THE CAMBR IDGE

H I STORY OF

CAP ITAL I SM

*

VO L UM E I

The Rise of Capitalism:From Ancient Origins to 1848

*

Edited by

LARRY NEAL

and

JEFFREY G. WILLIAMSON

University Printing House, Cambridge cb2 8bs, United Kingdom

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First published 2014

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accurate or appropriate.

Contents

List of figures page viiList of maps ixList of tables x

List of contributors xi

1 . Introduction 1larry neal

2 . Babylonia in the first millennium bce – economic growthin times of empire 24

michael jursa

3 . Capitalism and the ancient Greek economy 43alain bresson

4 . Re-constructing the Roman economy 75willem m. jongman

5 . Trans-Asian trade, or the Silk Road deconstructed(antiquity, middle ages) 101e t ienne de la vaiss i ere

6 . China before capitalism 125r. b . wong

7 . Capitalism in India in the very long run 165tirthankar roy

v

8 . Institutional change and economic developmentin the Middle East, 700–1800 193

s evket pamuk

9 . Markets and coercion in medieval Europe 225karl gunnar persson

10 . The via italiana to capitalism 267luciano pezzolo

11 . The Low Countries 314oscar gelderblom and joost jonker

12 . The formation of states and transitions to modern economies:England, Europe, and Asia compared 357

patrick karl o’brien

13 . Capitalism and dependency in Latin America 403richard salvucci

14 . The emergence of African capitalism 431morten jerven

15 . Native Americans and exchange: strategies and interactionsbefore 1800 455

ann m. carlos and frank d. lewis

16 . British and European industrialization 491c. knick harley

17 . America: capitalism’s promised land 533j eremy atack

18 . The political economy of rising capitalism 574jos e lu ı s cardoso

Index 600

Contents

vi

1

Introductionlarry neal

Modern economic growth, defined as a sustained rise in per capita income withpopulation growth (Kuznets 1966), has created higher levels of prosperity formany more people on earth than was ever thought possible before it began.Moreover, it began not so very long ago, perhaps as late as the middle ofthe nineteenth century and certainly not before the end of the seventeenthcentury. As modern economic growth emerged within a favored few nationsandmodern capitalism began to take on its distinguishing features, the wealth ofnations began to diverge at the same time. Capitalism both shaped andresponded to the structural changes required to sustain modern economicgrowth up to the present. The higher standards of living that camewithmoderneconomic growth stimulated efforts to imitate the successes of the firstBritish and American examples. But the visible hardships that early capitalisminflicted on existing societies repelled others. Further, the connection betweencapitalism and modern economic growth was difficult to see in its early stages.Consequently, the spread of bothmodern economic growth and capitalism afterthe middle of the nineteenth century was fitful and uneven.Even as the beneficial effects of modern economic growth became increas-

ingly evident in the leading industrial nations, the spread of capitalism wasrestrained by local social, political, and cultural conditions in other countries,as demonstrated by the essays in Volume ii, The Spread of Capitalism.Collectively, however, those essays provide evidence that the capitalist

system of coordinating economic activity through market signals to all theparticipants concerned was the root cause of the material advances so evidentacross the world at the beginning of the twenty-first century. Identifyingcapitalism as an economic system that generates modern economic growth,however, raises the question of whether continued growth in per capitaincome can be sustained and therefore whether capitalism as an economicsystem can be sustained. Those are questions dealt with throughout the essaysin Volume ii.

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The question that the essays in Volume ii do not raise, however, is: “Why didcapitalism and modern economic growth take so long to get started in the firstplace?” The essays in Volume i, The Rise of Capitalism, try to answer thatquestion. Their answer, essentially, is that it was hard – very hard – tocoordinate the various factors needed to build and sustain permanent settle-ments in the first place, although such efforts usually raised per capita incomes(what economists term “economic growth on the intensive margin”). Then, itwas even more difficult to sustain coordination over the long run in the face ofsuccessive shocks that arose naturally, either from external events or internalconflicts. Whether setbacks occurred from natural disasters, epidemic diseases,military defeats, or failures of leadership, they had the common feature ofundoing whatever advances had been achieved earlier without laying a founda-tion for subsequent recovery. A consistent theme throughout the essays inVolume i therefore is to determine what features of modern capitalism werepresent at each time and place and, further, why the various precursors ofcapitalism did not survive setbacks and then subsequently continue the growthof both population and per capita incomes from their earlier levels.

Concepts of capitalism

What are the salient features of modern capitalism and how were thesefeatures manifested in earlier times? The scholarly literature refers variouslyto agrarian capitalism, industrial capitalism, financial capitalism, monopolycapitalism, state capitalism, crony capitalism, and even creative capitalism.Whatever the specific variety of capitalism denoted by these phrases, how-ever, the connotation is nearly always negative. This is because the word“capitalism”was invented and then deployed by the critics of capitalists duringthe first global economy that clearly arose after 1848 and the spread ofcapitalism worldwide up to 1914. In the resurgence of a global economy atthe beginning of the twenty-first century, however, scholars accept that therecan be many varieties of capitalism and that there are comparative advantagesto each variety (Hall and Soskice 2001).Four elements, however, are common in each variant of capitalism, what-

ever the specific emphasis:

1 private property rights;2 contracts enforceable by third parties;3 markets with responsive prices; and4 supportive governments.

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Each of these elements must deal specifically with capital, a factor ofproduction that is somehow physically embodied, whether in buildings andequipment, or in improvements to land, or in people with special knowledge.Regardless of the form it takes, however, the capital has to be long lived andnot ephemeral to have meaningful economic effects. That means that each ofthe four features listed above has to have a long time horizon, spanning at leastseveral years and preferably several human generations. Capital should also beproductive and therefore in use throughout its economic lifespan, which maybe shorter than its physical life due to obsolescence. Ownership of productivecapital in whatever form it takes may be separated from its management,which leads one to consider explicitly the organizations and procedurescreated to operate, maintain, and expand or modify the capital stock.Beyond these technical terms used by modern economists to define “cap-

ital” objectively for purposes of academic research, however, “capitalism”

must also be considered as a system within which markets operate effectivelyto create price signals that can be observed and responded to effectively byeveryone concerned – consumers, producers, and regulators. The effective-ness of the market-driven capitalist system depends upon the incentives itsinstitutions create for all concerned, as well as the openness it provides toenable participants in the system to respond to incentives. Douglass C. Northdefines institutions as:

the rules of the game of a society and in consequence [they] provide theframework of incentives that shape economic, political, and social organiza-tions. Institutions are composed of formal rules (laws, constitutions, rules),informal constraints (conventions, codes of conduct, norms of behavior), andthe effectiveness of their enforcement. Enforcement is carried out by thirdparties (law enforcement, social ostracism), by second parties (retaliation), orby the first party (self-imposed codes of conduct). Institutions affect economicperformance by determining, together with the technology employed, thetransaction and transformation (production) costs that make up the total costsof production. (North 1997: 6)

Beyond the basic elements of economic activity that are physically observ-able, therefore, the history of capitalism must also pay attention to theorganizations such as guilds, corporations, governments, and legal systemsthat operate within and enforce the “rules of the game.” Further, less observ-able elements such as informal institutions and mental models that governindividual responses to external conditions may determine the effectivenessof markets in creating and then sustaining economic growth (North 2005).Continued reallocation of resources within an economy is essential for

Introduction

3

economic growth to be sustained, or regained after any setback, whethercaused by external factors such as war, famine, natural disaster, disease, orinternal factors such as a financial crisis or failures of leadership. Marketsignals are necessary to guide the reallocation of resources and to direct theeffort required to continue or resume growth. The source of finance for thetransition to the new state of the economy, however, may or may not bedriven by market signals, depending on the existence of capital markets andthe exigencies of command economies. Much attention has to be paid, there-fore, to sources of financing and its effective deployment in the past, especiallyfor the financing of long-distance trade and of long-lived projects that wouldbe essential for sustaining economic growth, given the technology of the time.Moreover, while a thoroughgoing market system with markets for labor,

land, and capital as well as final consumption goods and services has itsinternal logic, it is necessarily embedded within broader political, cultural,and social systems. So the price signals generated within the capitalist marketsystem have to be observed and responded to by political, cultural, and socialgroups as well as by consumers and producers within the economy (Ogilvie2007). Capitalism, therefore, can be defined usefully as a complex and adaptiveeconomic system operating within broader social, political, and culturalsystems that are essentially supportive.This operational definition of capitalism leads us to search for character-

istics that may have been present in different historical settings when eco-nomic growth was achieved for a significant period (at least a couple ofcenturies, as with modern capitalism). Archaeological evidence of settledagriculture combined with urban complexes sets the earliest limit for usefulhistorical inquiry into complex economic systems that may, or may not,evince signs of incipient capitalist institutions. Modern archaeology, for exam-ple, can identify the composition of food sources for ancient sites to determinethe variety of cultivars and domesticated animals. Evidence of olive oil, wine,and preserved fruits might demonstrate that economic agents operated withtime horizons of at least the several years required to bring olive trees, grapevines, or date palms to maturity for repeated harvesting. Aerial surveys thatshow up remains of irrigation works and canals, as well as ancient raised orterraced fields next to concentrations of housing, also provide tantalizingevidence of capital formation with long time horizons and increased produc-tivity. With appropriate attention to documentation that may have beenpreserved for whatever reason, sources of finance and issues of contractenforcement may be adduced as well. Clay tablets found throughout theMiddle East with arithmetic exercises and comparisons of different alphabets

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indicate the possibility of training specialists in record-keeping and dissem-inating market information, a very special kind of human capital and onefound only within urban settings.Whether these early efforts to maintain the flow of economic activity

through reliable payments systems could be the basis for longer-lived eco-nomic projects remains open to question, basically because the evidenceneeded to demonstrate the connections of finance capital to real capitalremains elusive. European scholars have the benefit of merchant accounts,correspondence, and even newspapers after the invention of the printingpress, combined with repositories of legal disputes and decisions. Scholars inthe rest of the world, however, have increasingly been able to uncovercomparable evidence of their merchant entrepreneurs, especially afterEuropean contact. While the Italian development of the foreign bill ofexchange has long been seen as an essential element in facilitating the rise ofEuropean capitalism, it is clear that the Arab empires that arose with Islambeginning in the seventh century used similar financial instruments. Bothhawala (transfers of credits from one place in one currency to another place inanother currency) and saftaja (transfer of credit from one place in onecurrency to another place in the same currency) financed the extensive tradeof Arab and other merchants throughout the Mediterranean and into centralAsia and northern India (Pamuk, Chapter 8). Hundi were the same techniqueused in southern India long before European contact when cotton textileswere doubtless exported to the rest of Eurasia (Roy, Chapter 7). Chinesemerchants used fei-ch’ien (flying money) or pien-huan (credit exchange) asanalogous financial instruments in their trade (Thompson 2011: 98; Wong,Chapter 6).In the European case, these techniques of financing long-distance trade

eventually interacted with the techniques of war finance to become thefinancial basis for European domination of global trade in the early modernperiod (Neal 1990). By contrast, the earlier emergence of comparable empiresseemed to finance military efforts by the equivalent of capital levies, which notonly disrupted the existing payments systems but also despoiled previousaccumulations of merchant capital. While long-distance trade sustained andwas sustained by both capitalism and economic growth, repeated wars,rebellions, and raids disrupted both capitalism and economic growth, makingthe eventual success of British mercantilist policy exceptional, as argued byPatrick O’Brien in Chapter 12.It has long been accepted that the start of modern economic growth was

due to industrialization as practiced first in Great Britain, although precursors

Introduction

5

of industrialization were evident in much of Europe, the Middle Easterncivilizations, and especially China and India well before the eighteenth cen-tury. Most books catalogued under the subject heading of “Capitalism,history” therefore deal with developments in western Europe from, at earliest,1500 (Appleby 2010; Beaud 2001), but usually from 1700 on (e.g. Broadberryand O’Rourke 2010). They then expand their coverage to include mainly theUnited States, Canada, Australia, and perhaps Japan and Russia for the nine-teenth century and later. More recently, however, scholars have attempted totake a much longer time perspective (Graeber 2011, Jones 1988; Morris 2010),and a much broader geographical range (Parthasarathi 2011; Pomeranz 2000;Rosenthal and Wong 2011).In keeping with these initiatives, we take the view that the current world

economy has been a long time in the making, so we look for the beginnings ofthe “rise of capitalism” as far back as archaeologists have been able to detecttangible evidence of some human activity that was consistent, if not fullycongruent, with the practices of modern capitalism. Organized market activitythat took place over long distances, and consequently with long time horizonsand long-lived structures, has left archaeological remains as well as an occa-sional historical record. Most useful are signs of rising population densityalong with increasing consumption per capita, what Jones (1988) has calledeconomic growth on the intensive margin, which coincided with economicgrowth on the extensive margin. These apparent contradictions to classicalMalthusian theory that population growth before the advent of moderneconomic growth would dissipate temporary gains in per capita incomefrom whatever source, can be called “Malthusian singularities.”1

A variety of evidence acquired by using the tools of modern science hasconvinced archaeologists and many historians of the ancient world that highlevels of per capita income did emerge episodically well before moderneconomic growth began in capitalist economies. Even more interesting,these episodes typically were accompanied by extended periods of populationgrowth as well as technical improvements that seemingly presaged aspects ofmodern, high-income societies. Why they failed eventually to realize whatmight have been much earlier achievements of modern economic growth andrapid technical progress, however, remains a mystery, but a mystery that hasstimulated all sorts of conjectural histories.

1 James Hutton (1795) coined the term “singularity” for modern geology when he observedtwo quite separate strata of rock juxtaposed off the coast of Scotland. Exploring thepossible incidents of such singularities worldwide then launched geology as a modern,truly global science.

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It appears that the earliest evidence of Malthusian singularities is from theancient civilizations of what is now known as the Middle East, mainlyBabylon and Egypt. Most tantalizing in light of later developments in theMediterranean world are the economic activities of the Phoenicians (Aubet2001; Moscati 2001). The Phoenicians clearly developed cities and a marketstructure to support the inhabitants with provisions in return for specializedartifacts and protection over very long periods of time, periods certainlylonger by orders of magnitude than the era of modern capitalism, and theirtrade routes covered the entire Mediterranean and the Atlantic coasts ofAfrica. It is an article of faith of Phoenician archaeologists that the firstcircumnavigation of Africa was by the Phoenician admiral Hanno, in theyears around 425 bce, for example. But they can only conjecture theeconomic significance of the artifacts they have uncovered and the quotidianfunctions of the sites they have identified, extensive as they are around theMediterranean.Unlike the contemporary civilizations in Mesopotamia and Egypt and later

in Greece and Rome, there is very little textual evidence from the Phoeniciansthat can enlighten us about their economic organization. Aubet (2001), forexample, infers that the extensive Phoenician settlements in Spain weremainly enclaves designed in the first case to gain access to the silver minesaccessed upriver from Cadiz, but how the extensive trade was organized andfinanced first from Tyre and then from Carthage remains a matter of con-jecture. Archaeological evidence of luxury goods obviously imported intoSpain by the Phoenicians may indicate that these were gifts to local tribal elitesto initiate profitable export trade for Phoenicians, much as Hudson’s Bayagents did in the beaver trade of eighteenth-century North America (Carlosand Lewis, Chapter 15). But how Phoenicians organized, controlled, andsustained their long-distance trade remains unknown.For later civilizations, modern archaeology has the benefit of classical texts

that provide rich contexts for assessing the economic consequences of thematerial evidence that archaeologists have uncovered in overwhelming quan-tities. The huge archives of clay tablets and bullae uncovered from theexcavations of ancient Babylon since the late nineteenth century, and nowstored in museums around the world, have gradually been decoded. Themind-numbing details of their economic records, both from temples andprivate merchants, have been pieced together by teams of archaeologists togive us a compelling picture of a vibrant economy lasting for centuries starting1200 bce at the outset of the Iron Age and extending to the conquest ofMesopotamia by Alexander the Great in 332 bce.

Introduction

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The case studies for the rise of capitalism

Michael Jursa (Chapter 2) introduces the archaeology-based reinterpretationsof the economic experiences of ancient economies, based on his extensiveanalysis of the Babylon evidence. In his earlier work (Jursa 2010), he concludedthat Babylonia in the sixth century bce had reached higher levels of prosperitythan in earlier periods of its history. “[T]he economy was growing, theproductivity of (frequently market-oriented) agriculture was increasing, asubstantial part of the urban population worked in non-agrarian occupations,there was a high degree of labour specialization, and the economy was largelymonetized” (Jursa 2010: 815). In a word, basic elements of what becameWestern capitalism as described in later chapters made their documentedappearance well before the rise of Greek city-states or of the Roman empire.Nevertheless, the life of individuals was uncertain and many remained ill andhungry while even members of the elite were on occasion arbitrarily put todeath and had their property confiscated, and laborers were forced to workwithout food or clothing being provided. Moreover, the extensive buildingprojects carried out by royal authorities seem to have been financed mainlyfrom the spoils collected by continued raids into surrounding territories,especially that of the Phoenicians. This was hardly the basis for sustainedeconomic growth, much less for embedding capitalist mental models insociety.Babylon’s economic efflorescence lasted through Persian domination.

Then it was interrupted by Alexander the Great’s conquest in 331 bce andthe subsequent division of the previous empire into separate satrapies.Nevertheless, right up to the rise of Islam the basic elements of Babylon’seconomic success – irrigated fields of grain and groves of date palms combinedwith herds of sheep and cattle to produce high agricultural productivity –

sustained higher standards of living in the cities created between and alongsidethe two rivers of Mesopotamia (Pamuk, Chapter 8).Meanwhile, the Greek city-states began to proliferate, dominating the

eastern Mediterranean from 1000 bce until the rise of the Roman empire. Inthe process of establishing the concept of republican government and layingthe intellectual basis for Western philosophy they also managed to combinerising population densities with rising per capita incomes. Recent discoveriesby modern archaeologists demonstrate that a considerable amount of inten-sive economic growth took place in ancient Greece, growth that was based ontechnical innovation, division of labor, extensive trade, and radical improve-ments in financial and contracting practices, all within a favorable global

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institutional framework, as demonstrated by Alain Bresson, Chapter 3. Romanlegions, however, effected another military revolution by establishing a stand-ing professional army in place of mercenary hoplite troops favored by thedispersed Greek city-states, combining the legions with naval support on lineswell established by Athens at the peak of its classical glory (Hale 2009).Extending the Grecian principles of finance, law, and contract enforcementto the furthest reaches of an expanding empire, the Romans took the Grecianprecedents to yet another level of population growth and higher standards ofliving. It took the Antonine plague of the second century to bring down bothpopulation and per capita income in the western empire and the Justinianplague of the seventh century to halt progress in the eastern empire accordingto Willem Jongman, Chapter 4.Demonstrating that even populations confined to the interior of the

Eurasian land mass could engage in long-distance trade and generate inde-pendent technical innovations, the fabled Silk Road was traversed for centu-ries by profit-seeking merchants. The best known were the Sogdian traders,long before Marco Polo made Europeans aware of the existence of the SilkRoad and the incredible wealth of Kublai Khan in the thirteenth century.Again, modern archaeologists have uncovered astonishing evidence of theprosperity centered on the trading emporia of Samarkand and Bukhara, whichnot only connected the various Chinese states over time with the Black Seaand the eastern Mediterranean but also extended trade routes south into Indiaand north as far as the Baltic. All this trade, however, was conducted under theoversight of competing warlords upon whose favor depended the fortunes ofthe various merchants, not a favorable setting for the rise of capitalismaccording to Étienne de la Vaissière, Chapter 5.All of these early experiments with combining intensive economic growth

with extensive trading relations within the confines of the Eurasian land massand extending into northern Africa came to a sudden stop at various times, butmost generally and pervasively in the middle of the fourteenth century withthe Black Death. At the time, all of Eurasia and much of northern Africa wereactively engaged in long-distance trade, the reason why the bubonic plaguespread so quickly and so completely across the continent (Abu-Lughod 1989).Chapters 6 through 8 take up the great civilizations that participated in the pre-Black Death trade across Eurasia and then responded to the disruption of tradeand the devastation of population in distinct ways up to the modern period.Imperial China takes precedence as the most advanced and most populous

economy anywhere in the world at this time. Ray BinWong, Chapter 6, tracesthe complexity of China’s political and economic arrangements through

Introduction

9

successive plagues, famines, and barbarian invasions cumulating with thechallenge of the sea barbarians from their initial contact until the TaipingRebellion lasting from 1850 to 1864. Rather than seeing the long course ofChinese history as unrelieved oriental despotism based on control and main-tenance of large-scale irrigation works, he finds that the central government’scapacity to command was limited by the scale of its empire, so that it neededto negotiate with its subjects, especially the regional elites, to create conditionsdesirable for them. This meant sustaining markets, both in land and labor aswell as consumer necessities and luxuries, and the institutional arrangementsthat developed over time proved quite viable through successive changes ofdynasties. Managing the resource constraints faced by a densely populated, byEuropean standards, society was challenging but accomplished with lighttaxation, no central government long-term debt, or private corporations, incontrast to the European style of capitalism.Tirthankar Roy, Chapter 7, examines the subcontinent of India where a

variety of military states sought and established authority in the interiorvalleys while sundry trading ports tried to profit from trading relations eitherwith the rest of Asia or with the competing empires to the west until thedynamism of the English East India Company subsumed both the competingwarlords and the sea merchants. The commercial centers turned increasinglyto meet the demands of the European markets, but at the expense of tradi-tional industry, especially cotton goods. India’s cotton textiles became the firstvictim of the deindustrialization that was to prove so general in the nineteenthcentury. Warlords in the interior retreated to their original territories wherethey could retain their rent-seeking privileges. The disastrous economic con-sequences of political rule by a profit-seeking corporation, which Adam Smithhad derided in the case of the Dutch East India Company’s rule over the SpiceIslands and the Indonesian archipelago in the eighteenth century, becameeven more evident with the rule of the English East India Company innineteenth-century India.Sevket Pamuk, Chapter 8, extends his magisterial history of the Ottoman

empire, which arose after the Black Death, back to its origins in the rise ofIslam from the seventh century on and the economic practices that accom-panied it. While the Middle East experienced much institutional change overthe centuries preceding the Black Death, and indeed afterwards, independentcity-merchant elites did not play the key roles that they did in western Europe(and earlier in the Phoenician and Grecian city-states). Cities were often underthe rule of the central state and the economic responses of local artisans andmerchants were directed by the priorities of the central authorities. Rather

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than geography, which was actually quite favorable for commercial interac-tions, or religion, which proved quite adaptable to economic pressures, it wasthe controlling interest of central authority in maintaining stable hierarchiesthat limited the Ottoman response to the challenges posed by the rise ofwestern European capitalist economies in the nineteenth century.Karl Gunnar Persson, Chapter 9, analyzes how the competing substates

dotting the remains of the western Roman empire sought to sustain bothindependence from marauding invaders, whatever their origin, and somedegree of economic self-sufficiency in light of the breakdown of traditionaltrade patterns. The trilemma posed by Evsey Domar (1970) that free labor,free land, and rent-seeking landlords could not coexist for long proves to bethe case in medieval Europe. But all the possible solutions to the trilemma,whether enslaving labor, restricting access to land, or finding protection otherthan from rent-taking landlords, were tried out across medieval Europe. Thenew patterns of trade among the hundreds of sovereign states that arose setthe stage for the eventual rise of capitalism in western Europe. Domar’sexplanation for serfdom in Russia turns out to apply only to Russia, as onlythere were landlords able to call upon higher authority to enforce serfdom.Elsewhere throughout Europe, free and mobile labor proliferated, especiallyin the cities that arose along traditional trade routes.Within Europe, a variety of experiments led to the rise of capitalism as it

finally emerged in the following centuries. Luciano Pezzolo, Chapter 10,compares the city-states of Genoa, Venice, and Florence, each with a distinc-tive political system, as they recovered from the devastation of the BlackDeath. All three relied heavily on family networks, a feature of later capitalistimitators after 1850, but in distinctive ways. The capture of the Genoese stateby the permanent corporation of the Casa di San Giorgio proved mostsuccessful, perhaps because the powerful families of Genoa acknowledgedthe importance of turnover among themselves in governance of the corpo-ration. Venetian families closed off political access to new families and bycontrolling the convoy system also prevented new competitors from arising.Florentine families split in violent opposition to one another, calling uponoutsiders to support one side or the other, until the city’s fortunes weresquandered. The economic fortunes of all three cities yielded ultimately tothe new mercantile states forming on the Atlantic coast of Europe.The Dutch, who had emerged relatively unscathed from the Thirty Years

War, indulged in a brief speculative fling on the prospects of exotic varieties oftulips, but mainly they concentrated on funneling the products of the EastIndies through their ports united in the Dutch East India Company (VOC

Introduction

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hereafter, for Vereenigde Oost-indische Compagnie). Oscar Gelderblom andJoost Jonker, Chapter 11, analyze why the world’s largest joint-stock companyat the time of its creation in 1607 could generate so much wealth and prosper-ity domestically for the Dutch economy during its golden age, but still fail towithstand the competition from the interlopers in their lucrative trade.Attempts at sharing the markets with the English East India Company andstifling the competition that arose occasionally from other European powers,including the French, Danish, Swedes, and even Austrians (after the ViennaHabsburgs gained control of the southern Netherlands in 1715) ultimatelyfailed due to the political constraints imposed on the corporation, whichcould never expand its original capital stock after 1620. Previous trade routesalong the ancient Silk Road and through the Indian Ocean also recovered, asnoted in the preceding chapters on China, India, and the Arab caliphate.Nevertheless, during its heyday as an independent, sovereign republic, the

United Provinces provided an enviable example of the possibilities unleashedby merchant capitalism, even without creating industrial capitalism. Thepacific competition among the port cities within the Low Countries andthen, later, among the Dutch provinces in the north, led to product special-ization. The ease of transport of goods and people along the extensive water-ways provided extensive markets for the speciality of each city or province,resulting in higher productivity throughout the Low Countries. The success-ful revolt of the northern provinces, finally recognized by the Treaty ofWestphalia in 1648, created a situation in which the merchant elites governingcities within the United Provinces could impose higher taxes and borrow atlower yields on their debt than could their counterparts in the southernprovinces. The cities remaining in the Spanish (later Austrian) Netherlandswere still subject to the impositions of a distant monarch, whether in Madridor Vienna.European mercantilism was a competition among the Atlantic port cities to

see which could combine its resources most effectively to reap the profitsanticipated from the new trades created by the European discoveries. Thenew markets included the regions discovered by the Europeans across theAtlantic and the all-sea route to the fabled Indies and the Spice Islands. PatrickO’Brien, Chapter 12, argues persuasively that only Britain managed to mobi-lize its naval and trading organizations to accomplish precedence over thecompeting powers of Spain, France, and the Netherlands. The Thirty YearsWar (1618–1648) wreaked havoc on the central European populations com-parable to that suffered during the Black Death. Thirty years of unrelentingwarfare generated new military technology and new means of public finance

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designed essentially to wage war, and set the stage for a century and half ofstate building across western Europe. When Oliver Cromwell emergedvictorious in the English Civil War by keeping his New Model Army con-stantly in the field and using cheap cast-iron cannon to knock down the curtainwalls of medieval castles throughout Ireland, Wales, and Scotland, he alsocreated the fiscal basis for maintaining a standing navy in the future. Theessential features of British capitalism were set, according to O’Brien, fromthat time forward, as succeeding monarchs kept intact the new tax system,which generated increasing revenues proportionately as the trade funneledthrough British ports expanded on the heels of naval victories.While mercantile states competed, trying out their different approaches to

capitalism in order to exploit the possibilities of settlement and trade with Asiaand the Americas, the various European powers encountered previouslyisolated populations in sub-Saharan Africa, the interior of North America,and, most famously, in Latin America. The European contacts with thesepreviously unknown societies had lasting consequences, both for the contactpopulations and the future of capitalism. The devastation of native popula-tions and their virtual enslavement by the conquistadores of Spain led by Cortezin Mexico and Pizarro in Peru have cast a pall over the history of capitalismever since. But, as Richard Salvucci, Chapter 13, demonstrates, the Spanish,and later the Portuguese, enterprises were hardly proto-capitalist initially.Only when later generations of colonial rulers had come to terms with theradically altered ratios of labor to land caused by the depopulation of nativeAmericans, were they able to exploit the region economically, which led tocolonial expansion throughout Latin America. The role of silver, mined andexported in large and rising quantities both to Europe and to the Indies, butending up mainly in China, while it served the Spanish monarchs well fornearly two centuries in financing their military ventures, actually had little todo with the fiscal support of the viceroyalties of Mexico and Peru. Tobaccoand sugar monopolies were far more important fiscally, and state exploitationwas very much along pre-capitalist lines, extending even so far as the obrajes ortextile mills that mimicked the workshops emerging in eighteenth-centuryEngland.As the European markets for the goods continued to expand, these monop-

olies, based on plantation cultivation, relied on large numbers of slaves,leading to the slave trade. Again, this is identified with the rise of capitalism,even to the extent that capitalist advances in British industry have beenidentified with the profits that British slavers acquired from exporting slavesfrom the west coast of Africa to British, Spanish, and Portuguese America.

Introduction

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Morten Jerven, Chapter 14, reprises the complicated system of trading rela-tions that developed on Africa’s west coast to facilitate the trans-Atlantic slavetrade. African chiefs readily provided the slaves demanded by British slavetraders arriving from Bristol or Liverpool, but only after they set the prices forthe slaves in terms of the European and Asian goods provided by theEuropean merchants. Over time, slave prices rose as a consequence whileAfricans extended the sources for slaves further inland. Supplementary tradearose before the demise of the slave trade in many other goods, such aspepper, palm oil, and redwood, which proved to be the main trading activitybetween Old Calabar and Bristol after 1807 and the end of the British slavetrade. Maintaining long-distance communications and finance so that theproper textiles from India could be shipped from England and the mostprofitable mix of slaves in turn shipped from Africa to the Caribbean sugarislands turned out to require personal relations for repeat transactionsbetween African chiefs, such as Antera Duke in the Niger delta, and Britishship captains, such as Thomas Jones out of Bristol.Ann Carlos and Frank Lewis, Chapter 15, show that similar responses to

European traders occurred among the North American Indians who, alreadyactively engaged in long-distance and local trade, quickly turned Europeancontact into expanded trading activity throughout the North American con-tinent. While gift-giving corresponding to existing Indian practices, as longobserved by anthropologists, became part of the Hudson’s Bay Company’sregular dealing with native Americans, it was just a courtesy to initiate theserious trading of goods that followed at each post’s annual markets. Theextent and variety of goods demanded by Indian tribes from the Europeantraders kept increasing, especially when higher prices for beaver pelts wereoffered. Initial contacts of European capitalist agents with native populations,therefore, whether in Latin America, Africa, or the wildernesses of NorthAmerica could be met with opportunistic responses leading to mutuallybeneficial exchanges and often were.Knick Harley, Chapter 16, takes up the continuing puzzle of how European

mercantilism eventually developed as European industrialization. While hiswork has shown that there was a British industrial revolution, its developmentinto modern economic growth was more gradual and less driven by simplyintroducing factory systems into the textile trades, as striking as those symbolsof early capitalism were and continue to be. Ultimately, British industrialpractices could be easily imitated in much of nearby Europe, but typicallywere not. Lack of imitation was due to uneconomic factor prices in Europe foradopting British techniques that were energy intensive, capital using, and

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labor saving. The driving force for the differences came, most likely, fromagriculture where English labor productivity had become markedly higherthan in the European continent, excluding the Netherlands.Both the Dutch and English had managed to create economically efficient

organizations of agriculture, creating incentive-compatible contracts betweenoperators and owners to maintain and attempt to increase high levels ofproductivity in terms of marketable produce. As British industrialization andexpanded overseas trade kept rising, especially during the extended wars withFrance that culminated in 1815, Europeans sought different ways to imitate theBritish success, often as not by protecting domestic producers from Britishproducts. Only after 1850 did major policy changes in most European coun-tries allow successful competition, starting with increased agricultural pro-ductivity. Adopting variants of British institutional arrangements, especially inrepresentative government that promoted capitalistic enterprises in transpor-tation, agriculture, and industry, proved to be the eventual key to success, butit was not realized in most cases even in Europe until after the mid nineteenthcentury (Cardoso and Lains 2010).Jeremy Atack, Chapter 17, takes up the iconic case of rampant capitalism –

the United States of America – by noting the importance of the Englishcorporate form of shareholding and governance from the beginning of thecolonization efforts by the British monarchs. Faced with virtually limitlessstretches of land and motivated to make a profit from exporting whatevercould be raised or gathered, the colonists in that tabula rasa pushed hard toextract that profit to the fullest extent possible. The expansion of a rapidlygrowing, but ever high-wage population, whether into arable land or com-mercial centers, remains one of the marvels of economic expansion that hascontinued into the twenty-first century. Atack places the corporation, with itsprofit orientation (even for the city and state governments that evolved), asthe defining capitalist institution for creating the American economic successand posing continued challenges to the hegemony of the state.The American South, with its increasingly peculiar institution of plantation

slavery, created a dynamic tension with the northern states where agriculturewas arguably, but perhaps less visibly, commercial as well, and based onfamily-owned and operated farms. These mounting tensions were managedfor decades by political compromises combined with westward expansion –

until the west coast was reached. With the United States already the largestcapitalist economy in the world at the start of the Civil War, the Union armiesemerged as the largest, most potent military force in the world at the end.The large-scale industrial corporation, long preceded by tens of thousands of

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small-scale businesses, especially in the north, then came into its own, drivingAmerican economic growth and political conflicts up to the present day.The rise of capitalism and the challenges it posed to existing structures of

economics, commerce, politics, and even religion, were especially evident toEuropean observers at the time, starting with the observation of the increasingquantities of silver coming into the European markets in the second half ofthe sixteenth century and the impact this had on the trade patterns andmilitary capacities of competing states. José Luís Cardoso, Chapter 18, arguesthat the contemporaries analyzing the causes and consequences of the rise ofcapitalism created a new science of political economy that was to haveimportant policy consequences. Adam Smith’s magnum opus built on along tradition of preceding thought about the benefits of multilateral trade,but explicitly attempted to prescribe intelligent economic policy to stateauthorities (see Book v of the Wealth of Nations). His optimism about thepossibilities of mutually beneficial trade leading to accumulating wealth andhappiness among increasingly civilized societies did not have immediatepolicy consequences but was surely influential in the move to free trade byBritain after 1848.That was also the year that Karl Marx and Friedrich Engels published their

Communist Manifesto predicting the collapse of capitalism due to its internalcontradictions, needing expanded markets but also needing increased exploi-tation of workers. But that was also the year in which John Stuart Millpublished his Principles of Political Economy, the pinnacle of classical economics,which extolled the civilizing possibilities of the coming stationary state, whichhe anticipated would come soon. Both of these contradictory visions of thefuture of capitalism were ultimately discredited by the spread of capitalismthat spun across the world for the next century and a half, which makes itodder still that both visions continue to resonate in the twenty-first century.

Conclusion

By accepting the inevitability of flux in the economic performance of thevarious economies in the past, the contributors to this history of the rise ofcapitalism have created a new meta-narrative that contrasts with the existingtreatments of the history of capitalism. The first narratives created during theearly twentieth century exuded a sense of triumphalism before the disasters ofWorld War I. Following the trauma of the Great Depression, the next roundof histories were searches for alternative forms of economic organization. Thedivision of the world after World War II into Western capitalism in various

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forms competing with centrally planned economies led to another set of meta-narratives, often to justify alternative experiments in the so-called ThirdWorld economies. With the renewed experience of globalization sinceroughly 1980, the current generation of historical scholarship has searchedfor a compelling new meta-narrative that seems appropriate for bringing theexperience of the past to bear on the challenges of the present.The variety of policy responses to the collapse of the centrally planned

economies in the 1990s made clear the difficulties of getting things right inorder to achieve modern economic growth. If some versions of moderncapitalism seemed more attractive than others to transition economies atthe end of the twentieth century, the institutions required for successfulimitation were difficult to create and then sustain (see Chapter 16 by Nealand Williamson that concludes Volume ii). The problems of changing tradi-tional political structures in order to accommodate effectively the possibilitiesof material improvement that became increasingly evident at different timeswere not easily overcome in the past, but on occasion they were. Just whatwere the essential features of the successful changes in political arrangementsthat complemented dynamic changes in the economies that prosperedremains a matter of conjecture, but economists, political scientists, andhistorians are making great efforts to dissect what were the critical elementsin the few cases of success that are amenable to investigation.The British case is the most intensively studied, with the political arrange-

ments that coalesced with the celebrated Glorious Revolution of 1688/1689usually given pride of place. Acemoglu and Robinson (2012) argue that theParliament that deposed James II was open to a broad range of economicinterests, from hereditary landowners to overseas merchants with varyingreligious and geographical orientations. North andWeingast (1989) argue thatParliament constrained the predatory inclinations of the monarch, forcing himto accept the terms set by Parliament for extending new taxes, creating newdebts, or establishing new enterprises. The “credible commitment” mecha-nisms so created were the essential aspect of the British constitution (stillunwritten, however) that enabled entrepreneurs to prosper thereafter, even-tually leading to the industrial revolution. Most historians of this episode,however, find events much more complex, and that a wide variety of commit-ment mechanisms were required, some of which predated the 1689 change ofregime, while others took much longer to establish firmly (Coffman, Leonard,and Neal 2012). Regardless, all other cases of incipient capitalism have to becompared with the British example along several dimensions beyond themerely economic, but especially in terms of the political and legal institutions.

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The obstacles to imitation were overcome in different ways by nation-statesfrom the nineteenth century into the present. We know now that the inno-vations in follower countries went beyond merely mobilizing capital on anever-larger scale in order to apply the latest technology. Political, social,cultural, and perhaps psychological adjustments were required as well ifimitation was to succeed. Coordination of the various processes that makeup any economy is the fundamental problem that has to be worked out forcapitalism or its alternatives to operate at all. Coordination starts with com-bining several factors of production to create desirable goods and services;then becomes more complicated in distributing output among consumersscattered in space and varying in demand; and culminates by resolving thevexing issue of compensating the owners of the various factors of production.While coordination problems are manifold and complex, perhaps they can

be analyzed usefully as attempts to overcome various dilemmas, trilemmas,and other problems that arise within economies regardless of the degree towhich they are capitalist, or industrialized, or market oriented. For example,modernmacroeconomics at the end of the twentieth century has identified thetheoretical basis for a specific trilemma confronted by nation-states participat-ing in the global economy. Access to global capital markets requires freemovement of capital to and from abroad, access to global commodity marketsis increased with fixed exchange rates, while maintaining domestic tranquilityrequires an independent monetary policy. Unfortunately, not all three desir-able economic policy regimes can be sustained at the same time. Eventually,one of the three desiderata has to be put aside (Obstfeld and Taylor 2004).Sorting out this particular trilemma provides a useful analytical framework

for assessing the development of global capitalism since the middle of thenineteenth century. Prior to that, the rise of mercantile capitalist economies inwestern Europe provided an interesting set of experiments with the leadingpowers – the Netherlands, the United Kingdom, and France – variouslyfocussing on fixed exchange rates (Netherlands), capital mobility (the UnitedKingdom), and independent monetary policy (France) over the periodroughly bounded by the Treaty of Westphalia in 1648 and the Treaty ofVienna in 1815 (Neal 2000). It bears repeating that the lesson from that long-run competition, essentially driven by the need to finance the increasingexpenses of the military revolution in the successive wars from 1648 to 1815,was that maintaining capital mobility was most useful, as the British found(see O’Brien, Chapter 12).Evsey Domar (1970) identified another, more fundamental trilemma in a

classic paper where he put forth the hypothesis that the three elements of a

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pre-modern agricultural structure – free land, free peasants, and non-workinglandlords – could never exist simultaneously. At least one of the elementswould have to be eliminated for a sustainable agricultural economy. Settledagriculture was repeatedly threatened by intermittent raiders, and farmersrequired military protection, which was typically provided by non-workinglandlords. In that case, either free land (western Europe) or free peasants(eastern Europe) had to be given up. Domar illustrated his hypothesis with afew examples drawn from his extensive reading in Russian history and theemerging literature on the profitability of slavery in the American South. Thefailure of serfdom to reappear in Britain or Europe west of the Elbe afterthe Black Death changed the land/labor ratio in favor of bondage remainedan issue, however, an issue that Domar willingly handed to historians andpolitical scientists. The contributions by Persson (Chapter 9) and Salvucci(Chapter 13) that follow in this volume explore other implications of theDomar trilemma.For the very earliest periods, dominated by the rise and ultimate fall of

empires, an interesting question is whether land-based empires had to becomecommand driven at the expense of developing market capacities while sea-based empires could diversify their responses to exogenous shocks morereadily by accessing new markets. Examples might include access to newsources of food supply for purchase, hiring military support in the form ofmercenaries, or avoiding epidemics by restricting access to ports. If land-basedempires were inherently unstable for the long run, how did the Egyptianempires manage to endure so long (Allen 1997) or the Chinese empires oncethey were established (Wong 1997)? What were the long-run implications foragricultural improvement and the rise of capitalism from Roman attempts tosettle professional soldiers along the increasingly distant borders of theempire, an effort more successfully imitated later by the Austro-Hungarianempire, and even the Swedish empire, in comparison with the typical recourseto mercenaries by Athens, then the Italian city-states, and ultimately GreatBritain?Sir John Hicks, in A Theory of Economic History (1969), grappled with this

problem by posing a provocative dilemma. Starting with the premise thathuman societies tend to be organized either from the top down (commandeconomies) or from the bottom up (customary economies), Hicks hypothe-sized that while market-oriented economies could arise from time to time toprovide an efficient allocation of resources or goods they had not prevailedthrough most of history. Societies confronted with shocks, whether fromnatural disasters, military invasions, or plagues, would naturally tend to

Introduction

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respond with a command economy in order to mobilize resources as quicklyas possible to confront the new challenge. Societies insulated from shocks,however, would tend to maintain their customary use of resources indef-initely whether their allocations were optimal for society as a whole or not.Because societies either did or did not experience shocks, they wouldbecome either command economies or customary economies. The marketeconomy would always be in peril as a consequence. Either it would bethrust aside by the forces taking command or it would be allowed to witheraway by popular indifference. The “command case” was the primary causefor the failures of early examples of market-oriented capitalism to surviveshocks. The analyses of Karl Marx (usefully summarized in Marx [c. 1932])variously argued two command cases that would lead to the collapse ofcapitalism: either internal contradictions among the economic rulers, or arevolution leading to a dictatorship of the proletariat. Later variants of thisline of argument might be Rajan and Zingales (2003), who argue thatentrenched capitalists can stifle creative responses to the challenges ofshocks, or Rajan (2010), who argues that entrenched political rulers canmaintain faulty policies in response to shocks. The “customary case” couldexplain the general failures of primitive populations to prosper, but couldalso be a cause for advanced economies to fail, whether because the capital-ists failed to innovate (Schumpeter 1950) or the workers failed to respond tonew opportunities for consumption (Bell 1976).Hicks suggested that the rise of market-oriented economies depended upon

independent city-states ruled by authorities committed to maintaining long-distance trade. The geography of the Mediterranean proved to be especiallyfavorable for sustaining such economies, with Venice and Genoa as leadingexamples. Why Carthage, the flourishing center of Phoenician mercantileexpertise before the creation of the Roman empire, could not prevail againstRome, however, was not considered by Hicks, save to make the point thatmarket-oriented societies were vulnerable to either command or customarysocieties in conflicts. The contribution on China by Roy BinWong (Chapter 6in this volume), however, shows that Hicks’s dilemma can be overcome bybureaucratic elites in land-based empires as well, provided they can synthesizeeffectively the equivalent of an island economy that is self-sufficient anddefensible.An alternative resolution of Hicks’s dilemma is to focus on the importance

of developing a financial market for government debt. Hicks relied on thearguments of his friend, T. S. Ashton, to explain how Britain had managed toavoid either custom or command in responding to the challenges of the

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Spanish, French, and Dutch in the eighteenth century. According to Ashton(1948), British interest rates, taken as the cost of capital, steadily fell over theeighteenth century, led by a fall in the yields on government debt. Theproblem with that argument is that interest rates on government debt wereeven lower elsewhere in Europe andmuch earlier than the eighteenth century(Chapter 10 in this volume). Nevertheless, a number of examples can be foundwhere a financial revolution preceded a sustained economic expansion for acountry (Rousseau 2003). If a government has the possibility of raising cashquickly by selling its bonds to a potentially large, diverse, and wealthy groupof investors, it can then use its command of cash to purchase the resourcesneeded to confront an external shock. The relevant markets for the neededlabor, capital, goods, or services will then be enhanced and increasinglycapable of responding effectively to subsequent shocks. In this way, a ten-dency for command economies to emerge can be diverted into a tendency formarket economies to expand and deepen. This argument provides an exampleof how important is the focus of the individual contributions in this volume onthe adaptability of the institutions in place in response to exogenous shocks.Did elements of command economies emerge? Did they then endure at theexpense of markets for resources or specific commodities? If market responsesdid occur, how were they financed? By forced loans, forced circulation ofcurrency, or drawing on external sources of supply through offering paymentin sovereign bonds? Perhaps Marx was correct when he identified the Britishcreation of a truly national debt funded explicitly by parliamentary commit-ment to servicing it with specific taxes after 1688 as the key element in the riseof modern capitalism!

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