lived my youth under Salazar’s authoritarian regime, a model admired by President Putin, I can understand the Russians’ fear, longing and delusions about past imperial might and equality in poverty. It also lets me sense the body language of those living in fear of the authorities or in servility before those in authority to whom they owe their business.
For instance, a souvenir shop I visited still exhibited a wall plaque stating that it had been opened by special permission of a minister. I also had lunch in a restaurant housed in a former Czar palace and headquarters of the Soviet Trade Unions. It housed many other “companies” which did not have any identification and nobody knew what they did or who owned the place. The meal itself was not much different from what one gets in a workers canteen and the service was very poor. However it have the “luxury” of classical live music played by a young violinist. The whole setting was quite surreal.
Only a lack of truly free enterprise can explain the absence of progress in Russia. In fact, the Russian economy continues totally dependent on the exports of arms and energy, with the later accounting for almost 70% of its exports and, together with other commodities, account for about 50% of the Federal Government tax revenue. Overall, Russian exports are less than 15% of the Euro-Area exports.
Searching for explanations for Russia’s poor performance, Chrystia Freeland’s Plutocrats (2013) compares the rent-seeking strategies of the Russian oligarchs with that of the Chinese Communist Party bosses and concluded that “China’s market reforms have been slower and its avenues for rent-seeking have been more varied and more opaque than a quick privatization drive led from the top”. In my view, this does not explain much about the disparate performances of Russia and China.
The key difference resides in the openness and participation of the two countries in international trade. While China began by creating special free trade regions for foreign investors and sought an early entry into the WTO organization, Russia only fulfilled the WTO membership requirements in 2012.
Equally important was the contempt for small business inherited from the communist regime which, coupled with a lack of property protection, rampant corruption and business fear, discouraged free enterprise and entrepreneurship.
The Russian experience confirms the importance of freedom for capitalism and economic development. Otherwise the incumbents fear the loss of power and people the loss of security and sooner or later turn to authoritarian nationalism invoking the risk of social unrest or imaginary external threats.
These fears can only be overcome through genuine democracy and a move towards market capitalism, by opening up to foreign competition and achieving significant progress in complying with the six principles of market capitalism.
Showing posts with label communism. Show all posts
Showing posts with label communism. Show all posts
Friday, 21 August 2015
Tuesday, 28 July 2015
Production, income and welfare under capitalism
When we take a detached long term look at human history, it is impossible not to be impressed by the global economic growth experienced since the rise of capitalism in the early XIX century. This was achieved despite two destructive world wars and the subjugation of half of the world population under communism throughout most of the 20th century.
In his history of economic growth Angus Maddison (2005) shows that: “Over the past millennium, world population rose 23-fold, per capita income 14-fold, and GDP more than 300-fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, with no advance in per-capita income”.
Yet, during the first eight centuries of the last millennium economic growth barely matched population growth, while life expectancy only rose from 24 to 36 years. However, from 1820 onwards, per-capita income rose twenty-four times as fast as in 1000–1820, population grew six times as fast and life expectancy increased to seventy-nine years in the West and sixty-four in the rest of the world.
Nevertheless, this was not an even process and it is interesting to recall the various phases identified by Maddison as:
1. The “golden age,” 1950–73, when world per capita income grew nearly 3 percent a year, by far the best performance.
2. Our age, from 1973 onwards (henceforth characterized as the neo-liberal order), is the second best.
3. The old “liberal order” (1870–1913) was third best, only marginally slower in terms of per capita income growth.
4. In 1913–50, growth was well below potential because of two world wars and the intervening collapse of world trade, capital markets, and migration.
5. The slowest growth was registered in the initial phase of capitalist development (1820–70), when significant growth momentum was largely confined to European countries, Western offshoots, and Latin America.
This historically unprecedented growth, the result of a combination of science and capitalism, was more pronounced in the West during the post-world war II period. However, since the collapse of communism we have more examples to show the power of capitalism as a production machine. In particular, when we compare the recent experiences of China, Russia and India, we note that Russia and India are lagging significantly largely because they have been more reluctant to endorse capitalism.
Nevertheless, the fact that large populations still live in poverty raises the question of whether they have been left behind by capitalism. This is not a failure of capitalism. On the contrary, it was often the result of misguided pursuits of alternative systems and the slow take-off under capitalism. Indeed, given the recent moves in Africa towards capitalism, one expects that this continent will progressively begin to recover and will accelerate its growth in the next decades.
Likewise, for those who expected the liberation of half the humankind from communism and the recent surge in technological developments to automatically create another era of unprecedented growth, the early history of capitalism from 1820 to 1870 is an important reminder that take-off is usually a slow process.
The transition to capitalism from subsistence, feudal or communist economic systems faces many resistances and the economic cycles of capitalism may slow down such transition. Both need to be assessed separately, as well as the risks of political turmoil. Otherwise, we risk letting such setbacks obscure the remarkable efficiency of capitalism to eradicate poverty and promote economic growth.
In his history of economic growth Angus Maddison (2005) shows that: “Over the past millennium, world population rose 23-fold, per capita income 14-fold, and GDP more than 300-fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, with no advance in per-capita income”.
Yet, during the first eight centuries of the last millennium economic growth barely matched population growth, while life expectancy only rose from 24 to 36 years. However, from 1820 onwards, per-capita income rose twenty-four times as fast as in 1000–1820, population grew six times as fast and life expectancy increased to seventy-nine years in the West and sixty-four in the rest of the world.
Nevertheless, this was not an even process and it is interesting to recall the various phases identified by Maddison as:
1. The “golden age,” 1950–73, when world per capita income grew nearly 3 percent a year, by far the best performance.
2. Our age, from 1973 onwards (henceforth characterized as the neo-liberal order), is the second best.
3. The old “liberal order” (1870–1913) was third best, only marginally slower in terms of per capita income growth.
4. In 1913–50, growth was well below potential because of two world wars and the intervening collapse of world trade, capital markets, and migration.
5. The slowest growth was registered in the initial phase of capitalist development (1820–70), when significant growth momentum was largely confined to European countries, Western offshoots, and Latin America.
This historically unprecedented growth, the result of a combination of science and capitalism, was more pronounced in the West during the post-world war II period. However, since the collapse of communism we have more examples to show the power of capitalism as a production machine. In particular, when we compare the recent experiences of China, Russia and India, we note that Russia and India are lagging significantly largely because they have been more reluctant to endorse capitalism.
Nevertheless, the fact that large populations still live in poverty raises the question of whether they have been left behind by capitalism. This is not a failure of capitalism. On the contrary, it was often the result of misguided pursuits of alternative systems and the slow take-off under capitalism. Indeed, given the recent moves in Africa towards capitalism, one expects that this continent will progressively begin to recover and will accelerate its growth in the next decades.
Likewise, for those who expected the liberation of half the humankind from communism and the recent surge in technological developments to automatically create another era of unprecedented growth, the early history of capitalism from 1820 to 1870 is an important reminder that take-off is usually a slow process.
The transition to capitalism from subsistence, feudal or communist economic systems faces many resistances and the economic cycles of capitalism may slow down such transition. Both need to be assessed separately, as well as the risks of political turmoil. Otherwise, we risk letting such setbacks obscure the remarkable efficiency of capitalism to eradicate poverty and promote economic growth.
Monday, 16 February 2015
Failed alternatives to capitalism
The rise of a new economic system to acquire wealth and social status is usually disliked by the established elites, and capitalism was no exception. This repulsion was also encouraged by the progressive replacement of serfs tied to the land by an urban proletariat working in factories under appalling conditions in the early years of industrialization. So, from the beginning there were calls for its reformation or replacement by alternative systems.
One the earliest attempts to find an alternative to capitalism was undertaken by businessmen who wished to promote a more humane form of industrial organization based on the ideal of a model village. We shall group these various experiments under the general heading of utopian socialism. Utopian socialism has its roots in the works of Henri de Saint-Simon, Charles Fourier, and Robert Owen who developed the fundamentals of voluntary cooperative socialism established among like-minded people.
Owen. established a textile factory in New Lanark, Scotland, and devoted much of his profits to improve the lives of his employees by introducing shorter working hours, schools for children and housing. He also established the New Harmony commune in Indiana, USA, which collapsed when one of his business partners ran off with all the profits.
Fourier was more radical. He rejected the industrial revolution and advocated the transformation of work into play and the creation of colonies based on love and passion. Today it is still possible to find similar initiatives among religious sects, hippies and new age travellers.
In general, all these peaceful utopian experiments subsided because they lacked the profit motive and the free markets necessary to create wealth. Moreover, the shared leadership adopted initially usually turned into a patriarchal dictatorship.
In contrast to the peaceful and voluntary creation of ideal societies, anarchists advocated terrorism and revolution to replace the state with self-managed institutions federated in a non-hierarchical structure. Anarchism is often also called libertarianism and has many distinct variations among left and right wing groups. Pierre-Joseph Proudhon’s political philosophy, expounded in his book What is Property? published in 1840, is among the most influential. It considers that property is a theft and is against the state, church and any other form of hierarchical organization. Currently, many remnants of the anarchist ideals can still be found among the anti-war, anti-capitalist, and anti-globalisation movements.
Despite its many ideological strands the number of actual anarchist experiments is very small and short-lived. For instance, the Paris Commune lasted only two months in 1871. Likewise, during the Russian revolution, the anarchist society established by the Revolutionary Insurrectionary Army of Ukraine in the “free territories” in eastern Ukraine lasted only for a few months. The same happened with the anarchist collectives formed in Aragon and Catalonia during the Spanish Civil War (1936-1939).
Since these anarchist experiments took place during civil wars their organization was mostly military and we cannot say that they really constituted an economic system. Should they have tried one it would have certainly failed because of their opposition to private property. This conclusion is corroborate by the fact that mutuals, cooperatives and other forms of non-corporate entities inspired in the social property ideal are being progressively abandoned.
On the contrary, the alternative proposed by Marx and Engels in the Communist Manifesto of 1848 was tried in various forms in many countries following the Russian Bolshevik revolution in 1917 and lasted until 1989. The central features of communism (or centralized planned economies as they were also called) are the abolition of private property and the replacement of markets by centralized planning. At the political level these regimes abolished democracy and established the so-called dictatorship of the proletariat.
The actual experiments with communism can be grouped in terms of the importance given to central planning relative to the market system to define three major gradients – the Soviet, the Chinese and the Yugoslav models – with the later relying more on self-managed organizations supervised by the state.
Notwithstanding their military success after World War II, their economic performance was abysmal and in the 1980s the ruling dictators began to be questioned by the party elites and the people alike. So, communism fell apart by itself in most countries after the fall of the Berlin Wall in 1989. With the notable exceptions of North Korea and Cuba where the god-like communist dictators so far managed to cling to power.
In spite of the various attempts to modernize communism and the efforts of economists to demonstrate how central planners could mimic the market system through an Arrow and Debreu tâtonnement process, central planning did not work efficiently. The theoretical superiority of the market economy demonstrated by Adam Smith back in 1776 and the inferiority of the communist system already pointed out in 1925 by Keynes were empirically vindicated when most countries, which at one stage accounted for more than half of the world population, replaced communism with some form of capitalism.
Apart from those attempting to find an alternative to capitalism, another group of thinkers, although critical of capitalism, accepted capitalism as the basis of the economic system provided that it was limited, regulated or controlled by the state. These may be categorized under two main lines - socialists/ social-democrats and corporatists/national-socialists.
Following Bismarck's Sickness Insurance Law of 1883 many dissenting Liberal Party politicians in Britain began arguing for similar social measures while non-revolutionary socialists inspired by the Fabian Society began supporting the idea of creating a party based on the trade union movement. So, the labour party was established in 1900, it endorsed socialism in 1918 and won its first election in 1924. Similar movements took place in the Scandinavian countries where Social Democratic parties began their social reforms in the 1920s.
After World War II major experiments with the nationalization of key industries and the creation of universal welfare states aimed at creating a mixed economy were tried in the UK and Scandinavia but only the later remains today as a type of state capitalism.
The other line of “controlled capitalism” was inspired in Pope Leo XIII’s Rerum Novarum encyclical of 1883 opposing the tri-partite (labour, capital and state) corporative cooperation to the Marxist concept of class struggle and the unregulated capitalism. In 1927 the Italian fascists adopted the carta del lavoro, setting the principles of corporatism, namely the strong influence of government over investment, as opposed to having a merely regulatory role. Corporatist models were adopted by the other Southern European countries.
Some of the corporatist policies were also adopted by the German National-socialists, but the Nazis introduced a new Darwinian approach based on racism, the ideal of racial supremacy and the conquest or elimination of the inferior races. Hitler’s control of labour relations and the key sectors of the economy was a tool for rearmament and the multiplier effect of such spending initially had a positive impact in the growth of the economy.
However, because the German experience from 1934 to 1945 was under an economy of war, it is better to assess this form of state capitalism through the experience of the more moderate forms of Christian-fascism. For instance, in Portugal corporatism lasted 40 years from 1933 to 1974. But, by the mid-1950s, the Portuguese ruler had to ease some of his corporatist policies to achieve a significant rebound of the economy. Still this was not enough to avoid the collapse of the regime and the restoration of democracy in 1974.
Overall, with the possible exception of the Scandinavian model, all historical attempts to create alternative economic systems or to control capitalism had a dramatic cost for humanity. In terms of economic misery and loss of human lives they surpassed everything experienced before during the turbulent past of the human species.
One the earliest attempts to find an alternative to capitalism was undertaken by businessmen who wished to promote a more humane form of industrial organization based on the ideal of a model village. We shall group these various experiments under the general heading of utopian socialism. Utopian socialism has its roots in the works of Henri de Saint-Simon, Charles Fourier, and Robert Owen who developed the fundamentals of voluntary cooperative socialism established among like-minded people.
Owen. established a textile factory in New Lanark, Scotland, and devoted much of his profits to improve the lives of his employees by introducing shorter working hours, schools for children and housing. He also established the New Harmony commune in Indiana, USA, which collapsed when one of his business partners ran off with all the profits.
Fourier was more radical. He rejected the industrial revolution and advocated the transformation of work into play and the creation of colonies based on love and passion. Today it is still possible to find similar initiatives among religious sects, hippies and new age travellers.
In general, all these peaceful utopian experiments subsided because they lacked the profit motive and the free markets necessary to create wealth. Moreover, the shared leadership adopted initially usually turned into a patriarchal dictatorship.
In contrast to the peaceful and voluntary creation of ideal societies, anarchists advocated terrorism and revolution to replace the state with self-managed institutions federated in a non-hierarchical structure. Anarchism is often also called libertarianism and has many distinct variations among left and right wing groups. Pierre-Joseph Proudhon’s political philosophy, expounded in his book What is Property? published in 1840, is among the most influential. It considers that property is a theft and is against the state, church and any other form of hierarchical organization. Currently, many remnants of the anarchist ideals can still be found among the anti-war, anti-capitalist, and anti-globalisation movements.
Despite its many ideological strands the number of actual anarchist experiments is very small and short-lived. For instance, the Paris Commune lasted only two months in 1871. Likewise, during the Russian revolution, the anarchist society established by the Revolutionary Insurrectionary Army of Ukraine in the “free territories” in eastern Ukraine lasted only for a few months. The same happened with the anarchist collectives formed in Aragon and Catalonia during the Spanish Civil War (1936-1939).
Since these anarchist experiments took place during civil wars their organization was mostly military and we cannot say that they really constituted an economic system. Should they have tried one it would have certainly failed because of their opposition to private property. This conclusion is corroborate by the fact that mutuals, cooperatives and other forms of non-corporate entities inspired in the social property ideal are being progressively abandoned.
On the contrary, the alternative proposed by Marx and Engels in the Communist Manifesto of 1848 was tried in various forms in many countries following the Russian Bolshevik revolution in 1917 and lasted until 1989. The central features of communism (or centralized planned economies as they were also called) are the abolition of private property and the replacement of markets by centralized planning. At the political level these regimes abolished democracy and established the so-called dictatorship of the proletariat.
The actual experiments with communism can be grouped in terms of the importance given to central planning relative to the market system to define three major gradients – the Soviet, the Chinese and the Yugoslav models – with the later relying more on self-managed organizations supervised by the state.
Notwithstanding their military success after World War II, their economic performance was abysmal and in the 1980s the ruling dictators began to be questioned by the party elites and the people alike. So, communism fell apart by itself in most countries after the fall of the Berlin Wall in 1989. With the notable exceptions of North Korea and Cuba where the god-like communist dictators so far managed to cling to power.
In spite of the various attempts to modernize communism and the efforts of economists to demonstrate how central planners could mimic the market system through an Arrow and Debreu tâtonnement process, central planning did not work efficiently. The theoretical superiority of the market economy demonstrated by Adam Smith back in 1776 and the inferiority of the communist system already pointed out in 1925 by Keynes were empirically vindicated when most countries, which at one stage accounted for more than half of the world population, replaced communism with some form of capitalism.
Apart from those attempting to find an alternative to capitalism, another group of thinkers, although critical of capitalism, accepted capitalism as the basis of the economic system provided that it was limited, regulated or controlled by the state. These may be categorized under two main lines - socialists/ social-democrats and corporatists/national-socialists.
Following Bismarck's Sickness Insurance Law of 1883 many dissenting Liberal Party politicians in Britain began arguing for similar social measures while non-revolutionary socialists inspired by the Fabian Society began supporting the idea of creating a party based on the trade union movement. So, the labour party was established in 1900, it endorsed socialism in 1918 and won its first election in 1924. Similar movements took place in the Scandinavian countries where Social Democratic parties began their social reforms in the 1920s.
After World War II major experiments with the nationalization of key industries and the creation of universal welfare states aimed at creating a mixed economy were tried in the UK and Scandinavia but only the later remains today as a type of state capitalism.
The other line of “controlled capitalism” was inspired in Pope Leo XIII’s Rerum Novarum encyclical of 1883 opposing the tri-partite (labour, capital and state) corporative cooperation to the Marxist concept of class struggle and the unregulated capitalism. In 1927 the Italian fascists adopted the carta del lavoro, setting the principles of corporatism, namely the strong influence of government over investment, as opposed to having a merely regulatory role. Corporatist models were adopted by the other Southern European countries.
Some of the corporatist policies were also adopted by the German National-socialists, but the Nazis introduced a new Darwinian approach based on racism, the ideal of racial supremacy and the conquest or elimination of the inferior races. Hitler’s control of labour relations and the key sectors of the economy was a tool for rearmament and the multiplier effect of such spending initially had a positive impact in the growth of the economy.
However, because the German experience from 1934 to 1945 was under an economy of war, it is better to assess this form of state capitalism through the experience of the more moderate forms of Christian-fascism. For instance, in Portugal corporatism lasted 40 years from 1933 to 1974. But, by the mid-1950s, the Portuguese ruler had to ease some of his corporatist policies to achieve a significant rebound of the economy. Still this was not enough to avoid the collapse of the regime and the restoration of democracy in 1974.
Overall, with the possible exception of the Scandinavian model, all historical attempts to create alternative economic systems or to control capitalism had a dramatic cost for humanity. In terms of economic misery and loss of human lives they surpassed everything experienced before during the turbulent past of the human species.
Wednesday, 3 September 2014
A brief history of Economic Systems
Economic systems are characterized by a set of rules defining the relationship between interacting economic agents. The organization of economic activities is not separate from the political and social institutions adopted by the groups carrying out such activities. Thus, we may categorize many economic systems across the globe and throughout human history.
However, if we consider only broad differentiating factors, we may resume our history to five main economic systems – the gathering and hunting economy, the predatory and slave economy, the medieval serfdom system, centrally planned economies and capitalism or free market system.
With the exception of the centrally planned systems (fascism, national socialism and communism) who were driven by a precedent ideology, all the other systems evolved more or less spontaneously after long periods of gestation. In this brief history of these five major economic systems we highlight their main distinguished features in terms of division of labor, property rights, income distribution and capital accumulation.
Our oldest ancestors (the homo sapiens) appeared as a distinct species some 200-500 thousand years ago organized in small groups, mostly made up of family members. They were basically roving hunters and only settled down and began farming around 10-50 thousand years ago. At this stage their level of organization was much more developed and included a clear division of labor between male (hunter) and female (farmer), a division of property rights between common and family property and an acceleration of capital accumulation on durable goods like lodging and hunting/domestic tools, but also on non-essentials such as jewelry and other cultural and religious artifacts.
As hunters they undertook also predatory activities as a short cut to get what they needed, either by stealing from other tribes or by killing similar species (like the Neanderthals) who competed with them for the same territory and preys. As an alternative to predation, primitive forms of barter trade also appeared, but they were not the primary form of wealth exchange, which continued to be mostly done on a kinship basis. Another important development in terms of farming was the domestication of animals as pets and cattle.
All these developments led to a rapid increase in predatory activities which required larger societies (tribes), a further division of labor, beyond gender and age, between warriors/ hunters, shepherds/ farmers, slaves and clergy, as well as a political power structure beyond the traditional family/tribal hierarchy.
So, in the ancient civilizations of Mesopotamia, Egypt and India that appeared between the 3rd and 4th millennium BC, economic activity was mostly based on predation (conquest) and slavery and the military warriors naturally became the most powerful group within those societies. War permitted not only to obtain slaves to perform domestic, agricultural and construction activities but also to achieve a fast accumulation of durable goods. The organization skills required to command large armies and numerous slaves were essential to increase further the level of specialization in the division of labor needed to construct large durable infrastructures like irrigation, bridges, fortresses or temples.
Although most of these activities were under a centralized command, the development of trade and its tools was also inevitable and facilitated by the development of money exchanges that progressively replaced the traditional barter trade. In particular, the development of pictographic writing by the Sumerians, during the Uruk period at about 3400 BC, was essential to keep trading records and turn Uruk into the most urbanized city in the world and a major trade center in Mesopotamia with more than 50,000 inhabitants.
Ancient civilizations progressively turned into agriculture based societies and big estates, producing wine and oil (the most important commodities for commerce), replaced the small self-sufficient wheat-producing farms. Thus, private ownership of land became one of the crucial factors in the social stratification of those societies. For instance, in ancient Athens and Rome the population was divided into slaves, freedmen, free men, foreigners and women and only some of these groups were considered citizens.
Slaves did most of the work in agriculture, mining and manufacturing. The rulers, whether theocratic, oligarchic or democratic, continued engaged in military campaigns, initially mostly to plunder and destroy the property of the vanquished. However, they soon realized that slaughtering and enslaving their enemies was not always the most profitable course of action. So, they began to demand as an alternative the payment of ransoms and tributes (through various types of taxation) from independent producers and traders. This allowed a much faster accumulation of capital in palaces and jewelry as well as a rise in population.
In Europe and the Mediterranean these civilizations were later vanquished by hordes of barbarians who destroyed most of the cities and centralized forms of government, thus splitting the continent into countless kingdoms. This had two important consequences, the rise of monotheist religions (first Christianity and later Islam) who became a unifying force in those societies and an inward return to the big estates as the base of society. These were invariably involved in frequent wars and alliances that led to the development of a vassalage system - the feudal system.
The driving force of the feudal system was still predation but now the territorial range was much smaller (with a few exceptions like the Charlemagne Empire) and reliance on slaves was slowly replaced by a system of serfdom.
In contrast to what happened with the ancient slaves, the serfs’ master did not have the power of life and death. The serf (whether bound to the soil or to the lord) was considered a living creature with soul and the master had to allow him to attend church and could not force him to work on holy days or to commit immoral acts. The serf usually had a separate hut with an attached plot of land and lived with his family.
Production was often organized in a manor system, where the land was split in three parts, one directly controlled by the lord for his own benefit, another used by the serfs in exchange for labor services and a share of their produce and a third considered free land leased against a money rent. Under this system there was very little incentive to produce surplus for trading, and the lords often reserved a large part of their domain for hunting.
Not surprisingly throughout the middle ages the division of labor, the level of trade and capital accumulation were significantly reduced when compared to the ancient civilizations. This system lasted for a long period, appropriately named the “dark ages”, which only began to change slowly with the fragmentation of the feuds and the resumption of the so-called trade revolution in the XII century and the rediscovery of the ancient civilizations during the Italian Renaissance in the XV century. These developments allowed the rise of a new class of rich traders and bankers who questioned an otherwise rigid class pyramid made up of the Pope, King, Nobles, Knights / Vassals, Freemen, Yeomen, Servants, and Peasants / Serfs / Villeins.
The transition from feudalism to capitalism was also a long process that was only completed in Europe by the end of the XVIII century. One may even say that it began as early as the Crusades in 1096 and was only completed by the British Limited Liability Act of 1855.
The key changes that combined to drive the process were the XIII century trade revolution, the Italian renaissance in the XV century, the Portuguese and Spanish voyages of discovery in the XV-XVI and the scientific, illuminist and industrial/transport revolutions from the XV to the XVII century.
At the institutional level the key marks were the progressive repeal/ ignorance of the usury laws that hampered the use of credit and banking, the creation of joint stock companies who enabled capital accumulation and risk sharing, the development of securities markets and the introduction of limited liability laws that facilitated entrepreneurship.
The end result of this process was that the specialization and division of labor deepened to unprecedented levels, free labor progressively replaced slavery and serfdom and the accumulation of financial and non-financial assets accelerated leading to the fastest ever growth in productivity and trade experienced by humankind. Thus old agrarian societies were replaced by commercial and industrial societies and the traditional rigid social hierarchy was challenged by the new money earned on such activities.
In the Wealth of Nations (1776), Adam Smith refuted Physiocratism and Mercantilism and demonstrated the clear advantages of free labor and free markets, which are the essence of capitalism. The word capitalism itself only made its first written appearance in Thackeray’s novel “The Newcomes” (1855) to refer to those whose capital was not the result of land ownership. The term was also used by Karl Marx in Das Kapital (1867) to denigrate the new economic system by claiming that “social wealth becomes to an ever-increasing degree the property of those who are in a position to appropriate continually and ever afresh the unpaid labour of others”.
The nobility and clergy did not accept easily the loss of power and status brought about by capitalism. Indeed, Marx was not the only one to fight the ideal of “the invisible hand” and decentralization subjacent to capitalism. Among both revolutionaries and reactionaries there were two opposite criticisms of a capitalistic decentralized system. Some proposed a return to a system of small communities (e.g. the model villages of Utopian Socialists or the Anarchist and Hamish communes) while the others proposed a centralized system relying more on economic planning than competition (e.g. communism, national socialism and corporatism).
The experiences with decentralized non-capitalist systems were localized and have been subsiding progressively without a major impact on humankind.
On the contrary, the experiences with central planning had a dramatic impact in our world since they were tried in the first three quarters of the XX century in many developed and less developed countries. The three types of experiments relied on dictatorships to control the economy and the labor market, in accordance with their different ideologies.
Following the Marxist-Leninist doctrine, communists established a so-called proletariat dictatorships, initially run by the oligarchy of the only legal party, which invariably transformed into a single god-like dictator (e. g. Stalin in Russia, Mao in China or Fidel Castro in Cuba). Communists abolished private property and reintroduced forced labor, namely slavery in the Russian Gulags, serfdom in Chinese rural areas and modern forms of slavery in Cuba. They also replaced the markets by some form of central planning.
Forced labor, private property confiscation and central planning proved disastrous, causing the worst man-made famines known to humankind, when 6-8 million people died during the 1932-1933 Soviet famine and 15-40 million starved to death during the 1958-1961 Chinese famine. Capital accumulation and productivity growth lagged so much under this system that in the 1980s communism collapsed by itself in the Soviet Union and the Chinese Communist Party replaced communism by a form of state capitalism.
National-socialism was introduced in the 1930s by the Nazi Party in Germany. It was based on an ideology of racial supremacy, proclaiming that the Aryans were a superior race and the other races should be either destroyed (e.g. the Jews and Gypsies) or become servants of the Germans (e.g. the Eastern and Southern Europeans).
The Nazis did not abolish private property and markets for the Germans, but firms had to work under the direction of the party by contracting to receive forced labor and to supply the government. The Nazis reintroduced the most brutal form of slavery by forcing war prisoners and Jews to work until they died of exhaustion. The party also had a god-like leader - Hitler - who repeated the old forms of predatory economics through outright confiscation of the Jews and the Central Banks of the countries occupied and the introduction of ransoms, forced labor, punitive taxes and the coercive supply of his armies.
The German (and Japanese) imperialist wars to conquer new territories originated the Second World War, the most deadly conflict ever lived by mankind, which claimed the lives of more than 60 million people.
Corporatism, was a milder form of centralized economic system introduced in Italy, Portugal, Greece and Spain during the 1920s and 1930s. Its ideological origin goes back to the Rerum Novarum papal encyclical on the social question issued by Leo XIII in 1891. The basic idea was that labor and capital should cooperate under the guidance of government.
Private property and markets were accepted, but labor relations were regulated by agreement between unions and employers under the supervision of the state. Other markets were also regulated through price controls and licensing.
At the political level, the dictatorships adopted more or less extreme forms of fascism depending on the moderation and warmongering of their leaders, with Salazar in Portugal being the only one who was not involved in war.
The economic consequences of corporatism and the lack of market competition was the impoverishment of Southern Europe relative to the rest of Europe.
Without exception, all attempts to create an economic system by design based on anti-capitalist ideologies only brought oppression, misery and war and have been progressively abandoned in favor of various versions of capitalism.
Despite having so few supporters and so many opponents capitalism vanquished by itself and is now the dominant economic system. So, one is left wondering what is the beauty of capitalism and how long it will last. But, first we needed to understand how mankind got here.
However, if we consider only broad differentiating factors, we may resume our history to five main economic systems – the gathering and hunting economy, the predatory and slave economy, the medieval serfdom system, centrally planned economies and capitalism or free market system.
With the exception of the centrally planned systems (fascism, national socialism and communism) who were driven by a precedent ideology, all the other systems evolved more or less spontaneously after long periods of gestation. In this brief history of these five major economic systems we highlight their main distinguished features in terms of division of labor, property rights, income distribution and capital accumulation.
Our oldest ancestors (the homo sapiens) appeared as a distinct species some 200-500 thousand years ago organized in small groups, mostly made up of family members. They were basically roving hunters and only settled down and began farming around 10-50 thousand years ago. At this stage their level of organization was much more developed and included a clear division of labor between male (hunter) and female (farmer), a division of property rights between common and family property and an acceleration of capital accumulation on durable goods like lodging and hunting/domestic tools, but also on non-essentials such as jewelry and other cultural and religious artifacts.
As hunters they undertook also predatory activities as a short cut to get what they needed, either by stealing from other tribes or by killing similar species (like the Neanderthals) who competed with them for the same territory and preys. As an alternative to predation, primitive forms of barter trade also appeared, but they were not the primary form of wealth exchange, which continued to be mostly done on a kinship basis. Another important development in terms of farming was the domestication of animals as pets and cattle.
All these developments led to a rapid increase in predatory activities which required larger societies (tribes), a further division of labor, beyond gender and age, between warriors/ hunters, shepherds/ farmers, slaves and clergy, as well as a political power structure beyond the traditional family/tribal hierarchy.
So, in the ancient civilizations of Mesopotamia, Egypt and India that appeared between the 3rd and 4th millennium BC, economic activity was mostly based on predation (conquest) and slavery and the military warriors naturally became the most powerful group within those societies. War permitted not only to obtain slaves to perform domestic, agricultural and construction activities but also to achieve a fast accumulation of durable goods. The organization skills required to command large armies and numerous slaves were essential to increase further the level of specialization in the division of labor needed to construct large durable infrastructures like irrigation, bridges, fortresses or temples.
Although most of these activities were under a centralized command, the development of trade and its tools was also inevitable and facilitated by the development of money exchanges that progressively replaced the traditional barter trade. In particular, the development of pictographic writing by the Sumerians, during the Uruk period at about 3400 BC, was essential to keep trading records and turn Uruk into the most urbanized city in the world and a major trade center in Mesopotamia with more than 50,000 inhabitants.
Ancient civilizations progressively turned into agriculture based societies and big estates, producing wine and oil (the most important commodities for commerce), replaced the small self-sufficient wheat-producing farms. Thus, private ownership of land became one of the crucial factors in the social stratification of those societies. For instance, in ancient Athens and Rome the population was divided into slaves, freedmen, free men, foreigners and women and only some of these groups were considered citizens.
Slaves did most of the work in agriculture, mining and manufacturing. The rulers, whether theocratic, oligarchic or democratic, continued engaged in military campaigns, initially mostly to plunder and destroy the property of the vanquished. However, they soon realized that slaughtering and enslaving their enemies was not always the most profitable course of action. So, they began to demand as an alternative the payment of ransoms and tributes (through various types of taxation) from independent producers and traders. This allowed a much faster accumulation of capital in palaces and jewelry as well as a rise in population.
In Europe and the Mediterranean these civilizations were later vanquished by hordes of barbarians who destroyed most of the cities and centralized forms of government, thus splitting the continent into countless kingdoms. This had two important consequences, the rise of monotheist religions (first Christianity and later Islam) who became a unifying force in those societies and an inward return to the big estates as the base of society. These were invariably involved in frequent wars and alliances that led to the development of a vassalage system - the feudal system.
The driving force of the feudal system was still predation but now the territorial range was much smaller (with a few exceptions like the Charlemagne Empire) and reliance on slaves was slowly replaced by a system of serfdom.
In contrast to what happened with the ancient slaves, the serfs’ master did not have the power of life and death. The serf (whether bound to the soil or to the lord) was considered a living creature with soul and the master had to allow him to attend church and could not force him to work on holy days or to commit immoral acts. The serf usually had a separate hut with an attached plot of land and lived with his family.
Production was often organized in a manor system, where the land was split in three parts, one directly controlled by the lord for his own benefit, another used by the serfs in exchange for labor services and a share of their produce and a third considered free land leased against a money rent. Under this system there was very little incentive to produce surplus for trading, and the lords often reserved a large part of their domain for hunting.
Not surprisingly throughout the middle ages the division of labor, the level of trade and capital accumulation were significantly reduced when compared to the ancient civilizations. This system lasted for a long period, appropriately named the “dark ages”, which only began to change slowly with the fragmentation of the feuds and the resumption of the so-called trade revolution in the XII century and the rediscovery of the ancient civilizations during the Italian Renaissance in the XV century. These developments allowed the rise of a new class of rich traders and bankers who questioned an otherwise rigid class pyramid made up of the Pope, King, Nobles, Knights / Vassals, Freemen, Yeomen, Servants, and Peasants / Serfs / Villeins.
The transition from feudalism to capitalism was also a long process that was only completed in Europe by the end of the XVIII century. One may even say that it began as early as the Crusades in 1096 and was only completed by the British Limited Liability Act of 1855.
The key changes that combined to drive the process were the XIII century trade revolution, the Italian renaissance in the XV century, the Portuguese and Spanish voyages of discovery in the XV-XVI and the scientific, illuminist and industrial/transport revolutions from the XV to the XVII century.
At the institutional level the key marks were the progressive repeal/ ignorance of the usury laws that hampered the use of credit and banking, the creation of joint stock companies who enabled capital accumulation and risk sharing, the development of securities markets and the introduction of limited liability laws that facilitated entrepreneurship.
The end result of this process was that the specialization and division of labor deepened to unprecedented levels, free labor progressively replaced slavery and serfdom and the accumulation of financial and non-financial assets accelerated leading to the fastest ever growth in productivity and trade experienced by humankind. Thus old agrarian societies were replaced by commercial and industrial societies and the traditional rigid social hierarchy was challenged by the new money earned on such activities.
In the Wealth of Nations (1776), Adam Smith refuted Physiocratism and Mercantilism and demonstrated the clear advantages of free labor and free markets, which are the essence of capitalism. The word capitalism itself only made its first written appearance in Thackeray’s novel “The Newcomes” (1855) to refer to those whose capital was not the result of land ownership. The term was also used by Karl Marx in Das Kapital (1867) to denigrate the new economic system by claiming that “social wealth becomes to an ever-increasing degree the property of those who are in a position to appropriate continually and ever afresh the unpaid labour of others”.
The nobility and clergy did not accept easily the loss of power and status brought about by capitalism. Indeed, Marx was not the only one to fight the ideal of “the invisible hand” and decentralization subjacent to capitalism. Among both revolutionaries and reactionaries there were two opposite criticisms of a capitalistic decentralized system. Some proposed a return to a system of small communities (e.g. the model villages of Utopian Socialists or the Anarchist and Hamish communes) while the others proposed a centralized system relying more on economic planning than competition (e.g. communism, national socialism and corporatism).
The experiences with decentralized non-capitalist systems were localized and have been subsiding progressively without a major impact on humankind.
On the contrary, the experiences with central planning had a dramatic impact in our world since they were tried in the first three quarters of the XX century in many developed and less developed countries. The three types of experiments relied on dictatorships to control the economy and the labor market, in accordance with their different ideologies.
Following the Marxist-Leninist doctrine, communists established a so-called proletariat dictatorships, initially run by the oligarchy of the only legal party, which invariably transformed into a single god-like dictator (e. g. Stalin in Russia, Mao in China or Fidel Castro in Cuba). Communists abolished private property and reintroduced forced labor, namely slavery in the Russian Gulags, serfdom in Chinese rural areas and modern forms of slavery in Cuba. They also replaced the markets by some form of central planning.
Forced labor, private property confiscation and central planning proved disastrous, causing the worst man-made famines known to humankind, when 6-8 million people died during the 1932-1933 Soviet famine and 15-40 million starved to death during the 1958-1961 Chinese famine. Capital accumulation and productivity growth lagged so much under this system that in the 1980s communism collapsed by itself in the Soviet Union and the Chinese Communist Party replaced communism by a form of state capitalism.
National-socialism was introduced in the 1930s by the Nazi Party in Germany. It was based on an ideology of racial supremacy, proclaiming that the Aryans were a superior race and the other races should be either destroyed (e.g. the Jews and Gypsies) or become servants of the Germans (e.g. the Eastern and Southern Europeans).
The Nazis did not abolish private property and markets for the Germans, but firms had to work under the direction of the party by contracting to receive forced labor and to supply the government. The Nazis reintroduced the most brutal form of slavery by forcing war prisoners and Jews to work until they died of exhaustion. The party also had a god-like leader - Hitler - who repeated the old forms of predatory economics through outright confiscation of the Jews and the Central Banks of the countries occupied and the introduction of ransoms, forced labor, punitive taxes and the coercive supply of his armies.
The German (and Japanese) imperialist wars to conquer new territories originated the Second World War, the most deadly conflict ever lived by mankind, which claimed the lives of more than 60 million people.
Corporatism, was a milder form of centralized economic system introduced in Italy, Portugal, Greece and Spain during the 1920s and 1930s. Its ideological origin goes back to the Rerum Novarum papal encyclical on the social question issued by Leo XIII in 1891. The basic idea was that labor and capital should cooperate under the guidance of government.
Private property and markets were accepted, but labor relations were regulated by agreement between unions and employers under the supervision of the state. Other markets were also regulated through price controls and licensing.
At the political level, the dictatorships adopted more or less extreme forms of fascism depending on the moderation and warmongering of their leaders, with Salazar in Portugal being the only one who was not involved in war.
The economic consequences of corporatism and the lack of market competition was the impoverishment of Southern Europe relative to the rest of Europe.
Without exception, all attempts to create an economic system by design based on anti-capitalist ideologies only brought oppression, misery and war and have been progressively abandoned in favor of various versions of capitalism.
Despite having so few supporters and so many opponents capitalism vanquished by itself and is now the dominant economic system. So, one is left wondering what is the beauty of capitalism and how long it will last. But, first we needed to understand how mankind got here.
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