A brief history of the development of capitalism

 

The old story goes: imagine Alice and her friend Bert are both hired to cut Mr. Fancypants's 128 lawns.  Alice will mow 64 lawns, and Bert will mow 64 lawns.  Mr. Fancypants gives the two friends a choice: "One of you will be paid a straight wage of $100 a day, and..." [at this point, with a flourish, Mr. Fancypants pulls out a standard chess board] "...as for the other person, I will give you 1 cent now.  You start cutting lawns tomorrow.  At the end of the day, I will pay you two cents for one day's work" [and here he puts two pennies down on the first square of the chess board] "the day after I will pay you four cents, the next day eight cents, and so on."  Which would you choose?  Without calculating, guess how much Mr. Fancypants will have paid each person at the end of this process.

Bert says, "Are you kidding? I'd rather get $100 a day."  Before Alice can object, it has been decided.  And so, after each mowing a lawn, which takes only a couple of hours, the two friends are ready to receive their reward.  Bert, as promised, gets $100, and Alice gets two measly cents, which she contemptuously leaves on the chess board.  

The next day, the two friends work hard for a few hours, and soon it is time for both to be paid again.  That's another $100 for Bert ($200 total so far), and four cents for Alice (a total of 7 cents). 

Third day: Bert gets $100 ($300 total); Alice get eight cents (15 cents total).

Tenth day: Bert gets $100 ($1000 total), Alice gets $10.24 ($20.47 total).  At this point, she's feeling pretty frustrated.  She's working just as hard as Bert, for far less than a dollar hourly wage, while Bert is going out to strip clubs.

On the twelfth day, Mr. Fancypants plops a stack of dollar coins, quarters and smaller coins down on the 12th square of the chess board, worth $40.96.  

The next day, it's double that: $81.92.  At this point, Alice has made a total of $163.83.  She's still nowhere close to paying off this month's rent, and you're way behind Bert, who has accumulated $1300.00 so far.

But then her luck begins to change.  On the fourteenth day, Mr. Fancypants pays her $163.84.  For the first time, she's made more in a day than Bert has. And the next day, the news is even better: she gets $327.68.  Now her total funds are $655.35.  Not too shabby, though still far from Bert's $1500.

And from then on, everything's different.  On the 16th day, she receives $655.36, and on the 17th day, $1310.72, for a total of $2621.43, and suddenly she's made more than Bert.  

On the 20th day, she has a total of $10,485.75.  

On the 30th day, she's a multimillionaire, with a total of $10,737,418.23.  

On the 40th day, she's a multibillionaire, with a total of $10,995,116,277.75.

On the 50th day, she's a multitrillionaire, with a total of $11,258,999,068,426.23.  A few days later, Mr. Fancypants has to pay her more than 45 trillion dollars - which is more than all of the money that exists on Earth currently. And the deal's not done.

When she finally finishes her 64th day of work, having mowed her 64th lawn, and Mr. Fancypants is putting money down on the final 64th square of the chess board, he has to pay her that day more than 92 quadrillion dollars, for a grand total of 184 quadrillion, 467 trillion, 440 billion, 737 million, 95 thousand, five hundred sixteen dollars and fifteen cents.  That's a pretty tall stack of quarters!  And poor Bert only has $6,400.  

What's the point of this silly story?  It demonstrates the difference between linear growth and exponential growth.  Exponential growth is tricky - it starts off very slow, almost imperceptible, and then it grows faster and faster, and finally at the end it explodes.  Human beings are very bad at estimating, or even understanding, exponential growth.  There's actually a well-studied psychological cognitive bias that humans have, appropriately named Exponential Growth Bias, by which we systematically and predictably underestimate exponential growth.

If you're good at math, you may have noticed a couple of things - first, that the amount that Mr. Fancypants pays Alice every day can be given by a simply formula:

P=2^d

where d is the day (i.e., d is 1 on the first day, 2 on the second day, 3 on the third day, etc.) and P is the amount Fancypants pays her, measured in cents.  (Divide by 100 for the number of dollars.)

Next, you may have noticed that the total amount of money Alice has been paid, on any given day, is exactly one cent less than the amount she'll be paid tomorrow.  So, on the third day, she has a total of 7 cents, and the next day she's paid 8.  On the 10th day, she has a total of $20.47.  The next day she is paid $20.48.  To put it differently, on each day, her pay is the pay of all the previous days combined, plus one cent.  That means that more than half of what Alice receives, she receives as a huge sum on the final day.

T=(2^(d+1))-1

That is, if you want to know what Alice's total is, today, calculate how much she'll make tomorrow and subtract 1 cent.

Okay, math aside, what else do we notice here?  First of all, how silly this story is.  How could Mr. Fancypants possibly be rich enough to pay Alice this much?  He couldn't.  No one could.  Alice's pay structure would bankrupt any employer.  Indeed, it would bankrupt the entire Earth.  And then some.  If there were anything on Earth getting paid the way Alice is being paid, it would siphon all of the wealth out of everything, crippling the economy for no reason, accumulation vast wealth on a scale that it could never spend, because no one else would have anything to buy.  This kind of growth is not simply explosive - it is apocalyptic.

Which should give us pause, and some cause for concern.  Because another way of looking at this fable is that Bert is being paid in wages, whereas Alice is being paid in interest.  Mr. Fancypants owes a debt to Alice, which is growing every day, as debts tend to do.  Okay, the debt Fancypants owes Alice has an interest rate of 100%, which is unrealistic - which is what makes this a fable, and not a true story.  But... then again, all interest-bearing debt grows exponentially, no matter what the interest rate is.  A $100 debt, growing 30% per day, will be more that 2 million dollars in 39 days.  And again, the growth is small for the first few days, and then it's huge at the end.  Because people have the cognitive bias that prevents us from intuitively grokking exponential growth, we will always be susceptible to fall for debt schemes that will sink us into permanent poverty.  To see how insidious exponential growth can be, let's get back to Alice's example, because it's so simply and easy to calculate.

Let's change the story a little.  First, let's multiply Bert's pay by 10 - now he gets $1000 a day.  At the end of the 64 days, he of course has $64,000 - still a pittance, compared with Alice.  Or let's try another change: in this version, Bert gets a "cost of living adjustment," of $100 per day, so that on the first day, he gets $1000, on the second day, he gets $1100, on the third, he gets $1200, and so on.  At the end, he has $272,000.  Yes, that's better.  Or what if we just say, $1000 the first day, $2000 the second day, $3000, and so on?  Then his total is $2,080,000.  That's a lot better.  But it's still nowhere remotely in the same ballpark as what Alice is getting.  He's getting about 0.0000000001 of what she got.  Why?  Because even this growth, impressive as it is, is linear.  There's no way to "fix" linear growth so that it can compete equally with exponential growth.  Once exponential growth pulls ahead, linear growth can never catch up.  In a head-to-head competition, it's profoundly unfair. Indeed, "unfair" is completely inadequate way of describing it.  The intuitions of our mere human brains literally cannot comprehend these kinds of mathematical inequalities.

This is not just an issue of debt.  It's an issue of capital.  In our little story, Bert is making money like a worker, and Alice is making money like a capitalist.  

One way to put it, without math, is to say that in the kind of capital accumulation from which Alice benefits, the outputs are fused to the inputs.  The amount Alice will receive tomorrow depends on how much Alice makes today.  That's why, at the beginning, she's hardly making anything, and at the end, she's making mind-boggling sums.  As the old saying goes, "It takes money to make money."

Of course, this is not a novel insight.  Far from it.

960-1127 Northern Song

Why didn't the Northern Song develop capitalism?  Seemingly, all the defining elements of capitalism are there: wage labor, capital, etc., etc..  China was by far the most advanced economy in the world at this time, and was involved in fairly vigorous foreign trade with lands as far off as Egypt.

1115-1234 Jin and 1127-1279 Southern Song

1162-1227 Genghis Khan

1243 Golden Horde founded by Batu

1256 Ilkhanate established by Hulagu 1258 siege of Baghdad Umayyads, Abbasids, Mamluks, Seljuks, Beyliks, Ottomans

1266 Chagatai Khanate 

1279 Kublai defeats Southern Song, establishes Yuan dynasty

Silk Road

Yam - mail system

1271-1295 Marco Polo 1304-1369 Ibn Battuta

Waves, or cycles of expansion and decomposition 

Maritime Silk Road

Majapahit Empire Kublai Kahn sent 1000 ships 1293

Indian influence in SE Asia 

Spice Islands Maluku Islands

Straits of Malacca

Piracy

Thalassocracies

Srivijaya Empire

907-1215 Cholas

 

Although the Mongol Empire(s) were a crucial early predecessor to capitalism, and must be studied in depth in order to understand capitalism, it was the Spanish and Portuguese Empires that made capitalism possible, because they - especially the Spanish Empire - for the first time in world history, allowed for the possibility of a world system - and, again, capitalism only flourished in the dissolution of these empires.  But before we can begin to discuss the Spanish and Portuguese Empires at the zenith of their power, we must make a quick detour to mention the repubbliche marinari - particularly Venice and Genoa.

The repubbliche marinari - also quite accurately referred to as a the repubbliche mercantili

Venice & Genoa 

Byzantine Venetian War 1171

Oligarchy

Venetian arsenal 1104? 1320 - mass production

Byzantine Empire vs. Abbasids & Muslim Turks 

1312-1337 Mansa Musa

 

  

Portuguese "explorers" coastal Africa

beginning with Ceuta in 1415

Henry the Navigator monopoly on tuna fishing in the Algarve

1444 Portuguese begin importing large numbers of slaves from Africa to Europe

1490s Spain Portugal 

1511 Portuguese capture Malacca - Alphonso de Albuquerque

1526 Portuguese export African slaves to Brazil

1416-1524 Vasco de Gama

Albuquerque, Goa

Iberian Union

1565 Spain invades Philippines 

small states - stubborn independence, combined with a slow and steady persistent agenda of cooperation. 

1566-1648 80 Years War 

Bourgeoisie

1588 Defeat of Spanish Armada

1600 English East India Company

1602 Dutch East India Company 

1606 Jerónimo de Ayanz y Beaumont - Spanish inventor of steam engine

Orange, William of Orange

1688 Glorious Revolution

1652-1784 Anglo-Dutch Wars

1642-1727 Isaac Newton 

1698 Thomas Savery water pump

1712 Newcomen atmospheric engine

1751 Bento de Moura Portugal

1756-1763 Seven Years' War (including French and Indian War)

1763-1775 James Watt

1816 Dutch East Indies