Chapter Four
Drawing up his will in 1685, William Petty felt it necessary to begin by disclosing the precocious intelligence that had made him famous: “In the first place I declare and affirm that at the full age of fifteen years, I had obtained the Latin, Greek and French tongues, the whole body of common arithmetick, the practical geometry and astronomy, conducing to navigation, dialling [surveying], etc., with the knowledge of several mathematical trades.”
At the time of writing, he was sixty-two years old, and in poor health with less than two years to live, yet for all his pride in past achievements—his professorship of anatomy at Oxford University, his readership in music at Gresham College, London, the annual income of £15,000 he earned from his investments in Ireland—it was still the future that most concerned him: “I intend to attend the improvement of my lands in Ireland, and to get in the many debts owing unto me, and to promote the trade of iron, lead, marble, fish and timber whereof my estate is capable: and as for studies and experiments, I think now to confine the same to the anatomy of the people and political arithmetic, as also to the improvement of ships, land carriages, guns and pumps, as of most use to mankind.”
A portrait painted at the height of Petty’s success shows him, full lipped and double chinned, gazing out with an expression of lazy arrogance from beneath half-closed eyes. It is not difficult to guess at the piercing intellect that drove his enemies to frustration and even thoughts of murder. To his friends, however, he was a generous, witty companion. “His eyes were a kind of goose-grey, very short sighted and as to aspect beautiful,” wrote his friend John Aubrey, the Oxford antiquarian. “They promised sweetness of nature and they did not deceive, for he was a marvellous good natured person.”
Out of his fertile mind came plans for mass-produced clocks, improved “Chariotts, new riggs for shipps, a Wheele for one to run races in,” and a “double-bottomed ship,” the first working catamaran in Europe. But he preferred to think of himself as a scientist, following the principles of practical experimentation laid down by Francis Bacon, and in 1660 he became a founding member of the Royal Society, Europe’s oldest scientific body. On scientific grounds, he deliberately chose “to express my self in terms of Number, Weight, or Measure; to use only Arguments of Sense, and to consider only such Causes, as have visible Foundations in Nature.” This method gave birth to what he thought of as his greatest achievement, “political arithmetic,” a combination of statistics and economics.
As a statistician, Petty revealed himself to be imaginative though over-adventurous in his use of information. Using tax returns, housing construction figures, and the newly published data of births and deaths collected from parish registers, he extrapolated wildly to estimate the population of London, then less than half a million, to be somewhere between six hundred thousand and more than seven hundred thousand, and for England, a figure in excess of seven million, about one third more than the real total.
As an economist, however, he came close to genius. In all his writing, but especially in three essays written between 1662 and 1682, A Treatise on Taxes and Contributions, Verbum Sapienti, and Quantulumcunque concerning money, he showed an almost intuitive understanding of the connections between inflation and money supply, taxation and rates of interest, international trade and foreign exchange markets, and the availability of credit and the velocity at which money circulated. There was no overarching theoretical explanation, merely a series of practical examples to illustrate how things worked. In other words, he was describing an already existing capitalist economy. And compared to the static mercantile model of the time that pictured economies as closed systems designed to accumulate money, his ideas are startling in their scope and assurance.
The son of a village clothier, Petty owed his wealth and his knighthood to nothing but his own energy and talent. He paid for his education and an apprenticeship as a mariner by gambling and writing letters for the illiterate. His cleverness was so intolerable, however, that on his first voyage his fellow sailors dumped him on shore in Normandy after he broke a leg. Characteristically, Petty made the most of the opportunity to learn French, math, and logic at the nearest Jesuit college, then trained in medicine at Amsterdam and Paris.
His unique combination of drive and intelligence first became widely known in 1650 when the body of Ann Green was brought to him as professor of anatomy at the University of Oxford. She had been hanged for the murder of her newborn baby, a crime she denied vehemently, claiming that the child was stillborn. After dangling from the rope for fifteen minutes where it was noted “divers friends of hers and standers by . . . hung with their whole weight upon her” to hasten her death, she was cut down and taken to be dissected in the interests of science. But, as Petty inspected the corpse, he heard a rattle in her throat. Although the body was cold and the muscles rigid with the agony of strangulation, he “wrenched open her teeth which were fast sett and put in some strong waters.” Her choking and coughing showed there was still life present. Immediately he set out to resuscitate her, massaging her feet and clenched hands, taking blood, giving an enema to set her intestines working, and, as she began to show signs of revival, putting her to bed with another woman to keep her warm.
Within a week Petty’s treatment restored Ann Green to full health—she would live another twenty years, get married and have three children—and his success caused a sensation. Reprinted in numerous pamphlets, the meticulous record he kept of remedies, their effectiveness, and his patient’s response, earned him a reputation that, as he liked to boast, could have made him a fashionable doctor. Instead he chose to accept the post of physician-general to the army that Cromwell sent to Ireland in 1652. It was a shrewd decision. Following in the army’s bloodstained wake, Petty would survey all of Ireland, acquire huge estates, and make his fortune.
Petty’s political arithmetic was not conceived in a vacuum. Many of his examples were drawn from Holland’s sophisticated banking and stock exchange structure that enabled it to finance a gigantic trade with the Far East and establish trading settlements in South Africa, Connecticut, and New Amsterdam on the Hudson River. He was aware also of the economic policies of Louis XIV’s chief minister, Jean-Baptiste Colbert. But while Colbert was a mercantilist trying to trap money inside France, and even the Dutch economy was based on the monopolistic trading pattern of medieval Venice and Renaissance Florence, Petty developed into a relentless free trader, dedicated to the principles of unfettered competition and to the operation of what Adam Smith would a hundred years later call “the marketplace” to determine prices, exchange rates, and the efficiency of production.
At the heart of Petty’s work were two complementary ideas: land had to be treated as capital, and only labor could release its value. The relationship was like sex, “labour is the father and active principle of wealth, as lands are the mother.” To make the most of England’s land and labor, he suggested three basic principles drawn from Dutch experience. The significance of Petty’s proposals, put forward mostly in the 1660s, is that they delineate the precise point at which capitalism and private property can be seen to have merged.
The first, perhaps unexpectedly, was to allow “liberty of conscience” to everyone, whether Puritan, Catholic, or Jew. Petty’s reasons were both social and economic. The sort of people who challenged orthodox religion were “for the most part, thinking, sober, and patient Men” and therefore useful to society, but they also conferred a competitive advantage because any economy would benefit from the ideas of ambitious outsiders who took a different view of the world from “men of extreme Wealth and Power.” His second and third ingredients were, however, purely economic.
To demonstrate how to make full use of the potential wealth in land, Petty made a distinction between viewing it simply as a static resource—England’s fourteen million farmable acres had a sale price of £144 million by his estimate—and treating it as capital. In the latter state, once its value was released by labor, it created multiple benefits. The wages it paid sustained families, the profits it generated created further investment, and the taxes on its operations financed government. Assessing these variables, Petty estimated that the capital value of England’s acres amounted to £417 million, almost three times the resale value. That sum could be increased still further, he suggested, by fairer taxation, more efficient agricultural production, and the establishment of a land registry to remove any possibility of doubt about the title to a property, “for there can be no incouragement to Industry, where there is no assurance of what shall be gotten by it.”
Once land was viewed as capital, however, an adequate supply of money became essential for its full value to be realized. Anticipating Milton Friedman’s monetarist approach to the same subject, Petty declared, “For Money is but the Fat of the Body-Politick, whereof too much doth often hinder its agility, as too little makes it sick . . . so doth Money in the State quicken its Action.” The kingdom possessed only six million pounds in gold and silver, by his estimate, and two thirds of that total was saved by tenants simply to pay rent on land. There was, as a result, too little money being invested in the improvement of fields, animals, and crops, in transport and accessibility to markets. The knock-on effect was to diminish returns that could be earned in the form of profits, wages, and taxes, as well as in the increased value of the land itself. Petty’s final ingredient, therefore, was a national bank, “the use whereof is to encrease Money, or rather to make a small sum equivalent in Trade to a greater.” A reputable bank could make available credit worth double the amount of cash in its vaults, and adjust the flow to what was needed to keep the market stable. “Money,” he concluded, “is the best rule of commerce.”
The lack was made good in 1694, when William Paterson founded the Bank of England with the power to issue paper notes backed by £1.2 million in cash subscribed by wealthy investors. Its lending power effectively increased the money supply—the “Fat of the Body-Politick”—by almost one third, boosting the economy at a time when the rest of Europe was in economic recession. By no coincidence, Paterson’s well-stocked library contained all Petty’s published work, including two copies of his Political Arithmetic.
In practice as well as theory, William Petty was the complete capitalist. At the age of twenty-nine, while still acting as physician-general to Cromwell’s army, he won the contract to survey and map Ireland, except for the western province of Connacht and some areas already mapped. In the face of stiff competition, he undertook to complete the gigantic task in the space of thirteen months for a price barely half that of other bidders. His method was surprisingly modern. He created an assembly-line that divided up each aspect of the process into simple repeatable tasks, and a management team to run the organization.
The equipment required by the surveyors consisted of a chain measuring two Irish perches (approximately forty-two feet) and a basic compass known as a circumferentor. To produce these, Petty appointed one specialist firm of wiremakers to manufacture a thousand identical chains, a watchmaker to provide a thousand magnetized needles for the compass, a carpenter to make a thousand boxes for the compass, a craftsman “of a more versatile head and hand” to assemble these components into a thousand surveyors’ compasses, a pipemaker to produce three thousand metal legs for the tripods to support them, and a stationer to run off a thousand identical ruled notebooks. To act as surveyors, he hired from the army a thousand soldiers who were “headfull [heedful] and steddy minded though not of the nimblest witts” but able to read and write, and forty clerks working in Dublin to transcribe their data, and map them to scale. Finally he personally selected “a few of the most astute and sagacious persons” to oversee the quality of the work and eliminate inaccuracies.
The clerks’ duties, known as “laying down” the information, gave the entire project its name, the Down Survey. It was completed on time, under budget, with an 87 percent accuracy reckoned by modern standards, and at huge profit to its organizer, who made almost £10,000 in fees and bonuses directly from the operation, and was later awarded fifteen thousand acres to cover additional expenses. By his own account, he had been worth just £500 before he began the survey.
For understandable reasons, Petty believed strongly that his assembly line would bring similar benefits to manufacturing. The division of labor had this overwhelming advantage, he explained, “the work of each artisan will be simple and easy . . . In the making of a watch, [for example], if one man shall make the wheels, another the spring, another shall engrave the dial-plate, and another shall make the cases, then the watch will be better and cheaper, than if the whole work be put upon any one man.” In 1776 Adam Smith would advocate similar specialization of labor with his famous example of the pin-maker’s trade, but 120 years earlier Petty had shown how the process could be applied to a far more complex operation.
Since labor was what released the value in capital, Petty also assumed that for entirely materialistic reasons a strong government would look after its citizens’ health and education, if only to ensure that its resources were exploited to the full. Although England’s workers only spent seven pounds a year per person, each one by Petty’s reckoning had a capital value of sixty-nine pounds when fully employed, making it worth spending ten pounds or more a year to provide him or her with work and schooling. Even his whirring brain could never have imagined how profoundly the addition of steam-power would change that calculation.
The rural economy that Petty described had already diverged from the largely peasant structure of northern Europe. The farms were bigger; by the end of the seventeenth century most measured more than fifty acres and were growing larger, compared to average sizes around Paris of less than ten acres, and growing smaller through subdivision.
The purpose of English farming had also fundamentally changed. The self-sufficient goal of peasant agriculture remained as it was in the first century AD when the Roman farming authority, Lucius Columella, declared, “He is a bad farmer who buys what he can get his land to supply.” Peasant markets were devoted to exchange and barter, and even when farmers sold their produce for money, it was only the surplus after their own needs had been met that went on sale. The capitalist agriculture that Petty described, however, was aimed at selling a commodity, be it corn, wool, or beef, and using the proceeds to buy labor, food, transport, and improved breeds of animals or strains of cereal. Consequently its goal was to make a profit, and since the weather rendered farming a gamble—especially during the “Little Ice Age” of lower temperatures that reached its nadir in the 1680s—it needed credit.
Throughout Petty’s writings, it is clear from his ready calculation of the interest rates to be charged for loans and mortgages secured against the value of land that a thriving if unofficial banking system existed in both England and Ireland to supply funds on credit to landowners. In a classic definition, Petty described interest as “A Reward for forbearing the use of your own Money for a Term of Time,” but the size of the reward was one that only the market could determine. The rate might go as high as a wholly illegal 100 percent in risky deals—a sixteenth-century statute set 12 percent as the legal maximum—but he was certain no government could hope to regulate interest rates any more than it could control prices or exchange rates.
Yet, the most important ingredient in Petty’s restless reckoning of the value of privately owned land was the inexorable way that, as he put it in Political Arithmetick, “the Rent [profit] of Land is advanced by reason of Multitude of People.” In a sense it was obvious that the demand from a growing population would push up land values, and that “Land of the same quantity and quality in England, [should be] generally worth four or five times as much as in Ireland, and but one quarter of what it is worth in Holland; because England is four or five times better Peopled than Ireland, and but a quarter so well as Holland.” But this would turn out to be the secret weapon that made exclusive, private property the most dynamic way of owning the earth. All things being equal, exclusive possession guaranteed that the demand from a growing population would increase the capital value of a landowner’s property. So convinced was Petty of its national importance that he contemplated bringing back the entire population of British colonists from America to their homeland so that “the Rents of Lands shall rise by this closer cohabitation of People.”
The effect that a growing population had on increasing the value of land was to become the fundamental driving force that powered the expansion of private property economies. Its earliest impact came in 1660 when the monarchy was restored and King Charles II came to the throne. A succession of royal favorites, among them the Penn family, George Carteret and John Berkeley were recompensed for their loyalty while the king was in exile by being awarded land in the New World, covering much of the colonies of Pennsylvania, Carolina, and New Jersey. At the time, American land was so cheap, existing colonies like Virginia still gave a free “headright” of one hundred acres to any adults who paid their own passage. The new proprietors, however, all intended to make a profit from their territories, both by selling farms to new settlers and from the increased value of their own holdings as immigrants to the New World drove up the price of land. Unlike the New England colonies, the policy of proprietors from 1665, soon followed by the authorities of existing colonies, was to entice potential land buyers by offering lists of concessions that guaranteed them surveyed properties, security of tenure, and even representation in colonial assemblies. The success of this strategy quickly became evident.
In 1699 Virginia’s growing population enabled the colonial government to abolish the free award of land and to start selling it at five shillings for fifty acres. Six years later, demand was so brisk that the colony’s first historian, Robert Beverley, described his countrymen as “not minding anything but to be masters of great tracts of land,” and the seventeen-year-old George Washington solemnly noted in 1748 that the wealthiest Virginians made their money “by taking up & purchasing at very low rates the rich back Lands which were thought nothing of in those days, but are now the most valuable Lands we possess.” By the second half of the eighteenth century, Benjamin Franklin could unblushingly emphasize that no effort was required to make money in this way, and that he had personally known of “several instances of large tracts of land bought on what was then the frontier of Pennsylvania, for ten pounds per hundred acres, which after 20 years when the settlements had been extended far beyond them, sold readily without any improvement made upon them for three pounds per acre.”
Driven by this new dynamic motive and buoyed by an equity in their land that grew as the population overcame the losses of the civil war, farmers in the private property economy of Britain’s multiple kingdoms increased the productivity of their land even faster than the demand. Wheat yields were rising from the medieval standard of around ten bushels per acre toward the eighteenth-century level of twenty-five bushels, consistently about three bushels more per acre than in France.
While French peasants relied on cereals generally eaten as gruel—flavored with onions, carrots, and cabbage—for 95 percent of their nourishment, and supplemented only infrequently by milk, cheese, and an occasional egg, English workers usually added mutton, bacon, or cheese to a diet that consisted largely of cabbage, turnip, bread, and boiled potatoes. Even the families of laborers owned chairs, saucepans, earthernware plates, and knives—items often absent from peasant homes in western France—and the wills of slightly richer tradesmen itemized the books, clocks, and mirrors they left to their successors. By the early eighteenth century, military records showed that the average height of English army recruits was around five feet six inches (169 centimeters), three inches taller than their French equivalents.
More and more workers lived in towns rather than in the country—London’s population had jumped from fifty-five thousand at the start of the land revolution to 475,000 in 1670—but wages rose strongly from the middle of the seventeenth century, at a time when they were falling in southern Europe. The wool economy had changed radically from simply producing the raw materials for Flemish weavers, to finishing, spinning, knitting, and weaving both a finer cloth for the Mediterranean market, and heavier broadcloth for northern Europe. Raw wool, worth around two million pounds a year, earned more than eight million pounds a year as cloth, and its production employed almost one in five of the workforce in the mid-seventeenth century. And almost uniquely among European nations, England charged no internal taxes on the movement of agricultural produce from the country to the town.
“The working manufacturing people of England eat the fat, and drink the sweet, live better, and fare better, than the working poor of any other nation in Europe,” declared Daniel Defoe in 1726. “They make better wages of their work, and spend more of the money upon their backs and bellies, than in any other country.”
The significance of this widening divergence has provoked furious debate amongst historians and economists attempting to explain why it happened. The emphasis used to be placed on enclosures as the spur to more efficient farming until research showed that open fields in England and France had also increased yields of cereals in the seventeenth century. More recently the growth of representative government and the rule of law have been picked out as vital in guaranteeing social stability and encouraging investment. But in Poland, sixteenth-century landowners elected the members of the Sejm, or parliament, while in France the law guaranteed peasants a security of tenure that was virtually unbreakable. Yet neither country experienced an agricultural revolution in the seventeenth century.
Today, economists argue for the influence of trade and of urban merchants from London who bought land as vital in fostering a businesslike outlook. They cite the nineteenth-century German economist Heinrich von Thünen, who identified proximity to cities, both as markets and suppliers of capital for investment, as the crucial factor in transforming farmers from feudal to capitalist producers. But this theory, like its predecessors, overlooks one critical detail, the actual way that land was owned. As a result it fails to explain why only in England and North America did seventeenth-century land become capital. More seriously, it ignores the vital contribution that land ownership made to the development of free-enterprise capitalism. It was not a mistake that Adam Smith, its first and greatest theorist, ever made.
When he considered how the free-market economy came into existence, Smith took it to be almost a freak of circumstance. In most of Europe, the feudal system had prevented a market in land developing, and consequently money had been invested in trade and manufacturing, where the profits were greatest. England, however, had geography, “natural fertility of the soil . . . [and] the great extent of the sea–coast in proportion to that of the whole country, and of the many navigable rivers which run through it, and afford the conveniency of water carriage to some of the most inland parts of it.” So the movement of food from country to town, and the trade in wool to Europe’s growing market, could flourish.
Uniquely then, England had favored agriculture. It had forbidden imports of cattle, and put high duties on imports of wheat—measures that Smith disapproved of and thought ineffective—but it also guaranteed individual ownership of land: “What is of much more importance than all of them, the yeomanry of England are rendered as secure, as independent, and as respectable as law can make them.” This was the achievement of the common law, and especially the writ of ejectment that allowed an owner to establish a monopoly on the use of his property. It made an investment in land secure.
Private property had allowed about 350,000 capitalist enterprises to come into existence, fated to compete against each other in the supply of food and clothing. “A revolution of the greatest importance to the publick happiness,” Smith concluded, “was in this manner brought about by two different orders of people [existing landowners and merchants investing in land], who had not the least intention to serve the publick.”
The private property system was not the first appearance of capitalism. In Europe, the trading economies of thirteenth-century and fifteenth-century Venice and Genoa undoubtedly qualified in financial terms. That is, they raised capital by public subscription, invested it in ships and commodities, and paid dividends from the profits. At the heart of the system was the security offered by the borrower’s capacity to repay. Borrowing against the future was always risky, but nothing reduced risk more effectively than owning a monopoly on an assured source of income.
The classic example was Florence in the fourteenth century, a period when the city needed to borrow money from its citizens to pay for the professional soldiers or condottiere who fought its wars against Milanese enemies. In an early form of the bond market, the city authorities exacted interest-bearing loans, offering as security the future revenue from taxes and excise duties that only the city could levy. Acting as both politicians and financiers, the Medici family ensured that the city allocated enough from its monopolized income to pay lenders before anyone else, and the confidence that ensued from the family’s dual role kept interest rates low. As the economic historian Niall Ferguson put it, “This oligarchical power structure gave the bond market a firm political foundation.”
In the early seventeenth century, the seven United Provinces of the Netherlands (roughly today’s Belgium and Netherlands) boasted the most advanced capitalist economy in Europe, with the largest stock market, the highest per capita income, the finest houses—“In all Europe,” a contemporary English commentator, Bernard de Mandeville, asserted, “you shall find no private buildings so sumptuously magnificent as the merchants’ and other gentlemen’s houses are in Amsterdam”—and a merchant fleet equal in size to those of England, France, Spain, and Portugal combined.
All this was built on a dynamic trade economy based largely on fishing and the import of spices, silk, and china from the Far East. In 1602, the inner circle of bankers, traders, and guild masters in six of these cities used their political clout to create the United East India Company, in Dutch Vereenigde Oost-Indische Compagnie or VOC, by amalgamating those companies trading with the Orient and especially the spice islands of modern Indonesia. The behemoth that was set up, eight times larger than the English East India Company founded in London two years earlier in 1600, transformed the financial and corporate environment. Its funding brought into existence such innovations as the public sale of shares, the concept of the joint stock company where the owners’ liability for debt was limited to their shareholding, the issue of bonds backed by future earnings, a stock exchange for trading the company’s shares, and a board of directors responsible to the shareholders for running the enterprise.
The phenomenal wealth generated by the VOC—for two centuries its dividends averaged almost 20 percent—lifted the development of commercial capitalism to a new level, but the company was not designed for free enterprise. Not only did the States-General, the Netherlands federal parliament, guarantee the VOC a monopoly of trade with the east for twenty-one years, it enforced restrictions on competition to the point of forbidding any Dutch ship to enter either the Indian or the Pacific Oceans, by sailing around the Cape of Good Hope or through the Straits of Magellan at Cape Horn, without its permission. To recycle the profits from this immense monopoly, and from other smaller trading companies, Amsterdam bankers and politicians generated a range of financial and fiscal instruments, including government bonds, annuities or rentes, and debentures, that reduced the cost of government borrowing to just 4 percent. Nevertheless, the basic structure of this complex financial market was what the socialist historian Eric Hobsbawm described as “a feudal business economy.”
The London trading monopolies operated in the same way. The East India Company obtained a monopoly from the crown for trade in spices from India and the Far East; the Greenland Company obtained a monopoly from the crown for trade in whales from the Arctic; the Muscovy Company obtained a monopoly from the crown for trade in furs and tallow from Russia; the Levant Company obtained a monopoly from the crown for trade in spices from the Middle East; and the Royal African Company obtained a monopoly from the crown for trade in slaves from Africa. None of these capitalists wanted competition. It was wasteful, inefficient, and made raising money more expensive. Unregulated competition, the Levant Company told England’s Privy Council in 1588, “will not only discourage us and others in like respect hereafter to attempt and go on with like charges and discoveries, but be utterly discouraged to enter into any new charge [expense].”
Had London’s merchants dominated politics in England as completely as the Dutch burghers did that of the Netherlands, they would have evolved the same kind of capitalism. The difference was the land revolution. Its vital role in England was made plain by the inadequate part it played in the Netherlands.
A truncated version of the English model did in fact emerge in the Netherlands’ two northern provinces of Friesland and Groningen. There, most families owned their farms outright; mortgage law treated coastal land newly reclaimed from the sea as a commodity providing an investment opportunity for urban merchants; and crops and livestock were raised for market rather than subsistence. The property-owning jonkers, widely caricatured with gin-inflamed red noses and a prickly snobbishness about their supposedly noble ancestry, bore a distinct resemblance to the gentry in England, and exercised a similar degree of influence in the provincial assembly. But these two provinces were the most poverty-stricken in the Netherlands, and beyond their borders the political influence of landed property was negligible.
In the other five provinces, the most valuable property was the directly possessed, urban variety, not land but a house, its furniture, paintings, jewelry, and other valuables, and the less tangible ownership of shares in a fishing vessel or a trading enterprise. The states—the governing assembly of each province—were dominated by the cities’ representatives, prosperous, black-clad burghers whose goal was to safeguard the financial and commercial interests that made this kind of property possible. So intimate were the ties between commerce and politics in cities like Amsterdam, Rotterdam, and Delft, that an oligarchy of wealthy families was able to coordinate government policies and trading goals to create the most favorable conditions for their investments.
The difference between Dutch and English attitudes to the ownership of land, and thus to the shape of government and society, became obvious when each was exported across the ocean. The string of VOC trading posts stretched from South Africa to the coasts of India, on to Sumatra and Java in the South Pacific, and as far north as Japan. In all these places Dutch settlers possessed land, but they did so under the near-feudal terms of the VOC’s monopoly that required them to provide food and manpower in return for their holdings. In 1621, the Dutch West India Company (WIC) was formed to trade with the Americas, and its monopoly was so sweeping that the very cabbages grown outside its trading-post of New Amsterdam on Manhattan Island belonged to the company. In 1629, when competition from the English colonists in North America forced the WIC to offer land rights to the colonists of New Amsterdam, it did so within a feudal structure proposed by Kilijaen van Rensselaer from the inland province of Gelderland.
The WIC’s “Charter of Freedoms and Exemptions” allowed any magnate or patroon who undertook to transport fifty colonists to New Amsterdam the right to own “as a perpetual fiefdom” a gigantic manorial estate along the Hudson or Connecticut Rivers. The greatest of these patroons, Van Rensselaer acquired seven hundred thousand acres, including the present county of Albany in upstate New York, while another, Cornelis Melyn, was granted Staten Island. Their tenants swore an oath of allegiance to the patroon and expected to have disputes and infractions of the law tried in the patroon’s manor court. These were conditions that William the Conqueror, creator of feudal England, would instantly have recognized, but not even he had presumed to grant such large fiefdoms to his chainmailed barons.
It was for this mercantile audience that Hugo Grotius wrote when he insisted in Mare Liberum that the seas were open to everyone, and in De Jure Belli ac Pacis that justice and mutuality governed the conduct of nations even when caught in the horrors of war. Personal liberty was not Grotius’s concern. Although he believed that people agreed to be governed, it was a one-sided, irrevocable agreement to give up all personal rights. Citing Aristotle as his authority, Grotius declared, “It is permitted to every man to enslave himself.”
This was not an academic point. It went to the heart of the difference between the two capitalisms. Parliament, Puritanism, and the common law had created a unique monopoly by which one man owned outright part of the earth. When Gregory King made the first attempt to tabulate the occupations of people in England in 1688, he reckoned that of 1.3 million families, the head of 350,000, or 25 percent, of them were tenant farmers, freeholders, or landowning aristocrats. Each had to compete for markets in the supply of food and clothing. For a Cromwell fighting for property rights, a Leveller demanding equal rights, a Harrington analyzing constitutions, a Petty computing economics, everything came back to that individual owner. The type of capitalism, of government, and of social justice all bore the stamp of private landed property.
By contrast, Grotius argued that in its own interest, any government, monarchical or democratic, would establish law, keep the peace, and enforce contracts. That, as the examples of Venice, Florence, and the Netherlands demonstrated, was all that the financial and commercial markets needed. If a Grotius government failed, there was no mechanism for replacing it, because the governed had no rights except those that came from the state. Quite specifically Grotius rejected the idea that “sovereignty resides in the people, so that it is permissible for the people to restrain and punish kings whenever they make a bad use of their power.”
To confuse mercantile capitalism with its free-market equivalent is to miss the most important element in the system that William Petty was describing. As the modern examples of China, Russia, and half a dozen other state-managed economies make glaringly obvious, capitalism of the mercantile kind can flourish with no need of democracy.
In 1763, Adam Smith arrived in Paris with a towering reputation as the author of the Theory of Moral Sentiments. Any believer in Hobbes’s view of humanity’s inescapable selfishness would have found much to criticize in his book, for Smith depicted people as naturally sociable. “How selfish soever man may be supposed,” he declared in the first sentence, “there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it.”
This insight into the innate sociability of human nature was the contribution of the Scottish Enlightenment, and gave rise to their distinctive political philosophy. Thinkers like Glasgow University’s Francis Hutcheson held that responsible people were guided by the pleasure of social approval and the pain of social condemnation, and so needed no government beyond what would safeguard their property and their right to life and personal liberty. The rule of thumb for deciding political questions was succinctly summed up in Hutcheson’s phrase, “That action is best which procures the greatest happiness for the greatest numbers.”
Although unmistakably a product of Scotland’s culture, the awkward composition of Adam Smith’s character—an extreme personal sensitivity that grew from a sense of his physical unattractiveness conflicting with insatiable conviviality and an incurable interest in the way the world worked—ensured that his conclusions were purely his own. For understandable reasons, self-consciousness of a marked, almost adolescent kind played a significant role in his picture of human nature. In Smith’s view, the sociability of human nature sprang not just from an innate sympathy for other people’s feelings, but also from a selfish desire to gain an objective view of “our own sentiments and motives.” The only way to do this was “by endeavouring to view them with the eyes of other people, or as other people are likely to view them.”
With the sweep of imagination that gave lasting value to his ideas, Smith lifted this oscillation between altruism and selfishness into a universal context, quoting with approval the Stoics’ belief that “the vices and follies of mankind were as necessary [to the overall happiness of the world] . . . as their wisdom and virtues.” From this he derived the argument that people could not help contributing to the greater good even at their most selfish, because they “are led by an invisible hand . . . and thus without intending it, without knowing it, advance the interest of the society.” What Smith emphasized in The Theory of Moral Sentiments was that the “invisible hand” grew out of an awareness of other people’s opinions, and the desire for general happiness. It could not operate in a moral vacuum. “Justice is the main pillar that upholds the whole edifice,” he insisted. “If it is removed, the great, the immense fabric of human society . . . must in a moment crumble into atoms.”
Even before his visit to Paris, Smith had begun to apply the ideas in the Theory to the study of what he called “political economy.” But one vital element was added during his time in the French capital. From his encounters with Dr. François Quesnay, founder of the fashionable school of economists known as the physiocrates, he became aware that, as he put it, “The different progress of opulence has . . . given occasion to two different systems of political economy with regard to enriching the people.” In other words, two distinct kinds of capitalism had come into existence.
The younger, passionately supported by the physiocrates, was based on agriculture, and was directly opposed to the older, mercantile capitalism, that had developed around the exchange of goods. It was the controlled structure of mercantile capitalism that the physiocrates opposed. In its place they championed a form of agricultural enterprise where prices were fixed by supply and demand with no distortion from monopolies, dues, subsidies, and tariffs. Such a form did not exist in France, but they had found the model for it in a book published in 1732, Essai sur la nature du commerce en général, by the Irish-born, Paris-based economist Richard Cantillon. Its first two sentences were lifted straight from William Petty: “Land is the source or material from whence all wealth is produced. Human labour is the form which produces it.” In other words, the physiocrates’economic model was based on conditions in seventeenth-century England.
Whereas Petty’s observations were scattered piecemeal through a variety of pamphlets written for different purposes, Cantillon set out to analyze in a single, closely argued volume how wealth was created. Taking the operation of a food market as one paradigm example, his Essai followed the flow of silver, the basic currency of the day, into and out of the market; from the housewife to the farmer as payment for butter; from the farmer who pastured the cattle to the landlord as rent; from the landlord who owned the land to servants and workmen as wages; and from each of those back to the market where food was sold. What makes Cantillon’s work exceptional is his sophisticated analysis of the way money circulates in these different forms of wages, rents, and profits, and the influence that inflation, consumer confidence, availability of credit, and the level of interest rates exert on the operation of a market. Cantillon explained that these factors applied to both mercantile and private property economies. In his conclusion, however, the difference between the two became clear.
Compared to the general increase in prosperity that might be expected from agricultural capitalism, the Essai explained that mercantile capitalism served to enrich the powerful few who supervised a country’s financial institutions. Within cities they controlled wages and the supply of labor through craftsmen’s guilds, and nationally they limited the scope of competition through the imposition of duties and the creation of monopolies. Strangled by the restrictive practices of the guilds that monopolized the building and textile trades, once thriving cities like Leiden, Rouen, and Cologne actually lost population in the eighteenth century as prices rose and output declined. Even in the Prussian capital of Berlin, where government and a well-financed military training center guaranteed employment, the power of the guilds condemned one third of the population to unemployment or at best casual labor.
The physiocrates never quite grasped the monetarist aspects of Cantillon’s masterpiece. What they held on to, however, was the preeminent importance of agriculture—“La terre est l’unique source des richesses,” their founder, Dr. François Quesnay, flatly asserted—and the consequent need to reward the efficient farmer. Their solution was to sweep away the plethora of feudal restrictions that still existed in France—about where corn could be milled, flour sold, animals marketed—then replace the myriad of charges and fees on the transport of produce with a single tax on the profits of landowners. Once markets operated freely, the economy would regulate itself. The application of laissez-faire economics, the first use of the term, would also remove any need for government intervention in the economy, as Quesnay frequently declared, not least in a conversation with Louis XV’s heir. Hearing the young prince complain of the burden of responsibility he would carry as king, the doctor replied dismissively, “I do not see that it is so troublesome.” Irritated, the prince demanded, “Then what would you do if you were king?” Quesnay’s reply was the classic physiocratedescription of government’s role: “Nothing.”
Adam Smith owed the theory of laissez-faire economics to the physiocrates, and he owed some at least of his understanding about the behavior of money to Cantillon. But The Wealth of Nations was more than the sum of its parts. It extended the market-driven motivations of capitalist agriculture to industry and trade, and yoked them to the financial systems of mercantile capitalism. And it based its analysis of the wealth-producing capacity of free-market economics on the pragmatic reality that human nature is encouraged by the prospect of profit and discouraged by the experience of injustice.
The Wealth of Nations was not published until 1776, seventeen years after The Theory of Moral Sentiments, but the sociability of the Theory provided its essential springboard, just as Hobbes’s delineation of insatiable greed was the necessary starting point of Leviathan. From its first publication, Smith’s startling insights, not least about the way that selfishness acted for the public good—“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest”—guaranteed the success of The Wealth of Nations. The first edition sold out in six months, another four followed in his lifetime, and it has served as the bible of free-market capitalism ever since.
Its unique quality lies in its depiction of the market-led economy as an unstable machine constantly adjusting itself in the effort to achieve an impossible equilibrium. A shortage of supply, for example, should result in higher prices that encourage greater produce and reduce demand; exchange rates ought to adjust to equalize the value of two different currencies; and cheaper production through division of labor will create increased market share until canceled out by rising wages and costs of distribution. This was the “invisible hand” at work, which led to growing prosperity so long as individuals were left free to pursue their own interests with the chance to maximize their gains and minimize their losses. There was, however, the same caveat as in the Theory, that the self-righting capacity of the hand only operated in the context of a concern for the general welfare.
Without it, the market needed supervision, otherwise the more powerful participants would choke the weaker by rigging its operation in their favor. The most important role of a free-market government was, therefore, to provide “that equal and impartial administration of justice which renders the rights of the meanest subject respectable to the greatest, and which, by securing to every man the fruits of his own industry, gives the greatest and most effectual encouragement to every sort of industry.”
Nevertheless, this extraordinary analysis of free-market capitalism grew out of what seems today like a glaring anomaly at the heart of his work. The precepts of The Wealth of Nations are usually cited in relation to the operation of financial markets and of industrial production, but its core is William Petty’s rural capitalism, as theorized by Cantillon and adapted by the physiocrates. It appears in Smith’s repeated assertion that “land and labour” represent a nation’s “real wealth.” Unlike his French tutors, Smith did not believe the earnings of industry and commerce to be “altogether barren and unproductive,” but the need for food put agriculture at the center of the economic engine. The title of his final chapter in Book One makes the point bluntly: “the Produce of Land [is] either the sole or the principal Source of the Revenue and Wealth of every Country.”
Such an assumption might just have been acceptable in Petty’s seventeenth-century England, but in broad terms it made no sense applied to a Britain already in the early stages of the Industrial Revolution and enjoying a booming trade with colonies in the West Indies and North America. How could such a basic error have occurred? It might be argued that in the context of the time, it did not distort Smith’s argument. Land remained the most widely held form of equity, the dominant supplier of working energy in the form of water, and the most important single source of income. But Smith meant what he said. The wealth of nations came from free-market capitalism, and in 1776 the only free-market to be found was in the produce of the land.
Nowhere in Marxist writing are there fiercer attacks on the monopolistic tendency of mercantile capitalism than in The Wealth of Nations. For Smith, free-markets could only ever be at bitter war with its older sibling. “But the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be the rulers of mankind,” he wrote, “though it cannot perhaps be corrected, may very easily be prevented from disturbing the tranquillity of any body but themselves.” And the way to prevent it was to ensure that government set the conditions for free-markets to operate, and prevent the evil genius of mercantilism sliding toward monopoly.