History Of Economic Ideas, Economic Ideas before 1870

Although it is not known exactly how or when capitalism as an economic system first started, it is known that it evolved gradually out of feudalism and later mercantilism. This conversion process took place over many centuries and was instigated by the influences of several major events including massive death from bubonic plague, huge and devastating wars, vast social disintegration and tremendous changes in traditional ways of life, various pervasive technological breakthroughs, and many accommodating religious transformations.

The bubonic plague or "Black Death" occurred during the mid-14th century (1348-49). Over one-third of the population died, most of who were serfs. As a result of the bubonic plague, a religious uprising was set off as people blamed the huge amount of death on sinners, witchcraft and heretics.

The plague and subsequent loss of serfs also had a large influence on creating the "Hundred Year War" between France and England (1337-1453) where soldiers made up from the noble class fought over territorial boundaries. War continued to be a predominant characteristic of the time especially on into the 15th and 16th centuries as a shortage of labor encouraged peasants or serfs and their newly acquired bargaining power to fight nobility for more control. All of this natural and man-made death played a major role in causing feudalism along with its existing power relations involving manor life and vassal hierarchy to gradually disintegrate.

During the early 16th century (the times that some consider the dividing line between feudalism and capitalism), one huge social change that sped up the permanent formation of capitalism was the creation of both a working class and rights of private ownership for means of production (i.e. tools, machines, buildings, etc.). Previous to this time, the feudalism predominated. Feudalism was a system of mutual obligations where peasants occupied land that was owned by nobility and cultivated and worked the land to produce crops and products for themselves as well as a portion for the nobility in exchange for protection. With this arrangement, societal relations were highly localized, central authority was minimal, population structures were highly decentralized, and agriculture dominated production.


After the dissolution of Roman Empire, no authority could ensure laws and protection. Feudal hierarchy, a system in which landlords protected serfs, higher lords protected the landlords, and the king protected the higher lords and their vassals, filled the vacuum. Custom and tradition instead of laws were the keys in understanding medieval relationship. Since there was no central authority in feudal society and economy, the entire medieval organization was based on a system of mutual obligations and services up and down the hierarchy. The lords were obligated to protect the serfs and in return the serfs provided food and soldiers to the lords. The basic economic institution of medieval life was the manor. A manor was a central or territorial location where farming and trade occurred in conjunction with the feudalism socio-economic arrangement. In the manor, two separate classes struggled: serfs, who were not really slaves since they could not be parted from either their family or land, and landlords, who gave protection, supervision, and administration of justice to the custom of manors.
These custom and tradition properties of feudalism were in substantial contrast to the legal and judicial system of capitalism. A capitalist system was and is based on a fairly objective system of enforcing contracts, whereas a Lord's judgments were highly subjective.

The Catholic Church was the largest landowner during the feudal ages. The church also monopolized the teaching services and was the closest body of the central government during the feudalism time period. Towns were the centers of manufacturing. Manufacturing goods were sold to manors and sometimes traded in long-distance commerce.

Guilds were the dominant institutions that controlled production and sale of goods and services in towns. Interestingly, guilds were so dominant that they regulated their members in all activities, including personal, social, economic, and religious activities. Despite the controlling power of guilds and increasing manufacturing sector in towns, the social structure during this period was mainly based on elements associated with a medieval age agrarian society.

Land was the key factor for wealth, and increases in agricultural productivity were the original drives for a series of changes that resulted in the dissolution of feudalism and the beginnings of capitalism. The most important technological advance in feudalism was the three-field system of crop rotation. With the help of the three-field system, peasants could produce more crops to feed the horses; this, in turn, enabled horses to replace oxen as the principal source of power in agriculture and transportation as well.

Improvements in agriculture and transportation resulted in population increases and thereby expansion of population in towns. The growth of towns and cities led to a growth of rural-urban specialization. These developments of increased economic specialization together with increased manufacturing further stimulated human productivity, and resulted in increased interregional trade as well. The growth of agricultural productivity also resulted in surplus food, and consequently increased the output of manufacturing products. With the help of various transportation improvements, mass scale production began to stimulate local and interregional markets to buy these goods, and that further increased the population in towns.

Keep in mind that although these basic agricultural and industrial developments were necessary prerequisites for the spread of trade and commerce, the growth of commerce cannot be considered to be the principal force in either the dissolution of feudalism or the creation of capitalism. This is clearly made evident by the fact that during the early makings of capitalism and while Western Europe entered in capitalism, Eastern Europe did just the opposite and returned to feudalism.

The "putting-out system" was another development that contributed to the dissolution of feudalism and the onset of capitalism. This system primarily resulted from the expansion of mass scale production and commerce.

In the early putting-out system, while craftsmen owned workshops, tools, and functioned as independent small-scale entrepreneurs, merchant capitalists would furnish these craftsmen with raw materials and pay them a fee to work materials into finished products. By doing so, the merchant capitalist would then become owners of the finished products at the end of this production process.

At later stages of this development, merchant capitalists began to own tools and machinery, and often buildings. Merchants hired workers to use these tools, furnished them with raw materials, and again took ownership of the finished products.

With the putting-out system, workers reached a point where they no longer sold finished products to merchants, but only sold their labor powers or their capacity to work. Capitalists, then, eventually controlled the entire process of production, and a labor force was created owning little or no capital with nothing to sell but labor power.

These two developments (i.e. that of capitalism controlling the process of production and workers being left with only labor power to sell) were the first originations of capitalism. Prior to the emergence of the complete system of capitalism, however, the last castles of the feudalistic system needed to be invaded so that the feudal manor system could be completely destroyed by market relations. The immediate effects, then, of the establishment of capitalism were that individual economic self-sufficiency would be broken down and customs and traditions of feudalism would be destroyed.

While landlords began to increasingly depend on cities for manufactured goods, the vast urban population in cities engaging in trade increasingly depended upon the rural countryside for the supply of food and raw materials for their export industries. These needs subsequently fostered a rural-urban specialization and encouraged trade between urban and rural sectors.
As increased exchange occurred between urban-rural sectors, peasants on manors also found that they could exchange surpluses for money at local markets. In fact, as peasants discovered that their past limitations and economic restraints were no longer necessary, especially with a new found source of revenue through a market, many peasants began to revolt against the manor system. This exacerbated the dissolution of the manorial system. Soon peasants found that they could rent lands. By doing so, some of them eventually became independent small businessmen and converted themselves into landlords. They also began to hire men to work on their rural lands.

This entire process of change for the feudal manor system had a cumulative effect of gradually breaking down the traditional ties in manors. In the end, the traditions of manor system were completely substituted by the market and by the search for all-important profits as the organizing principle of production.

There is one more development that significantly contributed to the permanent establishment of capitalism:

the "enclosure movement." As feudal nobility began to realize that they could sell their wool for profit and directly acquire sustenance from a market rather than depending solely on serfs, nobility captured communal grazing lands and fenced them off for private use. As a consequence, feudal ties were further destroyed especially as peasants were literally forced off of the land and compelled to move to the city to find work. From this movement, a new working class -stripped from all means of production or ownership of land, tools, and buildings-was formed. This whole process was exacerbated when various laws of repression were established by the government and an increase of monetary rents was imposed by Lords. This caused many peasants and minor nobility to go bankrupt. The enclosure movement created a large new labor force in cities that was left without lands and instruments of production and did much to destroy remaining feudal ties and promote the system of capitalism.