Thank Dutch Merchants, Not a Strong State, for Capitalism
Pioneers of Capitalism chronicles centuries of bottom-up economic evolution in the Netherlands.
Pioneers of Capitalism: The Netherlands 1000–1800, by Maarten Prak and Jan Luiten van Zanden, Princeton University Press, 280 pages, $39.95
Before writing this review, I asked Microsoft Bing: "When was capitalism invented?" Bing said: "1776." Then I turned to Google: "What was the first capitalist country?" Google's answer: "Great Britain." I then asked the chatbot Lia27, "Was a strong state necessary to back the formation of capitalism?" It replied: "Yes, strong states are necessary to provide the infrastructure and legal framework that allows capitalism to thrive. Without a strong state, it would be difficult for businesses to operate and for markets to function efficiently."
These answers are neat, clean, and wrong.
Maarten Prak and Jan Luiten van Zanden, two economic historians who do not have an obvious political agenda, tell a different story in a deeply researched and well-written new book, Pioneers of Capitalism. Differentiating small-scale markets from capitalism, they argue that a capitalist economy features advanced specialization and trade, the widespread use of wage labor, and financial markets. This sort of economy, they show, was neither invented in 1776 nor inseparable from a strong state. It evolved, from the ground up, over centuries, and Dutch merchants were some of its most important pioneers.
A thousand years ago, a traveling monk, Alpert of Metz, was dismayed by the scale of state collapse around him. In his visit to the merchants of Tiel, he saw, in Prak and van Zanden's words, that "they enjoyed a certain degree of independence" and self-organized in various ways. They "used drinking societies to strengthen their mutual bonds, fostering trust and thus simplifying mutual trade." They "also maintained their own system of justice, which deviated from canonical law." In other words, order was coming from market participants through private governance, rather than being established by a strong state. (This irked Alpert, who was "annoyed by the customs of the merchants, with their own legal rules and pagan drinking societies.")
The Netherlands was never entirely free from government. But through diligence, the Dutch eventually won various freedoms. In the early 13th century, a man from Friesland, in northern Holland, wrote that his region enjoyed "such great freedom that neither the bishop nor his henchman could rob us of even a chicken." Friesland "is rich in freedom, which applies equally to the poor and the wealthy (an invaluable asset), and is prosperous," he added.
"Despite a lack of central authority," Prak and van Zanden write, "Friesland was rich: rich in livestock, rich in field crops, rich in population, and also rich in monasteries." They note that Frieslanders "were commonly reported as being difficult to control….They had their own ambitions and ideas, and did not easily take orders from feudal orders. For the most part, in the core areas of Friesland there was practically no serfdom."
Other areas had aspects of feudal structures, including large domains and serfdom. But feudalistic structures were gradually undermined in many ways.
Much of the country was too boggy for traditional farming. Peat could be harvested, but that made certain bogs sink and turn into marshland and peat lakes. This helps explain why the Dutch got so involved in building canals, locks, and windmills to drain land. Instead of using boggy land to grow grain, it was more efficient to buy grain from elsewhere, such as the Baltics, and use the land to produce luxury agricultural goods, such as cheese. As trade expanded, other areas—such as Amsterdam, itself once replete with peat bogs—became important cities.
By the middle of the 14th century, the Netherlands relied more on markets than its neighbors did, which enabled the economy to respond more rapidly to shocks such as the Black Death. The Dutch increasingly used wage labor; markets advanced and became more specialized. By the 14th century, land "had also become a highly commercialized commodity and was widely traded and commercially leased," Prak and van Zanden write. "The capital market was, certainly by the standards of the day, and despite the Church's reservations about charging interest, well developed and quite accessible—even to small savers, including women."
Adam Smith's Wealth of Nations highlights how the expansion of trade between town and country facilitated the division of labor and enabled specialization in various crafts. Smith also repeatedly praised Holland as the richest country in Europe. By 1500, Prak and van Zanden report, it "was one of the most urbanized areas in the world."
At that point, only 24 percent of the work force in Holland was employed in agriculture, 12 percent in fisheries, and 3 percent in peat digging. In cities, only 3 percent worked in those three sectors; 96 percent worked in industry and services, including woodworking, metals, leather, textiles, clothing, brewing, food, trade, and transport. Even in the countryside, Prak and van Zanden add, "nonagricultural activities were just as important as agriculture: spinning for the textile industry, large-scale peat digging, fishing and merchant shipping, and more." The largest export industry was brewing.
By the 15th century, per capita consumption of printed books, church building activity per square mile, and income per capita were higher in the Netherlands than anywhere else in Europe.
Two centuries before the American Revolution was the Dutch Revolt, which the authors describe as a capitalist revolution. Tracts from participants in the Dutch Revolt clearly speak to the importance of economic and religious liberty.
The Dutch were at varying times and to varying degrees controlled by the sometimes intertwined Spanish, Holy Roman, and Habsburg empires, but these were not exactly strong states vis-à-vis the Netherlands. Holy Roman Emperor Charles V and his son, King Philip II, opposed Protestantism and attempted to centralize power, but their policies were "met with stiff resistance everywhere," Prak and van Zanden note. They add that Martin Luther's "popularity was soon eclipsed by even more radical movements, such as the Anabaptists, an almost anarchist group without hierarchical organizations."
The Dutch Revolt began in 1568 and did not end until 1648. During this time of tremendous political instability—when there was no strong state—the Dutch economy emerged as the most important for world trade. The Dutch East India Company came about with the merger of various existing companies in 1602. Although government officials granted it a charter, the Dutch economy was already very advanced: By the end of the 16th century, Prak and van Zanden note, "Holland's merchants already had 150 years experience in international trade."
The development of financial markets and creation of shares in companies also came about gradually and preceded the creation of the Dutch East India Company and the Dutch West India Company. Prak and van Zanden describe the development of various advanced financial arrangements, including "instruments of credit, used by the rich and poor alike to obtain credit or invest savings, and designed in such a way that evaded the official ban on interest by the Church."
Soon "the custom developed of dividing ownership of a house, ship, or mill into smaller units—called parts, or shares—that could be traded separately," Prak and van Zanden write. "One could invest savings in one-eighth of a merchant ship, and thus take advantage of profits that were made. These parts could be divided into very small shares—1/256th and sometimes even smaller—so the barriers to participation were correspondingly low." Families could divide ownership of farms and create the equivalent of annuities from them, which enabled individuals to use various assets as collateral for loans.
My own research (in my book Private Governance) shows that by the 17th century, Dutch stock markets had become surprisingly advanced. They featured the equivalent of modern derivatives, including futures, short sales, options, and shares pledged as collateral for loans (called hypothecation). Government officials had very little understanding of financial markets and considered trading in them a form of gambling; furthermore, they did not enforce any contracts in them. People nevertheless continued trading, and the stockbrokers subjected themselves to the discipline of continuous dealings, relying on reciprocity and reputation mechanisms. Government did not invent the advanced financial markets that changed the world.
Later stock markets in 18th century London and 19th century New York showed many parallels to their ancestor in 17th century Amsterdam. Russell Shorto's The Island at the Center of the World makes the case that New Amsterdam (New York)—and America itself—inherited its commitment to commerce and religious liberty from the Dutch. The commitment to religious liberty, Prak and van Zanden argue, was linked with capitalism: "The tolerance of the Dutch (for which they would later become famous) that arose during this period had, therefore, also a materialistic basis: one had to respect the beliefs of merchants with whom one regularly did business." Here markets themselves, not government edicts, created the freedom that we have today.
So don't credit a strong centralized state for inventing capitalism. Credit the Dutch merchants, laborers, sailors, whalers, fishermen, peat diggers, cheese jenever distillers, financial innovators, and brewers, all led by an invisible hand.
