1.2.3 Capitalism

The Rise of Capitalism and Its Historical Effect in Europe and America

Introduction

The emergence of capitalism, one of the most transformative economic systems in human history, is rooted in significant events dating back to the 1500s. This text explores the development of capitalism from its early days in Europe, following its journey across the Atlantic to the United States, and examines its profound impact on global economic and political landscapes.

Europe's Transition from Feudalism to Mercantilism

Discovery of America and European Ascendancy

• Background: In the 1500s, Europe was economically and technologically behind regions like East Asia. The discovery of America by European explorers marked an important turning point by infusing vast wealth into the European economy.

Spain's Wealth from American Silver

The Spanish Empire's wealth surged with the extraction of vast amounts of silver from the Americas, particularly from mines like Potosí in present-day Bolivia. This influx of wealth had significant global economic impacts, especially in trade relations with Asia.

Spain's mismanagement of the wealth acquired from the Americas ironically led to the decline of the Spanish Empire. The wealth was often used to fund expensive wars and maintain a lavish court, rather than investing in productive enterprises. Spain's involvement in numerous military conflicts, like the Eighty Years' War against the Dutch and the Anglo-Spanish War, drained its resources. The defeat of the Spanish Armada by England in 1588 marked a significant decline in Spain's naval dominance, impacting its ability to control trade and colonies. Spain's economy became overly dependent on its American colonies. As other European powers began to establish their presence in the Americas, Spain struggled to maintain its monopoly over American trade and resources.

Expanded Colonization

As Spain's influence decline other European powers, notably the British, the French, and the Dutch, established colonies in the Americas -- extracting resources that led to wealth accumulation by European planters and merchants. Exploitation of the Americas led to a reorientation of the basis of wealth from land to capital.

Shift from Feudalism to Mercantilism

• Decline of Feudalism: Feudalism, centered on land ownership and a hierarchy of obligations, was the predominant economic system in medieval Europe. The essential tenet of this system was that wealth was associated with land ownership, and in many ways the only way to acquire wealth was through the acquisition of land. Land is a finite resource, leading to a situation where the only way to acquire more wealth was to take it away from someone else. This partially explains the prevalence of warfare during the Middle Ages. The influx of American wealth and new trade routes began to undermine this system.
• Rise of Mercantilism: Mercantilism emerged as a new economic theory, emphasizing the accumulation of wealth through trade. National power was believed to be based on financial wealth, particularly gold and silver. A basic rule of mercantilism was that since land in America belonged to the nation -- Britain, France, or Spain for example -- any wealth acquired from the Americas belonged to the nation and should remain within the nation. This led to a system whereby the colonies could only trade with the mother country.

The Mercantile System and Its Impact

One example of how this system led to tensions between the colonies and the mother country can be demonstrated by a thought experiment. If you look at a map of the Atlantic world in the eighteenth century, you will notice that South Carolina and Sainte Domingue (today's Haiti) are in relatively close proximity in contrast to their nearness to Europe. South Carolina was a British colony that produced rice. St. Domingue was a French colony that produced sugar that was often converted to rum before being exported. Both of these colonies were wealthy. Both of these colonies produced goods that were desirable to the other. It would have made sense, from an American point of view, for the two colonies to trade directly. But the mercantile system required that all exports were to remain within the empire. Exports to destinations outside of the empire were only allowed from the mother country. So, if someone in South Carolina wanted rum from St. Domingue, that rum would have to be shipped across the ocean to France, from there to Britain, and then back across the ocean to South Carolina. This made sense from the European point of view, but added unnecessary costs for the colonists.

John Locke, whose writings were influential in American revolutionary ideology, asserted that the only purpose for government was to protect private property, and that if a government failed in that obligation the people had a right to replace it. From the point of view of Americans, this is precisely the situation that was created by the mercantile system.

Philosophical Foundations of Capitalism

John Locke's Influence

• Property Rights and Government: Locke's theories emphasized individual property rights and the role of government in protecting these rights. He argued that property was a natural right and that the government should serve the people.
• Influence on American Revolution: Locke’s ideas about property and government were foundational in shaping the political ideology that fueled the American Revolution.

Adam Smith and the Birth of Capitalist Theory

• Wealth of Nations: Smith’s seminal work laid the foundations for modern economic theory. He based his idea on the reality that it had become possible to create wealth without land ownership, breaking the link defining wealth as land. He posited that the amount of wealth was no longer finite and that because if this rather than restricting trade entrepreneurs should be allowed to pursue their own "enlightened self-interest." His theory was that rather than government control, the economy should be regulated by the "invisible hand," that would maintain equilibrium in the system by supply and demand. He argued that setting people free to create wealth for themselves they would also create wealth for the nation.
• Laissez-Faire Economics: Smith’s advocacy for minimal government intervention in economic affairs was a radical departure from mercantilist policies.

Capitalism in the United States: A New Economic Paradigm

• First Capitalist Economy: The United States, following its independence, became the first nation to base its economy on capitalist principles.
• Classical Liberalism: The American embrace of capitalism was part of a broader movement toward classical liberalism, which included values like democracy, secularism, and individual rights.