Saturday, November 02, 2013

Capitalism: Credit, Growth, and The Future

Since 1500, the world's total economic production has increased by a factor of about 240. Per capita production has increased by a factor of roughly 16. Capitalism, says Prof Harari, was the key ingredient in this growth, and in particular credit. Availability of credit made possible the vast economic expansion in the past six centuries.

Loaning money is not a new invention, though - it goes back at least to Sumer, 5000 years ago. Such credit, he argues, was short term and high interest. So what was the special ingredient that made longer term, lower interest credit available? Faith in the future. Faith that the future would be more prosperous than today.

Traditional societies, he said, tended to believe either in a static world or a golden age in the past. If one thinks that the world is a zero sum game, loaning money is just a gamble. On the other hand, if you believe that that money can produce new additional prosperity it makes excellent sense to invest.