How Market Economies Have Emerged and Declined Since AD 500

* Book: The invisible hand?: How market economies have emerged and declined since AD 500. by Bas van Bavel. Oxford University Press, 2016

URL = https://global.oup.com/academic/product/the-invisible-hand-9780199608133?

Description

"The book offers a radical departure from the conventional wisdom of economists and economic historians by showing that factor markets and the economies dominated by them—the market economies—are not modern, but existed at various times in the past. They are not always rising, but after some time they stagnate and decline again. They are not uniform, but consist of very different combinations of institutions embedded in very different societies. They create flexibility and high mobility in the exchange of land, labour, and capital, and initially they generate economic growth, although they also build on the growth already generated by these societies in the previous period using other exchange and allocation systems. The dynamism that results from the rise of factor markets leads to the rise of new market elites who accumulate land and capital and use wage labour extensively to make their wealth profitable. In the long run this creates social polarization and a decline of average welfare. As these new elites gradually translate their economic wealth into political leverage, it also creates institutional sclerosis, and makes these markets stagnate or decline again. This process is analysed for the three major, pre-industrial examples of successful market economies in western Eurasia: Iraq in the early Middle Ages, Italy in the high Middle Ages, and the Low Countries in the late Middle Ages and the early modern period, and more succinctly for England and the United States in the modern period."

(https://academic.oup.com/book/5795?login=false)

Contents

1 Introduction: Markets in Economics and History

2 Markets in an Early Medieval Empire: Iraq, 500–1100

3 Markets in Medieval City-States: The Centre and North of Italy, 1000–1500

4 Markets in Late Medieval and Early Modern Principalities: The Low Countries, 1100–1800

5 Epilogue: Markets in Modern States: England, the United States, and Western Europe, 1500–2000

6 Conclusion: The Fundamental Incompatibility of Market Economies with Long-Run Prosperity, Equity, and Broad Participation in Decision Making

Review

1. Branko Milanovic:

"The recently published “The invisible hand?: How market economies have emerged and declined since AD 500” (Oxford University Press, 2016, 330 pages) by Bas van Bavel has, like all important books, a relatively simple core theory which Van Bavel, a well-known economic historian teaching at the University of Utrecht, illustrates on five historical examples: Iraq between 500 and 1100, Central and Northern Italy 1000-1500, the Low Countries 1100-1800, England 1800-1900, and the United States 1800-today. (The first three cases are discussed in detailed separate chapters, each running to 50-60 pages, while the last two, to which Western Europe may be appended, are discussed in a single chapter called “Epilogue”).

Van Bavel’s key idea is as follows. In societies where non-market constraints are dominant (say, in feudal societies), liberating factor markets is a truly revolutionary change. Ability of peasants to own some land or to lease it, of workers to work for wages rather than to be subjected to various types of corvées, or of the merchants to borrow at a more or less competitive market rather than to depend on usurious rates, is liberating at an individual level (gives person much greater freedom), secures property, and unleashes the forces of economic growth. The pace of activity quickens, growth accelerates (true, historically, from close to zero to some small number like 1% per year) and even inequality, economic and above all social, decreases. This is the period so well recognized and analyzed by Adam Smith. Van Bavel, in a nod to Braudel, shows that very similar “essors” have existed in the pre-medieval Iraq (then the most developed part of the world), medieval Central and Northern Italy (Florence, Venice, Milan, Genoa..) and on the cusp between the late medieval Europe and early modern period in the Low Countries.

But the process, Bavel argues, contains the seeds of its destruction. Gradually factor markets cover more and more of the population: Bavel is excellent in providing numerical estimates on, for example, the percentage of wage-earners in Lombardy in the 14th century or showing that in Low Countries wage labor was, because of guilds, less prevalent in urban than in rural areas. One factor market, though, that of capital and finance, gradually begins to dominate. Private and public debt become most attractive investments, big fortunes are made in finance, and those who originally asked for the level playing field and removal of feudal-like constraints, now use their wealth to conquer the political power and impose a serrata, thus making the rules destined to keep them forever on the top. What started as an exercise in political and economic freedom begins to look like an exercise in cementing the acquired power, politically and economically. The economic essor is gone, the economy begins to stagnate and, as happened to Iraq, Northern Italy and Low Countries, is overtaken by the competitors.*

As this short sketch shows, Bavel’s theory has many links, or can be juxtaposed, to several contemporary views of economic history. Bavel is dismissive of a unilinear view that regards the ever widening role of factor markets, including the financial, as leading to ever higher incomes and greater political freedom. His view, although not fully cyclical (on which I will say a bit more at the very end of the review) is “endogenously curvilinear”: things which were good originally, when they hypertrophy, become a hindrance to further growth. It is thus a story of the rise and fall where, like in Greek tragedies, the very same factors that brought the protagonists grandeur, eventually hurl them into the abyss."

(http://glineq.blogspot.com.es/2017/04/a-theory-of-rise-and-fall-of-economic.html)

2. Jef Peeters:

"Studies of Historical Market Economies

In the introduction, Van Bavel contrasts the common assumptions in market thinking with the findings of historical research more broadly. He also provides an overview of market economies throughout history going back four millennia—not only in Europe and the Near East, but also, for example, in China. For the older cases, judgments remain hypothetical due to the limited historical material available.

For the book, Van Bavel selects six market economies for which sufficient data—mostly from recent historical research—is available to allow for more precise analysis. He devotes a detailed chapter each to three pre-industrial market economies: Iraq, the region around the Tigris and Euphrates rivers in the early Middle Ages (500–1100); the medieval city-states of Central and Northern Italy (1000–1500); and the late medieval and early modern principalities in the Low Countries (1100–1800).

Then, in a single chapter, he more briefly discusses three modern market economies: England, the United States, and Northwestern Europe (1500–2000). Based on historical data, Van Bavel reconstructs the chronology of the rise and development of factor markets as precisely as possible, as well as their interaction with society. His focus includes the distribution of wealth—particularly the ownership of production factors (whether widely spread or concentrated)—and the distribution of related political influence. Wealth turns out to be more important than income.

Although we cannot delve into the detailed historical accounts, as you read, a pattern emerges across the six cases despite their factual differences. Market economies and their societies went through a comparable cycle of rising and declining prosperity. This curve only becomes visible from a long-term perspective, which has received too little attention in historical economic research. Through his precise chronology, Van Bavel also seeks insight into the causes of this evolution, which appears to stem from the internal dynamics of the factor markets themselves. Common external explanations, such as the plague epidemic or the Little Ice Age, prove insufficient.

* The Market Cycle

In the final chapter, Van Bavel summarizes his findings, and the title speaks volumes: “Why Market Economies Are Fundamentally Incompatible with Prosperity, Equality, and Broad-Based Decision-Making in the Long Run.” To support this conclusion, he outlines the cycle he has identified in general terms, divided into four phases (also summarized in a chart on pp. 384–85):

In response to social uprisings against feudal conditions, a (more) open society emerges, with increasing freedom and self-organization among ordinary people (e.g., guilds, common lands). This implies a new social balance, with a broad distribution of property and political influence. It leads to open institutions that enable the growth of markets—first in goods and services, but also in land and labor—positively affecting living standards.

Markets become the dominant mechanism for allocating land, labor, and capital, pushing aside systems of self-organization, often through state power. Values such as mutual trust, cooperation, and equality are displaced by market values. Prosperity continues to grow.

Financial markets expand, and both citizens and states become increasingly dependent on market elites. Through the market, disparities in wealth translate into growing economic inequality, which in turn becomes political inequality. Market elites are able to influence policy-making and regulation in their own favor. Living standards stagnate.

For market elites, it becomes more profitable to invest in financial operations (e.g., government debt) than in the real economy. Both wealth inequality and GDP peak, but living standards begin to decline, and access to political organizations and civil rights diminishes. There may be uprisings, but they are easily suppressed by mercenary armies. Eventually, markets stagnate, followed by relative or even absolute decline.

According to Van Bavel’s analysis, the United States is currently in the final phase of this cycle. The cycle in Northwestern Europe began later, with a mixed economy that left considerable room for both government and civil society. However, neoliberal policies aligned Europe with the American cycle, accelerating it and putting it on a path toward the same decline. Van Bavel sees (too) little societal resistance to this trend so far.

These descriptions may not sound entirely unfamiliar. Let’s highlight a few further aspects. First, the causality between increasing freedom and markets is the reverse of what is commonly asserted. The rise in individual freedom and opportunities for self-organization, coupled with a relatively high standard of living, actually preceded the development of factor markets:

Freedom is not a result of markets, but rather an essential precondition for their emergence. Once markets become dominant, freedom is consumed and hollowed out by economic unfreedom. Factor markets, in this sense, parasitize freedom, rather than ushering it in or encouraging it. (p. 377)

As more surplus is accumulated and the rise of financial markets becomes inevitable, the nature and effects of markets change:

They became an end in themselves—that is, the simplest and safest way to make accumulated capital yield returns. As a result, financial markets began to dominate and suffocate the real economy. (p. 379)

Furthermore, centralizing governments also seek greater control over society and find natural allies in market elites:

Factor markets and their market elites, and states and their state elites, worked in close cooperation to destroy the self-organizing structures of ordinary people. The states needed strong markets to strengthen themselves […] and the market elites needed strong states to protect their property rights.

.to protect their property rights, since growing inequality increased the need to keep the losers in check. (p. 403)

A paradoxical effect, however, is that the reliance on financial markets leads to rising public debt, causing governments themselves to fall under the (political) control of market elites. To repay these debts, governments do not resort to taxes on wealth, but instead impose taxes on labor and consumption.

"[T]hen the tax system effectively functioned as a transfer of money from the poor to the rich."

(translated from a review by Jef Peeters, in Oikos, #105)