Throughout most of human history there have been two major factors for economic survival: Land and labor. These are referred to in economics as means of production. The overwhelming majority of people throughout history have spent their lives growing crops and raising livestock to provide for their own needs. As recently as 1885, in the United States, people produced more than 80% of what they consumed.
Some societies, for whatever reasons, were able to achieve agricultural production in excess of population needs. This freed up intellectual and physical labor for other pursuits like religion, government and military. Some were able to become artisans specializing in certain trades. Some societies become powerful enough that they could enslave their neighbors, forcing slaves to provide for their agricultural needs while they pursued other activities. Still, the percentage of those who were engaged in non-agricultural work was very small even in the most impressive ancient societies like the Chinese Dynasties, Egypt and Rome. Land and Labor were the primary means of economic production.
The unprecedented rise in prosperity over recent centuries is tied directly to the emergence of a third means of economic production: Capital. The idea of capital has always been around but until recently it has been limited by two major constraints. First, something has value only if a buyer has something to exchange that the buyer values less than the item for sale and the seller values what the buyer has to offer more than the item the seller is selling. The networks of buyers and sellers have always extremely limited due to travel and access to information. Second, amassing enough resources (other than through plunder and taxation) to undertake large scale projects over long timeframes was exceedingly impractical.
By way of analogy, imagine that you wanted to buy a house but money does not exist. First you would have to find out what items the seller would accept in exchange for the house. Then you would have to take inventory of your holdings of possessions and convert them through economic exchange into items the seller wants.
Take this analogy a step further. What if you are only able to come up with twenty percent of what the seller wants? Now you have to find some people who will lend you goods that you can convert into goods the seller wants, while in turn agreeing to pay back the lenders with goods they value. Now take this analogy to the level of building a skyscraper or a passenger jet. Accomplishing this level of commerce is all but impossible.
From the simple task of exchanging three one dollar bills for a gallon of milk to investing in a mutual fund, few of us realize how completely revolutionized our lives have been by the formation of capital markets. As boring as it may seem, the development of capital markets is one of the most transforming factor in human history. Ferdinand Braudel’s three volume series Civilization and Capitalism, 15th to 18th Century, written in the 1980s, has to be one of the most fascinating interpretations of world and European history I have ever read. He goes into amazing detail about aspects of everyday life and the economic forces that set in motion a revolution in human existence. I will highlight only some key turning points that brought this revolution about in the next post, especially those higlighted by Bernstein.
(If you really want an eductation on this topic Braudel' study is a wonderful series. But be forewarned. The three volumes combined are more than 2,000 pages!)