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LitCharts | October 12 2024
The Entrepreneur’s Dilemma
The Magic Circle of the Modern Economy
Now considering modern economies, Harari notes that banks in the United States can give loans for 10 times the amount of money that’s actually in their vaults. Harari calculates that ninety percent of the money in people’s bank accounts around the world isn’t actually covered by coins and notes. It seems like this sort of set up is a big fraud, but to Harari, it looks more like an exercise in human imagination. He thinks the “entire enterprise is […] founded on trust in an imaginary future.” The system of giving credit works because banks and people trust that they’ll earn money in the future, to pay back loans. It essentially enables people to spend their future income today.
Credit has existed in human cultures for a long time, but Harari thinks that in the past, humans didn’t trust in the future as much, so they were more cautious about extending it. This meant that it was harder for poor people to finance their ideas for future wealth. To Harari, the Scientific Revolution made people believe that humans don’t know things, but they can learn them and improve, which made them believe in progress. This idea, he thinks, also had force in economic circles. People began trusting in the future, extending credit, and allowing businesses to grow.
The Economic History of the World in a Nutshell
In 1776, Scottish economist Adam Smith argued that when businesses make more profits, they can expand their businesses, and therefore generate more wealth for everyone. This is the basic principle of capitalism. Of course, Smith assumed that people would use their profits to invest in society, not hoard the money for themselves. To Harari, this idea of reinvesting profits and increasing productivity is a very modern idea. Harari thinks that capitalism began as a theory but it soon grew into an “ethic—a set of teachings about how people should behave, educate their children, and even think.” Harari sees capitalism as a “new religion.”
Capitalism, says Harari, has a profound influence on modern science. Private businesses often fund scientific research when they think it will improve their profits and help their businesses expand. He thinks capitalism also depends on science—banks keep pumping credit into the economy, desperately waiting for scientists to come up with the next big money maker before their credit-bubble bursts.
Harari thinks that before the 18th century, when Asian societies dominated in the global market places, kings looked down on merchants, and they funded their efforts through taxes. In Europe, however, which was poorer, kings had to think more like merchants, and invest in lucrative ventures to generate wealth. Columbus, for example, needed a financer for his grand plan to sail around the world, and he pitched the idea like an entrepreneur to several kings and queens. Queen Isabella of Spain took the gamble, and she ended up generating wealth for all of Spain by conquering the Americas. Subsequent generations extended even more credit—because they trusted that investing in the Americas would pay off.
New Amsterdam in 1660, at the tip of Manhattan Island. The settlement’s protective wall is today paved over by Wall Street.
In the 16th century, the Netherlands was a small “swamp” under Spanish control. The Dutch revolted in 1568, and within 80 years, they’d built an empire that surpassed Spain’s. Harari thinks the Dutch’s secret was credit. They financed their armies and fleets by convincing other rich kings and queens to bankroll them in exchange for future profits. Harari wonders why the Dutch were so good at getting others to trust them. He says they were known for repaying debts in full, and on time. Dutch laws also protected individual property against the whims of the Dutch king. This enabled private Dutch entrepreneurs to use their property as leverage to strike deals, meaning the merchants—and not the kings—built this empire.
Harari thinks about people who believe in the free market, and they argue that governments shouldn’t regulate, tax, or otherwise interfere with trade. Harari thinks this a really naïve perspective. Harari thinks capitalism only works if people don’t cheat the system—because cheating, lying, and defrauding people causes a lack of trust, which makes markets crash. He believes that governments should intervene in the market to ensure that people can still trust the system. Another thing that governments can do is make sure profiteers don’t exploit their workers. He thinks about the African slave trade, which Europeans used in their new plantations in the Americas—all to make more profit.
Harari thinks about a Belgian “humanitarian” mission to the Congo. King Leopold II of Belgium set up an organization to flush out the slave trade in the Congo, but his organization ended up seizing 1.4 million square miles of the Congo basin, and forcing the locals to farm rubber in exchange for protection from slavery. When the locals didn’t produce enough rubber, the organization punished them by chopping off their arms or killing them. Harari thinks that capitalism, like the Agricultural Revolution, might turn out to be a “colossal fraud”—the economy keeps expanding, but people are more miserable.
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