1629, 1929, 2009: Always The Same

I don’t want to single out individuals, but it so happens that Tyler Cowen had an article in the New York Times on Sunday that mildly exemplifies the negative dystopian mood and the history-starved outlook we have come to recognise as ‘this time is different’. Because of new automation and change in demographics and division of labour, writes Cowen, “poorer nations might never become like us. There was something special about the 20th century mix … be prepared for the possibility that ... La Paz, Accra, and Dhaka will never look much like Seoul”. Dani Rodrik found elective affinity with Cowen on his own blog.

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I, in contrast, am heading in high spirits for the time machine capsule … I’m boarding it right now ... setting the creaky dial (drat the antique imprecision) on 1620-1629, the decade of the first Great Depression.

In the few seconds remaining before reverse thrust take-off shoots me into the 17th century, let me explain why I am doing this … When looking at twenty-first century crisis the usual comparative reference point is the much disputed great crisis of the twentieth century. I want to find what can be learned about crises of earlier centuries, about other functionally transformative political-economy catastrophes with the same or equivalent developmental dynamic. I shall apply telescopic tunnel vision to ascertain the truth.

It was a sentence in Hugh Trevor-Roper’s classic essay "The General Crisis of the Seventeenth Century" that led me to pack sandwiches and turn on the time machine.

… political crisis ... the European powers in motion … new taxes, new offices, new exactions. Meanwhile the European economy, already strained to the limit by the habits of peacetime boom, was suddenly struck by a great depression, the universal ‘decay of trade’ of 1620. Moreover, in those twenty years, a new attitude of mind had been created by disgust at that gilded merry-go-round which cost society so much more than society was willing to bear … [States] had grown so great, had consumed so much in waste, and had sent their multiplying suckers so deep into the body of society, that they could flourish only for a limited time of expanding general prosperity. When that prosperity failed, the monstrous parasite was bound to falter. In this sense, the depression of the 1620s is perhaps no less important, as a historical turning point, than the depression of 1929: though itself only a temporary economic failure, it marked a lasting political change …

An entire literature grew on the back of that essay, which, as one would expect, was much quarrelled over. Just as today one finds 22 reasons for 2009 crisis, and 25 ways to recover from it, so also in the historiography of 17th century crisis. It’s interesting how relevant many items on these 17th century history lists are - there are Schumpeterian, Smithian, Malthusian explanations, et al. Blame is laid on inequality, rent seeking, greed, climate change, et al. There’s even an Italian historian telling me unconvincingly t’was a Keynesian slump in demand. Does he imagine a 17th century sovereign could have created demand any less artificially or any more sustainably than a 21st century sovereign? Of course not. Then, as now, demand originates in the market economy. 

A shorter list of *process, outcome, ideas* will take priority in this blog’s time-travel machine. It is far easier, I maintain, to detect underlying causes and overriding remedies when you focus on the larger process in which the crisis itself was merely an incident that caused the great ships of the ‘state’ and the ‘market’ to sail in new directions.

1. Politics and Taxation:

One thing on which many historians are agreed is the influence of fiscal politics, i.e. reasons for excessive or new and unpredictable taxation that impacted on production or distribution by worsening supply and demand problems (hunger). Even the most recent book to be published on the 17th century crisis, which focuses on climate change as underlying natural cause, still views fiscal politics as the main negative driver of human agency during the crisis. Mainly because of sovereign profligacy and intra-state conflict, tax demands of sovereigns smothered market incentives which had flourished under more fiscally disciplined predecessors. So there was persistent financial crisis. It was inequality in the distributional impact of fiscal crisis that really shook the people four centuries ago.

2. Markets, Production, and Supply Chains:

Before and after the mid-17th century crisis, the central peacetime story was expansion of markets that dissolved feudalism and eventually -- once complementary institutions were in place -- generated industrial revolution. Markets grew in the 16th century through intra-Europe trade and overseas empire. 17th century crisis and wars interrupted foreign trade. Also, as a recent book explains, real or perceived shortage of money was associated with a blocked supply of metals from Bolivia and other American mining centres. The intellectual idea that this was a ‘money scarcity crisis’ evolved into the world-shaping 17th century English Financial Revolution which established credit instruments for coming generations of entrepreneurs. More generally, the pace of 17th century market integration was determined by differential impacts of competition on local production (one production crisis after another), and growing communications infrastructure. In England, 17th century crisis speeded up the spread of market ideology, which further broke down trade barriers.

3. Law, Administration, and Representation:

The major direct effect of the 17th century crisis was institutional transformation - rule of law, administrative impersonality, free representation. In large part, institutional reform was an effort to clear bottlenecks in the momentum of market expansion. OECD countries should expect an equivalent institutional effect over the next 10-30 years. The rapid 17th century effect was concentrated in Britain, spreading to other places more slowly. If I had to summarise the outcome of the English crisis-induced reforms in one sentence, it was the dramatic improvement of economic potential executed by the formal process of depersonalising state institutions. I first wrote in detail about this effect in 2003. Others have since reached the same conclusion, even with specific reference to 17th century England, where “the new rules sought by the commercial constituency were in the form of greater rights and impersonality” (North, Wallace, Weingast ‘Violence and Social Orders’). I confidently surmise that the advanced Western nations are overdue for a new wave of depersonalisation. With luck that wave will peak midway through this century.

The takeaway as follows -- it took a crisis to bring about all these improvements. The same crisis, and the same style and nature of change, are a feature of every century. Tyler Cowen, I call upon thee 21st century man not to look upon your generation’s transformational crisis through those gloom ‘n’ doom short-sight google glasses. Employ the telescope instead. The telescope, as it happens, was invented in the early 17th century. You could use it to look back and forward over an old pattern of wave-like oscillations with imagination and certainty that ingenuity and competitive spirit will adapt to apparitions of the scary machines, supply chains, inequality, and demography which return to haunt every century in futuristic garb.

As for La Paz, well, it will modernise by itself, just like Seoul, once those blockhead politicians at Legislative Assembly in Plaza Murillo dump socialism and get the right earthmoving ideology. Cowen chose to lament the destiny of some very idiosyncratic cities, each located in extremely poor countries where (no coincidence) socialism dominates politics. Why would anyone expect progress in a socialist city?