Creating Modern Capitalism

How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions

Thomas K. McCraw

• Publisher: Harvard University Press
• Year: 1998
• Print ISBN:
  9780674175563
  9780674175556
• eBook ISBN:
  9780674256200
• Topic: Economics
• Subtopic: Business General
• Index: Economics

What explains the national economic success of the United States, Britain, Germany, and Japan? What can be learned from the long-term championship performances of leading business firms in each country? How important were specific innovations by individual entrepreneurs? And in the end, what is the true nature of capitalist development?The Pulitzer Prize–winning historian Thomas K. McCraw and his coauthors present penetrating answers to these questions. Creating Modern Capitalism is the first book to explain for a broad audience the interconnections among technological innovation, management science, the power of entrepreneurship, and national economic growth. The authors approach each question from a comparative framework and with a unique triple focus on national economic systems, particular companies, and individual business leaders.Above all, the book focuses on how specific entrepreneurs influenced the economic success of their countries: Josiah Wedgwood and Henry Royce in Britain; August Thyssen and Georg von Siemens in Germany; Henry Ford, Alfred Sloan, and the two Thomas J. Watsons in the United States; Sakichi Toyoda, Masatoshi Ito, and Toshifumi Suzuki in Japan.The product of a three-year collaborative effort at the Harvard Business School, the book combines cutting-edge scholarship with a finely tuned sense of the art of management. It will engage general readers as well as those with a special interest in entrepreneurship and the evolution of national business systems.

1

INTRODUCTION

Thomas K. McCraw

For most of human history until about the seventeenth century, economic stagnation seemed to be the natural order of things all over the world.¹ People at every social level took it for granted and arranged their lives accordingly. They gave little thought to what later generations called “economic and social mobility.” The idea of an “industrial revolution” or a “consumer economy” would have seemed incomprehensible to them. In Europe during the thousand years before 1700, per capita income grew at the minuscule rate of about 0.11 percent per year, or just over a tenth of a percent. There is no substantial reason to think that the rate was much more or less than that in most other parts of the world.²

In many countries, the coming of industrialization and the creation of modern capitalism ended this long economic stagnation and transformed the mind-set that went with it. As Karl Marx and Friedrich Engels wrote in 1848, a scant hundred years of capitalism had already “created more massive and more colossal productive forces than have all preceding generations together.” And even as they wrote, the forces of capitalism were just beginning to gather steam. At the old annual growth rate of 0.11 percent, per capita income had doubled about every 630 years. But between 1820 and 1990, a period of only 170 years, it multiplied by a factor of about 10 in Great Britain, 15 in Germany, 18 in the United States, and 25 in Japan. The capitalist era, especially the period since 1820, has been unique in human history, a time of spectacular economic growth.³

This book explores some aspects of how that growth occurred, and particularly what entrepreneurs and business firms had to do with it.

The book’s structure is a little unusual, with four chapters focusing on countries and eight others on companies. The chapters entitled “British Capitalism,” “German Capitalism,” and so on, survey the evolution of each nation’s business system. Here our vantage point is long-range, as from an orbiting satellite taking continuous time-lapse photographs. These country chapters provide an overview of the innovation and constant change that are the defining characteristics of capitalist systems.

The economist Joseph Schumpeter (1883–1950), one of the most astute of all analysts of capitalism, called it a process of “creative destruction”—an incessant sweeping out of old products, old processes, and old organizational forms by new ones. Schumpeter wrote that “The atmosphere of industrial revolutions—of ‘progress’—is the only one in which capitalism can survive.” He went on to say that “stabilized capitalism is a contradiction in terms.” The contents of this book support his conclusions.⁴

The tumultuous process of creative destruction was carried out mostly by entrepreneurs operating through business firms. So, between the country chapters, we drop from the satellite view to helicopter height and examine the histories of at least two companies in each country: Wedgwood and Rolls-Royce in Great Britain; Thyssen Steel and Deutsche Bank in Germany; Ford, General Motors, and IBM in the United States; Toyota Motor and Seven-Eleven in Japan.

Each of these companies has been a champion performer in its particular industry. In choosing the firms to include in this book, we looked not only for top performers but also for examples that capture some of the essence of each country’s economy. No company is necessarily “typical” of its national business system, because the systems themselves are too varied. But these firms are not atypical. It’s hard to imagine the story of Rolls-Royce occurring anywhere other than Britain, or that of Ford anywhere but the United States.

A third component of the book is its comparative reference tools. These include a statistical appendix that also contains some time lines setting forth the chronology of each country’s and company’s development. Both the statistics and the time lines are indispensable to understanding the four countries’ experience with capitalism, and they’re worth your close attention.

Why do we focus on Britain, Germany, the United States, and Japan? Because all four countries have achieved outstanding economic growth, and are champions in their own right. Equally important, each has also exemplified a distinctive variety of capitalism. Britain, having started to industrialize in the late eighteenth century, represents the earliest instance of modern capitalist development.⁵ Germany and the United States came next, exploding to world prominence late in the nineteenth century. Japan, which began to industrialize just before the twentieth century, became a significant force in certain industries by the 1930s. Then, in the generation after 1950, it achieved sensational growth.

All four of these countries are “capitalist,” but their versions of capitalism are not identical. Nor do the four together exhaust the list of possible models. The historical record shows that there are many paths to capitalist success.

“Capital” and “Capitalism”

The term “capital” first appeared in its modern sense in about 1630. The Oxford English Dictionary gives a succinct definition: “accumulated wealth reproductively employed.” Throughout history, human beings had quickly consumed almost all of what they produced. Sometimes they accumulated a little wealth, but they customarily spent it on displays that weren’t very useful in improving common people’s living standards. The pyramids of Egypt represented an enormous amount of accumulated wealth, but it was devoted to the afterlife of pharaohs. It produced a good deal of employment, but not with the continuing developmental effect that would have come if the same money had been spent on roads and canals. The pyramids are only one example of the practice of traditional societies all over the world.

Often the use of accumulated wealth did have the worthy result of producing spiritual inspiration through priceless art and architecture: the pyramids, the Forbidden City of China, the Parthenon of Greece, the cathedrals of medieval Europe. But accumulated wealth put to these uses wasn’t “reproductively employed.” So it didn’t represent “capital” in the modern sense. Ironically, it did so later, when these monumental structures started attracting hordes of tourists.

“Capitalism” is a newer term than “capital,” and it’s harder to define. The word didn’t come into existence until the 1850s, when it appeared as an antonym of “socialism.” What exactly does “capitalism” mean?

At a minimum, a capitalist system is organized around a market economy that emphasizes private property, entrepreneurial opportunity, technological innovation, the sanctity of contracts, payment of wages in money, and the ready availability of credit. Under capitalism, property must be “alienable,” that is, freely bought and sold. The “value” of a good or service means whatever price someone will pay for it. Previously, there had been widespread quasi-religious notions of a “just price” above which one charged at the peril of one’s soul.⁶ And buying anything on credit, even for purposes of investment, was often regarded as questionable. The transition from the old mind-set to the new was a long, gradual process that even today is not complete. We ourselves feel vestiges of the old virtues in our guilt (often appropriate) about the unrestrained use of consumer credit.

Capitalism relies heavily on investment credit as a means of financing innovation. In this respect the term “capitalism” goes beyond the dictionary definition of “capital,” which is an economic concept and a factor of production common to all economies. Capitalism characteristically employs not only accumulated wealth but also financial resources that don’t yet exist in tangible form. It employs “money of the mind,” as credit has aptly been called. Banks, the primary sources of credit, lend out money far beyond their cash reserves, on the expectation that borrowers will employ the money, pay interest on it, and repay the principal in the future. In so doing, banks create money out of nothing but faith and informed expectation, subject of course to reserve requirements imposed by banking authorities. Entrepreneurs and companies borrow this money. To get still more of the capital they need, they may also issue stocks and bonds, often backed by nothing except the anticipation of a future return on the companies’ products.

“Capitalists,” then, are people who make bets on the future. The essence of capitalism is a psychological orientation toward the pursuit of future wealth and property. It’s all about aspiration and striving, measured by gains and losses in wealth and income. It rests on a belief that economic growth, even substantial growth, is possible and desirable—for an individual, a family, a business firm, an industry, even an entire country.

Today most of us take this belief for granted. It is an unstated assumption behind much of what we do. But for many centuries, such a belief did not enter the minds of most people. Economic growth did not necessarily seem desirable, let alone possible. Nor was it commonly seen as related to individual effort. There was little expectation of change in any circumstance of life, economic or otherwise. Most people looked on the changes that did occur as the consequences of some outside force. They explained catastrophes such as the Black Death, which wiped out about a third of Europe’s population during the fourteenth century, as God’s punishment.⁷

Many ethical systems contained stern warnings about how the pursuit of riches imperiled the soul. “Many evil men are rich, and good men poor,” the Athenian statesman Solon observed in the sixth century B.C. “It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the Kingdom of God,” cautioned the Gospel of Matthew. In some religions, including Christianity and Islam, lending money at interest was forbidden as sinful. In Japan as late as the mid-nineteenth century, merchants had the most money but the lowest status. They ranked not only below the samurai (warrior class), but also below craftsmen and the mass of agricultural peasantry. They stood at the bottom of Japanese society because their lives centered around buying low and selling high.

For much of human history, and in most societies across the world, the prevailing mind-set was antimaterialistic and antigrowth. Even people with strong acquisitive tendencies, ranging from the conqueror Genghis Khan to the Medici bankers of Florence, bent their efforts toward gaining a larger share of what was thought to be a pie of fixed size. Their gain was regarded as another’s loss, by definition. Life was viewed as a seesaw. If someone went up, someone else had to go down. That’s one reason why acquisitive people were often relegated to low social status, unless their success came from military conquest or was truly spectacular. Even in eighteenth-century England, a relatively modern capitalist society, most people thought it unseemly that merchants should try to become “gentlemen.” Gentlemen devoted themselves to their lands and surrounding communities, or to the church, the army or navy, or the civil service. They didn’t pursue money as an end in itself.

Partly because of this kind of mind-set, there was minimal economic growth in most of the world for several thousand years. Although life was “solitary, poor, nasty, brutish, and short,” as the English philosopher Thomas Hobbes put it, life was not necessarily filled with hard labor. Most people tended to work in “lumps”—assiduously at planting and harvest periods, lackadaisically during the winter. Their sense of time came not from clocks but from the sun and the seasons.⁸ Circumstances didn’t encourage or even permit them to work in a way we would regard as efficient. As a result, individual incomes didn’t rise.

Social mobility was extremely low. Few people were “free” in the sense that we now use that term. In 1772, the English economic writer Arthur Young estimated that the world contained about 775 million people, only 33.5 million of whom were “free.”⁹ The rest—96 percent of the total—were serfs, slaves, or vassals of some kind. They owed their loyalty and part of their labor to those above them in the social order, and ultimately to authoritarian kings, chieftains, or warlords.

Most agricultural lands in Europe were “entailed.” They were parts of unitary feudal estates. They couldn’t be sold or subdivided for ownership by individual farmers. Occupational and geographical mobility remained low. One usually did what one’s parents had done. One lived where they had lived. A large proportion of the earth’s people never in their lifetimes traveled more than thirty miles from their birthplaces. Incentives for change were very small. Institutional structures weren’t geared toward economic growth. And so not much growth occurred.

One essential condition of a dynamic economy, and of capitalism itself, is a relatively free labor market. Individuals must have some control over the disposition of their work. They must have a choice about whom they wish to “sell” it to. They should also be able to keep most of their wages for themselves and their families. Yet for thousands of years, almost no free labor markets existed. Few jobs paid cash wages, and a portion of the returns of everyone’s work went to the landlord, the chieftain, the king, the warlord.

Capitalism, by contrast, opened up labor markets and fostered cash wages systems. More broadly, capitalism promoted a dynamic, flexible, and future-oriented way of thinking. It injected a pattern of ceaseless and merciless competition into nearly every aspect of life. Politics, the military, even religion became more competitive, following the lead of the economic system and occasionally moving in advance of it. Martin Luther and John Calvin openly challenged the Church of Rome, which had dominated Europe’s religious life for centuries. Their doctrines competed not only against Catholicism and Judaism, but against each other. And all of this religious competition tended to widen the opportunities for market forces to operate, and thereby to strengthen the spirit of capitalism even more.¹⁰

Capitalism as an economic system did not necessarily go hand in hand with democracy. It did not, by itself, “free” anyone from anyth...

Table of contents

• Cover
• Title
• Copyright
• Preface
• Contents
• Illustrations
• 1 Introduction
• 2 Josiah Wedgwood and the First Industrial Revolution
• 3 British Capitalism and the Three Industrial Revolutions
• 4 Rolls-Royce and the Rise of High-Technology Industry
• 5 German Capitalism
• 6 August Thyssen and German Steel
• 7 The Deutsche Bank
• 8 Henry Ford, Alfred Sloan, and the Three Phases of Marketing
• 9 American Capitalism
• 10 IBM and the Two Thomas J. Watsons
• 11 Toyoda Automatic Looms and Toyota Automobiles
• 12 Japanese Capitalism
• 13 7-Eleven in America and Japan
• 14 Retrospect and Prospect
• Appendix:
• Notes
• About the Authors
• Acknowledgments
• Index