Thinking

A Natural History of Capitalism

Is there not in short, whatever the society and whatever the period, an insidious law giving power to the few? An irritating law, it must be said, since the reasons for it are not obvious. And yet, this is a stubborn fact, taunting us at every turn. We cannot argue with it; all evidence agrees.” [Braudel, Civilization and Capitalism: The Wheels of Commerce.]

[Pictured above: the solid lines are British controlled routes, the dotted ones are the rest of the European powers.]

I have previously written about the age of the Genoese bankers, and the somewhat naive take on Capitalism that we encountered with Giovanni Arrighi, who introduced me to Fernand Braudel. My primary interest was to understand the long-term dynamics of the American century. I thought I went out on a limb arguing against American decline. In relating this to the ‘signal crises’ of the American cycle–the switch to finance and speculation since 1973–Arrighi et al see the end of hegemony as imminent. I had strong disagreements with this analysis for other reasons, but I too fell for the choreography of the cycles of accumulation: A merchant phase based on trade, followed by a phase of industrial expansion, and finally a period of financialization. Until this summer, that is. Having read and re-read the three massive volumes of Civilization and Capitalism and the two of The Mediterranean: and the Mediterranean World in the Age of Phillip II, I have gained a more subtle understanding of Braudel’s thinking about the world-economy in the early modern period. [All quotes are from Braudel unless otherwise specified.]

I have to confess I now regard my original take on the matter as exceedingly formulaic and–it must be said for the sake of honesty–somewhat stupid. I am going to argue that Arrighi, Kevin Phillips, and a host of other brilliant thinkers not only read too much into the superficial choreography, they do so because they miss an essential, unchanging feature of Capitalism. To elaborate this point, we will need to reintroduce and elaborate some key notions, the organizing principles of Braudel’s thought: world-economy and its vertical and horizontal structure, Capitalism, the superstructures of hegemony, and the precise nature of control exercised by the centre.

World-economy

The world-economy is the true monster of history. It emerges over very long periods of time and its boundaries change very slowly. It “only concerns a fragment of the world, an economically autonomous section of the planet able to provide for most of its own needs, a section to which its internal links and exchanges give a certain organic unity.” It is the highest plane of the economy, a great sounding board that carries economic vibrations: there is a substantial degree of price coordination.

There is a distinct structure to a world-economy. “It is marked by hierarchy: the area is always a sum of individual economies, some poor, some modest, with a comparatively rich one at the centre. There are inequalities, differences of voltage which make possible the functioning of the whole.” At the vibrant heart of the system lies the core. In this privileged area, economic activity is robust; incomes and prices are high. Most of the wealth and power is concentrated here. A world-economy always has an urban center of gravity, a leading city. Throughout the core there is an ‘achipelago of glittering towns’, but they are subordinate to the Metropolis and act as its accomplices. The leading city has a functional role in a capitalist world-economy: it is the central control tower.

Dominant cities do not lead forever. When the center of gravity of the world-economy shifts it is only a matter of time before a new metropolitan site become dominant. “Such shifts, whenever they occur are always significant; they interrupt the calm flow of history and open up perspectives that are the more precious for being so rare. When Amsterdam repaced Antwerp, when London took over from Amsterdam, or when in about 1929, New York overtook London, it always meant a massive historical shift of forces, revealing the precariousness of the previous equilibrium and the strengths of the one which was replacing it.”

Surrounding the core of the world-economy is a vast periphery. This is not a boundary, it lies very much inside the world-economy. It refers to all the zones subordinate to the core. All the non-local economic vectors here point to the centre. “At the ground level and sea level so to speak, the networks of local and regional markets were built up over century after century. It was the destiny of this local economy, with its self contained routines, to be from time to time absorbed and made part of a ‘rational’ order in the interest of a dominant city or zone, for perhaps or or two centuries, until another ‘organizing centre’ emerged; as if the centralization and concentration of wealth and resources necessarily favoured chosen sites of accumulation.” [Emphasis in the original]

This core-periphery structure is also about the international division of labor which “cannot be described as a concerted agreement made between equal parties and always open to review. It become established progressively as a chain of subordinations, each conditioning the others. Unequal exchange, the origin of the inequality in the world, the invariable generator of trade, are longstanding realities. In the economic poker game, some people have always held better cards than others, not to say aces up their sleeves. Certain activities have yielded more profits than others: it was more profitable to grow vines than wheat.” Furthermore, we always live under ‘the weight of history’. “[T]he past always counts. The inequality of the world is the result of structural realities at once slow to take shape and slow to fade away.” Capitalism–the accumulation of great wealth–takes a long time. “Success is never the result of a single throw of the dice.” It requires piling advantage upon advantage, over and over again. And accumulated advantages survive for very long periods. Even today, Netherlands has the second highest financial assets per capita in the world, second only to the United States. In 1785, almost two centuries after Amsterdam eclipsed the Great bankers, five tons of gold was still arriving every year in Genoa as income from their overseas investments. A descendant of the Genoese banker Nicolò Grimaldi is still today on the Forbes list

The vertical structure

This jigsaw puzzle of zones is interconnected, but at different levels. The horizontal picture–which looks like an egg prepared sunny side up–is only a two dimensional picture so to speak. The subordination of the periphery by the core takes place from a great height, via remote control. This brings us to Braudel’s threefold vertical division of the world-economy. It would be best to use an example to illustrate this.

Think of the grain market in, say, sixteenth century European world-economy. The overwhelming bulk of all grain that is produced is not exchanged; it is either consumed by the peasant’s household or goes into the coffers of the manor without ever reaching the market. This is certainly part of the material economy but does not show up in the market economy which is one floor above the zone of material life.

A portion of the grain produced would be exchanged in the local or perhaps regional markets. The flow of grains to the towns from their catchment area–their neighbouring countryside–would be a market phenomena. Thousands of peasants would bring their grain to the market, the invisible hand would work its magic and the price would be determined competitively. Hundreds of thousands of small time traders, pedlars, and shopkeepers would be involved in these transactions but the big merchants would stay away from this petty business: there is no scope for large-scale profits.

Big merchants would be involved at a higher level, as when the grain would travel long distances, say from Sicily to Genoa or Poland to Antwerp; or when grain would be stored in massive warehouses in times of plenty to sell later when the price is high. These big merchant firms would have agents in dozens of towns keeping track of opportunities for profitable trades and the potential to monopolize certain key markets; carry out their procurements and loading, make payments on behalf of the firms, negotiate with regional powers that guarantee protection of their shipments and so on and so forth. They would deploy super fast ships and horses to secure business intelligence to exploit fleeting opportunities for vast profit. Enormous financial resources would need to be deployed over very long periods of time and very long distances: to store grains for long periods, insure and deploy massive ships to carry the grain to starving cities for a fortune et cetera. Only the big fish can play this game. This is not the market of the economics textbook: this is not about competition, it’s about domination and control. This is the zone of the anti-market–what we today call Big Business–the real home of Capitalism. In Braudel’s thought, Capitalism is not an economic system at all. It is the top floor of the system, where insiders play the game from a very privileged position. More often than not, by Capitalism, Braudel means big merchant firms and deep pocketed financiers who hold the strings behind the scenes.

Remote control

So, Capitalism gets involved only when there is potential for large-scale profits. It lets the small-fry run the rest of the economy. Indeed, even today small businesses account for half of the market economy, which itself is about half of all material production in the industrial world. This ratio was very much more skewed towards the lower levels in the early modern period. With its relatively modest resources, how is it that Capitalism managed to exercise such a significant degree of control over the world-economy??

Braudel answers this question with a brilliant analogy. Imagine a massive slab of marble lying on the ground. A few men can move it into position using pulleys and wheels and a sculptor can carve a statue of Athena using a chisel. Now, the marble represents enormous weight and energy. It can be controlled with ease because it is inert. The massive zone of the world-economy in the lower levels is similarly inert and subject to control from above for precisely the same reason. The levers in this case are money, credit, insider information, political connections, and violence.

Nice analogy, you may say, but what does this mean in concrete terms? What is the nature of this control? Why is there always a leading city where all the nonlocal vectors of the world-economy point? And why one city at a time? In order of appearance: Venice (1380-1500), Antwerp (1500-1557), Genoa (1557-1627), Amsterdam (1627-1780), London (1780-1929), New York (1929-). The reason goes to the heart of the nature of Capitalism. To rationalize and harness the world-economy, Capitalism inserts itself at the center of gravity. Big merchant-financiers flock to the City. It is here that questions of protection are negotiated with the holders of politico-military power. Information flows in from all corners of the world-economy. Orders flow in the opposite direction. The merchant located at the center can keep track of developments all over the periphery and the decision making at the center. Let me illustrate this with the very first example of remote control in the history of the European world-economy.

Around 1200 CE, the prenatal European world-economy was distinctly bipolar. The northern pole was centered at Bruges, through which the bulk of the trade of the already prospering late Medieval Baltic and North Sea littoral passed. This was mostly organized by German traders who would later coalesce to form the Hanseatic league. The second pole lay in the Italian city-states; where Venice, Genoa, and Florence were already competing for supremacy. It’s likely that the northern pole was richer, it certainly had a larger market size. But the Italian merchants operated in the Levant dominated by the highly advanced traders of the Islamic world, then in the autumn of its golden age. They learned quickly and accumulated wealth and know-how. They were learning from the most advanced players of the day, and starting to gain control of key trades in the Levant and with the north. Indeed, the Genoese were already organizing the Champagne fairs, that early center of gravity of the European world-economy.

So it came about that Capitalism developed earlier in the Italian city-states. At the point of first departure–when the first of the Genoese ships landed in Bruges in 1277–the advantage already lay with the Italian merchants. They had the connections at all points of the profitable long-distance trade. They had more financial depth and hence could stomach more risk. They were already in control of state power. They used their naval power to secure key monopolies. For instance, the alum needed for the dying of cloth in Flanders–which was the site of Europe’s first major industry–was procured from Asia minor and monopolized by Genoese merchants. Whence, they quickly consolidated control over the north-south trade, and even gained a foothold in the trade along the northern routes. Most importantly, they gained control over the credit machinery of European trade. So it was that the center of gravity of the European world-economy shifted to the Italian city-states.

The Italian merchants were to reign uninterrupted till the end of the sixteenth century. They cornered a lion’s share of the opportunities for large scale profits. They were the trend setters and led the way in business innovation. They established monopoly control over key trades and routes; in the north, in the Levant, in the Ottoman empire, through the Red sea and the Persian Gulf; going as far as Surat, the entrepôt then at the center of the Indian world-economy. Through their bills of exchange, and their capital they called the tune of European trade. They underwrote the voyages of discovery and the through their control of credit, they controlled the flow of specie. They were financiers of the all the princes of Europe and underwrote Spanish high imperialism. Just as today, apropos the crises in the eurozone we can see the strings being pulled by Wall Street–the Institute of International Finance is a front for the hedge funds and New York bankers who hold the bonds–the Italian merchants were present behind the veil in every situation pregnant with profit.

The iron law of Capitalism

Why is there always a strong state at the center of the world-economy? Consider the nature of the protection racket: the nexus of capital power and politico-military power. The evidence here is overwhelming.

In the fifteenth century, Venice enjoyed naval supremacy in the eastern Mediterranean, had a string of colonies dotting the coastline, constructed naval bases, batteries, and captured strategic choke points like Corfu at the mouth of the Adriatic. In the sixteenth century, we have already seen the role of the Great bankers of Genoa in the period of Spanish high imperialism. In the period of Dutch hegemony, Holland literally deployed half the European fleet on her own; imposed a monopoly on production and shipping of fine spices–the real big business of the day–virtually destroying large parts of the East Indies in the process; exercising an even more brutal form of colonial domination than the Portugese who were overstretched just to impose naval supremacy in the Indian ocean.

With Great Britain, we move on to a more robust form of domination. London gained prominence over Amsterdam in the 1780s by a confluence of powerful factors. The pound sterling had been stabilized at a fixed silver content with the financial reforms of the 1690s and had been a hard currency for almost a century. Indeed, it wasn’t to be devalued until 1931. The Bank of England, established in 1694, acted as a lender of last resort and stabilized the British banking system, reinforcing the dominance of the City of London. Most importantly, the English financial revolution (1688-1756), endowed the fiscal state with unprecedented balance and stability. The key innovation was long-term debt which could be bought and sold on the market. This enabled the crown to consolidate her debt and manage it just by making interest payments, which were tied to indirect taxes on the burgeoning entrepôt trade of London and the growing national market. Indeed, England would routinely borrow as much as the rest of the sovereigns of Europe combined, without any trouble whatsoever. With the rise of the national economies and the modern fiscal state it was only a matter of time before Holland–which lay between the successful city-state of the past and the rising territorial state of the future–was eclipsed.

Over the larger checkerboard of the now globe spanning European world-economy, England had already gained the upper hand. [See map above.] She was firmly in control of the triangular trade across the Atlantic which was fast gaining in importance and which she was to consolidate further after the American revolution. The Dutch were summarily excluded from this highly profitable venture. On the other side of the globe, she had already muscled out other European competitors from the Indian subcontinent. In 1757, she had acquired the giant and prosperous territory of Bengal and dealt a terminal blow to French ambitions in the subcontinent. Bengal was, in fact, key to the Chinese market, exports from which they needed to settle their deficits in yet another triangular nexus. Note that all this kinetic activity was entirely under the auspices of the East India Company. The company was an official monopoly backed by the crown, endowed with state powers, and controlled by the City of London. We are talking about an epoch when Capitalism carried its own sticks and the nexus of capital and military power was explicit and institutional. Parenthetically, note also that all this took place before the industrial revolution began in England in the 1830s. Whence, to locate the root of British hegemony in the industrial revolution is flat out wrong.

Finance: remote control par excellence

Pure finance–pioneered by the Genoese in the sixteenth century–is just the most sophisticated form of remote control. Its superiority comes from the fact that the exercise of control is automatic. It is the most refined strategy of Capitalism, reducing the exercise of control to its very essence. It is the allocation of all the dirty details of accumulation to servants. It maximizes maneuverability–making it easy to move in and out of a situation quickly–and insulation: the exercise of remote control never fails to enrage those who are being subjugated to ‘rationalization’ from an organizing center. It is in this sense that it is evidence of the maturity of a cycle of accumulation. Speculation is the fallout of an over accumulation of capital. It gains steam when there is too much money in the coffers of moneyed men to find profitable deployments. This was true in Genoa in the sixteenth century, Holland in the eighteenth, England in the late nineteenth, and the United States since the 1970s. 

So it was that when London took over from Amsterdam, Dutch Capitalism underwrote the transition. Almost a fifth of all capital controlled by the City of London was Dutch. This underscores the cosmopolitanism of Capitalism: “Capital laughs at frontiers”. The Dutch switch to finance was nothing more than the perpetuation of an already established Capitalism adapting to a realignment of forces: “Was this burst of financial activity an aberration as some historians, taking a moral tone, have suggested? Was it not rather a normal development? Already in the latter part of the sixteenth century, another period when capital was superabundant, the Genoese had followed the same itinerary, as the nobili vecchi, the official lenders to the King of Spain gradually withdrew from commercial activity. It looks very much as if Amsterdam, repeating this process, dropped the bird in hand to go chasing shadows, abandoning the money-spinning enterepôt trade for a life of speculation and retierdom, and leaving all the best cards to London, even financing her rival’s rise. But then, did Amsterdam really have a choice? Indeed had the rich Italians of the sixteenth century any choice? Was there even the remotest chance of stopping the rise of the North? At all events, every capitalist development of this order seems, by reaching the stage of financial expansion, to have in some sense announced its maturity: it was a sign of autumn.”

Perhaps this is a good point to take stock of what we have learned so far and relate this back to the choreography suggested by Arrighi et al. We see that finance is just a strategy used by Capitalism–a sophisticated one that only appears after a long gestation period no doubt–but just one of the strategies nonetheless. It would be wrong to regard this as the last of a linear stage. The transition from one hegemony to the next is being driven by more fundamental factors as we saw in the case of Holland to England.

This is not a sign of decadence at all, it is a sign of agnosticism. For if there is an enduring feature of Capitalism, it is this.

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3 thoughts on “A Natural History of Capitalism

  1. Michael John says:

    The author of this post begins with the claim that Giovanni Arrighi’s presents a “somewhat naive take on Capitalism.” I should like to point out that, in his book The Long Twentieth Century, Arrighi does offer an analysis of the whole of capitalism. Arrighi’s analysis is self-consciously limited to only the top layer of finance capital and its relationship with political power. He is well aware that there is much more to capitalism then this one single element.

    Also, the industrial revolution in England did not begin in the 1830s. The typical date, found in countless texts, for the “first” industrial revolution are 1760 to 1830. This is T.S. Ashton’s (1948) dating.

  2. So, Arrighi, Braudel, and I are all in complete agreement that capitalism is ‘merely’ superstructure. Capitalism acts on the much larger edifice of natural economies from a great height. That isn’t my beef with Arrighi.

    My beef is that Arrighi subscribes to a cyclic theory of capitalist dynamics: that the American switch to finance (like that of the British, the Dutch, and the Genoese) is a sign of American decline. I don’t think so. The politico-military foundations of American hegemony are based on firmer ground. Namely, the enduring geostrategic advantage of an offshore location, coupled with a homeland of continental dimensions endowed with tremendous war-making potential.

    The central feature of the current system–somewhat hidden but completely obvious once pointed out–is the capture of this natural global maritime hegemon by a merchant oligarchy. It is this arrangement with endows the system with tremendous stability. We should be wary of premature pronouncements of the end of American century, like those put forward by Arrighi et al.

  3. Pingback: The Great age of Genoese finance (1557-1627) | homelessholocaust

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