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11.1 Introduction

11.2 What is Commercial Capitalism

11.3 The Period of Commercial Capitalism

11.4 Significant Features of Commercial Capitalism

11.5 Evolution of Commercial Capitalism

11.6 Role of Mercantilism

11.7 Role of Trade

11.8 Transition from Feudalism to Capitalism

11.9 Commercial Capitalism in Spain, Italy, France, England and Holland

11.10 Results of Commercial Capitalism

11.11 Summary

11.12 Exercises


In order to clearly understand the concept of commercial capitalism in all its aspects, it is imperative to first fully conceive what is meant by capitalism (you will read more about capitalism in Unit 12), the different stages that it passed through and the exact stage that is referred to as commercial capitalism. The International Encyclopaedia of Social Sciences refers to capitalism as the economic and political system that in its industrial or full form first developed in England in the late 18th century. Thereafter, it spread over Europe, North America, Australia, New Zealand and South Africa. Together with its colonial manifestations, it came to dominate the world in the 19th century.

Dictionary of Social Sciences explained capitalism as denoting an economic system in which the greater proportion of economic life, particularly ownership of and investment in production goods, is carried on under private (i.e. non-governmental) auspices through the process of economic competition with an avowed incentive of profit. It has been pointed out that the wealth amassed by capitalism differs in quality as well as quantity from that accumulated in pre-capitalist societies. For example, many ancient kingdoms, such as Egypt, displayed remarkable qualities to gather a surplus of production above that needed for the maintenance of the existing level of material life, applying the surplus to the creation of massive religious or public monuments, military or luxury consumption. What is characteristic of these forms of wealth is that their desirable attributes lay in the specific use-values— war, worship, adornment—to which their physical embodiments directly gave rise. By way of decisive contrast, the wealth amassed under capitalism is valued not for its specific use-values but for its generalized exchange-value. Wealth under capitalism is typically accumulated as commodities or objects produced for sale rather than for direct use by its owners.

Historians such as Werner Sombart (1915), Max Weber (1922) and R.H. Tawney
(1926), who were concerned to relate change in economic organizations to shifts in
religious and ethical attitudes, found the essence of capitalism in the acquisitive spirit 5

Capitalism and
of profit-making enterprise. The spirit of economic activity under capitalism is acquisition, and more specifically, acquisition in terms of money. Acquisition, which is quantitatively and qualitatively absolute, degenerates eventually into unscrupulousness and ruthlessness. It has been pointed out that rise of capitalism is associated with three main features: (1) the growth of the capitalist spirit i.e. the desire for profits, (2) the accumulation of capital, and (3) the development of capitalist techniques. Until the 12th and 13th centuries methods of business were extremely simple. Most trade was local, some of it was barter. During this era in which ideas were hostile to profit, in which techniques of trade were primitive, the chance of emergence of capitalism was slight. Until about 1200 the whole medieval economy can be called non-capitalistic. As late as 1500, capitalism was still in its nascent stage.

It is in this context that this unit tries to analyze the meaning and role of commercial capitalism in the late medieval period. The attempt will also be made to look into those historical processes which led to the coming of this phenomenon and, which, in turn subsequently led to the rise of industrial capitalism (see Unit 12). Since commercial capitalism too, like all other phases, had varying impact in different countries, a short discussion about its specific development in different European countries will be undertaken.


The question now is: what is then commercial capitalism and what is its period? Marxist historians have identified a series of stages in the evolution of capitalism— for example, merchant or commercial capitalism, agrarian capitalism, industrial capitalism and state capitalism— and much of the debate on origin and progress has hinged on differing views of the significance, timing and characteristics of each stage. The first stage, i.e. mercantile or commercial capitalism provided the initial thrust and impetus for capitalism in the sense that merchants started becoming entrepreneurs to cater to market demands by employing wage labourers as well as by exploiting the existing craft guilds. Commercial Capitalism metamorphosed into industrial capitalism, which again, according to Marxist economists, gave way to socialism. Because industrial capitalism was inseparably connected with problems of the working class, this invariably gave rise to different currents of socialist thoughts.

Side by side with commercial capitalism sprang what is called agrarian capitalism
(capital accumulated out of agricultural surplus) that characterized Europe of the
16th, 17th and 18th centuries. Commercial Capitalism and agrarian capitalism were, therefore, two forms of capitalism that overlapped with each other, the difference between them being that one emerged out of commercial surplus while the other out of agricultural surplus. Agrarian capitalism sometimes metamorphosed fully into commercial capitalism i.e. invested the entire surplus accumulated from agriculture into commerce and sometimes transformed directly into industrial capitalism by investing in industrial development alone. Sometimes capital was accumulated from both these sources, i.e. commerce and agriculture, and paved the path for the rise of industrial capitalism. Agrarian capitalism was emphasized by Immanuel Wallerstein who adopted a world-economy perspective, and considered its origin to be rooted in the agrarian capitalism. Only transcending the national horizon, by establishing a world trade and commercial network, could fulfil the requirements of capitalism, according to Wallerstein. In this world economy, there existed certain zones— like the periphery, the semi-periphery and the core— where international and local
6 commerce were concentrated in the hands of a powerful bourgeoisie. The strong

states imposed unequal exchange upon the weak states. Therefore, the strong states or the core dominated the entire world economy in agrarian capitalism as well as industrial capitalism later. Tribe also emphasized agrarian capitalism which was the essence of a national economy where production is separated from consumption, and is made a source of profit after being utilized in profit-making enterprises. Agricultural revolution, therefore, played a very significant role in the growth of capitalism by feeding a growing population and by creating a surplus to meet the demand for industrial raw materials.

Reference is sometimes made to a fourth form—state capitalism—defined by Lenin as a system under which state takes over and exploits means of production in the interest of the class which controls the state; but the phrase, ‘state capitalism’, is also used to describe any system of state collectivization, without reference to its use for the benefit of any particular class.

Still there is a fifth form in which there is an increased element of state intervention either in terms of welfare programmes or lessening the impact of business cycle. This is welfare capitalism or protected capitalism.

In all these stages of capitalism, identified by the Marxist historians, therefore, the first stage was merchant capitalism or commercial capitalism. Now, what is it? Precisely, capital accumulation out of the profits of merchants to be invested in various economic activities, was what is called commercial capitalism. It took different forms in different stages. For example, it existed in some of its elements in ancient Egypt (as mentioned earlier) and in ancient Rome. In Babylonia, in the city-states of classical Greece, in Phoenicia, in Carthage, in the Hellenistic states of the Mediterranean littoral, and in the Roman Empire, also during different stages Commercial Capitalism developed. There was, however, little uniformity of economic and political institutions in these variant forms of commercial capitalism or merchant capitalism, which at this time was in a very nascent stage. Even where merchant capitalism existed in the ancient world, large applications of improved technology to goods production did not occur. In short, therefore, the ancient times were the age of capitalist accumulation, rather than capitalist production.

In the middle ages, however, the form assumed by commercial capitalism was entirely different. It was during this time that it developed in the true sense. In England, and even more emphatically in Holland, the birth of capitalism can be dated from the late
16th and early 17th centuries. Holland’s supremacy in international trade, associated with its urgent need to import grain and timber (and hence to export manufactures) enabled Amsterdam to corner the Baltic trade and to displace Venice as the commercial and financial centre of Europe. The capital thus amassed was available to fund the famous chartered companies (Dutch East India Company 1602; West India Company 1621). It also provided the circulating capital for merchants engaged in the ‘putting-out system’ whereby they supplied raw materials to domestic handicrafts workers and marketed the product. This stage of capitalism based upon riches amassed from commerce is known as commercial capitalism. An important point to notice in connection with most of these early capitalisms, is the combination of commercial and financial activities, of trade and banking. The type of capitalism that was growing up in Europe in the Middle Ages and was well established by
1500 was predominantly of this sort. Here lay the distinction between commercial
capitalism of the ancient and Middle Ages. For the most part, the production of goods was still carried on in a small way, on the basis of handicraft work. Under the
‘putting out’ system, or Verlagssystem, (as it was called in Holland), a wealthy merchant (capitalist) buys the raw material, pays a variety of labourers to work it up into a finished product at home or in shops, and sells the finished product. The
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characteristics that distinguished it from the ordinary handicraft system were that it was done on a large scale by hired labour, that the worker did not own the materials on which he worked and frequently not even his tools, and that one man controlled the whole process from start to finish. It was the merchants who made the crucial decision about the style, markets and volume of production, and employed or turned out the craftsmen at will. The whole industry became merchant-dominated and craftsmen became mere wage earners. It was also known as the domestic system as the work was done in the homes of individual workers instead of in the shop of master craftsman.

However, as has been pointed out, much before Holland or England, the so-called domestic or putting-out system was in full swing in Florence and northern Italy by the 13th and 14th centuries. The Arte della Lana or cloth manufacturer’s guild of Florence in the 14th century may serve as an example of the putting-out system. Its members bought wool abroad, brought it to Florence and had it made into finished cloth by carders, spinners, weavers, fullers and dyers who were paid wages. The product then was sent abroad for sale. Even in Florence or Bruges or Ghent, industrial capitalism was never developed in the modern sense. There was nothing truly comparable to the factory system of the 19th century. Predominantly, medieval capitalism was commercial and financial.

It can therefore be said that a limited form of ‘early’ or commercial capitalism, already known in the ancient world, had developed in Italy as early as the thirteenth century and later in the Low Countries. This commercial form developed in England in the 16th century and began to change into industrial capitalism while elements of feudalism and the guild system still existed. In short, therefore, the early stage of capitalism, primarily founded upon commerce is called commercial capitalism, which in course of time metamorphosed into industrial capitalism. Capitalism, therefore, did exist in ancient world in the form of commerce as well as guild system and merchant dominated putting-out system in the medieval world.


What then can be said to be roughly the date for commercial capitalism? Marx placed the beginnings of the industrial era in the 16th century but admitted that ‘the first attempts of capitalist production’ (not merely capital accumulation, it should be noted) appeared precociously in the Italian city-states in the Middle Ages. Any emerging organism, even if it is still far from having developed all its final characteristics, bears within it the potential for such development before it can be assigned a name. The roots of capitalism were, therefore, embedded, with all potentials of modern industrial capitalism in the middle ages. The main reason behind this lay in the fact that although making of profit or heaping up of wealth was generally condemned, the development of certain circumstances left an indelible impact on the existing situation and transformed the entire process of economic activities. Between 1100 and 1300, new gold and silver mines were opened up in Bohemia, Transylvania and the Carpathians. Furthermore, as various rulers became stronger they were able to coin more and better money. Florence began to issue gold coins called florins, in 1252. Venice began the coinage of similar pieces, called ducats in 1284. In the same century France began to issue gold coins and improved silver ones. The increase in the number of coins permitted an increase in the volume of business transacted by money. The middle ages were gradually developing what is called a money economy.

According to scholars, while every economic system appears first within the framework of another, there are some periods during which economic processes reveal in a comparatively pure form the features of a single economic system. These are the periods of full development of the system; until they are reached, the system is going through its early period, which is also the late period of the disappearing or retreating economic system. Applying to capitalism this division into epochs, we may distinguish the periods of early capitalism, full capitalism (Hochkapitalismus) and late capitalism. In the period of early capitalism, which lasted from the 13th century to the middle of the 18th century, economic agents, i.e. the entrepreneurs and the workers operated within the old feudal framework and retained all the features of their handicraft origin and pre- capitalist mentality; the output of factories and manufactories was still not very significant. In the period of full capitalism, which closed with the outbreak of the World War, the scope of economic activity was expanded enormously, and scientific and technological application was also remarkably broadened. Intensified commercialization of economic life and debasement of all economic processes into purely commercial transactions were the typical characteristic features of this period. The period of late capitalism can be best characterized by describing the changes which capitalism has been undergoing since the World War I.

Maurice Dobb admits that systems are never in reality to be found in their pure form and in any period of history and elements characteristic both of preceding and of succeeding periods are to be found, sometimes mingled in extraordinary complexity. However, he refuses to look upon the transitional period prior to the ‘putting out system’, when the craftsmen had started losing their independence and were being subordinated to merchants, as early capitalism. As he says, ‘…we cannot date the dawn of capitalism from the first signs of the appearance of large-scale trading and of a merchant class, and we cannot speak of a special period of ‘Merchant Capitalism, as many have done.’ According to him, the opening phase of capitalism must be dated in England, not in 12th century as Henry Pirenne has done, nor in the 14th century with its urban trade and guild handicrafts as others have done, but in the latter half of 16th and early 17th century when capital began to flow into production on a considerable scale and such relationships as that between the capitalist and hired wage-earners or that between domestic handicraftsmen and merchant capitalist in the putting-out system emerged.

From 1100 on, real accumulation of wealth were made, frequently in the first instance in the form of coin, which might later be invested in land, buildings, or ships. In some instances these accumulations sprang from the existence of an agricultural surplus. The profits of a rising commerce and the new mines enabled some merchants to heap up wealth. Often a man gathered wealth from one or two of these sources at once. Indeed, few medieval accumulations of money had a single, simple origin. However, one thing is very noteworthy. ‘Surplus value’ or surplus above subsistence existed both in feudal society and in the Egypt of the Pharaohs, but in neither case was bourgeois class its recipient. But under Commercial Capitalism capital accumulation took place out of the profits of merchants, quite independent of the employment of workers for wages. This is the point which distinguished commercial capitalism from other forms of capitalism. The ancient period, therefore, was the age more of commercial accumulation rather than of commercial capitalism.

Roughly speaking, therefore, the entire period from 13th to 18th century, till the coming of industrial capitalism, can be designated to be the period of commercial capitalism, though, following Dobb, it can be said to have attained its climax from
16th century onwards.
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Capitalism and
Industrialization 11.4 SIGNIFICANT FEATURES OF

From the discussion above, it can be concluded, that the intervening period between feudalism and industrial capitalism can be designated as Commercial Capitalism. As historians have argued, any historical period reveals the characteristics of both the preceding and succeeding periods. In a similar way, Commercial Capitalism also has certain features of feudalism along with capitalistic traits. In fact, according to Sombart, Commercial Capitalism or ‘early capitalism’ operated within the feudal framework. The feudal features are as follows:

1) Work was generally done in the homes of the producers and not under the factory shades of modern industries.

2) Not full-scale machines, but simple tools were used for manufacturing. And many a times these factors of production were owned by the workers themselves.

3) Since factors of production were limited, manufacturing was also on a much smaller scale as compared to goods produced in factories.

4) One man, i.e., the merchant entrepreneur, controlled the whole process from start to finish.

The capitalist features were as follows:

1) Incentive of profit was the main driving force behind the entire process.

2) With increasing desire for profit, the demand for labour was rising tremendously with the result that the merchant capitalists were hiring more and more workers.

3) Financial advances were provided to the producers by the capitalists. These could be equated to wages under industrial capitalism.

4) The final product as well as the entire profit was appropriated by the capitalist.


Any stage of capitalism, commercial or industrial, cannot be understood without some appreciation of the historic changes that bring about its appearance. In this complicated narrative it is important to distinguish three major themes. The first concerns the transfer of organization and control of production from the imperial and aristocratic strata of pre-capitalist states into the hands of mercantile elements. This momentous change originates in the political rubble that followed the fall of the Roman Empire. There merchant traders established trading niches that gradually became centres of strategic influence, so that a merchantdom very much at the mercy of feudal lords in the 9th and 10th centuries became by the 12th and 13th centuries an estate with considerable measure of political and social status. The feudal continued to oversee production of the peasantry on his manorial estate, but the merchant, and his descendant the guild master, were organizer of production in the towns and of finance for the feudal aristocracy itself. The transformation of a merchant estate into a capitalist class capable of imagining itself as a political and not just as an economic force required centuries to complete and was not, in fact legitimated until the English revolution of the 17th and the French revolution of 18th
10 centuries. The elements making for this revolutionary transformation can only be

alluded to here in passing. Feudal social relationships were replaced by market relationships based upon exchange and this in turn steadily improved the wealth and social importance of the merchant against the aristocracy. The rise of market society, therefore, became the central theme in the overall transfer of power from the aristocracy to the bourgeoisie. Economic organization of production and distribution through purchase and sale dominated the entire scene. The economic revolution from which the factors of production emerged came as an end product of a political convulsion in which the predominance of one social order is replaced by a new one. This is the second theme in the historical evolution of capitalism. It resulted in the separation of a traditionally seamless web of rulership into two realms. One of them involved the exercise of the traditional political tasks of rulership, and the other realm was limited to the production and distribution of goods and services. A third theme calls attention to the cultural changes that accompanied the evolution of capitalism. The presence of an ideological framework based upon profit contrasts sharply with that of pre-capitalist formations.

For a proper understanding of commercial capitalism, it is necessary to take a quick glance at the current of events through which it evolved. It passed through different stages already mentioned before finally reaching the stage of modern capitalism. Feudal society had been established by the eleventh century when the organization of production and extortion of surplus labour were carried out for the benefit of the seigneur, an exalted landlord. Soon, however, the process of its decomposition began. The most remarkable economic feature in the period during 1000-1250 was a steady rise in the wages, rents and profits. However, as Carlo Cipolla has pointed out in his book ‘Before the Industrial Revolution’, during the thirteenth century, certain bottlenecks had begun to manifest themselves. As demographic pressure steadily increased, there eventually came into play the economic law according to which lands with diminishing marginal returns are taken into cultivation. The laws of supply and demand inevitably pushed rents up and real wages down.

Things changed substantially from the 14th century onwards due mainly to two factors – 1) dreadful plague epidemic of 1348-51 as a result of which 25 million people disappeared in little more than two years, out of 80 million people who lived in Europe before the plague. 2) Wars and revolutions like the Hundred Years War (1337-1453), the War of Roses (1455-85) etc. which further depleted significantly the population of Europe. Between 1347 and 1500, European population declined from 80 to 60 or 70 million. The result was a drastic cutting down of the effective labour force leading to a rise of real wages, and a simultaneous stagnation or reduction of rents and interests. Consequently, the peasant classes improved their economic and social position relative to the class of landed proprietors. The weakening of the power of the merchant guild and formation of numerous craft guilds suggests that craftsmen and workers in the towns were likewise improving their position relative to the groups of the merchant-entrepreneurs. Simultaneously, there was a renewal of commercial fairs, a renaissance of urban life and the formation of a commercial bourgeoisie. It is in this decomposition of the feudal order that the formation of mercantile capitalism or commercial capitalism took root.

Over a period of several centuries the ‘long journey’ toward capitalism continued in this direction: the extension of trade and domination on the world scale, the development of techniques of transportation and production, the introduction of new modes of production and the emergence of new attitude and ideas. From the year 1000, the European economy ‘took off’ and gradually gained ground. In the course of the 13th century, Venetian merchants proved to be more advanced as far as business techniques were concerned than those used by the Byzantine Empire.
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The system of manufacture at this time was widely through guilds, that is, economic and social association of merchants or craftspeople in the same trade or craft to protect the interests of its members. Merchant guilds were often very powerful, controlling trade in a geographic area; the craft guilds (as of goldsmiths, weavers or shoemakers) regulated wages, quality of production, and working conditions for apprentices. The guild system declined from the 16th century because of changing trade and work conditions which led to the emergence of the putting-out system. The composition of international trade between East and West indicated that it was in the 13th and 14th centuries that Europe asserted its superiority. One of the main reasons for European success, at least in the paper and textile industry, was the mechanization of the productive process by the adoption of the water mill. The most spectacular consequences of the supremacy acquired by Europe in the technical field were the geographic explorations and the subsequent economic, political and military expansion of Europe. One of the remarkable results of the geographic explorations was the discovery of the American continent or the New World and the beginnings of migration therein. The lightning overseas expansion of Europe had far-reaching economic consequences. One of the major consequences was the discovery in Mexico and Peru of rich deposits of gold and especially silver. In 1503 precious metals arrived from the Antilles; in 1519 the pillage of the treasure of the Aztecs in Mexico began; in 1534 the pillage of the Incas in Peru started.

In the same period that precious metals became more abundant, prices rose because demand for goods had risen because the abundance of precious metals had made people richer. But due to fall in population, as explained earlier, production could not be expanded proportionately. As a result, the rise in demand resulted in a rise in price. Economic historians have labelled the period 1500 to 1620 as the ‘Price Revolution’. It is generally held that between 1500 and 1620, the average level of prices in the various European countries increased by 300 to 400 percent. A confused debate ensued in which a number of causes have been held responsible for causing high prices: farmers, middlemen, exporters, foreigners, merchants, and usurers as well as ‘monetary revaluations’. In this debate the analysis of J.Bodin, a jurist from Anjou, is particularly significant. Bodin wrote, ‘the principal and virtually sole cause’ of the rise in prices was ‘the abundance of gold and silver which is greater today than it has been during the four previous centuries…. The principal cause of a rise in prices is always an abundance of that with which the price of goods is measured.’ The net result was that the merchant and banking bourgeoisie gathered strength. After Venice and Florence, Antwerp, London, Lyon and Paris developed, with populations surpassing 50,000 even 100,000. Therefore, with banking and merchant bourgeoisies having acquired immense fortunes and national states having mastered the means of conquest and domination, the conditions were ready in the 16th century for the future development of capitalism. It is in this sense that one can date the capitalist era as beginning in the 16th century. However, historians and economists have referred to this early stage as mercantile or commercial capitalism. Significant progress in the field of trade and commerce took place. This unprecedented commercial growth naturally led to immense accumulation of capital and is referred to as the Commercial Revolution. It is undeniable that England, for instance, was able to do what she did in the first stages of the Industrial Revolution partly because this previous Commercial Revolution allowed a considerable accumulation of capital: the profits of overseas trade overflowed into agriculture, mining and manufacture. This situation is what is called Commercial Capitalism.

The Commercial Revolution was a very important economic event in the 16th and
17th centuries when the transformation of the European trade occurred as a result of the overseas expansion and the influx of bullion. In trade the most significant

changes were: growth in international trade, ending of regionalism, trans-oceanic trade, growth of markets, and new kinds of commercial organizations. The development in the international trade and the various means of banking and exchange between 1550 and 1700, especially in Holland and England, can be termed as the Commercial Revolution. It had certain outstanding characteristic features. One of them was immense capital accumulation and intensification of Commercial Capitalism as we have already noted. Another was the growth of banking. As we have discussed earlier, banking was very limited in the Middle Ages due to moral disapproval and was carried on mostly by the Jews. By the 15th century, however, the banking business had spread to southern Germany and France. The leading firm in the north was that of Fuggers of Augsburg. The first in order of importance was the Bank of Sweden (1657), but the most important one— the Bank of England — was founded in 1694. Another significant feature of Commercial Revolution was the replacement of craft guilds by the springing of industries like mining, smelting and woollen industry. The most typical form of industrial production in the period of the Commercial Revolution was the domestic system or the ‘putting out system’ which developed in the woollen industry. Although the scale of production was insignificant, the organization was basically capitalist. Formation of regulated companies, i.e. an association of merchants grouped together for a common venture, was another feature of the Commercial Revolution. Usually the purpose of the combination was to maintain a monopoly of trade in some part of the world. In the 17th century this was replaced by the joint-stock company. The remaining feature of the Commercial Revolution that needs to be considered was the growth of a more efficient money economy. A standard system of money was adopted by every important state to be used for all transactions within its borders. The creation of national currencies was therefore really an important achievement of the Commercial Revolution.

By the end of the 15th century, in Western Europe, the Mediterranean was the most developed area. But by the end of the 16th century, this area declined and the economic balance of Europe shifted to the Northwest area, on the Atlantic coast. There were changes in the type of commerce with the shift and growth of trade. In the 16th century, the flow of spices from the East and the bullion from the West were important. But gradually new overseas products became staples of consumption in Europe and grew in commercial importance—indigo from the East, porcelain from China, cocoa from America, tea and coffee from the Far East and the Near East, etc. A considerable portion of the bullion from America went to India and the East. The need for slaves transplanted black population to America. European goods were also exported to distant land, and this served as a boost to industries. Refining of sugar and preparation of tobacco were new industries. This acted as a great impulse to the growth of capitalism from overseas expansion. That is why till the end of the 17th century, capitalism can be called commercial capitalism, as it was capital dominated by commercial activity. Maritime dominance also passed from the Mediterranean to the Atlantic shipping. This was due to the development of cheaper forms of sea transport by the Dutch and the English.

The development, therefore, can be summed up briefly. In the centuries following the 12th, with the rise of commerce and business, there grew up a class of merchants, traders and financiers who sought profit and looked upon usury as a normal part of their business life. Though, of course usury was common among the Jews since the
11th century because they were the real moneylenders. The prohibitions against usury issued by the church could mean nothing to them since they were not Christians. As the merchant capitalists became more and more important and as the church became involved in the financial and business mechanism of the times, the ideas of the church and the public readjusted themselves towards the acceptance of the
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Capitalism and
capitalist spirit. The earlier method of manufacture on a large scale was through guilds in towns. The guilds were of significance in medieval economic development because of their deliberate policy of promoting sectional interests. A decisive change took place in Western Europe, when the intermediary, the merchant capitalist, as a result of the ‘putting out’ system, or Verlagssystem, separated the producer from the final consumer. All these developments since the 13th century constituted different stages of Commercial Capitalism or merchant capitalism. These capitalist tendencies remained confined, however, to commercial activities and within the feudal framework. The process was not complete by 1500, since more than a century later usury was still being denounced by churchmen, rulers and publicists.


Mercantilism, a term coined by Adam Smith, played a very important role in the evolution of Commercial Capitalism. Maurice Dobb refers to it as ‘a system of state regulated exploitation through trade—essentially the economic policy of an age of primitive accumulation.’ In short, mercantilism can be said to be a state controlled economic policy which aimed at regulating the trade and commerce of the nation, as well as its factories and manufactures with the primary purpose of ultimately to concentrate and wield political power by building fleets, equipping army etc. Although mercantilism varied from country to country, it had certain common characteristic features like bullionism, paternalism, imperialism, economic nationalism etc. Bullionism, which meant that the prosperity of a nation was determined by the quantity of precious metals within its borders, became an essential element of mercantilism ever since precious metals had started flowing in from America to the old world.

Generally speaking, the period between 16th and 18th centuries is designated as the period of mercantilism, as great economic growth, an increase in the use of money, a sharp rise in the volume of distance trade, acquisition of more and more colonies etc. reached its zenith during this period. Mercantilism is closely interlinked with Commercial Capitalism as growth of the latter attracted the attention of the state and although the activities of the merchants were sometimes obstructed and hampered by the policy of mercantilism and therefore the merchants were forced to oppose mercantilist policies on those occasions, on the whole the merchants were positively benefited by the state policies like creating markets by acquiring colonies and thereby expanding exports by building fleets, by providing protection against foreign goods by raising the tariff, by maintaining banks, by giving subsidies etc. Jean Baptiste Colbert, the French chief minister under Louis XIV, for example, gave a tremendous boost to commercial capitalism by adopting a vigorous mercantile policy like prohibition of export of money, levying high tariff on foreign manufactures, and giving bounties to encourage French shipping. He also fostered imperialism hoping to increase a favourable balance of trade. On the other hand, as Christopher Hill argues, the mercantilism of the Tudor monarchs in England was positively pro- guild and restrictive towards the putting-out system, because with a weak army and bureaucracy it was easier for them to tax the urban guilds more effectively than the merchant-capitalists of the putting-out system located mostly far away in the countryside. A series of Acts, starting with the 1533 Statute, passed by the Tudors in an effort to restrict them demonstrates the fact. The Weavers’ Act forbidding the clothiers to own more than one loom and two weavers and the Enclosure Commission set up in 1548 to look into the enclosures slowed down the growth of the putting- out system in England. The situation improved with coming of the Stuarts and Commercial Capitalism under the putting-out system flourished.


As the name indicates, and as is clear from above discussions, Commercial Capitalism emerged primarily out of profits of trade and commerce. The question now is what was the nature of this trade? The noted French historian Fernand Braudel thinks it to be long- distance trade. In his view, long-distance trade undoubtedly played a leading role in the genesis of merchant capitalism and was for a long time its backbone. The views of modern historians, however, are hostile to it in many ways. Jacques Heers, for example, writing about the Mediterranean in the 15th century, insists that there were a large number of short-range trades, instead of long-distance trade, the greatest traffic being in grain, wood and salt. Peter Mathias has also established with statistics that England’s foreign trade on the eve of the Industrial Revolution was considerably smaller than her domestic trade. It has been argued that inter-regional trade within Europe was a hundred times greater in the 16th century than the exchange between Europe and the New World. Braudel says that even though the volume of local trade might have been much greater and therefore the trade in the Mediterranean was in a position of minority, the value of minority in history should not be overlooked, though, he admits, today’s historiography is concerned primarily with the experience of majority, of the millions forgotten by previous schools of history. In the first place, Braudel continues, long-distance trade, known to German historians as Ferhandel, created groups of Fernhandler – import-export merchants, who were always a category apart. They introduced themselves into the circuit between the artisan and his distant raw materials – wool, silk, cotton. They also interposed themselves between the finished product and its marketing in distant places. The products of far-off lands also found their way into the hands of the import-export merchant like silk from China and Persia, pepper from India, cinnamon from Ceylon etc. The risks of long- distance trade were great, but so were its profits. According to Braudel, the long list of long-distance trade shows that distance alone could create ordinary everyday conditions for profiteering.
Commercial Capitalism


The question now logically arises that what precisely was the role of commercial activities and capital accumulated thereby in the transition from feudal mode of production to industrial mode of production. Because by now we know that commercial capitalism existed within the framework of feudalism since the Middle Ages.

The significance of commercial capitalism and its role in the transition becomes all the more striking in the transition debate, which ensued among scholars and historians. Two stages of the debate can be identified. 1) The Dobb-Sweezy controversy (mentioned above), turned mainly on what would be the correct Marxist explanation of the transition from feudalism to capitalism in the light of European experience. 2) The second stage of the debate is less bound by such limitations. Robert Brenner’s critiques of the ‘demographic model’, supported by Emmanuel Le Roy Ladurie of the Annales School, Michael Postan and Habakuk of the Liberal School and Marxist Guy Bois, the ‘commercialization model’ of Pirenne, Sweezy, ‘the falling rent rate’ of Perry Anderson, Rodney Hilton and ‘World System’ model of Immanuel Wallerstein, are not only rich in fresh insights and developments of Marxist analysis, but also utilize a mass of new and meaningful evidence on agrarian history, industrial
and commercial evolution and demographic changes. The debate was mainly about 15

Capitalism and

two points – whether the exchange relations or external trade demolished the feudal mode of production; or whether inner contradictions like exploitation of the peasant by the nobility and unproductive use of economic surplus like expenditure on war and luxury were responsible for the break-down of feudalism.

There was a long time-gap between the decline of feudalism in Western Europe during the 14th century and the beginning of the capitalist period in the second half of the 16th century at the earliest. Sweezy does not agree with Dobb’s characterization of the intervening period as feudal. Rather he considers it as a traditional form in which the predominant elements were neither feudal nor capitalist. According to Dobb, feudalism had its own dynamic phase (10th- 12th centuries) of expanding production based on the extension of cultivation, some technical improvements and extraction of surplus and its use in unproductive ways. Dobb indicated how the economic effects of trade and merchant capital were themselves shaped by feudal class relations and rather reinforced feudal obligations. Further, merchant or commercial capital is not directly involved in production and hence its source of profit lies in the ability to turn the terms and conditions of trade against petty producers in agriculture and industry.

Dobb made the following points regarding the emergence of capitalism: i) supersession of serfdom by contractual relations or rise of peasant property. This was the result of the inner contradictions in the feudal relations between the nobility and the peasantry. The very misery of the peasantry created the danger of depopulation of manors. The effects of the nobility’s expenditure on unproductive activities like war were equally disastrous. Overexploitation of labour, unproductive use of economic surplus and exhaustion of power and opportunities to increase lord’s revenue made the feudal mode increasingly untenable. ii) Dobb attached considerable importance to the growth of capitalist elements from the ranks of direct producers released from feudal constraints and engaged in the petty mode of production. iii) Dobb sees the English Revolution of 1640 as one in which artisans and yeomen seized political power from landlords and merchants.

Le Roy Ladurie stressed the importance of the demographic model implying that the long-term trends of the feudal economy conformed to the Malthusian sequence of population growth outstripping food supply and then demographic decline due to calamities like famine, starvation etc. A population upswing would then be associated with falling wages, rising food prices and rising rents. According to Le Roy Ladurie, there was a distinct upward surge of population during the 16th century, followed by a sharp decline in the 17th century. Abundance of labour in the 16th century due to population growth gave a boost to feudalism. Conversely, feudalism received a blow in the 17th century with a sharp fall in population. This was, in the view of Ladurie, the decisive role of the demographic factor in shaping the nature and sequence of transition.

Brenner criticizes both the demographic model as well as the trade-centred approach. The main thrust of Brenner’s argument placed the development of class structure and state power and its effects at the centre of analysis. According to Brenner, the two fundamental problems regarding the transition related to : i) the decline versus persistence of serfdom and its effects, and ii) the emergence and predominance of secure small peasant property versus the rise of landlord-large tenant farmer relations on the land. The class-structure, according to Brenner, had three layers— the state or the monarchy at the top, the gentry and feudal landlords at the middle and the peasants and serfs at the lowest base. In the 14th and 15th centuries the perpetual class conflict between the second and third social groups resulted in the triumph of the peasantry and serfdom came to an end. In England, however, since the monarchy

was dependent on the gentry for taxes, it could not protect the peasantry against the oppression of the gentry and the feudal lords. As a result, the peasantry were ultimately again suppressed by feudalism, leading to their deprivation of land which were subsequently enclosed by the landlords. The successful enclosure movement in England laid the foundations of agrarian capitalism in the 16th century and this facilitated the process of her early industrialization. In France, however, the monarchy was directly dependent upon the peasants for taxes. So the landlords could not enclose the lands successfully as the peasants resisted the move vehemently and the monarchy could not afford to impose it upon them against their will. As a result, agrarian capitalism could not develop in France. It was all the more delayed in Eastern Europe where monarchy was extremely weak, feudal lords were powerful and consequently feudalism continued in its strongest form.

Perry Anderson, a Marxist, stressed like Dobb, Hilton and Brenner that changes in social relations must precede development of productive forces. The nobility was unable to maintain serfdom after the feudal crisis because the towns gave peasants a shelter when they fled from their masters. In this manner, the political contradictions were first heightened and then resolved by its disintegration. But unlike them, he rejected the view that class struggle plays a decisive role in the germination as well as in the resolution of social crisis. Like Sweezy and Wallerstein, on the other hand, Anderson stressed the importance of towns and international trade to the process of capitalist development. His theory is also known as ‘eclectic Marxism.’

On the other hand, prominent scholars like Sweezy, Wallerstein, Perry Anderson recognized commerce and the capital accumulated thereby to be the most crucial link between the decline of feudalism and the rise of capitalism. Capitalist manufactories (i.e. large handicrafts employing wage labour) which competed with and ousted the old craft guilds, were the crucial link – the form in which the metamorphosis of merchant capital into industrial capital was achieved.

Paul Sweezy saw the Verlagssystem or the ‘putting out system’, in which large merchants of the town employed craftsmen scattered in domestic workshops in the villages or suburbs as the most significant point from which process of transition to the matured factory system of the Industrial Revolution started. Sweezy’s view that merchant capital, which developed and blossomed within the construct of the feudal society, evolved directly into industrial capital, has, however, been considered by others as misconception in the sense that only if merchant capital was invested in industrial production, could it be responsible for the transition to capitalism.

A little elaboration of the point made above is essential. In other words, it is to be clarified what is the distinction between investment in commercial production and that in industrial production and why, therefore, the latter only could put an end to feudalism and simultaneously paved the path for the rise of industrial capitalism. These were: 1) Under commercial production the earlier method of manufacture through guilds in towns underwent crucial organizational changes as production of goods came to be dominated by the merchant capitalists under the putting-out system. The putting-out system was much more elaborately developed and manufactories were created when merchant capital was invested in industrial mode of production.
2) The change of investment from commercial to industrial production was accentuated by the shift in the economic centre from the Mediterranean to the Atlantic. While earlier commerce was confined to the Mediterranean and Baltic region, a geographical shift took place to the north-western region of the Atlantic during the late 15th and 16th centuries. The reasons were many, like, the soil conditions in the Mediterranean Europe were inferior to those of North- Western Europe. Discovery of precious metals in America was another reason. It brought with it enormous
Commercial Capitalism


Capitalism and

international liquidity and marked the growth of international trade. Between 1500-
1700 at least in Holland and England a commercial revolution took place. Moreover, piracy deterred the merchants in the Mediterranean. Discovery of new trade routes through geographical exploration further accelerated the process of shifting the economic centre. Technological breakthrough was another reason. 3) Under industrial production, a much wider range of choice of goods than before was made available for the purpose of international trade, including a larger number of non-luxury goods;
4) the volume of articles of common consumption for both international and domestic markets was substantially increased by industrial mode of production

It can be said, therefore, that capitalism prevalent till the end of the 17th century was commercial capitalism, that is, capitalism dominated by commercial activity. A large part of the goods in trade was obtained from the traditional sector—agriculture, domestic work and craftwork. This growing volume of trade accentuated the commercial aspect of the still expanding capitalism. However, the demand on the manufactures multiplied bringing about in the end a fundamental technological breakthrough—Industrial Revolution. A new economy was ushered in by the Industrial Revolution—famous in the history of Europe as industrial capitalism. The metamorphosis of commercial capital into industrial capital was completed basically by two primary factors—the deployment of commercial capital increasingly into industries, thereby transforming it into industrial capital and a significant increase in the number of factories or manufactories, a typical feature of the industrial age which in its turn completed the decline of the ‘putting out’ system.


Commercial Capitalism, as mentioned earlier, took different forms in different countries. Here we will study briefly its features in different major countries of Europe at that time.

In Spain, the old colonial and commercial country of Europe, for example, the growth of commercial capitalism was not very successful for various reasons. Spain possessed all the economic stimuli necessary for industrial growth—gold and silver from the New World, rise in population and a class of affluent consumers. Still it failed as far as industry and commerce were concerned. The development of the Verlagssystem or putting-out system which symbolized the triumph of commercial capitalism did not grow adequately in Spain. It developed to some extent in the rural areas and struck a blow to the guilds, i.e. the Spanish gremios and benefited the merchants, but in the urban areas the guilds proliferated at the auspices of the government and set up rigid control over design and qualities of products, and thereby became a positive hindrance to innovations. Moreover, permission of entry of foreign goods and prohibition of the export of domestic products dealt a heavy blow to the domestic industries of Spain. The overall defective tax system of Spain was another impediment. Spain quickly became a country importing primary finished goods and exporting raw materials. Seville’s (an important industrial centre and port on the Guadalquivir river) trade with the New World or America started declining and fell into the hands of foreign merchants.

The 16th century Europe obtained from America huge treasures in gold, silver and other precious stones, food etc. Initially it had a tremendous beneficial impact upon Spain and Seville became one of Europe’s major ports. It quickly became an important centre of international trade, because rise in bullion led to a corresponding rise in prices and attracted traders to sell their products in the Spanish markets. The Spanish

people also indulged in buying these imported foreign goods for their own needs using bullion as a means of exchange, rather than setting up industries for manufacturing goods. Agricultural base in Spain was equally poor and made Spain a major grain importing country. In other words, ‘Spain became a colonial dumping ground for foreign goods in Europe.’ Commercial capitalism, therefore, could make no headway in Spain as there was no inflow of capital, rather, its drain. Neither could Spain capture a substantial foreign market for herself, nor was there a sufficiently large home market, because high food prices left little in the hands of the mass of the population to indulge in any other kind of purchase. All these factors along with technological backwardness retarded the process of industrialization. Enormous influx of capital, therefore, could not stimulate the growth of commercial capitalism and its subsequent transformation into industrial capitalism.

As we had seen briefly earlier, even before it developed in England and Holland, the
‘putting-out system’ flourished in Italy—Florence and Northern Italy in the 13th and
14th centuries. The major parts of Italy, however, remained tied to the traditional system of production and no further progress of Commercial Capitalism and its subsequent transformation into industrialism could take place. The main reason was that Italy went on producing only high quality, expensive woollen cloth which was produced through old-fashioned guilds, which maintained obsolete forms of economic organization and production and were unable to produce in large quantities. Therefore in Italy problems like high cost of production, expensive labour, heavy tax system, cumbersome internal tolls, imports of wool from Spain etc. retarded the growth of capitalism. As a result, she failed to compete with England and Holland, who produced new draperies that were lighter and brighter as well as cheaper.

In France and England, however, the situation was different. Trade developed in France in the 15th and 16th centuries, and Lyons became the most active financial centre of the west outside Italy. France’s only major foreign supplier was Italy from whom she took fine silk, spices, drugs and dyestuffs. Later in 1536 the silk industry of Lyons was set up with a view to making France gradually self-sufficient. Rouen on the Channel Coast connected Paris and northern France with the trading metropolis of Antwerp. Ports of Normandy and Brittany had old established fisheries and after
1520 they turned to Newfoundland fishery. Bordeaux and Rochelle exported great quantities of wine to England and Netherlands. Salt was sent to Netherlands and the Baltic. Linen was sent to Spain from Morlaix, St. Malo and woollens, corn, wood, ironware, paper and other goods.

Merchants of France adopted the putting-out system as a result of which Commercial Capitalism flourished, while the independence of innumerable master craftsmen, journeymen, apprentices and casual labourers—particularly of textiles, construction, mining and metallurgy industries—was ruined. They were replaced by what was called in the 16th century France – arts and manufactures—which were not labour intensive , but were marked by capital concentration, since the numerous workers were only accessible to those who had capital and not to simple master craftsmen.

In the early 16th century, England was on the periphery of European trade with marginal use of technology in industry and agriculture. The putting-out system developed in the manufacturing units. 16th century capitalism in England was, therefore, essentially commercial in nature. Basically, the type of industries in England were two—industries like coal, mining or iron smelting where technical improvement was required, and, on the other hand, the small-scale industry of independent craftsmen who were gradually losing their independence at the hands of the merchant capitalists. Trade was in very limited items like raw materials primarily, the sole manufactured export being woollen cloth. All her basic needs she imported from
Commercial Capitalism


Capitalism and
other countries. England traded primarily with Ireland, Normandy, Brittany, South- western France, Northern Spain etc. from where she obtained wine, oil, dyestuff, salt and iron. England’s trade with America initially started in the mid-16th century through Spain and then with the establishment of English colonies, England found a flourishing market in the New World for her manufactures. With the shift of the focal point of trade from the Mediterranean to Western Europe, England was placed at the centre of world trade by the mid-17th century.

The Dutch commercial capitalism was dependent on Northern trade i.e. trade with the Baltic region and Norway. Special ships were developed for the purpose and soon the Dutch industry became the best one. Holland was also the primary producer of sugar. Amsterdam had sixty refineries in 1661. The putting-out system was developed in luxury and semi-luxury goods. In 1660’s the United Provinces became the principal centre of production in the European world economy. As has been noted already textiles and ship-building were her chief sources of capital.


What were then the results of Commercial Capitalism? Evidently, the most important was the growth of industrial capitalism. Another was the evolution of a Scientific Revolution. The opening of America and the East and the consequent influx of Spanish gold and silver created a tremendous demand for shipbuilding and navigation and for the making of the compass, maps and other instruments. The age of Galileo, Newton, Harvey, Descartes, Copernicus and Leibnitz saw the victory of the experimental method and of the application of Mathematics in the explanation of reality. It was in this cultural climate that the school of ‘arith politicians’—Grant, Petty and Halley- rose and developed. It helped to create an institutional structure and a business ethic, which accentuated the development of industrial capitalism and thereby was the prime cause of the growth of large towns and industrial centres.

Another effect of commercial capitalism was a rise in demand for consumer and capital goods—textiles, wine, weapons, equipment of various kinds etc. and also for commercial and transport services for the transportation of finished goods as well as raw materials from one place to another. The slave trade resulted in transportation of black population to America. The rise in demand produced two different sets of consequences. One was that the rise in demand resulted in increased production, but due to certain bottlenecks in productive apparatus, production could not be proportionately increased leading to a rise in demand, which again resulted in rise in prices. The ‘Price Revolution’ was therefore an inevitable consequence of Commercial Capitalism. Scholars have also attributed a special maturity to the English pre-industrial economy. Accumulation of capital, big or moderate, for example, enabled business to develop more elaborate techniques of capitalism. The credit system was developed substantially because all these techniques were directly linked with the extension of credit. The simple form of Bill of Exchange, for example, gave way to a more complicated type called the draft, which was in use by the mid-14th century and common by the 15th.

Commercial Capitalism resulted in the growth of markets that again had a very important outcome—the rise of towns. From the nucleus of small trading centres, they slowly and gradually evolved into flourishing, prosperous towns with all characteristics of urban civilization. There is undoubtedly an eclectic explanation of the rise of medieval towns, but one fact is certain: without capital these towns could never have emerged as significant centres of exchange of goods and products. Therein
20 lay the role of Commercial Capitalism though of course, it would be wrong to regard

them as microcosms of capitalism, because many towns in the early stages were themselves subordinated to feudal authority. Nevertheless, they nourished the ‘first germs’ of merchant and money-lending capital that was later to be employed on a larger scale.

The Price Revolution, on the other hand, led to the rise of the bourgeoisie class. Nobles, who could not cope, became heavily in debt. Merchants, businessmen, traders, lawyers, i.e. the bourgeoisie, made fortunes and thereby emerged as a powerful force in society. The beginnings of an organized trading interest in the towns, distinct from the handicraft, evolved into close corporations of richer merchants, who proceeded to monopolize wholesale trade and soon came to dominate the town government and to use their political power to further their own privileges and explicitly excluded from their ranks the handicraftsmen. The rule of the merchant capital was established to the detriment of the craftsmen and these merchant capitalists or merchant bourgeoisie who replaced the earlier burghers, rose to play an exclusively preponderant role in the society posing a serious challenge to the old feudal aristocracy.

All these consequences of Commercial Capitalism helped to accelerate the pace of the coming of Industrial Capitalism. By accumulation of capital, by stimulating expansion and diversification of demand and thereby creating new markets, by favouring the growth of the bourgeoisie, Commercial Capitalism brought about drastic changes in the entrepreneurial attitudes after discarding the conservative ways and methods and paved the path for the entry of the Industrial Revolution—a spectacular landmark in the history of human evolution.
Commercial Capitalism


In this Unit we have seen the way money, trade and cash economy began to take precedence over feudal economy based on land rent from the 13th century onwards. It saw the beginnings of ‘putting out system’, large-scale financial and bank transactions, establishment of manufactories for production of goods on a greater scale, particularly textiles, leading to this phenomenon called Commercial Capitalism, the first major phase in the development of capitalism. We have also seen how it led to such a change through a survey of the debates over the internal problems emerging within the feudal system. Yet, as seen through different case studies, this phenomenon was not uniform and even happening at the same time across different countries. The increasing interlinkages between the production for commercial purposes and international and national trade prepared the ground for industrial capitalism, perhaps the most classic stage in the development of capitalism. You will read about this in the next Unit i.e. Unit 12.


1) Define the features of commercial capitalism.

2) Under what historical circumstances commercial capitalism emerged? Discuss briefly.

3) What are the different aspects to the debate over transition from Feudalism to



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13.0 Learning Outcome

13.1 Introduction

13.2 Initiatives towards Constitutional Status to Local Governance

13.2.1 Features of 73rd Constitutional Amendment

13.2.2 Features of 74th Constitutional Amendment

13.2.3 Decentralised Planning in Context of 73rd and 74th Constitutional Amendment Act

13.3 Initiatives after Economic Reforms

13.4 Functioning of PRIs in Various States after 73rd Amendment

13.5 Functioning of Local Governance after 73rd and 74th Constitutional Amendment: Observations

13.6 Conclusion

13.7 Key Concepts

13.8 References and Further Reading

13.9 Activities


After studying this Unit you should be able to:

• Identify the background of revitalisation of local governance;

• Understand the features of 73rd and 74th constitutional amendment;

• Discuss the initiatives after economic reforms; and

• Outlines the functioning of local governance in various states after the amendment.


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1.0 Learning outcome

1.1 Introduction

1.2 Concept of Democratic Decentralisation

1.3 Evolution of Democratic Decentralisation

1.4 Significance of Democratic Decentralisation

1.5 Democratic Decentralisation in India

1.6 Conclusion

1.7 Key concepts

1.8 References and Further Reading

1.9 Activities


After studying this unit, you should be able to:

• Understand the concept of Democratic Decentralization;

• Know the evolution and significance of Democratic Decentralization; and

• Describe the Democratic Decentralization pattern in India.


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