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C O U R S E 
A Brief History of Humankind
Dr. Yuval Noah Harari, The Hebrew University of Jerusalem
C O U R S E   L E C T U R E 
How Capitalism is Based on Trust in the Future
Notes taken on February 8, 2014 by Edward Tanguay
economics is often seen as a notoriously complicated subject
understanding modern economic history and the rise of the capitalistic system is quite easy
to understand it, you have to only understand a single word: growth
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
in 1500, the global production of goods and services is estimated to be equality to 250 billion dollars in today's dollars
annual per capita production: $550 per year
in 2013, this is approximately 60 trillion dollars
annual per capita production: $8800 per year
the way the economy grows
you want to open up a bakery but you don't have the money
you go to the bank and ask for a loan
the bank has money to give you because people put their earnings into the bank
e.g. a contractor just built an Italian restaurant and earned a million dollars and he puts this in the bank
you present your business plan to the banker
if the banker is convinced, then she can take the one million dollars and give them to you
you hire the same contractor to build your bakery for one million dollars
he takes the money from you and deposits it in his bank account
the contractor now has two million dollars in his bank account
but in the bank, there is only one million dollars
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
so you go to the bank, get another million from the bank and pay it to the contractor who puts it in the bank
so the contractor has three million dollars in his account but there is only one million in the bank
banks are allowed to loan ten dollars for every dollar that they actually possess
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
this means that over 90% of the money in the banks is not covered by actual money
if everyone came at one time and wanted their money, the banks would not be able to give it to them
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
it's not a deception but an amazing tribute to the abilities of the human imagination
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
banks loan money trusting that one day income-generating businesses will be built
this is how the capitalist economy functions, by trusting the future, and this is why it grows so rapidly
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
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
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
economic growth was slow and limited, hard to start and expand
the way out of this was with the capitalist system which is based on credit
people agree to represent goods that don't exist in the present with a special kind of money called credit
later you pay back the credit with interest
money is based on trust, credit is a special kind of money which is based on trust in the future
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
credit is more sophisticated is money which is based on trust in things that may exist in the future
we have evidence of credit in the past
loans from ancient Sumer
but most people didn't want to extend much credit because they didn't trust that the future would be better than the present
people in pre-scientific societies didn't believe much in progress, they tended to feel that the world was better in the past
to put this in economic terms, people believed that the total amount of wealth in the world was at best stable if not dwindling
the revenue of a particular bakery might rise, but only at the expense of another bakery
one city might flourish but only if another city becomes impoverished
that's why many cultures concluded that being rich and making large amounts of money was sinful and bad
credit is the difference between the size of the economic pie today and the size of the economic pie tomorrow
if you believe that the pie will stay the same, there is little reason to give others credit
most loans in the pre-modern world were small, short-termed, and subject to high interest