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economics is often seen as a notoriously complicated subject

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understanding modern economic history and the rise of the capitalistic system is quite easy

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to understand it, you have to only understand a single word: growth

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the most unique and important characteristic of the modern capitalistic economy is that it is growing constantly: every year we have more goods, more money

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in 1500, the global production of goods and services is estimated to be equality to 250 billion dollars in today's dollars

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annual per capita production: $550 per year

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in 2013, this is approximately 60 trillion dollars

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annual per capita production: $8800 per year

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the way the economy grows

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example

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you want to open up a bakery but you don't have the money

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you go to the bank and ask for a loan

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the bank has money to give you because people put their earnings into the bank

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e.g. a contractor just built an Italian restaurant and earned a million dollars and he puts this in the bank

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you present your business plan to the banker

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if the banker is convinced, then she can take the one million dollars and give them to you

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you hire the same contractor to build your bakery for one million dollars

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he takes the money from you and deposits it in his bank account

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the contractor now has two million dollars in his bank account

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but in the bank, there is only one million dollars

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but let's say the contract had come to you while building your bakery and said there were problems and now the cost is not one million dollars but two million dollars

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so you go to the bank, get another million from the bank and pay it to the contractor who puts it in the bank

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so the contractor has three million dollars in his account but there is only one million in the bank

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banks are allowed to loan ten dollars for every dollar that they actually possess

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this is called the "reserve requirement" (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world's central banks

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this means that over 90% of the money in the banks is not covered by actual money

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if everyone came at one time and wanted their money, the banks would not be able to give it to them

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this may seem like a fraud, but actually it's not a fraud and it's been working in an amazing way for hundreds of years

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it's not a deception but an amazing tribute to the abilities of the human imagination

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what enables banks and the entire capitalistic economy to survive and flourish, and covers the money in our bank account, is our trust in the future

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banks loan money trusting that one day income-generating businesses will be built

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this is how the capitalist economy functions, by trusting the future, and this is why it grows so rapidly

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the secret of capitalism is that it finances present expenses with money that has no cover in the present and only may have cover in the future

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for most of history, the economy was frozen, it hardly grew at all because it was very hard to finance new enterprises because people did not trust in the future

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if you wanted to build a bakery in the Middle Ages before the rise of the capitalist system, you would need to pay a builder and buy an oven and pots and pans and spoons, but you can't start earning money until you build the bakery, and so the economy was trapped in this viscous circle

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economic growth was slow and limited, hard to start and expand

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the way out of this was with the capitalist system which is based on credit

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people agree to represent goods that don't exist in the present with a special kind of money called credit

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later you pay back the credit with interest

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money is based on trust, credit is a special kind of money which is based on trust in the future

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pre-capitalist economies were based on trust of things that existed in the present, e.g. using your countries coins required trust in your current king

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credit is more sophisticated is money which is based on trust in things that may exist in the future

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we have evidence of credit in the past

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loans from ancient Sumer

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but most people didn't want to extend much credit because they didn't trust that the future would be better than the present

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people in pre-scientific societies didn't believe much in progress, they tended to feel that the world was better in the past

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to put this in economic terms, people believed that the total amount of wealth in the world was at best stable if not dwindling

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the revenue of a particular bakery might rise, but only at the expense of another bakery

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one city might flourish but only if another city becomes impoverished

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that's why many cultures concluded that being rich and making large amounts of money was sinful and bad

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credit is the difference between the size of the economic pie today and the size of the economic pie tomorrow

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if you believe that the pie will stay the same, there is little reason to give others credit

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most loans in the pre-modern world were small, short-termed, and subject to high interest