Introduction
Capitalism, also referred to as a free enterprise economy or free-market economy, is a type of economic system dominant in the western world where most of the production is privately owned. The economy uses operation markets to guide production and distribute income (Brick, 2015). Studies indicate that modern capitalism emerged in the 18th and 19th centuries in Western Europe. Some scholars of the 18th century, such as Marx, predicted that Western capitalism would spread to all countries globally (Marfany, 2016). As per their prediction, many countries around the globe practice capitalism in their economies, characterized by freedom of choice, free enterprise, competition, private ownership, and the possibility of profit. Capitalism is one of the greatest and most adopted forms of economic system because of the various advantages and opportunities it presents to individuals in a country. These include and are not limited to giving power to people, improving people’s lives, and producing wealth and innovation. One form of capitalism is financial capitalism which refers to the subordination of production processes to the accumulation of financial profits in a country’s the economy/financial system (Allen, 2003). In financial capitalism, the intermediation of saving to investment is a commonly used economic function with various impacts on social evolution and political process. In the modern economic world, financial capitalism is referred to as “financialization” and is a very strong force in driving the global economy.
Recent studies have indicated that trading money, risk and associated products (financial capitalism) lead to great profits as compared to trading services and goods for capital accumulation (Brick, 2015). In many capitalist economies, especially those in Western Europe, financial capitalism ensures that many aspects of daily life such as pensions, schooling and homeownership are mediated using financial markets. Profits from financial capitalism come from sale and purchase of, or investment in, financial products and currencies such as futures, stocks, and bonds. Lending money for interest is also used as a way of making profits. Capitalism also has some disadvantages. By using the investment of capital or money to produce profits, only a small portion of people and large corporations benefit, leading to economic inequality between the poor and the rich (Allen, 2003). This paper describes the rise of financial capitalism in North-western Europe and discusses how new methods of intermediation contributed to the emergence of modern economic growth.
The rise of financial capitalism in North-western Europe
The rise of financial capitalism in North-western Europe dates back in the 16 century. Its development was spearheaded by the growth of the English clothing business during the 17th and 18th centuries (Brick, 2015). Countries in this region include; the UK, Ireland, German, Sweden, Iceland, Northern France, Norway, Netherlands, Denmark, Luxembourg, and Belgium. During this time, accumulated capital was used to expand productive capacity instead of investing the capital in unproductive businesses such as cathedrals and pyramids as it was the case before.
One of the contributing factors that lent to this investment reform was the Protestant Reformation’s encouragement of frugality and hard work (Allen, 2003). As a result, inequalities in economic capacity were justified as it was argued that the rich had more capacity to develop the economy than the poor. Additionally, the increased supply of precious metals and minerals and their associated increase in prices contributed greatly to the expansion of the productive capacity of European economies. Despite the inflated prices of metals, labor costs remained low, which greatly benefited the capitalists. In the 17th century, early capitalists in North-western Europe, especially in Great Britain, benefited from the rise of strong national states, which provided beneficial basic social conditions favorable for the growth of private enterprises (Brick, 2015). These included various conditions such as universal legal codes and monetary systems essential for the growth of private initiatives and economies rather than public initiatives. Additionally, countries improved roads, docks, and harbors, making them safe for foreign investors, benefiting the private sector. Studies show that there were more than 7,400 miles of safe roads in France by 1789, most of which were built by enslaved Africans (Marfany, 2016).
During the 18th century, most North-Western European economies shifted their capitalist development focus to industry instead of commerce. In the United Kingdom, the accumulated capital that had been accumulated from commercial operations during the preceding centuries was used in developing technical knowledge (Inikori, 1992). During the Industrial Revolution, was characterized by completely transformed economies based on handicrafts and agriculture and was anchored on factory system, mechanized manufacturing, and large industrial production. The use of new methods of work organization, new power sources, and new machines enabled industries to be more efficient and productive. Various European philosophers and economists addressed the idea of classical capitalism in an attempt to inquire the causes and nature financial capitalism in developed nations. From various studies carried out, it was argued that for a country to grow and develop its economic muscles, it had to leave its economic decisions to the free play of the existing financial market forces (Brick, 2015). By the year 1850, many North-western European countries linked public finance, manufacturing, and commerce operations to form one economic system to prevent possible economic setbacks in any of the operations that would reduce investors’ confidence.
The idea of practicing free play in economic decision-making was put in practice after the remnants of feudalism were swept by the Napoleonic and French revolution wars. The 19th century was characterized by political liberalism driven by policies of reduced levels of poor relief, balanced budgets, sound money, and free trade (Brick, 2015). Additionally, the factory system and industrial capitalism were developed during the 19th century creating a new form of industrial labor characterized by miserable living and working conditions.
World War 1, which took place between 1914 and 1918, also impacted financial capitalism in North-western Europe. Studies indicate that there was a shrinkage of the international markets after the war, and managed banking and currencies was adopted in Europe (Marfany, 2016). In 1930, various trade barriers brought about by the Great Depression were brought to an end, and many European states were discouraged from interfering with economic matters. This led to socialism among middle-class professionals, workers, artists, writers, and intellectuals (Schuurman et al., 2010). After World War 2, which occurred between the years 1939-and 1945, many North-Western European countries that had embraced welfare state in their economies, such as the UK, experienced the greatest economic development. This inspired other European countries to adopt the capitalist financial system in their economies. However, from the year 1970, there was increased economic inequality, including inequalities in wealth and income distribution, in many North-western European countries (Brick, 2015). With such a negative impact, especially on the low-class people and small enterprises, many economists expressed their concerns about the viability of financial capitalism in economies.
Role of the transatlantic slave trade in the rise of the European financial capitalism
Many economists argue that the transatlantic slave trade contributed immensely in the rise of financial capitalism in North-western Europe. The profits gained from the trade of slaves and materials taken from the exploitation of Africa were used to grow financial systems in Europe. Studies show that before the introduction of transatlantic slavery, many western European countries barred rich people from trading for profits (Van Zanden & Baten, 2016). There was only one organization that was involved in the transportation of the enslaved people, known as the Royal Africa Company. However, in 1697, other European companies were allowed to trade enslaved Africans (Brick, 2015).
By using their control over the slavery trade, many European capitalists or upper-class people ensured that Africans got involved in the slave trade throughout the 17th century. Through the trade, capitalist individuals made many profits by exploiting both the African labor and minerals (Brick, 2015). The profits made were re-invested in other sectors of the European economies, such as the manufacture of machinery, technology, capitalist agriculture, insurance, and shipping. Therefore, most Western European economic developments were funded using profits made from the exploitation of Africans. Many industries were also opened due to the slavery trade, including fishing and clothing industries which were mostly privately owned, since merchants had the freedom to do business for profits (Inikori, 1992).
Studies also indicate that the transatlantic slave trade resulted in the rise of various industrial towns and port cities (Inikori, 1992). With the free play of the existing financial market forces in the economic decision making, merchants opened up various profit-making enterprises leading to the growth of cities and towns. Seville in Spain and Liverpool in Britain are some good examples. Manufacturing took place freely in various towns leading to the Industrial Revolution. The involvement of merchants in trading has also been shown to have greatly contributed to accumulating personal wealth (Schuurman et al., 2010). The traders exploited enslaved people to amass themselves great wealth in the 17th century. Money accumulated from the slave trade was then used in the 18th and 19th centuries to set up various privately owned insurance and banking organizations. Examples include Lloyds of London and Barclays Bank.
Lastly, the transatlantic slave trade led to the expansion of North-western European economies into the global market. For instance, in the 1700s, more than 18% of France’s external traders were people from West India (Van Zanden & Baten, 2016). Germany, France, and Britain expanded their trade with Portugal by supplying trade goods, ships, and loans to the Portuguese communities. Studies indicate that almost all towns in Britain in the 18th century were connected to the slavery trade (Brick, 2015). Therefore, money accumulated from the slave trade contributed immensely to the rise of the Industrial Revolution and, consequently, the current financial capitalism in many western European countries.
Studies show that the financial systems in most North-western European economies have undergone great structural changes, and most of the economies use capital markets as the major borrowing avenues for enterprises (Marfany, 2016). The countries have lifted the various barriers to capital mobility. Numerous financial regulations have been imposed to promote privatization of pension and health provisions and integrate the financial markets. For instance, in 1986, the Single Capital Act was signed, enabled the free movement of capital by removing trade barriers (Allen, 2003). Additionally, the introduction of the euro enabled individuals and businesses to undertake cross-border transactions, thus making trade within the region easy and efficient because the currency could be accepted in different countries. With such, a development, trade in Europe changed and evolved because individuals and companies could easily engage in any part of the region and transact without being limited by exchange rate challenges.
Ways through which intermediation contributes to the emergence of modern economic growth
Financial intermediation defines a combination of productive activities through which organizational units incur liabilities on its own account. By incurring liabilities, an organization can acquire financial assets by engaging in various financial transactions on the market because financial intermediaries channel capital from lenders to borrowers by acting as the middlemen. Some of the commonly known examples of financial intermediation include insurance companies, banks, investment banks and pension funds. These organizations have been as middlemen between borrowers and lenders to make the economy grow (Ali, & Ali, 2013). Financial intermediaries have been linked to the emergence of modern economic growth through different approaches, with one of the ways being reducing market friction. Specifically, financial intermediaries reduce technological and incentive frictions, thus promoting modern economic growth.
Financial intermediaries reduce incentive problem by making sure that no conflict of interest exists between financial organizations and savers. Different problems always arise when financial organizations have incentives not to reveal all their information because not all firms are exposed to similar risks. Notably, savers do not possess the required knowledge and skills to differentiate between low and high-risk financial firms, making it difficult to know which financial organizations are likely to promote their financial growth. In such cases, financial intermediaries play the role of helping the savers differentiate between the low and high-risk organizations while at the same time advising them on where to put their money and expect maximum growth (Sinha, 2001). By solving moral hazards and problems of adverse selection, intermediaries help savers, and small-scale investors make the right decisions, which leads to their growth.
Contemporary Financial intermediaries contribute to economic growth by reducing technological friction through screening functions (Sinha, 2001). An important element of economic growth is the ability of investors to get the money needed to invest in their brick and mortar businesses from bonds and stocks. However, it is not always easy for organizations to achieve this due to information asymmetry between investors and financial institutions. The existence of information asymmetry between financial institutions and investors makes financial intermediation important as they help the investors search, collect, and process the investor’s cost (Chen, 2006). Offering these services plays an important role in helping small investors to know where and how to make their investment and play an important role in economic growth. Financial intermediaries give mall savers and investors an avenue to access massive investment projects through fund pooling. Intermediaries are considered important because individual small firms and investors are considered too small to be granted access to benefits that accompany massive projects, which is made possible through fund pooling by intermediaries (Ali, & Ali, 2013). Through fund pooling, small investors and organizations get the opportunity to access the benefits while at the same time acting as a medium through which information asymmetry-related problems are adequately solved, making it easy for small investors to continue with their ventures and take part in the economic growth process.
Financial intermediaries help spur economic growth through risk diversification for small investors. Engaging in large projects is always accompanied by risks that could be difficult for small investors and companies to engage. As a result, the intermediaries come to their aid by pooling all the risks they could face when engaging in the large projects. One of the main ways the intermediaries attain this is by creating portfolios of all large risky investments that always present a challenge to small investors. Pooling and categorizing projects based on their accompanying risks has been instrumental in helping small investors know how to make their investments and benefit adequately compared to when such information is not provided (Shittu, 2012). Again, risk pooling helps investors know the kind of risks they are likely to incur if they invest their resources in a specific project, thus being presented with a perfect opportunity to contribute to the economy’s growth.
Financial intermediaries offer small firms with long-term investment opportunities to aid their growth and investment patterns. According to Sinha (2001), all long-term projects require long-term financing, which is always difficult for small-scale investors to acquire. As a result, small investors always find it difficult to engage in large projects that require long-term investments, making them biased towards investing only in short-term project characterized by minimal benefits and contribute less to spur economic growth. To help the small investors engage in long-term projects, financial intermediaries offer financial intermediation services through liquidity management that makes the small investors engage in higher returns projects that are always difficult to access (Azege, 2004). Generally, financial intermediaries always play an important role in making small-scale investors efficiently allocate their resources to long-time and large-scale investment projects that give them bigger returns while at the same time generating more revenues to the economy. Therefore, financial intermediation helps small investors gain access to long-term projects and helps them contribute towards economic growth by enabling them to access large-scale projects that require more employees and give large returns to the governments.
Yusifzada, & Mammadova, (2015) indicate that financial intermediaries contribute towards economic growth by improving financial access efficiency. In the case, the concept of efficiency defines the financial sector’s ability to offer reliable payment services and competitive interest rates to investors within a given economy. Therefore, financial institutions are supposed to offer their intermediary roles to an economy by offering loans with low net interests to reflect their efficiency. Offering financial services at low-interest rates encourages investors to seek financial muscles for their development projects, create employment, and contribute to economic growth in other ways. Offering low-interest rates work well towards adding value to a country’s production, which leads to improved economic growth because the country’s sectors keep on operating because they know that the interest rates charged on their finances are minimal and has been cushioned by the intermediary companies.
Financial intermediaries reduce cash hoarding, which leads to an increased flow of information in an economy. The process of reducing hoarding by financial intermediaries entails bringing together ultimate borrowers and lenders, leading to increased flow of cash and ultimately an increase in the rate at which investments are made in a specific economy. People are encouraged to take their money into financial institutions instead of keeping it in their homes, where it does not add any value (Yusifzada & Mammadova, 2015). Money that is both in the financial and non-financial institutions is always made available for investors to use by borrowing it at a specific interest. Once the money is made available, people can easily borrow and invest it in different projects that create employment and contribute to the economy’s growth in a significant way. The money is also made readily available for the household sector because financial intermediaries usually use the surplus funds to finance different household projects (Ali, & Ali, 2013). The institutions also offer mortgage and consumer credit loans that are used to spur development through improved production. They also play the role of promoting savings and massive investment amongst ordinary people for purposes of improving their business and life forms.
Conclusion
The purpose of this research paper has been to describe the rise of financial capitalism in North-western Europe and discuss how new intermediation methods contributed to the emergence of modern economic growth. Through the research, it is evident that plantation wealth and the transatlantic slave trade contributed significantly towards developing capitalism in Europe. Specifically, the slave trade contributed to expanding the North-Western European economies to become a global market. The study has also found out that hard work and frugality during the Protestant Reformation contributed significantly to the rise of financial capitalism in Europe. Additionally, an improvement in the production capacity of the European economies also contributed towards financial capitalism despite being faced with challenges linked to increased supply of minerals and precisions metals in the European market. The research has also sought to show how the new intermediation methods have contributed to economic growth. From the study, it is evident that some contemporary financial intermediaries like banks and other non-banking institutions always have a significant impact on a country’s economic growth.
The research has indicated that financial intermediaries influence economic growth by acting as middlemen between financial organizations and investors by way of reducing most of the risks that make it difficult for small investors to get into long-term projects. The intermediaries not only influence growth through risk reduction, but also help in offering the right investment data and information to investors, making it easy for them to develop the right investment strategies. The intermediaries also ensure that no conflict of interest exists between financial organizations and savers, thus prompting massive growth and investment. They also solve the information asymmetry problems that usually affect a country’s investment patterns and ensure that individuals make the right investments by utilizing the right information. Generally, financial intermediaries usually present an enabling environment for investors to thrive, offer them loans, and advise them on the most appropriate and effective way to invest and get benefits from the investments. Through financial assistance, organizations find it easy to improve their production capacities, create employment and earn more revenues, thus spurring economic growth. The intermediaries have also played a significant role in promoting savings in banks instead of keeping their money at home. Through savings, capital flow is guaranteed, making it easy for small and medium-scale investors to access loans and improve their productivity by engaging in different economic activities that contribute to economic growth. To conclude, trade in Europe is still going on and people are engaging in different trades to date. However, unlike in the past where people were limited by lack of finances, the emergence of financial intermediaries has seen a significant change in how businesses are carried because traders and business people are not limited by capital accessibility amongst other factors. Improved access to credit and business environment has spurred economic growth across the globe.
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