[Update: I posted this diary earlier today, and accidentally deleted it. Just ignore it if you already saw it.]
Disclaimer: I am not an economist, or a historian. This is the work of an amateur. Feel free to correct me or trash me in the comments.
Capitalism was born in 1832, in England. I lasted for roughly 100 years, and then died. It was learned that capitalism would destroy any country it entered. It was replaced by more Keynesian structures.
In a nutshell, captalism began with this: factories. England discovered, in the early 19th century, that it could make a ton of money by exporting wool products.
This required two changes in the social structure: farms which had previously been open were fenced-in to raise sheep, and poor people were hustled to urban areas to work in the new "factories."
But something strange happened. There became a class of "homeless" people. This was simply confusing to the powers that be in England. So they passed laws to help. Basically, they insured that no poor person in England would starve. The laws paid a living wage to everyone: if a factory wasn't paying enough, the government made up the difference.
Well, that didn't work. You can probably guess what happened: employers started paying workers near-ziltch, and workers were depressed and unmotivated. No one was happy.
So, England took a deep breath . . . and started capitalism in 1832, with the passage of the "Speenhamland Law." This law took away subsidies to the poor, and created a new thing called "the labor market." The labor market is the core of a capitalist system. It forces the poor to work on pain of starvation. The ruling class of England was perfectly aware of this. It was a deliberate decision. But in their defense, they were honestly and honorably confused about the right thing to do.
That didn't work either. Let me quote from Karl Polanyi's famous book, The Great Transformation, which he wrote in 1946. Here is the first paragraph:
Nineteenth century civiization has collapsed. This book is concerned with the political and economic origins of that event, as well as the great transformation which it ushered in.
Talk about your opening lines!
Polanyi describes the nature of capitalism:
SOCIETIES AND ECONOMIC SYSTEMS
Before we can proceed to the discussion of the laws governing a market economy, such as the nineteenth century was trying to establish, we must first have a firm grip on the extraordinary assumptions underlying such a system.
Market economy implies a self-regulating system of markets; in slightly more technical terms, it is an economy directed by market prices and nothing but market prices. Such a system capable of organizing the whole of economic life without outside help or interference would certainly deserve to be called self-regulating. These rough indications should suffice to show the entirely unprecedented nature of such a venture in the history of the race.
Let us make our meaning more precise. No society could, naturally, live for any length of time unless it possessed an economy of some sort; but previously to our time no economy has ever existed that, even in principle, was controlled by markets. In spite of the chorus of academic incantations so persistent in the nineteenth century, gain and profit made on exchange never before played an important part in human economy. Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life.
We have good reason to insist on this point with all the emphasis at our command. No less a thinker than Adam Smith suggested that the division of labor in society was dependent upon the existence of markets, or, as he put it, upon man's "propensity to barter, truck and exchange one thing for another." This phrase was later to yield the concept of the Economic Man. In retrospect it can be said that no misreading of the past ever proved more prophetic of the future. For while up to Adam Smith's time that propensity had hardly shown up on a considerable scale in the life of any observed community, and had remained, at best, a subordinate feature of economic life, a hundred years later an industrial system was in full swing over the major part of the planet which, practically and theoretically, implied that the human race was swayed in all its economic activities, if not also in its political, intellectual, and spiritual pursuits, by that one particular propensity. Herbert Spencer, in the second half of the nineteenth century, could, without more than a cursory acquaintance with economics, equate the principle of the division of labor with barter and exchange, and another fifty years later, Ludwig von Mises and Walter Lippmann could repeat this same fallacy. By that time there was no need for argument. A host of writers on political economy, social history, political philosophy, and general sociology had followed in Smith's wake and established his paradigm of the bartering savage as an axiom of their respective sciences. In point of fact, Adam Smith's suggestions about the economic psychology of early man were as false as Rousseau's were on the political psychology of the savage. Division of labor, a phenomenon as old as society, springs from differences inherent in the facts of sex, geography, and individual endowment; and the alleged propensity of man to barter, truck, and exchange is almost entirely apocryphal. While history and ethnography know of various kinds of economies, most of them comprising the institution of markets, they know of no economy prior to our own, even approximately controlled and regulated by markets. This will become abundantly clear from a bird's-eye view of the history of economic systems and of markets, presented separately. The role played by markets in the internal economy of the various countries, it will appear, was insignificant up to recent times, and the change-over to an economy dominated by the market pattern will stand out all the more clearly.
To start with, we must discard some nineteenth century prejudices that underlay Adam Smith's hypothesis about primitive man's alleged predilection for gainful occupations. Since his axiom was much more relevant to the immediate future than to the dim past, it induced in his followers a strange attitude toward man's early history. On the face of it, the evidence seemed to indicate that primitive man, far from having a capitalistic psychology, had, in effect, a communistic one (later this also proved to be mistaken). Consequently, economic historians tended to confine their interest to that comparatively recent period of history in which truck and exchange were found on any considerable scale, and primitive economics was relegated to prehistory. Unconsciously, this led to a weighting of the scales in favor of a marketing psychology, for within the relatively short period of the last few centuries everything might be taken to tend towards the establishment of that which was
eventually established, i.e., a market system, irrespective of other tendencies which were temporarily submerged. The corrective of such a "short-run" perspective would obviously have been the linking up of economic history with social anthropology, a course which was consistently avoided.
We cannot continue today on these lines. The habit of looking at the last ten thousand years as well as at the array of early societies as a mere prelude to the true history of our civilization which started approximately with the publication of the Wealth of Nations in 1776, is, to say the least, out of date. It is this episode which has come to a close in our days, and in trying to gauge the alternatives of the future, we should subdue our natural proneness to follow the proclivities of our fathers. But the same bias which made Adam Smith's generation view primeval man as bent on barter and truck induced their successors to disavow all interest in early man, as he was now known not to have indulged in those laudable passions. The tradition of the classical economists, who attempted to base the law of the market on the alleged propensities of man in the state of nature, was replaced by an abandonment on all interest in the cultures of "uncivilized" man as irrelevant to an understanding of the problems of our age.
Professor Polanyi taught at Oxford and Bennigton, and this book is one of the best I've ever read.
So capitalism didn't work. It is now known that in a capitalist system, a system with a true labor market, men and women simply lay down by the river and die. Thus, Roosevelt's alteration of capitalism, to end the Great Depression. Bush is trying to walk back to true capitalism. Watch what happens. I dare you.
