Entrepreneurs: From the Near Eastern Takeoff to the Roman Collapse

July 19, 2010

As first published in The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times, David S. Landes, Joel Mokyr, and William J. Baumol, eds., (Princeton: Princeton University Press, 2010):8-39.

A century ago economists could only speculate as to the origins of enterprise. It seemed logical to assume that entrepreneurial individuals must have played a key role in archaic trade, motivated by what Adam Smith described as an instinct to “truck and barter.” When a Mycenaean Greek site from 1200 BC was excavated and storerooms with accounting records found, the building accordingly was called “a merchant’s house,” not a public administrative center.[1]

Materialist approaches to history both by Marxist and by business-oriented writers have assumed that a timeless impulse toward gain-seeking determined status and political power. There was little room for Max Weber’s idea that a drive for social status might dominate economic motives and be the key to the evolution of enterprise and wealth. There also was little idea of temples and palaces playing a catalytic role in production or provisioning commercial ventures. Yet it was these semi-public institutions, not individuals on their own, that innovated the basic building blocks of enterprise long were assumed to be timeless: money, account-keeping to calculate gains, credit and basic contractual formalities.

Finance capitalism has become a network of exponentially growing interest-bearing claims wrapped around the production economy. The internal contradiction is that its dynamic leads to debt deflation and asset stripping. The economy is turned into a Ponzi scheme by recycling debt service to make new loans to inflate property prices by enough to justify yet new lending. But a limit is imposed by the shrinking ability of surplus income to cover the debt service falling due. That is what the mathematics of compound interest are all about.

Borrowing to make speculative gains from asset-price inflation does not involve tangible investment in the means of production. It is based simply on M-M’, not M-C-M’. The debt overhead grows exponentially as banks and other creditors recycle their receipt of debt service into new (and riskier) loans, not productive credit.

Half a century of IMF austerity programs has demonstrated how destructive this usurious policy is, by limiting the economy’s ability to create a surplus. Yet economies throughout the world now base their pension planning, medical insurance, state and local finances on a faith in compound interest, without seeing the inner contradiction that debt deflation shrinks the domestic market and blocks economies from developing.