• 12 Oct 1999
  • Research & Ideas

It Came in the First Ships: Capitalism in America

The Virginians in Jamestown, the Puritans in Massachusetts Bay, the Quakers in Pennsylvania and other early settlers of what later became the United States all brought with them elements of capitalism, precursors of the future nation's market-driven direction. In this excerpt from his article "American Capitalism" in Creating Modern Capitalism: How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions, HBS Professor Thomas K. McCraw looks at the early years of capitalism on the North American continent.
by Thomas K. McCraw
Book Cover: Creating Modern Capitalism

"Capitalism came in the first ships."
—Carl N. Degler, Out of Our Past

No nation has been more market-oriented in its origins and subsequent history than the United States of America. The very settling of the country, from the Atlantic to the Pacific and onward to Alaska and Hawaii, was one long entrepreneurial adventure. Even down to the present day, more Americans have probably made fortunes from the appreciation of real estate values than from any other source. But land is only the starting place for the epochal drama of American capitalism. That story, in comparison with the long-term business histories of all other large countries, has been one of intense and incessant competition. Americans have persistently shown themselves willing to follow market forces with relatively little hesitation.

In the early years, Americans' ravenous appetite for land was born of European deprivation confronting New World opportunity. Demand, which had been pent up for centuries, suddenly encountered plentiful supply. The settlers' hunger for more and more territory thrust them relentlessly westward, where they could establish farms and ranches that they themselves could own. This was the American Dream in its earliest form, and for the people living the dream, it had an aura of double-edged incredulity. There was disbelief not only at their own good fortune, but also at the backbreaking work required to capitalize on it.

From the colonial period through the early national years, and on into the nineteenth century, everything seemed up for grabs in the new country. Vast, apparently unlimited tracts of land were given away by the government or sold at irresistibly low prices. To get the best land, neither the first colonists nor the pioneers pressing across the frontier had much compunction about dispossessing Native Americans or each other. Sometimes they resorted to outright murder. The movement west constituted a great epic, but in its details was not a pretty story.

Land was available in prodigal abundance in early American history, but it is only one of the classic economic "factors of production." The others are labor, capital, and entrepreneurship. As the earlier chapters of this book have shown, modern capitalism fuses these four factors into operational systems for the conduct of economic life, most notably through the ingenious device of the business corporation.

There are several million corporations in the United States today, and a handful existed at the nation's official birth in 1776. The device became integral to the American economy only in the middle nineteenth century, but it was actually present at the creation 250 years earlier. In 1607, the settlers at Jamestown arrived under the charter of the Virginia Company of London. Puritans founded Boston in 1630 under the auspices of another English corporation, the Massachusetts Bay Company.

The proprietors of the Virginia Company soon were interested primarily in revenues from tobacco. Those of the Massachusetts Bay Company cared less about profit than about setting up what their leader John Winthrop called a "City upon a Hill." They wanted to demonstrate for all humanity the virtues of clean Christian living. If some of the Puritan merchants among them became moderately wealthy, then that might be a sign of God's grace, so long as customers were not cheated or overcharged. The line between virtuous profit and damnable avarice was blurry then, as it remains today. But the Puritans had an unmistakably capitalist turn of mind.

So did William Penn and his community of Friends. Persecuted in England for their religious beliefs, they acquired in 1681 a royal grant of land in America, and proceeded to develop their new colony on both religious and commercial principles. The Quaker merchants of Pennsylvania become prosperous international traders. Like the Puritan merchants of New England, they used their familial and religious connections to form a tight network of trustworthy relationships stretching over long distances. This kind of system for making credible business commitments is one of the essential conditions of strong economic development. In most capitalist economies today, it is embedded in the intricate law of contracts enforced by governments through courts.

Still another English corporation instrumental in populating the New World was the Royal African Company. Chartered in 1672, this company proceeded to take a significant though not dominant part in the slave trade. For the profit of shareholders, it brought to the western hemisphere masses of men and women who had been taken from Africa against their will. Eventually, many thousands of white merchants and seamen on both sides of the Atlantic participated in this commerce, including several hundred from Massachusetts and Rhode Island. The total number of Africans transported to the New World was about 10 million. Their destination was usually Brazil or one of the Caribbean sugar islands, but some 596,000, or about one of every 17, went to areas that became part of the United States.

In 1776, the 13 colonies that made up the original United States declared their independence after almost 170 years of British colonial status. Even at that early date, the new country's population of 2.5 million included plentiful examples of capitalism's many faces. Then as now, capitalism could serve despicable ends, noble ones, or some mixture of the two.

In between the oppressed slaves on the one hand and free yeoman farmers and entrepreneurs on the other stood a large number of whites who had come to America as indentured servants. Between one-half and two-thirds of all white immigrants before the Revolution arrived under these terms. They flocked to America mainly from England, but also from Scotland, Ireland, and Germany. (Germans tended to come in family groups, the others as single adults.) A few were abducted and taken aboard ship by force, but most made the trip voluntarily. They exchanged four to seven years' labor for passage to the New World.

So capitalism did come in the first ships, and in many different forms: legitimate commerce, legal cover for religious freedom, the slave trade, and individuals' exchange of labor for a ticket to America. Yet none of these examples represented modern capitalism. Few had much to do with the First Industrial Revolution, let alone the Second or Third. Each concerned farming, commerce, and trading, not technology and manufacturing. But all contained powerful elements of capitalism, and that proved to be momentous for the nation's future.

About the Author

Thomas K. McCraw's biography Prophet of Innovation: Joseph Schumpeter and Creative Destruction is scheduled to be published in April by Harvard University Press. Footnotes

1. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle (1911; translation into English by Redvers Opie, Cambridge, Mass., 1934).

2. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process (New York, 1939). Schumpeter to Mitchell, 6 May 1937; Schumpeter to Oscar Lange, 24 Feb. 1937, both in Joseph A. Schumpeter: Briefe/Letters, eds. Ulrich Hedtke and Richard Swedberg (Tübingen, 2000) (hereafter cited as Briefe), 295, 301, 303.

3. Committee on Research in the Social Sciences, Directors' correspondence, letter, Schumpeter to Committee (16 June 1937), in box 4 (P-Z), UAV 737.18, Harvard University Archives. Department of Economics, correspondence and records, 1930-61, letter, Schumpeter to Burbank (17 Jan. 1938), in box Robertson-Schumpeter, UAV 349.11, Harvard University Archives.

4. James Tobin, foreword to Eduard März, Schumpeter: Scholar, Teacher, Politician (New Haven, 1991), ix. Most reviews of Business Cycles were favorable. See E. Rothbarth of Cambridge, Economic Journal 52 (June-Sept. 1942): 223-29; J. Marschak of the New School, Journal of Political Economy 48 (Dec. 1940): 889-94; and Oscar Lange of the University of Chicago, Review of Economic Statistics 23 (Nov. 1941): 190-93. Hans Neisser of the University of Pennsylvania noted several problems with Schumpeter's argument, but conceded that "it will always be a marvel that such a book could be written by one man." Hans Rosenberg of Brooklyn College wrote, "This work cannot be merely read; it must be studied." Neisser, Annals of the American Academy 208 (March 1940): 205-6; Rosenberg, American Historical Review 46 (Oct. 1940): 96-99.

Simon Kuznets, a business-cycle theorist, pioneering macroeconomist, and future Nobel Laureate then based at the Wharton School, wrote the longest and most important critique. He praised Schumpeter for having written a "monumental treatise" that raised all the right questions, but he argued that cycles are quantitative phenomena, and instead of robust numbers Schumpeter had presented "an intellectual diary." He had told of his "journey through the realm of business cycles and capitalist evolution," disclosing "his encounters there with numerous hypotheses, diverse historical facts, and statistical experiments." These efforts were praiseworthy, but they could not substitute for tight quantitative analysis. See Kuznets, American Economic Review 30 (June 1940): 257, 266-71. A response came from Nicholas Mirkowich of the University of California, who pointed out that the book is not about cycles alone, but is a more general theory of economic development, extending the work Schumpeter had begun in his first two books; and contending that readers should not throw out the baby with the bathwater. See Mirkowich, American Economic Review 30 (Sept. 1940): 580.

5. Including Business Cycles, Schumpeter's published work for the remainder of his career totals about two million words. Of this work, Nathan Rosenberg has argued, "The fact is that most of what Schumpeter wrote qualifies as history, both economic and intellectual. More than this, the very subject matter of economics, in Schumpeter's view, is history." Rosenberg, "Joseph Schumpeter: Radical Economist," in Yuichi Shionoya and Mark Perlman, eds., Schumpeter in the History of Ideas (Ann Arbor, Mich., 1994), 56. In his book Schumpeter and the Endogeneity of Technology: Some American Perspectives (New York, 2000), Rosenberg makes a thorough case that Schumpeter was fundamentally an economic historian.

6. Business Cycles, vol. 1, v. This was by no means the first time Schumpeter had made such an argument. See Schumpeter, "Über das Wesen der Wirtschaftskrisen," Zeitschrift für Volkswirtschaft, Socialpolitik und Verwaltung 19 (1910): 271-325; and Harald Hagemann, "Schumpeter's Early Contributions on Crises Theory and Business-Cycle Theory," History of Economic Ideas 11 (2003): 47-67.

7. Business Cycles, vol. 1, 169, 173-74. Schumpeter would likely have been better advised to focus on the basic Juglar cycle, which for his purposes was the most plausible and important of the three. At times in the book he wrote not just of three cycles but of five, and in fact there could be many more than that, as innumerable stock-market analysts have tried to show. But the overall point was the one he made in his preface: Cycles are of the essence in capitalism; and it follows that depressions are an inescapable and even beneficial phase in its evolution. In a letter to the prominent American scholar Paul Homan, Schumpeter elaborated a bit: "For if one thinks of business cycles as the typical form of capitalistic evolution and if one looks upon those long time movements, which are sometimes called industrial revolutions, as one species of business cycles, it is but natural to link up with the cyclical phenomenon practically the whole of the economics and sociology of capitalist society." Schumpeter to Homan, 2 Apr. 1938, in Hedtke and Swedberg, eds., Briefe, 309.

8. Business Cycles, vol. 1, 299; Samuelson, "Joseph A. Schumpeter," Dictionary of American Biography, suppl. 4, 1946-1950 (New York, 1974), 723. This is not to say that the three-cycle scheme has no value at all. See, for example, Allen Oakley, Schumpeter's Theory of Capitalist Motion: A Critical Exposition and Reassessment (Aldershot, U.K., 1990); Christopher Freeman, "Schumpeter's Business Cycles Revisited," in Arnold Heertje and Mark Perlman, eds., Evolving Technology and Market Structure: Studies in Schumpeterian Economics (Ann Arbor, 1990), 17-38; Maria Brouwer, Schumpeterian Puzzles: Technological Competition and Economic Evolution (New York, 1991), esp. ch. 1; and Mümtaz Keklik, Schumpeter, Innovation and Growth: Long-cycle Dynamics in the Post-WWII American Manufacturing Industries (Aldershot, U.K., 2003).

9. Business Cycles, 174, 224. If, for example, a war or natural calamity interrupted a period's prosperity, Schumpeter still counted that period as prosperous in his cyclical schema. Otherwise, he wrote, it would "be inadmissible for a doctor to say: 'Organically this man is perfectly sound. If he is dying that is due to a brick which has fallen on his head.' I strongly feel that we must get thoroughly rid of the prejudice that our [cyclical] phenomena are simple and can be directly handled by simple methods either theoretical or statistical." Schumpeter to Mitchell, 6 May 1937, in Hedtke and Swedberg, eds., Briefe, 301, 303.

10. Schumpeter sent Keynes a copy of Business Cycles, and received a cordial reply. He then wrote in a letter to Keynes, "I cannot visualize you really wading through those two vols—or else I should apologize, not only for my egotistical concentration on my own tale (which you so generously forgive) but also that terrible size due to my wish to deal fully, historically and statistically, with 16 units of what I call the Juglar cycle, pointing laboriously in every instance to where my schema fits the facts and where it doesn't." Schumpeter to Keynes, 3 Oct. 1939, in Hedtke and Swedberg, eds., Briefe, 319-20.

11. On the composition, publication, and reception of The General Theory, see Robert Skidelsky, John Maynard Keynes: The Economist as Savior, 1920-1937 (New York, 1992), chs. 14-16.

12. In the acknowledgments to Business Cycles, Schumpeter thanks a few research assistants and, briefly, two of his Harvard colleagues, Seymour Harris and W. L. Crum, as well as "Professor Gordon, now of the University of California, and Dr. Clausing of the University of Bonn," but not the many other friends and colleagues who could have given him useful advice—not even his wife Elizabeth Boody Schumpeter, herself a very capable economist (vol. 1, pp. vii-viii).

13. Schumpeter, review of The General Theory of Employment, Interest and Money, in Journal of the American Statistical Association 31 (Dec. 1936): 794-95. In The General Theory, Keynes names dozens of economists and describes their ideas in detail—often very critical detail. He takes no note of Schumpeter, and little of other European business-cycle theorists. Keynes did not read German easily, and he paid insufficient homage to the giants of either the German tradition of economics or the Austrian: to the Germans Gustav Schmoller, Werner Sombart, Max Weber, Arthur Spiethoff, and Adolph Löwe; to the Austrians Carl Menger, Friedrich von Wieser, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich von Hayek. Many distinguished economists besides Schumpeter wrote negative reviews of The General Theory, among them Frank Knight, Jacob Viner, A. C. Pigou, Dennis Robertson, and Alvin Hansen, who later changed his mind and became an ardent supporter of Keynes.

14. Business Cycles, vol. 1, vi. Schumpeter goes on to say that he wishes "to make it clear that my analysis lends no support to any general principle of laissez faire."

15. Ibid., v-vi.

16. Perkins also edited most of the work of F. Scott Fitzgerald and Ernest Hemingway. In addition to condensing Look Homeward, Angel, he cut Wolfe's Of Time and the River by about half. See David Herbert Donald, Look Homeward: A Life of Thomas Wolfe (New York, 1987), 202, 294-303; and the long discussion on pp. 464-84 of the controversial work of another editor, Edward Aswell, on Wolfe's posthumously published novels.

17. In 1964, the economist Rendigs Fels of Vanderbilt, a former student of Schumpeter's, condensed Business Cycles by about 50 percent, though not in the pattern I have described here. McGraw-Hill, the original publisher, brought out this abridged edition. It was not very successful.

18. See, for example, "The Creative Response in Economic History," Journal of Economic History 7 (Nov. 1947): 149-59; "The Historical Approach to the Analysis of Business Cycles," in Universities-National Bureau Conference on Business Cycle Research, Conference on Business Cycles (New York, 1949), 149-62; "Economic Theory and Entrepreneurial History," in Change and the Entrepreneur (Cambridge, Mass., 1949): 63-84; and History of Economic Analysis (New York, 1954).

One of the most significant early signs of Schumpeter's movement toward a greater appreciation of history (and sociology) was his appreciative reconsideration of the leader of the German Historical School. See Schumpeter, "Gustav v. Schmoller und die Probleme von heute," Schmollers Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deustchen Reich 50 (1926), vol. 1, 337-88. For a discussion of the importance of this piece, see Richard Swedberg, Schumpeter: A Biography (Princeton, N.J., 1991), 82-89. On the whole, however, Schumpeter's turn toward history as represented in Business Cycles does not signal a revival of the German Historical School. As is well known, Carl Menger and other leaders of the heavily theoretical Austrian School in which Schumpeter had trained at the University of Vienna engaged in a long and bitter Methodenstreit (struggle over methods) with the German Historical School. Schumpeter lamented the Methodenstreit and respected the Historical School; but he regarded it, on the whole, as handicapped in constructing the kinds of comparative histories that would inform theory.