History and Theories of Capitalism

I.     Preconditions for historical development capitalist economic system

A.   Culture, religion, laws - reduce tribalism (broaden trust, cooperation, and exchange), protect ownership, allow accumulation of wealth.

B.   Sufficient labor productivity - allows formation of an investable surplus.

C.   Individual freedom, safe travel - allows exchange goods, change jobs.

D.   Monetary and accounting systems - encourage trade.


II.   Precapitalist Developments

A.   Egypt and Mesopotamia - State ownership.  Limited freedom.

B.   Greece and Rome - Increased freedom, but slavery still dominant. Retail trade primarily in luxuries for the upper class.  Surplus was used for public projects.

C.   The Middle Ages - The countryside was segmented into self-sufficient feudal estates.  Systems of mutual obligations arose between lords and servants and between the craftsmen in the cities. Recent work by Croix, Doepke, and Mokyr emphasizes the importance of the medieval craft guilds in the rise of technology and productivity that led to capitalism in Europe. Charles Kupchan argues that "Europe's stunning rise was the product of its own weakness" and its geographic position. Political power was fragmented during the Holy Roman Empire, allowing the rise of a business class in the cities, and access to rivers and the Atlantic facilitated trade. Even more recent work by Joseph Henrich (see his 2020 book, The WEIRDEST People in the World) suggests that the Catholic church ban on marriage to siblings and cousins reduced tribalism and placed them on a path toward becoming WEIRD (Western educated, industrialized, rich and democratic) societies (see this article for summary). The following passage and table from Henrich's book demonstrates the contrast between these cultural traits and earlier societies. By the way, in China, he says that marriage among close relatives was first made illegal by the Marriage Law of 1950 by the new Communist government.



Cousin Marriages


III.  The Development of Capitalism

A.   Merchant Capitalism- 13th C. in Italy. Also, enclosure movement created wage dependent class.

B.   Renaissance - 15th C. - Revitalization of literature and art; groundwork for Industrial Revolution.

C.   Protestant Reformation - 16th C. - Weakened old power structure, created individualistic theology. Max Weber (1864-1920), in The Protestant Ethic and the Spirit of Capitalism (1905) emphasized the role of Calvinist ideas in the 17th century about work, saving, and accumulation of wealth. In his new book, Religion and the Rise of Capitalism (2021), Benjamin Friedman argues that a new and more "optimistic" phase of the Reformation in the 18th century, rejecting Calvinist beliefs about depravity and predestination, made it possible for Adam Smith and other Enlightenment authors to argue that free and self-interested behavior by individuals could lead to positive social results.  See this article, this podcast, and/or this video.

D.   Putting out system - 16-17th C. - capitalist production in homes for a piece wage.

E.   Treaty of Westphalia - 1648 - Settlement at the end of the Thirty Years War, according to Richard Haass and others gave "rise to the modern international system" with respect for national sovereignty. The data, assembled by Steven Pinker in The Better Angels of our Nature, documents in the reduction in international violence that followed (his image from his book below).

Great Power Wars

F.   Industrial Revolution - 17-18th C. - First in England and then spreading to other countries. Supported by inventions such as coke smelting, thread spinning, steam engine. Factory system.  Rapid capital formation and growth, becoming self sustaining.  

G.    Mercantilists - Argued the nation's stock of gold determined its wealth and power. Favored strong national governments and intervention.  Imports heavily taxed and exports subsidized. Revenues from sale of patents of monopoly, including international trade.  


IV.  Classical Economics

A.   Adam Smith - Provision of consumer goods is the ultimate purpose of production.  A system based on self interest would best fulfill social ends.  A competitive system would protect the consumer and would establish itself with little government aid.  The government would have three important functions: to provide national defense, administer justice, and to build public works.

B.   Jean-Baptiste Say - Demand for commodities does not depend on the supply of money, but on the production of other commodities.  "Supply creates its own demand."  Government should encourage production and free market.  Foundation of supply side economics.

C.   Thomas Malthus - Doubted reliability of market system to generate sufficient demand. Argued that population growth would outstrip food production. Probable fate of mankind was war, famine, and plague.  Social welfare programs only make the problem worse.

D.   David Ricardo - Accepted Say's Law.  Main problem of capitalism was income distribution.  Population growth would drive up food prices.  Real wages at the subsistence level, but money wages increase, causing profits to fall.  Investment would slow and economic growth would stop.  England could prevent this with a policy of free international trade.  Developed the concept of comparative advantage.

E.   John Stuart Mill - Believed that social justice was the most serious problem of capitalism.  For taxation of large inheritances, redistribution of income, public provision of education and health.


 V.  Revolution and Intervention

A.   Karl Marx - According to historical materialism, society adopts system appropriate for its level of development.  Capitalism regarded a necessary evil for eventual adoption of socialism.  Problem of capitalism was desire for accumulation of wealth.  Exploitation of labor and investment in machinery would lead to over-production, business depressions, declining profits, social unrest, revolution.


B.   J. M. Keynes - Advocated reforms of capitalism during the Great Depression.  Rejected Say's Law and felt that the government should bolster insufficient demand.  Public control of aggregate demand could be assumed slowly without disturbing society.  Allocation of resources and distribution of goods should be handled by the private sector.


 VI. Austrians

A.   Joseph Schumpeter - Critic of Keynes. Creative destruction is strength and ultimate weakness of capitalism

B.   Friedrich Hayek - Danger of macromanagement, informational efficiency of capitalism


 VII.  New Twists on Old Ideas

A.   Postwar Keynesianism

B.   Monetarism

C.   Supply-Side Classicism

D.   New- and Post-Keynesians

E.   Radicals

 VIII.     Global Capitalism

A.   Dimensions - Trade, Investment, Finance, Information, Travel, Cultural Exchange, Intergovernmental Cooperation
Many of these dimensions are reflected in the KOF Globalization Index, prepared by a group of economists at the Swiss KOF Economic Institute.
Web site - map with interactive time lines.

Globalization Index 2018

B.   Stages (Thomas Friedman, The World Is Flat)

1.0 (1492-1800) About “countries and muscles,” driven by technology.

2.0 (1800-2000) Driven by continuing technological growth and  multinational corporations.

3.0 (2000-present) Driven by technologies favoring the individual


C.   Triple Convergence (Friedman)

1.    Technologies (web-based collaboration)

2.    Business practices (less top-down)

3.    Open borders (end of Cold War)

Export Shares of Regions to 2019

Import Shares to 2019

D.   Globalism Good? Adam Smith, David Ricardo, and other classical authors argued for free trade in commodities, which generally is mutually beneficial to countries. They said little about free movement of labor and capital, which may be beneficial to individual people, but may not benefit their countries.

E.   Framework - Many of the global institutions (IMF, World Bank, EU, etc) were created after WWII to rebuild countries and to stabilize the Western world economy. In 1947, President Truman visited Baylor University and gave a speech on national radio, trying to convince Congress to ratify U.S. involvement in an International Trade Organization (ITO) with enforcement powers. He failed, so a weaker General Agreement of Tariffs and Trade (GATT) was established instead - and played a huge role in trade liberalization. 

Over time, the missions of the international institutions have changed to: (1) provide support to developing countries, (2) support market transitions of China and the former Soviet client states, (3) bring more order to the growing complexity of  international trade and investment (GATT upgraded to WTO in 1995). However, as the memberships of these organizations have grown from around 20 countries to more than 160 and as the negotiations have grown more complex, it has been more difficult to conclude broad agreements.

F.   Globalism vs Regionalism - Economists generally prefer globalism (broad multilateral agreements) over bilateralism and regionalism to gain the benefits of trade creation (replacing inefficient domestic production with trade, based on comparative advantages) without inefficient and harmful trade diversion (replacing imports from one country with imports from another after signing a discriminatory trade agreement).
-- However, since the failure of the Doha Round, this has been difficult, because (1) a larger and more diverse set of actors in the global market since the end of the Cold War and rise of China, and (2) the rise of populist movements in many countries, stemming from rising intra-country inequalities, growing immigrant/refugee populations the inflexibility of the WTO, and slower global growth is leading to a new regionalism.

G.    Varieties of Global Capitalism - Branko Milanovich - Capitalism is triumphant, but with a competition between "liberal meritocratic" capitalism in the U.S., Europe, and several other countries, and "state-led" capitalism in China, Russia, Singapore, Vietnam, and several others. Liberal meritocratic has the advantages of democracy and rule of law, but with rising inequality. State-led has delivered high growth in China and elsewhere, but with corruption, weak rule of law, and restricted freedoms.

H.   Global Corporate Responsibility Under Capitalism - In 1962, Milton Friedman declared that the “one and only one ‘social responsibility’ of business” is to “increase profits.” Contrast with the Sullivan Principles in the 1970s/1980s and the Business Roundtable declaration in 2019. In 2021, Klaus Schwab, the founder of the World Economic Forum, published Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet:

We can’t continue with an economic system driven by selfish values, such as short-term profit maximization, the avoidance of tax and regulation, or the externalizing of environmental harm,” Schwab writes. “Instead, we need a society, economy, and international community that is designed to care for all people and the entire planet.” Simon Johnson argues that "until incentives created by financial markets change, we should expect the short-term profit motive to prevail," so the public sector is needed to take externalities into account.

H.   Changing Global Public Opinion on Globalization - Back in 2003, the Pew Global Attitudes survey found "broad acceptance of the increasing interconnectedness of the world. Three-quarters or more of those interviewed in almost every country thought children needed to learn English to succeed. People generally viewed growth of foreign trade, global communication and international popular culture as good for them and their families as well as their countries." Since that time, it seems that attitudes toward globalization have been challenged by:
*  U.S. involvement in "never-ending wars" in the Middle East
Movement of industrial jobs from high-income countries and rising inequality
*  Industrial job loss caused by technology, but attributed to globalization
*  Global "contagion" of the Great Recession of 2007-2009
*  Crises in the Central America and North Africa that sent refugees to U.S./Europe
*  "America First" policy of the Trump administration that caused other countries to  

             question a U.S.-led Western world.
*  Questions in some countries about whether the Chinese "One Belt, One Road"

              investments were causing them to lose sovereignty.

By 2014, another Pew poll showed that people in nearly all countries still believed that international trade is "good," but it had stronger support in developing countries than in the U.S. or Europe, particularly in terms of creating jobs and raising wages. Hence, the move to the British Brexit vote and the U.S. Trump era caused many to question whether globalization was in decline, and those questions have reached new height in the aftermath of COVID-19.  How will the pandemic affect longer-term attitudes toward globalization?   You can make the case in either direction.  Perhaps attitudes AGAINST  globalization will harden because:
*  Reputations of the two major nations - China and the U.S. - have both been damaged.
*  Perception that we have become too dependent on other countries for essential items - PPE, antibiotics, etc.

On the other hand, the pandemic also shows the NECESSITY of global cooperation, because so many of the world's problems - epidemiology, development and production of new vaccines, climate change, immigration, economic stability - require global solutions. Another Pew poll in advanced countries in 2020 found strong continuing support for the United Nations and the belief that stronger cooperation could have reduced the impact of COVID-19. In the U.S., it found that Democrats were far more supportive of international cooperation than Republicans.  Still another poll found that people in most countries welcome foreign investment that leads to building new factories, but not foreign purchases of domestic firms.

Most recently, a 2021 IPSOS poll of 25 countries found the following:

      • Majorities in all countries believed that "expanding trade is a good thing" with an average of 75%
      • Clear majorities believed that "overall globalization is good for my country" in only 8 of the 25 countries. Strongest agreement was in Malaysia, South Africa, Peru, and Brazil.  Weakest agreement in France, Russia, Belgium, and Italy.
      • Positive views of globalization were down in every country (most of all in Latin America) by an average of 10 points between 2019 and 2021.