Capitalism is perhaps one of the most heated discussions heard around the world today. Should the government be involved in the economy? If so, to what extent should they get involved? When is it okay for capitalism to bleed into socialism? How far can the boundary between capitalism and socialism be pushed? These are the questions that are asked by citizens and lawmakers, with varying degrees of answers based on people’s political inclinations. But the capitalism that rules our society today is very different from its humble origins in the thirteenth century.
For centuries the Catholic Church condemned money lending at interest or usury, believing it to be a mortal sin. This meant that the use of wealth to create more wealth had little chance of developing before major trade centers began to flourish. However, as trade centers began to grow, the seeds of capitalism were laid.
Italy was the epicenter of trade during the Middle Ages, placed at a very strategic location between Asia and Europe on the Mediterranean Sea. City-states, like Florence and Naples, brought in profits that were capitalist in nature because any merchant is, in a sense, a capitalist, and Italy had some of the largest merchant cities in the world. The merchant, and by rights capitalist, risked his profit each time her bought product in one place only to sell it in another.
Florence with its large banking families is the best example of early capitalism. They engaged in transactions across Europe, and even saw a successful strike by underpaid day workers in the textile industry, who all wanted a share in the benefits and profits enjoyed by their employers.
With the Protestant Reformation came the opportunity for capitalism in the northern protestant countries, like the Netherlands and France. Because the Protestant Church removed the stigma associated with usury, people were free to lend money at interest. The religion positively encouraged purposeful investment. A wealthy family was a sign of good predestination, meaning wealth ensured entrance into Heaven, leading people to seek out a means for wealth.
The nature of business during this time meant that there was a chance for profit growth for the individual, rather than a large-scale enterprise. This began to change with the creation of the joint-stock companies and the development of factories at the outset of the Industrial Revolution in the sixteenth and seventeenth centuries.
As the Old World started undertaking ocean voyages to expand the world, a mercantile system of trade came into practice. Mercantilism is the belief in the benefits of profitable trading; commercialism. It is the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism.
The risk and potential for profit were greatly increased as people traveled to more distant places. Merchants could not fund expeditions themselves, and sought out insurance for these ventures. They turned to their governments for help. The result is the charter company, which gives companies a monopoly on trade for a certain amount of time, by order of the government. These create the joint-stock companies, like the East India Company and the Hudson’s Bay Company. The bank, the government, and the employer all share stock in the company and its profits.
With joint-stock companies came the practice of speculation: investment in stocks, property, or other ventures in the hope of gain but with the risk of loss. When stockbroking develops, speculation became much more similar to gambling. It was a delicate system that requires the ultimate balance because if something grows too quickly, it is bound to collapse.
When so much money is invested in one company, there is rapid inflation and speculative hysteria. People want to know where to invest next because they are making a fortune. But when the joint-stock bubble’s burst, many lose the fortune that they made so quickly. Without financial regulation, the turmoil raises suspicions of corruption, especially when a few of the higher-ups come out of the crash well.
The boom and bust system occurred simultaneously with the advent of the Industrial Revolution. People began to shift their investments from mercantile trade to manufacturing and industry, is the first time countries are organized entirely on capitalist principles.
In 1776 Scottish philosopher Adam Smith wrote a treatise called “On the Wealth of Nations” and discussed the proper role of government in the economy. He argued that economic benefit came from the natural completion of the market place, where people are free to follow their best interest without interference from the government. This introduced the laissez-faire policy into many capitalist nations, including the United States.
Moving into the nineteenth century, capitalism meant overflowing commerce throughout Europe and the United States, and with it some economic troubles. In the United States the amount of government involvement in the economy largely depended on the government in place. A more liberal government meant a larger one with a presence in the economy, whereas a more conservative government was smaller and stayed out of the economy. This also meant that the political parties handled the economic crises differently.
At the outset of the twentieth century, economists sought out to prove that the markets were self-regulating, and therefore prove the triumph of capitalism. With it came social struggles and violent domestic and international conflicts, leading to WWI, which was largely an attempt to maintain the globalized liberal utopia. But the utopia was not to be, and the market had the largest crash in history in 1929.
When the stock market crashed the major powers reacted differently. Italy, Germany, and Japan chose fascism, choosing war as a means to change the status quo. The United States and France instead launched the idea of market management, or regulation of the market through active state intervention. This new policy set a precedent for handling future economic crises, present in the 1980s, 90s, and 2000s.
Today, debate continues to rage about the advantages and disadvantages of capitalism and its counter, socialism. The twentieth century proved that markets cannot go unregulated, and many European countries have transitioned into a socialist model for economic development. Business is largely private owned, but people don’t think that the market is able to self-regulate, which is where the government comes into play.
The United States continues to struggle on this front. With the recession in 2008, Obama decided to bail out the banks and car industry, much to the chagrin of Republicans because it crossed the line into socialism.
While Congress stonewalls about decisions regarding the economy, the upcoming presidential election will usher in a new economic era for the United States, regardless if Trump or Clinton end up in the White House.
