Well, if that's all that you wanted to know . . .

Mon, 03 Mar 1997 21:45:32 -0500
Salvatore Babones (sbabones@jhu.edu)

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Esteemed Colleagues,

I've just re-read Prof. Bergesen's posting from last October, which
apparently was the inspiration for the current debate on capitalism, and
I'd like to throw a few cents into the debate.

First, Prof. Boswell is certainly correct as to the enormous magnitude of
16th-17th century European growth. What we don't know very well is how
this growth measures up to other periods of growth. Decennial growth
rates in Renaissance Florence must have been pretty impressive. And the
little city-state called Rome conquered virtually the entire Mediterranean
in a few centuries. (Given the transportation capabilities of the 3rd
century BCE, that's not too shabby - and the Romans didn't have much in
the way of technological advantage, either.) And I'll leave "mainland
Asia" for those better informed to discuss.

Second, output, living standards, technology, and the like may have been
high in western Europe in 1700, but they weren't off the scale. British
Romans lived pretty well, and they were out colonial nobodys. 15th
century Venice must have been a pretty impressive port. Ancient Piraeus
and Syracuse ditto.

Third, there have been rises and falls throughout history. It would not
have been very surprising if over the centuries a wave of economic growth
had swept over Europe, with the Mediterranean rising first, then mellowing
into a golden sunset while the Netherlands rose, then the Dutch getting
fat on prosperity while the British stole their markets, Britain having a
run of things for a while until over time the whole area atrophied and
slowly faded into mediocrity. Read Phonecia -> Ionia -> Athens -> Greek
Italy -> Carthage -> Rome -> the western provinces. Please, Profs. Frank
and Barendse, fill in the story for Asia.

Now, Prof. Thompson's call for determining the relative magnitudes of
different episodes of economic growth emprically is well taken, but I
would argue that this is not necessary for understanding the issue at
hand, which I take to be "was Europe different?". There is nothing such
as "a quantitative change so large as to be qualitative." There may be a
quantitative change so large as to imply that a qualitative change has
taken place to cause it, or a quantitative change so large as to be sure
to cause qualitative changes, but if what we are interested in is the
qualitative change itself, then we always retain the option of analyzing
it directly. This I propose to do.


Before considering capitalism, let's consider ARBITRAGE. Arbitrage is
buying low to sell high. There are two basic kinds of arbitrage:
arbitrage over distance and arbitrage over time. Let's consider the

In ARBITRAGE OVER DISTANCE, a trader buys in one place in order to sell
in another. By doing so, the trader fosters economic efficiency: if
grain is cheap around the Black Sea and expensive in Athens, while pottery
is cheap in Athens and expensive around the Black Sea, the enterprising
Athenian charters a ship, makes a round trip, and goes home quite a bit
richer for taking the trouble. The Athenian has produced nothing, but has
made a profit. Now, I leave it to the moralist among you to determine
whether that profit was surplus value or entrepreneurial return. In
either case, Ricardo's principle holds that both Athens and the Pontus are
richer as a result - even if the resulting riches may or may not be fairly

That wealth-creating trip would never have been made, however, if some
political organization hadn't suppressed piracy in the Aegean, improved
harbors, enforced contracts for ship charters, etc. I'll give North et al
their due (and I don't think that North said anything fundamentally new,
but that's another issue). Fine. So arbitrage over distance requires
some political input, but can have some really big economic payoffs.

Let's look at the other kind of arbitrage, ARBITRAGE OVER TIME. The
simplest example is buying low to sell high: Herodotus tells the story of
how Solon cornered the market on olive oil by buying options on all the
presses since he could see that it would be a big crop that year. Buying
and selling the same product over time CAN produce a net social good: if
someone buys up grain in glut years and sells it in famine years, people
may not like the prices charged when the famine comes, but better
expensive grain than no grain.

But it gets better. You can buy some flax, rent some spinners and weavers
(when you rent people you pay them wages, another point that I'll get back
to somewhere else), and six months later - presto! - you have linen. You
sell the linen and get back what you started with plus some. Again, the
usual disclaimer about surplus value. Social wealth is created. It may
go to the wrong people, but arbitrage over time also created social

Now, just like arbitrage over distance is regulated by government inputs,
arbitrage over time also has a regulator. It is the interest rate. The
lower the interest rate, the more arbitrage over time; the higher the
interest rate, the less. This is easy to see: say that there existed
some investment opportunity that would pay a 6% profit in one year's time.
If the interest rate were 5%, you could borrow money, make the investment,
take your profit, and pay off your loan. If the interest rate were 7%,
the investment opportunity would go untaken.The lower the interest rate,
the more social gain from arbitrage over time.

There has always been some arbitrage over time, and a stable political
environment certainly was good for interest rates and long-term
investment. But both forms of arbitrage - ARBITRAGE OVER DISTANCE and
ARBITRAGE OVER TIME - reach a natural maximum for any given level of
technology and societal propensity to save. Once a government has swept
pirates from the seas, put in a pro-trade tax structure, enforced
contracts, etc., you've done all you can do. The economy chugs at full
steam . . . and grows maybe 1% per year. That's still doubling every 40
years or so (does someone out there have a compound interest table?); not
shabby, but nothing unprecedented. We've seen a lot of that kind of thing
in history - east, west, and very west.

There's room for more, though. A breakthrough in transportation can cause
massive growth for a while - until all the newly-reachable arbitrage
opportunities are taken up. Witness the periodic outbreaks of canal
building in western history. Or a society can go way off the scale in
saving for the future, institutionalizing a high level of arbitrage over
time, leading to more and more new production, and new technologies as
well, due to cross fertilization (cheap iron -> railroads -> cheaper iron
-> more railroads, etc.).


If you believe in the protestant ethic, you could argue that the northern
Europeans saved and saved, lowering interest rates, which led to more
arbitrage over time. I say bunk. The Dutch burghers dressed somberly,
true, but richly nonetheless. And they commissioned portraits to prove
it. Amsterdam wasn't exactly shack city, from what I hear (would Prof.
Barense or Prof. Frank care to enlighten?).

My own pet theory (which I will be testing in the course of preparing my
doctoral dissertation) is that the rise of fractional reserve banking
in Britain, and later in the U.S. and on the "peninsula," revolutionized
the practice of arbitrage over time. Fractional reserve banking
essentially means that when you deposit $100 (excuse the U.S.-centrism: I
don't have a yen sign on my keyboard!) in the bank, the bank puts aside
about $7 in reserve and lends back out the other $93. Prior to about
1970, they didn't just lend it out to anyone, but primarily to capitalists
(see, I didn't forget about capitalism!).

Let's say that the entire economy contained only $1000. Without
fractional reserve banking, my $100 represented 10% of the total credit
available in the economy. But if everyone deposits their money in a bank,
the total credit available will be $1930, with a total of $70m sitting
unused as reserves. There's no magic here. If I want to build a factory,
I can use either my $100, or I can borrow money from the bank - as long as
everyone doesn't want their money at the same time, this works. Note that
only the money has increased, not the goods. Goods become accordingly
more expensive.

The trick is this: the new money is only made available for arbitrage
over time, not for consumption. The pool of money available to finance
consumption remains the same, $1000, but as a share of society's credit
resources, it has dropped from 100% to just over 50%. Accordingly,
interest rates in the market for arbitrage fall dramatically, while
interest rates for consumers rise.

This QUALITATIVE TRANSFORMATION in society's trade-off of present for
future goods could lead to a massive QUANTITATIVE growth in society's
gross output.

I submit, in accordance with Profs. Bergesen, Frank, and Barendse, that
the rise of capitalism in the west was qualitatively similar to periods of
economic vitality in the western past, the east, and perhaps the far west
(measuring from Greenwich - oops! - sorry! :) ). I further submit that
the transformation of capitalism through the operation of fractional
reserve banking, first in Britain and later in the U.S. and western
Europe, was a qualitative transformation, not because of its raw
quantitative scale, but because it was founded on a new and unprecedented
basis. It brought about new forms of accumulation and new forms of

I submit, contra Profs. Bergesen, Frank, and Barendse, that what we are
witnessing today is not the decline of the west, but the delayed rise of
the east, based on principles similar in operation, but different in
specifics, to those that brought about the rise of the west. The west is
not declining - by long-term historical standards, Europe and the U.S.
are still growing at stupendous rates. Rome fell. The west is still
rising, only less quickly than before. THAT is unprecedented, and part of
the qualitative change that I have suggested above.

Thank you for your attention,


Salvatore J. Babones
Doctoral Candidate
Department of Sociology
Johns Hopkins University
Ph.D. expected May, 1998

PS - Chris Chase-Dunn is not to be held responsible for the views of his
advisees, not for their cheekiness.

:) S.