What is Capital? What is Capitalism?
The aim of my new book The Capitalist Self is to find some precision and a point of origin for the concept of capital and by doing that, therefore capitalism. It contends that the term capitalism is often used too broadly, characterised as some kind of force whose power sweeps all before it. It also usually involves exploitation in the service of ever-expanding profits by a small elite who possess capital. Most theories of the origins of both capital and capitalism stress the role of merchants trading over long distances -especially overseas merchants who accumulated profits as capital and who used paper instruments of credit such as bills of exchange extensively.
My story is different. I argue that the use of capital developed as a social system. Before anything called ‘capitalism’ could characterize a society it had to spread from merchant elites, and capital had to be understood, accepted, and used by most people in society. This again started in Italian cities such as Florence, Prato, Genoa and Naples where local tradesmen and professional bankers created a local paper currency, issuing promissory notes, secured on their known capital, which could be used by ordinary people in their day to day transactions. In Italy this development stalled for various reasons. But the institutions and ideas were promoted by radicals in England during the civil war and republic (1642-59) and capital was turned into circulating paper currency in England, Scotland and the American colonies after 1680. It is a story of everyday life mostly in rural areas -not of high finance in London, and it is a story which emphasizes not merely the accumulation of value as capital but its use to promote economic growth and employment though currency creation.
The History of Capital from Below
Theories which stress the merchant origins of capitalism began with the middle ages traders moving luxury goods such as spices and silks from Asia through the Indian ocean to the Red Sea and then through the Mediterranean to the Italian peninsula. The profits from moving such luxury goods could be immense -as high as 600% on trips to the Moluccas. Such profits accumulated as stores of capital in Europe, allowed these merchants to purchase the materials and employ workers to build the city of Venice. The opening of the Atlantic and southeast Asia to European commerce by the Portuguese and Spanish unfurled new sources of profit from the spice trade and from trade in gold from Africa. But the most significant development and the one with the greatest long term effect, was the Spanish conquest of Peru. This led to the huge production of silver from Potosi which was turned into coins, which further facilitated the expansion of international trade and merchant profit. We know less about non-European trade in the early Indian Ocean and China Sea, but this stress on international trade has revitalised the history of capitalism as a part of global trade. More recently, the new history of capitalism has focused more on colonial exploitation as an essential part of such capital formation with the extermination of indigenous populations in South America and wars such as the conquest of the Spice Islands to overcome or destroy traditional systems of exchange to be replaced with profit oriented systems of production, which needed larger amounts of labour often needed to be coerced using slavery or other forms of coercion.
Marx, of course, also theorized about capital formed through the exploitation of traditional agricultural labour being turned into wage labour through the process of enclosure specifically in England. In both theories which stress the exploitation of labour and the role of merchants and trade, capital accumulation is always confined to elites in society. Capitalists are presented as a different sort of person, who impose their avarice on innocent bystanders. Most histories of capitalism assume that merchant capital eventually evolved into modern capital through banks such as the Banco di San Giorgio in Genoa or later the Bank of England, which used merchant capital to invest in state debt, or the Bank of Amsterdam which invested in overseas trade.But, before it could significantly affect ways of doing business and relations of production, capital needed to progress beyond the world of merchants and bankers’ dealings with each other into wider society.
The book also takes a significantly different approach from those which argue that Britain had better and more ‘representative’ institutions, which made financial capital more secure. Instead, it argues that it was legal flexibility, which permitted local credit markets to be transformed through the use of new forms of savings and currency in an evolutionary way. Institutional flexibility was, in fact, more crucial than security. The gradual creation of trust in new forms of capital was the decisive factor, and no new institution created trust on its own. This was a complex social and cultural process which involved changes in theology, ethics and politics.
The Original Definition of Capital as a Moral Good
Like many nouns turned into ‘isms’ capital took form in the late nineteenth century as the defining base of capitalism. Thus it was locked into a conceptual definition of a liberal, competitive economic organisation of society to counter socialist ideals of cooperative society. However, it is no accident that the root ‘capital’ was used, and this derivation points us not towards market freedom and liberty, but rather towards a certain type of abstract value supported by an institutional structure to preserve financial value over time.
Older theories of capitalism such as those of Sombart (or more recently, Braudel) stressed the technology of bookkeeping as a means of turning profit into something called ‘capital’ which takes its name from the heading in an account book for capital stock. This, I believe, was indeed absolutely correct. Accounting is the necessary means to preserve non-physical value over time in any substantial way.
Crucially, this process also allowed this value to be turned into circulating capital as paper currency, which increased liquidity in the economy. This is not fixed capital or stock which exists everywhere, but requires a recognised, wider system of valuation or accounting to become ‘valuable’ in a monetary sense. Capital in this sense was indeed first given value by long distance merchants and larger tradesmen and industrialists, in exchanges with each other using bills of exchange, and also by early modern states who borrowed from the merchants to pay for the large and immediate expense of war by issuing interest-earning forms of equities, such as annuities, bonds, treasury bills, and shares in state banks, like the Bank of England. All of these were issued as pieces of paper which could be traded amongst these people, who understood and believed in their security and their value, as a form of monetary currency. But, as Fernand Braudel, the great French historian of capitalism, emphatically argued such exchange involved very large, high value instruments of exchange and therefore was confined to a small, elite section of the economy.
However, during the English civil war and commonwealth a group of radical utopian protestant thinkers centred around Samuel Hartlib, wanted to improve society by creating employment. To do this they proposed that by adopting paper currency for the ordinary transactions involved in paying the wages of labourers and industrial workers, employment could be promoted, thereby kickstarting what today we would call economic growth. There were many proposals of how to make such a new currency widely trusted, including being issued by banks based on land registries, or warehouses of trade goods, or being issued by trusted tradesman. They were able to promote their idea because of the remarkable situation after the English civil war which saw a collapse of censorship and an explosion of print about everything. This also involved projectors who had ideas for new enterprises, and who desired to make a profit by doing this. These radicals were not supporters of the old hierarchies of common rights and the self-employed, small-scale peasant, but ‘projectors’ of new investment, capitalist farming and wage labour.
Crucially such investment was not justified by the desire to turn profit into capital as private property (that would come later), but as the creation of employment and the elevation of material well-being as a form of moral goodness. This is a public policy issue and an approach still with us today, albeit in an era in which capitalism has predominantly come to mean something else; and we might even say it is the basis of why governments are so wedded to economics rather than, say, religion.
The formation of Capitalism through the capitalist Self
It is important to stress just how radical the nature of this program of liquidity creation was. The key to doing this was to create capital as a form of fixed value, and this was done primarily through ethics of the self, which stressed self love, happiness, interest and savings.
The Capitalist Self presents a theory of how this historical change took place, tracing how communicative practices through sermons, pamphlets, letters and philosophy changed institutions, ethics and practices. In particular, it traces how three concepts: self-love, happiness and interest were developed and disseminated as religious and interpersonal ethics, all related to the development of the self within the singular mind. Interest was crucial in the pivot of religion away from searching for evidence of providence in worldly events to a world of interacting moral selves interested in the well being of each other as well as themselves. This form of interest involved the mutuality of individuals pursuing their own survival in a material sense, relying on the need for others in a society where all have interests which are organised through an interest in God’s goodness. This also validated the possession of interest-bearing capital as morally good. Happiness validated increased consumption of material goods, while at the same time, a focus on self-control was crucial to prevent savings being squandered on too much consumption and instead used to create capital.
With this nexus of new ideas brought into being,, new institutions and practices of accounting allowed profits to be saved and turned into circulating capital, the basic form of currency. In England, this process was not undertaken by banks, as the civil war radicals had proposed, but was rather done privately. At the same time in Scotland and the American colonies similar sorts of currencies were created by formal banking institutions [give a name in each country), in contrast to England. Most importantly currency in England was created by larger farmers based on the security of their land as it served as the main form of collateral for credit to release liquid money, in the form of the mortgage. This was primarily used to fund capital-intensive, profit-making farming, rather than by traditionally-run family farms tied up in inheritance rules.
Interest bearing loans, based on the security of property, became a source of both income, and more importantly, also a store and source of stable abstract value, which could be used to increase the money supply by underpinning the creation of local notes and bills. Mortgage income could also smooth credit flows by providing capital when outgoings were greater than incomings. In economic terms this process, whereby paper currency entered the transaction economy, not only succeeded in creating the additional liquidity to help expand industrial production but it was also providing support for economic growth, driven by mass consumption. With paper currency replacing oral credit, workers now had a form of earnings, which enabled them to be trusted to make larger-scale purchases.
The role of trust in the institutional creation of capital and paper money has probably been underestimated as a precondition for the Industrial Revolution. In many ways harder to do than building machines, and certainly the machines are useless if no one can afford to buy what they produce.
Policy Implications Today of the New History Capital
What relevance does this have to capitalism today? Especially, how does it relate to inequality which is justifiably seen as a result of the concentration of capital in the ownership of the elite? Capitalism was not in its origins and first century of growth an elite and corporate ‘possession’ but served society’s needs more widely. Power certainly began to be accumulated in the hands of great nineteenth and early twentieth century industrialists and bankers, but as Thomas Piketty has argued, the state was able to control this power and redistribute wealth through democratic taxation in the twentieth century. But, since the state stepped back from regulation and progressive taxation under Reagan and Thatcher, the power of wealthy elites to self-accumulate has risen enormously. Certainly, the logic of interest-earning capital or investment in equity, as stressed by Piketty, means that the more capital any individual accumulates, the more they can earn out of the fruits of economic growth, and this drives inequality by diverting a larger percentage of growth to investors who possess the most capital to invest. But, we didn’t arrive here because this was imposed upon society from above.
The book shows that at its beginning capitalism was not an elite system devised by wealthy merchants and industrialists, whose only aim was more and more profit. We are all capitalists to some extent in our way of thinking about values and ourselves, and much of our material well-being depends on capital. You can’t just throw away capital if you think it is ruining the planet, and still get paid. Many of us will want to enjoy possessions and accumulate savings as capital for security, but probably only a few want to use it for power. Because of the great power capital has in the world today to influence politics and society for the benefit of a very small elite, capitalism tends to be associated only with that elite and ‘society’ is portrayed as a victim. This means that current debates about capitalism set up a binary opposition for and against capitalism. History indicates that it may be more helpful to start by reconsidering and modifying our thinking about how capital is created.
Hopefully this book shows how to think about the role of capital in society in much more nuanced ways. It can also help us to think of how power is created, and how merchants have ‘played’ the state for a very long time. But most importantly it demonstrates that we need to look at the ethical foundations of capital and ask how are profit and competition related to trust?
How do we shift our way of thinking about capital to something which is a social creation and not individual property supported by a social system? Many people have said that capitalism is an historically created system which is not necessary, but social systems are not like cookie cutters which can be used to chop up the dough of human society into new forms immediately. This book shows how change evolved from thought – but it also shows that we cannot maintain current levels of wealth without some form of capital continuing. But this form of capital is definitely not simply private wealth. History shows us that capital is much more communal in origin, and it certainly does not need to be concentrated in the hands of so few, as today. Capitalism is in fact not about liberty but about social dependence and prudence, and it still depends on institutions which maintain the value of savings, which creates capital. Inequality, when combined with the idea of purely self-made individualism, is dangerous, as such wealth means that power can be accumulated and used in ways simply to support the power of the possessors of lots of capital while ignoring society.