| This article is an authorized excerpt from Ryan's | | | | Smith further backed this idea and was the first |
| book, Zero to One MillionOne of the most | | | | to capture and explain the essence of the |
| important advances needed for the creation of a | | | | marketplace. He did so in his famous 1776 work |
| market system took place sometime between | | | | An Inquiry into the Nature and Causes of the |
| 12000 and 10000 B.C. with the advent of | | | | Wealth of Nations, slaying the mercantilist dragon |
| specialization and the start of the Neolithic Age. | | | | in the process. Within, Smith outlines certain laws |
| Instead of each tribe hunting and gathering their | | | | of the market, that are worthy of mention.Smith |
| food, different persons within each tribe would | | | | explains that self-interest acts as a guiding force |
| become experts at a certain task such as hunting, | | | | toward the work society desires. As Smith notes |
| gathering, cooking, tool making, shelter making, or | | | | in Wealth, "It is not from the benevolence of the |
| clothes making. As methods of agriculture | | | | butcher, the brewer, or the baker that we |
| improved, the first towns and cities were seen. | | | | expect our dinner, but from their regard to their |
| Dependable food supplies allowed people to build | | | | self-interest." While one would naturally assume |
| permanent houses and settle in one area. As | | | | that everyone following only his or her |
| settlements increased in size, new forms of | | | | self-interest would not create a very good |
| society such as religious centers, courts, and | | | | society, there is another force that prevents |
| marketplaces developed. The advent of towns | | | | selfish individuals from exploiting the marketplace. |
| produced further specialization, creating jobs in | | | | That regulator is competition.This principle can be |
| tool making, pottery making, carpentry, wool | | | | explained best with the following excerpt from |
| making, tool making, and masonry, among others. | | | | The Worldly Philosophers.A man who permits his |
| The specialist created items faster and of a | | | | self-interest to run away with him will find that |
| better quality than if each family made its own, | | | | competitors have slipped in to take his trade |
| increasing standards of living.The earliest signs of | | | | away; if he charges too much for his wares or if |
| the market system at work can be seen with | | | | he refuses to pay as much as everybody else |
| the advent of bartering within tribes as far back | | | | for his workers, he will find himself without buyers |
| as 6000 B.C. in Mesopotamia. If Tom had twenty | | | | in the one case and without employees in the |
| cows and Igor had eighty hens, and Tom and | | | | other.Those workers will go to the competitor |
| Igor agreed that one cow was worth four hens, | | | | who is willing to pay more and those customers |
| then the trade could take place. The problem with | | | | will go to the competitor who charges less. The |
| the barter system, however, was that in order | | | | wonderful paradox of the market, through the |
| for a trade to take place, both parties had to | | | | interaction of supply and demand and competition, |
| want what the other party had. This 'co-incidence | | | | creates a price that properly allocates industry so |
| of wants' often did not happen. The demands of | | | | as to produce the proper quantities of goods and |
| growing business and trade caused a money | | | | services. No intervention, planning, or forethought |
| system to be developed. Silver rings or bars are | | | | is needed to create exactly what society desires, |
| thought to have been used as money in Ancient | | | | in the exact amount it desires. What a wonderful |
| Iraq before 2000 B.C. Early forms of money | | | | contraption the market is! As long as society can |
| would usually be specie, or commodity money. | | | | promote competition and innovation, standards of |
| Examples range from seashells, to tobacco | | | | living will continue to grow and wealth will increase. |
| leaves, to large round rocks, to beads.While the | | | | So the theory goes.Unfortunately, our world |
| money system still had much development to go | | | | cannot be simplified to quite this degree. Such |
| through (credit and paper money did not yet | | | | things as crime, corruption, and market failures do |
| exist), its invention over four thousand years ago | | | | exist. There are some cases where the |
| was of crucial importance to the world we live in | | | | government should be involved, and there are |
| today. The use of an accepted medium to store | | | | other cases when the government should have |
| value and enable exchange has greatly enhanced | | | | less involvement. This topic will be dealt with in a |
| our world, our lives, our potential, and our future.In | | | | later section of this chapter.Now that we |
| the year 1100, the prevailing system in the | | | | understand the basics of how the market system |
| Western World was feudalism. It was a world of | | | | works, let's progress with its history up to the |
| kings and lords, vassals and serfs, kingdoms and | | | | present day. Following Smith there were many |
| manors. Long distance trade was expanding and | | | | other economists, ideologists, sociologists, and |
| new worlds of foreign spices, oriental treasures, | | | | philosophers that pontificated on the workings of |
| and luxurious silks were discovered. Three | | | | the increasingly complex marketplace. Ricardo |
| hundred and fifty years later, after weathering a | | | | outlined the all important principles of trade while |
| Black Death and the Hundred Years War, Europe | | | | Malthus predicted overpopulation and doom. Mill |
| emerged by expanding trade to new levels and | | | | contemplated on liberalism while Bentham |
| building the foundation for the start of the | | | | promoted utilitarianism. Marx painted a bleak |
| competitive market economy we know | | | | picture of forced labor and surplus value while |
| today.With a population spurt starting around | | | | Keynes later showed there sometimes was |
| 1470, cities, markets, and the volume of trade | | | | reason for an active government.By the of |
| grew. Banking, initially started by Ancient | | | | Smith's death in 1790, the nascent Industrial |
| Mesopotamians, grew to new heights and | | | | Revolution had already reared its head. The |
| complexities, the guild system expanded, and the | | | | effects of the Renaissance, the humanist |
| idea that a business was an impersonal entity, | | | | movement, and the new focus on science and |
| with a separate identity from its owner, took hold. | | | | empiricism would translate into the launch of |
| Silver imports from the new world drove | | | | movement that would impact the world as none |
| expanded trade and bookkeepers created | | | | before it had. It was this revolution, often harsh |
| standardized principles for keeping track of a | | | | and cruel, that prompted thoughts of communism, |
| firm's accounts based on Luca Pacioli's advances. | | | | created robber barons and titans, and led to the |
| Early entrepreneurs, called merchants and | | | | development of the innovations, technology, and |
| explorers, began to raise capital, take risks, and | | | | standards of living we have today.From the |
| stimulate economic growth. Capitalism had begun.It | | | | Industrial Revolution, the concept of mass |
| began with much resistance, however. The idea | | | | production and economies of scale came about. |
| of gain was shunned and shamed. The practice of | | | | Bigness, trusts, and horizontal integration became |
| usury, charging interest on loans, was banned by | | | | the key to riches in the day. It was Andrew |
| the Church. Jobs were assigned by tradition and | | | | Carnegie and J. P. Morgan in steel, John D. |
| caste. Innovation was stifled and efficiency was | | | | Rockefeller in oil, and Henry Ford in automotives. |
| forcefully put down, punishable by death. In | | | | While many of these titans often had questionable |
| sixteenth-century England, when mass production | | | | ethics, no one can deny that they were |
| in the weaving industry first came about, the | | | | innovators. They forged alliances, developed new |
| guildsmen protested. An efficient workshop | | | | ways of doing business, and created efficiency |
| containing two hundred looms and butchers and | | | | across industries.Out of necessity, regulatory |
| bakers for the workers, was outlawed by the | | | | organizations such as the Environmental Protection |
| King under the pretense that such efficiency was | | | | Agency, Antitrust Division of the Department of |
| improper. Makers of innovative buttons in France | | | | Justice, the Securities and Exchange Commission, |
| in the late 1600s were fined and searched and the | | | | the Food and Drug Administration, the Financial |
| importation of printed Calicos cost the lives of | | | | Account Standards Board, and the Federal Trade |
| 16000 people.The world would soon see, | | | | Commission would soon be created in the United |
| however, that innovation was generally a good | | | | States while similar organizations were created |
| thing that made lives better and that efficiency | | | | across the developed world. Theodore Roosevelt |
| was a path toward a higher standard of a living. | | | | would go on his trust-busting and anti-monopoly |
| As Robert L. Heilbroner says in The Worldly | | | | campaigns while Franklin D. Roosevelt created |
| Philosophers, "The precapitalist era saw the birth | | | | new laws relating to the distribution of wealth. |
| of the printing press, the paper mill, the windmill, | | | | John Maynard Keynes would go on about public |
| the mechanical clock, the map, and a host of | | | | spending while Milton Friedman and Frederick A. |
| other inventions. The idea of invention itself took | | | | Hayek would fight large government in the name |
| hold; experimentation and innovation were looked | | | | of freedom. Lyndon Johnson would forge his |
| on for the first time with a friendly eye."With the | | | | Great Society while Reagan lowered taxes. The |
| advent of a complex marketplace and capitalists, | | | | Berlin Wall would fall and the Internet as well as |
| the battle of ideas raged to explain the sources | | | | increased trade and flow of capital would create |
| of wealth and to explain the workings of market. | | | | profound change in business. The markets would |
| Between approximately 1550 and 1800, a | | | | go dot com crazy and then crash and burn. |
| philosophy called mercantilism was at the | | | | We've gone from hunting, gathering, bartering, |
| forefront. The mercantilists had the misguided | | | | and grunting to specialization, miniaturization, |
| notions that a country's wealth was solely based | | | | internationalization, mass-production, and six |
| on how much treasure and gold it could obtain | | | | sigma-all due to the invisible hand, innovation, and |
| and how much more it exported than imported. | | | | industry. And such is the history of the market |
| Monopolies and tariffs were promoted and | | | | system.Ryan Allis is the founder of a leading |
| competition and trade were discouraged. They | | | | entrepreneurship resource with over 3000 articles, |
| had gotten it all wrong.Fortunately for Europe, | | | | 100 interviews, and a free monthly newsletter |
| new schools of thought sprung up in the 18th | | | | The Entrepreneurs' Chronicle. Ryan is the author |
| century that promoted commerce, and not the | | | | of the book Zero to One Million. |
| hoarding of gold, as the source of wealth. Adam | | | | |