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Money, Credit & Capitalism [Books
Posted on December 29, 2016 @ 05:44:00 AM by Paul Meagher

My holiday reading consisted of the book Sapiens: A Brief History of Humankind (2014) by Yuval Noah Harari.

This book was on various best sellers lists for a long time when it was released and deservedly so as it offers many useful insights for understanding the progress of humans (Homo sapiens) from our hunter gatherer days to the present. Without an historical perspective we can take for granted how money, credit, and capitalism helped to solve major problems that temporarily held Sapiens back.

Before the invention of money, for example, it was difficult to trade with neighboring humans. In the absence of money we are required to barter with our neighbors to obtain goods that are difficult or impossible to get through our own labor. It can be difficult to know how many units of what you have is required to obtain a certain number of units of what another person might have. Perhaps you have nothing that the other person wants. Then what? While bartering is arguably a good way to build community, if we were limited to that method of exchange then our communities would be smaller, less complex, and less dynamic than communities that use money for exchange. There is a reason we don't barter much anymore and it isn't simply because we don't live in tight-knit communities. It is because there are limitations to bartering that money solves.

While there are technical mechanisms regulating money in an economy, the most important mechanism regulating money is mutual trust. According to Yuval:

Trust is the raw material from which all types of money are minted. When a wealthy farmer sold his possessions for a sack of cowry shells and travelled with them to another province, he trusted that upon reaching his destination other people would be willing to sell him rice, houses and fields in exchange for the shells. Money is accordingly a system of mutual trust, and not just any system of mutual trust: money is the most universal and most efficient system of mutual trust ever devised.
~ p. 180

Another financial invention that was important in shaping modern economies is credit. Prior to easy-to-obtain credit it was difficult for any government or business to get any project off the ground. Governments could raise taxes, raid, and plunder to raise capital but that was not as efficient as getting a loan to finance your plans. Yuval documents how the ascendancy of England and the Netherlands in defending themselves and expanding their territories was in large part due to the development of institutions capable of offering credit on good terms to the governments and businesses in those regions. Countries without easy access to reasonable credit found it hard to assemble armies and finance new business. Without access to credit it is difficult to change your station in life as obtaining credit depends more strictly upon being born into wealth.

It took awhile after money and credit were invented for capitalism to be invented. Some link it to around the time of Adam Smith and his formalization of the idea that economic growth can keep going indefinately if money earned as profit from production is reinvested into more production.

All this depends upon the rich using their profits to open new factories and hire new employees, rather than wasting them on non-productive activities. Smith therefore repeated like a mantra the maxim that 'When profits increase, the landlord or the weaver will employ more assistants' and not 'When profits increase, Scrooge will hoard his money in a chest and take it out only to count his coins.' A crucial part of the modern capitalist economy was the emergence of a new ethic, according to which profits ought to be reinvested in production. This brings about more profits, which are again reinvested in production, which brings more profits, et cetera ad infinitum. Investments that can be made in many ways: enlarging the factory, conducting scientific research, developing new products. Yet all these investments must somehow increase production and translate into larger profits. In the new capitalist creed, the first and most sacred commandment is: 'The profits of production must be reinvested into increasing production'.

That's why capitalism is called 'capitalism'. Capitalism distinguishes 'capital' from mere 'wealth'. Capital consists of money, goods and resources that are invested into production. Wealth, on the other had, is buried in the ground or wasted on unproductive activities. A pharaoh who pours resources into a non-productive pyramid is not a capitalist. A pirate who loots a Spanish treasure fleet and buries a chest full of glittering coin on the beach of some Caribbean island is not a capitalist. But a hard-working factory hand who reinvests part of his income in the stock market is.
~ p. 312

Money, credit and capitalism are often viewed as the root of all evil. What I learned from Yuval is to view these inventions in historical context and the evolutionary problems these inventions helped to solve. I don't aim to be a cheerleader for money, credit and capitalism but I do think that when we criticize one or more of these ideas, we may take for granted the socio-economic problems they helped to solve (i.e., exchange of goods, project financing, economic growth).

Part of my motivation for finishing this book now is because Yuval recently came out with another book Homo Deus: A Brief History of Tomorrow (2016). It also has positive reviews and I hope to start reading this one when it arrives in the mail next week.




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