Chapter 16 - The capitalist creed Flashcards
Summary of Fractional Reserve System Section
The story of the capitalist creed begins with a monumental shift in our economic landscape. Whereas before economic expansion hinged on demographics, territorial acquisitions, and population growth, now it is credit that fuels this growth. This abstract concept of credit functions as a promise of future resources, a bridge extended into tomorrow to build the present.
A vivid example of this is the integral role of the fractional reserve system in modern banking. This can be illustrated through a hypothetical scenario. Mr. Greedy opens a bank, into which Mr. Stone, a contractor, deposits his earnings of one million dollars. Enter Miss M, an aspiring baker, who secures a loan from Mr. Greedy’s bank with the money deposited by Mr. Stone. Miss M hires Mr. Stone for her bakery, paying him the loaned amount, which Mr. Stone then deposits back in the bank.
Despite unforeseen expenses requiring an additional loan of a million dollars, the bank is able to accommodate Miss M’s request. This money is once again paid to Mr. Stone, who redeposits it in the bank. Interestingly, the bank has lent out two million dollars while only originally possessing one million. This creation of additional money out of the initial deposit is the fundamental premise of the fractional reserve system.
If this system did not exist, the creation of new wealth would come to a halt. Miss M wouldn’t be able to start her bakery, Mr. Stone wouldn’t have a job, and the cycle of money would cease. This is in sharp contrast to the past, where the notion of credit was static due to a widely held belief that wealth was finite.
In those times, affluence was seen as ill-gotten gains, with the rich often paying penance for their wealth. Capital was raised through taxation, but this was only effective as long as the populace was accepting. Loans existed but were provided at high interest rates due to a lack of belief in economic growth. This resulted in a stagnant economy — a self-fulfilling prophecy of no growth leading to no loans, and the absence of loans further stagnating growth.
With the advent of the modern banking system and a renewed belief in economic growth, the prophecy has been broken. The introduction of credit and the fractional reserve system has spurred economic growth by creating new wealth. The economy has now transitioned from being static to dynamic, ushering in an era of unprecedented economic expansion.
What characterizes the economy of the modern era that is different from the past?
In the modern era, economic growth is fueled by credit, unlike in the past where growth depended on demographics, more land, and more population.
Explain the role of the fractional reserve system in modern banking with an example.
The fractional reserve system allows banks to lend out more money than they actually hold in deposit. For example, if Mr. Stone deposits 1 million dollars in a bank, and Miss M borrows 1 million to start her bakery, the bank can still lend out another million despite only having the initial 1 million dollar deposit. This is because the borrowed money circulates back into the bank.
What was the problem with the view of wealth in the past?
In the past, wealth was considered static or finite. To become rich, one had to take wealth from someone else. This led to a stagnant economy, with high interest rates on loans and limited belief in economic growth.
How has the view of credit and economic growth changed in modern times?
The modern view of credit is dynamic, not static. There’s a strong belief in economic growth and this has led to the generation of new wealth. The system of credit, particularly the fractional reserve system, plays a huge role in this economic expansion.
What is the self-fulfilling prophecy of a stagnant economy?
: In a stagnant economy, the belief that there is no economic growth leads to no loans being given out. This in turn leads to no new businesses, which further validates the belief of no economic growth. This is the self-fulfilling prophecy of a stagnant economy.
How did the advent of the modern banking system influence the economy?
The modern banking system, with its embrace of credit and the fractional reserve system, has broken the cycle of a stagnant economy. It has enabled the creation of new wealth and spurred economic growth.
Summary of The Growing Pie
The chapter begins by discussing the concept of the “growing pie” and the scientific revolution. The scientific revolution cultivated a newfound belief in humanity, persuading individuals that through innovation and exploration, our living standards could be elevated. This incited an increased trust in the future, an optimism that tomorrow would invariably be better than today.
The argument of Adam Smith from his seminal work, “The Wealth of Nations,” is then examined. Smith professed that the increased profits of a business benefit everyone in society. For instance, a prosperous company can hire more employees, who, in turn, spend their earnings, stimulating the broader economy. The capitalist mantra, “If I get rich, you get rich,” echoes this sentiment. However, Smith stressed that these profits must be reinvested into the business to generate further profits, not squandered or stashed away.
This key principle delineates why the system is dubbed capitalism. The chapter delineates the difference between capital and wealth. Capital is money or assets invested in generating production and profits, whereas wealth can be spent on less productive endeavors or hoarded. A pharaoh utilizing his wealth to erect a pyramid does not qualify as a capitalist. Similarly, a pirate, despite his accumulated treasures, isn’t one either due to his propensity to bury his loot rather than reinvesting it.
The concept of nobility undergoes a dramatic transformation under capitalism. Historical nobles showcased their wealth by donning opulent attire and constructing monumental structures, displaying their benevolence by hosting grandiose feasts and tournaments for commoners. However, today’s nobility is not the wealthiest class anymore. The baton has been passed to the capitalist, the suit-wearing believer who ardently reinvests a considerable portion of his wealth to generate further profits.
The author notes that capitalism has evolved beyond just fostering economic growth; it has ingrained itself as a way of life. Modern capitalists believe that issues plaguing countries such as Afghanistan and Zimbabwe, like law and order problems, could be addressed through economic investment, promoting affluence among their populations. They assert that capitalism has the power to deliver justice and political freedom to these nations.
Lastly, the chapter emphasizes the integral role of modern science in the expansion of capitalism. The primary sponsors of scientific research today are governments and businesses. Rooted in the core principles of growth and improvement, capitalism dictates that scientific research only receives approval and funding when it demonstrates the potential to contribute to economic growth. The interplay between science and capitalism reinforces the cycle of perpetual growth, where each advance in one spurs progress in the other.
What impact did the scientific revolution have on people’s perception of the future, as described in Chapter 16 of Sapiens?
Answer: The scientific revolution convinced people that through technological innovation and exploration, our living standards could be improved, thereby fostering an increased trust in the future.
The scientific revolution convinced people that through technological innovation and exploration, our living standards could be improved, thereby fostering an increased trust in the future.
According to Adam Smith in “The Wealth of Nations,” how does an increase in business profits benefit society?
Smith proposed that if a business’s profits increase, it can hire more employees who can then spend their earnings, stimulating the broader economy. Hence, increased business profits benefit everyone in society.
What distinguishes capital from wealth in the context of capitalism?
Answer: Capital is money or assets invested in generating production and profits, whereas wealth can be spent on less productive pursuits or hoarded.
Capital is money or assets invested in generating production and profits, whereas wealth can be spent on less productive pursuits or hoarded.
Why wouldn’t a pharaoh spending wealth on building a pyramid or a pirate hoarding cash be considered a capitalist?
Neither the pharaoh nor the pirate are using their wealth to generate further production and profits, which is a fundamental principle of capitalism.
How has the concept of nobility evolved with the advent of capitalism?
Traditional nobles demonstrated their wealth and generosity through opulent displays and public events. However, modern-day capitalists, the new nobility, focus on reinvesting a significant portion of their wealth to generate further profits.
How has capitalism evolved to become more than just a system for economic growth?
Capitalism has become a way of life, with modern capitalists believing that societal issues can be solved through economic investment and prosperity. They assert that capitalism can bring justice and political freedom to troubled nations.
Who are the primary sponsors of scientific research in the capitalist system?
The primary sponsors of scientific research in the capitalist system are governments and businesses.
