Many years ago, I wrote my senior thesis on the origins of capitalism. I argued that capitalism can be defined as the ability to leverage one’s own assets, coupled with a legal system of equality under the law. This sounds easier than it is. In most of the world, throughout most of history, property has ultimately belonged to a lord, a king, or — most critically — to the future generations. If one is farming a piece of familial land, then the property is not actually owned by the farmer. He is, instead, a steward, connecting the past to the future. He cannot mortgage the property, because he cannot lose it. Capitalism requires the ability to lose one’s investment, and a society where the real estate is held as familial land cannot free up the capital required to achieve the enormous growth in wealth that capitalism enables.
Equality under the law is quite difficult as well. Almost every legal system has different rules for different people, and some kind of immunity for rulers. This kind of law, however, ultimately comes at a steep price for the populace. Only a fool invests in a new venture that the king can seize on a whim, so the most successful nations are the ones that put the law above any man. In order for capitalism to work, the system has to allow, at least theoretically, a poor man to sue the king for a property violation – and win.
My argument, back in the early Pleistocene Era, was that the legal breakthrough for both of these requirements came into existence in 12th Century England. At that time, the law accepted a pretty wide definition of equality under the law, and allowed for legal ownership of land. In England, even a tenant farmer, a villein, could, and sometimes did, risk his property in order to leverage the asset.
I pointed out that there was more cultural diversity in the England of that period (with over a dozen different languages and cultures) than anywhere else, and that each of those sub-societies offered their own legal systems and services. There was a free market in legal systems, and the King by no means had a monopoly that the state enjoys today. Any two parties could go to any mutually-agreed judge in order to settle a dispute.
We know the result: English Common Law, the foundation of Capitalism, was born in that world.
So far, so factual.
Then, as now, I was interested in pushing the envelope. And so I went further. While I argued that English Common Law was itself in fact a product of the invisible hand working through competing legal systems, there is no smoking gun. Correlation is not causality, however much I tried to make it so.
Most courts did not keep records, so any effort to trace the innovation of private ownership of land, or equality under the law, is basically a dead-end. The only court records that we have are from the crown’s own itinerant justices, who visited each region once every five or ten years. And the only reason that the crown kept records was to ensure that everyone in the chain was paying their “fair share.” As the local courts did not have to prove to a royal auditor that they had not embezzled the funds, they kept no records. Disputes arose, and were settled. When the royal justices turned up, they had to market their “law” as being somehow more equitable and desirable, otherwise disputants would simply work things out using a private arbitrator or judge.
Even though causality could not be proved, it is certain that a competitive and free market in legal systems was replaced by a government-enforced monopolistic legal system. But that system, in a first for the history of the world, respected individual (as opposed to familial) property rights and enshrined law above the power of a baron or a king.
The result, which nevertheless took numerous other developments and centuries to reach full flower, enabled the Industrial Revolution and the dominant economic success of the English legal culture over every other culture in the world. In a nutshell, Capitalism built the modern world.
Nevertheless, the lessons learned through history are easily forgotten. When Russia liberalized, tens of billions of dollars were invested by Western companies like BP and Exxon. These companies were apparently unaware of the risks of investing in a country with neither a solid foundation in property law, nor in equality under the law. In 21st century Russia, what Putin wants, Putin gets. And those companies invested, and lost, when the local tyrant decided he wanted the assets.
Even today, the only companies that truly work on behalf of their fiduciaries (their owners) are in the Anglosphere. French and German industrial companies are guided and managed far more by government and unions than by shareholders. And those are the best examples: In most of the world, the absence of property rights and rule of law mean that paying bribes is the only way in which companies can even maintain a semblance of an independent relationship, but they clearly cannot function for the sole benefit of their owners.
We need to be careful not to underestimate the importance of these very same elements in the United States. For years, companies from Silicon Valley ignored the federal government, leading politicians to threaten antitrust actions against the likes of Microsoft until those companies ponied up to pay the same protection money that other companies do in order to be left more-or-less alone. It is relatively benign corruption, but corruption nonetheless.
In recent years, of course, we have seen substantial erosion in these two pillars of capitalism. Regulations are now very effective. Like medieval Frenchmen, we don’t own our own land. But we are not stewards for our children. Instead, we are stewards for Gaia, as interpreted and served by secretive high priest EPA bureaucrats.
Asset forfeiture has made a further mockery of individual property rights. A man can no longer do what he likes with his own property. He may not even keep possession if the local commissar or police officer would quite like to possess any given car or cash that a person might be carrying.
And equality under the law? While in medieval England a man could sue the King, and even in 1970 America the IRS would never dream of allowing political players to influence which persons or companies are audited, we now have a country where both illegal immigrants and presidential candidates can be open scofflaws without any repercussions. It no longer matters whether one breaks the law: It only matters if one gets caught and lacks the political muscle to buy one’s way out of it. The Biblical injunction that “you shall have the same law for yourself and for the strangers within your gate” (Lev. 24:22) is now just a big joke.
At some point, the capitalism that we take for granted becomes so compromised that everyone loses faith in the system. This is the danger of the United States going further down its pathway of debt and/or default. When we stray too far from our founding principles, America becomes unrecognizable. Which is why we are now more like non-Anglosphere countries than we have ever been in our history. Alas, we know that if America fails, our ideological enemies will not fail to inform the world that this shows that economic liberty and capitalism are flawed.
America was a capitalist nation with property rights and equality under the law. Now? Not so much. Though it will be a losing battle, we must point out, as my thesis graders did, that correlation is not causality.