Authors: Jeremy Rifkin
The dramatic productivity gains brought on by the fulling mill made it economical and highly profitable to switch land use from growing food for subsistence to raising sheep for export and exchange in markets. It is no wonder that the fulling mills were sometimes referred to as “an industrial revolution of the thirteenth century.”
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The historian E. M. Carus-Wilson says of the fulling mill that it was a “revolution which brought . . . opportunity and prosperity to the country as a whole, and which was destined to alter the face of medieval England.”
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In this regard, notes Carus-Wilson, the mechanization of fulling “was as decisive an event as the mechanization of spinning and weaving in the eighteenth century.”
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In the 1790s, on the eve of the introduction of steam power and the First Industrial Revolution, there were more than half a million water mills operating in Europe with the equivalent of 2,250,000 horsepower. Although fewer in number, the thousands of windmills up and running at the time were generating even more power than the water mills. The average windmill could produce upward of 30 horsepower.
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Although the new energy sources were bitterly fought over by the feudal aristocracy and an incipient burgher class in the towns and cities, these widely distributed and abundantly available sources of power ultimately favored the interests of the latter. For the first time, the power of urban craftsmen and merchants began to match and even exceed the power of the feudal lords, giving the burghers the edge they needed to shift the economic paradigm away from a feudal economy, which was organized around proprietary obligations, to a market economy, which was structured around property rights. The medieval historian Lynn White summed up the economic significance wrought by the introduction of water and
wind power and the spate of new technologies that accompanied the new sources of power:
By the latter part of the fifteenth century, Europe was equipped not only with sources of power far more diversified than those known to any previous culture, but also with an arsenal of technical means for grasping, guiding, and utilizing such energies which was immeasurably more varied and skillful than any people of the past had possessed, or than was known to any contemporary society of the Old World or the New. The expansion of Europe from 1492 onward was based in great measure upon Europe’s high consumption of energy, with consequent productivity, economic weight and military might.
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The shift from a subsistence economy to a market economy, and from production for use to production for exchange, was a watershed event in the human journey. But it would not have been possible without an accompanying communication revolution to manage the increased flow of economic activity generated by these new sources of power. That revolution came in the form of the printing press, invented by the German Johannes Gutenberg in 1436.
The effect of the new printing press on day-to-day life was immediate, with consequences every bit as significant as the introduction of the Internet today. The sheer volume of printed material being distributed was striking:
A man born in 1453, the year of the fall of Constantinople, could look back from his fiftieth year on a lifetime in which about eight million books had been printed, more perhaps than all the scribes of Europe had produced since Constantine founded his city in AD 330.
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We take print for granted today. It’s so much a part of our daily existence that we rarely stop to consider how growing up on the printed word affects the very way our minds are organized. While medieval script was idiosyncratic and varied with the subjective contribution of each scribe’s input, print removed the subjective element, replacing it with a more rational, calculating, and analytical approach to knowledge. And unlike oral communication, which depended on memory and therefore formulaic responses, print stored memory and systematized the retrieval of information—in the form of tables of contents, indexes, footnotes, and bibliographies—allowing the mind to deepen and expand vocabulary and develop a far more nuanced language that could be tailored to the specific moment or experience.
Print had a profound impact on the way human beings conducted business. Print introduced charts, lists, and graphs that offered a more objective and accurate account of the world than someone’s personal
assessment. Print not only standardized maps, but made them cheap and reproducible in large numbers, making land travel and navigation more predictable and accessible for commercial trade.
Print also enabled commercial contracts, a key element in advancing long-distance trade and extending market exchange over a wider terrain. We forget that in the feudal economy, where economic interaction relied on the spoken word, economic activity was largely constrained by walking distance and shouting distance. In an oral culture, one’s “word” sufficed to settle economic arrangements. Even today, accountants use the word
audit
to describe financial probes, a throwback to the preprint days of feudal economic life when auditors spoke the financial information out loud to one another as a way of verifying the authenticity of the transaction. Print opened the way to modern bookkeeping. Standardized bills of lading, schedules, invoices, checks, and promissory notes could be delivered over distances and stored over time, providing a versatile and expansive management tool that could keep pace with the speed, reach, and scope of commercial life unleashed by the new power sources of water and wind. With print, commercial “trust” was sealed in written accounts accompanied by personal signatures.
The convergence of print and renewable energies had the effect of democratizing both literacy and power, posing a formidable challenge to the hierarchical organization of feudal life. The synergies created by the print revolution and wind and water power, along with steady improvements in road and river transport, sped up exchange and decreased transaction costs, making possible trade in larger regional markets.
The new communication/energy matrix not only shortened distances and quickened time, bringing diverse people together in joint economic pursuits after centuries of isolation, but in so doing, also encouraged a new openness to others and the beginning of a more cosmopolitan frame of mind. Centuries of provincialism and xenophobia that had stultified life began to melt away and a new sense of possibility seized the human imagination. This period saw the flowering of what historians call the Northern Renaissance—an awakening of the arts, literature, scientific experimentation, and exploration of new worlds.
By the late medieval era, more than a thousand towns had sprung up across Europe, each bustling with economic activity. Aside from providing granaries, lodging, and shops, these urban centers became the gathering place for craftsmen of all stripes and shades. These new urban jurisdictions were often called free cities, as they were deemed independent of the reach of local lords. For example, it was customary practice that if a serf were to escape the feudal commons and take refuge in a nearby town for a year and a day, he would be deemed free, having safely left one jurisdiction and taken up residence in another.
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The craftsmen in the new towns organized themselves into guilds by trade—metalworkers, weavers and dyers, armorers, masons, broiders and
glaziers, scriveners, hatters, and upholsterers—in order to establish quality standards for their goods, set fixed prices for their products, and determine how much to produce. The guilds were halfway houses to fully functioning markets. The guilds charged what they called a just price for their goods, rather than the market price, preferring to maintain a customary way of life rather than making a profit. The guilds steered clear of free-labor markets and competitive prices—the critical features of a market economy—and put store in maintaining the status quo.
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The breaking up of the feudal commons and the sudden availability of cheap wage labor, combined with the new productivity potential unleashed by the convergence of the printing press and water and wind power, were enough to push the guild system to the side in the seventeenth century. Merchants began to bypass the guilds, dispensing work to the cheaper labor force in the rural countryside—called the putting-out system—steadily eroding the once entrenched control the guilds exercised over commercial life. The putting-out system paved the way to a fully operational market economy.
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While merchants were struggling with the craft guilds, a new force of small-manufacturing entrepreneurs, many of whom were harvesting the new water and wind energies to power their minifactories, were battling the guilds on the other end in an effort to open up domestic markets for their cheaper goods.
The new manufacturers found common cause with merchants in pushing for the liberalization of national markets, and they jointly championed domestic free trade, the elimination of restrictions on labor mobility, the legal enforcement of commercial contracts, and improvements in transport to enlarge markets. They parted company, however, on the question of exports for foreign trade. The merchants aligned with the monarchies in pursuit of colonial policies that favored foreign over domestic trade. The mercantilist’s rationale was to heavily regulate domestic production to secure high-quality goods at cheap prices for sale abroad at inflated prices, to be paid in precious metals. The overseas colonies, in turn, were prevented from producing finished goods and restricted to producing cheap raw materials for export back to the host countries, and then forced to buy the finished manufactured goods from the home country at a higher price.
Mercantilist policies favored merchant exporters but hurt domestic manufacturers in the host countries as well as in the colonies. Moreover, restricting the volume of domestic products that could be produced for the home market in order to keep export prices artificially high worked not only to the disadvantage of the domestic manufacturers, but also the rising middle class and urban working poor, who had to contend with higher prices for domestic goods.
Opposition to mercantilist policies in Europe and the colonies continued to mount, leading the 13 American colonies to break with England in
1776, followed by the French Revolution, which initiated the overthrow of that nation’s monarchy in 1789. These two great defining moments in political history were as much about the struggle to secure private property through free trade in open markets as they were about securing political freedom and democratic representation. Any doubt on that score was quickly put to rest as the first modern nation-states deliberated the question of who should be extended the right to vote. The United States, Britain, France, and most other nation-states in the eighteenth and nineteenth centuries believed that the central mission of government was to protect private property and a market economy. With that rationale in mind, the right to vote was extended only to men of property, aligning the new nation-state with a market economy based on the free exchange of private property.
Chapter Three
The Courtship of Capitalism and Vertical Integration
I
t is not uncommon to suppose that the free exchange of property in markets and capitalism are one and the same. They are not. While capitalism operates through the free market, free markets don’t require capitalism.
The Birth of Capitalism
The soft proto-industrial revolution of the late medieval era gave rise to the free market, but capitalism, as we conceive of it now, didn’t emerge until the late eighteenth century with the introduction of steam power. The earliest manufacturers headed small, family-owned enterprises that generally employed relatives, augmented by a few itinerant laborers. These entrepreneurs operated in markets but capitalism was not yet a part of the equation. The changeover to capitalism first began in the textile trade. Recall from chapter 2 that merchants, anxious to bypass the guilds, began putting-out work (an early form of subcontracting) to cheaper labor in the countryside. While guild craftsmen in urban centers were sufficiently well-off to afford their own looms, rural labor was destitute and unable to purchase looms of their own. Merchants supplied the looms—usually leasing them out in return for a fee. The fees were often so high that the rural workforce was barely able to earn enough to pay for their leases, leaving them little for their own survival.
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By transferring ownership of the workers’ tools to the merchants, a pattern was set that would change the course of economic history.
In the late sixteenth century, a new generation of small manufacturers began to bring together workers under one roof to take advantage of the
economies of scale in harnessing water mills and windmills to the production process. These small manufacturers also owned the machinery used by the workers. The result is that craftsmen, who had previously owned their own equipment, were stripped of the tools of their trade and turned into wage laborers working for a new type of master—the capitalist.
The textile trade fell into the hands of the capitalists and soon other trades followed. The historian Maurice Dobb makes the point that
the subordination of production to capital, and the appearance of this class relationship between capitalist and producer is, therefore, to be regarded as the crucial watershed between the old mode of production and the new.
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The concentration of ownership of the means of production by the capitalists and the subjugation of labor to capital would come to define the class struggle by the late eighteenth century. Adam Smith penetrated to the very core of the contradiction that would plague capitalism until the end of its reign. Smith saw a correlation between the enclosure of land and the enclosure of the tools of craftsmen. In both cases, millions of people were separated from control over the means of their economic survival. In the first instance, the serfs and peasant farmers were expelled from their ancestral lands and, in the second instance, craftsmen were separated from the tools of their trade. Their new status was euphemistically referred to as free labor, but in reality, that freedom came at a cost—as Smith understood. He wrote:
In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land . . . the whole produce of labour belongs to the labourer. . . . [However] as soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials.
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If this doesn’t seem fair, Smith argued that
something must be given for the profits of the undertaker of the work, who hazards his stock in this adventure. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced.
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The transformation of land from commons to real estate followed a similar logic. Smith assumed that “as soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”
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Smith then summed up the operating logic that drives the entire capitalist system with the succinct observation that
the whole of what is annually either collected or produced by the labour of every society, or, what comes to the same thing, the whole price of it, is in this manner originally distributed among some of its different members. Wages, profit, and rent, are the three original sources of all revenue, as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.
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Most classical and neoclassical economists believe that profits are the just reward for capitalists who risk their capital. Socialist economists, however, might agree with the young Karl Marx, who argued that the part of the worker’s contribution that is subtracted from his wages and kept as profit—surplus value—is an unjust appropriation and that a more equitable arrangement would be to socialize production and let the workers enjoy the full benefit of their labor contribution.
Capitalism played little role in the soft proto-industrial revolution of the medieval era. As previously discussed, small manufacturers did begin to appear near the end of the era and some began to organize production under a single roof to better economize investment in water and wind power, but for the most part, these precursors to full-fledged capitalist enterprises were still quite small and the financing owners used came from family coffers.
What we call capitalism today emerged alongside the shift to a new communication/energy matrix in the last decade of the eighteenth century and the first few decades of the nineteenth.
A Coal-Powered Steam Infrastructure
In 1769, James Watt invented and patented the modern steam engine powered by coal.
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The cotton industry became the first to deploy the new technology. The productivity gains were dramatic. Between 1787 and 1840, British cotton production “jumped from 22 million to 366 million pounds” while the cost of production plunged. By 1850, coal-powered steam engines could be found across Europe and America. Still, as late as 1848—the year of the great European revolutions—hydraulic power “accounted for two and a half times more power than steam engines” in France. Hydraulic energy continued to be used in more French factories than coal-fired steam technology. For example, of the 784 firms in the French steel industry, 672 were still using water mills for their energy.
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The energy mix quickly changed in the second half of the nineteenth century. Steam power rose from 4 million horsepower in 1850 to about 18.5 million horsepower in 1870.
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Steam power made its quickest inroads in countries with large coal reserves. England was the first European country to make the shift from
water and wind to coal, followed by Germany. The United States, with its abundance of coal deposits, quickly caught up to its European neighbors. By the outbreak of World War I, these three countries dominated the First Industrial Revolution.
Coal-powered steam technology ushered in a new communication/energy matrix—steam printing and the steam locomotive—which provided a general-purpose megatechnology platform for the First Industrial Revolution.
The coal-powered steam locomotive transformed the nature of commerce by shrinking space and shortening transaction times. By the 1830s, locomotives were traveling at speeds in excess of 60 miles per hour. It’s difficult for us in the twenty-first century to imagine the impact of a machine that could carry passengers and freight at such speeds.
By 1845, 48 million Britons were traveling the rails annually.
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In the 1850s alone, more than 21,000 miles of railroad tracks were laid down in the United States, connecting much of the country east of the Mississippi River.
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To get a feel for how the train compressed our sense of time and space, consider the fact that a journey from New York to Chicago by stagecoach would have taken three weeks or more in 1847. By 1857, that same trip by rail would have taken 72 hours.
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Besides its speed, the steam locomotive provided a dependable form of transportation that, unlike roads and water, was not affected by changes in the weather. They could make several trips back and forth in the time it took a barge to make one trip and could carry three times the amount of freight as barges at the same price. The combination of speed and reliability allowed for a vast expansion of commerce and trade across a wide continental terrain at greatly reduced costs.
Railroad construction was spotty in America in the first half of the nineteenth century. The railroad boom began in earnest in the late 1840s. By 1859, overall capital investment in private railroad corporations in the United States topped $1 billion, a staggering figure by the standards of the day. The funds capitalized the completion of 30 large railroads.
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This capital investment ran apace until the depression of the 1870s. By that time, 70,000 miles of track were laid down, connecting much of the continental United States. By 1900, locomotives were running over 200,000 miles of track, connecting large cities, small towns, and even rural hamlets across the breadth of America.
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Financing for a transport infrastructure on this scale required a whole new type of business model—the modern stock-holding corporation. While stock-holding enterprises were not unknown previously, they were few in number and generally limited to short-term trading expeditions. Both the British East India and Dutch East India companies were state-chartered stock-holding enterprises.
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The sale of railroad securities turned the small provincial New York Stock Exchange into a financial
powerhouse. Although few Americans are aware of the fact, much of the stock in U.S. railroads were purchased by British, and to a lesser extent, French and German, investors.
The railroads became, in effect, the first modern capitalist business corporations. They created a new business model that separated ownership from management and control. Henceforth, giant business enterprises would be run entirely by paid professional managers whose primary responsibility would be to ensure a return on investment to their shareholders. Capitalism is a unique and peculiar form of enterprise in which the workforce is stripped of its ownership of the tools it uses to create the products, and the investors who own the enterprises are stripped of their power to control and manage their businesses.
The high capital cost of establishing a rail infrastructure made necessary a business model that could organize around vertical integration, bringing upstream suppliers and downstream customers together under one roof. The major railroads bought mining properties to secure a guaranteed supply of coal for their locomotives. The Pennsylvania Railroad even financed the Pennsylvania Steelworks Company to ensure a steady supply of steel to make its rails. The Canadian Pacific Railroad built and managed hotels near its rail stations to accommodate its passengers.
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Managing large, vertically integrated enterprises, in turn, was most efficiently carried out by centralized, top-down command and control mechanisms. The railroad companies were the first to understand the operating requisites that came with the new communication/energy matrix. Laying down and maintaining thousands of miles of track, monitoring rail traffic across vast regions of the country, repairing and manufacturing thousands of pieces of equipment, coordinating the shipment and delivery of freight, managing passenger schedules, assuring on-time performance, and overseeing the work of thousands of employees was a momentous task. Moreover, a lapse or breakdown of any part of the system could—and often did—have a cascading effect, jeopardizing the entire operation.
Running these mammoth enterprises required the successful rationalization of every aspect of the company’s business operations. Max Weber, the great nineteenth-century sociologist, provided a good description of what is entailed in the rationalization of business. To begin with, the modern business corporation is arranged pyramidically, with all decision making automatically flowing from the top down. Formal rules and procedures dictating the flow of activity, the definition of tasks, how work is to be carried out, and how performance is to be judged at every stage of operations and every level of engagement are meticulously planned, leaving little room for improvisation. The tasks are broken down by division of labor and each worker is given precise instructions on how he or she is to perform their work. Promotions in the company are based on merit and calculable objective criteria.
The business historian Alfred Chandler described how the railroads adopted the rationalizing process into their management structure. He observed that railroads
were the first to require a large number of salaried managers; the first to have a central office operated by middle managers and commanded by top managers who reported to a board of directors. They were the first American business enterprise to build a large internal organizational structure with carefully defined lines of responsibility, authority, and communication between the central office, departmental headquarters, and field units; and they were the first to develop financial and statistical flows to control and evaluate the work of many managers.
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Weber and other thinkers took it for granted that a mature capitalism required vertically integrated companies to create economies of scale and highly rationalized corporate bureaucracies—with centralized management and top-down command and control mechanisms—to organize commercial life.
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The ideal capitalist enterprise, according to Weber, is a bureaucratic organization that rationalizes every aspect of commercial life under a single roof. The marshaling of investment capital through the sale of stock, the mobilization of free labor, the setting up of mass-production processes, and competitive exchanges in the market, buttressed by formalistic legal codes, are all subject to calculability and rational bureaucratic management designed to facilitate the centralization of decision-making power in a hierarchical command structure. Weber was right, but left unsaid was that the same centralized hierarchical command and control mechanisms were equally required under a socialist economic system.