The Origins of Capitalism

A Presentation given to the Economics and Law Conference 2015

Peter Bowman, School of Philosophy and Economic Science

Over the last few years at this Conference we have been exploring the significance of land in economics. Three years ago we studied Roger Scruton’s Book on Green Philosophy out of which came the idea of oikiophilia or love of place. The following year we studied the land enclosures, particularly those which took place in England in the Eighteenth Century through a lecture given by Mr. Leon MacLaren and also Hammond & Hammond’s book on The Village Labourer from which the lecture itself had drawn much of its material. Last year we studied Andro Linklater’s quite recent book, Owning the Earth. This is a very extensive study of land ownership across the world and it showed distinctly how the system of land tenure has a strong influence on the subsequent direction in which an economy develops. It revealed in particular the extent to which the system of private ownership of land that had developed in England in the sixteenth century was exported and spread across what is now the United States and also many of the territories of the British Empire. The book also pointed out how the economies of countries with different systems of land ownership (e.g. peasant and serf) to those developed in England evolved in different ways. The implication is that the system of private land ownership had a significant impact in the development of what became the free market capitalist economic system.

In looking into the unique features of capitalism our Economics course refers to the work of Hernando de Soto. In his book, The Mystery of Capitalism, de Soto’s thesis was that the key to the development of an effective market economy is a system of well-established property rights. One particular reason for this was that land could be used as collateral to borrow against and so provide a means of acquiring capital. The importance of being able to of use land as collateral was also recognised in Linklater’s description of the development of the economy in the United States in the nineteenth century.

Another author we have had recourse to in looking at the role of land in the capitalist economy is Karl Polanyi. In The Great Transformation his key contributions to the description of the way the modern economic system has developed was the notion that the basic factors of the economy, namely land labour and credit have become treated as if they were commodities which can be bought and sold in the market. He saw this as very significant change in conceptual thinking as an effect of industrialization and one with huge social implications.

At the Rethinking Economics Conference this year there was a session on developmental economics in which Mushtaq Khan, an economics Professor at SOAS gave a very informative presentation. He stood out as someone who was interested in and was informed about how the world actually works rather than being interested in theories and models. He recommended a book called The Origins of Capitalism, a longer view by Ellen Meiksins Wood, Professor of Political Science at York University Toronto. This book examines in a careful and critical way the various theories on the origins of capitalism and in particular recent developments from the Marxist School of Economics. Her conclusions help to clarify the historical importance of the system of land tenure, particularly as it developed in sixteenth century England in shaping an economy to give an explanation for the origins of what is now called the capitalist system.

The first step in exploring the origin of capitalism is to establish in a meaningful way what the word is being used to represent. The term capitalism tends to be used in a very general and non-technical way, perhaps so generally as not to have any one specific meaning associated with it. It could, for example, be used to describe any economy based on trade in which there is commercial development, private ownership and a market. Although the word capital has long been in use and also capitalists have been referred to for a long term the word capitalism was not itself used until the beginning of the twentieth century. It appears neither in the writings of Adam Smith or of Carl Marx. Its first use is attributed to the German economist Werner Sombert and it was then taken up by his friend and colleague, the sociologist and political economist, Max Weber in his famous work: The Protestant Ethic and the Spirit of Capitalism. As the title implies Weber sought the origins of this way of organizing an economy in a particular North European outlook on life. Here is an extract giving a flavor of the sociological direction in which Weber was looking for the origin of the phenomenon:

The development of the concept of the calling quickly gave to the entrepreneurs a fabulously clear conscience – and also industrious workers; he gave to his employees as the wages of their ascetic devotion to the calling and of co-operation in his ruthless exploitation of them through capitalism the prospect of eternal salvation.

What are the characteristic features of a capitalist economy? Is it essence really about a particular work ethic? Here is a list of some of the basic modus operandi of this particular type of economy as it is conceived.

1) The “means of production,” a combination of land and capital, is privately owned.

2) Production of commodities is for sale in the market (rather than for direct consumption).

3) Producers compete with each other for sales in a self-regulating market where the price is determined by a balance between supply and demand.

4) Producers accumulate capital to increase productivity.

Because of the competitive nature of the arrangement there is pressure on capitalists to produce more efficiently than their competitors so they can sell their goods more cheaply. The main mechanism for this is to increase labour productivity by employing more capital.

5) Producers aim to maximise profits.

There is no central planning or allocation. It is left to individual producers to supply what they can and their motivation is to acquire by producing and then exchanging what has been produced for a price that is greater than the cost of production.

6) As well as a market in produced commodities there are markets in the basic factors of production – land, labour and credit.

In practice it is found that when a system operates in which there is production for the market these fundamental factors become drawn into the market system.

This type of economy can be distinguished from others such as feudal, mercantilist and socialist.

If this is provides a basic description of the way a capitalism economy is organized then the next step is to look into how it has come about. A generally accepted view is that the growth of capitalism has been a natural progression requiring for its evolution primarily the removal of the barriers that otherwise prevented it from developing. This story assumes that a good description of human beings is that we are primarily self-interested and have a natural propensity to truck, barter and exchange one thing for another. Over time progress has consisted in technological development and this has led to increased specialization and productive capacity and these developments have been particularly centred in towns and cities. As traditional restrictions to the process have been broken down over time capitalism has progressively grown and prospered.

The Marxist view is similar but more dramatic. It assumes capitalism came about with the overthrow of feudalism and took place by bourgeois revolution (presumably referring in particular to the English Civil War and French Revolutions), equating “bourgeois” with “capitalist”.

According to Karl Polanyi the dominance of the profit motive, which he suggests is a key feature of capitalism, has only arisen in the modern age. Previous economies certainly had markets and engaged in trade but economic arrangements were embedded in social arrangements and traditional motives such as status, prestige and communal solidarity mattered more than profit.

Polanyi’s view was that when the basic elements of the economy, coldly termed “land” and “labour” which, he points out, in reality mean human lives and the whole of the natural world, became treated as commodities that could be bought and sold in the market place then a great transition took place to produce a market society in which social relations were now embedded in the market system rather than the other way round which had been the condition for the remainder of previously recorded history. Polanyi did not explain precisely how this commodification came about but associated it in a general way with the progress of technological change and in particular with the arrival of industrialization.

It is generally agreed that the economic arrangements that exist in capitalism are fundamentally different from the feudal arrangements that preceded it. One major difference in the feudal system was that civil and economic arrangements were combined in a single system. A ruling class provided military protection and dispensed justice and in return received their portion of the produce of the community they ruled over. Most peasants were in part self-sufficient through their access to various commons. There were local markets but mainly for trade in surpluses and there were merchants within the system who organized trade. They made their profits through commerce, buying cheap in one location and selling dear in another, they did not organize production.

If the suggestion that capitalism arose in towns and cities is correct then a good place to look for its origins would be the city states of late Mediaeval Italy such as Florence. There was certainly great prosperity there but were the arrangements capitalist in the way it was outlined above? There was manufacture but this was in the main through skilled craftsmanship. The wealth was acquired principally through trade. Thus the basis of economic success was not competitive production methods but the acquisition of what might be called “extra-economic” powers such as the ability to facilitate production through monopoly or the ability of civic office holders to acquire wealth through the privilege of charging taxes or other dues. Later the ruling family moved into financial services and on this basis acquired great wealth. Although such practices might be associated with capitalism in a general way they do not correspond to the generally established methodology.

Another successful urban region associated with the origins of capitalism is the Dutch Republic. Indeed, Linklater describes the system developed here as one of the two types of capitalism but, again, careful examination shows that what was taking place here did not conform to the methodology of competitive production for the market which is the essence of the capitalist system.

The United Provinces of the sixteenth century comprising the area that is roughly now the Netherlands and Belgium was essentially a trading community. Fish was a speciality and also high value goods imported from the east – spices, silk and porcelein. Profits were made through taking advantage of the existence of fragmented markets so goods could be bought cheaply in one location and sold at a greater price in another. The trading arrangements were not based on free competition, but on monopoly privileges such as those acquired by the huge Dutch East India Company. The trade in luxury goods attracted and supported a large urban population that serviced the requirements of the wealthy merchants. It was sustained by the import of cheap grain from the Baltic region where again merchants could take advantage of disconnected markets and special trading privileges. There was local agriculture and because the cheap grain imports met basic local needs it could focus on highly valued goods such as dairy produce.

This was mercantilism rather than free market capitalism. The merchants were primarily interested in circulation rather than production and certainly not in competitive free markets. One of the features of the Dutch system was the way they produced effective financial instruments such as tradable bonds. Another aspect was the exalted status with associated financial rewards of civic positions. Dutch merchants would invest much to acquire these and so gain access to what were “extra-economic” sources of considerable wealth.

If urban examples do not offer convincing locations for the origin of capitalism with its production for sale and competitive free markets then the alternative is to look to the rural areas which in these times would have constituted a much greater component of the economy than they do now. The arrangements in different parts of Europe in both feudal times and what followed it were not the same. For example in France, by the sixteenth century, feudalism had been replaced by a more Absolutist regime with power greatly concentrated at the centre. In the main peasants retained control of their land but the aristocracy had gained “extra-economic powers” to appropriate excess wealth, particularly through taxation. Also markets were quite disconnected with considerable trade tariffs so there was little incentive for peasants to produce more or for them to produce for sale rather than for their own consumption.

England, by contrast had developed in quite a different direction. Gradually the country had moved from feudal arrangements where land was held in return for service to the monarch, originally direct military service, and later through various feudal payments, to one where land was held in its own right. In England there were very limited “extra-economic” powers available to the aristocracy so most of their income had to come directly from the lands they held.

With these changing arrangements also came a shift in social roles and particularly fundamental nature of the arrangement between the landholder and the land he held. [This is described in part 2 of the economics course as a shift from a Timocratic regime – rule by honour to an Oligarchic one – rule based on property]. Two historical events served to accelerate this change. The first was the dissolution of the monasteries, 1536 – 1540. In the early sixteenth century around one fifth of the land surface of England and Wales was church property. Because of King Henry VIII’s need for money to fight his French wars much of what had been confiscated from the church was sold off or let on long leases. The new owners were not the traditional aristocratic families but a quite different breed comprising merchants, civil servants and members of the legal profession with a new attitude to land which they saw it now primarily as a source of income. A hundred years later, during the English Civil War a second major re-distribution took place as the lands of the defeated Royalists were sold off by the Government, this time to finance a war in Ireland.

The new landowners could use their possession directly themselves but they often preferred to rent or lease it out and receive a cash income. Surveyors were employed to establish suitable rents and it was soon discovered that the market rent that could be charged on the basis of supply and demand was considerably more than existing customary rents.

The new arrangements are apparent in the development of the use of the word “farm.” It comes from the Latin firma, meaning a fixed payment, only later was the meaning transferred to the land subcontracted by the payment.

England, with its centralized monarchical administration, its good transport access by road and river and large capital city acting as an economic hub had a fairly unified national market.

The new tenant farmers became firmly established in the market system and grew to be dependent upon it not only for the sale of their products but also for access to the land needed to produce them in the first place.

The farmers were now effectively in competition with each other. Those who were efficient prospered, made healthy profits and expanded their holdings. Those that were not, and this included freeholders as well as tenants, did not survive, lost their land and dropped out of the race.

The purpose of the new system was production for profit rather than for direct consumption or for exchange. A new concept which appeared at this time and added momentum to the new system was that of improvement. Derived from the Anglo-French emprouwer itself from the Old French proumeaning profit the word originally had a much narrower meaning than it does now. An improver was specifically someone who rendered land more productive and profitable, for example, by draining, introducing crop rotation and particularly by consolidating land holdings. A considerable literature on this new art of improvement grew up in the seventeenth century and much of the attention of the Royal Society founded in 1667 was directed to this end leading to various technical innovations. But of the various strategies available to the improver the most significant was land enclosure as this enabling exclusive private use of the terrain. Improvement effectively required turning land into private property.

Enclosures threatened traditional customary practices such as access rights and the idea of improvement put pressure on landowners to enclose common land. The first wave took place in the mid sixteenth century particularly to facilitate sheep farming. The process would have probably then continued with force had it not been resisted by the monarchy through the later sixteenth and seventeenth century up to the Glorious Revolution of 1688. After that time, with land holding interests strongly in control in the English Parliament a second major wave took place in the eighteenth and early nineteenth century.

The watchword for this movement continued to be improvement. The idea was frequently put forward as a justification for enclosure and became a principle evoked by judges in its favour when legal challenges were made.

The philosophical support for the dynamic of improvement and the justification for private property in land came from the philosopher John Locke. The famous passage is the fifth chapter of the Second Treatise on Government presents the essential argument. Locke acknowledges that originally everything is given by God to all men to hold in common but then he asserts that when man mixes his labour with something then that gives him a right of property in that thing including a plot of land. The assumption is that it is labour that adds value and the value is exchange value – what the product can be sold for in the market.

In this new way of thinking it is assumed that unimproved land is wasteland so that by taking it and improving it one is contributing to human welfare by adding to the total wealth produced. The enclosure of land is justified.

It is a market-based argument. The basis of private property is taken to be the willingness to create exchange value from it.

Locke is starting to accept those aspects of production we now associate with capitalism: the importance of value created in production, increased productivity is lauded and employment of labour is conflated with profit production.

Locke condemns the landlords who just passively collect their rent. He also condemns the merchant who just focuses on trade and makes his money buying cheap and selling dear. He reserves his praise for the improving landholder (for example his patron, Lord Shaftesbury) who strives to gain from his lands through increased productivity.

Thus we see the origins of the capitalist mode of working in sixteenth century English agriculture. The tenant farmer is producing for the market. He is in competition with his neighbours and is driven to maximize his profit by increasing productivity. The underlying pressure comes from the appearance of a market in land, in the access to the basic means of production.

It should be noted that in the sixteenth and most of the seventeenth century wage labour was quite rare and the exploitation of workers was not a feature of this early phase of agricultural capitalism. Other than on the large estates farms were worked with two or three servants who would also expect to a have holdings of their own. Alternatives to wage labour such as squatting on wasteland or hiring a loom were on offer.  At the time of the first wave of enclosures the situation was still one in which in effect there was “free land at the margin”. Legislation of 1563 was for maximum wages, not minimum wages. Linklater reports that in 1688 there were 1.3 million families in England and of these around 300,000 were landlords, freeholders or tenant farmers. It was a time of considerable prosperity.

It was not until a century later when the second wave of enclosures effectively took away the last of the remaining free land that a market in labour appeared and the subsequent poverty that follows.

That situation gave rise to the three tier economy Adam Smith describes with the landowner owning the land and taking the surplus as rent, the capitalist farmer as tenant producing for the market, accumulating capital and aiming to maximize his profit and labourer with only his labour to sell and forced into a position having to receive the least he is willing to accept. The economy has been monetized and the produce of the farm, the most essential of human needs, is grown for sale in the market as a commodity.

An obvious outcome of the new capitalist farming arrangements was a significant rise in agricultural productivity both per acre and per capita. By the end the eighteenth century wheat yields, for example, had risen from ten to twenty five bushels per acre. As a consequence although a significant proportion of the population was now not participating in agriculture they could still be supported. This allowed them to be able to move to the urban areas and be employed in the rapidly growing industrial production. This growing urban population also provided a market in cheap manufactured goods. The new logic of process that had been established in agriculture, production for profit and dependency on the market for price determination provided the basic economic arrangements for industrial production.

So the conclusion is that the origins of the capitalist free market system lie in the changes that took place in English agriculture from the mid-sixteenth to the mid-seventeenth century and particularly to the changes in social property relations that gave rise to a market in land.

It is useful to distinguish two phases, the first corresponding to a situation of “free land at the margin” in which there was a generally relative high level of prosperity and very little wage labour and a second in which all land was effectively privatized giving rise to a wage-based employment and a corresponding market in labour.

The formation of a market in land was fundamental to the evolution of the system. It was not, as Polanyi implies, an outcomes of the process of industrialization but rather a significant social change that set the conditions for the formation of the free market capitalist economy to which industrialized production then conformed.



L. Hammond & Barbara Hammond, The Village Labourer 1760 -1832, Longmans, Green & Co., 1911

Andro Linklater, Owning the Earth, The Transforming History of Land Ownership, Bloomsbury 2013

Ellen Meiksins Wood, The Origins of Capitalism, a Longer View, Verso, 2002.

Karl Polanyi, The Great Transformation, Farrar & Reinhart, 1944

Roger Scruton, Green Philosophy, How to Think Seriously about the Planet, I Atlantic Books, 2012

Marion Shroud, This Land is Our Land, The Struggle for Britain’s Countryside, Paladin Grafton, 1987

Hernando de Soto, The Mystery of Capitalism, Why Capitalism Triumphs in the West and Fails Everywhere Else, Basic Books, 2003

R.H. Tawney , Historical Introduction to Thomas Wilson’s Discourse Upon Usury by Thomas Wilson, G Bell & Sons, 1925