Slaying History's Golden Calves (2): The Myth of Capitalism

Yep, you read that right—and partly inspired by a recent comment by the reader Martin Bassani, today we’ll take a go at another one of History’s Golden Calves (for the first instalment of this occasional series, see below):

Today, I’d like to direct your attention to a peculiar piece of scholarship from what seems like ages ago. This is what Martin Bassani wrote in response to my posting on the ‘UBS Wealth Report 2025’:

This is the Venetian/British economic model of plunder. The West is the final frontier for plundering opportunities. We are the target. Welcome to the post-industrial, financial casino circus! Imagine

I tend to disagree because I’m a nitpicking pedant: the British merely copied this system, for it is the late mediaeval Republic Venice that we must turn our attention.

Hence, I’d like to introduce you to Frederic C. Lane (1900-84; Wikipedia profile) who specialised in the economic and social history of especially the Venetian republic, and if you don’t have much time at your disposal, I recommend reading his Venice: A Maritime Republic (JHU, 1973), which is quite the last general synthesis of Venetian history written by a single author, as well as his collection of essays under the title Profits from Power: Readings in Protection Rent and Violence-Controlling Enterprises (SUNY Press, 1979).

He was, of course, thoroughly ridiculed and dismissed by the emergent caste of Venetianists of a different stripe (see Eric Cochrane and Julius Kirshner’s review essay ‘Deconstructing Lane’s Venice’, The Journal of Modern History, 47, no. 2 (1975): 321-34).

As an aside, I note that one of my own specialisations is—precisely in sixteenth-century Venetian history, hence this posting is both a pleasure for me and, if prompted, I’ll drown you with tons of more references.

One more thing to note here, though, and it relates to the sad state of Venetian Studies since around 1970: for a scathing, if apt, summary, see Martin Drechsler’s review essay ‘Venice Misappropriated’, Trames, 6, no. 2, (2002): 192–201, in which the most recent collection of essays, co-edited by John Martin and Dennis Domano under the title Venice Reconsidered: The History and Civilization of an Italian City-State, 1297-1797 (JHU, 2000), is discussed in frank and refreshing terms. I’ll merely add that this collection is quite an apt summary of scholarship of the last 25-30 years of the 20th century, i.e., the period after Lane’s career. 1Here’s a teaser from Drechsler’s critique that has, to this day, gone un-answered:

Interdisciplinarity is not one of its strengths. The absence of lawyers, economists, and philosophers among the authors is painfully obvious and causes a distorted image of Venice, which is counter-productive to the self-set mission of the book to deliver an overall picture, and its interdisciplinary claim. (x) Likewise, the lack of interest in foreign affairs, military matters, or diplomacy gives a strangely domestic picture of Venice (and, admittedly, the terraferma). Basically, this is a history book with some contributions by art historians and musicologists. It may be that one needs “to go beyond purely legal and institutional perspectives” (13); however, without them, one is even more lost.

Unfortunately, the same is true as regards the comparative approach…

It needs now to be said that, while the essays are altogether almost uniformely good to very good, some excellent, the book as such, i.e. the editors’ creation, is one of the most saddening compilations of scholarship I have ever seen. John Martin (Trinity University) and Dennis Romano (Syracuse University) are certainly reputable Venice scholars, but here they seem to have been carried away by their project. The fulsome advance praise on the back of the dust jacket (admittedly, perhaps an unfair place to look) sums up the claim and mission of that project very well: “A dramatic reassessment... [by] leading scholars ... who insist on breaking away from a unilinear reading of Venice’s past. Their studies ... challenge our overidealized assumptions and images of the Venetian republic.” (Margaret Rosenthal) This is probably meant as praise and not ironically, although to accuse historians of insisting to break away from some interpretation surely means that no attempt at scholarship is made, but that preconceived ideological notions determine the outcome of the studies.

One of the great boons of Lane’s scholarship, though, is that he’s able to see through these blinders—which is, I submit, also why his work is quite actively dismissed these days. I found his Venice (JHU, 1973) very worthwhile, although it’s a dense read.

Below, I’m reproducing (parts) of the introduction of his Profits from Power (SUNY Press, 1979), which relate to issues that are very pertinent to our present.

I’ve added some [commentary] and omitted the footnote anchors, but otherwise I’ve left the text speak for its own. Enjoy, if you will.

Of the many sources of power, these essays deal with only one: physical violence and the threat of violence exerted by some men on others. Although such power is at the foundation of well established legal systems, it is most obvious in periods of war or disorder. At the time of the events referred to in the first of these essays, power came not from the muzzle of a gun [contra Mao], but from the edge of a sword, the point of a spear, or the bolt from a crossbow. On the high seas power of that kind was not monopolized by governments; it was organized by competing enterprises that might be called private enterprises except that the line between private and public was then blurred. Later differentiations between political and economic enterprises and among economic institutions, although they have clarified how actions through free markets affect distribution, have somewhat veiled [what an understatement] the effects of power on the distribution of wealth among nations and classes. The use of organized violence is more obvious in the earlier period. Analysis of its use then suggests effects that may be hidden in the modern world.

The efficient use of power in that earlier period brought wealth not only to those for whom the organization of violence was a primary concern—such as slave raiders, pirates, tribute-takers, and tax collectors—but also to many merchants. Why did some groups of merchants prosper more than others, at some times and places? Why those of Venice more than those of Genoa? Or vice versa at other times and places? Why was one commercial route more profitable than another? Specifically, why was the route from Europe to India around Africa more profitable than the route through the Red Sea? Or was it really more profitable? Profitable to whom?

These historical questions dominate the first two essays presented here and introduce some basic concepts employed in seeking answers. Those ideas are expanded or applied in the later essays, which are reprinted in the sequence of their original publication. This introduction aims to explain the varying forms and contents of the essays and their intellectual background. In so doing it includes some references to my other writings and to recent contrasting or complementary treatments by other scholars.

The concepts I found most useful in answering my initial and specific historical questions concerned the relations of profits to ‘protection.’ Their clarification distinguishes between two kinds of enterprises: (1) those that produce protection and are called governments and (2) those that produce goods or other services and pay governments for protection. In Europe’s early overseas expansion, the distinction was conspicuous by its absence, as elaborated in the third essay. Merchants provided their own protection and governments traded for profits. But within Europe there was more specialization. Both kinds of enterprises were important sources of wealth for the wealthy. Many protection-producing enterprises-feudal monarchies and city states-collected large sums in taxes and tribute. Governments were highly remunerative enterprises as evidenced by the fact that the kings, councillors, generals, and judges who headed them were well paid, especially generals such as John Churchill, who became Earl of Marlborough, or admirals such as the Doria of Genoa. The fortunes collected by merchants were for a time small by comparsion, but the merchants accumulated wealth by taking advantage of the different prices at which they were offered protection. In many markets, sellers of spices, for example, had to compete in the sixteenth century with other merchants who received supplies by diverse routes. All these competing wholesale dealers in spices had to make payments for protection directly or indirectly to a number of different protection-producing enterprises, whether taxes to governments or bribes to officials. Less dramatically, in many branches of trade the prosperity of a city’s merchants depended on their paying lower tariffs, lower convoys fees and lower insurance rates than competitors, or lower protection costs in some other form when commercial customs were less developed. The differentials resulting from their being able to operate with lower protection costs constituted what I call their protection rent…

A broader view of the importance of violence-using enterprises for economic development is presented in the fourth essay, an ‘Address to the Economic History Association’. It includes a division of all economic history into four stages. Stage theories are illusory as efforts to predict a predetermined future, but they indicate what the exponent of a particular series of stages believes was important in the past and what he believes will be important in the present’s shaping of the future. Four stage theories serving that purpose have dominated economic history: (l) Karl Marx, taking off from the declaration that the history of all previous societies is a history of class war, defined stages in terms of the classes at war in successive periods, and exhorted to class struggle as the means for creating a desired future. (2) The German Historical School headed by Gustav von Schmoller defined stages in terms of the public authorities that had regulated economic life. He looked to beneficent governmental regulation as the means of progress. (3) The Liberal tradition clung to Adam Smith’s perceptions of the beneficent linked effects of the extension of the market and the division of labor. The stages proposed by Karl Bucher were distinguished by forms of marketing and industrial organization but were entangled in the methodology of the German Historical Schools. The sharp opposition between the Liberal approach and Schmoller’s was more clearly, indeed belligerently, expressed by George Unwin, Professor of Economic History at Manchester (appropriately enough), in his praise of the third book of Adam Smith’s Wealth of Nations. Many stage theories elaborated in this country owed much to the Germans but accepted the basic tenants of the classical Liberal tradition. (4) Finally there was the sociological school, dominated by Max Weber. From narrow juvenile work in economic history he moved through broad studies of the connections between religion and economic life to an examination of the fundamentals of methodology. In the lectures on economic history which he gave at Munich during his very last years, Max Weber sorted out the elements of many particular stage theories while subordinating them to his overarching scheme of human development in which the capitalism of western Europe was the culmination of successive triumphs of rationalization over traditionalism and magic. He was at the same time working on his unfinished masterpiece Wirtschaft und Gesellschaft which when translated with explanations after his death was to make his influence great among sociologists while it declined among economic historians. Today, one may well be surprised to find that the person who judged Max Weber’s summary of economic history worth the labor of translating it was an economist, and not a run-of-the-mill economist but Frank H. Knight of the University of Chicago.

It would be misleading to use the four names, Marx, Schmoller, Unwin, and Weber, to indicate four different stage theories without at once pointing out that the four different traditions have come to conceive ‘stages’ differently. In the Liberal and Sociological approaches, a ‘stage’ has been stripped of all predictive value and causal power. A traditional ‘stage’ such as ‘handicraft’ or ‘town economy’ has come to be regarded as a kind of ‘model’ or ‘ideal type.’ Historical realities are seen as having approximated now one, now another of these models, and to have approximated various models in different degrees contemporaneously. By a ‘stage in history’ is meant only a period of time in which there occurred more approximations of one type and less of another, at least in the region which can be said to be passing through that stage. An implication of evolution or progress survives, but only as an assertion that some types, for example capitalism, have been more nearly approximated more generally in recent periods, whereas other types, such as the self-sufficient village or household was more commonly approximated in an earlier period.

The four schools—Socialist, German Historical, Liberal, and Sociological—competed for dominance in economic history between World War I and World War II. Many influential scholars drew ideas from two or three of the four schools. Werner Sombart was Schmoller’s prize pupil but in the first edition of his Der Moderne Kaptalismus he accepted Marxist doctrine about capital accumulation. In later editions which emphasized the spirit of capitalism he claimed to have embraced Weber’s doctrine of ideal types. Joseph Schumpeter, whose early Viennese background and later American successes linked him to classical Liberal economics, accepted the basic Marxian stages of Feudalism, Capitalism, and Socialism, and explained the waxing and waning of the capitalistic spirit as results of changes in social structure. The stage theory which I offered in order to emphasize the importance of violence-using enterprises also borrowed from several schools.

In emphasizing government it resembled the German Historical School, in its concern with the distribution of the surplus it followed the Socialist School, and in its attempt to analyze how the surplus was distributed it looked for help to the Liberal school. Its claim to originality lay in distinguishing the stages by the effects in each of the control and use of violence: stage one being characterized by plunder and the lack of any surplus, stage two by the tribute-taking of the violence-using enterprises, stage three by the distribution of the surplus through protection rent and land rents, and stage four by the furnishing of protection at cost so that the surplus was distributed through the ‘free market’ to the technically efficient.

The explosion of productivity in nineteenth-century Europe was the dominant historical fact for which all the stage theories provided background. Marx and Weber both considered capitalism the dynamic ingredient in that growth because they found in capitalism the features which distinguished western Europe from the rest of the world and which explained its recent economic leadership. In contrast, pronouncing the word ‘capitalism’ suffices to raise the hackles on adherents of the Liberal school and mention of ‘surplus’ seems to be damned by association [remember: every time you’re offered a binary, it’s likely to be a fake argument™]. This antagonism arises partly from the ambiguous and varied meanings of ‘capitalism,’ but not from that alone. Their beloved term ‘market’ is not entirely free from ambiguity and certainly has a variety of meanings. The opposition of many economists and economic historians to discussing capitalism arises from a desire to avoid certain problems. Attachment to the term arises from insistence on making those problems the center of discussion, namely, the problems of exploitation and social hierarchies. Discussing surplus leads to ranking some forms of consumption above others. Claiming that such problems are better left to ethical philosophy or religion, many economic historians retreat as economists behind the traditional frame of reference within which classical economics has practiced its ‘objectivity.’ Other historians and sociologists seeking a general view of the course of history respond more boldly to the call to battle.

The battle can inflame, however, without illuminating. I feared that might be the result when the committee organizing the program for the Fourth International Conference of Economic History held at the University of Indiana in Bloomington in 1968 agreed that one section should be devoted to ‘Formation and Development of Capitalism’…

In almost that same year a thorough-going rejection of the term capitalism was presented by the distinguished English economist, Sir John Hicks, under the title, A Theory of History. Frankly offered as an adversary’s alternative to ‘the Marxian version of the general course of history,’ it elaborates stage theory in the spirit of the Liberal School for which Unwin spoke and which Hicks imbibed, as he indicates, at Unwin’s University of Manchester. The stages may be diagrammed as follows:

Revenue Economy: (Non-Market-Economy)

• Customary Economy, expanding into

• Command Economy, and then either degenerating through feudalism, or

  preserved through bureaucracy.

Mercantile Economy (Market Economy)

• First phase: City States

• Middle Phase: Semi-mercantilized Territorial States

• Modern Phase: distinguished by Mercantilization of Agriculture,

  the Administrative Revolution in Government, and Fixed Industrial Capital

[…; here follows a somewhat more wordy presentation of these stages, which I omit here]

In these connections a useful distinction has been made by Richard T. Rapp and Edward Ames. Accepting protection as the essential function of government, they point out that is is of two kinds ‘so that protection is not a homogeneous good.’ Both kinds are protection against a threat: ‘a threat by foreigners creates a demand for defense; a threat by one group of the population against another creates a demand for justice. Defense and justice are local public goods: that is to say, a given public service may affect different groups differently.’ In place of the broadly defined ‘tribute-taking’ which characterized the second stage of my series of stages, they prefer ‘extortion’ which they define by saying: ‘A payment for defense or justice contains elements of extortion to the extent that there is a monopoly profit to government.’ They use these concepts to explain how the basic taxations systems of early western European states ‘were born in essentially their final form at the time central governments were formed (between 1200 and 1400 depending on the country2). In each state, social needs for protection and royal ability to provide it at the historical moment of the birth of the tax system determined the character of taxation long into the future.’

In the transition to what Hicks calls the Modern Phase, contests over justice strengthened some property rights and weakened others. The kind of property rights that were protected explains the accompanying growth of productivity, argue Douglass C. North and Robert Paul Thomas in a book discussed in the seventh of these essays. The kind of property rights by which they explain the unique economic growth of Europe in modern times (the kind which enabled Europe to become the center of a ‘World Economy’3) were, they say, ‘Those which channel individual economic effort into activities that bring the private rate of return close to the social rate of return .... Private benefits or costs are the gains or losses to an individual participant in any economic transactions. Social costs of benefits are those affecting the whole society. A discrepancy between private and social benefits or costs means that some third party or parties, without their consent, will receive some of the benefits or incur some of the costs. Such a difference occurs whenever property rights are poorly defined, or are not enforced.’ When they are enforced, after being defined so that the benefits or costs fall on the individual deciding on the action, his return approximates the social return and his striving for gain results in economic growth. The spurt of productivity of western Europe through the mercantilization of agriculture and large investments of fixed industrial capital depended on the protection of property rights of that kind, just as the transition from command economies to the market economy of the city states depended on the protection of the kind of property rights which Hicks analyzed as those needed by traders.

The sharpening of the focus on what is protected by governments, in this case property rights, seems to me admirable. But the thesis of North and Thomas neglects some other aspects. One is the effect of property rights on control of surplus and its investment, that is, of the use of that part of production which is more than is needed to maintain the existing level of production. Will this surplus be devoted to increasing future production or consumed in ways that prevent future increases in production? How, by what classes or institutions, will the decision be made?

When was the last time, if ever, you’ve read such a clear-eyed exposé of the issues at-hand? I submit to you that it’s been quite a while, hasn’t it?

Yet, even asking the obvious questions related to cui bono, whose rights, and what consequences will, say, this tariff or that policy decision has—all of this has become anathema. The same must be said about historical and other context of any such decision.

You can borrow the book at the Internet Archive.

Put crudely, NATO (and esp. the US) functions like the Venetian navy for the mercantile-financial interests of the City of London and its affiliates in Paris, Amsterdam, Brussels, Hamburg/Frankfurt am Main, and Rome.

Evidence is coming from the most unlikely quarters, namely high-profile EU Commission insider Martin Selmayr:

If NATO is ‘the European Army’, and if said alliance™ is overwhelmingly paid-for by the US and manned by US forces, what would that render the US? (By both ‘Europe’ and ‘the US’ is meant: the gov’t and gov’t-like structures controlled by the proverbial powers-that-be.)

I don’t know if that reading of the Von der Leyen-Trump meeting is 100% correct, but it would seem so: no agreement was signed, the commitment™ is verbal-only, and there’s a sizeable share of American power players who are literally doing the same as Von der Leyen: they’re biding their time until Mr. Trump will be gone.

In the meantime, it’s all about money, or protection rent, that’s paid: pay the piper, call the tune.

Change my mind.