Capitalism and Inventions — Part 1

Understanding how capitalism works requires understanding its history. The second chapter of the book The Capitalist’s Bible was exactly about the history of how capitalism had started and became more and more prevalent and important part of our civilization.

It all starts from the need for humans to trade. We humans need number of different things in order to lead our daily lives; grain, clothes, tools, you name it. However, we cannot go about our lives producing each and every little thing we need in our daily lives. If simply do not have the capabilities and resources as an individual to do that. Therefore, we trade: sell what we have, and buy what we do not have. In order to make trading easier, currency was invented. Currency lets one trade with the other even if the exact supply and demand do not match between them, meaning if the other person is looking for cotton and has only paper and meat, let’s say, and I am looking for grain and only have fruits, without the help of currency I and the other person cannot satisfy our needs with each other. With the currency, the process of satisfying one another’s needs become asynchronous.

Fast forward about two thousand years (from when metal currency was invented in the west of Lydia in the 7th century BC to when spice trade was at its peak in the 15th century AD), we now have the concept of money and all these formal and informal rules that act as contracts and and financial instruments that allow international trade. Up until when Mercantilism was popular, the concept of money was bound to physical things like gold and silver. All people (and nation as well) could do to increase their wealth was increase the influx and decrease the outflow of money. This resulted in tariffs and need for control on the quality and quantity of produces, which resulted in a birth of centralized government. The governments sought to increase their wealth by colonizing other nations that could produce things cheaper for them, which then they could go and sell to others resulting in more influx of wealth. The Dutch during the period between 1648 and 1672 are often seen as the first modern capitalists and what they did by introducing financial instruments and transportation laws allowed them to dominate the international trade scene.

This interestingly leads to the topic of investment. The Dutch, being the first modern capitalists, saw the need for the continuous accumulation and effective preservation of capital. The tulip market or mania is one of the earliest phenomenons portraying such evolution of capitalism. Without going too deeply into the history of how tulip mania came about, it was a symbol of luxury item and became more and more coveted and therefore rare. When supply was short and demand was high, the new invention was the futures. Quite literally, one would sell the future prospects of a thing, in this case the future value of tulips. Tulips bloomed in April an May, and during the rest of the year, tulip traders signed contracts that they would buy the tulips at the end of the year. The result of this was the infamous tulip mania, the first recorded speculative bubble.

Now fast forward to the 17th century, we have England as a strong mercantilist nation based on the finite overall quantity of wealth. The new player was America, or then the colony of America, and it was kind of a different breed. Many came to America looking to find easy money everywhere but quickly realizing that there was no easy money everywhere, some hustling was done. A guy named John Rolfe from England smuggled out seeds of tobacco to plant in America. He eventually married the famous Pocahontas and died quickly but the tobacco he brought became a large source of wealth for the people in America.

The new inventions that came about this time of the history was not the meta concepts like the futures contract but more of a make more out of little kind of inventions. A guy named Richard Arkwright around the 1770’s invented the spinning frame, which essentially made the process of transforming raw cotton to cotton lap more much more efficient and automated. The subsequently invented water frame also allowed inexpensive cotton-spinning.

Then, James Watt from Scotland in 1766 invented the first operational steam engine. His partner, Boulton, and Watt started manufacturing the steam engine and was a great commercial success to say the least. Steam engines eventually greatly improved transportation and opened doors for the Industrial Revolution.

In 1789, this guy named Samuel Slater got on the boat from England and basically with the memorized version of the blueprint for the textile mill immigrated to America and started textile factories in America, now being remembered as the “Father of the American Factory System”. What was so interesting to me is that what China is now was essentially America back then, smuggling new technologies out of the already advanced countries like England and hurriedly copying things to make it work.

It already became a much longer post than I intended so I am going to stop here without finishing the whole story but what essentially happened was that America was born and became the gigantic nation that it is now with the help of Industrial Revolution, wars and the financial “inventions” to help people make wealth when there was no simple way of making more wealth. More to come later…