Comprised of three institutions, private property, markets and firms, capitalist economies are characterised by private ownership of capital goods, which are organised for use in firms, in order to generate output. Capitalism is to a large extent responsible for economic growth on history’s ‘hockey stick.’ While some might argue that capitalism dates back even further than the 16th century, the famous 19th-century economist Karl Marx acknowledged the industrial revolution of Britain as the start of capitalism. Hence, I will start by using the British Industrial Revolution as an example of how capitalism ‘explains’ the ‘hockey stick’ model. He also recognised capitalism as a stepping stone in the progression of mankind, in other words, he associated it with development. There is a major correlation between the increase of GDP per capita on history’s economic hockey stick and the emergence of a British capitalist society. To what extent, however, was capitalism a causal factor of Britain’s early economic development and the ‘divergent performance’ of economies within Britain?
Britain’s industrial and technological revolutions occurred at the same time as rapid urbanisation. Hundreds of thousands of people flocked from outlying rural areas into big cities to find better-paying jobs in firms, mostly working in factories. This period saw the shift from small-scale family-run businesses to firms run by owners and managers who employed labourers. This introduction of the institution ‘firms’ into the economy, lay the foundations for capitalism. At the same time, the “technological change” which Britain experienced in the mid-eighteenth century, revolutionised the production process of predominantly textiles, energy, and transportation. As productivity soared, the prices of manufactured goods plummeted, dramatically enhancing demand for British goods globally. The end of protectionism, when import taxes on international goods and services shield domestic industries from foreign competition, turned Britain into a free-trade state. By the late eighteenth century, this had a huge impact alone on the upwards ‘kink’ on the ‘hockey stick model.’ The value of British exports rose from £15million in 1760 to £59million in 1805. Machinery such as the spinning jenny, which enabled the user to produce multiple spools of thread simultaneously, dramatically increased the quantity of a single day’s output. This new technology led labourers working for firms to ‘specialise in tasks’ along the production line. Labourers who focus solely on one task produce more, these are the ‘gains from specialisation.’ This meant that from a single day’s work, firms not only generated more private property for in-market sale but also had to purchase more capital good in order to fuel their production process, thus supporting other firms. This interconnection between the three institutions, private property, markets, and firms distinguished capitalism. Therefore, one can confirm that a capitalist economic system was in effect at the time of Britain’s upwards ‘kink’ on history’s ‘hockey stick’ model and that it stimulated economic growth and caused an increase in living standards. The limitations to this conclusion, however, are that during this time, Britain’s government protected firms that had already secured foreign trade with its colonies. The British East India Company, for example, monopolised the spice trade between the countries prohibiting competition. This is an example of how not capitalism alone contributed to economic growth in Britain.
The beginning stages of this variety of capitalism saw some inequality between the owner, manager and labourer, in terms of income. Empirical studies conducted by economists Peter Lindert and Jeffrey Williamson confirm that income inequality did, in fact, rise at the start of the industrial revolution, both in the United States and Britain. They attribute this to population growth and “unbalanced technological change,” which expanded income disparities between economic sectors and increased skill premium, the ratio of wages between skilled and unskilled labourers. This is evidence of the ‘divergent performance’ of different economies within the country itself, as different economic sectors experienced disparities in income. With this information, it is possible to identify the relationship between Britain’s capitalist economic system and economic inequality.
There are also examples of developmental states that contribute to the standard of living in addition to capitalism itself, such as South Korea. In 1950, both South Korea and Nigeria had a GDP per capita of around $1000. Over the past 65 years, through a series of governmental acts and introductions to public programs, which class South Korea as an interventionist state, its GDP per capita had risen to $25,000, whilst Nigeria’s remained lower than $2500. Policies introduced by the South Korean government guaranteed “jobs for life,” which resulted in low regional income disparities, and the democratised economy attracted a more global audience increasing the number of goods exported. The Index of economic freedom describes South Korea in a report as putting a “greater emphasis on enhancing regulatory efficiency and ensuring a larger role for small and medium-sized enterprises in the economy.” The IEF report also says “South Korea’s dynamic private sector, bolstered by a well-educated, hard-working labour force, continues to capitalise on the country’s openness to global trade and investment.” Under Park Chung-hee’s governance, the economically stagnate country underwent rapid modernisation and industrialisation. While South Korea is a democratic state-guided capitalist state, different governments influence economies to different extents. China, for example, is a communist and statist capitalism, in which the state has substantial control over social and economic affairs. The United States is a fully democratic capitalist state, which allows for more freedom.
The economic success of Western capitalist Germany versus the centrally planned government of Eastern Germany alone exemplifies the fact that capitalism is responsible for the upwards ‘kink’ on the hockey model. Centrally planned economies take governmental direction to an extreme. In the case of East Germany, the government acted as the institution controlling how goods were produced, how they were distributed and to whom. When compared directly to the capitalist economy of West Germany, East Germany’s growth rate was insubstantial. The introduction of central planning essentially eradicated the three institutions that comprise capitalism. The lack of private property, firms, and markets resulted in a GDP per capita half that of West Germany.
To what extent is capitalism responsible for economic inequality between countries? Why, for example, is the average income in Norway nineteen times that of Nigeria? Jared Diamond, a geographer and UCLA professor, among other things, wrote a book titled ‘Guns, Germs and Steel.’ In his book, he accredits geography, germ immunity, food production, the domestication of animals and the use of steel to uneven worldwide development. On the one hand, Norway has extensive access to surrounding waters and access to foreign markets. This sparked international trade, primarily via merchants for thousands of years but made the transfer to firms a lot easier because connections to foreign markets were already established. Twenty per cent of Norway’s economy is comprised of oil and gas production. This, a high cost good, of which there is a high demand, resulted in a consistent revenue stream. Contrariwise, Nigeria is a landlocked country whose primary industry is agriculture, a low cost good. With a yearly average temperature of between 26 degrees Celsius and 28 degrees Celsius, Nigeria is prone to the spread of diseases among people, livestock and crops, which typically has resulted in low food security. The majority of the population employed in the ‘formal’ sector, work in primary industries producing low-cost goods. During development, the most competitive markets are ones with more diverse and complex goods. Currently, globalisation allows for the production of a particular good or service to occur in different places around the world. This means that countries such as Vietnam and Indonesia do not have to be economic powerhouses to get involved in private property and markets. In conclusion, regardless of the economic system, these countries as examples were already predisposed to success or failure. Households also play a pivotal role in economies as they foster the next generation of owners, managers and labourers. Well developed countries have a positive feedback cycle where on average, future workforces are better educated and have the tools required to contribute to their economy simply because their country is already at the necessary stage of development. Likewise, poorer countries do not have the same calibre or quantity of resources available for the next generation of labourers. This is why goods and services produced by low-income countries typically remain primary sector jobs. This negative feedback cycle can make it challenging for countries to break out of poverty.
In conclusion to the primary question, the increasing interaction between private property, markets and firms caused the birth of capitalism which predominantly explains history’s economic ‘hockey stick.’ This then triggered a technological revolution and ‘specialisation’ which further fuelled firms with ‘ammunition’ in markets, as productivity increased. There are also different varieties of capitalism such as developmental states, which contribute to GDP per capita in different ways.
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