Promoted from the Ricochet Member Feed by Editors Created with Sketch. The Origins of Capitalism

 

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.

There are 23 comments.

  1. RushBabe49 Thatcher

    Absolutely. Thank you.

    • #1
    • May 29, 2016, at 8:45 PM PDT
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  2. Son of Spengler Contributor

    Great post.

    • #2
    • May 29, 2016, at 8:57 PM PDT
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  3. Jules PA Member

    Thank you for this.

    • #3
    • May 30, 2016, at 4:46 AM PDT
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  4. I Walton Member

    Excellent and vitally important historical observation. Not easy to get so much insight into so brief an article, thanks.

    • #4
    • May 30, 2016, at 5:00 AM PDT
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  5. Matt Bartle Member
    Matt Bartle Joined in the first year of Ricochet Ricochet Charter Member

    iWe: When we stray too far from our founding principles, America becomes unrecognizable.

    Yup.

    • #5
    • May 30, 2016, at 5:23 AM PDT
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  6. TG Thatcher
    TG

    Bravo, iWe!

    • #6
    • May 30, 2016, at 7:26 AM PDT
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  7. PHCheese Member

    University of Ricochet. I love it. Thanks for the wonderful post iWe.

    • #7
    • May 30, 2016, at 7:27 AM PDT
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  8. Songwriter Member
    Songwriter Joined in the first year of Ricochet Ricochet Charter Member

    Wonderful post. Thanks.

    • #8
    • May 30, 2016, at 7:30 AM PDT
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  9. Misthiocracy grudgingly Member
    Misthiocracy grudgingly Joined in the first year of Ricochet Ricochet Charter Member

    12122703_10156162817780707_696019517832342439_n

    • #9
    • May 30, 2016, at 7:55 AM PDT
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  10. Profile Photo Member

    iWe: At some point, the capitalism that we take took for granted becomes became so compromised that everyone loses lost faith in the system. This is the danger of the United States going further down its pathway of debt and/or default. When we strayed too far from our founding principles, America becomes became unrecognizable.

    Just a couple friendly edit suggestions.

    • #10
    • May 30, 2016, at 8:58 AM PDT
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  11. Al Sparks Thatcher

    iWe: 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.

    There’s evidence that in 1960’s America (Kennedy/Johnson Administrations) that the IRS did allow political players to influence their audits. The civil service all of a sudden becomes “honest” when their political masters all of a sudden say they want to reduce the size of government. As it turned out they had nothing to fear from Richard Nixon.

    • #11
    • May 30, 2016, at 9:07 AM PDT
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  12. Z in MT Inactive

    The English Common Law doesn’t get mentioned as a key enabler-differentiator of the anglosphere as much as it should.

    Thanks

    • #12
    • May 30, 2016, at 9:59 AM PDT
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  13. Susan Quinn Contributor

    Thanks so much for giving us this historical perspective on capitalism and the rule of law, iWe. Although it is quite depressing and concerning, isn’t it? We are definitely heading down a dangerous road.

    • #13
    • May 30, 2016, at 10:05 AM PDT
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  14. John Hanson Thatcher

    IWe –

    “Equality under the law is quite difficult as well.”

    I agree completely. When the Declaration if Independence , and a few years later, the Constitution were written, the idea was that our basic rights were inalienable, granted by a higher power, and unable to be taken away by men. The Constitution enshrined these rights, by a short list of what our Federal government was allowed to do, and reserved all else to the states or to individuals. Almost uniquely, it was a negative rights document, it circumscribed what government could do, not what the subjects of the government were guaranteed. This allowed individuals to be equal under the law, and to maintain their individual property.

    Of course, this has always seemed wrong to those who think government should be the enforcer and guarantor of our rights, and they have worked steadily, since the founding, with increasing success over the last 100 years, to change from a Government with limited enumerated powers to one, that can at the whim of the individuals in power, decree its will and enforce it at the point of its guns.

    Critical to this, has been the steady, and quickening, switch of the Constitution from meaning what the English words it was written meant, at the time it was written, to whatever a select panel of nine unelected men in robes say it means. We have been fortunate over the last two decades to have a roughly equal split between progressives and conservatives, that in the breech has served to preserve some semblance of a limited government, though the drift is still towards a soft tyranny.

    We are at a critical juncture, and to me the next presidential election represents a serious existential threat to our liberties, beyond the tactical temporary loss of some case or other, and rather to a tipping point, at which the second amendment will be declared non-existent, and first amendment rights will be subjected to prior approval by some government board or panel, as has already happened in Canada. Private property rights will continue to decline, and be more and more at the whim of whoever is heading some regulatory agency.

    A shrinking of Federal power does not appear to be in the immediate cards for any of us, and our choices at this election, do not lend much comfort.

    If our way of life is to continue, we must educate, and discover a means to convince more Americans that Capitalism with a limited government was the source of our success, not our problems. It will be a long and difficult fight. I hope we can ultimately win it.

    • #14
    • May 30, 2016, at 10:28 AM PDT
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  15. KiminWI Inactive

    I have been scarce around Ricochet for a few weeks. Here I venture back and find this post of the sort that got me hooked to begin with! Thanks iWe!

    • #15
    • May 30, 2016, at 11:48 AM PDT
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  16. Hartmann von Aue Member

    Thanks for a terrific post! In medieval Iceland, the society was built on the idea of equality of all free men under the law. A poor but free man could challenge a chieftain in a property dispute and bring the case to the quarter courts or if the case did not find a satisfactory resolution there to the Althing. The problem that arose was that, though court decisions were legally binding on all parties, enforcement and respect of those decisions was up to the parties themselves. There was no central law enforcement authority of any kind. The system only worked as long as those who were poor but free had either powerful allies or honorable adversaries or both. Absent one or both it fell apart, which is what ultimately did happen.

    • #16
    • May 30, 2016, at 12:19 PM PDT
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  17. RushBabe49 Thatcher

    It was an Act of Congress that opened up the slide into government tyranny. The Administrative Procedure Act of 1946 enabled federal agency rules to have the force of law, without new laws being passed by Congress. Yes, it also specified judicial “oversight” of those agencies, but that hasn’t been very effective, has it?

    The other big enabler, and the first thing I would reverse if I were Queen, was JFK’s executive order allowing government-employee unions. Even judicial oversight of agencies is powerless in the face of government unions who fight to the death against any of their members being fired for any reason.

    • #17
    • May 30, 2016, at 1:44 PM PDT
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  18. iWe Reagan
    iWe Joined in the first year of Ricochet Ricochet Charter Member

    RushBabe49:It was an Act of Congress that opened up the slide into government tyranny. The Administrative Procedure Act of 1946 enabled federal agency rules to have the force of law, without new laws being passed by Congress.

    The other big enabler, and the first thing I would reverse if I were Queen, was JFK’s executive order allowing government-employee unions.

    I was unaware of those two specific actions. Thank you for educating me!

    • #18
    • May 30, 2016, at 1:48 PM PDT
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  19. SpiritO'78 Member

    “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.”

    I think they always understand the risks; the upside is such that they think it is worth it.

    Great Post!

    • #19
    • May 30, 2016, at 1:52 PM PDT
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  20. MACHO GRANDE' (aka - Chri… Coolidge

    This is another example of why when Richard Epstein talks about property rights, I pay attention.

    When someone else owns your property, they own you. There’s a reason we had a revolution, it seems we still have people so afraid to cut their own lives out of the world that they’re willing to be enslaved to yet another master, under the guise of “progressivism”.

    • #20
    • May 30, 2016, at 4:15 PM PDT
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  21. Rodin Member

    Son of Spengler:Great post.

    Ditto.

    • #21
    • May 30, 2016, at 5:13 PM PDT
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  22. cbc Inactive
    cbc

    There are many many links in this chain. It grew piecemeal but according to Deirdre McCloskey Douglas North and others the rate of change did not accelerate greatly until the 17th and 18th century in England.

    For Causality instead of Correlation, try Sir Edmund Coke’s 16th century jurisprudence.

    He was the leading legal guide for the English Civil War anti royalist and he was the guiding legal spirit for the Radical Whigs and the American founder. I believe he may have also been the leading proponent of the history of law your thesis seem to have depended on.

    In a sense he invented English Common Law as we know it now. Back in the 12th century wasn’t it merely the King’s law?

    He also forced the King, at least temporarily, to bow to the law.

    Great post.

    • #22
    • May 31, 2016, at 5:49 AM PDT
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  23. TeeJaw Inactive

    RushBabe49:It was an Act of Congress that opened up the slide into government tyranny. The Administrative Procedure Act of 1946 enabled federal agency rules to have the force of law, without new laws being passed by Congress. Yes, it also specified judicial “oversight” of those agencies, but that hasn’t been very effective, has it?

    The other big enabler, and the first thing I would reverse if I were Queen, was JFK’s executive order allowing government-employee unions. Even judicial oversight of agencies is powerless in the face of government unions who fight to the death against any of their members being fired for any reason.

    Franklin Roosevelt, August 16, 1937, Letter on the Resolution of Federation of Federal Employees Against Strikes in Federal Service:

    All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations. The employer is the whole people, who speak by means of laws enacted by their representatives in Congress. Accordingly, administrative officials and employees alike are governed and guided, and in many instances restricted, by laws which establish policies, procedures, or rules in personnel matters.

    Read the whole thing at the link above.

    • #23
    • May 31, 2016, at 6:46 AM PDT
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