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The Evolution of Business: Feudalism, Mercantilism, and Capitalism BUS/210 April 15, 2012

THE EVOLUTION OF BUSINESS 2 Introduction

In his book, The Origins of Business, Money, and Markets, Roberts (2011) quotes author Niall Fergusons words, Only understand the origins of an institution or instrument and you will find its present day role much easier to grasp (p. 1 ). While such a statement is applicable to many areas, Roberts uses the words to explain the value of understanding the origins of business in order to truly understand the contemporary business world. After all, the business concepts of commerce, property rights, profit, profitability, innovation, and others are not 21st century creations. Instead, they can be documented in the variety of business systems that evolved through time. Those business systems, which depended on commerce and property rights and were transformed by the Industrial Revolution, include feudalism, mercantilism, and capitalism. Feudalism The first business system after ancient times was that of feudalism, which established both a commitment of loyalty and a system of business. A monarch, for example, provided land for aristocrats in exchange for their loyalty and protection in times of war. The aristocrats, in turn, provided land to tenant farmers. In exchange for the land the tenants provided the landowner a share of their produce or appropriate rent. The amount of rent became the source of negotiations because of the competing interests between the landowners, who wanted to charge as much rent as they could, and the tenant farmers, who desired to profit from their hard work even after paying the rent (Jones, 2007). This negotiation created the terms landlord, lease, and tenant which are still used today. The monarchs, the aristocrats, and the tenant farmers lived and worked together with a goal of self-sufficiency. However, over time, the necessity for diverse products did not permit total self-sufficiency because people, for one reason or another, could not

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produce all the necessary products. As a result people began to barter and trade in order to obtain products that could not be produced on their estates. Mercantilism Bartering and trading was the foundation of another major business systemmercantilism. This system developed as merchants and bankers organize the trade of products across markets and countries until they are put to their most valued use (Jones, 2007, p. 45). For example, a merchant desired to purchase a product in a market where there was an extensive supply of that particular product. By doing so, the merchant bought the product at a low rate. To earn a profit, the merchant then sold the product where there is a limited supply of the product but a high demand for it. This allowed the merchant to sell the product at a much higher price than he paid for the product. Such actions expanded the economys structure from a mere dependence on land and labor to one which depended on trade and, eventually, enterprise or the ability to increase land and capital in ways that were not obtainable by focusing on their landed estates (p. 46). While mercantilism became the prevalent business and economic system, political structures also changed. The most important political change to economic practices was the signing of the Magna Cara which created a powerful shift in property rights because aristocrats gained private property rights, an important factor in the system of capitalism. Capitalism Capitalism is the business and economic system which is dependent on the private ownership of resources as the basis for the production and distribution of goods and services. When people were granted private property rights, they became more willing to risk their capital in new business ventures. In time, these ventures used the technological changes associated with the Industrial Revolution to alter the production of goods from the costly production of products

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made by skilled workers to the production of large quantities of low-cost products. This change forced skilled workers to compete for unskilled jobs in order to find economic success. In a desire to make additional profit, many capitalists exploited their labor supply by offering low wages and demanding extensive work hours in unpleasant conditions. These laborers were known as proletariats. The creation of the proletariats and the capitalists not only changed business but also the entire world. Commerce As the business and economic systems emerged and changed, so did business commerce, or the process through which people produce, exchange, and trade goods and services (Jones, 2007, p.11). In early times, commerce depended on bartering or exchanging one good or service for another. Bartering was complicated, though, because both people needed to want what the other was offering and find a way to create an equal exchange. To move beyond these challenges, money was introduced to use to buy products or services. Money allowed for an exchange standard because a particular value was assigned to the money which had a store of value. With this standardization, people began to learn the monetary value of various products and services. As a result, money facilitated specialization in the labor force which allowed people to use their time to create more profit and capital. Since money is associated with value, it also became an important source of capital beyond land and labor. Thus, the process of lending money at an interest rate became another way for people to use their money to increase their capital. The rate charged for the loan varied on the riskiness of the loanthe higher the risk of money loss, the higher the interest rate. These principles of commerce developed over time and remain an important part of the worlds current economic structure.

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Property Rights Property rights or the rights people have to own, use, or sell valuable resources including land, labor, capital, and enterprise has been another essential part of business systems. Throughout history, owning land and whatever existed on that land has been a critical property right. In fact, within feudalism, those without land generally had no property rights. Instead, they were nothing more than a resource owned by the estate for their labor. Those who did have the property rights of labor owned their own labor and had the right to work freely. Once people had the property rights of land and labor, they generally had the property right to capital or financial assets (e.g., stocks, bonds, money). With capital, people could then venture into unknown business territories through enterprise, or the right to use the land, labor, and capital to increase their personal wealth and power. While the importance of specific property rights may have differed at various points in history, property rights have been and continue to be critical to the success of a business person. Industrial Revolution While business has developed throughout history, it may have been altered the most during the Industrial Revolution in Western Europe and the United States. This revolution occurred in the 18th and 19th centuries and improved production and trade through the innovative use of technology. The innovation, according to most scholars, began with the invention of the steam engine which altered production, communication, travel, and trade (Jones, 2007). The steam engine helped provide power for the new machines developing in the rapidly expanding manufacturing companies. While the Industrial Revolution spurred on industrial development, it also affected farming because the steam engine and other innovations increased productivity and reduced the labor supply needed to work the land. As a result, many farmers were forced to

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move into urban areas and take jobs in manufacturing companies. The changes stemming from the Industrial Revolution pushed forward capitalism, the economic system on which the United States is based today. Conclusion In conclusion, the evolution of business, including feudalism, mercantilism, and capitalism, has been influenced by commerce, property rights, and the Industrial Revolution. From the beginning of feudalism to contemporary capitalism, property rights have been critical to defining who can find economic success. The methods of commerce changed within each economic systemfeudalism, mercantilism, and capitalism. Significant changes in the production and distribution of goods changed with the Industrial Revolution. Despite all the changes, economic concepts have been in place for a long time and understanding how they developed does help one have a deeper appreciation for the business world today.

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References Jones G. R. (2007). Introduction to business: How companies create value for people. New York, NY: McGraw-Hill/Irwin. Roberts, K. (2011). The origins of business, money, and markets. New York, NY: Columbia University Press.