Important insights for investors are to be found in historian Joyce Appleby’s thoughtful and informative book The Relentless Revolution: A History of Capitalism. She agrees with Max Weber’s observation that “A man does not by nature wish to earn more and more money, but simply to live as he is accustomed to live and to earn as much as is necessary for that purpose.” Which is what people in traditional societies have done for millennia. They rely on tried and true methods of production, but are fated to endure periodic famines and plagues.
Appleby sets out to explain why this old order gave way to modern capitalism, which she defines as “a system of individual investments in the production of marketable goods,” animated by the “imperative of private investors to turn a profit.” Her key premise is that the development of capitalism was not a natural or inevitable process but rather was the result of factors and forces that came together at a specific time and place – England in the 17th and 18th centuries. They included:
- The protestant reformation of the 16th century. As Max Weber argued, Protestants viewed worldly success as evidence of salvation and therefore pursued it with dogged, systematic determination. Prominent English industrialists tended to be Protestants, frequently Quakers. In France, protestant Huegenots were typically more capitalistic than Catholics. (Interestingly, these same modern-minded groups led the drive to abolish slavery.)
- The gradual modernization of agriculture in the Netherlands and later England created food surpluses, which freed up labor for non-agricultural activities while creating stronger demand for manufactures. In contrast to France, England did not suffer a serious famine after the mid-17th century, though chronic hunger continued to torment the poor.
- The colonization of the New World by Europeans had two important effects. Big profits in both Britain’s horrific slave trade (centered in Liverpool and London) and Caribbean sugar production generated ample risk capital. Meanwhile, by the eighteenth century North America was a large, affluent, fast-growing market for English manufactures; this fostered the “division of labor” heralded by Adam Smith in The Wealth of Nations. Particularly after 1740 or so, enormous shipments of “dry goods” were shipped in the spring and autumn from London, Bristol and later Liverpool to merchants in Philadelphia, New York, and other ports; they in turn sold them to retailers and artisans throughout North America. Note that booming colonial markets supported an impressive expansion of British manufacturing before it was mechanized during the “industrial revolution.”
- As an island nation with a single giant capital city, Britain was a more accessible and integrated market than other large countries in Europe. Most parts of England had fairly good access to the ocean, and many aristocrats spent part of the year in London–the seat of government, commerce, and finance.
- Scientific advances during the 18th century enlightenment were instrumental in certain technological breakthroughs, such as the steam engine.
Other places — 13th century Venice, 15th century Florence, 17th century Holland– shared some of these characteristics and became thriving centers of finance and commerce. But they never developed the transformative “culture of capitalism” that turned England, Germany and the U.S. into industrial giants over the course of the 19th century.
Why Should Investors Care?
For one thing, the notion that capitalism is a historically contingent cultural construct is subversive of conventional economic analysis, which naively assumes that people are naturally profit maximizers. In the real world, some people are, others aren’t. Nations that place a lower priority on rapid economic growth, with its attendant unpleasant side effects such as social turbulence and high income inequality, will grow more slowly. Look at Western Europe: Yes, the single currency was a very dumb and destructive idea, but Europe’s economic growth problems go well beyond that to a visceral aversion to capitalism. In the U.S., Texas creates more jobs than other large states not primarily because of oil and gas (which California and New York also have) but rather because it has a far more laissez faire political economy.
All this has special relevance to investors in emerging markets. I claim no expertise here, but it is obvious that, to varying degrees in each of the BRIC countries (Brazil, Russia, India, China), the “culture of capitalism” must contend with potent countervailing traditions, institutions, and cultural impulses — government corruption, uncertain property rights, excessive regulation, autocratic leaders, etc. All of which make investing in emerging markets rather risky. One reason why I like U.S. multinationals is that they participate in the growth of a diverse array of emerging markets, but without the risks attendant to actually being headquartered there.
Not that the U.S. is immune from anti-capitalistic impulses. The very affluence of the U.S. has given rise to powerful interest groups in government, universities, foundations, etc. that are insulated from market forces and committed to aggressive intervention in the private economy. As we saw in the 1970s and are seeing today, such “reforms,” however well-intentioned they may be, can impede growth, reduce living standards, and increase poverty.
Copyright Thomas Doerflinger 2012. All Rights Reserved.
