Capitalism - Big Ideas
That Changed The World
New York city is the epitome of capitalism, an idea that connects it to businesses and people across the globe and affects every waking minute of our lives.
Joseph Stiglitz, a Nobel Prize for Economics winner and top economic adviser to President Clinton, should be fully in favour of capitalism, but he isn't. While he recognises capitalism as the only practical way to run an economic society, he is worried about a particular brand of free-market capitalism that is being promoted around the world.
To understand the risks of global economies we need to trace the idea of capitalism itself, and where better to do this than in New York. From the very first settlers, who bartered and traded in Soho, to the high-finance trading on Wall Street, we see a history of huge growth and the creation of massive wealth. New York symbolises all that is great and all that is deplorable about capitalism.
The Greeks first cut metal into coins and invented money, and it is money that has remained at the heart of capitalism ever since.
So, what is capitalism? To understand this we have to understand the market. What is the first thing we see in the market? The prices! But who sets these prices? We all do, through the law of supply and demand and with competition.
Ever since the Greeks, people have wondered what the motive, that drove this system, might be. Some businessmen like to claim that it was altruism that drove them to create wealth, some thought the system was so perfect that God must be behind it, but then a Scotsman came up with a much more sobering insight. Adam Smith was the first person to try and really understand how the capitalist system works. Smith's book "The Wealth of Nations", was first published in 1776, the same year as the American Declaration of Indepedence. Even as an American, it is not easy to say which is of greater historical importance. The declaration sounded a call for a new society dedicated to "Life, Liberty and the Pursuit of Happiness". Adam Smith explained how the economics of this society would actually work. For the first time in history industry, business and commerce were taking place on a massive scale.
Smith realised that certain things allowed this to happen. Things like the rule of law, the nation state and banks and institutions created the conditions for a thriving market. These factors gave people confidence to invest their money and to trade.
But, there was something even more mysterious, something Adam Smith called the invisible hand and explains this in his quote:
"While every individual was working for his own labour he intends only his own gain and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention, that is the well-being of society as a whole."
Adam Smith's work has been used to back unregulated markets ever since it was first published. But, in fact, it is full of warnings. "capitalism" he said "doesn't just generate wealth, it could create huge inequality, making some very rich and others very poor".
At the turn of the 19th century, one of the biggest and most important changes in human history began. The competition amongst young entrepreneurs fuelled innovation, this led to investment in new technology, enabling the modern industrial economy. As factories sprang up, labourers, in their millions, moved from farms to cities. Money was driving the most rapid social changes humans had ever seen, transforming landscapes and the way they lived. It was in the United States, with no aristocracy and no class system, that the entrepreneurial spirit would truly flourish.
The capital that built up in London made possible the growth of the British Empire. As the Empire grew, capitalism spread to all parts of the world. Britain protected it's own interests and forced trade on it's terms, and in doing so, imposed a trading system that was far from free. The legacy of these inequalities and hypocrisies remains with is today.
In an attempt to protect this trade and trade routes, economic competition grew into something worse. The 1st World War, while not caused by this colonial protectiveness, was certainly exacerbated by economic competitiveness.
On 23rd Oct 1929 everything seemed fine. In fact, one top American investor said "Now is the time to invest". How wrong could he have been. On Oct 24th 1929 a sudden loss of investor confidence sparked the famous Wall Street crash which brought about the great depression. The average share price had peaked at 386.1 on 3rd Sep 1929 and by 8th July 1932 it had collapsed to just 40.56. This brought on a loss of confidence in capitalism itself.