The Myth of the Market

In the beginning, there was usury.

In the deflationary, no-growth world of the early Middle Ages, lending was frequently predatory. More often than not, the predators were priests. The poor were not the only victims. Nobles also forfeited property—even entire estates—to rapacious moneylenders.

The Church was powerful, but ultimately it could not resist pressure to curb abusive practices within its ranks. In 1049, Pope Leo IX outlawed interest-bearing loans, declaring at the Council of Reims that “No cleric or layman should be a usurer.”

At that point, a surprising thing happened: the trade in interest-bearing loans—officially outlawed by the Church—took off. With the usurious energies of the clergy becalmed, if not entirely dissipated, a new market space opened up in which the medieval “private sector” could provide loans.  At the center of this transformation was a financial innovation known as the bill of exchange, predecessor to today’s garden variety bank check. Bills of exchange were important not only because they enabled commerce to occur over long distances, which facilitated trade, but also—and importantly—because they created a loophole in the papal ban on interest-bearing loans. By carefully designing their terms, the earliest merchant bankers could employ bills of exchange as a way to extend short-term loans.

As financial institutions developed around bills of exchange and other innovations, they changed the social function of banking. “What made the new banking different from the old,” says Robert Lopez, a pioneering scholar of early financial institutions, “was its shift from an agrarian to a commercial orientation and from an antagonistic to a collaborative attitude of borrowers and lenders.” Where the old banking was fundamentally extractive, the new banking had the potential to be creative. Alongside lending, a new and deeply disruptive financial form took shape: private investment.

The special edition of Innovations journal being released today at the 2011 Social Capital Markets conference at Fort Mason, in San Francisco, is a report from the evolutionary frontier of capital, and of capitalism. The authors of the essays, case narratives, and analytic papers published in these pages are a veritable Who’s Who in the linked domains of blended value and impact investing.

In this brief essay I will reinforce a simple point also made by Antony Bugg-Levine and Jed Emerson in their contribution to this issue: The nascent world of “impact investing” is not entirely new and unprecedented, nor is it simply an incremental tweak to a now nearly perfected “market system.” Instead, the development of impact investing and of new approaches to assessing value represents the latest stage in the invention, and reinvention, of the concept of economic self-interest and the reality of market-based capitalism over the period of centuries.

In other words, the movement described in the pages that follow is not a fad. It is the next step in a historical progression that dates back to the 11th century. Consequently, there is good reason to think that the transformations suggested by contributors to this special edition are just getting started.


The full text of my into to the special edition of Innovations for SOCAP11 is here.