So yesterday, I found that I was thinking about wealth and its origins. Now, most people are concerned about about the basics of building wealth, maintaining a checking account and building up emergency savings. So, they aren’t too concerned with the intellectual or sociological origins of capitalism.
Its too bad, because if you study the origins of something you have a better sense of the conditions that foster it and cause it to grow. Since capitalism has been important for our economy and our pocketbooks, it makes sense to give it some thought. To whit, I wanted introduce two competing theories of the origins of capitalism: Weber’s Protestant Ethic and Diamond’s Competition-Fragmentation Theory.
Max Weber was a big time old school German sociologist. The wrote in the 1880s when Europe was starting to take on its modern political forms. Being a pretty clever guy, he wrote a classic book called The Protestant Ethic and the Spirit of Capitalism. In it he said the rise of banking and merchant classes in Europe coincided with the growth of protestantism. Weber argued that this was because protestant communities emphasized free, open and transparent business and self government as well as a strong work ethic rooted in religious ascetic beliefs. There’s more here if you want to read up on Weber.
The other idea I wanted to discuss is Jared Diamond’s Competition-Fragmentation theory. Jared Diamond, an evolutionary biologist, is best known his books Guns, Germs and Steel and Collapse. In a recent speech he gave aptly titled, How to Get Rich, Diamond looked at a bunch of countries over time to develop a natural history of becoming rich. What Diamond found was that wealth was optimized in areas with a lot of competition and fragmentation – like Europe in the 1880s. He also notes that when companies adjusted their management structures to fit the optimal mix of decentralization and fragmentation, they tended to have greater profits.
Now, Weber’s and Diamond’s theories are fine, but what do they mean for you? In my view this means at least two things for your own personal finance. First, if Weber is correct, you’ll probably have to work hard to attain wealth. Second, provided that Diamond is right, you might consider investing in companies that have the right kind of management structure, one which has the correct mix of centralized management in an industry with a healthy degree of competition.
Of course, a lot of this pretty theoretical so it also pays to stick to tried and true methods like maxing out your IRA and contributing the maximum to your company’s 401k plan!
Best,
James
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