The Best Thing That Ever Happened to Humanity

The Amazing Thing Called Capitalism

Overview

If there is one thing that unites disparate groups ranging from Just Stop Oil to Muslim fundamentalists to social workers toiling away in some poverty-stricken area, it is the utter, absolute conviction that capitalism is either bad or terrible, and we would be all much better off if this pesky thing were put to bed, and replaced by a more humane system (whatever that may be).

In this context, as a somewhat contrarian position, let me offer an alternative perspective. Capitalism has actually been, on balance, an immensely positive force for humanity. To understand why, you will need to zoom out with me for a long-term historical perspective, and take a peek at what the world was like before capitalism.

It is human nature to focus on what is wrong, and lose sight of the larger part that is working properly. For example, while driving on a road, we will notice the occasional pothole and bump, but fail to appreciate the fact that there is a road in the first place that we can travel on, and the work that was required to put it there.

Likewise, when looking at the global economic system, and forgetting for a moment our individual circumstances, we tend to see only the economic crises, the large CEO pay packages, the starving children in one country while others are throwing away food, the middle class man who dies because he could not afford a liver transplant, the people who are flipping burgers in dead end jobs, and so on; we see the problems, because that is in our nature, and miss so much more that is going on well.

Even when we take a broader historical perspective, most of us tend to focus only on rulers and events, such as who was king, and who he fought with, rather than on economic aspects such as how many goods and services he had access to, and what his living standard was. In doing so, we miss seeing how unique the last two hundred years have been in human history.

The Rise of Capitalism

Up until about five hundred years ago, if you lived in what would pass for a “developed” region of the world, by the standards of that time, then you probably lived under some form of a feudal system, tilling the land for an aristocrat, or under a static system in a centralized state, where your future was more or less determined the day you were born.

This was true not only for Europe, but also for India and China, at that time the most “advanced” societies in the world. Obviously, there were exceptions to the rule; a breakdown of central government, which periodically happened everywhere, could lead to warfare and great volatility in a person’s fortune, perhaps turning a peasant into an emperor. Likewise, there were many merchants who traded goods from one place to another, who were not tied in any way to a particular land or location, and were thus less beholden to a central authority, be it that of an emperor or the local baron. But on the whole, human societies were remarkably static when compared to our times.

It was in this context, which had remained more or less unchanged since the Agricultural Revolution, that there arose a new way of organizing an economy, which we now call capitalism. Starting in isolated regions of Europe, from around five hundred years ago, in this new economic system, the emphasis was on an accumulation of capital, and its constant re-investment in the means of production to generate more capital. In Karl Marx’s words, the accumulation of capital, rather than land or the trappings of power, became an end in of itself.

A Brief History

In the initial phase of capitalism, perhaps the first two hundred years, the greatest impetus came from trade, with the establishment of long-range trading routes linking widely disparate markets.

The initial European leaders in the formation of these trading empires were the merchant city states of the Mediterranean, such as Venice, Genoa, and Pisa; however, with time, the power of these trading cities gave way to the Dutch and then the English, who set up and institutionalized trade through the formation of specific companies such as the Dutch East India Company and the British East India Company, thus inaugurating what we now call the mercantilist phase of capitalism.

These companies, backed more often than not by their country’s military, started acquiring exclusive rights to trade with other nations, with a view to extracting metals (gold and silver) as well as agricultural products from these nations, in exchange for manufactured goods produced in their own countries.

The English subsequently instituted the trans-Atlantic trade routes, in which trinkets were sent to West Africa, exchanged for slaves who were shipped to the Caribbean, and there exchanged for sugar and other produce, which was then shipped back to England, with immense and handsome profits made at every stage. In time, the nations that were at the “receiving” end of these trading links would end up being colonized, and exploited even more deeply through the imposition of restricted and one sided trading agreements.

As capital flowed back into the home country, it fueled industrialization, as more and more goods needed to be produced for trading purposes; this was the beginning of the industrial stage of capitalism, beginning from around three hundred years ago.

It was industrialization, more than anything else, which formed the foundation for an enhanced standard of living, because the technological innovation it fostered increased productivity per working person. The end result, and still counting, has been a drastic increase, over the last two hundred years, in both the variety as well as quantity of goods and services that humanity can produce. And as we shall see below, this rate of growth is itself accelerating, i.e. it is exponential.

The Emperor’s Room

To get a better understanding of how much of a difference capitalism has made, let me take you to a place I visited many years ago, the Forbidden City in Beijing, the palace complex of the Chinese emperors from around the time of the Yuan Dynasty, about 700 years ago, up till the time of the last emperor, who abdicated in 1912.

Going as a tourist inside the palace complex, our tour guide finally brought us to the inner courtyard, where only the emperor and his close family members would have been allowed access. Within one of the palaces in this inner sanctum was a small bedroom, which had been left exactly as it was during the time of the last emperor.

I was a university student at that time, living in a little room in a hostel, which was not very luxurious, and in fact was the equivalent of a one- or two-star hotel. And yet, compared to my humble room, the last emperor of China, who ruled over hundreds of millions of subjects, and had the power of life and death over them during the early period of his reign, lived in a room that was remarkably Spartan.

Now it is true that this room had the trappings of wealth associated with any emperor — the gold and the jewelry — but his mattress was less comfortable than mine, and there was no electricity. If he had fallen sick, he would have had no antibiotics and no intravenous drips; if he had wanted to travel, he would have had to take an uncomfortable horse driven carriage, and getting in an airplane and flying halfway across the world to see the palace of another emperor would have been out of the question.

As stated earlier, we take so much for granted that we forget how much the world has changed in the last two hundred years, even for people who live in a poor country. You could have taken a peasant from the Han Dynasty of China, which ruled around two thousand years ago, brought him to the Ming Dynasty, fifteen hundred years later, and the peasant would have fitted right in; everything would be familiar, though the language would have evolved to a point where it was incomprehensible.

But take the richest person from two hundred years ago, bring him to the present, and he would be completely and utterly lost, with many technological marvels appearing to be magical to him: electric lights, airplanes, antibiotics, internet — the list can go on for many pages.

This technological innovation did not occur in a vacuum or through happenstance; instead, it was fostered by an intense (some would say rapacious) greed to make more money, which is what capitalism is all about.

The Hockey Stick That Really Matters

In his book “Contours of the World Economy 1–2030 AD,” Angus Maddison, a Professor at the University of Groningen in the Netherlands, attempted to work out the per capita GDP of the world over the last two thousand years.

Obviously, this is a subject that is fraught with many uncertainties, and requires a significant amount of extrapolation, but according to him, using constant 1990 US dollars (i.e. adjusting for inflation), the per capita GDP of the world remained almost constant at USD 400 per person until around 1800, and then started increasing at a faster and faster pace, surpassing USD 6,500 around 2003, creating the characteristic shape of a hockey stick — a long flat shaft giving way to a steep upturn at one end.

As an incidental thing, while this measure called GDP has been criticized — for example, breaking a window increases the GDP, because it generates additional economic activity associated with the repair of that window — it remains by far the best proxy for the quantity and variety of goods and services available in an economy, i.e. per capita GDP is a good measure of living standards.

Going back to the main point, the increase in GDP was not just an increase in a quantitative sense, but also in terms of the quality of life. In his words:

“…..From the year 1000 to 1820, growth was predominantly extensive. Most of the GDP increase went to accommodate a four-fold increase in population. The advance in per capita income was a slow crawl — the world average increased by half over a period of eight centuries. In the year 1000, the average infant could expect to live about 24 years…..By 1820, life expectation had risen to 36 years in the west, with only marginal improvement elsewhere. After 1820, world development became much more dynamic. By 2003, income per head had risen nearly ten-fold, population six-fold. Per capita income rose 1.2 per cent a year: 24 times as fast as in 1000–1820. Population grew about 1 per cent a year: six times as fast as in 1000–1820. Life expectation increased to 76 years in the west and 63 in the rest of the world.”

In other words, up until about 1800, there was a strong relationship between population and total GDP, so that the most populous areas at that time — India and China — accounted for the bulk of the world’s production. The basis of this relationship was simple — the more people you had, the more you could produce. What capitalism achieved, by fueling technological innovation, was something quite different; it increased production per person, i.e. human productivity, and thus broke the age-old relationship between total population and total wealth.

For example, in 1750, India and China accounted for 57% of the world GDP, while England accounted for a paltry 2%. However, by 1900, England accounted for 18.5% of world GDP, while China and India’s share had dropped to 8%. The total production of India and China actually increased during these one hundred and fifty years, but by a relatively small amount; on the other hand, England’s total production increased drastically during the same period, so its percentage share of total world production increased.

The fundamental difference was that any production increase in India and China was almost solely due to population increase — meaning due to more workers — while the major reason for England’s increase was the increased productivity per worker, i.e. each worker producing more goods due to industrialization.

Thus, it could be argued that while England no doubt benefited tremendously from having India as a colony and the latter no doubt suffered as a consequence, colonization in of itself, as the latter experience of the Asian tigers (after World War 2) would demonstrate, was not the fundamental driver for England’s growth.

Exponential Growth

Looking at it from another angle, the total world production of goods and services, without even factoring in the increase in quality of life and convenience (for example, a bottle of antibiotic, which may cost a few dollars, can save a life), increased by nineteen times from 1500 to 1900, and then again by well over forty-five times from 1900 to 2020.

Of course, this increase was not uniformly spread across the world, not even within any particular region or country. Furthermore, the greatest benefits accrued to those countries that industrialized first, such as England, Germany, other European countries, and USA. But after World War 2, as the capitalist mode of production, and concept of free markets, has spread around the world, the trend of economic growth has been maintained even in the newly capitalist economies.

There is however one important difference; for reasons that are still debated, the rate of increase of technological innovation is itself increasing, i.e. it has become exponential, and this in turn is being reflected in the growth experience of these newly-industrializing economies.

It is very important to highlight this tendency of exponential growth, because we are used to visualizing linear functions that grow evenly with time, but not as good at understanding the implications of exponential functions, which curve upwards like a hockey stick.

To quote Dr. Mathew Burrow, Director at the Atlantic Council, an American think tank:

“From the start of its Industrial Revolution, Britain took 155 years to double GDP per capita with about 9 million people in 1870. It took the United States 30 years with a few tens of million people. China did it in 12 years with more than 100 times the people than Britain had.”

The Environment

Now we can question whether this growth is sustainable from an environmental perspective, given the increased global warming and pollution that is being generated from growth. So far, the problems created by technological advances have been solved by the same market forces that created the technology in the first place, and there is no reason to believe that global warming will be any different.

However, what cannot be denied is the vast increase in human well-being that has been achieved over the last two centuries. For thousands of years, human progress was slow and steady, and of course subject to cyclical up and downs, as empires rose and fell. In places such as China, the concept of a cycle of history, where things went up and down, with very little overall progress upwards, became almost institutionalized; it was expected that this is how life was always going to be.

But then along came capitalism, and the cycle of history changed into a spiral, still with ups and downs, but with each up going progressively higher, accompanied by a consequential increase in average human well-being.

Whether we like it or not, and in spite of its shortcomings, capitalism has been the greatest single force for materialistic progress in human history.