Investment Expenditures and the Transition from Feudalism to Capitalism

Abstract

There is a great deal of literature on the role of capital investment in the economic transition from feudalism to capitalism. Investment in capital and new technology and agricultural techniques has not been considered worthwhile in a medieval economy because of a lack of strong peasant property rights and no incentive on the part of lords and barons to lend money to peasant farmers. Therefore, the medieval economy and standards of living at that time have been characterized as non-dynamic and static due to insufficient investment in innovative techniques and technology. The capital investment undertaken typically would have been in livestock, homes, or public investment in canals, bridges, and roads, although investment in the latter would have been hindered by a fragmented political system of fiefdoms and lack of a unified national government. This paper attempts to demonstrate empirically that a productive and sufficient level of investment out of accumulated capital income, taxation, and rents does not have a real impact on economic per capita growth until the 1600s in Britain perhaps due to the beginning of a strong, central government as well as to the level of capital, tax, and land income achieving an adequate threshold amount and providing some type of investment multiplier effect. A high wage share as a portion of national income also appears to be associated with higher investment levels. The types of investment, threshold amounts of investment out of profits and rents, and the price of labor seem to matter when it comes to raising GDP per capita to higher levels.