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The Rise of the Merchant, Industrialist, and Capital Controller

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The Rise of the Merchant, Industrialist, and Capital Controller


From the fifteenth century on, European soldiers and sailors carried the flags of their rulers to the four corners of the globe, and European merchants estab­lished their storehouses from Vera Cruz to Nagasaki. Dominating the sea-lanes of the world, these merchants invaded existing networks of exchange and linked one to the other. In the service of 'God and profit' they located sources of products desired in Europe and developed coercive systems for their deliv­ery. In response, European craft shops, either singly or aggregated into manu­factories, began to produce goods to provision the wide-ranging military and naval efforts and to furnish commodities to overseas suppliers in exchange for goods to be sold as commodities at home. The outcome was the creation of a commercial network of global scale.



—Eric Wolf, Europe and the People Without History

When I think of Indonesiaa country on the Equator with 180 million people, a median age of 18, and a Moslem ban on alcoholI feel I know what heaven looks like.

—Donald R. Keough, President of Coca-Cola

At no other time in human history has the world been a better place for capitalists. We live in a world full of investment opportunities—companies, banks, funds, bonds, securities, and even countries—into which we can put money and from which we can get more back. These money-making machines, such as the Nike Corporation, have a ready supply of cheap labor, capital, raw materials, and advanced technology to assist in making products that people all over the world clamor to buy. Moreover, governments compete for their presence, passing laws and making treaties to open markets, while maintaining infrastruc­tures (roads, airports, power utilities, monetary systems, communication networks, etc.) that enable them to manufacture products or provide services cheaply and charge prices that remain competitive with other investments. Nation-states maintain armies to protect

investments and see that markets remain open. Educational institutions devote themselves to producing knowledgeable, skilled, and disciplined workers, while researchers at colleges and universities develop new technologies to make even better and cheaper products. Our governments, educational institutions, and mass media encourage people to consume more and more commodities. Citizens arrange their economic and social lives to accommodate work in the investment machines and to gain access to the commodities they produce. In return the investment machines churn out profits that are reinvested to manufacture more of their particular products or that can be invested in other enterprises, producing yet more goods and services. Never before have people had so much opportunity to accumulate great wealth. Among the 400 richest Americans in 1999, 298 of them were worth a billion dollars or more, and the top 400 had a net worth of $1.2 trillion, about one-eighth of the total gross domestic product (GDP) of the United States (see Forbes 2000).

But there are economic, environmental, and social consequences of doing business and making money. We live in a world in which the gap between the rich and poor is growing, a world that contains many wealthy and comfortable people and over one billion hungry people, almost one-fifth of its population. Then there are the environmental con­sequences of doing business: Production uses up the earth's energy resources and pro­duces damaged environments in return. There are health consequences as well, not only from damaged environments but also because those too poor to afford health care often do without it. Finally there are the political consequences of governments' using their armed force to maintain conditions that they believe are favorable for business and investors.

In the long view of human history these conditions are very recent ones. For most of human history human beings have lived in small, relatively isolated settlements that rarely exceeded three or four hundred individuals. And until some ten thousand years ago virtually all of these people lived by gathering and hunting. Then in some areas of the world, instead of depending on the natural growth of plant foods and the natural growth and movements of animals, people began to plant and harvest crops and raise animals themselves. This was not necessarily an advance in human societies—in fact, in terms of labor, it required human beings to do the work that had been done largely by nature. The sole advantage of working harder was that the additional labor supported denser popula­tions. Settlements grew in size until thousands rather than hundreds lived together in towns and cities. Occupational specialization developed, necessitating trade and commu­nication between villages, towns, cities, and regions. Political complexity increased; chiefs became kings, and kings became emperors ruling over vast regions.

Then, approximately four or five hundred years ago, patterns of travel and commu­nication contributed to the globalization of trade dominated by 'a small peninsula off the landmass of Asia,' as Eric Wolf called Europe. The domination by one region over others was not new in the world. There had existed prior to this time civilizations whose influ­ence had spread to influence those around them—the Mayan civilization in Central America, Greek civilization of the fourth millennium B.C., Rome of the first and second centuries A.D., and Islamic civilization of the eighth and ninth centuries. But there was an important difference. The building of these empires was largely a political process of conquest and military domination, whereas the expansion of Europe, while certainly in­volving its share of militarism, was largely accomplished by economic means, by the ex­pansion and control of trade.


Now let's shift our focus to the development of the capitalist—the merchant, indus­trialist, and financier—the person who controls the capital, employs the laborers, and profits from the consumption of commodities. This will be a long-term, historical look at this development, because if we are to understand the global distribution of power and money that exists today and the origins of the culture of capitalism, knowledge of its his­tory is crucial.

Assume for a time the role of a businessperson, a global merchant, or merchant ad­venturer, as they used to be called,' passing through the world of the last six hundred years. We'll begin searching the globe for ways to make money in the year 1400 and end our search in the year 2000, taking stock of the changes in the organization and distribution of capital that have occurred in that time. Because we are looking at the world through the eyes of a merchant, there is much that we will miss—many political developments, reli­gious wars, revolutions, natural catastrophes, and the like. Because we overlook these events does not mean they did not affect how business was conducted—in many cases they had profound effects. But our prime concern is with the events that most directly influ­enced the way in which business was conducted on a day-to-day basis and how the pursuit of profit by merchant adventurers influenced the lives of people all over the world.

Our historical tour will concentrate on three areas:

1.          An understanding of how capital came to be concentrated in so few hands and how
the world came to be divided into rich and poor. There were certainly rich people
and poor people in 1400, but today's vast global disparity between core and periph­
ery did not exist then. How did the distribution of wealth change, and how did one
area of the world come to dominate the others economically?

2.    An understanding of the changes in business organizations and the organization of
capital, that is, who controlled the money? In 1400, most business enterprises were
small, generally family-organized institutions. Capital was controlled by these
groups and state organizations. Today we live in an era of multinational corpora­
tions, many whose wealth exceeds that of most countries. We need to trace the evo­
lution of the power of capital over our lives and the transformation of the merchant
of 1400 into the industrialist of the eighteenth and nineteenth centuries then into the
investor and capital controller of the late twentieth century. How and why did these
transformations in the organization of capital come about?

3.    The increase in the level of global economic integration. From your perspective as
a merchant adventurer, you obviously want the fewest restraints possible on your
ability to trade from one area of the world to another; the fewer restrictions, the
greater the opportunity for profit. Such things as a global currency, agreement
among nations on import and export regulations, ease of passage of money and
goods from area to area, freedom to employ whom you want and to pay the lowest
possible wage are all to your advantage; furthermore, you want few or no govern­
ment restrictions regarding the consequences of your business activities. How did

'The name is taken from a sixteenth-century English trading company, The Merchant Adventurers, cloth whole­salers trading to Holland and Germany with bases of operation in Antwerp and Bergen-op-Zoom and later Ham­burg. The company survived until 1809.



the level of global economic integration increase, and what were the consequences for the merchant adventurer, as well as others?

With these questions in mind, let's go back to the world of 1400 and start trading.

The Era of the Global Trader

A Trader's Tour of the World in 1400


The splendor and wealth of fifteenth- and sixteenth-century China is portrayed in this engraving of a mandarin's terrace and garden.


If, as global merchants in 1400, we were searching for ways to make money, the best op­portunities would be in long-distance trade, buying goods in one area of the world and selling them in another (see Braudel 1982:68). If we could choose which among the great cities of the world—Cairo, Malacca, Samarkand, Venice—to begin trading, our choice would probably be Hangchow, China. China in 1400 had a population of 100 million and was the most technologically developed country in the world. Paper was invented in China probably as early as A.D. 700 and block printing as early as 1050. China of 1400 had a thriving iron industry; enormous amounts of coal were burned to fuel the iron fur­naces, equal in northern China alone to 70 percent of what metal workers in Great Britain used at the beginning of the eighteenth century. The explosive power of gunpowder was harnessed around 650 A.D. and by 1000 was used by Chinese armies for simple bombs





and grenades. Cannons were in use by 1300, some mounted on the ships of the Chinese navy, and by the fourteenth century the Chinese were using a metaled-barreled gun that shot explosive pellets (Abu-Lughod 1989:322ff).

If you were to tour the Chinese countryside you would have been struck by the net­works of canals and irrigation ditches that criss-crossed the landscape, maintained by wealthy landowners or the state. China was governed by a royal elite and administered largely by mandarins, people selected from the wealthy classes and who were exempt from paying taxes. State bureaucrats were also selected and promoted through civil ser­vice examinations open to all but those of the lowest rank of society (e.g., executioners, slaves, beggars, boatpeople, actors, laborers) (Hanson 1993:186). China produced some of the most desired trade goods in the world, particularly silk, spices, and porcelain.

The economic conditions in China also favored traders. There were guilds and asso­ciations of merchants such as jewelers, gilders, antique dealers, dealers in honey, ginger, and boots, money-changers, and doctors. China had its own currency system. In the Middle East and Europe governments issued money in the form of coins of precious metals whose value depended on their weight. In China there was not only copper coin but paper money (cotton paper stamped with a government seal) to provide merchants with a convenient means of exchange. Paper money also allowed the state to control the flow of money in and out of the country. Precious metals, such as gold and silver, could not be used by foreigners in trade, so foreign traders were forced to exchange their gold or silver for paper money, which they then exchanged for gold and silver when they left. Since they had usually purchased Chinese commodities to sell elsewhere, they usually left with less gold and silver than when they arrived (Abu-Lughod 1989:334).

China was also politically stable. The rulers, members of the Ming Dynasty, had successfully rebelled against the Mongols in 1368 A.D. The Mongols, nomadic horsemen who roamed the vast steppes of Central Asia, conquered China in 1276 and set up their own dynasty, the Yuan. The Mongols, eager to establish trade with the rest of the world, had established relatively safe trade routes to the rest of Asia, the Middle East, and Eu­rope. At least at first, the Ming appeared to want to maintain that trade, sending its im­pressive navy as emissaries to ports along the Indian Ocean.

The city of Hangchow was situated between the banks of the Che River leading to the sea and the shore of an enormous artificial lake. According to Ibn Battuta, an Arab trader who visited the city in the 1340s, the city extended over six to seven square miles and was surrounded by walls with five gateways through which canals passed. Thirteen monumental gates at which its great thoroughfares terminated, provided entry to the city. Situated on the hills overlooking the city were the imperial palace and homes of the wealthy state bureaucrats and merchants; at the opposite end of the city were the houses of the poor—crowded, narrow-fronted, three- to five-story houses with workshops on the ground floors. The main thoroughfare, the Imperial Way, was three miles long and 180 feet wide, crowded with carriages drawn by men or tiny horses.

The city was a trader's paradise. Inside the city were ten markets as well as tea houses and restaurants where traders could meet and arrange their business. Outside the city were a fish market and wholesale markets. Ibn Battuta said it was 'the largest city on the face of the earth.' Sections of the city contained concentrations of merchants from all over the world. Jewish and Christian traders from Europe in one; Muslim traders in another, with bazaars



and mosques, and muezzins calling Muslims to noon prayer. The bazaars of Chinese mer­chants and artisans were in yet another section. In brief, Hangchow would have been an ideal place to sell merchandise from Europe, the Middle East, or other parts of Asia and to purchase goods, such as spices and silks, that were in demand in other parts of the world.

Silk was particularly desired by foreign traders because its light weight and com­pactness made it easy to transport and because China had a virtual monopoly in the silk trade. Syrian traders had smuggled silk worms out of China in the thirteenth century, and in 1400 one could purchase silk in India and Italy; but, the quality of Chinese silk was su­perior. Since the production of silk was likely in the hands of Chinese merchants, you would have purchased it directly from them. You might also purchase Chinese porcelain, especially if you planned to travel by ship, since porcelain could be used as ballast by ships returning to the Middle East or Europe (see Figure 3.1).

Your next task would be to arrange to transport your goods to where you planned to sell them. Let's assume you had orders from merchants in cities such as Venice, Cairo, and Bruges, where Chinese goods were in demand. Your first task is to get your goods to the Mediterranean. You could go overland through China, through central Asia to North­ern India, or to ports on the Black Sea, then travel to European ports such as Venice and Naples. The trip overland through Asia to Europe would take you at least 275 days using



EUROPE


CHINA

Silk

Porcelain Spices Drugs

Perfu


MOGADISHU

EAST AFRICA

ZANZIIBAR       Gold

Ivory Slaves




FIGURE 3.1   Major Trade Routes in 1400



pack trains—camels over the deserts, mules through the mountains, ox carts where roads existed, human carriers, and boats. The overland route was popular in the thirteenth and fourteenth centuries, when the Mongols had through their conquests unified Central Asia and issued safe conduct passes to traders. In 1400, however, with the Empire fragmented, you may have risked raiding by nomadic bands of Mongol horsemen.

A safer route in 1400 would have been the sea route, down the East Coast of China, through the Strait of Malacca to Southern India, and then either through the Persian Gulf to Iran and overland, through Baghdad to the Mediterranean, or through the Red Sea to Cairo, and finally by ship to Italy.

Traveling through the Strait of Malacca and into Southeast Asia, you would have found powerful elites ruling states from their royal palaces, surrounded by armed retain­ers, kin, artisans, and specialists. Beyond this was a peasantry producing rice to support themselves and the elites. These were the civilizations that built Angkor Thom and Angkor Wat in Cambodia. You would likely have been more at home, however, in the sea­ports that dotted the Strait of Malacca, which owed their existence to trade. Occasionally these ports would merge with inland kingdoms such as Madjapahit in Java. The main city of the area in 1400 was Malacca, founded by pirates led in rebellion twenty years earlier by a prince from Madjapahit. The prince converted to Islam, attracting to Malacca wealthy Muslim merchants, and by 1400 Malacca was a city of forty to fifty thousand people with sixty-one nations represented in trade. The Portuguese Tome Pires, writing a century later, said 'Whoever is lord of Malacca has his hands on the throat of Venice' (cited Wolf 1982:58). While in Malacca, you likely would have obtained additional trade goods to take West. Spices, particularly cinnamon (at one time in Egypt considered more valuable than gold), were highly valued because they were easy to transport and brought high profits in the Middle East and Europe.

From Malacca you probably would have traveled along the coast of Southeast Asia and on to India, whose wealth in 1400 rivaled that of China. Southeast India had a thriv­ing textile industry. Farmers grew cotton and passed it on to spinners, who made thread for the weavers. There is some evidence that merchants provided cotton and thread to spinners and weavers and paid the artisans for what they produced. There was a sophisti­cated technology: a vertical loom, block printing, and the spinning wheel, probably intro­duced from Turkey. But cotton and textiles were not the only items you might have obtained in India for trade; there were also dyes, tannins, spices, oil seed, narcotics, lum­ber, honey, and ivory (see Wolf 1982).

From India you might travel to East Africa, where from Bantu-speaking peoples you might have obtained slaves, ivory, leopard skins, gold from Zimbabwe, and rhinoc­eros horns (still believed in some parts of the world to be an aphrodisiac).

Leaving East Africa you would have journeyed up the coast through the Red Sea to Cairo or through the Persian Gulf, through Iraq to Baghdad, and on to Constantinople and the Eastern Mediterranean. You would have found the Islamic countries of the Middle East favorable to business, with a sophisticated body of law regulating trade, including rules for the formation of trading partnerships and the extension of credit. One law allowed people to pay for merchandise at a later date at a higher price, a convenient way around the Islamic prohibition of lending money at interest. Bags of gold coin whose value was printed on the outside, and whose contents were apparently never checked, served as money. There were


bankers who changed money, took deposits, and issued promissory notes, another way of extending credit and making loans. Merchants kept their accounts by listing credits and deb­its. Thus all the rudiments of a sophisticated economy—capital, credit, banking, money, and account keeping—were present in Islamic trade (Abu-Lughod 1989:216ff).

From Cairo you could join a caravan to go south through the Sahara to West Africa, where textile goods were in demand and where you might obtain slaves or gold. Virtually two-thirds of the gold circulating in Europe and the Middle East came from West Africa. Or you might travel a short way to Alexandria, still a major city. From there you would travel by ship on the Mediterranean to one of the city-states of Italy, such as Venice or Genoa. Italy was the center of European and Mediterranean trade. At European fairs Ital­ian traders would set up a bench (banco, from which bank is derived) with their scales and coins, enabling traders to exchange currency from one area of the world for another. Ital­ian bankers monopolized the international exchange of money and credit, and it was they who pioneered the bill of exchange. This was a document in which a buyer agreed to de­liver payment to a seller at another time and place in the seller's home currency. In the ab­sence of any widely recognized currency, the bill of exchange greatly facilitated foreign trade (Abu-Lughod 1989:93).

You might then join other merchants from Genoa, Pisa, and Milan who formed car­avans to take goods such as silks and spices from the Orient or the Middle East, alum, wax, leather, and fur from Africa, dates, figs, and honey from Spain, and pepper, feathers, and brazilwood from the Middle East, over the Alps to the fairs and markets of Western and Northern Europe, a trip taking five weeks. Or you could send your goods by ship, through the Mediterranean and the North Sea to trading centers such as Bruges.

Once you reached Northern or Western Europe, you had already left the wealthiest part of the world. After the decline of the Roman Empire Western Europe was a backward area, exploited for its iron, lumber, and slaves. Urban areas had declined and artisan activ­ity retreated to rural areas. Moreover, Europe had been devastated in the fourteenth cen­tury by bubonic plague: In the mid-fourteenth century Europe's population was about eighty million (Abu-Lughod 1989:94). By 1400 plague had reduced it by 45 percent, to forty to fifty million. The plague likely originated in Central Asia or China. It traveled the trade routes, striking Chinese cities as early as 1320 and first striking Europe in Caffa, on the Black Sea, in 1346. It arrived in Alexandria in 1347, probably from Italian ports on the Black Sea. At its height in Alexandria it killed 10,000 people a day, finally killing 200,000 of the city's half million people. It struck Italy in 1348, appeared in France and Britain the same year, and reached Germany and Scandinavia a year later.

Feudalism was still the main form of political and economic organization in Eu­rope. Kings bestowed lands, or fiefs, to subjects in return for their loyalty and service. Lords 'rented' land to peasants, generally for a share of the produce, which they used to pay tribute to the kings and to finance their own expenses.

Woolen textiles were the most important products of Northern and Western Europe in 1400. Flanders (Western Belgium and Northwest France), the textile center of Northern Europe, had virtually monopolized the purchase of raw wool from England, and woolen textiles from Flanders were in demand throughout Europe and in other parts of the world.

Let's assume you have sold the commodities you brought from China and realized a handsome profit. The question is what to do with your capital and profits? You might


buy Flemish textiles in Bruges or, depending on the political circumstances, travel to En­gland to buy textiles. You might buy land or finance other traders in return for a share of their profits. If, however, you decided to undergo another trade circuit, returning east would be your likely alternative. The Americas were probably unknown, and certainly unreachable. You might have traveled down the European coast to West Africa, where European textiles were in great demand and where you could obtain slaves and gold. But while the wind patterns of the Eastern Atlantic would have carried your ship to West Af­rica, they made it impossible, given the sailing technology, to return by sea, and you would be forced to return overland across Northern Africa. Your likely trade route, then, would have been back to Italy and east through the Mediterranean to India, the East In­dies, and China.

What if you had been able to cross the sea to the Americas? What would you have found in 1400? No one left a written record of life in the New World just prior to the ar­rival of Europeans. Archaeologists, however, have created a record from what was left be­hind. You would have discovered elaborate trade routes extending from South America into North America and the remains of great civilizations in Central Mexico and the Yucatan Peninsula.

The Inca were just beginning their expansion, which would produce the Andean Empire confronted by Pizarro in 1532. Inca society in 1400 was dominated by the Inca dynasty, an aristocracy consisting of relatives of the ruling group, local rulers who sub­mitted to Inca rule. Men of local rank headed endogamous patrilineal clans, or ayllus, groups who traced descent to a common male ancestor and who were required to marry within their clan. These groups paid tribute to the Inca aristocracy by working on public projects or in military service. Women spent much of their time weaving cloth used to repay faithful subjects and imbued with extraordinary ritual and ceremonial value. The state expanded by colonizing new agricultural lands to grow maize. It maintained irriga­tion systems, roads, and a postal service in which runners carried information from one end Of the empire to another. Groups that rebelled against Inca rule were usually relocated far from their homeland (Wolf 1982:62-63).

If you had traveled into the Brazilian rainforests you might have encountered peo­ples such as the Tupinamba, who lived on small garden plots while gathering and hunting in the forests. Sixteenth-century traveler Calvinist pastor Jean de Lery, concluded that the Tupinamba lived more comfortably than ordinary people in France (cited Maybury-Lewis 1997:13).

In Mexico in 1400 the Aztecs were twenty years from establishing their vast empire with its capital at Tenochtitlan. In the Caribbean there were complex chieftainships with linkages to the civilizations of Mesoamerica and the Andes. A merchant of 1400 would have been able to follow trade routes that spread from Mexico into the southeastern and northeastern United States, encountering descendants of those who archaeologists called the Mississippians. In this society goods and commodities were used to indicate status and rank. A trader would have encountered towns or ceremonial centers focused on great terraced, earthen platforms. The Mississippians relied on the cultivation of maize, beans, and squash, called 'the three sisters' by the Iroquois. You might have met the Iroquois at the headwaters of the Ohio River, the Cherokee in the southern Appalachians, the Natchez on the lower Mississippi River, and the Pawnee and the Mandan on the Missouri


River. On the surrounding prairies you would have encountered the peoples of the North-west, the buffalo hunters of the plains (the horse, often associated with the Plains Indians, wouldn't arrive for another century), and the Inuit hunters of the Arctic and subarctic. These civilizations and cultures might in later centuries have provided a lucrative market for the sale and purchase of goods had not other events led to their devastation.

As we complete our global tour, the barriers to commerce are striking. For example, most political rulers were not yet committed to encouraging trade. While states might value trade for the taxes, tolls, and rents they could extract from traders, merchants were still looked down upon. Rulers generally viewed trade only as a way to gain profit from traders and merchants, and some states even attempted to control some trade themselves. In China, for example, trade in salt was monopolized by the government. Religious au­thorities in Europe, the Middle East, and China discouraged trade by extracting high taxes or forbidding loans at interest.

Geography was obviously a major barrier: trade circuits might take years to com­plete. Roads were few and ships relatively small and at the mercy of winds and tides. Se­curity was a problem: a merchants' goods were liable to be seized or stolen, or merchants might be forced to pay tribute to rulers along the way.

Economically there were various restrictions. We were a long way in 1400 from anything resembling a consumer economy. Most of the world's population lived on a sub­sistence economy, that is, produced themselves whatever they needed to exist. In Europe, for example, where 90 percent of the population was rural, people might buy an iron plow, some pots, and textile products, but that was all. Consumers tended to be the urban dwellers, largely the clergy, aristocracy, and the small middle class consisting of artisans, merchants, and bureaucrats. Furthermore, if people wanted to buy more, there was virtu­ally no currency with which to do it; even if all the gold and silver of Europe had been in circulation, it would have amounted to only about two dollars per person (Weatherford 1988:14).

Thus, overall the world of 1400 seemed little affected by trade. China and India were probably the richest countries in the world, and there is little doubt that royal rulers controlled most of the wealth, largely through the extraction of tribute from peasants, ar­tisans, and traders. Much of this they redistributed in the form of gifts, feasts, and charity. Moreover, the people who worked the soil, as those who remained gathering and hunting at the fringes and outside the world system, had ready access to food. Though there is ev­idence of periodic famine in which thousands perished, it is unlikely that, as now, one-fifth of the world's population in 1400 was hungry. Thus while a growing system of trade was beginning to link more of the world's people together, there had yet to develop the worldwide inequities that exist today. This, however, would rapidly begin to change over the next one hundred years.

The Economic Rise of Europe and Its Impact on Africa and the Americas

Two events dominate the story of the expansion of trade after 1400: the increased with­drawal of China from world trade networks, and the voyage of Vasco da Gama around the southern tip of Africa. These events resulted in a shift in the balance of economic domi-



nance from a country of one hundred million occupying most of Asia to a country of one million occupying an area just slightly larger than the state of Maine.

The date and reason for China's withdrawal from its position of commercial domi­nance is something of a mystery and subject to considerable academic debate (see, e.g., Frank 1998; Landes 1998). The ruling dynasty moved the capital of China inland and al­lowed its powerful navy gradually to disintegrate. Regardless of the reasons for these ac­tions, they resulted in a diminished role for China in global trade, and Portugal, with the most powerful navy in the world, was quick to fill the vacuum left by China in the East Indies. Portugal used its navy to dominate trade and supplemented trading activities with raiding (Abu-Lughod 1989:243).

Japan also took the opportunity after China's withdrawal to expand its trading activity in Southeast Asia. Japan, like England, was in the fifteenth century a feudal society divided into an upper nobility, the daimyo, or great lords; and the samurai, vassals of the daimyo; and the chonin, or merchants, who were looked down on by the nobility. There was contact be­tween Japan and Europe by the mid-sixteenth century, and Christian missionaries soon estab­lished themselves in Japan. But around 1500 Japan was involved in heavy trade with China, trading refined copper, sulfur, folding fans, painted scrolls, and, most important, swords. One trade expedition carried ten thousand swords to China and returned with strings of cash, raw silk, porcelains, paintings, medicines, and books. Thus in the fifteenth century, Japan was be­ginning economic expansion to areas vacated by China (Sanderson 1995:154).

Technological advances in boat building were partially responsible for Portugal's power. Around 1400 European boat builders combined the European square rigger with the lateen rig of the Arabs, the square rig giving ships speed when running and the lateen rig allowing the boat to sail closer to the wind. They also equipped their ships with can­nons on the main deck and upper decks by cutting holes in the hull. The result was a speedy and maneuverable galleon, half warship and half merchantman (Wolf 1982:235).

Equally important for Portugal was location. Prior to the fifteenth century, Portugal was at the edge of the world system. The Mediterranean was controlled by the city-states of Italy and by Islamic powers. The Americas were seemingly out of reach, even if traders were aware of them. The west coast of Africa was inaccessible by boat unless one sailed south down the coast and returned overland. But once the route east to India and China was restricted, action shifted to the Atlantic, and as Africa and the Americas became readily accessible, Portugal was suddenly at the center of world trade.

It was the era of discovery and conquest, of the voyages of Columbus, of efforts to find alternative routes to China and the East Indies. Columbus believed he had discovered China or Ciangu (Japan), and as late as 1638 the fur trader Jean Nicolet, on meeting Win-nebago Indians in the shores of Lake Michigan, wore a Chinese robe he brought to wear when meeting the Great Kahn of China (Wolf 1982:232).

Much is made in popular culture and history books of the spirit of adventure of early 'explorers' such as Marco Polo, Vasco da Gama, and Christopher Columbus. But they were less explorers than merchant sailors. Their motivation was largely economic; they were seeking alternative ways to the riches of China and the East Indies. One might say that European economic domination, to the extent it was fueled by the wealth of the Americas, was due to the accidental discovery of two continents that happened to be in the way of their attempts to find alternative routes to China, Japan, and India.


If you were a global trader in the sixteenth century and if your starting point were Lisbon, Portugal, you had a choice of trade routes. You could go east to the Middle East, India, or Southeast Asia, all kept open to Portuguese traders by Portugal's navy. You could go south along the African coast, or follow Columbus's route to the New World. Or you could simply trade into the rest of Europe. All routes could prove profitable. In our reincarnation as a Portuguese trader, let's first go south to Africa.



Let's assume you have the capital to hire a ship to carry yourself and your goods to Africa. You would probably be carrying Mediterranean wine, iron weapons, perhaps horses, much in demand in Africa, and a consignment of textiles consisting perhaps of Egyptian linen and cotton. What sort of commodities would you acquire in Africa for trade in Europe?

Africans were already producing the same things as Europeans—iron and steel (possibly the best in the world at the time), elaborate textiles, and other goods. As a trader, you would have been interested in the textiles made in Africa, which were in demand in Europe. You would also have been anxious to trade in gold mined in West Africa, the source until that time of most of the gold in Europe and the Middle East. But your real interest would likely have been slaves.

The institution of slavery goes back well into antiquity. The ancient Greeks kept slaves, and slave labor was used throughout the Middle East and Europe in 1500. Mos­lems enslaved Christians, Christians enslaved Muslims, and Europeans enslaved Slavs and Greeks. Coal miners in Scotland were enslaved into the seventeenth and eighteenth centuries, and indentured servitude was widespread in Europe. However, there was about to be a huge surge in the demand for slave labor from the new colonies being established in the Americas.

The nature of the slave trade has long been a contentious issue among historians. Many believe the slave trade was forced on Africa, if not by direct military intervention then by economic extortion, Europeans offering guns and horses needed by rulers to maintain their authority in exchange for slaves. But there is increasing evidence that the slave trade was largely an African institution that Europeans and others were only too happy to tap into. Slavery in Africa was different from slavery in Europe, however, and different from what it was to become in the Americas.

Slaves were regarded traditionally in Africa as subordinate family members, as they were in Europe going back to Aristotle's time. Thus slaves in Africa could be found doing any duties a subordinate family member might do. To understand the African institution of slavery it is also necessary to understand that among people in African states there was little notion of private property; for example, land was owned by 'corporate kinship groups,' networks of related individuals who together owned land in common. People were given the right to use land but not to own it. Slaves comprised the only form of pri­vate, revenue-producing property recognized in African law. Slaves could produce reve­nue because if you had the labor in the form of family members, wives, or slaves, you could claim the use of more land. African conceptions of property are reflected also in the fact that, whereas in Europe taxes were paid on land, in Africa taxes were paid on people, 'by the head' (Thornton 1992).

The size of African states may have reflected the lack of concern with land as prop­erty. John Thornton (1992:106) estimated that only 30 percent of Atlantic Africa con-


tained states larger than fifty thousand square kilometers (roughly the size of New York State), and more than half the total area contained states of five hundred to one thousand square kilometers. Africans went to war generally not to acquire land, as in Europe, but to acquire slaves, with which more land could be worked.

Given these attitudes toward land and toward labor, there existed in Africa at the time of European arrival a large slave population and a thriving slave market. Slaves were a major form of investment; a wealthy African could not buy land but could acquire slaves and, as long as land was available, claim more land to use. Moreover, slaves, since they were property, could be inherited by individuals, whereas land, since it belonged to the corporate kin group, could not. Investing in slaves would have been the wealthy African's equivalent of a European investing in land, and if you were not using slaves you could sell them (Thornton 1992:87). Thus European traders found ready sources of slaves, not be­cause Africans were inveterate slave traders but because in Africa the legal basis for wealth revolved around the idea of transferring ownership of people (Thornton 1992:95).

Once you obtained the slaves, you might have obtained a special ship to transport them back to Europe or to one of the Atlantic Islands, where they were in demand as workers on the expanding sugar plantations. Sugar in the sixteenth century was still a luxury item, used by the wealthy to decorate food or as medicine. The primary areas of supply were around the Mediterranean—Egypt, Italy, Spain, and Greece. But with the opening of the Atlantic, sugar plantations were established first on the Canary Islands and the Azores and later in the Caribbean. Sugar production was a labor-intensive activity, and slaves from Africa supplied much of that labor. From 1451 to 1600 some 275,000 slaves were sent from West Africa to America and Europe. In the seventeenth and eigh­teenth centuries sugar would begin to play a major role in the world economy, but in the sixteenth century its possibilities were only beginning to be recognized.

Let's assume that after buying slaves in Africa and selling them in the new sugar plantations of the Azores, you resume your journey and go west to the Americas. The opening of the Americas brought into Portugal and Spain vast amounts of gold and silver plundered from the Inca and Aztec Empires and extracted from mines by slave and inden­tured labor. When Pizarro invaded Peru and seized Atahualpa in 1532, he demanded and received a ransom of a roomful of gold and killed the emperor anyway. When Cortes con­quered the Aztec he demanded gold; after the Aztec's counterattack, Cortes's fleeing men carried so much loot that one-quarter drowned as they fell from a causeway into a lake, so burdened down were they by their cargo (Weatherford 1988:7).

At the time of the conquest of the Americas, there was approximately $200 million worth of gold and silver in Europe; by 1600 that had increased eight times. Some 180-200 tons of gold, with a contemporary value of $2.8 billion, flowed into Europe, much of it still visible in the robes, statuary, and sacred objects of European churches (Weatherford 1988:14).

Most of the silver came from San Luis Potosi. Cerro Rico ('rich hill' in Spanish), the mountain above Potosi in Bolivia, is the richest mountain ever discovered, virtually a mountain of silver. In 1545 slaves and indentured laborers recruited from the indigenous population began digging silver out of the mountain, forming it into bars and coins, and sending it to Spain. By 1603 there were 58,800 Indian workers in Potosi, 43,200 free day laborers, 10,500 contract laborers, and 5,100 labor draftees. By 1650, Potosi rivaled London and Paris in size, with a population of 160,000 (Wolf 1982:136).


The amount of currency in circulation worldwide increased enormously, enriching Europe but eroding the wealth of other areas, and helping Europe expand into an interna­tional market system. China reopened its trading links to Europe and took in so much silver that by the mid-eighteenth century its value had declined to one-fifth what it had been prior to the discovery of America. The gold from the Americas also had the effect of destroying the African gold trade (Weatherford 1988).

Gold and silver were not the only wealth extracted from the New World. Spain im­ported cochineal, a red dye made from insects (it took 70,000 dried insects to produce one pound of cochineal), indigo (blue dye), and cocoa. Portuguese traders established sugar plantations on the Northeast coast of Brazil.

The cost of the European expansion of trade to the Americas, at least to the people of the Americas, was enormous. It resulted in the demographic collapse of the New World, what Eric Wolf called 'the great dying' (1982:133).

There is broad disagreement about the population of the Americas at the time of the European conquest. In 1939 Alfred E. Kroeber, one of the founders of American anthro­pology, estimated that the total population of the Americas was about 8.4 million of which 900,000 were in North America. Harold Herbert Spinden, relying on archeological evidence, suggested there were 50-75 million people in the Americas in A.D. 1200. Henry F. Dobyns, working with archeological evidence, estimates of the carrying capacity of given environments, and historical documents, estimated 90-112 million in the hemi­sphere and 12.5 million in the area north of Mexico. The disagreement reflected in these numbers is not unimportant, for it involves an important legal question: Did the 'discov­ery ' of the New World permit Europeans to move on to unoccupied wilderness, or did they displace and destroy a settled indigenous population? If the latter in the case, then European claims of legal ownership of the land based on the doctrine of terra nullius-land belonging to no one—would be legally invalid.

There is little doubt, we think, that the higher estimates are closer to the actual pop­ulation of the Americas. In 1500, Europe, a fraction the size of the Americas, had a pop­ulation of 45 million; France alone had a population of 20 million, and tiny Portugal 1 million. And this was after the bubonic plague epidemics. There seems little doubt that the environment and societies of the Americas were capable of supporting large popula­tions. The peoples of the Americas built empires, palisaded settlements, temples, great pyramids, and irrigation complexes. There was certainly an adequate supply of foodstuffs to support a large population; most of our diet today comes from plants domesticated first in the New World, including corn, potatoes, sweet potatoes, tomatoes, squash, pumpkins, most varieties of beans, pepper (except black), amaranth, manioc, mustard, some types of rice, pecans, pineapples, bread fruit, passion fruit, melons, cranberries, blueberries, black­berries, coffee, vanilla, chocolate, and cocoa.

In 1496 Bartolome Colon, Christopher's brother, authorized a headcount of adults of Espanola, the present day Haiti and Dominican Republic, then the most populous of the Caribbean Islands. The people of the island, the Tainos, created a culture that ex­tended over most of the Caribbean. Colon arrived at a count of 1.1 million working adults; if we add children and the elderly, and consider that disease and murder had already di­minished the population, there must have been at least 2 million and as many as 8 million on that island alone (Sale 1991:160-161). Thus it is hardly unreasonable to suppose that the population of the Americas as a whole was upward of 50-100 million people.


The scale of death after the arrival of the Europeans is difficult to conceive and rivals any estimate made for the demographic consequences of a nuclear holocaust today. When the Spanish surveyed Espanola in 1508, 1510, 1514, and 1518, they found a population of under one hundred thousand. The most detailed of the surveys, taken in 1514, listed just 22,000 adults, which anthropologists Sherburne Cook and Woodrow Borah estimated to represent a total population of 27,800 (Cook and Borah, 1960). Thus in just over twenty years there was a decline from at least 2 million to 27,800 people. Bartolome de Las Casas, the major chronicler of the effects of the Spanish invasion, said that by 1542 there were just two hundred indigenous Tainos left, and within a decade they were extinct. Cook and Borah concluded that in Central America an estimated population of 25.3 million was reduced by 97 percent in a little over a century. In all, it is estimated that 95-98 percent of the indige­nous population of the Americas died as a consequence of European contact.

Many died in battles with the invaders; others were murdered by European occupi­ers desperate to maintain control over a threatening population; and still others died as a result of slavery and forced labor. But the vast majority died of diseases introduced by Eu­ropeans to which the indigenous peoples had no immunity.

The most deadly of the diseases was smallpox. It arrived sometime between 1520 and 1524 with a European soldier or sailor and quickly spread across the continent, ahead of the advancing Europeans. When Pizarro reached the Inca in 1532, his defeat of a di­vided Empire was made possible by the death from smallpox of the ruler and the crown prince. When a Spanish expedition set out from Florida for the Pacific in 1535, they found evidence of the epidemic in West Texas. Dobyns (1983) assumed that virtually all the in­habitants of the hemisphere were exposed to smallpox during that one epidemic. What would the mortality rate have been from this one pathogen alone?

Dobyns (1983:13-14; see also Stiffarm and Lane 1992) estimated that in the epi­demic of 1520-1524 virtually all indigenous peoples—certainly those in large population areas—would have been exposed to smallpox, and since there would have been no immu­nity the death rate, judging by known death rates among other Native American popula­tions, must have been at least 60-70 percent. Spanish reports of the time that half of the native population died, said Dobyns, most certainly were underestimates.

This was not the only smallpox epidemic. Dobyns calculated that there were forty-one smallpox epidemics in North America from 1520 to 1899, seventeen measles epi­demics from 1531 to 1892, ten major influenza epidemics from 1559 to 1918, and four plague epidemics from 1545 to 1707, to name a few. In all, he said, a serious epidemic invaded indigenous populations on average every four years and two and half months during the years 1520-1900.

Thus the occupation of the New World by Europeans was not so much an act of conquest as it was an act of replacing a population ravaged by pathogens that Europeans carried with them. Depopulation was not the only consequence of the economic expan­sion of Europe into the Americas. The deaths of indigenous peoples proved a boon to the slave trade, as Europeans transported millions of Africans to the plantations and mines to replace the dying indigenous laborers. Much of the remaining native population gathered around mining communities and Spanish agricultural estates, providing a surplus labor supply, producing cheap crafts and agricultural products, and paying tribute and taxes to the colonizers (Wolf 1982:149). Their descendants today still suffer economic and social discrimination at the hands of descendants of European and indigenous unions.


In 1776, Adam Smith, in The Wealth of Nations, wrote, 'The discovery of America, and that of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of mankind' (cited Crosby 1986 vii).

A decade later there was a debate among the savants of France over whether the dis­covery of the New World was a blessing or a curse. Abbe Guillaume Reynal, author of a four-volume study of trade between Europe and the East and West Indies, wrote a paper to answer this question. In it he listed the gains that Europe had received and discussed the costs to the peoples of Asia and the Americas. He concluded:

Let us stop here, and consider ourselves as existing at the time when America and India were unknown. Let me suppose that I address myself to the most cruel of the Europeans in the following terms. There exist regions which will furnish you with rich metals, agreeable clothing, and delicious food. But read this history, and behold at what price the discovery is promised to you. Do you wish or not that it should be made? Is it to be imagined that there exists a being infernal enough to answer this question in the affirmative! Let it be re­membered that there will not be a single instant in futurity when my question will not have the same force, (cited Sale 1991:366-367)

The Rise of the Trading Companies

The expansion of trade into the Americas marked an important development in the con­trol of global trade and commerce: states began to take a much more direct interest in commerce within their borders. For example, states controlled much of the trade with the Americas. Each year two fleets of the Spanish Crown would leave from Cadiz or Seville carrying European goods, one landing at Vera Cruz and the other, with goods bound for Peru, landing at Cartagena or Portobelo in Panama. From there mules carried the goods into the Andes, returning with silver and American goods for shipment home. The two fleets converged in Havana before returning to Spain (Wolf 1982:149).

The seventeenth century marked the era of what economists call mercantilism, as European states did all they could to protect, encourage, and expand industry and trade, not for its own sake but to prevent wealth, largely in the form of gold and silver, from leaving their countries. States enacted protective legislation to keep out foreign goods and to prevent gold and silver from leaving, and they subsidized the growth of selected indus­tries by ensuring the existence of a cheap labor supply. Also during the seventeenth-cen­tury the so-called trading or joint stock company evolved, a joining of trade and armed force designed to ensure the continued extraction of wealth from areas around the world.

As a global merchant in 1700 your best chance of making profits would have been to join a trading company, by far the most sophisticated instrument of state-sponsored trade. The companies consisted of groups of traders, each of whom invested a certain amount of capital and were given charters by the state and presented with monopolistic trade privileges in a particular area of the world. Since other countries also gave monopo­listic trading privileges to their companies, there was often armed conflict between them. For example, in 1600 the British crown issued a royal charter to the Governor and the Company of Merchants of London trading with the East Indies, later known simply as the British East India Company. The company was formed to share in the East Indian spice trade but met with resistance from the Dutch, who in 1602 formed the Dutch East India Company to monopolize Asian trade.



The Dutch maintained political control over its posts in India with an army of ten to twelve thousand troops and a navy of forty to sixty ships. The company brought 10-12 million florins worth of goods to Europe each year, producing a profit of 25-30 percent (Braudel 1982). In 1623 the Dutch authorities in what is now Ambon, Indonesia, executed ten Englishmen, ten Japanese, and one Portuguese, believing that the English planned to attack the Dutch garrison when their ships arrived. In India, however, the British East India Company defeated Portuguese troops and gained trading concessions from the Mughal Empire. The British East India Company gradually extended its trade into South­east Asia. In 1757 it defeated Indian troops and took control of all of Bengal, looting the Bengal treasury of some £5 million. Eventually its control expanded to most of India, and it became the managing agency for the British colonization of India.

Other trading companies granted charters by the British state include the Virginia Company in 1606, the English Amazon Company in 1619, the Massachusetts Company in 1629, the Royal Adventurers into Africa in 1660, and the Hudson's Bay Company in 1670.

The Dutch were initially best able to exploit the new developments in trade, largely because of their large merchant fleet and the development of the fluitschip, a light and slender vessel that carried heavy cargoes. The availability of funds in financial centers such as Antwerp and Amsterdam, much of it originating in the gold and silver of the Americas, allowed builders to get the best woods and best craftsmen and employ foreign sailors. Gradually, however, England and its navy gained, and the English trading compa­nies soon dominated world trade.

As a merchant adventurer in the first part of the eighteenth century you may have joined the Virginia Company and established a trading post, or 'factory,' in southern Ap-palachia, probably in a Cherokee village. The Cherokee were necessary to supply the commodities you would want to acquire for trade, items such as deerskins, ginseng and other herbs in demand in Europe as aphrodisiacs and cures for venereal disease, and war captives that you could sell as slaves. In exchange, you would supply the Cherokee with European goods such as guns, ammunition, iron utensils, and European clothing. Your normal business practice would be to advance these goods to the Cherokee, thus obligat­ing them to repay you. But to succeed in making a profit, you would need the cooperation of the Cherokee. This is where the British government came in.

Prior to European contact the Cherokee lived in large towns in which land was owned communally, and subsistence activities consisted of hunting, fishing, gathering, and agriculture. The Cherokee population had been decimated by disease by the early eighteenth century, but they still retained most of their traditional culture. For example, Cherokee villages were relatively independent from each other, each having its own lead­ers and each relatively self-sufficient in food and production of necessities such as cloth­ing, weapons, and cooking utensils. The independence of village leaders, however, made it difficult for the British government and traders to deal with the Cherokee. If there were overall leaders who could make agreements binding on large groups, with whom govern­ment and merchants could deal, it would be far easier to make treaties, collect trade debts, and engineer political alliances (Dunaway 1996:31). Consequently, using their military power and the threat of withdrawing trade, the British government appointed chiefs who they recognized as having the power to make agreements binding on the entire Cherokee nation whether or not their autonomy was recognized by other Cherokee. The British gov­ernment also encouraged conflict between indigenous groups, reasoning, as the South


Carolina governor reported in the 1730s, 'for in that consists our safety, being at War with one another prevents them from uniting against us' (Dunaway 1996:28).

Thus merchants, such as yourself, along with the Cherokee, became integrated into a global trade network in which slaves and deerskins were sent through Charleston, Vir­ginia, to England, the northern colonies, and the West Indies. In return, Charleston re­ceived sugar and tobacco from the West Indies and rum from the northern colonies that was manufactured from molasses from the West Indies, which the Northern colonies ac­quired in exchange for lumber and other provisions. In exchange for the deerskins sent to England, Charleston received goods manufactured in England, such as woolens, clothing, guns, and iron tools. The deerskins were converted in England into leather goods, which merchants in England traded for raw materials, luxury goods, and meat provisions from all over the world (Dunaway 1996:34).

For traders, these arrangements worked very well: by 1710 as many as 12,000 Indi­ans had been exported as slaves and by 1730 some 255,000 deerskins were being shipped annually from British trading posts to England and other parts of the world (Dunaway 1996:32). Furthermore, with the help of the British military strength and diplomacy, trad­ers were making a 500-600 percent profit on goods advanced to the Cherokee in ex­change for deerskins, slaves, and herbs.

But what of the Cherokee? By becoming integrated into the global economy on terms dictated by British government officials and traders, the Cherokee economy was transformed from self-sufficient agricultural production to a 'putting-out' system in which they were given the tools for production (e.g., guns) along with an advance of goods in exchange for their labor—an arrangement that destroyed traditional activities and stimulated debt peon­age. To pay off debts accumulated to acquire European goods, communal Cherokee land was sold by chiefs appointed by the British: in little more than fifty years the British extinguished title to about 57 percent of the Cherokee traditional land (some 43.9 million acres).

In addition, the new economy brought profound changes in Cherokee social life. Trade was male-oriented, men being responsible for acquiring the items—slaves and deer—desired by the British. This removed men from traditional agricultural activities as well as incapaci­tating them with rum (Dunaway 1996:37). By the mid-1700s, British observers noted that 'women alone do all the laborious tasks of agriculture,' freeing men to hunt or go to war.

Furthermore, traditional crafts deteriorated with the increased consumption of Eu­ropean goods such as guns, axes, knives, beads, pottery, clothing, and cooking utensils. By the mid-1700s the British could report that 'the Indians by reason of our supplying them so cheap with every sort of goods, have forgotten the chief part of their ancient me­chanical skill, so as not to be able now, at least for some years, to live independent from us' (Dunaway 1996:38). In 1751, the Cherokee chief Skiagonota would observe that 'the clothes we wear we cannot make ourselves. They are made for us. We use their ammuni­tion with which to kill deer. We cannot make our guns. Every necessity of life we have from the white people' (cited Dunaway 1996:39).

The Era of the Industrialist

By 1800, England had militarily, politically, and economically subdued her closest rivals of the early eighteenth century—France and Holland. British commerce thrived, fueled


largely by the growth of industry, particularly textiles, and the related increase in the availability of cheap labor. And while the British lost her American colonies—politically if not economically—she gained in many ways a wealthier prize—India.

But the big news was the industrial development of England. From 1730 to 1760 iron production increased 50 percent; the first iron bridge was built in 1779 and the first iron boat in 1787. In 1783 Watt produced the double-effect steam engine. From 1740 to 1770 consumption of cotton rose 117 percent, and by 1800 mechanized factories were producing textiles at an unprecedented rate.

Social scientists often pose the related questions, what made England take off? and why was there an industrial revolution at all? These are more than academic questions. As planners in so-called economically undeveloped countries attempt to improve peo­ples' lives through economic development, they often look to the history of Great Britain to discover the key ingredients to economic success. England became, to a great extent, the model for economic development, the epitome of progress, so it was believed, partic­ularly in Great Britain.

The reasons for the industrial revolution in England and the emergence of the capi­talist economy are varied, and while analysts disagree on which were the most important, there is general agreement on those that played some part. They include the following (see Wallerstein 1989:22ff).

1.           An increase in demand for goods. This demand may have been foreign or domestic,
supplemented by increased demands for largely military products from the state. The tex­
tile industry was revolutionary also in its organization of labor and its relationship to the
foreign market, on which it depended for both raw materials (in the case of cotton) and
markets. Historian Eric Hobsbawm argued that there was room for only one world sup­
plier, and that ended up being England.

2.     The increase in the supply of capital. An increase in trade resulted in greater profits
and more money, and these profits supplied the capital for investment in new technologies
and businesses.

3.     A growth in population. Population increased dramatically in England and Europe
in the eighteenth century. From 1550 to 1680 the population of Western Europe grew by
18 percent and from 1680 to 1820 by 62 percent. From 1750 to 1850 England's popula­
tion increased from 5.7 million to 16.5 million. Population increase was important be­
cause it increased the potential labor force and the number of potential consumers of
commodities. But there is disagreement as to why population increased and the effects it
had on industrialization.

Some account for the increase with lower mortality rates attributable to smallpox inoculation and an improved diet related to the introduction of new foodstuffs, such as the potato. Life expectancy at birth went from thirty-five to forty years (Guttmann 1988:130). Others attribute the rise in population to an increase in fertility. Indeed, families were larger in the eighteenth century. In England between 1680 and 1820 the gross reproduc­tion rate (number of females born to each woman) went from two to nearly three and the average number of children per family from four to almost six. Later we will need to ex­amine the relationship of population growth to industrialization because it is key to under­standing the rapid growth of population today.


4.     An expansion of agriculture. There was an expansion of agricultural production in
England in the eighteenth century that some attribute to enclosure laws. These laws drove
squatters and peasants from common lands and forests from which they had drawn a liveli­
hood. The rationale was to turn those lands over to the gentry to make them more produc­
tive, but this also had the effect of producing a larger landless and propertyless population,
dependent on whatever wage labor they might find. Regardless, some argue that the in­
creased agricultural yields allowed the maintenance of a larger urban workforce.

5.     A unique English culture or spirit. Some, notably sociologist Max Weber, attribute
the rise of England to the development of an entrepreneurial spirit, such as the Protestant
ethic, that motivated people to business success in the belief that it would reveal to them
whether they were among God's elect.

6.     State support for trade. Some claim that a more liberal state structure imposed
fewer taxes and regulations on businesses, thus allowing them to thrive. The state did take
action to support trade and industry. There was continued political and military support
for extending Britain's economy overseas, along with domestic legislation to protect mer­
chants from labor protest. A law of 1769 made the destruction of machines and the build­
ings that housed them a capital crime. Troops were sent to put down labor riots in
Lancaster in 1779 and in Yorkshire in 1796, and a law passed in 1799 outlawed worker
associations that sought wage increases, reduction in the working day, 'or any other im­
provement in the conditions of employment or work' (Beaud 1983:67).

7.     The ascendance of the merchant class. Stephen Sanderson (1995) attributed the de­
velopment of capitalism to an increase in the power of the merchant class. There has
always been, he suggested, competition between merchants and the ruling elites, and
while elites needed merchants to supply desired goods and services, they nevertheless
looked down on them. But gradually the economic power of the merchant class grew
until, in the seventeenth and eighteenth centuries, the merchant emerged as the most pow­
erful member of Western, capitalist society. Capitalism, said Sanderson (1995:175-176),
'was born of a class struggle. However, it was not, as the Marxists would have it, a strug­
gle between landlords and peasants. Rather, it was a struggle between the landlord class
and the merchants that was fundamental in the rise of capitalism.'

8.     A revolution in consumption. Finally, some attribute the rapid economic growth in
England to a revolution in the patterns of retailing and consumption. There was a growth
in the number of stores and shops and the beginning of a marketing revolution, led by the
pottery industry and the entrepreneurial genius of Josiah Wedgewood, who named his
pottery styles after members of the Royal Family to appeal to the fashion consciousness
of the rising middle class.

Regardless of the reasons for England's rise and the so-called industrial revolution, there is little doubt that in addition to the traditional means of accumulating wealth—mercan­tile trade, extracting the surplus from peasant labor, pillage, forced labor, slavery, and taxes— a new form of capital formation increased in importance. It involved purchasing and combin­ing the means of production and labor power to produce commodities, the form of wealth formation called capitalism that we diagramed earlier as follows: M —>C —>mp/lp —>C' —>M


 [Money is converted to commodities (capital goods) that are combined with the means of production and labor power to produce other commodities (consumer goods), that are then sold for a sum greater than the initial investment]. How did this mode of production differ from what went before ?

Eric Wolf offered one of the more concise views. For capitalism to exist, he said, wealth or money must be able to purchase labor power. But as long as people have access to the means of production—land, raw materials, tools (e.g., weaving looms, mills)— there is no reason for them to sell their labor. They can still sell the product of their labor. For the capitalistic mode of production to exist, the tie between producers and the means of production must be cut; peasants must lose control of their land, artisans control of their tools. These people, once denied access to the means of production, must negotiate with those who control the means of production for permission to use the land and tools and receive a wage in return. Those who control the means of production also control the goods that are produced, and so those who labor to produce them must buy them back from those with the means of production. Thus the severing of persons from the means of production turns them not only into laborers but into consumers of the product of their labor as well. Here is how Wolf (1982:78-79) summarized it:

Wealth in the hands of holders of wealth is not capital until it controls means of produc­tion, buys labor power, and puts it to work continuously expanding surpluses by intensify­ing production through an ever-rising curve of technological inputs. To this end capitalism must lay hold of production, must invade the productive process and ceaselessly alter the conditions of production themselves. Only where wealth has laid hold of the conditions of production in ways specified can we speak of the existence or dominance of a capitalis­tic mode. There is no such thing as mercantile of merchant capitalism, therefore. There is only mercantile wealth. Capitalism, to be capitalism, must be capitalism-in-production.

Wolf (1982:100) added that the state is central in developing the capitalist mode of production because it must use its power to maintain and guarantee the ownership of the means of production by capitalists both at home and abroad and must support the organi­zation and discipline of work. The state also has to provide the infrastructure, such as transportation, communication, judicial system, and education, required by capitalist pro­duction. Finally, the state must regulate conflicts between competing capitalists both at home and abroad, by diplomacy if possible, by war if necessary.

The major questions are how did this industrially driven, capitalist mode of production evolve, and what consequences did it have in England, Europe, and the rest of the world?

Textiles and the Rise of the Factory System

Assume once again your role as a textile merchant; let's examine the opportunities and problems confronting you as you conduct business. Typical textile merchants of the early eighteenth century purchased their wares from specialized weavers or part-time producers of cloth or from drapers, persons who organized the production of cloth but did not trade in it. The merchant then sold the cloth to a consumer or another merchant who sold it in other areas of Europe or elsewhere. The profit came from the difference between what the mer­chant paid the artisan or draper and what the customer paid. This is not a bad arrangement.



It does not require a large capital outlay for the merchant, since the artisan has the tools and material he or she needs, and as long as there is a demand for the cloth there is some­one who will buy it.

But as a merchant you face a couple of problems. First, the people who make the cloth you buy may not produce the quantity or quality that you need, especially as an ex­panding population begins to require more textiles. Moreover, the artisan may have trou­ble acquiring raw materials, such as wool or cotton, further disrupting the supply. What can you do?

One thing to do is to increase control over what is produced by 'putting out'—sup-plying the drapers or weavers with the raw materials to produce the cloth—or, if you have the capital, buy tools—looms, spinning wheels, and so on—and give them to people to make the cloth, paying them for what they produce. Cottage industry of this sort was widespread throughout Europe as merchants began to take advantage of the cheaper labor in rural areas, rather than purchasing products from artisans in towns and cities. In En­gland of the mid-eighteenth century there was probably plenty of labor, especially in rural areas, supplied by people who had been put off their land by enclosure legislation or be­cause of failure to pay taxes or repay loans. In the land market of the eighteenth century, there were far more sellers than buyers (Guttmann 1988).


Power loom weaving in a cotton textile factory in 1834. Note that virtually all the workers are women.


Another problem English textile merchants faced in the mid-eighteenth century was that the textile business, especially in cotton, faced stiff competition from India, whose calico cloth was extremely popular in England. How do you meet this competition? The first thing England did was to ban the import of Indian cloth and develop its own cotton


industry to satisfy domestic demand. This not only helped protect the British textile in­dustry, it virtually destroyed the Indian cotton industry, and before long India was buying British cotton textiles. The result was summed up in 1830 in testimony before the House of Commons by Charles Marjoribanks (cited Wallerstein 1989:150):

We have excluded the manufactures of India from England by high prohibitive duties and given every encouragement to the introduction of our own manufactures to India. By our selfish (I use the word invidiously) policy we have beat down the native manufactures of Dacca and other places and inundated their country with our goods.

And in 1840, the chairman of Britain's East India and China association boasted




that This Company has, in various ways, encouraged and assisted by our great manufactur­ing ingenuity and skill, succeeded in converting India from a manufacturing country into a country exporting raw materials, (cited Wallerstein 1989:150)

The next, and to some extent inevitable, stage in textile production was to bring to­gether in one place—the factory—as many of the textiles production phases as possible: preparing the raw wool or cotton, spinning the cotton yarn and wool, weaving the cloth, and applying the finishing touches. This allowed the merchant or industrialist to control the quantity and quality of the product and control the use of materials and tools. The only drawback to the factory system is that it is capital-intensive; the merchant was now re­sponsible for financing the entire process, while the workers supplied only their labor. Most of the increase in cost was a consequence of increased mechanization.

Mechanization of the textile industry began with the invention by John Kay in 1733 of the flying shuttle, a device that allowed the weaver to strike the shuttle carrying the thread from one side of the loom to the other, rather than weaving it through by hand. This greatly speeded up the weaving process. However, when demand for textiles, particularly cotton, increased, the spinning of thread, still done on spinning wheels or spindles, could not keep up with weavers, and bottlenecks developed in production. To meet this need James Hargreaves introduced the spinning jenny in 1770. Later, Arkwright introduced the water frame, and in 1779 Crompton introduced his 'mule' that allowed a single operator to work more than 1,000 spindles at once. In 1790 steam power was supplied. These tech­nological developments increased textiles production enormously: the mechanical advan­tage of the earliest spinning jennies to hand spinning was twenty-four to one. The spinning wheel had become an antique in a decade (Landes 1969:85). The increase in the supply of yarn—twelve times as much cotton was consumed in 1800 than in 1770— required improvements in weaving, which then required more yarn, and so on.

The revolution in production, however, produced other problems. Who was going to buy the increasing quantity of goods that were being produced, and where was the raw material for production to come from?

The Age of Imperialism

The results of the industrial revolution in Europe were impressive. The period from 1800 to 1900 was perhaps one of the most dynamic in human history and, certainly until that


time, the most favorable for accumulation of vast fortunes through trade and manufacture. Developments in transportation such as railroads and steamships revolutionized the trans­port of raw materials and finished commodities. The combination of new sources of power in water and steam, a disarmed and plentiful labor force, and control of the produc­tion and markets of much of the rest of the world resulted in dramatic increases in the level of production and wealth. These advances were most dramatic in England and later in the United States, France, and Germany. In England, for example, spun cotton in­creased from 250 million pounds in 1830 to 1,101 million pounds in 1870. World steam power production went from 4 million horsepower in 1850 to 18.5 million horsepower twenty years later; coal production went from 15 million tons in 1800 to 132 million tons in 1860, and 701 million tons in 1900. The consumption of inanimate energy from coal, lignite, petroleum, natural gasoline, natural gas, and water power increased sixfold from 1860 to 1900; railway trackage went from 332 kilometers in 1831 to 300,000 kilometers in 1876. The Krupp iron works in Germany employed 72 workers in 1848; there were 12,000 by 1873.

There was also a revolution in shipping as ocean freight costs fell, first with the advent of the narrow-beamed American clipper ship and later with the introduction of the steamship. A clipper ship could carry 1,000 tons of freight and make the journey from the south coast of China to London in 120-130 days; in 1865 a steamship from the Blue Funnel Line with a capacity of 3,000 tons made the journey in 77 days. The construction of the Suez Canal, completed in 1869 with the labor of 20,000 conscripted Egyptian fell­aheen, or peasants, cut the travel time from England to eastern Asia in half—although it bankrupted the Egyptian treasury and put the country under Anglo-French receivership. These events initiated a military revolt that the British stepped in to put down, conse­quently cementing the British hold on Egypt and much of the Middle East. Politically, the United States emerged as a world power, and Japan was building its economy and would be ready to challenge Russia. The Ottoman Empire was on its way to disintegrating as France, England, and Russia sought to gain control over the remnants.

But it was not all good news for the capitalist economy. There was organized worker resistance to low wages and impoverished conditions, resistance and rebellion in the periphery, and the development of capitalist business cycles that led to worldwide economic depressions. Thus, while business thrived in much of the nineteenth century, it had also entered a world of great uncertainty. First, with the expansion of the scope of production, capital investments had increased enormously. It was no longer possible, as it had been in 1800 when a forty-spindle jenny cost £6, to invest in the factory production of textiles at fairly modest levels. Furthermore, there was increased competition, with fac­tory production expanding dramatically in Holland, France, Germany, and the United States. There was the constant problem of overproduction, when supply outstripped demand and resulted in idle factories and unemployed workers. Unlike agricultural production—there seemed always to be a market for food—industrial production depends on the revolution in demand or, as Anne-Robert-Jacque Turgot put it, 'a transformation of desires' (cited in Braudel 1982:183). Until the eighteenth century manufacturers launched their enter­prises only when profit was guaranteed by subsidies, interest-free loans, and previously guaranteed monopolies. Now manufacturers just had to hope people would buy their products.


The Great Global Depression of 1873 that lasted essentially until 1895 was the first great manifestation of the capitalist business crisis. The depression was not the first eco­nomic crisis: For thousands of years there had been economic declines because of famine, war, and disease. But the financial collapse of 1873 revealed the degree of global eco­nomic integration, and how economic events in one part of the globe could reverberate in others. The economic depression began when banks failed in Germany and Austria be­cause of the collapse of real estate speculation. At the same time, the price of cast iron in England fell by 27 percent because of a drop in demand. The drop in iron prices increased British unemployment, while European investors, needing to cover their losses from real estate, withdrew their money from American banks. This led to bank collapses in the United States. In England from 1872 to 1875, exports fell by 25 percent, the number of bankruptcies increased, and rail prices fell by 60 percent. In France, the Lyon stock market crashed in 1882; bank failures and rising unemployment followed. Competition among railroads decreased profits and led to the collapse of railroad securities in the United States (Beaud 1983:119-120; see also Guttmann 1994).

The Depression of 1873 revealed another big problem with capitalist expansion and perpetual growth: it can continue only as long as there is a ready supply of raw materials and an increasing demand for goods, along with ways to invest profits and capital. Given this situation, if you were an American or European investor in 1873, where would you look for economic expansion?

The obvious answer was to extend European and American power overseas, partic­ularly into areas that remained relatively untouched by capitalist expansion—Africa, Asia, and the Pacific. Colonialism had become, in fact, a recognized solution to the need to expand markets, increase opportunities for investors, and ensure the supply of raw ma­terial. Cecil Rhodes, one of the great figures of England's colonization of Africa, recog­nized also the importance of overseas expansion for maintaining peace at home. In 1895 Rhodes said:

I was in the East End of London yesterday and attended a meeting of the unemployed. I listened to the wild speeches, which were just a cry for 'bread,' 'bread,' and on my way home I pondered over the scene and I became more than ever convinced of the importance of imperialism. My cherished idea is a solution for the social problem, i.e., in order to save the 40,000,000 inhabitants of the United Kingdom from a bloody civil war, we colo­nial statesmen must acquire new lands for settling the surplus population, to provide new markets for the goods produced in the factories and mines. The Empire, as I have always said, is a bread and butter question. If you want to avoid civil war, you must become impe­rialists, (cited Beaud 1983:139-140)

P. Leroy-Beaulieu voiced the same sentiments in France when, to justify the con­quest of foreign nations, he said:

It is neither natural nor just that the civilized people of the West should be indefinitely crowded together and stifled in the restricted spaces that were their first homes, that they should accumulate there the wonders of science, art, and civilization, that they should see, for lack of profitable jobs, the interest rate of capital fall further every day for them, and that they should leave perhaps half the world to small groups of ignorant men, who are


powerless, who are truly retarded children dispersed over boundless territories, or else to decrepit populations without energy and without direction, truly old men incapable of any effort, of any organized and far-seeing action, (cited Beaud 1983: 140)

As a result of this cry for imperialist expansion, people all over the world were con­verted into producers of export crops as millions of subsistence farmers were forced to become wage laborers producing for the market and to purchase from European and American merchants and industrialists, rather than supply for themselves, their basic needs. Nineteenth century British economist William Stanley Jevons (cited Kennedy 1993:9) summed up the situation when he boasted:

The plains of North America and Russia are our cornfields; Chicago and Odessa our gra­naries; Canada and the Baltic are our timber forests; Australasia contains our sheep farms, and in Argentina and on the western prairies of North America are our herds of oxen; Peru sends her silver, and the gold of South Africa and Australia flows to London; the Hindus and the Chinese grow tea for us, and our coffee, sugar, and spice plantations are all in the Indies. Spain and France are our vineyards and the Mediterranean our fruit garden, and our cotton grounds, which for long have occupied the Southern United States are now being extended everywhere in the warm regions of the earth.

Wheat became the great export crop of Russia, Argentina, and the United States, much of it produced in the United States on lands taken from the Native Americans. Rice became the great export of Southeast Asia, spurred by Great Britain's seizure of lower Burma in 1855 and its increase in rice production from one million to nine million acres. Argentina and Australia joined the United States as the major supplier of meat as cattle ranchers in Australia and the United States turned indigenous peoples into hired hands or hunted them to extermination, as did the ranchers in California into the late nineteenth century (see Meggitt 1962).

In 1871 a railroad promoter from the United States built a railroad in Costa Rica and experimented in banana production; out of this emerged in 1889 the United Fruit Company that within thirty-five years was producing two billion bunches of bananas. The company reduced its risk by expanding into different countries and different environments and by ac­quiring far more land than it could use at any one time as a reserve against the future.

The demand for rubber that followed the discovery of vulcanization in 1839 led to foreign investments in areas such as Brazil, where one major supplier increased produc­tion from 27 tons in 1827 to an average of 20,000 tons per year at the end of the nine­teenth century. The laborers who collected the rubber were workers who had lost their jobs with the decline in the sugar industries and Indians, who were sometimes held cap­tive or tortured or killed if they didn't collect their quota of rubber, or whose wives and children would be killed if they didn't return (Taussig 1987).

In the nineteenth century palm oil became a substitute for tallow for making soap and a lubricant for machinery, resulting in European military expansion into West Africa and the conquest of the kingdoms of Asante, Dahomey, Oyo, and Benin.

Vast territories were turned over to the production of stimulants and drugs such as sugar, tea, coffee, tobacco, opium, and cocoa. In the Mexican state of Chiapas and in Gua­temala legislation abolished communal ownership of land. Land could now be privately


owned and subject to purchase, sale, and pawning, allowing non-Indians to buy unregis­tered land and foreclose mortgages on Indian borrowers (Wolf 1982:337). These lands were then turned to coffee production and, later, cattle ranching. In Ceylon, common land was turned into royal land and sold to tea planters. In 1866 diamonds and gold were dis­covered in the Orange Free State of West Africa. By 1874, 10,000 Africans were working in the European-owned diamond mines and by 1884 almost 100,000 were working in the gold mines. By 1910, 255,000 were working the mines, and by 1940 there were 444,000.

Colonization was not restricted to overseas areas; it occurred also within the bor­ders of core states. In 1887 the U.S. Congress passed the General Allotment Act (the 'Dawes Act') to break up the collective ownership of land on Indian reservations by as­signing each family its own parcel, then opening unallotted land to non-Indian home­steaders, corporations, and the federal government. As a consequence, from 1887 to 1934 some 100 million acres of land assigned by treaty to Indian groups was appropriated by private interests or the government (Jaimes 1992:126).

At first glance it may seem that the growth in development of export goods such as coffee, cotton, sugar, and lumber, would be beneficial to the exporting country, since it brings in revenue. In fact, it represents a type of exploitation called unequal exchange. A country that exports raw or unprocessed materials may gain currency for their sale, but they then lose it if they import processed goods. The reason is that processed goods— goods that require additional labor—are more costly. Thus a country that exports lumber but does not have the capacity to process it must then re-import it in the form of finished lumber products, at a cost that is greater than the price it received for the raw product. The country that processes the materials gets the added revenue contributed by its laborers.

Then there is the story of tea and opium and trade in China. China, of course, was a huge prize, but the British and Western European nations had a problem with trade into China: Chinese products, notably tea, were in high demand, but there was little produced in England or the rest of Europe that the Chinese wanted or needed. However, there was a market in China for opium, virtually all of which was produced and controlled by the British East India Company. Opium was illegal in China, but the government seemed in-capable of stopping the smuggling that was hugely profitable for British, American, and French merchants. When in 1839 the Chinese government tried to enforce laws against opium sales by seizing opium held by British merchants in warehouses in Canton, the British government sent in troops and effectively forced the Chinese government to stop enforcing opium laws. An analogy today might be the Colombian government sending troops to the United States to force acceptance of Colombian cocaine shipments. More­over, using its military superiority, the British demanded and received additional trading rights into China, opening a market not only for opium but for British textiles as well.

The British-led opium trade from India to China had three consequences. First, it reversed the flow of money between China and the rest of the world; during the first decade of the nineteenth century, China still took in a surplus of $26 million dollars; by the third decade $34 million dollars left China to pay for opium. Second, it is estimated that by the end of the nineteenth century one out of every ten Chinese had become an opium addict. Finally, cotton exports to India and China had increased from 6 percent of total British exports in 1815 to 22 percent in 1840, 31 percent in 1850, and more than 50 percent after 1873 (Wolf 1982:255ff).


Thus, as a merchant adventurer, your economic fortune has been assured by your government's control over foreign economies. Not only could you make more money in­vesting in foreign enterprises, but the wealth you accumulated through trade and manu­facturing gained you entry into a new elite, one with increasing power in the core countries. Power was no longer evidenced solely in the ownership of land, but in the con­trol of capital. In England, for example, the great families of high finance and interna­tional trade, businessmen, manufacturers, ship owners, bankers, parliamentarians, jurists, families of the aristocracy and gentry, all criss-crossed by ties of marriage and kinship, became the new ruling class. This new elite depended for their economic power on busi­ness and industry to a great extent: In the eighteenth century landed inheritance accounted for 63.7 percent of national wealth in Great Britain; toward the end of the nineteenth cen­tury that figure had decreased to 23.3 percent. Meanwhile, during the same period, wealth linked to capitalist development increased from 20.8 percent to almost 50.0 percent.

In the United States a new capitalist elite emerged during and after the Civil War, as people such as J. P. Morgan, Jay Gould, Jim Fisk, Cornelius Vanderbilt, and John D. Rockefeller—most of whom made their fortunes in dealings with the U.S. government— emerged as a new bourgeoisie. More important, they were the driving force behind the emergence of a relatively new form of capital organization—the multinational corporation.

The Era of the Corporation, the Multilateral Institution, and the Capital Controller

While the imperialist activities of the core powers allowed their economies to grow, they also created international conflict on a scale never before imagined. In 1900, each of the great powers sought to carve out a sphere of domination in Asia, Africa, and South and Cen­tral America that with the help of nationalism, racism, and xenophobia turned economic competition into political and military conflict. These conflicts fed on myths of national or racial superiority—British, French, American, White, and so on—and the supposed civiliz­ing mission of the West (Beaud 1983:144). At the Berlin Conference of 1885, great Euro­pean powers met to carve up zones of influence and domination in Africa, laying the groundwork for levels of colonialization from which Africa still has not recovered.

Attempts to extend or defend these zones of economic influence triggered what was until then the bloodiest war ever fought—World War I. Eight million people were killed. Britain lost 32 percent of its national wealth, France 30 percent, Germany 20 percent, and the United States 9 percent. Germany was forced to pay $33 billion in reparations. Indus­trial production fell in all countries except the United States. Then the Russian Revolution cut off huge markets for European and American products, while colonized countries de­manded independence.

The United States emerged from World War I as the world's leading economic power: its national income doubled and coal, oil, and steel production soared. However, workers' real wages and the power of labor unions declined; new forms of factory organi­zation led to greater fatigue—there were 20,000 fatal industrial accidents per year in the 1920s; and the courts blocked the formation of new unions and the application of social laws such as those prohibiting child labor. It was an era of the rise of a new, great eco­nomic power—the corporation.




The Rise of the Corporation

From your perspective as a merchant adventurer, the most important development of the early twentieth century was the merger frenzy in the United States that would be unri­valed until the 1990s. Companies such as Ford, General Motors, and Chrysler in automo­biles, General Electric and Westinghouse in electric, Dupont in chemicals, and Standard Oil in petroleum dominated the market. In 1929, the two hundred largest companies owned half of the country's non-banking wealth. Since then, of course, corporations have

Painter Diego Rivera's depiction of the symbols of corporate wealth as John D. Rockefeller (rear left), J. P. Morgan (rear right), Henry Ford (to Morgan's left), and others read a ticker tape while dining.


become one of the dominant governance units in the world. By 1998 there were more than 53,000 transnational corporations (French 2000:5). From their foreign operations alone they generated almost $6 trillion in sales. The largest corporations exceed in size, power, and wealth most of the world's nation-states and, directly or indirectly, define policy agendas of states and international bodies (Korten 1995:54). Since, as a merchant adven­turer, you have now entered the corporate age, what kind of institution is the corporation and how did it come to accumulate so much wealth and power?

Technically a corporation is a social invention of the state; the corporate charter, granted by the state, ideally permits private financial resources to be used for a public purpose. At an­other level, it allows one or more individuals to apply massive economic and political power to accumulate private wealth while protected from legal liability for the public consequences. As a merchant adventurer, clearly you want to create an institution in which you can increase and protect your own profits from market uncertainties (Korten 1995:53-54).

The corporate charter goes back to the sixteenth century, when any debts accumu­lated by an individual were inherited by his or her descendants. Consequently, someone could be jailed for the debts of a father, mother, brother, or sister. If you, in your role as merchant adventurer, invested in a trading voyage and the goods were lost at sea, you and your descendants were responsible for the losses incurred. The law, as written, inhibited risky investments. The corporate charter solved this problem because it represented a grant from the crown that limited an investor's liability for losses to the amount of the in­vestment, a right not accorded to individual citizens.

The early trading companies, such as the East India Company and the Hudson's Bay Company, were such corporations, and some of the American colonies themselves were founded as corporations—groups of investors granted monopoly powers over terri­tory and industries. Consequently corporations gained enormous power and were able to influence trade policy. For example, in the eighteenth century the English parliament, composed of wealthy landowners, merchants, and manufacturers, passed laws requiring all goods sold in or from the colonies to go through England and be shipped on English ships with British crews. Furthermore, colonists were forbidden to produce their own caps, hats, and woolen or iron goods.

Suspicion of the power of corporations developed soon after their establishment. Even eighteenth-century philosopher and economist Adam Smith, in Wealth of Nations, condemned corporations. He claimed corporations operated to evade the laws of the market by artificially inflating prices and controlling trade. American colonists shared Smith's suspicion of corporations and limited corporate charters to a specific number of years. If the charter was not renewed, the corporation was dissolved. But gradually Amer­ican courts began to remove restrictions on corporations' operation. The U.S. Civil War was a turning point: corporations used their huge profits from the war, along with the sub­sequent political confusion and corruption, to buy legislation that gave them huge grants of land and money, much of which they used to build railroads. Abraham Lincoln (cited Korten 1995:58) saw what was happening and just before his death observed:

Corporations have been enthroned. An era of corruption in high places will follow and the money power will endeavor to prolong its reign by working on the prejudices of the people until wealth is aggregated in a few hands and the Republic is destroyed.


Gradually corporations gained control of state legislatures, such as those in Dela­ware and New Jersey, lobbying for (and buying) legislation that granted charters in perpe­tuity, limited the liabilities of corporate owners and managers, and gained the right of corporations to operate in any way not specifically prohibited by the law. For example, courts limited corporate liability for accidents to workers, an important development in the nineteenth century when fatal industrial accidents from 1888 to 1908 killed 700,000 workers, or roughly one hundred per day. Other favorable court rulings and legislation prohibited the state from setting minimum wage laws, limiting the number of hours a person could work, or setting minimum age requirements for workers.

A Supreme Court ruling in 1886, however, arguably set the stage for the full-scale development of the culture of capitalism. The court ruled that corporations could use their economic power in a way they never before had. Relying on the Fourteenth Amendment, added to the Constitution in 1868 to protect the rights of freed slaves, the Court ruled that a private corporation is a natural person under the U.S. Constitution, and consequently has the same rights and protection extended to persons by the Bill of Rights, including the right of free speech. Thus corporations were given the same 'rights' to influence the gov­ernment in their own interest as were extended to individual citizens, paving the way for corporations to use their wealth to dominate public thought and discourse. The debates in the United States in the 1990s over campaign finance reform, in which corporate bodies can 'donate' millions of dollars to political candidates, stem from this ruling, although rarely if ever is that mentioned. Thus corporations, as 'persons,' were free to lobby legis­latures, use the mass media, establish educational institutions such as the many business schools founded by corporate leaders in the early twentieth century, found charitable or­ganizations to convince the public of their lofty intent, and in general construct an image that they believed would be in their best interests. All of this in the interest of 'free speech.'

Corporations used this power, of course, to create conditions in which they could make more money. But in a larger sense they used this power to define the ideology or ethos of the emerging culture of capitalism. This cultural and economic ideology is known as neoclassical, neoliberal, or libertarian economics, market capitalism, or market liberalism and is advocated in society primarily by three groups of spokespersons: economic rationalists, market liberals, and members of the corporate class. Their advo­cacy of these principles created what David Korten called corporate libertarianism, which places the rights and freedoms of corporations above the rights and freedoms of in­dividuals—the corporation comes to exist as a separate entity with its own internal logic and rules. Some of the principles and assumptions of this ideology include the following.

1.          Sustained economic growth, as measured by gross national product (GNP), is the
path to human progress.

2.    Free markets, unrestrained by government, generally result in the most efficient and
socially optimal allocation of resources.

3.    Economic globalization, achieved by removing barriers to the free flow of goods
and money anywhere in the world, spurs competition, increases economic effi­
ciency, creates jobs, lowers consumer prices, increases consumer choice, increases
economic growth, and is generally beneficial to almost everyone.


4.    Privatization, which moves functions and assets from governments to the private
sector, improves efficiency.

5.    The primary responsibility of government is to provide the infrastructure necessary
to advance commerce and enforce the rule of law with respect to property rights
and contracts.

Hidden in these principles, however, said Korten, are a number of questionable as­sumptions. First, there is the assumption that humans are motivated by self-interest, which is expressed primarily through the quest for financial gain (or, people are by nature motivated primarily by greed). Second, there is the assumption that the action that yields the greatest financial return to the individual or firm is the one that is most beneficial to society (or, the drive to acquire is the highest expression of what it means to be human). Third, is the assumption that competitive behavior is more rational for the individual and the firm than cooperative behavior; consequently, societies should be built around the competitive motive (or, the relentless pursuit of greed and acquisition leads to socially op­timal outcomes). Finally, there is the assumption that human progress is best measured by increases in the value of what the members of society consume, and ever-higher levels of consumer spending advance the well-being of society by stimulating greater economic output (or, it is in the best interest of human societies to encourage, honor, and reward the above values).

While corporate libertarianism has its detractors, from the standpoint of overall economic growth few can argue with its success on a global scale. World economic output has increased from $6.7 trillion in 1950 to over $41.6 trillion in 1998. Economic growth in each decade of the last half of the twentieth century was greater than the eco­nomic output in all of human history up to 1950. World trade has increased from total ex­ports of $308 billion in 1950 to $5.4 trillion in 1998. In 1950 world exports of goods was only 5% of the world GNP; by 1998 this figure was 13% (French 2000:5)

There were still, however, some problems for the merchant adventurer in the early twentieth century. As corporations rose to power in the 1920s and 1930s, political and business leaders were aware that corporations, by themselves, could not ensure the smooth running of the global economy. The worldwide economic depression of the 1930s and the economic disruptions caused by World War II illustrated that. That every country had its own currency and that it could rapidly rise or fall in value relative to others created barriers to trade. Tariffs and import or export laws inhibited the free flow of goods and capital. More important, there was the problem of bringing the ideology of corporate lib­ertarianism, and the culture of capitalism in general, to the periphery, especially given the challenge of socialism and the increasing demands of colonized countries for indepen­dence. The solution to these problems was to emerge from a meeting in 1944 at a New Hampshire resort hotel.

Bretton Woods and the World Debt

In 1944 President Franklin D. Roosevelt gathered the government financial leaders of forty-four nations to a meeting at the Mt. Washington Hotel in Bretton Woods, New Hampshire. From your perspective as a merchant adventurer it was to be one of the most


far-reaching events of the twentieth century. The meeting was called ostensibly to rebuild war-ravaged economies and to outline a global economic agenda for the last half of the twentieth century. Out of that meeting came the plan for the International Bank for Re­construction and Development (The World Bank), the International Monetary Fund (IMF) to control currency exchange, and the framework for a worldwide trade organiza­tion that would lead to the establishment in 1948 of the General Agreement on Tariffs and Trade (GATT) to regulate trade between member countries. While GATT was not as com­prehensive an agreement as many traders would have liked, its scope was widely enlarged on January 1, 1995, with the establishment of the World Trade Organization (WTO). The functions of these agencies are summarized in Table 3.1.

The IMF constituted an agreement by the major nations to allow their currency to be exchanged for other currencies with a minimum of restriction, to inform representa­tives of the IMF of changes in monetary and financial policies, and to adjust these policies to accommodate to other member nations when possible. The IMF also has funds that it can lend to member nations if they face a debt crisis. For example, if a member country finds it is importing goods at a much higher rate than it is exporting them, and if it doesn't have the money to make up the difference, the IMF will arrange a short-term loan (Driscoll 1992:5).

The World Bank was created to finance the reconstruction of Europe after the dev­astation of World War II, but the only European country to receive a loan was Holland, then engaged in trying to put down a rebellion of its Southeast Asian colonies. The World Bank then began to focus its attention on the periphery, lending funds to countries to foster economic development, with, as we shall see, mixed results.

The GATT has served as a forum for participating countries to negotiate trade policy. The goal was to establish a multilateral agency with the power to regulate and promote free trade among nations. However, since legislators and government officials in many coun­tries, particularly the United States, objected to the idea of an international trade agency with the power to dictate government trade policy, the creation of such an agency did not occur until the WTO was finally established on January 1, 1995. In essence, the agency can react to claims by member nations that other nations are using unfair trade policies in order to give businesses in their country an unfair advantage (see Low 1993:42). For example, in 1989 the European Union instituted a ban on the importation of beef injected with bovine

TABLE 3.1    The Bretton Woods Institutions
Institution or Agency                              Function

International Monetary Fund (IMF)        To make funds available for countries to meet short-term financial needs and to stabilize currency exchanges between countries

International Bank for Reconstruction      To make loans for various development projects and Development (World Bank)

General Agreement on Tariffs and                   To ensure the free trade of commodities among

Trade (GATT)                                               countries


growth hormones. These hormones are manufactured in the United States by Monsanto Corp. and are used to boost milk production in cows. The hormone was approved in 1993 by the United States Food and Drug Administration, but public interest groups maintain that, because it increases udder infections in cows, it requires greater use of antibiotics in cows, and that these antibiotics end up in the milk. Some scientists even link the use of the hormone to cancer development (see BGH Bulletin 2000). The United States, on behalf of Monsanto, claimed to the WTO that the ban amounted to an unfair barrier to U.S. beef exports. The WTO ruled in favor of the U.S. and allowed the U.S. government to impose a 100% tariff on $116.8 million worth of European imports such as fruit juices, mustard, pork, truffles, and Roquefort cheese. Thus the WTO can rule that a country's food, envi­ronmental, or work laws constitute an 'unfair barrier to trade,' and penalize a country that does not remove them (see French 2000).

The year 1994 marked the fiftieth anniversary of the Bretton Woods institutions, prompting a worldwide review of their successes and failures. Generally the reviews were not favorable, leading, as we shall see in Chapter 13, to widespread protests and demon­strations against the World Bank, the IMF, and the WTO. Even the World Bank's own eval­uations were highly critical of its performance. In spite of lending some quarter of a trillion dollars to peripheral countries, one billion people in the world are desperately poor; fur­thermore, the disparity of wealth in the world between the core and periphery has doubled in the last thirty years. The richest 20 percent of the world's people now consume 150 times more of the world's goods than the poorest 20 percent (United Nations 1993:11).

One of the most profound influences of the Bretton Woods meeting is the accumu­lation of the debt of peripheral countries; some consider this 'debt crisis' the gravest one facing the world. The reasons for the debt crisis, and the possible impact it can have on everyone's lives, is complex but essential to understand. Overwhelming debt of peripheral countries is one of the major factors in many global problems that we will explore, includ­ing poverty, hunger, environmental devastation, the spread of disease, and political unrest.

Three things were particularly important in creating the debt crisis: the change over the last third of this century in the meaning of money; the amount of money lent by the World Bank and other lending institutions to peripheral countries; and the oil boom of the early 1970s and the pressure for financial institutions to invest that money.

Money, as noted in Chapter 1, constitutes the focal point of capitalism. It is through money that we assign value to objects, behaviors, and even people. The fact that one item can, in various quantities, represent virtually any item or service, from a soft drink to an entire forest, is one of the most remarkable features of our lives. But it is not without its problems. The facts that different countries have different currencies and that currencies can rise or fall in value relative to the goods they can purchase have always been a barrier to unrestricted foreign trade and global economic integration. Furthermore, there have always been disputes concerning how to measure the value of money itself. Historically money has been tied to a specific valuable metal, generally gold. Thus money in any country could always be redeemed for a certain amount of gold, although the amount could vary according to the value of a specific country's currency.

While the meeting at Bretton Woods would not lead to the establishment of a global currency, the countries did agree to exchange their currency for U.S. dollars at a fixed rate, while the United States guaranteed that it would exchange money for gold stored at


Fort Knox at thirty-five dollars per ounce. But in the 1960s, during the Vietnam War and the increase in U.S. government spending on health, education, and welfare programs, the United States was creating dollars far in excess of its gold supply, while at the same time guaranteeing all the rest of the money in the world. As a result, in 1971 the United States declared it would no longer redeem dollars on demand for gold. This totally divorced the American dollar and, effectively, all the other currencies in the world, from anything of value other than the expectation that people would accept dollars for things of value. Money became simply unsecured credit.

Since countries no longer needed to have a certain amount of gold in order to print money, money became more plentiful. How this happened, and the impact it has had on all our lives requires some elaboration.

We generally assume that governments create money by printing it. And, in fact, when money was linked to gold, there was a limit on how much could be printed. However, with the lifting of these restrictions, most money is now created by banks and other lending institutions through debt. We generally assume also, that the money that banks lend is money that others have deposited. However that is not the case; only a fraction of the money that banks lend needs to be in deposits. In effect, whenever a bank lends money, or whenever a product or service is purchased on credit, money has been created. In effect, then, there is virtually no limit on the amount of money that lending institutions can create; furthermore, the interest on the loan payments creates yet more money. To get an idea of what this means, in the United Kingdom in 1997 the total money stock—coins, notes, de­posits, loans, etc.—amounted to £680 billion (it was only £14 billion in 1963). Yet there was actually only £25 billion in actual coins and notes (Rowbotham 1998: 12-13). Thus 97% of the money had been created by banks and other lending institutions. Economists call this 'debt money' (Rowbotham 1998:5), or 'credit money' (Guttmann 1994).



Debt provides an important service to the culture of capitalism; it allows people to buy things with money they don't have—thereby fueling economic growth—and it requires people to work in order to pay off their debts. Furthermore it stimulates greater need for eco­nomic growth to maintain interest rates—that is return on investments. It also means, how­ever, that there is more money that has to be invested and lent, and a considerable amount of that went to peripheral countries. This proved to be a boon, not only for individual borrowers but also for peripheral countries seeking to develop their economies. The problems were that the interest on most loans was adjustable (could go up or down depending on economic cir­cumstances) and that debts began to accumulate beyond what countries could repay.

The second factor that led to the debt crisis was the operation of the World Bank. The Bank itself had a problem. European countries, whose economies it was to help re­build, didn't need the help. With a lack of demand for their services, what could they do? How could the institution survive? The Bank's solution was to lend money to peripheral countries to develop their economies. The plan was to help them industrialize by funding things such as large-scale hydroelectric projects, roads, and industrial parks. Furthermore, the bigger the project, the more the Bank could lend; thus, in the 1950s and 1960s money suddenly poured into India, Mexico, Brazil, and Indonesia, the Bank's four largest borrow­ers. From 1950 to 1970, the Bank lent some $953 million. We should not overlook the fact that these loans also benefited wealthy core countries, who largely supplied the construc­tion companies, engineers, equipment, and advisors needed to develop these projects.




But the success of the Bank in lending money created another problem—what economists call net negative transfers; borrowing nations collectively were soon paying more money into the Bank than the Bank was lending out. Put another way, the poor or peripheral nations were paying more money to the rich core nations than they were re­ceiving from them. Aside from the consequences for poor countries, this would lead ulti­mately to the bank going out of business—its only purpose would be to collect the money it had already lent out. This is not a problem for regular banks because they can always recruit new customers, but the World Bank has a limited number of clients to which to lend money. Now what do you do? The Bank's solution was to lend still more. Robert McNamara, past chief of the Ford Motor Company and Secretary of Defense during the John F. Kennedy and Lyndon B. Johnson administrations, more than any one person, made the World Bank into what it is today. During his tenure from 1968 to 1981, the Bank increased lending from $953 million to $12.4 billion and increased staff from 1,574 to 5,201. The result was to leave many peripheral countries with a staggering debt burden. There were other problems as well.

The third source of the debt crisis was the oil boom of the early 1970s. Oil produc­ers were making huge profits ('petrodollars'). The problem was that this money needed to be invested, particularly by the banks into which it went and from which depositors ex­pected interest payments. But banks and other investment agents had a problem finding investments. One of their solutions was to lend even more money to peripheral countries. The source of the debt crisis is illustrated in Figure 3.2.

Thus, by the late 1970s peripheral countries had borrowed huge sums of money and, with this infusion, were doing generally well. But then financial policies in the wealthy countries precipitated an economic collapse. With their own economies in reces­sion because of the increase in oil prices in the 1970s, core governments reacted by rais­ing interest rates. Countries such as Brazil, Mexico, and Indonesia that had borrowed large sums of money at adjustable, rather than fixed, interest rates suddenly found that





TABLE 3.2     External Debt of Selected Countries, 1980,1994, and 1998

Total External Debt

External Dept

as

(millions $)

% of GNP

Country

1980

1994

1998

1980

1994

1998

Bangladesh

4,327

16,569

10,100

33.4

63.4

23.7

Brazil

72,920

151,104

219,900

31.8

31.8

28.3

China

4,504

100,536

135,000

2.2

19.3

14.3

Ecuador

5,997

14,955

14,200

53.8

96.6

72.1

Egypt

19,131

33,358

24,400

89.2

78.3

29.5

India

20,582

98,990

84,300

11.9

34.2

19.6

Indonesia

20,944

96,500

144,700

28.0

94.7

153.6

Mexico

57,278

128,302

155,700

30.5

35.2

37.9

Nigeria

8,921

33,485

29,400

10.1

102.5

71.0

Pakistan

9,930

29,579

26,200

42.4

56.6

41.2

Peru

9,386

22,623

33,600

47.6

46.2

53.6

Philippines

17,417

39,302

45,300

53.7

59.7

69.6

Russian Federation

4,447

94,232

165,200

25.4

59.7

Tanzania

2,616

7,441

5,700

229.5

70.4

From World Development Report 1996:220-221; World Development Report 1999/2000: http://www. worldbank. org/wdr/2000/.

they could no longer pay back what they owed. Many couldn't even pay back the interest on the loans. Furthermore, an economic recession in the core nations decreased the demand for whatever commodities peripheral countries had for sale, further undermining their economies.

This all sounds largely like an economic problem that would have little effect on people such as you or me, or on a peasant fanner in Mexico, craftsperson in Africa, or small merchant in Indonesia. But, in fact, it has had an enormous impact, and it illustrates how global problems are tied closely to today's merchant adventurers. It is estimated that the amount of money owed by peripheral countries increased from $ 100 billion in 1971 to $600 billion by 1981 (Caufield 1996:134). And the problem hasn't improved: the total owed by countries in the periphery increased in 1998 to well over $2 trillion. Table 3.2 shows the increases in external debt for a few selected countries, along with the percent­age of their yearly GNP (total of goods and services produced) that the debt represents. For example, the external debt of the Philippines went from $17 billion in 1980 to more than $45 billion in 1998. Indonesia's debt went from some $20 billion in 1980 to $144 billion in 1998, or some 153% of its GNP.

This debt has not only created problems for the debtor countries; it has created a major problem for lending institutions and investors. There is an old joke that says that when an individual can't pay his or her bank debts, he or she is in trouble, but when a big borrower, such as a corporation or country, can't repay its debts, the bank is in trouble.


This, in brief, was the dilemma posed by the global debt crisis for private lending institu­tions and the World Bank.

The World Bank and the IMF responded to the debt crisis by trying to reschedule the repayment of debts or extending short-term loans to debtor countries to help them meet the financial crises. However, to qualify for a rescheduling of a debt or loan payment a government had to agree to alter its fiscal policies to improve its balance-of-payments problems; that is, it had to try to take in more money and spend less. But how do you do that? There are various ways, all creating, in one way or another, serious problems. For example, countries had to promise to manage tax collecting better, sell government prop­erty, increase revenues by increasing exports, reduce government spending on social pro­grams such as welfare, health, and education, promise to refrain from printing more money, and take steps to devalue their currency, thus making their goods cheaper for con­sumers in other countries but making them more expensive for their own citizens.

While these measures are rarely popular with their citizens, governments rarely refuse IMF requests to implement them because not only might they not receive a short-term loan, but agencies such as the World Bank and private capital controllers such as banks and foundations would also then refuse to make funds available. There is pressure on the World Bank and IMF to forgive or reduce debt, and forty-one of the poorest coun­tries in the world have been targeted for debt relief of some sort (see Jubilee 2000). But for most countries, the interest alone on their debts dictates economic, environmental, and social policies that are devastating.

First, debt means that countries must do whatever they can to reduce government ex­penses and increase revenue or attract foreign investment. Reducing government expenses means cutting essential health, education, and social programs. In Zambia, between 1990-1993, the government spent thirty-four times as much on debt service as it did on educa­tion ($1.3 billion compared to $37 million). Since then, educational spending has de­creased. The United Nations estimates that had severely indebted countries been relieved of their debts from 1997 to 2000, they could have saved the lives of 21 million children and provided basic education to 90 million girls and women (Human Development Program 1997). Yet recently, the IMF insisted that indebted countries impose user fees for health services and education. In countries where such fees have been imposed, visits to health clinics and attendance at schools, particularly for women, has declined dramatically.

The effects on environmental resources are equally devastating. To increase reve­nues, countries must export goods and resources. Since most indebted countries, particu­larly those in sub-Saharan Africa, have little industrial capacity, they must export raw materials such as minerals and lumber. This requires dismantling whatever environmental regulations may have existed. But since so many countries (including the wealthy coun­tries of the world) are in debt, each must adopt the same export strategy. Thus as each country tries to export more and more goods to raise revenue to pay debts they all have accumulated, the competition and glut of goods and resources drives down prices and re­duces the revenue that can be raised, while, at the same time, gutting natural and human resources (see Rowbotham 1998: 89).

Finally there is the question, where did all the money that was lent to peripheral countries go? Since 'capital flight'—money leaving the periphery—increased dramati­cally during the period of rising debt, the prevailing view is that loans were siphoned off


by the elites in the periphery and invested back in the core. For example, while the IMF and other financial institutions were lending billions to restore the Russian economy after the fall of communism, $140 billion (U.S.)—almost $2 billion per month—fled Russia during the first six years of market reforms. The World Bank estimates that between 1976 and 1984 capital flight from Latin America was equal to the area's whole external debt (Caufield 1996:132). Capital flight from Mexico alone from 1974 to 1982, invested in everything from condominiums to car dealerships, amounted to at least $35 billion. 'The problem,' joked one member of the U.S. Federal Reserve Board, 'is not that Latin Americans don't have assets. They do. The problem is they are all in Miami' (Caufield 1996:133).

The Power of Capital Controllers

One of the enduring tensions in the culture of capitalism is the separation between politi­cal power and economic power; in a democracy, people grant the government power to act on their behalf. However, in capitalism, there are, in addition to elected leaders, capital controllers, individuals or groups who control economic resources that everyone depends on but who are accountable to virtually no one, except perhaps a few investors or stock­holders. Their goals often conflict with state goals. As a merchant, industrialist, or inves­tor your goals are simple: you want to attain the highest possible profit on your investment, you want to be certain your right to private property is protected, and you want to keep your financial risks to a minimum. As Jeffrey A. Winters (1996:x) sug­gested, if capital controllers, who are unelected, unappointed, and unaccountable, were all to wear yellow suits and meet weekly in huge halls to decide where, when, and how much of their capital (money) to invest, there would be little mystery in their power. But, of course, they don't. Collectively they make private decisions on where, when, and how to distribute their investments. Furthermore, under this system of private property, capital controllers are free to do whatever they wish with their capital: they can invest it, they can sit on it, or they can destroy it. States are virtually helpless to insist that private capital be used for anything other than what capital controllers want to do with it.

The anonymity of investors and the hidden power they hold (or that is hidden from us) present problems for political leaders: while the actions of capital controllers can greatly influence our lives, it is political leaders that we often hold responsible for the rise and fall of a country's financial fortunes. When unemployment increases, when prices rise, when taxes are raised or important services discontinued or decreased, we can fire our governmental representatives at the next election. However, we do not have the power to 'fire' the board of General Motors or the investment counselors at Smith, Barney's or Chase Manhattan.

Though investors may not consciously coordinate their actions, their choices have enormous consequences for societies and state leaders. The reasons for this are obvious. States depend on revenue for their operation and maintenance. This revenue can come from various sources, including income taxes, corporate taxes, tariffs on imported goods, revenue from state-run enterprises (e.g., oil revenue), charges for state services (e.g., tolls), foreign aid, and credit, loans, or grants from abroad. In the case of peripheral coun­tries, much of this money comes from international lending agencies. But money from in­ternational lending agencies represents only a small percentage of the money that flows


into peripheral countries. Far more comes from capital controllers. As a final stop on our historical tour as merchant adventurers, let's assume the role of capital controller. You have substantial sums of money to invest; what do you do with it?

During the last half of the twentieth century there has been enormous growth in the number of people with capital to invest. Many are the very wealthy, the elite 1 or 2 percent who control vast resources, such as the major corporations of the world. Others, as men­tioned above, are responsible for deciding where to invest public moneys from multilat­eral organizations or state agencies. In addition, there are the less wealthy who save in banks and have pension funds or insurance policies. Investment capital from these differ­ent sources and held by capital controllers represents enormous power. Furthermore, with modern methods of communication most of this money is now extremely mobile: billions of dollars can be transferred from one place to another with the touch of a computer key. Capital was not always so mobile. For example, if you had money to invest fifty years ago in a textile plant, you might be constrained by import laws to build your factory in the country in which you wanted to sell your merchandise. In today's free trade environment, however, you can build your factory wherever you can get the cheapest labor. And if labor prices increase, you can simply move your factory production where labor is cheaper yet.

With an increase in free trade, standardized currencies, and economic globalization in general, capital can move freely all over the world. This can greatly increase the power of the capital controller, because if more regions or countries compete to attract capital in­vestment, you, as a capital controller, are more able to demand conditions that guarantee profits and minimize risk. If you could build a textile factory in a country with strong labor unions or one with weak ones, which would you choose? If one country had strong environmental laws that required you to control toxic waste, while another had few such regulations, where would you build? If one country had a high minimum wage, while an­other had none, where would you likely realize the highest profit? These issues have become subsumed under the term 'competitiveness'; that is, to be competitive in a global economy, a country must institute policies that allow it to compete successfully for mobile capital with other countries.

This fact determines social, economic, and political policy in countries and regions all over the world, and it affects your life as well. The mobility of capital means that social systems that produce profitable investment climates will attract the most invest­ment capital. What constitutes a favorable investment climate? Investment climate refers to the constellation of policies within a given jurisdiction (city, state, region, country) that either advance or inhibit the key goals of investors (profit, property guarantees, and low risk). A bad climate might involve the risk of the expropriation of private property, politi­cal instability, high taxes, strong worker's unions, strong environmental regulations, and social laws regarding minimum wage and child labor. A favorable climate can be created by low tax rates, tax holidays and other special incentives, weak unions, little environ­mental regulation, and few social regulations. Furthermore, capital (money) will flow away from locations (e.g., countries) that do not create profitable investment climates. This capital, constantly flowing in and out of communities, regions, or countries, repre­sents what Winters (1996:x) calls 'power in motion.'

The amount of power in motion is difficult to measure; the United Nations World Investment report for 1999 shows that in 1998 the amount of direct foreign investment—


money invested in such things as factories, equipment, and research facilities—reached $644 billion, up from $464 billion in 1997. On an average day the volume of money trans­acted around the world amounted to almost $2 billion. But the amount that flows into any given area can vary enormously; in 1995, for example, Africa received just 1.5 percent of the world's total.

The case of Indonesia offers a good example of what countries need to do to attract capital (Winters 1996). Indonesia fought for and gained independence from the Dutch in 1949. After a period of intense political competition President Sukarno, the victor in this competition, instituted a policy to free the country from foreign influence, carefully trying to balance power between the army and a strong Communist Party. Among his actions, he began nationalizing foreign firms. With their property at risk, and no longer guaranteed by the state, companies and investors began to pull their money out of the country. Conse­quently, the economy collapsed. Then in 1965 the military, under General Suharto, put down an alleged coup by the PKI, the Indonesian communist party. The subsequent blood bath led to the slaughter of hundreds of thousands of Indonesians believed to be sympa­thetic to or members of the Communist Party and removal of Sukarno from power.

With little money, the new ruler, President Suharto, faced the problem of rebuilding an economy in ruins. To solve the problem Suharto turned to economics professors at the University of Jakarta and assigned them the task of designing a policy to attract foreign investors. The first thing they did was to send signals through the press that they were changing economic policies and appointing people to government offices known to be friendly to foreign investors. Next, they applied for loans from multilateral institutions such as the World Bank and the IMF, hoping their approval would build the confidence of foreign investors in their country. Then, to assure capital controllers that their country was politically stable, the government suppressed all political dissent and limited the power of workers to mobilize unions. Finally, the government modified their tax structure to favor foreign investors. The result was that foreign capital began to flow into the country, and in the late 1960s and early 1970s the Indonesian economy began to thrive.

The story did not end there; what happened next illustrates how the power of capital controllers to create conditions favorable to investment is not absolute. Indonesia has large oil reserves, and when in the early 1970s oil revenue increased, Indonesia's need for foreign investment decreased. Since it had another source of money, the country became less friendly to foreign investors: taxes increased, preference was shown to domestic in­dustries, and bureaucratic procedures became more cumbersome for foreigners wanting to do business in Indonesia. As a result, foreign investments decreased dramatically. As long as oil revenues were stable, Indonesia had no problem. But in the early 1980s, oil prices plunged, and once again the Indonesian economy was close to ruin. Once again, in response to domestic political pressure from those who were suffering from economic de­cline, the government, still under the control of President Suharto, found itself instituting the measures outlined above to attract capital investors once again.

Foreign investment did indeed return to Indonesia, particularly in the growth of as­sembly plants; consequently until late 1997, the economy was doing well. However the collapse of the value of Asian currencies in late 1997 resulted in capital controllers once again pulling funds out of Indonesia, leaving its currency plummeting in value, unem­ployment spreading, and social unrest increasing (see Bello 1998). The IMF, seeking to


restore financial stability, forced currency re-evaluations and government cutbacks that made things even worse, forcing half the businesses in Indonesia into virtual bankruptcy, increasing unemployment tenfold, and sending real wages plummeting. Thus from 1996 to 1997 economic growth rate went from some 8% a year to -14% and unemployment climbed from 4.7% to 34% (see Firdausy 2000).

Thus virtually all countries today, core nations as well as those in the periphery, seek to create conditions to attract or keep capital investment, to create or keep jobs for the millions of people dependent on wage labor. To this end they work to maintain and promote the confidence of foreign banks and investors in the viability of their economy and the stability of their political regimes. But in an era in which capital may flow out of a country faster than it will flow in, the prospect of economic collapse is ever-present. What capital controllers give, they can just as quickly take away.

The major lesson of this analysis is that the economic goals of capital controllers— profit, a guarantee for private property, and little risk—can often conflict with larger soci­etal goals, such as relative economic equality and security, environmental safety, equal access to medical care, and equal access to food. In other words, making the world safe for capital sometimes means making it unsafe for people. Many of the global problems that we will examine in later chapters—population growth, poverty, hunger, environmen­tal devastation, disease, ethnic conflict, and the oppression of indigenous peoples—all, in one way or another, find their origins in the drive of capital to profit, to keep the profit, and to minimize the risks of capital investment. Having said that, we must also recognize that no other large-scale economic system has been able to do as well for so many, and that many of the vast gains in areas such as food production, technology and science, and medicine are directly attributable to the same economic drives. The important thing is to understand the dynamics of the system so that we can understand what we may need to give up and what we are able to maintain if we ever hope to solve global problems.

Conclusion

We began this chapter with the goal of trying to understand three historical developments that have had a profound influence on today's world and in the development of the culture of capitalism—the increase in the division of world wealth, changes in the organization of capital, and the increase in the level of economic globalization. We found that the division of wealth has grown enormously, between both countries and areas of the world. In 2000 over 1.2 billion people lived in absolute poverty, earning the equivalent of less than one dollar per day. The three top ultra-rich people, including Microsoft's Bill Gates, own more than the gross national product of the forty-eight poorest nations combined. Fur­thermore, the gap is increasing. In the UN World Development Report of 1997, of the 173 countries in the study, 70 to 80 have lower per-capita incomes than they did 10 or 30 years ago. People in Africa consume 20 percent less than they did twenty-five years ago. The UN report pointed out that the 20 percent of the world's population living in the wealthi­est countries consume 86 percent of the world's goods and services. The poorest 20 per­cent consume only 1.3 percent.


The organization of capital has changed dramatically. We began our journey with capital largely in the hands of individual merchants, family groups, or limited partner­ships and ended with the era of capital controllers, such as transnational corporations, multilateral institutions, and investment firms. In 1400, it might take a global merchant a year's journey from one area of the world to another to complete an investment cycle of buying and selling goods; today a capital controller can transfer billions from one area of the world to another without ever leaving her or his computer.

Finally, we have seen global economic integration increase to the extent that global trade is easier today than trade between adjacent towns was in 1400, as trade treaties dis­solve regional and country boundaries, freeing capital to migrate where it is most likely to accumulate. Furthermore, we have seen how global financial and multilateral institutions such as corporate controllers, the World Bank, the International Monetary Fund, and the World Trade Organization function to open international markets to corporations and force countries to dismantle environmental, social, and labor reforms.

Our analysis of how the culture capitalism functions is incomplete, however, until we understand the development and function of the nation-state, how it has functioned in the evolution of the culture, how it mediates between the consumer, laborer, and capitalist.









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