By Ryan Allis
The Beginnings of Trade
The original entrepreneurs were, of course, traders and merchants. The first known instance of humans trading comes from New Guinea around 17,000 BCE, where locals exchanged obsidian, a black volcanic glass used to make hunting arrowheads for other needed goods. These early entrepreneurs exchanged one set of goods for another.
Around 15,000 BCE, the first animal domestication began taking place, and around 10,000 BCE, the first domestication of plants. This step toward agriculture was critical for the advancement of the human species. Now, instead of having to continually move around as nomadic tribes, seeking new places to hunt and to gather, we could stay in one place. Agriculture allowed us to start to form larger stationary communities and cities (the basis for civilizations), which set the stage for the development and spread of human knowledge. Agriculture changed everything for humans, enabling the formation of stable rather than migratory populations and laying the foundation for human populations to grow from 15 million to over 7 billion in the millennia ahead. 1
As more people moved into these stable communities, one of the most important advances took place with the advent of specialization. Instead of each tribe hunting and gathering their food, different individuals within each tribe would become experts at certain tasks, such as farming, hunting, gathering, fishing, cooking, tool-making, shelter-building, or clothes-making. The importance of specialization in various tasks (versus self-sufficiency in all) cannot be overstated. As some individuals in a community focused on one activity or another, they got much better at it, speeding up the pace of innovation. As different people got better at different tasks through specialization, they were then able to exchange with one another for the various goods and services needed, increasing the benefits for all.
As methods of agriculture improved, the first towns and cities were seen. Dependable food supplies allowed people to build permanent houses and settle in one area. As settlements increased in size, new social institutions such as religious centers, courts, and marketplaces developed. The advent of towns produced further specialization, creating jobs in tool-making, pottery, carpentry, wool-making, and masonry, among others. The specialist created items faster and of a better quality than each family making its own, increasing standards of living.
When the last Ice Age ended around the year 8,000 BCE, the poles melted, raising sea levels and creating a divide between Siberia and North America. This divide created two separate human civilizations for nearly 10,000 years, until European explorers reached the Americas again in the 15th century.
The First Cities
The Middle East’s fertile crescent between the Tigris and the Euphrates had the right mix of plants and animals to sustain the foundations of civilization. Around 4,000 BCE, people in central Asia tamed horses, giving them a major advantage in both agricultural work and warfare. By 3,000 BCE, the first settlements and cities formed in Sumeria (modern day Iraq). During this timeframe, the city of Uruk along the banks of the Euphrates River was home to 50,000 people in an amount of space that would have previously supported just one hunter-gatherer.2. Humans had become much more efficient at generating the food and energy necessary to support their communities.
Human civilizations began to spring up near rivers like the Nile, the Tigris and Euphrates, the Indus, and the Yellow and Yangtze. In the first cities, writing was developed to keep track of crops. In this period, the first armies developed and the first city governments were formed. Agricultural settlements had put humanity on a rapidly developing path toward intellectual and scientific advancement.
Trade Routes Allow Ideas and Memes to Spread
Trade routes between the new cities soon sprang up. Donkeys, horses, and camels enabled trade caravans between civilizations, moving both goods and ideas. Ships were built to carry trade over the seas. Networks and hubs soon formed and more complex structures emerged. Great Pyramids were built in Cairo. Temples were built in Sumeria.
Around 2000 BCE, iron was discovered, leading to advances in warfare and a very tumultuous few centuries. Around 600 BCE, human warriors with iron weaponry on horseback led to the creation of empires. Between 500 BCE and 117 CE, small cities turned into the Persian Empire, Alexander’s Empire, Han Chinese Empire, and Roman Empire with complex political systems and philosophies and beliefs. Judaism, Christianity, Hinduism, Buddhism, and Islam formed and became the world’s five major religions between 1300 BCE and 600 CE.
Trade routes expanded. Salt from Africa reached Rome, rice traveled from China to Asia, and the secrets of making paper were transferred from China to Europe. Arab traders brought coffee, lemons, and oranges into Europe for the first time. Around 800, gunpowder was discovered in China when carbon and sulphur were combined with potassium nitrate. Around the year 1200, an Italian trader named Leonardo Fibonacci brought the standard system of numbers that we still use today from Arabia to Europe.
Separated from the rest of the world, the Aztecs, Mayans, and Incan empires had formed in the Americas. Starting in 1492, Columbus’ voyages connected Europe and the Americas, bringing guns, horses, and disease. With the importance of Atlantic trade, power would shift toward the West in the coming centuries as Europeans colonized and laid the foundations for a globalized world. The reconnection of the hemispheres marked a major turning point for our species.
The Invention of Money
Early trade consisted of barter (one good for another). If Tom had twenty cows and Igor had eighty hens, and Tom and Igor agreed that one cow was worth four hens, then the trade could take place. The problem with the barter system, however, was that in order for a trade to take place, both parties had to want what the other party had. This “co-incidence of wants” often did not happen. Thus, the demands of growing business and trade gave rise to a money system. Silver rings or bars are thought to have been used as money in Ancient Iraq before 2000 B.C. Early forms of money (called specie) would be often be commodities like seashells, tobacco leaves, large round rocks, or beads.3
While the money system still had much development to go through (credit and paper money did not yet exist), its invention over four thousand years ago was of crucial importance to the world we live in today. The use of money, an accepted medium to store value and enable exchange, has greatly enhanced our world, our lives, our potential, and our future.
By the year 1100, the prevailing cultural system in the Western World was feudalism. It was a world of kings and lords, vassals and serfs, kingdoms and manors. Long-distance trade was expanding and new worlds of foreign spices, oriental treasures, and luxurious silks were discovered. Three hundred and fifty years later, after weathering a Black Death and the Hundred Years War, Europe emerged by expanding trade to new levels and building the foundation for the start of the competitive market economy we know today.
The Creation of Markets
With a population spurt starting around 1470, cities, markets, and the volume of trade grew. Banking, initially started by Ancient Mesopotamians, grew to new heights and complexities; the guild system expanded; and the idea that a business was an impersonal entity, with a separate identity from its owner, started to take hold.4 Silver imports from the new world drove expanded trade and bookkeepers created standardized principles for keeping track of a firm’s accounts based on Luca Pacioli’s accounting advances. Early entrepreneurs, called merchants and explorers, began to raise capital, take risks, and stimulate economic growth. Capitalism had begun.
Early on in the history of capitalism, the idea of monetary gain was shunned and shamed by many. The practice of usury, charging interest on loans, was banned by the Christian Church. Jobs were assigned by tradition and caste. Innovation was stifled and efficiency was forcefully put down, sometimes punishable by death. In sixteenth-century England, when mass production in the weaving industry first came about, the guildsmen protested. An efficient workshop containing two hundred looms and butchers and bakers for the workers was outlawed by the King under the pretense that such efficiency reduced the number of available jobs. Makers of innovative shirt buttons in France in the late 1600s were fined and searched and the importation of printed calico textiles cost the lives of 16,000 people.5
The world would soon see, however, that innovation was generally a good thing, making lives better, and that efficiency was a path toward a higher standard of a living. As Robert L. Heilbroner says in The Worldly Philosophers,
“The precapitalist era saw the birth of the printing press, the paper mill, the windmill, the mechanical clock, the map, and a host of other inventions. The idea of invention itself took hold; experimentation and innovation were looked upon for the first time with a friendly eye.”
Markets & Machines
Just when it seemed we had reached our human limits we found the energy and technology to carry us into the future. On Earth, the seeds of the past have bloomed into a present filled with energy creativity. The stories of billions of lives have played out against a backdrop of a universe almost too vast to comprehend. In everything that we do, in all that we are, we remain living monuments to the past, as we continue to make history every day.” – The History Channel6“
The story of the last 200 years is truly one of machines and markets.
With the advent of a complex marketplace and a system of capitalism, a battle of ideas raged to explain the sources of wealth and to explain the workings of the market. Between approximately 1550 and 1800, a philosophy called mercantilism was at the forefront. The mercantilists had the misguided notions that a country’s wealth was solely based on how much treasure and gold it could obtain and how much more it exported than imported. Monopolies and tariffs were promoted and competition and trade were discouraged. But they had gotten it all wrong.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest.” – Adam Smith, The Wealth of Nations
Fortunately, new schools of thought sprung up in the 18th century that promoted commerce as the source of wealth, rather than the mercantilist notion of the hoarding of gold. Adam Smith further backed this idea and was the first to capture and explain the essence of the marketplace. He did so in his seminal 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations, slaying the mercantilist dragon in the process. Smith explained that self-interest acts as a guiding force toward the work society desires.
While one would naturally assume that everyone simply following his or her self-interest would not create a very positive society, there is another force that prevents selfish individuals from exploiting the marketplace in a healthy economy. That regulator is competition.
This principle can be explained best with the following excerpt from Robert L. Heilbroner’s book The Worldly Philosophers:
“A man who permits his self-interest to run away with him will find that competitors have slipped in to take his trade away; if he charges too much for his wares or if he refuses to pay as much as everybody else for his workers, he will find himself without buyers in the one case and without employees in the other.”
Those customers will go to the competitor who charges less and those workers will go to the competitor who is willing to pay more. The wonderful paradox of the market, through the interaction of supply and demand and competition, creates a price that properly allocates industry so as to produce the proper quantities of goods and services. No intervention, planning, or forethought is needed to create exactly what society desires, in the exact amount it desires. What a wonderful contraption the market is. As long as society can promote competition and innovation, standards of living will continue to grow and wealth will increase.
The Start of the Industrial Age
The Industrial Age truly began in 1712 with the invention of Thomas Newcomen’s steam engine in Devon, Britain. But it wasn’t until James Watt’s steam engine in 1763 that things really got moving, enabling work to be done through the movement of pistons rather than the movement of muscle.
By the time of Adam Smith’s death in 1790, the nascent Industrial Revolution had already reared its head. The effects of the Renaissance, the humanist movement, and the Enlightenment’s focus on science and empiricism would translate into the launch of a movement that would impact the world as none before it had. It was this revolution—often dirty, harsh, and cruel—that prompted thoughts of communism and created robber barons and industrial titans. It was this same revolution, however, that led to the development of the innovations, technology, and standards of living we have today.
From the Industrial Revolution, the concept of mass production and economies of scale came about. Bigness, trusts, and vertical integration became the key to riches at that time. It was Andrew Carnegie and J. P. Morgan in steel, John D. Rockefeller and Frank Kenan in oil, and Henry Ford in automobiles. While some of these titans had questionable ethics, no one can deny that they were innovators. They forged alliances, developed new ways of doing business, and created efficiency across industries.
It was the combination of energy and engine that freed man from the constraints of muscle power, making the Atlantic world the greatest military power and laying the foundations for the locomotive, the internal combustion engine, the automobile, and the discovery of oil. The telegraph and telephone connected humanity around the world. With electricity, we lit up the night.
While critical governance institutions are required for the effective functioning of capitalism, the market system has been one of the most significant innovations in the history of humankind.