The Quest to Understand Capitalism’s Origins: The Rise of a Market-Driven World
Recently, I’ve been reading quite a lot of economics books and trying to dig deeper into the history of capitalism. It’s telling that an econ postgrad (me) who spent 4 years studying complex macroeconomical models and econometrics can’t even explain how capitalism came to be. Years later I am still wondering as, unfortunately, none of my teachers covered this topic. Neither did any of the funding fathers of capitalism that I have read recently; From Milton Friedman to Friedrich Hayek. So what better way to find out than investigating this topic together?
In this essay, we will explore how the shift from feudalism to capitalism was not merely an economic transformation but a profound change in societal mentality, driven by surplus production, workforce mobility, and socioeconomic shifts. We will do this by:
Exploring the core differences between the two economic models: capitalism vs. feudalism both from a practical but also ideological perspectives
Understanding what fundamental characteristics feudalism lacked for capitalism to emerge
Examining the socioeconomic events that created the fertile soil for capitalism to grow
Economic Systems in Contrast: Capitalism vs. Feudalism
Let’s start by taking a very simplified look at both models and understanding the main differences:
Capitalism: If we take a look at the core of capitalism, we can see it is strikingly simple based on a “circular flow”. In very simplified terms, here comes capitalism: In order to produce the goods and services that consumers need, firms employ people (labour) and capital (In form of liquid assets such as money or iliquid assests, such as building and machinery). In exchange for these products, households spend their hard-earned money, which comes from labour (income) and savings (capital). The revenue from these sales is what provides firms with money to pay salaries. The excess money not spent on products (households) or salaries (firms) goes back into the system either directly (through investment) or indirectly (through banks) to the firms. Mix this circular system with an ideology based on individual freedom, entrepeneurship and competition for profit, and voilà: Capitalism.
Feudalism: Now, consider the core of feudalism (yet again, very simplified): Land is the main source of wealth and productive power. Lords own large estates and grant portions of their land to vassals in exchange for loyalty and military service. Vassals oversee the peasants (serfs) who work the land and serfs provide agricultural labor and produce goods, most of which go to the vassals and then to the lords as rent or tax. In return, serfs receive protection and a small share of the produce. Excess goods could be traded for other goods or coin, which could be saved. The vast majority of people were employed in agriculture (85-90%) and a few in rudimentary manufacturing (10-15%). Wealth is mostly measured by land ownership and its productivity, creating a self-sustaining cycle where goods produced on the land support the entire hierarchy. Combine this system with an ideology based on social hierarchy, land tenure, and mutual obligations, and voilà: Feudalism.
Despite the organizational differences (vassal-lord vs. employee-employer), economic activities in feudal times show similarities to capitalism. People worked for sustenance, and those with power (capital/rights) owned the means of production (factories/lands). Households bought and sold goods, saved and spent money, and even banks existed in the 14th century1. Both local and international trade existed, although at a much smaller scale in the case of feudalism. Thus, many elements of the capitalistic circular system were already present, albeit in a slightly different form or scale.
So, what does truly set capitalism apart? Is it merely the scale of economic activity, or are there specific prerequisites for the intricate production-consumer interactions we see today? In my view, three fundamental characteristics lacking in feudalism were essential for capitalism’s development:
Absorption of Surplus: Capitalism relies on consumer demand to sustain the system, while feudalism was too inefficient to produce or absorb surplus.
Workforce Mobility: In capitalism, labour mobility is crucial for growth, unlike in feudalism where people were tied to the land and lords.
Market Mentality: Capitalism thrives on a market-driven mentality focused on profit and innovation, unlike the more static feudal system.
Although the first 2 characteristics are important, the most fundamental change needed for capitalism to flourish was one of mentality. In feudal times, money did not rule the world as it does today. The hunger for profits was not a main driver of technological advancements, and merchants were a small cohort of people. In short, markets and the mentality that accompany them were not as prevalent as they are today.
The Shift in Mentality: From Societies with Markets to Market Societies
In the transformation from feudalism to capitalism, we slowly transitioned from a “society with markets” to a “market society” during a span of hundreds of years. This shift was made possible by a set of interrelated factors such as the developments in surplus production/absortion, workforce mobility and changes in private property rights among other things. The hunger for trade impulsed a new mentality which resulted in the abandoning of old social structures. The market mentality slowly started filling in the cracks that resulted from the breakdown of feudalism. So, what are the differences between a “market society” and a “society with markets”?
Society with markets: In earlier times, markets existed as a component of the social and economic structure. Markets were places where people exchanged goods based on certain rules and dynamics (such as supply and demand), and these rules and dynamics were restricted to markets. In those times, markets were limited in their scope and influence and were surrounded by a broader social fabric that dictated different values and norms. These norms were very different to what we are used to today where almost everything is dictated by money. I wonder what a Knight would have answered if you tried to hire him for gold, or what a noble would have said when trying to buy out their lands. Such offers would have likely been met with confusion or offense, as these roles and possessions were intertwined with honor, duty, and heritage rather than mere economic transactions.
Market society: Nowadays, our current world is in stark contrast with older times. The underlying concepts of markets dominate our economic and social organization. Markets are no longer just places; they permeate everything. The principles of market transactions—efficiency, competition, and profit maximization—have infiltrated spheres previously governed by different values. Education, healthcare, and personal relationships are increasingly viewed through the lens of market dynamics. In this lens: Patients are customers, schools and universities fight for ranking and funding by selling marketable skills. Even personal relationships are influenced, with social media platforms commodifying interactions and friendships, turning social capital into measurable metrics like likes and followers. In today’s modern ideological landscape you can probably buy any knights’ services or any lords’ lands (for the right price, of course).
To understand how this shift in mentality happened, we need to explore societies with markets and the socio-economic changes that propelled the gradual transformation. For this, we will be taking a look at some historical examples.
Historical Examples: Why Didn’t Capitalism Sprout Earlier?
This shift in mentality both contributed to and was a result of the breakdown of the feudal system. Even though we have gone through the core differences between both economic models, we need to dig deeper into the details to understand what were the key changes to impulsed the change. Some key concepts we will explore include changes in production surplus, the commodification of labor, and constrained markets, among others. But first, we need to travel back to older times—times when things were different, and people were ruled by different ideas and values. Let’s picture a couple of examples and travel back to the 1500s:
Picture this: You are an average farmer (serf) working for your lord in one his lands you have been assigned to. You are expected to work the lands of your lord to produce a certain amount of crops each season, a small part of the land is reserved for your personal sustainance. Your labour “earns you no money”, if you do not trade (which is heavily restricted). You are able to sustain yourself based on what you farm and what you exchange in the small comunity/village you live in. Land ownership is reserved almost exclusively to nobles, not for common people.
Or imagine you are the town’s shoemaker. The guild you belong to dictates the quantity, quality, and selection of goods you produce. Production is based on the community’s needs and potential excess trade the guild estimates necessary. Overproducing (surplus) is pointless, as scarce resources might be wasted. Changing your profession is incredibly difficult, often inherited within the same household. You own your workshop and tools but not much more.
These examples bring up very important differences fundamental to understand some underlying concepts that we take for granted in our current economic model that were not there during feudalism. These being:
(Non-existent) Wage Labor: The concept of “selling” your labor (wage-labor) is quite new and serfs did not work for a salary but for the right to exploit a land. Hence, the relationship between the serfs and their lords is not comparable to that of an employee to their employer. Serfs were tied to their lands, not only physically but also legally and socially, based on feudal obligations. These obligations were not negotiated but imposed by the feudal system. This system provided a basis for social security (albeit a very limited one) as it provided sustenance for the serfs. Most of the people were not free to move around, in contrast to the modern job market. People working in guilds had the closest we get to the modern job market (roughly 10% of the population worked on guilds2, although these are unreliable estimates). There was no “free labour” (labour mobility) during these times.
Constrained Markets: Feudal lords and guilds dictated the production of goods: The quantity, quality and selection. This could be comparable to a centralized production plan used in communist planned economies, although much simpler due to a manageable economic structure and smaller scale. There was never a free flow of goods and trade was carefully planned and organized.
Lack of (need of) Surplus: During feudal times there was a lack of surplus in most domains, mostly because there was not a need for surplus as there was not sufficient demand. The reasons are plenty: constrained markets, inneficiency of production, lack of trade, general lack of profit seeking mentality, etc. The surplus topic is incredibly important, as surplus is the cornerstone of a market society. In order to exchange goods with others you need to have enough to serve yourself and extra to sell.
Private property: The modern concept of private property is fundamentally different from that of older times. The structure of feudal society, particularly in medieval Europe, was deeply hierarchical and based largely on land tenure systems that defined social status, economic power, and political rights. Nowadays private property just equals money, but for feudal lords it meant much more than that.
The gradual change in these 4 characteristics are some of the main reasons that allowed us to slowly transition to the modern capitalistic model by creating a fertile soil to promote trade and unchain the markets. The next question is: what were the socioeconomic events that impulsed changes in these social & market characteristics?
The Erosion of Feudal Values: Creating Fertile Soil for Capitalism
The erosion of feudal values was not something that happened overnight but was a gradual process that unfolded over several centuries. One of the key factors is the incredible increase in trade and the rise of a merchant class which began to shift the economic landscape and, with it, societal values. All these changes got us closer to abandoning old values and welcoming our classic capitalistic values that we so much esteem.
From Serfs to Employees: The Commodification of Labour
In the late Middle Ages, the decline of serfdom and the gradual emancipation of the peasantry began to change the economic fabric of Europe. As serfs became free peasants, they started to move to towns and cities seeking employment. A significant catalyst for this mass migration was the enclosure movement, particularly in England. Feudal lords began to “enclose” common lands, transforming them into private property3. Why, you might ask? Lords were in the search of more profitable ventures, particularly wool production. Wool became a highly lucrative commodity starting in the 16th century. Through enclosures, large tracts of land were converted into sheep farms. The massive expansion in wool production was mainly due to the expansion of the trade routes, where english textile products were sold around Europe (Absorption of Surplus). Think about it, why have a large number of people (serfs) working your lands in a much less lucrative business (agriculture)?
This migration was pivotal in the emergence of wage labor, as people were no longer tied to the land and vassal obligations. Former serfs, now landless and desperate for work, mass migrated to towns and cities where the new upcomming industries—such as textile manufacturing, which benefited from the wool produced on enclosed lands—provided new employment opportunities. Factory owners rejoiced at the incredibly cheap and abundant labour force flocking at their doors. This rise of wage labor fostered a more dynamic and flexible economic system, fundamental for the development of modern capitalism.
The Expansion of Markets: Innovation, Surplus and Mass Urbanization
Markets, once constrained and tightly regulated by feudal lords and guilds, began to expand and become more dynamic. The decline of feudalism and the mass migration of serfs due to enclosures saw the rise of towns and cities, which became centers of trade and commerce. The growth of these urban areas created enormous clusters of demand that couldn’t be served locally4. As such, the need for more efficient trade and production capabilities grew, and this increase in demand impulsed innovation in production techniques and trade practices across all fields. Finally there was a need for surplus, both locally and internationally. This meant that production was not only a means for subsistence anymore, and surplus goods became critical in the economy.
This increased need also shattered the tight chains that both feudal lords and guilds had on the market dynamics. The bigger the markets are, the harder they are to regulate. As such, guilds started loosing power and relevancy and the emerging notion-states around Europe started to promote commerce and industry at the detriment of the lords control5. The markets were freer than ever before with technological advancements improving both efficiency and quality of production.
The Evolution of Private Property: Liberalization of Markets
The concept of private property underwent a profound transformation during this transitional period. In feudal society, land ownership was tied to social status, political power, and a network of mutual obligations. However, as economic structures changed, so did the notion of property. The rise of a market economy necessitated a clearer and more flexible system of property rights, where land and other assets could be bought, sold, and used as collateral for loans6. This shift was crucial in facilitating economic transactions and investments. The Enclosure Movement in England, which transformed common lands into privately owned property, exemplifies this shift.
This shift towards a more liberal and clearer market for property rights is a fundamental cornerstone of modern capitalism. This encouraged individuals and businesses the liberty to allocate resources to a wider variety of assets, pursue entrepreneurial ventures, and engage in productive activities that were otherwise out of reach in earlier times. Most importantly (probably), it provided a legal framework that protected property owners’ interests and ensured the enforceability of contracts7. This starts to sound very much like modern capitalism, doesn’t it?
Conclusion: Reflecting on Capitalism’s Emergence
The journey from feudalism to capitalism represents a profound transformation in societal mentality and economic structures. This shift was not just about changing economic models but about redefining human relationships, property rights, and the value systems that underpin our interactions. The commodification of labor, expansion of markets, and evolution of private property were pivotal in creating the fertile ground necessary for capitalism to flourish.
At its core, this transition was fundamentally a shift in mentality. The emergence of a market-driven mindset, characterized by the pursuit of profit, individualism, and innovation, replaced the static, obligation-based values of feudal society. This new mentality permeated all aspects of life, encouraging a dynamic and flexible economic system where mobility, competition, and entrepreneurial spirit could thrive.
Recognizing this shift in mentality is crucial for understanding the foundations of our modern economic world. By appreciating the historical context in which these changes occurred, we can better understand the forces that continue to shape our economic and social landscapes. This can also help us recognize that the next economic model will be driven by a mentality change. This always makes me wonder, what new mentality will shatter our current one? Time will tell.
Goldthwaite, R. A. Banks, Places and Entrepreneurs in Renaissance Florence, (1995). Volume 492 of Variorum – Business & Economics
https://en.wikipedia.org/wiki/Guild
https://en.wikipedia.org/wiki/History_of_capitalism
Holton, R.J. (1985). The Place of Feudalism in the Transition to Capitalism. In: The Transition from Feudalism to Capitalism. New Studies in Sociology. Palgrave, London. https://doi.org/10.1007/978-1-349-17745-5_7
Rodney Hilton, FEUDALISM AND THE ORIGINS OF CAPITALISM, History Workshop Journal, Volume 1, Issue 1, SPRING 1976, Pages 9–25, https://doi.org/10.1093/hwj/1.1.9
North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press
De Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books