Before Capitalism

Part 6 set out the problems every economy has to solve: who knows what people need, how millions of decisions fit together, why anyone works hard, who gets what, who holds power, and how much to save for later. Capitalism and socialism are two sets of answers.

I’d assumed the story started with Adam Smith and Karl Marx. Going back chronologically showed that most of the big arguments, state control against markets, interest and debt, price controls, were first fought out thousands of years earlier, often in Asia and the Middle East. Each system also grew out of the problems of the one before. This part covers everything up to about 1800. The next covers the Industrial Revolution, and what Smith and Marx actually argued.

As before, I’ve kept the questions I had along the way and what cleared them up.

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Early Societies and Ancient Empires

Hunter-gatherers: sharing. For most of human history, people lived in small bands of a few dozen. Anthropologists who studied surviving hunter-gatherer groups found that food, especially big game, was usually shared across the band rather than kept by whoever caught it. There was little to own beyond what you could carry, and little surplus to store.

Sharing made sense as insurance. A hunter might catch a large animal one week and nothing for the next three, and meat spoils. You give when you’re lucky and receive when you’re not: risk spread across a group, thousands of years before insurance companies.

Farming changes everything. Around 10,000 years ago, farming created a surplus: more food than the farmers needed, which could be stored. Once there’s a surplus, someone has to decide who controls it. That question is where classes, states, writing and economics all begin.

Mesopotamia and Egypt: temple and palace economies (from about 3000 BCE). In early Mesopotamia, in today’s Iraq, and in Egypt, temples and royal palaces ran much of the economy. They owned land, collected grain, stored it in huge granaries and paid workers in rations.

Two things will sound familiar. Loans with interest were common, and the Code of Hammurabi, around 1750 BCE, set maximum rates: roughly 20% a year on silver and about 33% on grain. And farmers who borrowed after a bad harvest often fell into debt they could never repay, sometimes into slavery, so Mesopotamian kings periodically cancelled debts and freed debt slaves, partly to keep enough free farmers and soldiers. It’s an early answer to a problem that keeps coming back: debt compounding faster than people can repay it.

Rome: markets, money and slavery (about 200 BCE to 400 CE). Rome had real markets, coins, banking and long-distance trade. But much of its production, especially on large farming estates, used slave labor on a vast scale.

Rome also gives one of history’s clearest lessons about price controls. For decades, emperors had paid their armies partly by debasing the coinage: putting less and less silver in each coin so they could mint more from the same metal, the ancient version of printing money. People caught on, coins became worth less, and prices rose sharply. In 301 CE, Emperor Diocletian issued the Edict on Maximum Prices, setting legal maximums for more than a thousand goods and services, from wheat and wine to the wages of carpenters and teachers. Selling above the limit could be punished by death.

What happened is what supply and demand predicts when a price is held below where buyers and sellers would set it: at a capped price, more people want to buy than sellers will supply. Many sellers simply refused to sell at the legal price. Goods disappeared from markets, trade moved to black markets, and the edict was ignored and dropped within a few years. It didn’t fix the cause, the debased money, so it couldn’t stop the inflation. It only made the shortages worse.

Mauryan India: the Arthashastra (around the 300s BCE). The Arthashastra, traditionally credited to Kautilya, an adviser to the emperor Chandragupta Maurya, is one of the oldest detailed works on running an economy. It describes a strongly managed one: the state ran mines, forests and weaving workshops directly, officials supervised markets, checked weights and measures and could regulate prices, and taxes funded the state while trade was encouraged but closely watched. It treats wealth as the foundation of a strong state and the ruler’s job as actively organizing production. Scholars debate its exact date, since it was likely compiled and revised over centuries, but it shows a state-heavy model was carefully thought through in India over two thousand years ago.

Han China: the first great “state or market” debate (81 BCE). Under Emperor Wu, the Han government took over the production of salt and iron, two essentials, as state monopolies, and set up programs to buy grain when it was cheap and sell it when it was expensive, to steady prices. It raised money for wars and smoothed out shortages. In 81 BCE, the court held a formal debate, later written up as the Discourses on Salt and Iron:

Change a few words and you could hear it today: state control for stability and fairness, against markets for quality and freedom, with both sides worried about concentrated power, just in different hands.

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The Medieval World (about 500 to 1500)

Four very different economies existed at the same time, each answering the same questions differently.

European feudalism. After the Western Roman Empire collapsed, Europe broke into small, insecure territories. Feudalism was largely a trade of land for protection. A king granted land to lords in return for military service. Lords ran estates called manors and protected the people on them. Serfs farmed the land. They weren’t slaves, since they had their own plots and families, but they were bound to the manor: they couldn’t leave, and they owed the lord part of their crop and days of work on his fields.

In the towns, trades were controlled by guilds, associations of bakers, weavers, smiths and so on. Guilds set quality standards and trained apprentices, but also limited who could enter a trade and often set prices. The Church banned usury, charging interest on loans, and thinkers like Thomas Aquinas wrote about the just price: the idea that things had a fair price and charging more was a sin.

The Black Death. From 1347 to 1351, plague killed something like a third or more of Europe’s population. Suddenly workers were scarce, and when the supply of something falls, its price rises: wages shot up. Lords competed for the surviving workers, and serfs who fled to other manors were often welcomed. England tried to stop this with the Statute of Labourers in 1351, which capped wages at pre-plague levels. Like Diocletian’s edict a thousand years earlier, it largely failed: employers who needed workers paid more anyway. Over the next century, serfdom faded across much of Western Europe, partly because workers’ bargaining power had risen. In parts of Eastern Europe, where lords held more power, serfdom actually tightened later. The same shock had different outcomes depending on who held power.

The Islamic world (about 700 to 1400). From Spain to Central Asia, the Islamic world had one of the most commercial economies anywhere: big cities like Baghdad and Cairo, long-distance trade by land and sea, coins accepted across vast regions, and early forms of checks and credit.

Islamic law prohibits riba, generally understood as charging interest, so merchants funded business by sharing profit and risk instead. In a mudaraba, one partner supplies the money and the other the work; profits are split by an agreed share, and if the venture loses money, the investor bears the financial loss while the worker loses their effort. In a musharaka, partners all contribute money and share profits and losses. Instead of a lender getting a fixed return no matter what, the investor shares the risk and the upside, much like someone buying a stake in a startup.

Two other institutions stand out. The muhtasib was a market inspector who checked weights and measures and punished fraud, an early fix for sellers knowing more than buyers. And the waqf was a charitable endowment: property set aside permanently to fund mosques, schools, hospitals and water supplies, a kind of nonprofit centuries before the term.

Ibn Khaldun, a North African scholar, wrote the Muqaddimah in 1377. He argued that specialization and the division of labor make cities rich, four centuries before Adam Smith. He argued that when rulers raise taxes too high, people produce less and tax revenue actually falls. And he described dynasties following a cycle: lean and productive at first, then increasingly luxurious and heavily taxed, and eventually weak.

Song China (960 to 1279). Song China went through what historians call a commercial revolution. New fast-ripening rice allowed more harvests, so more food and bigger cities. Iron production grew enormously, markets spread across the country, and merchants formed large trading networks. Merchants in Sichuan began using paper money in the early 1000s, and the government took over issuing it. China was the first place to use paper money on a large scale.

Then paper money taught the lesson of inflation. Later governments, especially the Yuan dynasty that followed, printed far too many notes to pay for wars and spending. The notes lost value, prices soared, and by the Ming dynasty China had largely abandoned paper money and gone back to silver.

The state-or-market debate returned too. In the 1070s, the reformer Wang Anshi introduced state loans to farmers at lower rates than private moneylenders and state buying and selling to steady prices. His opponent Sima Guang argued the state was overreaching and squeezing the people. The reforms were eventually reversed: the Salt and Iron debate, a thousand years later.

India. Medieval India had two economies side by side. Village economies were mostly agricultural and largely self-sufficient. Occupations were often hereditary and organized through caste, with families providing services like pottery, metalwork or laundry in exchange for a share of the harvest rather than through open markets. Rulers like the Delhi Sultanate collected a large share of each harvest as land revenue. Alongside that ran large-scale trade: Indian merchants, often organized in guilds called shrenis, traded across the Indian Ocean. Indian cotton textiles were sought after from East Africa to Southeast Asia, and South Indian kingdoms like the Cholas had wide maritime networks.

Much of capitalism was already present somewhere: markets and money in the Islamic world and Song China, risk-sharing investment in the mudaraba, specialization in Ibn Khaldun. What was missing was the combination: anyone free to start a business, secure property for ordinary people, and capital markets on a large scale.

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Trade and Empire (about 1500 to 1800)

Mercantilism: wealth as gold. From roughly 1500 to 1800, European states followed mercantilism. A nation’s wealth was its stock of gold and silver, so the goal was to export as much as possible and import as little as possible, bringing precious metals in. States used tariffs, bans and government-granted monopolies to protect home industries, and acquired colonies to supply cheap raw materials and buy finished goods.

The flaw is the difference between money and wealth. Wealth is the things that provide benefits: food, buildings, tools, skills. Gold is a claim on those things, not the things themselves. Spain shows what happens when you confuse them.

Spain’s silver and the price revolution. After conquering the Americas, Spain shipped home enormous amounts of silver, especially from the mines of Potosí, in today’s Bolivia, worked by forced Indigenous labor. By mercantilist logic, Spain should have become hugely rich. Instead, much of the silver flowed out to pay for wars and imports, and the flood of new money helped push up prices across Europe for over a century, a long inflation historians call the price revolution. More money without more goods just meant higher prices.

Much of that silver ended up in China, which had moved onto silver after its paper money problems. American silver paid for Chinese silk and porcelain, one of the first truly global trade loops.

The joint-stock company. Long voyages to Asia were hugely expensive and risky: ships sank and crews died. No single merchant could fund one or afford to lose it. So the English East India Company (1600) and the Dutch East India Company, the VOC (1602), raised money by selling shares to many investors. The VOC’s shares could be bought and sold, and the Amsterdam exchange where they traded is often called the first modern stock market. Investors had limited liability: they could lose what they put in, but no more. Many investors each took a small slice of a big, risky venture, which is how capital markets were born.

But these weren’t just businesses. They had government-granted monopolies on trade with Asia, their own armies, and the power to make war and govern territory.

Colonialism and extraction. Much of this era’s wealth was taken by force rather than created through trade. The Atlantic slave trade forcibly transported over 12 million Africans to the Americas to work on plantations producing sugar, tobacco and later cotton.

India, under the Mughal Empire, was one of the world’s largest economies and a leading producer of manufactured goods, especially cotton textiles; some estimates put it at roughly a quarter of world output around 1700. After the East India Company won the Battle of Plassey in 1757, it took control of Bengal and its tax revenue. Much of that revenue went to Company shareholders and to buying Indian goods for export rather than being spent in India. In 1770, a famine killed millions in Bengal, made far worse by the Company’s tax collection.

This is where voluntary exchange, the idea that people trade only when both sides agree, was missing entirely. It’s also central to later critiques: many argue that some of Europe’s early capital came from extraction, not just from markets.

Tokugawa Japan and the first futures market. Japan took a different path. From the 1600s it sharply limited foreign trade, and its economy ran on rice: lords were paid in rice, and taxes were measured in it. In Osaka, the Dojima Rice Exchange, officially recognized around 1730, let merchants trade contracts for rice to be delivered later at a price agreed now. It’s widely seen as the world’s first organized futures market.

The first critics. In France in the mid-1700s, the Physiocrats argued that real wealth comes from production, especially farming, not from piling up gold. They popularized the phrase laissez-faire, “let it be,” arguing government should stop micromanaging trade. Then in 1776, Adam Smith published The Wealth of Nations, largely as an attack on mercantilism: wealth is what a nation can produce, not its gold; trade isn’t a contest where one side’s gain is the other’s loss, because both sides gain through specialization; and monopolies like the East India Company harm the public and enrich insiders.

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What’s Next

For thousands of years, economies answered the same questions with different mixes of custom, command and markets. Surpluses created the question of who controls them. Debt, price controls, debased money and paper money all taught the same lessons in Mesopotamia, Rome and China that they teach now. Markets, money, risk-sharing finance and specialization all existed long before capitalism, and so did the argument over whether the state or the market should run things. What changed around 1800 was that all the pieces came together at once, and productivity began to grow faster than ever before.

Part 8 is that turn: the Industrial Revolution, what Adam Smith and Karl Marx actually argued, the critiques of each, and how Marx thought socialism and communism would come about.