As a businessman I am very interested in the concept of business morality, and as a student of history, I am aware that the sense of business as immoral arose very early. Homer depicted Phoenician traders in their black boats as wily and dishonorable, and his writings sealed a disdain for trade into the foundations of Western thought.[i] The Phoenicians were indeed pirates when possible, traders only if necessary.[ii] Business’s self-serving nature does border on the sin of greed, and deceit is common.  Cicero, for one, equated marketing with lying.  Moreover, business proprietors were often distrusted aliens–foreigners in the Greek world, Syrians in Rome, Jews nearly everywhere, or else natives of low status, women or slaves.

Another important reason for considering business immoral was the difference between the rules of the marketplace, and the rules of personal morality.  Markets have always had their rules, but sometimes they allow for practices contrary to personal morality, such as charging interest on loans, puffery, or haggling.[iii] Most people in antiquity were farmers who lived in small villages.  They found it difficult to see business as a game-like activity with rules quite distinct from those of daily life.[iv]

I do not agree, however, that business is immoral.  Rather, I would distinguish between the morality of business, and the moral conditions under which businesses operate. Businesses are mechanisms that survive on profitable sales.  But they’re not human, and have no morality of their own.  Their behavior is determined only by external requirements, such as the personal preferences of their leaders or the moral conditions of their operating environment.

Modern economists argue that the moral conditions under which business operates may be critical to economic success.  So, when a prevailing moral code “supports truthfulness and playing by the rules….[e]conomies with such moral conditions have prospered, those without them have not.”[v] But adherence to those operating conditions is a matter of enforcement, not a moral characteristic of business as such.

In small communities or markets, informal norms effectively enforce moral conditions, but as size and complexity increases, the opportunities and benefits of cheating do as well, requiring more formal enforcement.[vi] In antiquity, banking was intensely local, focused on the reliable handling of client valuables.  So bankers, although often foreigners or slaves, were usually paragons of probity.  By contrast, businesses that operated far from home were more rapacious.  Perhaps the most notorious were Rome’s international business corporations, the publican societies, which collected Rome’s tax levies in the provinces.  Like business today, they sought to free themselves from regulation.  Deregulation accomplished, their patrician owners in Rome, well insulated from the consequences of their choices, pursued profit in the provinces with unrestrained viciousness. Murderous provincial revolts followed, bringing Rome, and the publican societies, to the brink of ruin.

The parallel today is unmistakeable. Deregulation has shredded the moral conditions that should govern the operations of our largest, most powerful firms, and their leaders too often yield to greed.  The problem is not the immorality of business, but the immorality of its leaders and of the governance under which business operates.

People are rightly furious at Wall Street. Financial companies have defrauded the public on a massive scale, leading the world to near catastrophe. The vast public expenditures to save them have generated enormous windfalls for the managers who created the problem. Not one of those responsible has been prosecuted or paid a meaningful civil or administrative penalty, and now these firms use their vast resources to protect tax favors and undermine corrective regulation.
All of which leads to the question, why has finance become so powerful? What do financial firms do that makes them so central to the economy, such phenomenal generators of income?
To understand the power of finance, consider its role in business. Sales are the lifeblood of business. But a sale only occurs when a buyer can pay; that is, possesses the necessary purchasing power. To a previously unimaginable degree, modern purchasing power consists of “credit”: the present use of future or otherwise unavailable wealth, made available on a promise of repayment. And it is finance that arranges for such credit.
The first uses of “credit” were to smooth out crop cycles and help farmers survive droughts and other natural disasters. For a long time finance was a simple activity. A banker invested the savings in his custody by personally evaluating the trustworthiness of a borrower’s promise to repay, and took prudent steps, such as demanding collateral, to limit the risk. As the ability to evaluate trustworthiness and limit risk was limited to the banker’s personal relationships, “credit” was restricted to the fortunate few.
In recent decades, however, computer-enabled innovations have greatly improved the financier’s ability to evaluate the trustworthiness of promises to repay and the ways to limit risks. These changes have greatly expanded the scope and volume of “credit” available. Today, financiers can provide credit cards and other forms of “credit” at acceptable risk to virtually everyone. As a result, “credit” now accounts for 80-90% of US purchasing power, making finance a huge business. Moreover, with virtually unregulated consolidation in recent years, the assets of the six largest banks have grown from 15% of GDP in 1995 to about 62% in 2009. Meanwhile, legal and regulatory changes have allowed financial firms to multiply their activities by greatly leveraging their own equity.
As a result of all these structural changes, financial firms now allocate most of the private purchasing power in our economy, plus much that comes from governments and foreign investors. It takes but a dribble from this vast flow of funds to pay all the salaries and bonuses on Wall Street, to lobby governments, and to underwrite the politicians who make the economic rules. This is the source of the enormous power and influence that Wall Street now possesses.

What is the crucial difference between modern business and that of ancient times? Not firm size, the complexity or technology of operations, what is sold, or even the nature of work. However changed, these are all basically extensions and variations of what existed in antiquity. The main difference, I think, lies in the role that modern business plays in the creation of material wealth, thanks to systems of innovation and marketing that never existed in antiquity. This role makes business central to modern economies.
Yet the importance of business in creating wealth, although often asserted, is rarely explained. It has been hard to understand because the nature of wealth itself is elusive. For instance, a recent academic work claiming to be about the origins of wealth never actually defines what wealth is, or states whence it comes! Let me therefore define wealth at the outset: wealth is the sum of all valuables, and material wealth is the sum of all saleable valuables. Before civilization allowed people to accumulate very much, the prevalent form of material wealth consisted of slaves. Virtually everything else was so perishable or difficult to accumulate that it was neither sought nor kept.
My own understanding of how business creates wealth gained a lot from the story of how ancient Athens, and similar Greek city-states, rose to prominence after the 7th century BCE.
For most of human history, wealth consisted almost entirely of land and other natural resources used for subsistence, plus a thin surplus of production mostly paid as rent and taxes. All the great works of ancient civilizations came from that thin surplus. It was especially thin, prior to the 6th century BCE, in Athens and other Greek city-states, which struggled to subsist on their hilly, rocky terrains. Then, however, a mysterious miracle began taking place, much like the one that makes resource-poor nations like Japan, Holland, and Denmark wealthy today.
The miracle began for the Greeks with the extraordinarily powerful close drill military formation known as the phalanx. A product of inter-city warfare during the 7th century BC, the phalanx required extensive training and iron discipline to operate, qualities only available in the unique culture of Greek city-states. To deploy phalanxes, foreign kings hired Greek mercenaries.
To pay the mercenaries, nearby kings like Midas and Croesus used their precious metal, an amalgam of gold and silver. But since the composition of the amalgam was variable, it proved expedient for the rulers to make their pay consistent by refining the amalgam into pure gold and pure silver, a process they mastered in the 7th century BC. Molded into disks and stamped as a guarantee of purity, these forms of payment were the first coins. These valuables flowed to the Greek city-states, a river of new wealth.
Even greater was the amount of wealth that resulted from the monetization of Greek markets. The centers of Greek city-states had long served as barter markets where farmers exchanged produce and homemade goods. But as coins rapidly proliferated in many Greek city-states, they dramatically simplified market transactions. The volume of trade multiplied, and markets became lively centers of trade. People who had produced only the necessities for subsistence now saw new goods and gained new desires. To satisfy those desires they needed purchasing power for use in the markets—coins and other readily exchangeable forms of wealth. To that end, they exploited skills, assets, and time to create goods and services that others would buy: in a word, valuables, which is to say wealth.
By the late 5th century, Greek wealth had vastly increased through the monetary earnings of Greek mercenaries and the increased output summoned forth by the lively new markets. More valuables were conceived, desired, and brought into existence. And so that process of creating wealth operates today.

Most people who make investment decisions for themselves or for business probably have technical investment skills like the ability to read balance sheets or calculate net present values. But developing an investment strategy requires a broader perspective, such as the ability to distinguish between fundamental and incremental change.  Using that example, I would like to show how the history of ancient business can usefully contribute to such challenges.

My interest in ancient business did not begin as a quest for investment strategies.  As manager of a small manufacturing and distribution company, I was stomping around my office late one night, frustrated with our antiquated business practices.  I heard myself mutter, “this place is run like a Roman blacksmith shop!”  I stopped.  Did they even have any blacksmith shops in ancient Rome, I wondered?  How did they run, and what did they do?  In fact, how did business, to which billions of us now devote our working lives, even begin, and what are the important differences between ancient businesses like Roman blacksmith shops and the computerized, outsourced, internet-linked, machine-based businesses of today?  Such questions led to The Origins of Business, Money, and Markets.

Satisfying curiosity is fun, but knowledge of history has practical functions as well.  Often, the easiest way to understand complex phenomena like business is to watch their development unfurl over time.  The earliest phases of development often display its driving forces most clearly, thus constituting a relatively simple model of what may now be something of bewildering complexity.

In the back of my mind, then, I hoped that by learning about ancient business and what affected its standing and profitability, I might gain insight into investment strategies applicable today.  As a wise old man once said, if you want to know where the train is going, look at the tracks.

In modern life we face an endless succession of changes, many of which appear dramatic, or are claimed to be so.  Important investment and policy decisions turn on the question of just how fundamental a change may be.  For business, a fundamental change is one that disrupts existing practices in major ways, often hard to foresee.  A leading modern example would be the Industrial Revolution.  Incremental changes have consequences too, but that’s just life; they do not change the nature, role, or operations of business, and they have a more limited, more predictable impact.  Distinguishing between one type and the other is not easy, but has major investment implications.

While change came much more slowly to the ancient world than it does today, there are some interesting examples of the difference between fundamental and incremental change.  For instance, the coming of the Iron Age around 1000 BC, a development of immense political importance, would seem to have fundamentally changed business as well.  After all, the Iron Age led to gigantic empires in the Middle East—the Assyrian, Babylonian, and Persian—as it dramatically undercut the previous Bronze Age cost of tools, armor and weaponry.  A Bronze Age cooking tripod was worth three women or twelve oxen to Achilles, but iron tripods performing the same function cost a small fraction of that.

On closer observation, however, iron technology changed business very little.  Yes, blacksmiths came into their own, and yes, iron tools made farming more productive.  But the Iron Age did not noticeably improve the marginal role of business in the economies of the Middle East, change business practices, or lead to disruptive new industries.  Business played no different or larger role in the economies of the Assyrian, Babylonian, and Persian Empires than it had in the Sumerian and Egyptian societies that were the first civilizations 2000 years earlier.

By contrast, the second great change—the invention of coinage—dramatically altered the role and practice of business in the Greek world.  Coins were invented late in the 7^th century BC, when in order to pay Greek mercenaries the Anatolian kingdom of Lydia began minting pure gold coins in a size equal to a year’s pay.  As the Greeks learned of this innovation, they began issuing their own coins.  Over the course of the 6^th century BC, these became smaller and more useful as a medium of exchange in their markets.  Coins vastly increased Greek purchasing power.

This revolutionized the nature and role of business.  As trade in coin replaced barter, economic exchanges became much more frequent, stimulating consumer demand.  With more trades in terms of money, prices became visible indicators of value, and provided instant information about supply and demand.  So useful were these money-based markets that they, and the traders and manufacturers who worked them, became central to many city-state economies and were considered defining features of Greek life.  The conquests of Alexander the Great and the Romans later made this nexus of business, money, and markets the dominant form of urban economy throughout the western world.

The difference between the impact on business of the Iron Age and of coinage cautions us to ignore the “shock and awe” of change as a general proposition, and focus on the practical details of exactly how the change might work in reality.

Consider now two of the most famous changes taking place currently: globalization and the computer revolution.  With the rapid growth of nations like China, India, and Brazil, plus the wonderfully written books of Thomas Friedman, globalization has attracted enormous attention.  It has certainly wreaked havoc with US and European labor markets, as many formerly well paid jobs have been shipped to low wage nations, and it has led both to a great new wave of business consolidation as firms have bulked up for international competition, and also to new competition as formerly protected national markets have opened up to firms and products from outside their borders.  It has also permitted a vast expansion of international investment, and with new players gaining advantage, provided many new investment opportunities.

Based on the example of the Iron Age, however, I would argue that despite its dramatic political and personal consequences, globalization does not represent a fundamental change for business. The expansion of supply chains, the addition or subtraction of competitors, the creation of new investment opportunities, even the internationalization of labor—these are all normal conditions of business life. Globalization has not produced radically new industries, altered the role of business in modern economies, or fundamentally changed the nature of business activity.  Its investment implications are by no means trivial, but they hardly point to dramatic innovations, a proliferation of new businesses, or changed perspectives on the business landscape.

By contrast, the computer revolution (really, the microprocessor revolution) that started in the 1960’s does indeed seem fundamental, comparable in scope and impact to the Industrial Revolution.  Only with computers could many scientific calculations even be made, leading to vital new industries like genomics and virtually the entire modern field of microbiology.  Computer-aided design and manufacturing permit products and tolerances never before possible.  Computers power virtually instantaneous communication and information capabilities that are transforming the modes of buying, selling, innovation, marketing, and business organization.

In finance, computers have greatly increased the trustworthiness of promises to repay, resulting in a vast expansion of purchasing power by way of credit.  Computers have reduced the risk creditors must bear by supporting an explosion in options and other hedging instruments.  Risk has also fallen because computers facilitate the creation of credit instrument portfolios whose risk is lower than that of the components.  By allowing “quants” to create complex structured finance vehicles that allocate credit risk to parties with different risk preferences, computers have greatly increased the supply of credit. Computers also crunch vast quantities of data to provide rapid and massive evaluations of consumer creditworthiness, making predictions of future repayment far more accurate.  In these and other ways, computers make it far more rational to provide credit to many more people and businesses than ever before: that is, to increase the purchasing power that fuels business activity.

In short, the computer revolution resembles the invention of coinage far more than it does the advent of the Iron Age.  As such, it offers vast and fertile possibilities for investment, and requires a much greater focus of attention than do the comparatively simple implications of globalization. That conclusion, I submit, is important for framing investment and even public policy strategies. I am sure that it could be reached without historical knowledge, but for me history has greatly clarified where the train tracks lead.

Current American social and political forces alarmingly resemble those that helped push the late Roman economy in Western Europe into the Dark Ages.  As then, there has been a fragmentation of society, and the concepts that previously unified it, at least to a significant degree.  To quote the poet, “the center does not hold.” While this fact is widely perceived, the late Roman experience may help explain the forces that are making it happen.

In The Origins of Business, Money, and Markets I describe these forces in some detail because they explain the decline and near disappearance of business activity in Western Europe after the 3^rd century AD, ushering in a period of economic depression that would last a millennium. We do not, of course, wish to see THAT repeated!

The basic similarity between late Rome and present-day America is that in each case manmade political and social developments seriously damaged a formerly robust commercial world, leading to enormous disparities in wealth and opportunity. The few who possessed that wealth and opportunity in the Roman world then demanded tax and legal concessions from the central government that greatly weakened the government, atomized the State, and ultimately destroyed its legitimacy. The concessions that Congress is granting to America’s super-rich today—constantly reduced taxes, freedom from legal restraints—could lead in the same direction.

When Marcus Aurelius became Roman emperor in 161 AD, ruling the largest State the world had ever known, it was “the period in the history of the world,” according to Gibbon, “during which the condition of the human race was most happy and prosperous.” Today, many would say the same for the 20^th century USA.  In the Roman world, a robust class of knights, entrepreneurs, civic leaders, and well-paid retired soldiers inhabited the Empire’s many cities and towns, enjoying a market-based and monetized economy. The Empire’s per capita money supply was nearly 80% of that which circulates in the US today. Even in primitive northwestern Europe, where Rome stationed its army at frontier posts like Cologne, Mainz, and Vienna, cash salaries and pension payments, plus the use of private businesses to supply food, arms, and other necessities, ensured a city-centered, money-based market economy.

The crisis of the 3^rd century AD demolished this world and led to a social and economic restructuring of late Roman society. In northwestern Europe it produced an oligarchy of a few exceptionally wealthy families. While the elevation of the extremely wealthy to oligarchic status is happening differently today, the earlier outcome of such a shift is disturbing to contemplate.

The social and economic restructuring of northwestern Europe in Roman times began with a series of disasters and wars, not entirely unlike the Great Recession and multiple wars that afflicted the beginning of Barrack Obama’s Presidency.  These shocks devastated the population and sharply reduced production. Starting with Marcus’s foolish son Commodus, the government’s treasury shrank even as later emperors launched expensive wars of choice against family enemies, greatly enlarged the imperial armies, and raised military salaries. The emperor who followed Commodus, expressing a view somewhat akin to that of recent Republican administrations, advised his sons: “Be of one mind: enrich the soldiers; trouble about nothing else.”

Since the tax revenues from a diminished Empire could not meet these increased expenditures, the emperors tried to depreciate their coinage, creating rampant inflation. Credit and commerce collapsed, and barter became the primary method of trade in poorer parts of the Empire like northwestern Europe, where land values plummeted. Peasants fled, the urban middle classes floundered, and the surviving towns and cities, barely hanging on, could no longer protect the countryside and its farms. Only the very rich–Roman senators, imperial generals and the like—had the diversified investments that allowed them to escape the poverty and dangers that engulfed virtually everyone else.

These wealthy Romans acquired huge tracts of land at bargain prices, becoming the owners of northwestern Europe’s most productive assets. They could offer protection and aid in return for loyal service, and desperate men flocked to their employment (mostly tenancy). The emperors now had to bargain with these great powers for the taxes and manpower they needed to protect the Empire. These bargains gradually sapped imperial power, and after the Vandals sacked Rome itself in 455, the last emperor was soon forced to retire.

As the very wealthy assume political power through the virtually unlimited campaign spending that the US Supreme Court now allows, do they not also demand tax relief and legal protections? And if their power becomes overwhelming, is it not foreseeable that their demands will debilitate our military strength, and the government’s ability to protect the public interest within its own borders?

The social and economic structure that had prevailed in northwestern Europe during the late Roman era also proved damaging to long-term prosperity. The self-sufficient landowners had little short-term interest in maintaining roads, protecting those who were not employees, or  generating prosperity for others.  Except for their own households, life was largely reduced to the terms of subsistence, and in the absence of a more widespread demand for goods and services, even the richest could no longer find or acquire luxuries that had once been commonplace. The same economic laws still apply. If the very rich can use their power to monopolize wealth today, and a prosperous middle class disappears, then the disappearance of demand will force even the wealthiest to suffer a sharply reduced style of life.

Despite its dire economic consequences, the late Roman structure of society suited the powerful, who could not be challenged, and as feudalism would last many centuries. There is no obvious reason why an oligarchic structure would not prove equally stable in the US. The US does, however, have two crucial advantages. One is that we know where the present road leads, whereas the Romans did not. The second is that, as a democracy, we still have the chance to change our fate.

What does the story of ancient business tell us about current investment strategies?  I think it does tell us some useful things, because despite many obvious and some important differences between ancient and modern business, business in antiquity was surprisingly similar to that of today.  It therefore provides a relatively simple model showing the dynamics that affect business prosperity.  Here are a couple of examples.

Investments

In modern life, with its constant changes large and small, investment and policy decisions may turn on the question of what constitutes a fundamental change for businesses.  A fundamental change disrupts existing practices in major ways, hard to foresee. Incremental changes have a more predictable effect.  Moreover, business may experience a change quite differently than do other parts of society.

During the period of business’s early formation in the Middle East, quite possibly the greatest single social change was the coming of the Iron Age, around 1000 B.C.  Iron dramatically undercut the cost of tools, armor, and weaponry. A cooking tripod was worth three women or twelve oxen to Bronze Age Achilles, but only a small fraction of that in the Iron Age. [1] Cheap iron brought many tools and implements within reach of ordinary people, greatly increasing productivity and wealth.  And inexpensive iron armaments equipped huge armies, making great empires possible, such as those of the Assyrians (1000-640 CE Babylonians (640-580 CE), and Persians (580-334 CE).

Yet the Iron Age changed business very little.  Society’s economic organization within the great empires, in which elites distributed the benefits, hardly changed.  Business had been a marginal activity in such economies since the dawn of civilization in Sumeria and Egypt 2000 years earlier.  What businesses did, with whom, and to what small economic effect, scarcely changed with the coming of the Iron Age.

By contrast, the far less noted invention of coins profoundly altered the role and practices of business.  Coins made possible the markets and entrepreneurial businesses that would shape urban economies throughout the Mediterranean and Roman worlds.

Before coins there was barter, a slow and uncertain method of exchange.  One party may not want what the other offers, or the offers may not have equivalent values.  Coins, however, were a reliably valuable, divisible and acceptable form of wealth.  These qualities make them easy to exchange because their value was trustworthy, “trust inscribed” according to one expert.[2] As a result, values so measured were widely understood, and coins became a reliable way to hold wealth.[3]

The first coins appeared in the Anatolian kingdom of Lydia, late in the 7^th century BCE.  An amalgam of gold and silver called electrum had made its kings, such as Midas and Croesus, fabulously wealthy.[4] The exact proportion of gold and silver varied in each nugget, but that only mattered when Lydia’s rulers sought to hire Greek mercenaries, the best fighters around.  Their demand for exact recompense led Lydia’s rulers to refine electrum into gold and silver coins, stamped to guarantee weight and purity.  Coins proved so popular that neighboring Greek city-states began issuing their own, which soon supplanted barter in their economic transactions.

Their transactions multiplied as coins made them faster and easier.  Monetary prices also improved information about values and supply and demand, reducing risks for entrepreneurial traders and vendors.  Wares became more available, stimulating consumer interest by their presence and visibility in the market.  As a result, a market economy based on entrepreneurial business became a popular, even defining feature of Greek urban life.  The conquests of Alexander the Great and the Romans brought such market economies to towns and cities throughout the western world.

The difference between the impact on business of the Iron Age and of coinage cautions us to ignore the “shock and awe” of change as a general proposition, and to focus on the practical details of exactly how a change works in reality.

Compare, in this light, the advent of globalization and of microprocessors.  Globalization has attracted enormous attention and generated undeniably important consequences.  While wreaking havoc on U.S. and European workforces it has considerably raised the level of manufacturing productivity, brought vast new populations into the modern economy, and lowered consumer prices almost everywhere.  International investment opportunities have greatly expanded, along with a great reshuffling of business organizations and relationships.  In one recent analysis, globalization even gets considerable blame for the current depression[*] in the United States and Europe.[5]

Based on the example of the Iron Age, however, I doubt that globalization, consequential as it is, represents fundamental business change.  Larger markets, more far-flung business organizations, disrupted supply chains, new competition, additional investment opportunities, and even the internationalization of labor are hardly new.  Even the costs and possible benefits of globalization that I discuss later do not represent fundamental change to the nature or functions of business.

By contrast, the invention of microprocessors has brought changes that seem more fundamental to business, perhaps even comparable in scope and impact to the invention of coins.  Computers, running on microprocessors, have enabled whole new fields of knowledge (like genomics), new types of work, and new businesses.  Computer-aided design and manufacturing have given us products never before possible. Microprocessors power the virtually instantaneous communication and information capabilities that are transforming purchasing, innovation, marketing, sales, and organizational structures.  Because the different impact of Iron Age technology and coinage foreshadows the different impact of globalization and microprocessors, I conclude that high technology, in general, offers better investment possibilities than does globalization.

Finance

Finance has become a central issue for investors in recent years.  It is a huge and dynamic business sector in its own right, and critical to the general business climate.  A river of words has flowed about the financial events that brought the developed world to its knees in 2007, where it currently remains.  Anyone not already devoted to a school of thought about finance, meaning most investors, would have a difficult time sorting through these often-conflicting accounts.  But the picture of finance’s role in ancient business can provide a helpful perspective on the roiling currents of the post-2007 market.

Business is the activity of selling for a profit.  Sales fuel business, and for a sale to happen, the buyer must pay.  The ability to pay is called purchasing power, without which sales cannot take place.  Early sales were essentially barter trades, but commodities like gold and silver, consistently acceptable in trade, soon came to serve as money, constituting some of the purchasing power used in business transactions.  Credit, purchasing power advanced in return for a promise of repayment, provided the rest. It is finance, the discipline of managing wealth, which makes credit available.

Finance began when long distance traders, probably the first businessmen, returned from their ventures with valuable surpluses and invested them in loans.  Most were to farmers, who sought them (as modern farmers do) to smooth out seasonal variations in revenue and survive bad weather.  To ensure repayment, the farmers pledged growing crops, fields, their persons, and even their families as security.

As governments developed legal institutions, promises of repayment became increasingly enforceable.  By 2000 BCE, new types of financial promises, credit instruments, transformed unwieldy or distant assets into purchasing power usable here and now.  Mesopotamian traders, traveling long and dangerous trails, minimized the amount of bullion they had to carry by creating instruments like letters of credit and checks, etched in fast-drying clay tablets.  These were contracts with other traders that pledged wealth in Babylon or Assur to borrow purchasing power in Afghanistan or Anatolia.  Insurance mechanisms, like options and futures contracts, likewise turned unwieldy forms of wealth, such as standing crops, into purchasing power.  Finance, then, turned some forms of wealth (land, buildings, growing or yet to be planted crops, future claims) into those usable as purchasing power.

With the invention of coins, cash plus credit became virtually synonymous with purchasing power.  Greek, Hellenistic,[†] and Roman governments issued coins, and an array of moneychangers, bankers, vendors, investors, and patrons in those societies supplied credit.  Today, purchasing power consists largely of credit,[6] but the essential role of purchasing power in business remains unchanged.

In antiquity, as today, two independent factors underlay the availability of credit.  One was the supply of cash.  The Persian emperors hoarded their gold and silver tax revenues in their palaces, creating a cash shortage that destroyed purchasing power, helped stagnate their economy, and set the stage for the conquests of Alexander the Great.  Alexander and his successors, by contrast, turned the Persian hoard into coins, circulating adequate supplies of cash for their economies over the next two centuries.  The Romans likewise converted booty to cash, generating a peak money supply roughly comparable to those of modern nations.[7] Modern money supplies are usually adequate, given the electronic and paper forms they have taken.[‡]

The second factor affecting the availability of credit has always been the perceived trustworthiness of promises to repay.  This perception is partly subjective, and partly a matter of calculable risk. The original and most common basis of trust during antiquity, and probably today as well, was a relationship rooted in family, tribe, clan, or personal friendship.  But there were also several ancient developments that increased trust, the credit supply, and purchasing power by reducing calculable risk.
• Oaths sworn before fierce and vengeful Middle Eastern gods;
•Functional legal systems that enforced promises even between relative strangers;
• Financial intermediaries, who emerged after the invention of coins.  The bankers of Greek city-states, Hellenistic cities, and the Roman empire used an intimate knowledge of those they financed, as well as of the risks that traders and other commercial borrowers were running, to invest deposits and other funds wisely;[8]
• The culminating ancient arrangement for reducing risk was Rome’s patronage system.  Virtually every entity in the Roman world—men, families, slaves, freedmen, social clubs, towns, cities, and allied States—was client to one or more patrons.  Patrons helped and protected their clients; clients owed intense obligations of fidelity and loyalty to their patrons.  Patronage allowed patrons to finance clients with great confidence in repayment.

As a result, wealthy patrons advanced credit to entrepreneurial clients throughout the Roman Empire.  Some people even sold themselves into slavery in order to gain access to this kind of credit (not unlike the relationship between entrepreneurs and venture capitalists), and interest rates at Rome apparently remained between four and six percent for hundreds of years.[9] Freed slaves so often became successful, using credit from their former masters, that laws were passed to prohibit their claiming the high social rank to which their wealth otherwise entitled them.[10]

If we substitute venture capital, leveraged buyouts, and private equity for patronage, there are not so many differences between ancient finance and that today.  So, for instance, the trendy modern term for the “pooling, segregation or reallocation of expected cash flows in ways that reduce uncertainty or diversify or reallocate risk”[11] is “structured finance.”  In 2000 BCE Babylonians were also doing “structured finance.”[12] No doubt they would be delighted to know that, just as Molière’s M. Jourdain was delighted to learn that he spoke prose.[13]

Above all, the centrality of trust remains crucial for credit, and from this perspective it seems clear that financial innovations in risk management reduce the calculable risks of advancing credit, and thereby underlie its vast modern expansion.[14] 20^th century prosperity owes much to the resultant purchasing power.[15] I know that in the current climate this is heresy.  But the fact that rapid financial innovation has outrun regulation, leading to the Bush-era festival of financial fraud, should no more discredit finance than Medicare fraud, however extensive, discredits medicine.

What, then, of the current crisis?  When it began, in 2007, the principal financial institutions of the developed countries were in grave danger of disintegration, which would have meant a virtual cessation of credit for a considerable time, with extremely destructive consequences for business and employment.  TARP and other emergency measures averted that catastrophe, and measures like the Dodd-Frank bill and regulatory improvements offer some hope that the reliability of the financial industry will soon improve.[16]

As to the ongoing problem, the ancient model of finance orients me toward focusing on two related elements: wealth and trust.  Wealth is the value of what we own.  2007 changed the valuation of what we own, as measured by likely sale prices.  Those prices, especially in real estate, had floated upwards on credit, and as plunging trust in repayment withdrew credit, many valuations suddenly plunged as well, like Wiley E. Coyote chasing the roadrunner off a cliff.

With the plunge in valuations came a sharp drop in employment and, therefore, of the trustworthiness of promises to repay.  No amount of cash pumped into the financial system could raise that lower level of trust.  Only more well-compensated employment can do that.  Then creditors could trust future earnings as the source of repayment, and secure loans with the increased level of wealth that the earnings would produce.

At this juncture, due to globalization, the ability of the US and Western Europe to themselves increase well-compensated employment seems doubtful, while salvation through innovation is, at least, uncertain.  On the other hand, the globalization that weighs on Western employment now could well overcome that problem in the intermediate future.  That is because, as the underdeveloped world becomes richer, its demand for goods and services will necessarily generate vast new sales for developed world businesses, triggering a virtuous cycle of demand, employment, and more demand.

In conclusion, then, I am arguing that while astute political action prevented financial institutions from collapsing (and may have to do so again), it can have little effect on the availability of credit, the level of purchasing power, and therefore the amount of business activity.  Globalization ensures that Western employment and the level of wealth will not dramatically improve in the near term, but if globalization continues, the longer-term prospects for Western employment, wealth, purchasing power, and business activity are favorable.

In May 2010, a 5-4 decision of the US Supreme Court in Citizens United v. Federal Election Commission declared any limitation on corporate campaign spending to be unconstitutional. In the context of campaign realities, this ruling substitutes large corporations for citizens as the sovereign powers under our system of government. Since large Democratic majorities in both the House and Senate could not enact even modest measures to mitigate the impact of this ruling, the shift of sovereign power to large corporations and their wealthy financiers appears irreversible.

What does this change augur? In my studies of ancient business, I found that a comparable situation arose under the Roman Empire, and I suggest we can gain some insight from how that worked out.

Around 200 BC, the tiny Roman government began to outsource managerial chores as its conquering armies acquired Mediterranean lands. It did so by auctioning off five year contracts to supply Rome’s conquering armies, manage captured properties, and most profitably of all, to collect taxes in subjugated lands. The largest contractors were publican societies, corporations formed to do the public’s business, with Roman investors and Roman executives, who managed operations in the vast empire’s many provinces.

Although Roman governors had various objectives in the provinces, such as maintaining the peace, encouraging long term provincial prosperity, pursuing lucrative commercial possibilities for themselves, forming useful family alliances, and quickly subduing rebellions, the publicans had only one objective: to maximize profits. To do so they often used chicanery and brutality. One king, refusing to aid the Romans in a war, explained that the publicans had seized all his men and sold them into slavery.

That such exploitation caused increasingly frequent and savage rebellions did not trouble the publican managers living safely in Rome. The harm their behavior did in the provinces, and the cost of rebellion to the army, were not their concern. And if thievery and brutality troubled their local agents, plenty of others would happily take their place.

As furious provincials, desperate slaves, and external enemies kept the Republic’s militias under constant attack, a need to improve military performance became evident. Nothing much happened, though, until Gaius Gracchus offered huge concessions to gain the support of publican societies and their influential backers. Although Gaius was eventually assassinated for his efforts, the publicans gained what one historian called “the biggest killing in the financial world” when Gaius opened the wealthy Eastern regions of the empire to publican tax collectors, who replaced the city magistrates in performing that immensely lucrative task. In addition, Gaius emasculated what little financial regulation had previously served to restrain publican depradations.

With these measures, contemporaries described the publicans falling upon the prosperous Eastern city-states like wolves.  They had many ways to collect and pocket more than their contracts specified—ways that modern credit card customers might recognize, such as collection fees, exorbitant interest on late payments, and friendly officials who facilitated excess collections. Insiders like M. Brutus, the father of Caesar’s assassin, multiplied their profits by advancing tax payment funds to desperate provincials at exorbitant rates of interest: 48% per year, in Brutus’ case. Upon the nearly inevitable default, they would seize the mortgaged property and sell the debtors into slavery.

But 25 years after Gaius’s concessions, in 88 BC, a fearsome enemy capitalized on the provincial grievances that stemmed from publican profiteering. This was Mithridates, who had secured his throne by murdering his father, mother, brother, and wife (who was his sister as well).  Fearful of assassination, Mithridates gradually poisoned himself to build up immunity.  As the poet describes,

They put arsenic in his meat
And stared aghast to watch him eat;
They poured strychnine in his cup
And shook to see him drink it up….
I tell the tale that I heard told.
Mithridates, he died old. (A.E. Houseman, A Shropshire Lad)

Reputedly also fluent in 22 languages and dialects, he persuaded Rome’s subjects in the richest of all its provinces to commit an atrocity known, because of the location, as the Anatolian Vespers.  This was a midnight slaughter of some 150,000 Italian businessmen, their families, and local companions. He sent pirates to ravage Roman possessions in the Aegean Sea, and provoked a bloody Athenian revolt as well. Rome lost its richest source of revenues, as did the publicans, and many important Romans faced bankruptcy, including Cicero. As he declared in a speech passionately advocating war:

The whole system of credit and finance that is carried on here at Rome is inextricably bound up with the revenues of the Asiatic provinces.  If these revenues are destroyed, our system of credit will crash…  If some lose their entire fortunes they will drag many more down with them.  Save the state from such a calamity….  Prosecute with all your energies the war against Mithridates, by which the glory of our Roman name, the safety of our allies, our most valuable resources, and the fortunes of innumerable citizens will be effectively preserved.

To defeat Mithridates and recapture the East, the Senate granted dictatorial powers to Sulla, first in a series of proconsuls—Sulla, Pompey, Caesar—sent East on this mission. Caesar finally conquered Mithridates’ kingdom in 47 BC, occasioning his famous “I came, I saw, I conquered” comment.  Unfortunately for the publicans, however, these military leaders had the multiple concerns I outlined earlier, while their prestige made them immune from political pressure.  As a result, they ignored publican pleas, improved conditions in the provinces, and threw out the publican tax collectors.

I think this story does have implications for current use.  The narrow focus on sales and profits that characterized Roman publicans remains the chief characteristic of a modern business corporation. That makes them effective, but also dangerous. Only public policy can make them take the harms they do into account. But when corporations gain political control, as the publicans briefly did, they work diligently to undermine any policy, such as regulation or taxation, which increases their costs. The results are bad for the society, and eventually for themselves.

A few psychopaths, acting in the name of a perverted idea of Islam, killed thousands of people and caused immense damage on 9/11. A few psychopaths, acting in the name of a perverted idea of capitalism and freedom, therafter used that event to kill tens of thousands and cause vastly more damage. These were America’s most dangerous enemies: Bush, Cheney, Rumsfeld et al. Today, they are triumphant.