What Is Capitalism? The History of How Capitalism Developed (2)

Hello, this is Bitpunk. Today we live in a capitalist society, and we often find ourselves asking what this capitalist society actually is. In this post, we'll look at the history of how capitalism developed. This post continues from Part (1).

The Roots of Capitalism: Feudalism

Capitalism grew out of feudalism in Europe. Until the 12th century, fewer than 5% of Europe's population lived in towns. Skilled workers living in towns received protection from feudal lords rather than actual wages. On top of that, most workers were serfs of the nobility. By the late Middle Ages, however, industry and trade became more active, and towns grew more and more important.

Traders began paying real wages, and many people moved to towns where they could earn money in exchange for their labor. Sons and daughters in a family could now find a new source of income in the towns where trade took place. For reference, just as serfdom was one element in the development of rural life, child labor at the time was also one element in the development of the urban economy.

Mercantilism Replaces Feudalism

Mercantilism, the dominant economic system from the 16th to the 18th century, gradually began to replace the feudal economic system of Western Europe. Mercantilism started through trade between towns, but it did not always take the form of competitive trade. At first, each town offered quite different goods and services. Over time, however, these began to become uniform according to demand.

After goods became uniform in this way, trade expanded its reach from village to village, city to city, state to state, and country to country. Around the time too many countries were trying to offer similar goods, trade began to turn competitive, and alongside strong nationalist sentiment, the risk of war also emerged.

Colonialism flourished alongside mercantilism, but most colonies were set up with feudal economic systems rather than mercantilist ones. As a result, the colonies' raw materials flowed back to the colonizing countries, and the colonized countries often had to buy finished goods with fake currencies that could not be used to trade with other nations.

The person who realized that mercantilism was a regressive system, one that did not drive national development or change but instead caused trade imbalances between countries and held back progress, was Adam Smith. Smith's ideas about free markets soon gave birth to the capitalist world.

The Growth of Industrial Capitalism

This was around the time the Industrial Revolution was starting to shake up the Western world, and Smith's ideas came at just the right moment. Gold mines in the colonies brought new wealth and demand, which spurred the automated production of goods. Thanks to dazzling advances in technology, factories no longer had to be built near waterways and windmills, and industrial capitalists began building factories in cities where they could draw on thousands of ready workers.

The industrial tycoons of that era were self-made, people who had built their wealth within their own lifetimes. Their fortunes are said to have typically surpassed those of landed aristocrats or money-lending families. For the first time in history, ordinary people could hope to become rich too. More factories were built, more labor was put to work, and goods began to be produced that more people could afford to buy.

Meanwhile, the term "capitalism" was born from the Latin word "capitalis," meaning "head of cattle." It was used in 1850 by the French socialist Louis Blanc to describe a system of ownership in which individuals, rather than the public, monopolize the means of industrial production.

Contrary to what many people believe, it was not Karl Marx who coined the term capitalism.

The Impact of Industrial Capitalism

Industrial capitalism brought benefits to more social classes than just the aristocracy. Wages rose, and it became possible for labor unions to form. As cheap products were mass-produced, living standards rose as well. This growth led to the formation of a middle class, and more and more people were able to move up the social ladder one step at a time.

The economic freedom of capitalism developed alongside democratic political freedom, liberal individualism, and the theory of natural rights. However, not every capitalist system means political freedom or individual liberty. Economist Milton Friedman, who championed capitalism and individual freedom, said, 'Capitalism is a necessary condition for freedom, not a sufficient condition.'

Industrial capitalism began to rise as finance developed. Banks at the time stored valuables, served as clearinghouses for long-distance trade, and acted as lenders to nobles and governments. But these banks started to become the center of commercial activity, acting as intermediaries for large sums of money and beginning to fund long-term investment projects. By the 20th century, stock markets had opened up to more individuals, and some economists predicted the arrival of financial capitalism.

Capitalism and Economic Growth

By giving entrepreneurs an incentive to take resources from where they are unprofitable and use them to create more consumer value, capitalism has proven to be a highly effective means of economic growth.

In the 18th and 19th centuries, before capitalism rose, rapid economic growth was made possible by plundering the resources of colonies. This was a zero-sum process with clear limits. According to research, average per capita income did not change from the rise of agrarian societies until around 1750, when the First Industrial Revolution took root.

In contrast, centuries of capitalist production processes have greatly improved productivity. As a result, more and more people have gained access to better products at lower prices, and have come to enjoy living standards that were previously unimaginable. For this reason, most political theorists and economists argue that capitalism is the most efficient and productive system of exchange.