A Short Story About Wealth
A long time ago, in medieval Europe, economic freedom was but a distant dream. Property rights did not exist, and indeed many of the people were property. Three economic classes of people existed in medieval society – the bourgeois (or property class), the artisans (tradespeople), and peasants. Ownership of property was tightly restricted, with land ownership especially constrained. The term “landed aristocracy” is thoroughly appropriate, as land ownership and high class went hand in hand. To own land was to be guaranteed both wealth and social standing – as one was liberated from the menial, subsistence livelihood of the proletariat.
Land ownership was therefore the privilege of certain families, and indentured servitude the privilege of everyone unlucky enough not to be born into such a family. It was naturally in the interest of the ruling class, to maintain the social and economic system which ensured their life of luxury and gave them the freedom to engage in idle pursuits, whilst the peasants toiled in their service. Thus, all threats to the existing order were eliminated through the use of force. If a person who was not entitled to own property acquired any, the aristocracy would promptly strip them of it (even the less authoritarian regimes such as the Tudor monarchs).
Peasants were not free to move somewhere else, go on strike, or even negotiate the terms of their labour. Contracts were unheard of. Artisans were born into, or allocated trades for life. Feudal Europe was a command economy, with the commanding the prerogative of the aristocracy. Rights were non-existent, and peasants and artisans worked to produce whatever was required of them. The sole basis for fame, fortune and success was power, and power was controlled by those who owned the land and the labourers.
Ironically, it was the ruling class itself which was responsible for iniating the collapse of the system upon which it depended. By the 18th Century, international trade was flourishing, and the mediums of choice for the purpose of exchange were gold and silver. Gold and silver also became increasingly useful for monarchs, who used the specie to hire mercenaries, arm and feed them, and fight wars. This mercantilism arose from the self-aggrandising aims of various monarchs to increase the power, wealth and influence of their realms. It was at this point that the critical mistake was made by the new mercantilist states, namely that of considering gold and silver to be actual wealth.
This misconception was a significant factor in the subsequent demise of the feudal system, and the advent of capitalism. However, it must be viewed in a historical context, if one is to understand why it was made. The property class had never comprehended what real wealth really was. In the feudal system they participated in, peasants were duty bound to remit a certain amount of produce each year to the landowner. However, the peasants were not free to produce as much as they could and exchange what they had left over for some other goods. The landowner decided what and how much would be produced, and there was little benefit to be had in producing surfeit amounts, as there was no organised market system in which to exchange them.
This is not to say that no market for goods existed, but the market which did exist was minute, and dealt with the very small leftovers. Landowners restricted over-production, as it was not in their interests to see their tenants rise above subsistence levels. The stability of the feudal system depended on the reliance of peasants on the meagre doles handed out by their lord’s granary. Self-sufficiency would have caused a shift in the balance of power, meaning that peasants actually would have acquired some. Thus, surplus production and market exchange were actively prohibited and discouraged by the powerful elites. Additionally, there was little incentive for peasants to produce more than that required of them, as any surplus was usually appropriated by the landowner anyway.
When gold and silver became precious commodities to the ruling class and monarchs, the first response was to seek it out directly in the New World. When the mines in Peru, Mexico and the other colonies started to dry up, European mercantilism was transformed into a zero-sum game. England could only gain at the expense of France, Spain or Portugal, and vice-versa. The second alternative to gaining specie then became necessary. That meant exchanging more locally produced goods and services for gold and silver from overseas, and at the same time limiting the exchange of local specie for overseas goods.
Never having had any regard in the past for the lower classes, the monarchs had no qualms about exploiting the peasants and labourers. Thus began the infamous “Enclosure Movement” in England, which saw the landed aristocracy displace thousands of tenants from their land to make room for sheep. The reason for this was that wool was England’s most profitable export, and brought in copious amounts of gold and silver. European monarchies also acted to prohibit or restrict imports, and massively promote exports.
Much of the exports came from the new factors of production created by the displacement of the tenants. These peasants suddenly had to support themselves, and found work in the burgeoning factories and plants which emerged to utilise the large, new labour markets. The flood of new workers allowed them to be paid abysmally low wages, which suited the monarch’s policy of low consumption by the masses, so that the new goods could be exchanged for gold and silver.
This feverish pursuit of gold and silver in exchange for local produce, and the restriction on imports of goods, led to England being flooded with specie, whilst at the same time suffering a shortage of goods to buy. Inevitably, prices in terms of specie, had to rise. The longstanding method of exchange through barter, was now threatened by the new medium. Labour was now a tradeable commodity, and with the disappearance of the normal lord-serf relationship, wages were now being paid in specie. However, the remaining feudal lords were stuck with the traditionally fixed dues and rents paid in kind (ie. produce). Consequently, feudal lords found themselves unable to maintain payments on the rising prices of merchandise, and many became impoverished.
Meanwhile, the economic freedoms and opportunities in the new markets resulted in a new, richer class of merchants who quickly came to regard land not as untouchable, ancestral estates, but as potential capital. Land subsequently was sold, and became just another factor of production. Traditional guarantees of wealth, class and power vanished once land appeared on the market and its ownership was no longer restricted. With the mobility of labour, the new market system, and property rights, feudalism collapsed, and capitalism ascended to the throne.
All of this resulted from the mistaken idea that real wealth was measured by the gold and silver in the monarch’s treasury, and that goods and services were only a means to that end. Indeed, the truth is the complete opposite. Goods and services are the end, and gold or silver only represent a claim on this realwealth, and in strictly that sense (as a claim) serve as means to acquiring it. One cannot eat gold, and nor can one wear it as clothing. Gold and silver are inherently valueless for the vast majority of people. The manic policy pursued by England had the effect of sending real wealth overseas, in exchange for claimson future production. However, there is nothing to guarantee the value of these claims, as the aristocracy found out to their cost when England was flooded by such claims, and prices rose.
It seems that few people are capable of learning from past mistakes in history. Yet, a knowledge of the social and economic history of Europe is hardly necessary to learn this particular lesson. In fact, one need look no further than the writings of the first and greatest economist. Adam Smith explicated what realwealth was over two centuries ago, and refuted his contemporaries notion that wealth was gold and silver. Unfortunately, the same fundamental misconception is held by a majority of people today, as is evidenced for example by the contemporary view of international trade (see essay - Exports are bad, Imports are good). Many of the apparent dilemma’s in economics become crystal clear when one has a firm hold on the fundamental economic principles. Understanding that real wealth is constituted by goods, and not money or gold, is one such fundamental principle.