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, could 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 became 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 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.
Over recent centuries, the unprecedented rise in prosperity 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. Buyers' and sellers' networks have always been 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 impractical.
By analogy, imagine you wanted to buy a house, but money does not exist. First, you would have to determine what items the seller would accept in exchange for the house. Then you would have to take inventory of your possessions and convert them through economic exchange into items the seller wants.
Take this analogy a step further. What if you can only produce twenty percent of what the seller wants? Now you have to find some people who will lend you goods you can convert into goods the seller wants, while agreeing to pay back the lenders with goods they value. Now take this analogy to building a skyscraper or a passenger jet. Accomplishing this level of commerce is all but impossible.
From exchanging three one-dollar bills for a gallon of milk to investing in a mutual fund, few 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 factors 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. In the next post, I will highlight only some key turning points that brought this revolution about, especially those highlighted by Bernstein.
(Braudel's study is a wonderful series if you really want an education on this topic. But be forewarned. The three volumes combined are more than 2,000 pages!)
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