Introduction to History of Economic Thought

Introduction to the History of Economic Thought

Chapter – 1

Anviksha Paradkar

Psychology (BHU)

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A Definition of Capitalism

Adam Smith (1723-1790) is commonly cited as the beginning of modern economic theory, primarily focusing on the capitalist economic system.
Economists have sought to understand how capitalism functions, including factors like production, economic growth, and distribution of wealth.
Capitalism’s origins are complex and evolved over centuries, with attempts to define and understand its essential features.
There is no consensus on what defines capitalism, but it’s generally agreed to be distinct from other economic systems.
The book uses a methodological approach based on the mode of production, which is defined by the forces of production and social relations of production.
Forces of production include productive technology, tools, and machines, while social relations of productioninvolve how classes relate in the production process.
Capitalism is characterized by:
1. Market-oriented commodity production.
2. Private ownership of the means of production.
3. A large working class that sells its labor power to survive.
4. Individualistic, acquisitive, maximizing behavior.
In capitalism, products have use value (satisfying needs) and exchange value (traded for money), leading to the commodification of labor.
Commodity production implies complex social and economic relations mediated through the market, where individuals interact through exchange rather than personal relationships.
The private ownership of production means that capitalists control the social surplus and establish themselves as the dominant class.
The working class does not own the means of production, and their labor power becomes a commodity, leading to unequal distribution of wealth.
Wages allow workers to buy back only a portion of the commodities they produce, while the rest constitutes the social surplus retained by the capitalists.
Individualistic, acquisitive behavior is essential for both workers and capitalists to maintain capitalism’s functioning.
Over time, workers’ productivity increased, and they organized for higher wages, but the rise of consumerism became a new form of motivation.
Consumerism leads to a treadmill effect where more consumption leads to greater feelings of inadequacy, perpetuating the cycle of harder work.
Capitalists are driven by the need to accumulate more capital to stay competitive, as failure to do so can lead to economic extinction.
Capitalists’ consumption plays a key role in ensuring demand for commodities, which helps avoid economic criseslike depressions.
Recurring economic crises in capitalism have been a central focus for many economists, seeking to understand their causes and potential solutions.

Precapitalist European Economy

After the fall of the Western Roman Empire, Europe lacked centralized laws and protection, leading to the formation of a feudal hierarchy.
In feudalism, serfs (peasants) were protected by lords, who owed allegiance to higher overlords, eventually culminating with the king.
The system was based on mutual obligations: serfs provided labor, crops, or military service to the lords in exchange for protection and a fief (hereditary right to use land).
Custom and tradition governed medieval relationships, as there was no strong central authority to enforce laws.
The custom of the manor dictated obligations, where the lord was obliged to protect serfs in return for labor or taxes, but lords had considerable power, often exploiting serfs.
Disputes were resolved in the lord’s court based on custom, though lords often ruled in their own favor. Overlords could punish lords who violated customs.
Feudal rights varied over time and location, and as they became stronger, they contributed to the emergence of modern nation-states.
The manor was the central economic institution, divided into lords and serfs. Serfs were not slaves but had significant obligations and were tied to the land and lord.
Lords lived off the labor of serfs, receiving taxes in money or kind, while offering protection and administration of justice.
The Catholic Church was the largest landowner, with bishops and abbots serving as lords in the feudal hierarchy. They were loyal to the Church in Rome rather than shifting allegiances like secular lords.
The church provided spiritual aid while the nobility offered military protection. Both controlled the land and wealth, exploiting serfs heavily.
Towns existed alongside manors and were centers of manufacturing. Guilds regulated production and trade within towns, exerting social, religious, and economic control.
The guilds were less profit-focused and more concerned with maintaining order and salvation based on church teachings.
Despite the growth of towns, medieval society remained predominantly agrarian, with social hierarchy tied to the land.
Technological advances in agriculture, particularly the shift from the two-field system to the three-field system, were key to breaking down feudalism and fostering capitalism.
The three-field system increased agricultural productivity by allowing more land to be cultivated and supporting larger populations.
The use of horses in agriculture replaced oxen, increasing the speed of farming and extending cultivation areas, leading to population growth and urbanization.
Technological improvements in transportation, such as the four-wheeled wagon, further boosted efficiency in agriculture and trade.
The population of Europe doubled between 1000 and 1300, and urban concentration grew, with the emergence of many thriving cities by 1300.
The growth of cities and towns resulted in greater specialization, increased manufacturing, and interregional trade and commerce, driving economic progress.

The Increase in Long-Distance Trade

The spread of trade and commerce is often argued to be the most important factor in the disintegration of medieval feudalism, but it was also supported by the internal economic evolution of Europe.
Increased agricultural productivity led to a surplus of food and handicrafts for both local and international markets, while improvements in power and transportation facilitated mass production and long-distance trade.
While commerce was a key factor in the dissolution of feudalism in western Europe, in eastern Europe, it helped consolidate feudal structures due to the different stages of feudal development in both regions.
In western Europe, feudalism had already reached its peak, and the growing social surplus was insufficient to support the rapidly expanding ruling class, leading to conflicts among the nobility and the church.
Commerce became a destabilizing force in western Europe, accelerating the dissolution of feudal ties and laying the groundwork for capitalism.
The expansion of long-distance trade led to the growth of commercial and industrial towns, dominated increasingly by merchant capitalists.
Commerce weakened traditional feudal structures in both industry and agriculture, contributing to the breakdown of feudalism.
From the eleventh century, the Christian Crusades boosted commerce, though the reasons for the Crusades were more linked to the internal development of France than to purely religious factors.
Trade with the Arabs and Vikings also stimulated European production for export, leading to the rise of great trade fairs from the twelfth to fourteenth centuries.
By the fifteenth century, trade fairs were replaced by commercial cities with year-round markets, which clashed with feudal customs and traditions.
These cities gained independence from church and feudal lords, developing complex systems of currency exchange, debt-clearing, and credit facilities.
Commercial law in these cities became fixed by precise codes, forming the basis for modern capitalist contract law, negotiable instruments, and auctions.
In the manorial handicraft industry, the producer was also the seller, but in the new city industries, producers sold goods wholesale to merchants, who resold them elsewhere.
Unlike manorial craftsmen, who were also farmers, city craftsmen focused solely on their craft, earning a monetary income to satisfy their individual needs.

The Putting-Out System and the Birth of Capitalist Industry

The expansion of trade and commerce increased demand for manufactured goods and reliable supply, leading to greater control by the merchant-capitalist.
By the sixteenth century, the handicraft industry, where craftsmen owned their tools and materials, was replaced by the putting-out system.
In the early putting-out system, the merchant-capitalist supplied raw materials to independent craftsmen, paying them to convert materials into finished products, while the capitalist retained ownership of the product.
In the later putting-out system, the merchant-capitalist owned the tools, machinery, and often the buildings, and hired workers to produce goods, controlling the entire productive process.
Workers no longer sold finished products but instead sold their labor power to the merchant-capitalists, particularly in textile industries.
Capitalist control expanded into production, and a labor force emerged that owned little or no capital, marking the appearance of capitalism.
Some historians argue that capitalism began when trade and commerce became central, but feudal tradition initially remained dominant, keeping trade and commerce outside the main economic system.
As markets and the pursuit of monetary profit replaced custom and tradition, the capitalist system took shape.
Capitalism became dominant when the relationship between capitalists and workers spread beyond the export industries to the broader economy.
For capitalism to develop, the self-sufficiency of the feudal manor had to be broken, and manorial customs and traditions had to be undermined.
Agriculture needed to become a capitalist venture, where workers sold their labor power, and capitalists bought it for profit.
A capitalist textile industry existed in Flanders in the thirteenth century, but class wars erupted due to wealth and poverty disparities, leading to the industry’s near destruction by 1280.
In the fourteenth century, a capitalist textile industry thrived in Florence, but adverse business conditions and class conflicts resulted in violent rebellions in 1379 and 1382, worsening the decline of the industry.
By the fifteenth century, England dominated the world textile market, avoiding class conflict by ruralizing the industry, with scattered fulling mills isolating workers and preventing organized resistance.
Later capitalist enterprises, usually centered in cities, sought monopolistic positions and created barriers to protect employers’ interests.
Livery guilds emerged, forming associations of merchant-capitalist employers with apprenticeships, privileges for the wealthy, and high membership fees, limiting the opportunities for poorer craftsmen.
These barriers transformed poorer craftsmen and their sons into a new urban working class that relied exclusively on selling their labor power.

Decline of the Manorial System

For a complete system of capitalism to emerge, capitalist market relations had to penetrate the rural manor, a stronghold of feudalism.
The increase in population in new trading cities created dependence on the rural countryside for food and raw materials, fostering rural-urban specialization and trade.
Lords of manors began to rely on cities for manufactured goods and desired luxury items from merchants.
Peasants could exchange surpluses for money at local grain markets, which allowed them to commute their labor services, leading to greater independence and profits.
As peasants rented land from lords and sold produce, this incentivized production, gradually breaking down traditional ties of the manor in favor of market principles.
By the middle of the fourteenth century, money rents often surpassed the value of labor services in many European areas.
Alienation of the lords’ demesnes further introduced the market into the countryside, as lords rented lands to peasant farmers instead of farming directly with labor obligations.
Many lords became absentee landlords, moving to cities or engaging in battles, contributing to the breakdown of the manorial system.
The disintegration of the manorial system accelerated due to catastrophes in the late fourteenth and fifteenth centuries, including the Hundred Years’ War and the Black Death.
The Black Death decimated populations; England’s population dropped from 4 million before the plague to about 2.5 million by the early fifteenth century, causing a labor shortage and rising wages.
Land became more plentiful and cheaper to rent, prompting the feudal nobility to attempt to revoke commutations and restore labor service obligations.
Peasants, now enjoying greater freedom and prosperity, resisted efforts to reinstate old obligations, leading to widespread peasant revolts across Europe from the late fourteenth to early sixteenth centuries.
These revolts were marked by extreme cruelty and ferocity, with accounts of brutal actions against the nobility and their families.
England experienced multiple revolts, while Germany faced some of the bloodiest uprisings, particularly the 1524-25 peasant rebellion, which saw tens of thousands killed by Imperial troops.
These revolts illustrate that significant changes in economic and political structures often occur through traumatic social conflict.
The feudal nobility fought to maintain their privileges but ultimately succumbed to the forces of change led by aspiring merchants and minor noblemen.
Ironically, the peasants, often striving to protect their status quo, became victims of the upheaval caused by the transition to capitalism.

Creation of the Working Class

The early sixteenth century is a watershed moment in European history, marking the transition from the feudal orderto a capitalist system.
After 1500, significant social and economic changes began to occur frequently, leading to the establishment of capitalism.
A working class emerged, systematically stripped of control over the production process and forced to sell their labor power for survival.
The population of western Europe grew by nearly one-third in the sixteenth century, reaching about 70 million by 1600.
This population growth coincided with the enclosure movement, which began in England in the thirteenth century.
The feudal nobility fenced off communal grazing lands to raise sheep for the booming wool and textile industries, requiring minimal labor.
The enclosure movement peaked in the late fifteenth and sixteenth centuries, displacing three-fourths to nine-tenthsof tenants and forcing them into cities.
Enclosures and population increases destroyed remaining feudal ties, creating a new labor force without land, tools, or means of production, reliant solely on selling labor.
Migration to cities supplied labor for capitalist industries, soldiers for armies, colonizers for new lands, and potential consumers.
Beyond enclosures, many peasants, yeomen, and minor nobility faced bankruptcy due to exorbitant rents and unpayable debts.
Urban guilds became increasingly exclusive, monopolizing crafts and denying many producers independent production, contributing to the new working class.
Displaced farmers and craftsmen often became vagrants or beggars; some squatted on marginal lands for subsistence.
Harsh laws were enacted against squatting and vagrancy, employing criminal statutes and government repression to create the new working class.

Other Forces in the Transition to Capitalism

The sixteenth century saw an intellectual awakening that fostered scientific progress, particularly in navigation, leading to the Age of Exploration.
The telescope and compass improved navigation, enabling Europeans to chart sea routes to India, Africa, and the Americas.
These discoveries resulted in a large influx of precious metals into Europe and initiated a period of colonization.
From 1300 to 1500, European gold and silver production stagnated, leading to an acute shortage of money essential for the expanding capitalist trade.
The Portuguese began extracting metals from the African Gold Coast around 1450, alleviating some shortages, but significant inflows from the Americas in the mid-sixteenth century caused rapid inflation.
During the sixteenth century, prices in Europe rose by 150 to 400 percent, with manufactured goods increasing faster than rents or wages.
The capitalist class benefited greatly from the price revolution, enjoying larger profits while real wages for landlords and workers stagnated.
Capital refers to materials necessary for production, trade, and commerce, and includes tools, factories, and raw materials, as well as social relationships needed for commodity production.
The initial accumulation of capital, termed primitive accumulation, was driven by four main sources: (1) growing trade and commerce, (2) the putting-out system, (3) the enclosure movement, and (4) price inflation.
Additional sources of initial capital accumulation included colonial plunder, piracy, and the slave trade.
The putting-out system spread to most types of manufacturing, leading to significant increases in productivity and lowering transportation costs through improved shipbuilding and navigation.
The new bourgeoisie gradually replaced the nobility as the dominant economic and social class.
The emergence of nation-states marked the transition to a new dominant class, with monarchs relying on the capitalist class for support against feudal rivals.
The unification of England began under Henry VII (1485-1509), with subsequent monarchs completing nation-building through support from Parliament, which represented the middle classes.
Other early capitalist nation-states emerged, such as France under Louis XI, Spain through the marriage of Ferdinandand Isabella, and the Dutch Republic, which gained independence in 1690.
By the late sixteenth and early seventeenth centuries, major cities in England, France, Spain, and the Low Countrieshad developed into thriving capitalist economies, dominated by merchant-capitalists.
This period of early capitalism is referred to as mercantilism, where coalitions of monarchs and capitalists gained power from the feudal nobility, especially in production and commerce.

Mercantilism

The earliest phase of mercantilism, known as bullionism, arose during a shortage of gold and silver in Europe, limiting the money supply for expanding trade.
Bullionist policies aimed to attract gold and silver into a country and prevent their export, with penalties as severe as death for violations, particularly in Spain.
Despite restrictions, Spanish merchant-capitalists often bribed officials or smuggled bullion, contributing to widespread inflation across Europe.
After the bullionist period, mercantilist policies shifted to creating a favorable balance of trade, encouraging more money to enter a country than leave.
Encouragement was given for exports (goods, shipping, and insurance by nationals) and discouragement for imports(foreign goods and shipping charges).
Trade monopolies were established to control prices; a single English merchant bargaining would lower costs compared to multiple merchants competing.
Governments aimed to exclude rival foreign merchants by creating colonial empires, ensuring control over trade and providing raw materials.
Extensive regulations were implemented for exporting and importing, with England applying the most comprehensive rules, offering tax refunds and subsidies to struggling exporters.
Export duties were levied on raw materials to keep them within England, minimizing prices for British manufacturers.
The export of crucial materials for industries, like wool and textile products, was often prohibited to protect the textile industry, which accounted for about half of England’s exports in the early eighteenth century.
Measures to discourage imports included prohibitions and high duties on certain commodities to protect domestic industries from foreign competition.
Special interest groups often influenced the maintenance and expansion of trade restrictions, exemplified by the English Navigation Acts of 1651 and 1660, promoting British shipping.
Restrictions extended to domestic production, including tax exemptions, subsidies for export-focused industries, and regulations over production methods and quality.
Under Louis XIV in France, centralized controls were enacted over guild practices, mandating specific production techniques and quality controls.
The Statute of Artificers (1563) in England centralized control over worker training, employment conditions, labor allocation, wages, and quality regulations.
The motivations behind mercantilist policies blur between a genuine desire to enhance state power and self-serving interests of capitalists, as both sought profit for the merchant class to benefit the state.
Mercantilist views on the nature and origins of profit will be further explored in the following chapters.