The relentless revolution: a history of capitalism (16 page)

Mun’s writings contributed to the popularity of the balance of trade theory, the so-called mercantilist idea that a country’s wealth came from being a better seller than a buyer. Actually Mun was making the more important point that money passively followed the exchange of goods through the circuitous channels laid out by the settling of trade accounts in international commerce. He didn’t aim to explain the benefits of a favorable balance of trade but rather to scotch the paternalistic notion that a depression could be cured by official regulations of exchange rates. The mercantilist goal of achieving a favorable balance of trade, advanced by a variety of commentators, continued to dog economic discussions, even though its basic fallacies were exposed repeatedly. Primarily a political response, the obsession with England’s balancing its trade—i.e., not buying any more than it sold—was cultivated by those who benefited from controlling domestic consumption.

The East India Company throve on spending at home and pushed for higher wages to enhance purchasing power. Manufacturers were concerned with exporting and wanted to keep wages down to keep their prices of goods low and competitive. The central mercantilist assumption was that the wealth of the world was a zero-sum pie. National enrichment came from getting a larger piece of the pie. Mercantilists also continued to give money a privileged place despite the obvious interchangeability of money and goods. Some form of mercantilist thinking always crept back into public discussion in times of national insecurity and economic instability and continues to do so.

Breaching the wall of paternalism in the 1620s with a ramrod of economic realism marked a significant moment in the history of capitalism. It indicated that men of commerce could persuade their social superiors—the aristocrats who sat on the king’s Privy Council—of the wisdom of their recommendations. The advisers and pamphleteers had created a public arena for discussing economic relations. Had we not the examples of Spain and Portugal, we might not stress the significance of this cooperation between entrepreneurs and members of the landed elite. The Spanish king and his noblemen had run roughshod over merchants and artisans whenever they challenged aristocratic privileges. It represents another critical difference between England and continental Europe.

Mun was a contemporary of the famous philosopher Francis Bacon, often credited with moving seventeenth-century English natural philosophy toward the science of observation and analysis. Bacon was a great believer in facts as a master teacher. Study nature, he advised his contemporaries. Test your ideas, and you will learn because nature fights back. Bacon’s bête noire was opinion—what today we might call ideology—because opinion promoted only heated conversations, never truth seeking. Empiricism gained a greater and greater hold on European imaginations, starting with Galileo’s idea about the cosmos on to Robert Boyle’s work on gases and Newton’s on gravity. Speculation about unknowable and imponderable subjects began to wither. These philosophical advances strengthened an interest in developing testable hypotheses about the economy.

Discussions of Usury

On a more practical level, getting capital into the hands of people who knew how to invest it presented a major challenge to the promoters of economic development. Lending money for repayment with interest contravened the biblical injunction against usury. A deeply rooted religious rationale impeded the free use of one’s money. Critics of commercial expansion drew heavily on the social vision embedded in the Old Testament in which money was considered sterile and could not be lent with the view of earning a return. For Jews the laws of the Pentateuch clearly evoked the goal of a Hebrew brotherhood.

The famous verses on usury in Deuteronomy explicitly denied legitimacy to the extension of credit for profit: “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury….” The Deuteronomic injunction against usury was part of a moral code that sharply distinguished between acceptable behavior toward the members of one’s community and toward outsiders. Unable to criticize commercial transactions that were hidden from public scrutiny, opponents clung tenaciously to the tie of charity binding rich to poor. They frequently quoted biblical assertions that men were properly one another’s brothers.

The Catholic Church maintained that Christ’s coming had erased the distinction between brother and other, going, as one author has described it, “from tribal brotherhood to universal otherhood.”
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Still, the laws of the Hebrew brotherhood became a part of canonical law, representing the church’s stand against an unrestricted commercial economy. As in any simple prohibition, enforcement depended upon the unambiguous nature of the crime; commercial developments in the heart of Catholic Europe in the fourteenth and fifteenth centuries had eroded many of the distinctions that separated usurious from nonusurious practices. The imaginative evasions of merchants and the casuistry employed by clerical apologists had made a simple ban against charging interest difficult to enforce.
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Protestant theologians, from Luther to Calvin, moved away from a policy of enforcing Hebrew law as positive civil laws, preferring to rely on the promptings of Christian consciences. Usury was not to be condemned in all cases. Rather charity and the Golden Rule were to guide Christians. English lawmakers vacillated. In 1488 an antiusury statute proclaimed that all usury was to be extirpated and that anyone lending money at interest should forfeit one-half of the principal sum involved. Statutes during the subsequent reigns of Henry VIII and Elizabeth established a 10 percent ceiling, which was dropped to 8 percent in James’s reign. In 1652 the maximum allowable rate was reduced to 6 percent, where it stayed for the rest of the century. By contrast, in the Muslim world, all forms of taking interest remained sinful, leading to numerous evasions. An unintended consequence of accepting usury was the transparency introduced into bookkeeping, once there was less to hide.
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Moralists made usury a symbol of all that was distasteful in the commercial world, where private gain was sought, treasure tolled, hard bargains were struck, and unlucky competitors ill used. Social and religious conservatives found in the usury issue the means to expose the dangers of a market economy. Not only was the rational pursuit of profit thus against the law of charity, but it flouted Providentialism by its implicit reliance upon self. There was a fundamental incompatibility of religion and the profit-oriented commercial activities, they asserted. In the seventeenth century, when the influence of the market became more pervasive, the issue of usury continued to draw fire from those totally antagonistic to the self-centered, calculating spirit of the entrepreneur, be he merchant, landlord, farmer, or manufacturer. Where much of the fifteenth-and sixteenth-century literature on usury had centered on the fact that money could not earn more money, economic changes weakened that line of attack. Money, as capital, had proved to be very fruitful. The enhanced productivity that followed investments in agriculture and industry justified the taking of interest to many, but this required a new line of argument.

In all this public discussion, a model of the market system, for which the Dutch provided a stimulus, was taking shape. Envy and wonder stimulated English observers to try to figure out how they might imitate the phenomenal success of the Netherlands. During the seventeenth century the Dutch extracted tons of herring from waters that washed on English shores, had the largest merchant fleet in Europe, drew into their banks Spanish gold, borrowed at the lowest interest rate, and bested all comers in the commerce of the Baltic, the Mediterranean, and the West Indies. Dutch prosperity, like Dutch land, seemed to have been created out of nothing. The inevitable contrast with Spain, the possessor of gold and silver mines now teetering on the verge of bankruptcy, only underscored the conundrum of Dutch success.

The Netherlands represented a kind of anti–fairy tale. The rags-to-riches heroes of medieval folklore invariably found pots of gold or earned fortunes through acts of valor. Elfin magicians, fairy godmothers, and subdued giants were the bestowers of great wealth. Spanish exploits in the New World had been entirely in keeping with this legendary tradition. The conquistadors had won the fabled mines of the Incas and Aztecs with their military prowess. Even the less glamorous triumphs of the Portuguese conformed to the “treasure” image of getting wealthy. Venturing into uncharted oceans, they had bravely blazed a water trail to the riches of the Orient.

The Dutch, on the other hand, had made their money in a most mundane fashion. No aura of gold and silver, perfumed woods, rare stones, aromatic spices, or luxurious fabrics attended their initial successes. Instead their broad-bottomed flyboats plied the waters of the North Sea in an endless circulation of European staples. From this inglorious foundation the industrious people of the Low Countries had turned their cities into the emporiums of the world. The Dutch were the ones to emulate, but to emulate was not easy, for the market economy was not a single thing but a complicated mix of human activities that seemed to sustain itself.

The first step in economic reasoning was the isolation of key variables like value, profit, and various rates from the social activities in which they were enmeshed. This step in analysis is the most difficult because it requires that we not be distracted by the lively details of the actual. In addition, seventeenth-century men and women were used to thinking of a social whole like the king and his kingdom, not of the parts that interacted within it. The Dutch can be credited with pushing English thinkers toward analysis.

Goaded by a curious mixture of jealousy and admiration, English commentators from the first to the last decade of the seventeenth century took their questions about the market to the Dutch example. It provided a means of observing the buying, selling, producing, lending, and exchanging of goods, independent of personal and political considerations that had often veiled the purely economic aspect of these acts. Sometimes just pointing to the Dutch could overturn a policy. When Parliament revoked penalties for the export of foreign coin in 1663—a restriction that had reflected the mercantilist goal of increasing the country’s bullion—the fact that the Dutch allowed specie to move freely in and out of the country without harm alone convinced the members of Parliament.

Dutch accomplishments inspired some Englishmen with a zeal for the right ordering of trade, while they prompted those with a more speculative bent to search for the secret spring of the new market economy. Analyzing the Dutch economy encouraged the creation of an abstract model of the market and hastened an appreciation of the unseen forces at work in it. With the widening of the market, uniform and known prices replaced the face-to-face bargaining of the local market. Like gravity (which Newton was to explain in 1687), aggregate demand represented power exercised from a distance, motion through a void. As the ultimate consumers moved farther and farther away from the producer, the steps linking production and consumption became more obscure and more in need of clarification. The predominance of foreign trade in the Dutch economy made these links accessible for investigation.

In the Dutch example there were challenging contradictions between appearances and reality with puzzling divergences between expectations based upon established truths and what actually happened. Without mines, how did the Dutch come to have plenty of coin? With few natural resources for export, how could the Dutch engross the production of other countries? How did the Dutch have low interest rates and high land values? How were high wages maintained with a burgeoning population? How could high prices and widespread prosperity exist simultaneously in the Low Countries? Throughout the middle decades of the seventeenth century the Dutch were formidable rivals to English merchants and sources of raw data of incalculable value.

By the end of the period key assumptions about market relations had entered the public discourse in a way that decisively influenced all subsequent social thought. The discrete facts of buying and paying, employing and earning, producing and selling were woven into a single economic paradigm susceptible to sustained inquiry, challenge, and adjustment. Central to the efforts to analyze market relations was the conviction that there existed a determinable order. But this was not a political order to be presided over by a ruler; rather it was an ordering from the consistent behavior of men and women in their market transactions.

In denying the power of the sovereign to control commerce, analysts did not suggest that individual market decisions were random or idiosyncratic. Instead they searched for the relevant cause-and-effect relationships, assuming a uniformity operating at all levels. This in turn led to the conviction that anarchy was not the inevitable alternative to external control. Gone from discussion was the old description of the impulsive nature of human beings found in literature, replaced by a description of market participants as self-interested, calculating, and rational. Old words were given new meaning. If you were to look up words like “career,” “individual,” “expertise,” “interest,” and “manager” in the
Oxford English Dictionary
, which records changes in meanings over the centuries, you would find that “career” referred to horse races well into the nineteenth century and that “individual” was not applied to persons until the seventeenth century.

Members of the East India companies entered the list of disputants in order to defend their practice of exporting specie, which continued to be suspect as long as people considered a store of bullion the only form of wealth. The company offered a stellar example of how to make money in defiance of convention. Only piracy was more profitable than its first voyages, which returned a 200 percent profit. Then the company settled down to annual payments of more than 20 percent for the next century. Because its customers in the Orient didn’t want much that Europeans had to sell, company ships took out coin to pay for their purchases.