Credit Where It's Due

Three Main Themes:

• Trade and Colonization
• Agricultural Innovation
• Industrialization

The Unifying Theme: Money And What To Do With It

• Ancient world had a static concept of wealth: gold, land, slaves
• Modern world defines wealth as investment and production

Trade and Colonization

Slavery

Slavery comes in many varieties:

• In Old Testament, slaves could opt to become permanent members of master's household.
• In Rome, many "white collar" occupations (accountant, scribe, teacher) were held by slaves. Many "lower class" occupations (oarsmen, mining) were done by free men.
• The concentration camps of Nazi Germany and the Soviet Union were modern examples of mass slave labor.
• One common evasion of anti-slavery laws today is sham adoption: children are "adopted" into families but in fact are slaves.

Banking

• Bank of Amsterdam, 1609
• Charles II raids Royal Mint and confiscates private gold
• Merchants begin storing gold with private goldsmiths (a reversion to the Roman practice, by the way)
• Merchants and goldsmiths soon began leaving the gold in place and trading letters of credit authorizing access to the gold
• Bank of England, 1694

Limited Liability Companies

• Legislation passed in England, 1662
• Before this, only partnerships were possible
• Debtors could sue all partners for any debts; one partner could end up paying the entire debt if others had no resources
• New system meant investors could lose only the amount they had invested
• In America, we call them corporations, abbreviated Inc., because the concept was well entrenched by the time the U.S. became independent. In other places the terminology reflects the concept more clearly
  • In Britain, corporations are abbreviated Ltd., for Limited
  • In Germany, the abbreviation is GmbH: Gemeinschaft mit beschraenkter Haftung, or Business with diminished Liability (beschraenkter is related to English “shrink” and Haftung to “haft,” something to grab hold of.)
  • In the Romance languages, the abbreviation is S. A. (sociedad anonima in Spanish) or Anonymous Society. Reflects that in law, the corporation is legally distinct from its individual investors

Insurance

• Shipping – Lloyd’s
• Fire Insurance
  • Encouraged investments in towns
  • Early fire companies were funded by insurers (a literal case of protecting one’s investments!)
• Life Insurance

Some Hard Truths About Insurance

Shipping Insurance

• Say a ship has a 1% chance of being lost on a voyage
• Charge 2% of the value of the ship and cargo
• If the ship is lost (1% of the time), investors take no loss
• If the ship comes in (99% of the time), investors profit from the voyage, insurers keep the premium.
• A win-win deal all around

Insurance covers rare but catastrophic losses

• Most cars are not wrecked or stolen
• Most ships are not wrecked
• Most airplane flights land safely
• Most houses do not burn down or suffer loss in natural disaster

Insurance cannot cover routine losses

You cannot insure a car against wearing out

• Every car will wear out.
• You will have to pay premiums equal to the cost of a new car, plus profits for the insurer
• It’s easier and cheaper simply to save

• Many industries self-insure; it’s cheaper just to replace a wrecked vehicle rather than pay insurance

Dental insurance is marginally effective

• Most dental costs are routine
• People tend to enroll when they foresee big dental bills, like crowns
• Premiums are high

Application to Health Care

In 1950, health insurance typically covered

• Delivering babies
• Minor operations (appendix, tonsils, etc.)
• Terminal health care
• Covered rare but burdensome expenses. If a worker typically used $10,000 in benefits over a 40-year career, that came to $250/year or $21/month.
• Viewed by employers as a low-cost but popular benefit
• A win-win deal for employers and employees

Some health care issues that did not exist in 1950

• Organ transplants
• Bone-marrow transplants
• Open-heart surgery
• Chemotherapy
• AIDS
• Alzheimer’s
• MRI, CAT, PET imaging
• Substance Abuse Therapy

If everyone in the U.S. will typically need a million dollars in health care over a 40-year working lifetime, that comes to $25,000 a year. Some options:

• Require people to buy their own insurance
  • What if they can’t afford it?
  • Do we deny care to people who can afford it but refuse to buy it?
  • What about dependents of such people?
• Make employers buy it and pretend it’s free (but everyone pays in terms of higher prices and lower wages)
• Have the government pay and pretend it’s free (but everyone pays in terms of higher taxes)

About Interest

View of interest changed in late 1600’s

• Condemned by ancient Greeks and Romans, Jews of Old Testament, early and medieval Christians
• Biblical teachings on interest and debt are informative
  • Could not take a man’s millstone or cloak as security because he would need them for survival
  • Implications: most debts were short-term for emergencies
  • If a person was already short of cash, he’d have a hard enough time paying the loan back, let alone interest. (Think about that before visiting a quick-loan place)
  • Reflected static view of wealth. Wealth did not grow. Interest was exploitation.
  • For deep debt, the option was slavery. In Old Testament it was for a maximum of seven years.
• In late 1600’s, interest began to be seen as payback for participating in risk of investment

Banks and Interest

• No banks in ancient world. To safeguard money, you hid it or left it with someone who could safeguard it.
  • Common arrangement, leave it with a goldsmith who had a vault
  • It cost money to store it. The goldsmith had to build a vault and guard it with unsympathetic people armed with swords. He charged for his services
• Banks keep enough cash to cover routine transactions and loan or invest much of the rest.
  • Banks cover expenses from their investments and pass on some interest to customers
  • That’s why savings accounts never offer as much interest as other investments
  • It still costs money to keep money in the bank
  • Interest allows us to pretend bank services are free
  • Checks written to myriad places have to be returned to original bank for accounting. Clearing houses centralize this process. The cashing bank, the originating bank, and the clearing house all have to pay people to do this. It costs roughly 50 cents to clear a check (think about that next time you write a check for $2.76)
• If the bank can’t invest money, but has to keep it on hand, it costs money to keep it
  • Minimum checking balances
  • Fees for frequent withdrawals
  • Incentives to lock money in (CD’s and other term deposits)
  • Incentives for large depositors
  • Discourage small depositors

Agricultural Changes

Changes in land ownership

• Safeguards to land titles allow owners to borrow using land as collateral, raise capital for investment
• Closure of commons and fencing of private land

New forage crops

• Carrots
• Turnips
• Clover

New farming techniques

• Water meadows for increased hay production
• Along with new forage crops, water meadows eliminated the need to slaughter animals in the winter
• Improved fertilization methods
• Increased and improved crop rotation

Prolonged spell of good weather 1720-1750

• Bumper crops mean large profits
• Small landowners bought out, use money for other ventures
• Population increases

Industrialization

Social Factors

Entrenched upper classes (big landowners, nobility, Anglican Church) tended to view wealth as the ancients had:

• Estates
• Buy title in nobility
• Positions in Church and Government
• Established universities trained upper classes for these increasingly irrelevant roles

Non-Anglicans (Dissenters) were excluded from traditional routes to wealth

• Gravitated to trade and industry
• Initially used wealth to buy traditional trappings
• Eventually found status within their own circles
• Schools founded by Dissenters focused on industry

Ideas of John Locke

• People are motivated by self-interest
• Essence of liberty is freedom to pursue self-interest (“life, liberty, and the pursuit of happiness”)
• Government is a social contract
• Government is by the consent of the governed
• Separation of powers necessary to prevent abuse
• If these ideas look familiar it’s because they were incorporated into the Declaration of Independence and the Constitution

Coal and Iron

Around 1700, industries were located near raw materials, tended to be small and easy to relocate

• Wood shortage about 1700 led to demand for coal
• Coal transport problem solved by canals
• Canals facilitated movement of goods and raw materials of all kinds
• For the first time, industry was freed somewhat from constraints imposed by location of raw materials

Iron-making requires very pure fuel

• Coking (cooking off impurities in coal) resulted in the required purity
• By-products of coking would lead to other synthetic fuels later

Power

Early attempts at artificial power

1690, Denis Papin proposes an engine powered by explosions of gunpowder. Although it sounds silly, reflect that:

• Automatic weapons are piston engines powered by gunpowder
• The whole automotive industry is based on an engine that uses controlled explosions for power.

1700 Thomas Savery invents a steam engine powered by boiling water in a chamber, then letting it cool

• Slow and inefficient
• Sufficient for its intended use, pumping mines

1705, Thomas Newcomen witnesses an accident

• The spray of water to cool the boiler on a Savery engine got inside the boiler through a cracked seam
• The steam inside condensed instantly. The resulting vacuum caused the piston to slam back so hard it wrecked the machine
• Newcomen said “Wow” and promptly designed an engine where the “accident” happened every time
• Faster and more powerful Newcomen engines soon became the standard for many applications
• Newcomen engines remained in use pumping mines into the 20^th century.
• Pumping mines required power rather than speed. Newcomen engines were quite satisfactory, and the limited application provided little stimulus for improvement.

James Watt: Myth and Reality

• Myth: Watt was sitting in his mother’s wee cottage in Scotland watching the lid on a tea kettle bounce up and down. Suddenly he had an inspiration and shouted “I think I’ll start the Industrial Revolution.”
• Reality: Watt was an instrument maker at the University of Edinburgh and was struck by an inefficiency in the existing, and very successful, thank you for asking, Newcomen steam engines

The Scottish Enlightenment.

• Watt was part of a circle of remarkable innovators, including the chemist Joseph Black and the pioneering geologist James Hutton.
• Joseph Black’s possible contribution
• Black, a chemist, was approached by a group of distillers with a problem
  • Being Scottish, they enjoyed their Scotch
  • Being Scottish, they also wanted to save money
  • Why did it cost so much fuel to distill Scotch?
• Black experimented with heating and boiling water. He measured energy crudely by timing how long it took to achieve a given result.
  • If it takes 100 units of heat to raise water from freezing to boiling:
  • It takes 80 units of heat to turn ice at the freezing point to water at the freezing point without changing the temperature.
  • It takes 600 units of heat to evaporate water without changing the temperature.
  • Since heat is somehow absorbed without changing temperature, Black called it “latent” heat. The energy goes into breaking bonds between molecules. Latent heat is why you use ice to cool drinks and sweat to cool down.

What Watt did

• Possibly influenced by Black, he realized that alternately heating and cooling the same vessel was inefficient and wasted fuel
• Watt drew the spent steam off into a separate condenser after use. The steam vessel could stay hot and the condenser could stay cool
• Speed of the new device limited only by how fast the steam could be let in and drawn off.
• This was such an improvement it amounted to a different kind of engine
  • Fast enough to power machines other than mine pumps
  • Small enough to locate anywhere
  • Small enough to put on vehicles
• Large factories often used a large engine to run a vast system of belts and pulleys powering individual machines. If this sounds inefficient, as recently as 1900 a belt system a quarter of a mile long was found to be more efficient than transmitting power electrically.

How the Universe Changed

Nature of wealth

• Old: static (land, gold, slaves)
• New: Dynamic (investment opportunities, production)

Views of Interest

• Old: wealth static and finite, hence interest is exploitation
• New: wealth can multiply. Interest is a reward for investing in risk

Routes to status

• Old: titles, Church and government positions
• New: trade, industry
• Our society is not classless: it contains so many social classes that there are innumerable alternate routes to status

Nature of Work

• Old: work often individual, self-paced, ad hoc (New Testament parable of workers in the vineyard, Matthew 20:1-15)
• New: work scheduled, salaried, regulated
• As late as late 1800’s craftsmen resisted (mostly unsuccessfully) attempts to turn them into salaried workers

One Final Note

"Power is the ultimate aphrodisiac" - Henry Kissinger

The Name of the Game is Power, Privilege, Status, Comfort, not money per se. 

Examples:

• Nomenklatura (mid-level bureaucrats) in the former Soviet Union were the privileged class. In money terms they were not rich, but because of their connections they were able to obtain privileges far in excess of those available to the general public.
• Khmer Rouge Cambodia in the 1970's was the only country in modern times to abandon money entirely. In their efforts to create a theoretically pure Marxist society, possibly a third of the population died or were killed. Clearly money is not the root of all evil.
• Anti-Monopoly, a game put out briefly in the 1970's before Parker Brothers (owner of the Monopoly monopoly) sued for copyright infringement. Instead of accumulating money, players vied for "social consciousness points." In all other respects the game was exactly like Monopoly. If we tied social status to "social consciousness points," it's quite obvious that they would soon play the role of money, subject to the same abuses. 

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Created 24 October 2001, Last Update 12 November 2001

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