The Mystery of Capital - Chapter 1

So far, Western countries have been happy to take their system for producing capital entirely for granted and to leave its history undocumented. That history must be recovered. This book is an effort to reopen the exploration of the source of capital and thus explain how to correct the economic failures of poor countries. These failures have nothing to do with deficiencies in cultural or genetic heritage. Would anyone suggest æculturalÆ commonalities between Latin Americans and Russians? Yet in the last decade, ever since both regions began to build capitalism without capital, they have shared the same political, social and economic problems: glaring inequality, underground economies, pervasive mafias, political instability, capital flight, flagrant disregard for the law. These troubles did not originate in the monasteries of the Orthodox Church or along the pathways of the Incas.

But it is not only ex-communist and Third World countries that have suffered all of these problems. The same was true of the United States in 1783, when President George Washington complained about æbanditti ... skimming and disposing of the cream of the country at the expense of the manyÆ. These æbandittiÆ were squatters and small illegal entrepreneurs occupying lands they did not own. For the next hundred years, such squatters battled for legal rights to their land and miners warred over their claims because ownership laws differed from town to town and camp to camp. Enforcing property rights created such a quagmire of social unrest and antagonism throughout the young United States that the Chief Justice of the Supreme Court, Joseph Story, wondered in 1820 whether lawyers would ever be able to settle them.

Do squatters, bandits and flagrant disregard of the law sound familiar? Americans and Europeans have been telling the other countries of the world, æYou have to be more like us.Æ In fact, they are very much like the United States of a century ago, when it, too, was a Third World country. Western politicians once faced the same dramatic challenges that leaders of the developing and former communist countries are facing today. But their successors have lost contact with the days when the pioneers who opened the American West were undercapitalized because they seldom possessed title to the lands they settled and the goods they owned; when Adam Smith did his shopping in black markets and English street urchins plucked pennies cast by laughing tourists into the mud banks of the Thames; when Jean-Baptiste ColbertÆs technocrats executed 16,000 small entrepreneurs whose only crime was manufacturing and importing cotton cloth in violation of FranceÆs industrial codes.

That past is many nationsÆ present. The Western nations have so successfully integrated their poor into their economies that they have lost even the memory of how it was done, how the creation of capital began back when, as the American historian Gordon Wood has written, æsomething momentous was happening in the society and culture that released the aspirations and energies of common people as never before in American history.ƹ The æsomething momentousÆ was that Americans and Europeans were on the verge of establishing widespread formal property law and inventing the conversion process in that law that allowed them to create capital. This was the moment when the West crossed the demarcation line that led to successful capitalism ù when it ceased being a private club and became a popular culture, when George WashingtonÆs dreaded æbandittiÆ were transformed into the beloved pioneers that American culture now venerates.

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