Profits from Power: Readings in Protection Rent and Violence-Controlling Enterprises

PROFITS FROM POWER

HC 12 L35

PROFITS FROM POWER READINGS IN PROTECTION RENT AND VIOLENCE-CONTROLLING ENTERPRISES

,

FREDERIC C. LANE

State University of New York Press

Albany

CONTENTS

Introduction

Published by State University of New York Press, Albany © 1979 State University of New York

All rights reserved Printed in the United States of America No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews.

1 National Wealth and Protection Costs

12

2 The Economic Meaning of War and Protection

22

3 Oceanic Expansion: Force and Enterprise in the Creation of Oceanic Commerce

Violence 5 Meanings of Capitalism

50 66

6 Public Debt and Private Wealth: Particularly

in Sixteenth-Century Venice

7 The Role of Governments in Economic

Library of Congress Cataloging in Publication Data

8 Economic Growth in Wallerstein's Social

Includes bibliographical references. I. Economic history-Addresses, essays, lectures. 2. Profit-History-Addresses, essays, lectures. 3. Power (Social sciences)-Addresses, essays, lectures. I. Title. HC12.L35 330.1 '6 79-13860 ISBN 0-87395-403-3

37

4 Economic Consequences of Organized

For information, address State University of New York Press, State University Plaza, Albany, N.Y., 12246

Lane, Frederic Chapin; 1900Profits from power.

1

Growth in Early Modern Times

Systems. A Review Article

72 82 91

ACKNOWLEDGMENTS

For permission to reprint articles in this volume, grateful acknowledgment Is made to the publishers named below. THE JOURNAL OF ECONOMIC HISTORY. "Economic Consequences of Organized Violence," Volume XVIII, December 1958 Number 4. "Meanings of Capitalism," Volume XXIX, March 1969 Number I.. "Th~ Role of Government in Economic Growth in Earl~ Modern Times, Volume XXXV, March 1975, Number I. "Oceanic Expansion," Volume X, 1950. COLUMBIA UNIVERSITY PRESS. "National Wealth and Protection Costs" from WAR AS A SOCIAL INSTITUTION: THE HISTORIANS PERSPECTIVE (1941) by Jesse Clarkson and Thomas C. Cochran (editors). CAMBRIDGE UNIVERSITY PRESS. "Economic Growth in Wallerstein's Social Systems" from COMPARATIVE STUDIES IN SOCIETY AND HISTORY, Volume 18, Number4, October 1976. . P~IVAT, EDITEUR. "Public Debt and Private Wealth: Particularly m Sixteenth Century Venice," from HISTOIRE ECONOMIQUE DU MONDE MEDTERRANEEN 1450-1650: ME'LANGES EN L'HONNEUR DE FERN AND BRAUDEL (1913).

INTRODUCTION

Of the many sources of power, these essays deal with only one: physical violence and the threat of violence exerted by some men on others. Although such power is at the foundation of well established legal systems, it is most obvious in periods of war or disorder. At the time of the events referred to in the first of these essays, power came not from the muzzle of a gun, but from the edge of a sword, the point of a spear, or the bolt from a crossbow. On the high seas power of that kind was not monopolized by governments; it was organized by competing enterprises that might be called private enterprises except that the line between private and public was then blurred. Later differentiations between political and economic enterprises and among economic institutions, although they have clarified how actions through free markets affect distribution, have somewhat veiled the effects of power on the distribution of wealth among nations and classes The use of organized violence is more obvious in the. earlier period. Analysis of its use then suggests effects that may be hidden in the modern world. The efficient use of power in that earlier period brought wealth not only to those for whom the organization of violence was a primary concern-such as slave raiders, pirates, tribute-takers, and tax collectors-but also to many merchants. Why did some groups of merchants prosper more than others, at some times and places? Why those of Venice more than those of Genoa? Or vice versa at other times and places? Why was one commercial route more profitable than another? Specifically, why was the route from Europe to India around Africa more profitable than the route through the Red Sea? Or was it really more profitable? Profitable to whom? These historical questions dominate the first two essays presented here and introduce some basic concepts employed in seeking answers.

2

PROFITS FROM POWER

Those ideas are expanded or applied in the later essays, which are reprinted in the sequence of their original publication. This introduction aims to explain the varying forms and contents of the essays and their intellectual background. In so doing it includes some references to my other writings and to recent contrasting or complementary treatments by other scholars. The concepts I found most useful in answering my initial and specific historical questions concerned the relations of profits to "protection." Their clarification distinguishes between two kinds of enterprises: (1) those that produce protection and are called governments and (2) those that produce goods or other services and pay governments for protection. In Europe's early overseas expansion, the distinction was conspicuous by its absence, as elaborated in the third essay. Merchants provided their own protection and governments traded for profits. But within Europe there was more specialization. Both kinds of enterprises were important sources of wealth for the wealthy. Many protection-producing enterprises-feudal monarchies and city states-collected large sums in taxes and tribute. Governments were highly remunerative enterprises as evidenced by the fact that the kings, councillors, generals, and judges who headed them were well paid, especially generals such as John Churchill, who became Earl of Marlborough, or admirals such as the Doria of Genoa. The fortunes collected by merchants were for a time small by comparsion, but the merchants accumulated wealth by taking advantage of the different prices at which they were offered protection. In many markets, sellers of spices, for example, had to compete in the sixteenth century with other merchants who received supplies by diverse routes. All these competing wholesale dealers in spices had to make payments for protection directly or indirectly to a number of different protectionproducing enterprises, whether taxes to governments or bribes to officials. Less dramatically, in many branches of trade the prosperity of a city's merchants depended on their paying lower tariffs, lower convoys fees and lower insurance rates than competitors, or lower protection costs in some other form when commercial customs were less developed. The differentials resulting from their being able to operate with lower protection costs constituted what I call their protection rent.

3

INTRODUCTION

Indulgence in the historian's chief delight, the discovery of new evidence and the striving to solve the puzzles created by the fresh evidence, has led me back again and again to Venice. Attempting finally to synthesize its thousand years of history in Venice, a Maritime Republic, I summarized my conclusions about the role played in its development by the skillful and lucky use of violence. The word "protection" appeared naturally and repeatedly without need of explanation in describing Venice's first use of its seapower to increase its wealth.l Explicit explanation of the importance of varying "costs of protection" for mercantile profits became basic for the selections on convoys and on shifts in the spice trade. The very title of the chapter on "Finance and Income from Power" reflects the conception that the Venetian Republic had become by the end of the sixteenth century a protection-producing enterprise in which the livelihood of the upper classes was derived largely from the receipts of that enterprise.2 The sixth of the essays here published, "Public Debt and Private Wealth," analyzed one aspect of that process. It was published at about the same time, but separately in a volume in honor of Fernand Braude!. Such analysis would not have been appropriate in a historical narrative; in that time-honored form of composition, the effort to avoid doctrinal cliches, jargon, and words requiring explanatory definitions prevented clarification of basic assumptions and conceptual distinctions. My history was written with more conviction, however, because of the theorizing embodied some thirty years earlier in these essays on the costs of protection. A broader view of the importance of violence-using enterprises for economic development is presented in the fourth essay, an Address to the Economic History Association. It includes a division of all economic history into four stages. Stage theories are illusory as efforts to predict a predetermined future, but they indicate what the exponent of a particular series of stages believes was important in the past and what he believes will be important in the present's shaping of the future. Four stage theories serving that purpose have dominated economic history: (l) Karl Marx, taking off from the declaration that the history of all previous societies is a history of class war, defined stages in terms of the classes at war in successive periods, and exhorted to class struggle as the means for creating a desired future. (2) The German Historical

4

PROFITS FROM POWER

School headed by Gustav von Schmoller defined stages in terms of the public authorities that had regulated economic life. He looked to beneficent governmental regulation as the means of progress. (3) The Liberal tradition clung to Adam Smith's perceptions of the beneficent linked effects of the extension of the market and the division of labor. The stages proposed by Karl Bucher were distinguished by forms of marketing and industrial organization but were entangled in the methodology of the German Historical Schools. 3 The sharp opposition between the Liberal approach and Schmoller's was more clearly, indeed belligerently, expressed by George Unwin, Professor of Economic History at Manchester (appropriately enough), in his praise of the third book of Adam Smith's Wealth of Nations. 4 Many stage theories elaborated in this country owed much to the Germans but accepted the basic tenants of the classical Liberal tradition. 5 (4) Finally there was the sociological school, dominated by Max Weber. From narrow juvenile work in economic history he moved through broad studies of the connections between religion and economic life to an examination of the fundmentals of methodology. In the lectures on economic history which he gave at Munich during his very last years, Max Weber sorted out the elements of many particular stage theories while subordinating them to his overarching scheme of human development in which the capitalism of western Europe was the culmination of successive triumphs of rationalization over traditionalism and magic. He was at the same time working on his unfinished masterpiece Wirtschaft und Gesellschaft which when translated with explanations after his death was to make his influence great among sociologists while it declined among economic historians. Today, one may well be surprised to find that the person who judged Max Weber's summary of economic history worth the labor of translating it was an economist, and not a run-of-the-mill economist but Frank H. Knight of the University of Chicago.6 It would be misleading to use the four names, Marx, Schmoller, Unwin, and Weber, to indicate four different stage theories without at once pointing out that the four different traditions have come to conceive "stages" differently. In the Liberal and Sociological approaches, a "stage" has been stripped of all predictive value and causal power. A traditional "stage" such as "handicraft" or "town economy"

5

INTRODUCTION

has come to be regarded as a kind of "model" or "ideal type." Historical realities are seen as having approximated now one, now another of these models, and to have approximated various models in different degrees contemporaneously. By a "stage in history" is meant only a perod of time in which there occurred more approximations of one type and less of another, at least in the region which can be said to be passing through that stage. An implication of evolution or progress survives, but only as an assertion that some types, for example capitalism, have been more nearly approximated more generally in recent periods, whereas other types, such as the self-sufficent village or household was more commonly approximated in an earlier period. The four schools-Socialist, German Historical, Liberal, and Sociological-competed for dominance in economic history between World War I and World War II. Many influential scholars drew ideas from two or three of the four schools. Werner Sombart was Schmoller' s prize pupil but in the first edition of his Der Moderne Kaptalismus he accepted Marxist doctrine about capital accumulation. In later editions which emphasized the spirit of capitalism he claimed to have embraced Weber's doctrine of ideal types. Joseph Schumpeter, whose early Viennese background and later American successes linked him to classical Liberal economics, accepted the basic Marxian stages of Feudalism, Capitalism, and Socialism, and explained the waxing and waning of the capitalistic spirit as results of changes in social structure.7 The stage theory which I offered in order to emphasize the importance of violence-using enterprises also borrowed from several schools. In emphasizing government it resembled the German Historical School, in its concern with the distribution of the surplus it followed the Socialist School, and in its attempt to analyze how the surplus was distributed it looked for help to the Liberal school. Its claim to originality lay in distinguishing the stages by the effects in each of the control and use of violence: stage one being characterized by plunder and the lack of any surplus, stage two by the tribute-taking of the violence-using enterprises, stage three by the distribution of the surplus through protection rent and land rents, and stage four by the furnishing of protection at cost so that the surplus was distributed through the "free market" to the technically efficient.

6

PROFITS FROM POWER

The explosion of productivity in nineteenth-century Europe was the dominant historical fact for which all the stage theories provided ?ackgr~un~. Marx and Weber both considered capitalism the dynamic mgred1ent m that growth because they found in capitalism the features which distinguished western Europe from the rest of the world and which explained its recent economic leadership. In contrast, pronouncing the word "capitalism" suffices to raise the hackles on adherents of the Liberal school and mentioned of "surplus" seems to be damned by association. This antagonism arises partly from the ambiguous and varied meanings of "capitalism," but not from that alone. Their beloved term "market" is not entirely free from ambiguity and certainly has a variety of meanings. The opposition of many economists and economic historians to discussing capitalism arises from a desire to avoid certain problems. Attachment to the term arises from insistence on making thoseproblems the center of discussion, namely, the problems of exploitation and social hierarchies. Discussing surplus leads to ranking some forms of consumption above others. Claiming that such problems are better left to ethical philosophy or religion, many economic historians retreat as economists behind the traditional frame of reference within which classical economics has practiced its "objectivity." Other historians and sociologists seeking a general view of the course of history respond more boldly to the call to battle. The battle can inflame, however, without illuminating. I feared that might be the result when the committee organizing the program for the Fourth International Conference of Economic History held at the University of Indiana in Bloomington in 1968 agreed that one section shou_ld be devoted to "Formation and Development of Capitalism," and It was proposed that the first session in that section be devoted to methodology and the definition of capitalism. My experience had been that two difficulties prevent prepared papers on methodology being fruitfully discussed in a large group. (1) A common frame of reference an understanding in that sense of each other's language, can not b~ attained in a few hours. (2) With a sizable audience to speak to, each speaker becomes so absorbed in thinking of ways to make his own point effectively that he pays less than full attention to points made by others. Consequently I suggested that a few of us exchange memoranda among ourselves, invite some from others, and have a small meeting to

7

INTRODUCTION

clarify our points of view. In doing so we left aside much of the ethical implications of "capitalism." We sought instead conceptions useful in connecting capitalism with that major concern of economists, economic growth. The resulting paper with appended comments, No.5 included here, was circulated in advance so that papers on specific topics would take into account what various authors mean by "capital.

ISm.

"8

In almost that same year a thorough-going rejection of the term capitalism was presented by the distinguished English economist, Sir John Hicks, under the title, A Theory of History. Frankly offered as an adversary's alternative to "the Marxian version of the general course of history," it elaborates stage theory in the spirit of the Liberal School for which Unwin spoke and which Hicks imbibed, as he indicates, at Unwin's University of Manchester. 9 The stages may be diagrammed as follows: Revenue Economy: (Non-Market-Economy) Customary Economy, expanding into Command Economy, and then either degenerating through feudalism, or preserved through bureaucracy. Mercantile Economy (Market Economy) First phase: City States Middle Phase: Semi-mercantilized Territorial States Modern Phase: distinguished by Mercantilization of Agriculture, the Administrative Revolution in Government, and Fixed Industrial Capital. In analyzing the genetic characteristics of the early stages Hicks fully recognizes the exercise of violence and the need for protection. He stresses the military character of many of the command economies which replaced "customary economies" and he highlights the protective function of the cities as they created the first mercantile economies. He carefully analyzes the merchant's need for protected rights of property and rights of contract and the restriction of the first phase of market economy by the limited power of city states to police their

8

PROFITS FROM POWER

contracts in all the area on which their prosperity depended, especially since their biggest profits came, for reasons he sets forth, from expansion into new areas. In the organization of violence (i.e. in military power), city states proved inferior in the long run to territorial states based largely on command economies, and were either conquered by them or turned to them for protection. When the latter took over they became "semimercantilized." At least that happened in western Europe, where kings did not destroy the wealth of the trading classes, not even of its richest segment, as happened in such states as Mamluk Egypt. It is in this stage, as well as in that of the city states, that I would point to "protection rent" as an important source of mercantile wealth. Hicks points instead to another source, certainly important, the finances of the semi-mercantilized states. During Hicks' Middle Phase, the use and control of violence continued to be an essential element in economic development although he pays less attention to it. Tax collecting depended on suppressing local riots and more extensive revolts in defense of privileges called "liberties." The application to agricultural villages of concepts of Roman law alien to their communal customs provoked many armed rebellions. Force also put down efforts of the pre-factory wage workers to become something more than members of the proletarian class of "casual laborers" to which Hicks assigns any that he cannot classify as also traders. In these connections a useful distinction has been made by Richard T. Rapp and Edward Ames. Accepting protection as the essential function of government, they point out that is is of two kinds "so that protection is not a homogeneous good." Both kinds are protection against a threat: "a threat by foreigners creates a demand for defense; a threat by one group of the population against another creates a demand for justice. Defense and justice are local public goods: that is to say, a given public service may affect different groups differently." In place of the broadly defined "tribute-taking" which characterized the second stage of my series of stages, they prefer "extortion" which they define by saying: "A payment for defense or justice contains elements of extortion to the extent that there is a monopoly profit to government." They use these concepts to explain how the basic taxations

9

INTRODUCTION

systems of early western European states "were born in essentially their final form at the time central governments were formed (between 1200 and 1400 depending on the country.) In each state, social needs for protection and royal ability to provide it at the historical moment of the birth of the tax system determined the character of taxation long into the future." 10 In the transition to what Hicks calls the Modern Phase, contests over justice strengthened some property rights and weakened others. The kind of property rights that were protected explains the accompanying growth of productivity, argue Douglass C. North and Robert Paul Thomas in a book discussed in the seventh of these essays. The kind of property rights by which they explain the unique economic growth of Europe in modern times (the kind which enabled Europe to become the center of a "World Economy") were, they say, "Those which channel individual economic effort into activities that bring the private rate of return close to the social rate of return .... Private benefits or costs are the gains or losses to an individual participant in any economic transactions. Social costs of benefits are those affecting the whole society. A discrepancy between private and social benefits or costs means that some third party or parties, without their consent, will receive some of the benefits or incur some of the costs. Such a difference occurs whenever property rights are poorly defined, or are not enforced."ll When they are enforced, after being defined so that the benefits or costs fall on the individual deciding on the action, his return approximates the social return and his striving for gain results in economic growth. The spurt of productivity of western Europe through the mercantilization of agriculture and large investments of fixed industrial capital depended on the protection of property rights of that kind, just as the transition from command economies to the market economy of the city states depended on the protection of the kind of property rights which Hicks analyzed as those needed by traders. The sharpening of the focus on what is protected by governments, in this case property rights, seems to me admirable. But the thesis of North and Thomas neglects some other aspects. One is the effect of property rights on control of surplus and its investment, that is, of the use of that part of production which is more than is needed to maintain

lO

PROFITS FROM POWER

the existing level of production. Will this surplus be devoted to increasing future production or consumed in ways that prevent future increases in production? How, by what classes or institutions, will the decision be made? Those questions are fundamental to important distinctions made by Immanuel Wallerstein's The Modern World Systems, reviewed in the last of these essays. He begins by asking what was it that distinguished western Europe from the rest of the world and which can explain its recent assumption of economic leadership. In the normal course of economic development (what has happened elsewhere) independent, small-scale economies ("social systems," he calls them) have been absorbed into empires. Each empire was an economically independent social system in which there was only one protection-producing enterprise. Having a monopoly, the government of the empire could charge what it wished for protection and as a result its institutions channeled all the surplus to the office-holding class, which was overwhelmingly concerned with maintaining itself in power, not with innovations that increased productivity. In western Europe, in contrast, trade transformed previously independent economies into a single social system including many sovereign states. The competition between them, entwined with the class conflicts within them, prevented governments from channeling all the surplus to office holders. Although Hicks and Wallerstein are poles apart, they would probably agree that the semi-mercantilized states of the sixteenth century could destroy the trader class but could not control it. A king who destroyed his merchants, lessened his power to compete with other kings. In the multi-state social system, much of the surplus went to individuals who in their self-interest used it for innovations producing economic growth-at least in western Europe. In contrast to the constructors of stage theories, Wallerstein is less interested in the sequence of types than in their spatial distribution. He distinguishes zones characterized by different ways of organizing production and by the nature of their relations to each other. Geography is essential in his synthesis. In this respect it shows the influence of France where more has been done than elsewhere to link history to geography. The French have shown less interest than the Germans in stages abstracted from historic time and geographic

11

INTRODUCTION

location, but have elaborated on regional contrasts, especially recently on those that have hardly changed, being in the sphere of "motionless history." Now, as the capitalistic world system created in western Europe throws out impluses for change over the whole globe, the deeply rooted regional differences demand a prominent place in any theoretical structure designed to provide a view of "the general course of history." Wallerstein offers one possible bridge between the Europocentric stage theories and the needed systematic analysis of both enduring and transitory elements in globe-circling contrasts.

r"',.,., , 13

ONE NATIONAL WEALTH AND PROTECTION COSTS

Spokesmen for modern imperialism repeat the faith of the mercantilists that war is an instrument which can and should be used to increase national prosperity. In that tradition, arms are also viewed as a means to the high end, power, but wealth is said to depend on power just as power depends on wealth. Accordingly, one school of :vriters regards the defeat of the Spanish Armada as a fact of major Importance for the increase of the wealth of Britain. Another school, more devoutly attached to the faith of Adam Smith, minimizes the economic consequences of military successes. 1 A reconciliation of the conflicting traditions is hardly to be expected, but perhaps more could be done than has been done to apply the economists' traditional style of though~ to _some aspects of non-peaceful behavior. Before attempting to descnbe m these terms specific historical situations, it is necessary to clarify the starting points of the analysis. An essential charge on any economic enterprise is the cost of its protection, its protection from disruption by violence. Different enterprises competing in the same market often pay different costs of This paper was read at the meeting of the American Historical Associa· tion in December 1940, and published with other papers presented at that meeting in Jesse Clarkson and Thomas C. Cochran (eds.), War as a Social Institution: The Historian's Perspective (New York, Columbia University Press, 1941), pp. 32·43. Before he was aware of this plan of publication, the author had submitted a longer version to the Journal of Social Philosophy and Jurisprudence, but he eliminated from that more theoretical version the details included in this paper concerning the price of spices before and after the Portugese discoveries. Both these articles are included here because of differences of content and phraseology. (This paper is reprinted by permission.)

NATIONAL WEALTH AND PROTECTION COSTS

protection, perhaps as tariffs, or bribes, perhaps in some other form. The difference between the protection costs forms one element in the income of the enterprise enjoying the lower protection cost. This element in income I will call protection rent. Just as differences in the fertility of land produce rents for the owners of the more productive fields, so differences in the difficulties of protection produce rents for the enterprises which are more easily or efficiently protected. To the categories traditional with the economists, that is, wages, interest, and land rent, can be added for present purposes the category protection rent. 2 How a change in protection costs could shift a carrying trade from one nation to another is illustrated by the trade of the West Indies at the time of Colbert. At the beginning of his ministry the trade of those islands was conducted almost entirely by Dutch enterprise, and there is every indication that under free competition without the interference of armed force the Dutch would have continued to underbid competitors. At Colbert's direction not only was the Dutch trade declared illegal, but a fleet of three naval vessels was sent to seize the Dutch ships visiting French islands. This use of armed force caused the Dutch some loss, threatened them with more losses, and increased the cost of "protection" for those Dutch who continued to trade as smugglers. At the time of Colbert's death some 200 French ships were receiving passports each year for voyages to the French West Indies. By raising the protection costs of the Dutch, Colbert had given the French the advantage of a protection rent and so made theW est Indies trade profitable for French enterprises. But profits for French enterprises trading to the French West Indies did not necessarily mean a profit for France as a whole-did not necessarily mean any increase in the total national income of France. The protection costs compared so far were those of private French trading enterprises and those of private Dutch trading enterprises. In order to discuss French national income, a way must be found of balancing against the profits made by French traders to the West Indies such items as the cost to France of maintaining naval squadrons there. In short we must consider protection costs from the point of view of the nation. As soon as we adopt this point of view, it is necessary to stretch the

14

PROFITS FROM POWER

15

meaning of the word protection. Under national protection costs are to be included not only what is spent by a nation for the defense of the economic enterprises of its own members, but also what the nation spends in raising the protection costs of competing enterprises of other nations. Besides protection costs which are obviously defensive-such as the cost of convoys for defense against pirates-there are others which may be called offensive protection costs. Perhaps to include these the term "political costs" wou1d be preferable, but the word "political" is too vague. The phrase "national protection costs," whatever the verbal contradiction in applying it to aggressive actions, at least preserves the suggestion of the use of armed force. I shall use it to cover all the expenditures by which a nation seeks to create protection rents in favor of its own enterprises. In modern times many such expenditures, for example the expense of maintaining a permanent navy, may be regarded as overhead costs. Allotting the cost of a navy to various branches of trade would be as difficult to a cost accountant as the problem of allotting the cost of a dam between its various uses for power production, irrigation, and flood control, but perhaps no more puzzling. This difficulty is less in the study of medieval and early times because force was then more commonly exerted in direct connection with particular commercial activities and there is more basis for estimating how much a particular branch of trade added to national protection costs. To discover the effect on national income, involves considering also the national opportunity cost of the new enterprises, that is, the cost of violating the law of comparative advantage. As Adam Smith argued so convincingly in similar cases, goods could have been more cheaply obtained in the West Indies, and West Indian wares could have been more cheaply obtained in France, if the transport had been left to the Dutch, and that French capital and labor which was in fact diverted to the West Indies trade had been allowed to find employment according to "the system of natural liberty." The profits of the new French enterprises were being paid for not only in royal outlay on the naval squadron, but also in the higher freights on shipments between France and the West Indies. Only by dealing with all these factors can one estimate, even roughly, the effects of Colbert's West Indian policy on French wealth.

NATIONAL WEALTH AND PROTECTION COSTS

. . b d · d in the profits of Against the addition t~ the nadtlonal mdcos;;;pepe:s om:st be balanced a F h west Indian tra ers an . the rene F" b . usly there is the big defiot of the formidable array ?flosses. Irst,:h~;~ i;neered the voyage; then the French West India Comphany, 1 adpron Since the exclusion of the · f 1 ·ng a Frenc nava squ cost oh femp oyi . f the reasons for the outbreak of he west Ind1es was one o Dutc rom t and Holland in 1672, some part of the the war between France b "d d also To allow for the nanonal ld have to e consi ere · of that war wou . f ar to French consumers would have opportunity costs, the ~nee o_ sugd nted part of the French . · d d If the Islan ers are cou to mvestigast: loss they suffered in paying prices for supplihes nation, we mu . h d by the Dutc . three times as high as those prevwus1y ~ arge . . to C o lbert the evidence presented .falls, two or· th rs sympat h etic . Even Inllauh o f ctors are consi"dered ' to indicate that any gam m a Income . t ese resu a lted during Colbert's lifetime from the capture of natwnal

ex~ense

~e

a~~~he

wh~n

k" to increase national wealth by the trade.3 . f A more c~~phcated ca~e ~e ::~ I:~ary capture of the spice trade ~y the use of mihtary pow~r IS t p 1 ays especially prominent m the Portuguese. Pro~ect~~nh~~~~ew:: :;ces which moved from the determmmg who s ou d h If of the fifteenth century Indian Ocean to Euro~e. In the sec~~cha:ts from India to Jeddah in most of them were earned by Arab m . f the Soldan of Red Sea There they came under the protection o h .. pt and through his lands, paying dearly on the for gy . they were sold to the Venetians an· · t"l at Alexan d na h d India by circumnaviprotection, un I Wh n the Portuguese reac e other Europeans. e h h ould ruin the Venetians by . A£ · · t as feared t at t ey w gatmg nca, I w . the Venetians were accustomed to selling for less than the pnc~s h nt banker Gerolamo Priuli, f ted v enetlan mere a ' auld be able to undersell charge. The o ten-quo . . h. d" that the Portuguese w prophesie_d m Is Iary . ht around Africa would not have the Venetians because the spiCes broug . h. h passed through

~e

p~ssed

w~y

~

~og~~:4 ~~u~:ge~pt:~:~ lt~:e~a;: r~~tes~~c~r;e I~heaper because of

lower protection costs. d"d not set their prices h d The Portuguese I This is not what appene . . . the fifteenth century. True, the below those common at v:mce m t of the spice trade, but by Portuguese did, for a short time, capture mos

16

I

PROFITS FROM POWER

methods which raised prices rather than lowered them. The Portuguese king attempted to prevent by armed force the passage of any spices from India to the Red Sea or Persian Gulf. He staked his hopes of profit on securing a monopoly. Although his success was not complete, Portuguese seizure of sources of supply, the destruction of Arab ships, and the risk of capture for others was sufficient for some decades to raise greatly the protection costs of the Red Sea route. Consequently, the Portuguese king was able to sell for prices higher than those the Venetians had received in the fifteenth century before Vasco da Gama rounded the Cape. Since Priuli's prophecy has often been mistaken for a true statement of what happened, it may be worthwhile to give a few details on the p~ice of pepper, that "king of the spices" which the Portuguese king tned hardest and most successfully to monopolize. Prior to the war between Turkey and Venice in 1499, pepper was selling at Venice for 42 to 57 duc~ts a cargo. War and speculation then drove the price up momentanly to 131, but that was a most exceptional figure.s For more than a half century before the interference of the Portuguese, the typical Venetian wholesale price had been about 50 ducats. 6 When news reached Venice in November 1501 that the Portuguese had sunk Arab spice ships, pepper again rose at Venice and for a few years remained between 80 and 100. From this high level the price fell, first at Lisbon and then at Venice after the return of Vasco da Gama's second fleet. The king of Portugal fixed his price in 1506 at the equivalent of 52 ducats a cargo, and in 1509 Venetian prices were only slightly above that figure. 7 In short, the first shock of Portuguese interference raised prices at Venice. As soon as the Portuguese voyages were in full operation prices dipped to, but not below, the fifteenthcentury level. This conclusion is based primarily on quotations of the Venetian wholesale market but agrees with what little evidence is available concerning the prices paid by English and German consumers.8 During the twenty years after 1506 the general trend of pepper prices was upward, more steeply upward than can be explained by the influx of precious metals from America to Europe. The prices charged at Antwerp by the Portuguese rose about 66 per cent between 1509 and 9 1527. At Venice the pepper received from Egypt was selling as high as

.,i.:

'

17

NATIONAL WEALTH AND PROTECTION COSTS

llO ducats a cargo in 1520 and, in hopes of buying more cheaply at Lisbon, Venetian galleys were ordered to call there. But when the galleys reached Lisbon in January 1522, one of the merchants wrote home that Lisbon prices were so high no one would think of buying for cash although there might be some barter. Pepper was selling at Lisbon at the equivalent of 83 ducats a cargo, 10 well above the fifteenthcentury Venetian price of 50 ducats. These prices show that the tight grip which the Portuguese had on the pepper trade in the fifteen twenties did not depend on their selling more cheaply than the Venetians had sold in the fifteenth century. The Portuguese had seized the pepper trade by increasing the protection costs of their Arab and Venetian competitors. But at the same time the Portuguese king had created for his own spice-trading enterprise some high protection costs also, the costs of overawing Indian princes, seizing trading posts, and maintaining naval control of the Indian Ocean. These were the king's means of raising the protection costs of his competitors and were therefore what I have called an offensive protection cost comparable to the cost of the fleets which Colbert sent to patrol the West Indies. But whereas in Colbert's France the profits of the private French traders to the West Indies and the cost of naval squadron fell on enterprises entirely separate in their direction and their accounting, in Portugal the bulk of the profits from the sale of spices came into the hands of the same entrepreneur who paid the offensive protection cost, namely, the king. This cost appeared in the deficits of the Estado da India and in the expenses for sending out from Portugal soldiers and warships for operations in India. Hence, historians have some basis for estimating the financial results of this royal enterprise which combined spice trading with military action. Charles de Lannoy figured that by 1580 the king obtained at the most 250,000 ducats a year net from the spice fleets, a figure which allowed for wrecks but did not allow sufficiently for the many cases of spending one to three hundred thousand ducats in reinforcing the Indian army and navy. 11 Lucio de Azevedo, taking into account all the military expenses, asserts, "The truth is that only in the period of conquest did India pay its cost ... " and then, as he says, only by b~oty, tribute, prizes and the ransom of Moors.l 2 Historians of the Portuguese empire seem generally agreed that the riches

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PROFITS FROM POWER

prophesied by Albuquerque proved a mirage. Long before the Spanish conquest of Portugal the inefficiency of the Portuguese system of government and trade was such that the costs of the Indian empire, added to the then considerable loss of ships, threatened to consume all the spice profits of the king. The offensive protection costs of the royal Portuguese enterprise were proving excessive. Meanwhile the progressive inefficiency or corruption of the Portuguese government in India and the efforts of the Ottoman Turks lowered somewhat the protection costs of the Red Sea route. At times the protection costs of the Portuguese king may have been the higher, a possibility which helps explain the revival of spice exports from Alexandria to Europe in the second half of the sixteenth century. About 1560 Venice and other Mediterranean ports regained a substantial part of the spice trade.l 3 Why, one might ask, did not the king of Portugal lower spice prices as soon as the Venetians or French threatened to take his business? Was not the all-water route around the Cape cheaper from a purely economic point of view, so that he could undersell the Venetians even if he did fail to keep the protection costs of the Red Sea route as high as in 1520? The greater economy of the Cape route, apart from protection costs, is difficult to demonstrate. Contradictory assertions on the subject are easy to find,l 4 but any calculation which ignored protection costs would be irrelevant to the present problem. In trying to cut off the Red Sea route the Portuguese king had assumed high protection costs for his own enterprise. He could not later lower spice prices substantially and still cover his own costs-not, at least, while his Eastern empire was so thoroughly permeated with inefficiency and corruption. That much at least is clearly implied by the statements of Azevedo and others concerning Portuguese finances. Turning now from the Portuguese capture of the spice trade and the nature of that "capture" to its effects on the prosperity of Portugal, we enter the field of conjecture, one in which profits from the spice trade and from pure plundering can hardly be distinguished. When Lucio de Azevedo says that the cost of the Indian empire exceeded the receipts, he seems to include under the costs the salaries and pensions with which the Portuguese king rewarded the nobles who conquered and governed the empire. In so far as these rewards came directly or indirectly from the empire, they made the income of the nobles greater than it would

19

NATIONAL WEALTH AND PROTECTION COSTS

otherwise have been and accordingly they represent an addition to the national income. Royal officials in India also increased their revenue illegally from booty, bribes, and private trade. The revival of the Red Sea route did not interfere with these illegal forms of revenue, since Portuguese officials could grow rich on the bribes paid them for their "protection" of Arab traders. There seerris no doubt that Portuguese national income increased for a time. Even the Portuguese kings, whatever the condition of their treasury, so enhanced their credit through the possession of spices that they were able to borrow extensively from international bankers and suspend payments in the grand manner, like their fellow sovereigns, in the third quarter of the sixteenth century. Before deciding whether the Portuguese military action in India was profitable to the nation, one must consider in this case, as in connection with Colbert's activities, the opportunity cost. Could Portuguese capital and labor, assuming the same geographic discoveries and the same skill in navigation, have been used more profitably in some other way than that to which it was directed by military action in the Indian Ocean? Admittedly it is difficult for even a lively historical imagination to conceive how Portugal could have followed in this case "nature's simple plan," but the question must be faced if the Smithian point of view is to be dealt with at all. And some contemporaries did in fact conceive policies requiring far less military action. Gerolamo Priuli was not the only Venetian observer who considered whether the Portuguese might not operate advantageously, without enforcing a monopoly, simply because their new route would enable them to avoid the high taxes formerly paid in Egypt.15 But the Portuguese soon showed that they intended to depend on force, and by basing their hopes of profit on raising the protection costs of their rivals, the kings of Portugal diverted Portuguese labor and capital from the commerical development of the voyage and focused the energies of their people on war, plunder, and the taking of bribes. In the long run of fifty or a hundred years, a more peaceful policy, fostering a greater development of the Eastern trade, might have made the nation richer. Although the conquest of India increased Portuguese national income for a time, it was followed by a decrease later in the productivity of the nation's labor. It does not therefore supply a clear

20

PROFITS FROM POWER

case of success in using armed force to increase the nation's prosperity. But can we not find an opposite case, an example of a use of armed force which, although decreasing the national income temporarily, may have increased its productive capacity in the long run? The previous discussion of Colbert's West India policy considered its effects on French national income in the short run only. Looking at the policy from the long run historical point of view, Professor Mims concluded: "In reality their development [that of the West India colonies] proved to be the most valuable colonial asset which France possessed and contributed more to her commercial prosperity than any other single branch of trade." 16 By stimulating the French West Indian commerce Colbert fostered the development in France of a certain type of labor and capital which proved in the long run of a hundred years exceptionally productive. By various measures, many of which depended on armed force, the mercantilists strove to increase the proportions of their nations' capital and labor devoted to oceanic commerce and to manufacturing for export. Thereby they diverted capital and labor from employments in which, according to nature's simple plan, they would have produced at the time more national income.l 7 But oceanic commerce and manufacturing were to prove, in the long run of a couple of centuries, those branches of economic activity capable of the greatest expansion. The distinguished continuator of the Smithian tradition, Alfred Marshall, admits that the national income of England depended much in the eighteenth century, and even more in the nineteenth, on "the action of the law of increasing return with regard to her exports." 18 Colbert did not, to be sure, think in terms of "a law of increasing return" and he was more interested in power than in plenty. But in so far as Colbert diverted capital and labor from conspicuous consumption or from agricultural investments which were subject to the law of decreasing return, and directed them into commercial and industrial activities which in the future were to yield increasing return, his activity as a statesman did contribute to the future wealth of France. Of course, armed force was not the only form of state activity used by mercantilists to canalize economic activities, and in many cases it is practically impossible to distinguish the particular effects which should be attributed to the use of force. All attempts at explaining secular

21

NATIONAL WEALTH AND PROTECTION COSTS

trends in national wealth must be tentative because of the number of factors involved. Explanations in terms of a single factor are properly suspect, and economists may well condemn those which are simply references to military victories. But such victories do, in some cases, change the protection costs borne by a nation's enterprises and so affect both the distribution of income within the nation and the growth or decline of the whole national income.

23

TWO THE ECONOMIC MEANING OF WAR AND PROTECTION

Because wars reduce national wealth in many ways it is often said that even for the victors wars never pay and never have paid except under quite primitive conditions. On the other hand, one of the ~ays in which an individual may gain his livelihood is by specializing m the use of force, and history records many groups of men famous mainly for their efficiency in war who gained relatively great wealth. Of course they had to live in a society with others engaged in occupations more commonly called productive. Can not a nation ~ivi.ng in a relation of give and take with other nations, similarly add t~ Its mcome by showing superiority over others in its ability to use force? Some of its capital and labor will have to be diverted from other employments, but it may be argued that under some circumstances war is the employment which will be most productive of national income. Although economists have done little to define the conditions under wh~ch the use of force may be the most advantageous of occupations, their usual method of theoretical analysis seems applicable to this problem so long as it is admitted that the use of force may be productive of a utility. That utility is protection. Every economic enterprise needs and pays for protection, protection against the destruction or armed seizure of its capital and the forceful disruption of its labor. In highly organized societies the production of this utility, protection, is one of the functions of a special association Reprinted from Journal of Social Philosophy & Jurisprudence, Volume 7, Number 3, Aprill942.

THE ECONOMIC MEANING OF WAR AND PROTECTION

or enterprise called government. Indeed, one of the most distinctive characteristics of governments is their attempt to create law and order by using force themselves and by controlling through various means the use of force by others. The more successful a government is in monopolizing all use of force between men within a particular area, the more efficient is its maintenance of law and order. Accordingly, the production of protection is a natural monopoly. The territorial extent of this monopoly is prescribed more or less loosely by military geography and historical circumstances. Breaks in the monopoly occur, as when there is an insurrection or a boom in the rackets of gangsters, but such rival enterprises in the use of force substitute monopolies of their own if successful. These illegal monopolies may be quite transitory and highly localized, perhaps as fleeting as that of the stick-up man who finishes his robbery before the policeman comes around the corner. When, as in that extreme example, no protection is given against immediate additional seizure by the same bandit or some other user of violence, it is a clear case of plunder. Both the history of nations and the stories of gangsters contain plenty of borderline cases, but clearly force is not only used in plundering but also in preventing plundering, and a government which maintains law and order is rendering a service in return for the payment it collects. The cost of producing this service varies greatly and affects the size of the real national income since the amount of goods and services other than protection which can be distributed to the nation is reduced when more capital and labor is employed in the production of protection. 1 Sometimes, as in the recent Spanish civil war, internal conflicts prevent any single enterprise from securing general recognition as the only legitimate monopolist of force and so reducing its costs. Sometimes fear of powerful neighbors causes more to be spent on arms. In the United States the amount of our nation's capital and labor now being employed for the production of protection is strikingly larger than the amount so employed a few years ago. Some nations have lower protection costs than others because of their cultural heritage or geographic position. A nation with easily defended frontiers, for example, may have a lower protection cost due to this gift of nature. The United States still devotes to the production of other goods a larger proportion of its productive capacity than does Great Britain, and our

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geographic position has, so far, enabled us to enjoy more protection while paying less for it. Ia Thus broadly stated from a national pqint of view, the importance of protection as a factor in production is easily recognized. But from the point of view of private economic enterprises the relation is frequently obscured. The ordinary economic enterprise operating within the territory of a government which has a monopoly of the use of force pays for protection in the process of paying taxes. Of many an individual entrepreneur it can be said that he does not normally "vary the amount of 'law and order,' or security, by variations in the taxes he pays." To him, " ... law and order is in general a free good, in the sense that any payment which must be made for it will presumably come out of general taxation and will not be counted as specific expense of production at all." 2 In this way economists generally dismiss protection from their calculations. But even for individual economic enterprises, protection costs are variable and to a significant extent affect the earnings of such enterprises. What they pay in taxes can in some cases be reduced by paying for protection in some other form-by lobbying, by bribes, or even by revolution. 3 To be sure, changes in protection cost are not often effected by an individual entrepreneur acting by and for himself alone. They are generally effected by group decision and group action. The decisions are made by governments in consultation with and for the benefit of a group of enterprises. They involve action in the forum and perhaps on the battlefield as well as in the market place or factory, but in so far as they are attempts to gain a utility at minimum cost they are subject to economic analysis. When an associate of Cecil Rhodes estimated that "good government" in the Boer states would bring a saving of six shillings per ton on gold ore production costs and an increase in consequence of $12,000,000 a year in dividends, 4 we may say that protection was being included by an entrepreneur among the factors of production and the principle of substitution was about to be applied. For individual enterprises engaged in international trade protection hardly ever appears a free good. Costs of protection are vital factors in production since their variations frequently determine profits. Competing enterprises are subject to different governments, and pay in taxes and tariffs different costs of protection. Usually they pay at least

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THE ECONOMIC MEANING OF WAR AND PROTECTION

two governments for protection and not infrequently they hope that the action of one government, which they call their own, will effect a reduction in what they pay to another government. For that purpose they can afford to increase their payments to their own government if their total protection costs, the sum of their payments to both governments, will be reduced. To isolate the element in business profits which results. from minimized protection costs, imagine a case of various enterprises competing in the same market and having the same costs except that they pay different costs of protection. The sale price of their product will be high enough to cover the highest protection cost, namely that of the marginal producer whose offering is needed to satisfy the demand. The profits of the enterprises enjoying lower protection costs will include the difference between their protection costs and that of the marginal competitor. This difference I will call protection rent. Just as differences in the fertility of land result in rents to owners of more fertile fields, so differences in the ease of securing protection result in returns to enterprises which enjoy cheaper protection, returns for which the best name seems to be protection rent. 5 The simplest illustration of such a protection rent is provided by enterprises competing under a tariff differential. For example, Hawaiian sugar was admitted to the United States free of duty from 1876 to 1890 while to meet the American demand much sugar was being imported from Cuba or Java. These full duty imports were the marginal supply and fixed the price. The Hiwaiian producers received a protection rent of two cents a pound. 6 Other examples abound in the history of the wealth of nations and the analysis of a few instances in which protection rents determined major changes in international trade will assist an analysis of the possibilities of increasing national income by the use of force. The Venetians obtained in 1082 a charter exempting them from all tariffs in the Byzantine empire and thus secured a differential in their favor even against the Greeks. These privileges were secured by placing the Venetian navy at the service of the Byzantine emperor in his war against the Norman king of Sicily. For more than a hundred years they were renewed or elaborated by continued use of Venetian arms, sometimes against the enemies of Byzantium, sometimes against the

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PROFITS FROM POWER

Byzantine emperor himself to compel renewal of the charter. The privileges were used in trade between different parts of the Byzantine empire and between that empire and other markets of the Levant as well as in trade between East and West. The Venetians alone did not satisfy all demands for commercial interchange within so large a field. Although their earlier chief rivals, the Amalfitans, were soon reduced to insignificance, the Venetians continued to have competitors, not only the Greek and Jewish subjects of the Byzantine emperor, but also new groups, the Pisans who paid a tariff of 4 per cent and the Genoese who paid the usual 10 per cent until 1155 and then 4 per cent. 7 Since such merchants found the trade worthwhile they too must have been necessary to meet the demand. Among them were the "marginal producers." The Venetians were able to sell wares at prices which must often have been higher by reason of the higher protection costs of less privileged traders. Consequently the profits of the Venetian merchants in that area were swelled by fat protection rents procured for them by their government's use of its naval power. At a much later date, the trade of the French West Indies at the time of Colbert illustrates how a government could, by changing protection costs, shift a carrying trade from one nation to another. The trade of the French islands was almost entirely in the hands of Dutch enterprises when Colbert became minister, and there is every indication that the Dutch would have had no difficulty holding their own against possible French competitors if there had been no appeal to force. Under Colbert's direction the Dutch trade was declared illegal and a fleet of three vessels was sent to seize any Dutch ships visiting the French islands. This caused the Dutch some loss, threatened them with more, and increased the cost of protection of those who continued to trade as smugglers. When Colbert died, some two hundred French ships were receiving passports each year for voyages to the French West Indies. The rise in the protection costs of the Dutch had made the trade profitable for French enterprises by giving them protection rents. s But profits for French enterprises trading to the West Indies, or for Venetian enterprises trading in the Byzantine empire, did not necessarily mean a profit for France or Venice as a whole-did not necessarily mean any increase in the totals of their national incomes. To consider the effects of these uses of force on national income, a way must be

27

THE ECONOMIC MEANING OF WAR AND PROTECTION

found to balance against the protection rents of the Venetian traders in the Byzantine empire the cost of the naval action which secured their privileges, to balance against the profits made by French traders to the West Indies such expenses as that of maintaining naval squadrons there. In short we must investigate the national protection costs in these cases. And we must first inquire further into what is to be included in these costs and what additions to national income besides protection rents they may produce. When we adopt this point of view we can hardly avoid stretching the meaning of the word protection to include aggressive action. The cost of using armed force at sea and in lowering foreign tariffs must be counted, although protection on the high seas is not a natural monopoly and international trade, by definition, extends beyond the territory of any single government monopoly. In this connection there are some protection costs which are obviously defensive-such as the cost of convoys to ward off pirates; others-such as the cost of capturing ships of other nations engaged in competing enterprises-might be called offensive protection costs. But it would be useless to try to classify the suppression of smuggling as offensive or defensive action. Whatever the verbal contradiction involved in applying it to aggressive actions, one .term is needed to cover both what a government spends to prevent the plundering of its own enterprises and also what it spends in plundering enterprises of other nations; in attempting to create protection rents for its own enterprises, or in extending its monopoly of force so as to levy tribute. By tribute it means payments received for protection, but payments in excess of the cost of producing the protection. The possibility of tribute arises from the fact that a government, like many another monopoly, does not need to sell its product at the cost of production. Most governments have been so constituted that ruling classes have been able to exploit these monopolies and raise the price of protection for other classes so as to increase their own incomes. 9 The tribute collected by one class from another need not in itself change the total of national income. It may merely move money from one pocket to another within the nation. 10 But tribute may be collected from outside the nation, and the income of a nation is increased by any sums which its ruling class is able to collect as tribute from members of some other

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PROFITS FROM POWER

nation. The Venetian penetration of the Byzantine empire, for example, came to a dramatic climax in 1204. Finding a large supply of armed force, the knights of the Fourth Crusade, available for its purposes at bargain prices, Venice employed them to overthrow the Byzantine empire and seize a portion of it. By that conquest the Venetians not only arranged to collect their protection rents for many more years but they also secured a sensational amount of booty and were enabled to levy tribute in the portion of the empire which passed under Venetian dominion. This tribute was paid by Greek subjects in taxes or in servile services and was received by Venetian nobles as manorial revenues or as salaries of government offices. Since it is readily admitted that plunder and tribute added to national wealth in earlier times, this conquest has been much emphasized. But the tariff privileges of the Venetians had gained them much wealth from the Byzantine empire before they became strong enough to overthrow it; the growth of wealth in Venice during that period as a whole came less from booty and tribute than from protection rents. The variety of uses to which may be put the force organized by governments makes the national cost of protection an overhead cost and creates the practical difficulties involved in allotting such costs. When the Venetians were fighting theN orman king of Sicily in 1081-4, they were acting not only to secure privileges in the Byzantine empire but also to prevent the king from extending his rival monopoly of force over both sides of the Adriatic and Ionian Seas. Had he succeeded he would have been able to take plunder and tribute from the Venetians. The problem of allotting the cost of an army or navy is as difficult a problem in cost accounting as allotting the cost of a dam among its various uses for power production, irrigation, and flood control, but perhaps no more difficult. Defense of the home territory against the devastation of invasion may be compared to the prevention of floods in a populous country. At least such defense may be accepted as a starting point. Additions to national protection costs beyond that poin:t may be judged profitable or unprofitable according to the amount they add to national income in the forms of booty, tribute for the ruling class, or protection rents for privileged private enterprises. Colbert created a navy larger than was needed to prevent the plundering of France; its cost was predicated on the desirability of extending France's commer-

29

THE ECONOMIC MEANING OF WAR AND PROTECTION

cial and colonial empire. The cost of the portion of the navy used in the West Indies may fairly be allotted to whatever France gained by that commerce. In estimating the cost to the nation of any acquisitions of booty, tribute, or protection rent, it is particularly important, and difficult, to reckon the opportunity costs. Allowance must be made for any violation of the law of comparative advantage involved either in the military effort or in the new enterprises created by the stimulus of the protection rents. For it is evident that all tariffs and forceful restraints involve less income immediately for someone than would have been gained if everyone concerned had acted freely, peacefully, without restraining or being restrained by force, and with a perfect eighteenth-century reasonableness. As Adam Smith argued so convincingly in regard to similar cases, West Indian wares could have been sold more cheaply in France, and European wares would have been cheaper in the West Indies, if that trade had been left to the Dutch and if the French capital and labor, which was in fact diverted to the West Indies trade, had been allowed to find employment according to "the system of natural liberty." The protection rents of the new French enterprises were being paid for not only in royal expenditure on the naval squadron but also in higher prices paid by consumers both in France and in the French West Indies. On the other hand, the protection rents of Venetian traders in the Byzantine empire, although dependent on the higher prices produced by the duties levied on their competitors, were not paid for in the main by Venetian consumers since relatively little of the merchandise found its ultimate market in Venice. The cost of the violation of the law of comparative advantage was borne by foreign consumers and was therefore no deduction from Venetian national income. The only substantial opportunity cost to the Venetians was the opportunity cost of the war fleets by which their privileges were won. If the capital and labor employed in those war fleets had been secured by bidding for them in an open market against competing demands for their use in other activities-such as continuance of the trade without special privilege-then there would be no opportunity cost requiring special investigation. But most war fleets are not secured simply by competitive bidding in a free market and their costs are not therefore fully expressed by figures in a government budget. Although Colbert's

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PROFITS FROM POWER

navy was partly paid for at market prices and the squadron sent to the West Indies was too small to make the difference of great weight, the Venetian fleets which fought for and against the Byzantine empire were major mobilizations of the maritime force of the nation. The government decided whether in a given year ships should be allowed to sail as usual or whether certain trades should be suspended and a fleet prepared for war. Roughly put, the choice before the Venetians was whether to withdraw their ships and crews from trade for certain years and use the same capital and labor during those years in fighting. The opportunity cost of a year's war was primarily the loss of the returns on a year's trade. War also risked damage to the ships and the loss of productive labor through casualties, but when successful, the Venetians may have made up for these losses by plundering the enemy.n Assuming they were going to have a successful campaign, the Venetian leaders might sometimes have calculated in the following terms: With our privileges, the employ of our merchants and seamen in the Byzantine empire in trade yields each year 20 percent more than it would if we had no privileges.J2 Employing those merchants and seamen as fighters for a year will mean a 100 percent loss of return from them for this year but it will be worthwhile if it secures us our privileges for five years or more. Of course the Venetians did not work out the problem precisely this way and the sources do not permit us to calculate it in exact accord with attested facts. But it illustrates how it was possible for the Venetian use of force in securing tariff differentials to be productive of increase in Venetian national income. During the century after 1082 Venetian national income did increase very substantially. Other developments of that century helped, especially the rise of Western markets for Eastern products. That aided all the seaboard cities of the Mediterranean which were intermediaries in the trade, but Venetian commercial enterprise was then focused particularly on the Byzantine empire and was very largely devoted to exchange within that empire and to the commerce between it and other markets of the Levant. To be sure, the Venetians acted partly for their own security, as has been explained, and our picture of how Venice grew rich in this general period is complicated by the events of the Fourth Crusade. Yet, everything considered, Venetian policy from 1082 to 1204 appears an unusually successful use of force to increase national income.

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THE ECONOMIC MEANING OF WAR AND PROTECTION

Colbert's capture of trade with the West Indies seems, by contrast, to have failed to produce any immediate gain in French national income. When we count all aspects of the national protection cost and the opportunity cost of the new enterprises, a formidable list of losses must be subtracted from the addition to national income embodied in the profits of traders to the West Indies. Besides the big deficit of the French West India Company which pioneered the voyage, there was the direct cost of employing a French naval squadron, and, since the exclusion of the Dutch from the West Indies was one reason for the outbreak of war between France and Holland in 1672, some part of the expense of that war would have to be included. To allow for national opportunity costs, the price of sugar to French consumers would have to be investigated, and if the islanders be considered part of the French nation, their losses in paying for supplies prices two or three times as high as those previously charged by the Dutch must be added. Even in authors highly favorable to Colbert the evidence presented indicates that a loss rather than a gain in national income resulted during Colbert's life-time from the capture of the trade. 13 A case of attempting to increase national wealth by military power which presents enlightening similarities and contrasts with those just discussed was the temporary capture of the spice trade by the Portuguese. In the second half of the fifteenth century nearly all the spices reaching Europe from the Indian Ocean passed through the Red Sea and the lands of the Soldan of Egypt, paying him well for his protection on the way, before they reached 'the Venetians and other Europeans. After the Portuguese found the way to India around Africa, the Portuguese king decided to assume a royal monopoly of the most valuable spices. At the same time he attempted by armed force to bar the passage of all spices into the Red Sea. His success was not complete, but the destruction of some ships of Arab traders and the risk of capture for others was sufficient for some decades to raise greatly the protection costs of the Red Sea route. While he kept these costs up, the Portuguese king sold spices in the West at prices above those which the Venetians had charged in the later fifteenth century. So long as he raised the protection cost of the Red Sea route sufficiently, the king, as monopolist of the Cape route, could fix his price so as to secure the protection rent arising from the higher protection costs of his rivals.l 4

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But in attempting to extend 4is government's monopoly of force over the Indian Ocean the Portuguese king assumed a heavy burden of expenditure which can properly be charged as protection cost to his own spice trading enterprise. The overawing of Indian princes, the seizing of trading posts, and the assertion of naval supremacy in the Indian Ocean were the king's means of raising the protection costs of his competitors, and such was the inefficiency of Portuguese methods of trade and government that these offensive protection costs soon proved excessive. The Ottoman Turks lowered tariffs in Egypt after they conquered it, and they challenged the Portuguese control of the Indian Ocean.l 5 About 1560 a substantial part of Europe's spice imports again came through the Red Sea, 16 a sign that the protection costs of the Portuguese king were at times higher than those of his rivals on the competing route. Reviewing the economic history of the Portuguese in India and taking into account the military expenses, J. Lucio de Azevedo asserts: "The truth is that only in the period of conquest did India pay its cost ... " and, then as he says, only by "booty, tribute, prizes, and the ransom of Moors."l7 Tribute was an extremely important factor in this case and especially so if we shift our point of view to consider not simply the royal enterprise of governing and spice trading but the changes in Portuguese national income as a whole. When Lucio de Azevedo says that the cost of the Indian empire exceeded the receipts, he seems to include under the costs the salaries and pensions with which the Portuguese king rewarded the nobles who conquered and governed the empire. Whatever increase in the income of this ruling class came from charges levied on non-Portuguese subjects constituted an addition to national income. Royal officials in India did increase their revenue illegally also by booty, bribes, and private trade. This sort of corruption was probably the chief factor in undermining the profitableness of the royal monopoly, but it was a positive factor in national income. Although in political or legal theory they were part of the royal enterprise, the corrupt officials were from an economic point of view acting as entrepreneurs on their own. Each sold for his own profit the protection of the force at his disposal. The revival of the Red Sea route was not an interference with their income but a sign that they preferred selling their protection for bribes to Arab traders instead of extending it to the

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THE ECONOMIC MEANING OF WAR AND PROTECTION

king's monopoly as they were supposed to do. If ·we count all the increased income of the ruling class, legitimate and illegitimate, booty and tribute as well as protection rent, there seems no doubt that Portuguese national income did increase for a time. The opportunity cost remains to be considered. With the same geographical discoveries and the same skill in navigation, could Portuguese capital and labor have been used more profitably in another way than that to which it was directed by military action in the Indian Ocean? Although it is hard to see how the Portuguese could have followed "nature's simple plan" in this case, any more easily than the Venetians could have adopted such a plan in dealing with the Byzantine empire, some contemporaries did conceive policies requiring less military action. Observers at Venice-ironically enough now that Venice, three hundred years after the conquest of Constantinople, was no longer making wars pay-pointed out that the Portuguese might operate advantageously without attempting a monopoly of force, simply because the Cape route would enable the Portuguese to avoid the high customs levied in Egypt.l 8 Instead, the Portuguese decided to seek their protection rents by raising the protection costs of possible rivals rather than by trying themselves to operate with protection costs below the existing level.l 9 The consequent increase in the prices to Portuguese consumers of Indian products was of trifling importance since the bulk of these products was sold abroad. But less military action against Arab traders and the employ of more capital and labor in commercial activity might have 'increased the volume and the value of the Eastern wares which the Portuguese could offer for sale in Europe. Would the returns of such an expanded commerce have increased Portuguese national income more than it was increased by plunder, tribute, and the small trade actually developed? To frame the question in this way suffices to suggest that a full estimate of opportunity cost involves two considerations which were passed over lightly in the cases discussed earlier. The first concerns the kind of capital and labor there was in Portugal, in other words nothing less than the character of Portuguese society in 1500. The activity in which the Portuguese then displayed superiority over other nations was not shrewd trading but bold adventuring both in navigation and in war. Because of the military and religious traditions of the Portu-

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guese and their class structure, the crusading policy pursued in India may well have stimulated energies which obtained more wealth than the Portuguese could have gained by less bellicose means. A Venetian of 1500 was likely to believe that the Portuguese could gain more by a more peaceful policy because such might have been the case had the Portuguese ruling class been similar in character to the Venetian in 1500. At that date many Venetian nobles had become wedded to peaceful trade or to the management of country estates. They were no longer, as they had been three or four hundred years earlier when bullying Byzantium, equally efficient either as merchants or as sea raiders. The second consideration is that two different answers are possibleone for the short run and one for the long run. The policy which the Portuguese adopted in India yielded so much tribute and plunder that a greater immediate increase in national income under a more peaceful policy seems improbable. But the king's attempt to conquer an Indian empire, and the closely connected decision to make the chief items in the trade a royal monopoly, diverted Portuguese capital and labor from the commercial development of the voyage and focused the energies of his people on war, plunder, and the taking of bribes and tribute. The large immediate rewards attracted the youth of the nation to these warlike activities which soon yielded diminishing returns. A royal policy which relied less on force and opened more opportunities for those with trading skill would have favored the development of mercantile capacities among the Portuguese. In the long run of a hundred or two hundred years these capacities might well have made Portugal richer. The possibility raises very complex questions since a change in the type of capacity possessed by a nation's labor, both managerial and manual, involves a basic change in social structure, in this case a decline of the military and a rise of the commercial and industrial classes. Because the ensuing centuries were to bring greater wealth to commercial and industrial nations, it is generally held that the conquest of India, although it increased Portuguese national income for a time, caused a decrease later by undermining the productivity of the nation's labor. On the other hand, Colbert's West Indian policy, although in the

I

35

THE ECONOMIC MEANING OF WAR AND PROTECTION

short run it decreased French national income, is generally judged successful in the long run. Within a century after his death, the West Indies "proved the most valuable colonial asset which France possessed nd contributed more to her commercial prosperity than any other a . I single branch of trade. "2° The particular type of labor and cap~ta which Colbert fostered by providing protection rents for West Indian traders became in the long run of a hundred years exceptionally roductive. The same can be said of many of his efforts. After describing Colbert's East India Company, Professor Cole concludes: "The value of navigators who knew the routes to the East, of merchants who could carry on the Indies trade, of agents who had learned oriental ways, were all assets which did not appear on the balance sheet, but which formed a significant contribution from the Company of Colbert to its successors."21 By a variety of measures many of which depended on force of arms, Colbert increased the proportion of his nation's capital and labor devoted to oceanic commerce and to manufacturing. He often diverted capital and labor from employments in which they would have produced more national income at the time. But manufacturing and oceanic commerce were to become more and more profitable as they attracted more and more labor and capital. In so far as Colbert drew resources away from conspicuous consumption or from agricultural investments which were subject to the law of ~imini.s~i~g returns and directed them into commercial and industrial actiVities which were in the future to yield increasing return, his activity as a statesman did contribute to the future wealth a'£ his nation. This contrast between short run loss and long run gain is present in many cases of mercantilism. Against England's immediate losses from enforcing the Navigation Acts, losses from higher freight rates and from naval action, may be put some of the advantage which the size of the British merchant marine later gave many British enterprises. Against the immediate cost to the British of winning and holding colonial outposts may be balanced not only any immediate return in protection rents, but also some of the benefits of the internal econ~mies made possible to British industries in following centuries by the ~iz~ of Britain's overseas market. The recent continuator of the Smlthian tradition, Alfred Marshall, admits that the national income of England

I '

36

PROFITS FROM POWER

in the eighteenth century, and even more in the nineteenth century depended much on "the action of the law of increasing return with regard to her exports."22 During a long earlier period of history the chief hope of making war pay was tribute. In the Age of Mercantilism the wealth which governing classes took directly for themselves from other nations became relatively small. As economic life became less largely agricultural and more intricately organized through differentiated enterprises, the profits secured by favored economic enterprises came to form a larger part of national income. Tribute became less important than protection rents. The change made immediate success in increasing national income by military action less frequent, for protection rents were secured by violations of the law of comparative advantage which were usually to the detriment of all nations concerned. Yet in the long run military victories added more to national income when used to gain protection rent than when used to gain tribute. Tribute-paying empires yielded diminishing returns as they drew more manpower into the maintenance and extension of such conquests. The protection rents stimulated oceanic commerce and industries which found new markets from wider trade. In another epoch the premiums given commerce and industry might have been thrown away. In that particular period of social and technological change, the period of the expansion of Europe, those fields of enterprise yielded increasing return. In more recent times the forms in which national income may be increased by military pressure on other nations have been enormously complicated and especially recently by exchange controls and marketing quotas. At the same time the armed forces used by governments have been consolidated into enduring military and naval establishments.

THREE OCEANIC EXPANSION: FORCE AND ENTERPRISE IN THE CREATION OF OCEANIC COMMERCE

Among the other excellent and extraordinary gifts that God has given to human kind is the knowledge of the' motion of the spheres, the course of the planets and stars, and of the climatic zones under which is placed this marvelous world machine. With this knowledge we furrow that very great element, the water, and betake ourselves into almost any part of the world that we wish, with the same facility as if there were in the wide ocean a fixed road showing signs of its use, and a through highway.I

These opening words of a Venetian treatise on navigation written about 1560 summarize the impressive technological achievement that made possible oceanic commerce. In considering what was the role of government and what the role of business enterprise in making highways across the oceans for man's use, one is tempted to give the easy answer that governments played the major role. The activities of Prince Henry and King John II of Portugal/ the voyages of Columbus, the development in the Spanish Casa de la Contrataci6n of what C. H. Haring calls "a hydrographic Bureau and School of Navigation, the earliest and most important in the history of modern Europe" -all these Tasks of Economic History. Supplement to The journal of Economic History, Volume X, 1950.

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PROFITS FROM POWER

and more could be cited as evidence of the role of government in the · creation of oceanic commerce. 3 Looking more closely at the great voyages of discovery raises doubts, however, about classifying these activities as either governmental or business enterprise. The doubts increase as one turns from the discoveries to examine the exploitation of their commercial possibilities. Whereas most of the papers at this meeting relate to the last hundred and fifty years, the conquest of the oceans occurred some centuries earlier, at a time when neither governments nor business enterprises had assumed the forms now most familiar to us. In present thought there is an inclination to assume that government and business have existed as separate organizations. We identify as governments those organizations that are guided by considerations of power and general welfare, that use war and police as essential activities-while basing their authority also on appeals to moral sentiments-and that bring into existence systems of law and allegiance. We recognize as business enterprises those organizations that are guided by considerations of profit and loss to the enterprise, that use as their customary activities buying and selling and the organization of labor and techniques in the production of goods, and that bring in to existence new uses of the means of production and new distributions of goods and services. Thus we are inclined to assume that all three criteria may be used to distinguish between the two types of organization. In terms of motives, the antithesis is between the profit-oriented activities of business and the poweroriented activity of government, or its provision for someone's conception of the general welfare. In terms of the methods employed, the contrast is between the buying, selling, and calculation of engineering costs in a business enterprise and the military action, the policing, and the judicial procedures employed by government. In terms of social consequences, the contrast is between the new goods and services created by business enterprise and the emergence of new laws and empires through the actions of governments. In examining the organizations actually existing in theW estern world about 1900 it is not too difficult to classify them according to all three criteria either as governments or as business enterprises. But in examining the oceanic expansion of the fifteenth and sixteenth centuries, we cannot classify in this way the organizations initially involved.

39

OCEANIC EXPANSION: FORCE AND ENTERPRISE

This is especially true of the key innovating enterprises. Whether we consider their motives, their methods, or their consequences, we find that these enterprises usually combined characteristics of government with characteristics of business. The Portuguese pepper trade with India was, at least in the long period of the royal pepper monopoly, part and parcel of the same enterprise that waged war to build an empire. The Portuguese colonization of the islands off Africa and of Brazil was largely through grants to proprietors who were charged not only with organizing production on the lands granted them but also with police and protection. The conquest of Mexico and the conquest of Peru were initiated as profit-making enterprises financed by contracts stipulating how the profits were to be shared. These enterprises resembled government in some respects, business in others. Of course, distinctions can be made, and it would be both possible and profitable to make them in legal terms. Using that approach, one might seek for the distinctions made by legal thinkers between activities of the state and activities that were based on rights of private property. Perhaps historians of public and private law can find recognized distinctions in those centuries between the usual sphere and attributes of governmental activity, on the one hand, and the usual sphere and activity of private enterprise, on the other; and perhaps exceptions could be taken care of by saying that for various purposes peculiar to the problems of oceanic expansion governments occasionally assumed certain activities and attributes of private enterprise, and, on the other hand, private enterprise took on some of the activities and. attributes of government. Certainly it would be possible and profitable to follow through legal sources the development of these conceptions-to study the distinctions in constitutional law between the public property of the Crown and the more personal property of the prince, the change from feudal to more modern forms of land tenure, and the development of distinctions concerning public and private corporations. But the legal formulation of the distinction between government and private enterprise was far from being clear-cut at the time when oceanic expansion began. In its legal systems Europe was still close to feudalism. As Joseph Schumpeter has said, our words "state" and "private" enterprise can hardly be applied to the institutions of feudalism without creating a distorted view of those institutions. 4 Under feudalism a state was in a certain sense the

40

PROFITS FROM POWER

private property of a prince in the same way that the fief was the private property of a vassal. The feudal vassal was expected to collect from the lands and rights he held in fief more goods and services than he had to pay his suzerain, and to gain thereby a profit as his reward for defending the fief and rendering the service provided in the feudal con tract. Princes and their vassals extended the jurisdictions of their courts, the cultivation of their fields, and the conquests of their arms as profitseeking ventures. Later, much of the spirit and legal forms of feudalism were applied in oceanic expansion.

II

But I am less interested in legal formulas and theories than in a different aspect of the question. The problem that has most aroused my curiosity in this connection is the effect of the use of armed force on economic development. When and how did force-using enterprises become separate from the profit-seeking enterprises we call business? And in those numerous cases in which they were not separated, what were the effects on economic development of various uses of armed force? The way in which force was applied to secure gain determined the economic success or failure of many of the innovating enterprises that created oceanic commerce. As an example, consider first the Portuguese circumnavigation of Africa. It presented an opportunity to organize the shipment of spices by that route in such a fashion that the cost of bringing the spices around Africa to Europe would be less than the cost of bringing them to European markets through the Red Sea and the Mediterranean. Since the taxes levied by the Soldan of Egypt were a large factor in the cost of the Red Sea route, the Portuguese king could col}ect an equivalent amount and still undersell the Venetians, provided transportation cost by the oceanic route was less than by the Red Sea route. Whether transportation by the oceanic route was or could have been made cheaper seems to me doubtful. It was never put to a test. The Portuguese Crown did not try to resolve the problem in those terms. The Portuguese decided to apply military and naval power, with the twin objectives of gaining the glory of having an empire of India and gaining wealth. The king undertook to prevent forcibly any shipment of spices to the Red Sea, to secure a complete monopoly for himself, and to sell the

41

OCEANIC EXPANSION: FORCE AND ENTERPRISE

spices in Lisbon at prices as high as or higher than those prevailing before the discovery of the new route. Accordingly, the profitableness of the oceanic route to India depended on whether the returns from the sale of the spices would yield sufficient revenue to support fleets and armies large enough to blockade the Red Sea route. It was not a question of size only, but of whether the armies and fleets would be used well in order to make the monopoly effective. In fact they were either not large enough or not sufficiently well organized. By the 1560's the royal Portuguese Indian enterprise was not proving profitable. Spices were again moving through the Red Sea in as large a volume as ever-an aspect of that continued commercial predominance of the Mediterranean in sixteenthcentury Europe which has been brilliantly pictured in Fernand Braude!' s recent volume. 5 Except in the opening decades, when enriched by the plunder of conquest, the Portuguese kings failed to gain the expected riches from the discovery of the oceanic route to India. 6 They had misjudged and badly organized their use of force in Indian waters. Although this very abbreviated account of Portuguese enterprise in India leaves out much, even a more extended analysis would, I believe, lead to the conclusion that the gain or loss of the Portuguese depended, not on technically determined costs of competing routes of transportation, but on the way in which force was applied to control the use of the competing routes. From the point of view of the long run, Portuguese enterprises in South America were more profitable. In Brazil there was less occasion for investing so heavily in military and naval forces, but even in Brazil the way in which arms were used decided the fate of colonial enterprises. After a preliminary period in which the only Portuguese in Brazil were the cutters of brazilwood, the Portuguese Crown divided the region among twelve colonial proprietors called the donatarios. These proprietors were expected to fulfill the political function of keeping out the French. They had civil and criminal jurisdiction within their captaincies, the right to levy taxes, and the right to collect tithes from land granted to settlers. At the same time they engaged in what might be called the business enterprise of establishing sugar plantations. Their success in creating new supplies of sugar for the European market makes some of these donatarios deserving of attention as innovating entrepreneurs. Within a century imitative entrepreneurs had extended

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the sugar plantations of Brazil so that they were Europe's chief source of supply. The first successful sugar plantations of Brazil were developed by those proprietors who were able to solve at the same time the political and economic problems of bringing land, labor, and capital together in a profitable way. One example of a successful proprietor was Martim Affonso da Sousa. Martim Affonso started his colony of Sao Vicente in the present state of Sao Paulo, in 1532, before he received his proprietary grant, at a time when he commanded a fleet sent by the Portuguese king to patrol Brazilian waters against the French. Tradition has it that he introduced in the next year the first sugar cane grown in Brazil, bringing sugar-cane growers from Madeira, and that shortly thereafter, when he had received Sao Vicente as his donataria, he imported Negro slaves to work on the sugar plantations. But there is no direct evidence of the use of Negro slaves in Brazil that early. The main solution of the labor problem in the colony of Sao Vicente was the use of Indian slave labor. MartimAffonso allied with friendly Indians to wage war and secure slaves from other tribes, and hired enough soldiers to keep the upper hand. 7 Another conspicuously successful proprietor was Duarte Coelho whose grant was at Pernambuco. A Brazilian writer about a generation later says that he expended on his colony thousands of cruzados, gained in India, which were well spent because his son received tens of thousands in revenue as a result. 8 A letter written by Duarte Coelho himself in 1550, sixteen years after he had received his grant, said that he had five sugar mills in operation and implied he was just beginning to make a profit. 9 How much of his investment during the previous sixteen years went into bringing settlers and supplies to his colony and how much was spent building mills and laying out cane fields is uncertain, but the evidence makes clear that a part was spent in hiring soldiers. Coelho had secured some labor for a time from the Indians by barter, giving them such items as cloth and iron tools in exchange for their labor. But in addition to these peaceful relations at certain periods with some of the Indians, his colony lived through periods of Indian attacks followed by the enslavement of Indians. Whether the Indian attacks were the result of efforts to enslave or whether Indians were reduced to slavery only after they turned hostile is left by the sources to our imagination. This much is clear, however, not only in regard to the colony of Duarte

43

OCEANIC EXPANSION: FORCE AND ENTERPRISE

Coelho at Pernambuco but in regard to the colonies of many other donatarios: it was essential to be able to resist Indian attacks. Those enterprises that could not failed. Those proprietors who prospered were able both to resist the attacks and to acquire Indian slaves to labor on their sugar plantations. Among all the items of expenditure that had to be made by a proprietor in order to bring into existence profitable sugar plantations in Brazil, the hiring of soldiers was one of vital importance to the success of the enterprise. These Portuguese enterprises in Asia and America have been presented as examples of force-using, profit-seeking enterprises. Many other examples in the transoceanic expansion of the Spanish, French, Dutch, and English invite analysis. When English and Dutch enterprises first penetrated the Caribbean, they came equipped to use force against the Spaniards. Armament was necessary to secure trade just as arms were necessary to secure labor, and in the first establishment of trade or of plantations in new areas, military and business activities were conducted by the same enterprise. Very soon, however, at least in the Americas, the initial colonial enterprise began to subdivide into a number of more specialized enterprises, some of which were primarily concerned with war, police, and protection, while others specialized in trading, mining, or in agricultural production. In Brazil, for example, after about fifteen years in which efforts by the donatarios had achieved a few successes and many failures in occupying the land, a governor-general was created. Although he did not take over all force-using (political) activities from the donatarios, the organization headed by the governor-general was of a more specialized character than that of the donatarios had been. He was concerned with war and police, not directly with the organization of sugar production. At the same time the grants of lands by the proprietors created enterprises in Brazil that were concerned with sugar production and that depended for protection, not on their own efforts, but on the donatario or the captain general.1° Instead of all the problems of colonization being handled as by one enterprise, various aspects of colonizing activity were undertaken by more specialized agencies. This development occurred much earlier in Spanish America. Columbus' first two expeditions were empowered to perform all the

44

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functions of colonization-discovery, government, conversion of the Indians, mining, and the conduct of trade. The royal enterprise of which Columbus was the head contemplated activity in all these fields.ll Again, when Ovanda was placed in charge in Hispaniola, his responsibility as royal governor included for a few years the direction of trade and mining as well as conquests and police. 12 The situation was very different twenty years later, after colonizing activity had grown larger. We can then see many more specialized enterprises operating in the colonial field. I will mention but a few: (l) royal governors collecting taxes and commanding troops in established colonies; (2) the Casa de la Contrataci6n providing ships and arms to protect vessels going to the New World; (3) shipowners asking high freight from the Casa and from various shippers; (4) traders who bought wares in Seville, contracted for their shipment to America, and entered into commenda contracts with agents who went overseas with the wares to sell them in the colonies; and (5) conquistadors such as Pizarro operating on the geographical frontier of the Spanish empire and adding to the area of colonial enterprise. 13

III

This development of differentiated enterprises within a colonial area seems to me comparable in many ways to the emergence within a single industry, such as the automobile industry, of many types of firms each specializing in furnishing parts or service in demand by other firms within the industry. In colonial activity in a transoceanic area, an activity which may be considered for the purposes of the comparison as one industry, government was one of the most important services needed by the industry. The industry needed government in the crude sense of a use of force to provide protection from assaults and to impose forced trade or forced labor. Once colonies were well enough established, governmental organization to furnish these services became an enterprise separate from the other enterprises in the industry. On the other side, managing a plantation or farm also became a specialized enterprise. Shipping services likewise finally became distinct, although for a time they were performed either by the same enterprises that furnished protection or by the trading enterprises

45

OCEANIC EXPANSION: FORCE AND ENTERPRISE

that marketed in Europe the products of the farms, plantations, and mines of America. The analogy between the differentiation of enterprises in growing industries and in oceanic colonization suggests a formula by which to explain in economic terms why there was no such differentiation in precisely those colonial enterprises which were the trail blazers, those which were the clearest cases of dynamic innovation. Industrial firms cannot specialize until the industry has grown large enough to supply a market for a specialized product-whether that product be a form of a service or a component used in manufacture. Similarly, colonial enterprises did not specialize until there was, in the transoceanic area in question, a market for such specialized services as transportation, or trading, or the use of force. To call the use of force an economic service raises some important problems that I have hitherto touched on only indirectly. Did the use of force only transfer wealth from one group to another and usually decrease in the process the combined total wealth of the two groups? Or did war and other forms of organized physical violence in some cases create wealth? Two ways in which the use of force may affect the income of the persons or enterprises involved may be distinguished. First, application of force may result in a simple transfer of wealth from one person or enterprise to another. For example, when a gunman steals a watch or a treasure ship is taken by pirates, it is a clear case of plunder. Second, force may be used to create protection. Some colonial governments took plunder, but generally they assured to those in the colonies from whom they collected payments some protection against plunderers and against other governments. Giving this protection involved creating some kind of a rule of law. In creating a system of law and order the government performed an economic service; it created the utility that I have called protection.I 4 I think it may be accepted as a general proposition that every economic enterprise needs protection against the destruction or seizure of its capital and the disruption of its labor force. In creating protection under a system of law, governments imposed practices concerning the appropriation of land, labor, and other goods. Establishing these practices was part of the process of organizing production. If produc-

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tion, such as the growing of sugar cane or the mining of silver, was done by organizations separate from government, then the situation could be described by saying that the government created conditions favorable to the development of business enterprise. But when all activity in a colonial area was under one enterprise, labor and land were appropriated as part of the process of organizing production. An organization using force and producing goods for sale was making its own rules. Later, general rules about the appropriation of land and labor came to be used by other enterprises, which had to depend on the government in the cases when arms were necessary to enforce the appropriation. Rules concerning the appropriation of land, water, patentable ideas, or labor can be called part of the law of property. When the practices enforced by property law include forced labor, the question arises whether these practices are not like plunder in merely transferring wealth from one person to another, but the same question might also be raised regarding application of force to appropriate land for private use. The whole problem is so large that I can only skirt the edge of it. Plunder and forced labor were of such importance in early colonial activity that there is much truth in the assertion that Europeans gained wealth by taking it from colonial peoples. But that assertion does not explain why some uses of force contributed to economic development whereas other uses of force contributed little or nothing. The question on which I wish to focus attention is this: How distinguish those uses of force that contributed to economic development and those that did not? I cannot hope to give any full answer to that question, but I wish to direct attention to its importance and to suggest some concepts that might be useful in seeking an answer. Can we not use in this connection the familiar concepts of increasing and decreasing returns? I venture to propose as a hypothesis that the enterprises which used force to plunder and to prevent the trade of rivals were in general subject to diminishing returns, but that many enterprises using force to create protection, including many that imposed forced labor, enjoyed the advantages of increasing returns. The Portuguese activities previously mentioned can be described in these terms. Their enterprise of India seems to have encountered diminishing returns, for, under the policy the Portuguese adopted,

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OCEANIC EXPANSION: FORCE AND ENTERPRISE

efforts to increase their trade in pepper depended on tightening their blockade of the Red Sea. Outfitting fleets for that purpose was a use of funds that yielded decreasing returns. In Brazil, in contrast, a use of force created protection and a rule of law of such a character that, as the colony grew and produced more sugar, the proportion of the expenses of the whole colonial enterprise that was spent on protection became less. As the number of those receiving protection increased, its cost per unit in the colony declined, and government-the protection-producing enterprise-was operating under conditions of increasing returns. That favorable condition did not last forever. A highly prosperous colony was an enticing prospect for plunder or conquest in the eyes of other European nations. When the Dutch invaded Brazil, protection costs in that area took on a new aspect. But that was eighty years after the arrival of the donatarios. The colonial rivalries of the European powers are an important complication to consider in analyzing later economic development. In very general terms, however, the principle of development can, I suggest, be stated as follows: The cost of producing protection, like the cost of producing other utilities, was affected by the size of the demand for it. Effective demand, able to pay the price, was very small in the area of a new colony when the enterprise started. So long as there was no demand except that of the first colonizers themselves, there was no economic basis for a specialized organization of government. Government and various kinds of business were all conducted by the same enterprise. When a colony was successfully established and began to grow, the market for protection increased. This expansion of the market led to increased division of labor that took the form of specialized enterprises. The force-using enterprise-government-then became one among many enterprises operating in that transoceanic colonial area. While it satisfied the demands of other enterprises for the service of protection, they satisfied its demands for the kinds of goods and services we usually associate with business enterprise. Production of both protection and oher goods at lower unit prices gave opportunities for external economies to all the enterprises in the colonial area. I have in mind in this connection the article entitled "Increasing Returns and Economic Progress," in which Allyn A. Young elaborated the theme that the main explanation of all economic progress in

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modern times lies in the increasing returns that result from the extension of the market, and that these increasing returns arise less through the internal economies of firms that expand as their industry expands than through the external economies created for each firm by the development of specialized firms producing at lower costs the components and services used in the industry.1 5 This applies in a special way to early colonial enterprise. In initiating these ventures, a variety of activities-trading, transport, government, and farming or mining-had to be combined under one management. There was a notable lack of division of labor, especially in the field of managerial labor. Specializing by entrepreneurs or managers was not even sufficient to place the military man, the planter, and the merchant at the heads of different enterprises. But the kinds of ability and knowledge needed in a force-using enterprise were different from those needed in a peaceful business enterprise. Consequently when differentiation occurred and government separated from business, it was an important step in the increase of wealth through the division of labor. On the other hand, combining the two types of managerial or entrepreneurial activity in the same enterprise was also highly productive in its own time. It was the method by which transoceanic colonization was initiated. Government and business entrepreneurship were combined in the innovating enterprises that created new spheres of economic activity. Those initial undifferentiated enterprises created the conditions of demand and supply that enabled more specialized and more efficient enterprises to appear. In addition to creating a supply of the service I have called protection, they created also a supply of seamen experienced in oceanic voyages and created the beginning of a supply of overseas products such as sugar and silver. Each element of supply was also an element of demand. The expansion of colonial markets should be understood to mean not only the overseas market for European manufactured goods but also the market for services to be performed in the colonies or on the oceans.

IV

In this paper I have touched on many broad issues in a partial, one-sided way in order to deal with some aspects that have

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OCEANIC EXPANSION: FORCE AND ENTERPRISE

seemed to me important in understanding Europe's oceanic expansion. Part of the role of government in that expansion consisted in organizing the use of force, employing it sometimes in ways favorable to economic development, sometimes in ways less favorable. Only after the use of force was applied in a colonial area in a way favorable to economic development was business organized into enterprises distinct from the organization of government.

51

FOUR

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

way in which I will approach my main theme lays me open to the common misinterpretation. I wish to explore the possibilities of discussing governments as one among the many organizations producing goods and services, and specifically as the producer of a service I will call protection. I will leave aside initially any consideration of justice, will center attention on material wealth, and may even seem to speak cold-bloodedly of brute force.

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

In the writing of economic history at present there is a tendency to focus attention on the quantity of material goods and of people. This is not because economists seriously maintain that the chief end of man is to produce a maximum population, each member of which has at his disposal a maximum amount of material things. I do not think many economists or economic historians hold such a materialistic belief-why then would they choose to be professors? We merely write as if we did, or at least we too often write so that we can be thus misinterpreted; and we are the more likely to be thus misinterpreted because the great political powers of the present, the United States and the Soviet Union, using different ideologies, each extols, paradoxically, its material productivity as proof of the force and validity of its ideals. In the past a major concern in economic history-from Adam Smith and Karl Marx to Gustav Schmoller and Richard Tawney-has been dissecting the forms of justice and injustice in economic life. Many of its most enthusiastic students were attracted to economic history by this concern, sometimes passionately avowed, sometimes calmly assumed. They expressed it through indignation and satire, for as historians they wrote mainly about injustice, searching for more perfect justice by elimination, by examining alternatives. I hope we continue the search. I have placed this profession of faith at the beginning because the Reprinted from The Journal of Economic History, December 1958, Volume XVIII, Number 4.

Economic theory has dealt at length with some of the functions performed by the state, for example, with monetary policy, but has had relatively little to say about the military and judicial activity which may be regarded as the essence of government and which bulks largest in history. Economic theorists have generally traditionally defined their subject so as to exclude analysis of the use of violence. One of the tasks of economic history is to overcome that exclusion. Looking back over the centuries, or even if looking only at the present, we can clearly observe that many men have made their living, often a very good living, from their special skill in applying weapons of violence, and that their activities have had a very large part in determining what uses were made of scarce resources. Men specializing in warfare appear very early in the history of the division of labor and were at an early date organized into large enterprises. In the use of violence there were obviously great advantages of scale when competing with rival violence-using enterprises or establishing a territorial monopoly. This fact is basic for the economic analysis of one aspect of government: the violence-using, violencecontrolling industry was a natural monopoly, at least on land. Within territorial limits the service it rendered could be produced much more cheaply by a monopoly. To be sure, there have been times when violence-using enterprises competed in demanding payments for protection in almost the same territory, for example, during the Thirty Years' War in Germany. But such a situation was even more uneconomic than would be competition in the same territories between rival telephone systems. Competing police forces were even more inefficient than competing fire companies. A monopoly of the use of force within

52

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a contiguous territory enabled a protection-producing enterprise to improve its product and reduce its costs. The use of violence, I am maintaining, is to be considered a productive activity, at least in some cases, and governments would have to be considered producers of a part of the total economic output even if they had no other function than the use and control of violence.l To be sure, an armed robber renders no service by his robbery; but the police that protect us from robbers, and the courts that protect the rights of the citizen even against the police, do, it is commonly agreed, render a service. Difficulties begin when we consider the racketeer who collects payments for "protection" against a violence that he himself threatens, and who actually supplies a sort of "black-market" protection in return, suppressing rival gangsters. Such borderline cases may not be important in analyzing the economic life of modern America, but they are far from negligible when we consider the violence-using and violence-controlling enterprises of Europe during the millennium between A.D. 700 and 1700. Which princes were rendering the service of police? Which were racketeers or even plunderers? A plunderer could become in effect the chief of police as soon as he regularized his "take," adapted it to the capacity to pay, defended his preserve against other plunderers, and maintained his territorial monopoly long enough for custom to make it legitimate. Whether a government was engaged in pure policing and defensive war, or was in contrast a kind of "racket," imposing payments by its use of violence against those who refused to pay, is important from several points of view, some of which I will consider later.2 Most actual governments were probably a mixture. But in any case the payments that these governments collected were, from the point of view of the enterprises that made payments to them, the prices that they had to pay to avoid more severe losses. On the frontiers and on the high seas, where no one had an enduring monopoly in the use of violence, merchants avoided payment of exactions which were so high that protection could be obtained more cheaply by other means. On land or sea, the protection received was far from perfect; we might say that the service being rendered by the protection-producing enterprises was of poor quality and outrageously overpriced, but poor as it was, it was still for most enterprises most of the time a service for which they had

53

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

to pay. Without it they could not operate. Although wasteful by ideal standards, the payments for protection were one of various kinds of waste built into the social organization. 3 Some useful distinctions between payments proportionate to the service rendered and payments not proportionate to any service will appear from examining how the costs and income of the violencecontrolling enterprise were affected by its monopolistic character. Once it had eliminated from the territory of its monopoly all competing specialists in the use of violence, it could reduce the costs of policing that territory and of exacting payments from its farmers, craftsmen, and local traders.4 It could reduce the costs it incurred in producing and selling protection, unless there was a dangerous threat from outside. Costs could be further reduced if the government acquired legitimacy, either through mere time and custom, or through ceremonial and religious acts, or through any forms of appeal to opinion that established legitimacy and were less costly ways of controlling violence than expenditure on the police force. Reduction in the costs of a protection-producing enterprise did not necessarily lead to any reduction in its exactions. Being a monopoly, it could keep up its "sales price" or even raise the price up to the point at which it encountered a kind of sales resistance, namely, difficulty in collecting taxes, or at which it invited the entrance of a competitor into the territory monopolized.s Lowering costs, while establishing the highest prices the traffic would bear, gave the protection-controlling enterprise an excess of income over costs. 'This was a special k~nd of monopoly profit (or producer's surplus) which it seems appropnate to call, for convenience, by the name of tribute. Of course if the violence-controlling enterprise behaved as a government should according to our democratic ideal, it would take no tribute. It would lower the prices charged for protection as fast as it was able to lower the cost. A government can be expected to behave that way if it is in fact controlled by its customers, as it is supposed to be in the theory of representative government. But during most of history governments have not been democratic; the protection-producing enterprises were not controlled by the totality of other producers and consumers. They have been in the hands of a separate group or class pursuing distinct purposes of their own. In so far as they rationalized

54

PROFITS FROM POWER

the economics of the violence-controlling enterprise, they pursued aims diverse from that of serving customers by maximizing the quality of their service and minimizing the price charged for it. Two other goals were in fact probably more frequently sought. A great many protection-producing enterprises were controlled by the upper ranks of the army and police, in short, by their top management. In such cases we might say that their primary objective was preserving the life of the firm, and that maximizing size was more important than maximizing profits. Sometimes the rank and file of the army and other employees controlled or at least limited the policies followed, although their methods were different than those of modern labor unions. When employees as a whole controlled, they had little interest in minimizing the amounts exacted for protection and none in minimizing that large part of costs represented by labor costs, by their own salaries. Maximizing size was more to their taste also. A different principle prevailed in those governments controlled by a prince or emperor so absolute that he could be considered the owner of the protection-producing enterprise. An interest in maximizing profits would lead him, while maintaining prices, to try to reduce his costs. He would, like Henry VII of England or Louis XI of France, use inexpensive wiles, at least as inexpensive devices as possible, to affirm his legitimacy, to maintain domestic order, and to distract neighboring princes so that his own military expenses could be low. From lowered costs, or from the increased exactions made possible by the firmness of his monopoly, or from the combination, he accumulated a surplus, the kind of monopolistic profit which I am calling tribute. Modern discussions of fiscal policies are full of references to their effect on full employment and the redress of social inequalities. In a modern context it may be shocking to consider government a profitseeking enterprise. But in the feudal system a fief holder was expected to manage his fief with an eye to profit. The successful baron might disdain bourgeois haggling over merchandise, but he was an expert in using military and governmental means of making money. This mixed conception of private and public enterprise carried over from feudalism into the building of the absolute states at the end of the Middle Ages. 6 Moreover, in that period governments were so insecure and the limits of their territorial monopolies so uncertain that the princes at the head

55

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

of protection-producing enterprises faced necessities that approximated those of competition. They often had to act on the principle of maximizing profits if their competitors were not to bid away from them their resources and their customers. Of course, while their situation was really that difficult, they enjoyed no monopoly and made no monopoly profit; but having surmounted it, as Louis IX did, the princes continued their pursuit of profit and organized a bureaucracy devoted to that aim. Between governmental enterprise and other kinds, the difference in regard to the degree and the principles of rationalization is considerable, but it is becoming less as more other enterprises become monopolistic and affected with a public interest. It was less, for converse reasons, during the period when European governments were more or less feudal, kings considered their realms personal possessions, and kings and chartered companies mixed trade and violence in their competition for colonial empires. When a protection-producing enterprise operated at a profit, the profit or tribute generally went not to one person only, the prince, but to a group of which he was the focus, dispensing gifts, pensions, sinecures, and important offices. If a king had to spend all his income on army and police, then he had no profit, no tribute to keep or give away-all his income was consumed in the costs of the governing enterprise. In fact, large profits were made in early modern times by the suppliers from whom princes bought military services, by the military entrepreneurs who undertook to recruit, organize, finance, and perhaps command bodies of soldiers.7 Judicial and fiscal services as well as military forces were obtained from suppliers who used governmental powers for their personal profit. 8 Lacking effective bureaucracies, princely enterprises contracted out so much of their violence-using activities that subcontractors made large profits and the subcontractors should perhaps be considered the chief recipients of the tribute collected by maintaining at high level the exactions of government. And in addition the court of a Renaissance prince contained many favored courtiers who received in gifts and pensions much more than was necessary to enable or induce them to perform any service connected with protection. What difference did it make to the rest of society, one may ask, so long as the exactions of the government were at the same level, whether

56

PROFITS FROM POWER

it was or was not reducing its expenditure on violence? A large difference. Reduction in the costs of producing protection freed resources for other uses, whether or not the price was reduced. If there was areduction in the cost of production and no reduction in price, the resulting profit or tribute could be spent in new kinds of consumption, or be hoarded or invested. This is what distinguishes tribute from the labor costs incurred in hiring generals, soldiers, police, tax collectors, and legal officers. As a practical matter the distinction would be difficult to apply, I suppose, in any statistical analysis of royal expenditure, but there was enough conspicuous consumption at Renaissance courts to indicate that a part of the revenue collected and dispensed in the king's name was not consumed on necessities, not even military necessities. The expenditure of tribute for luxuries or wants previously unsatisfied stimulated new forms of production. If it was not spent on this kind of consumption, the tribute was available for investment, for a courtier's improvements of his landed estates, for example. High costs of producing protection were a drain on resources high prices for protection merely diverted wealth from one group t~ another.

II

In addition to governments, other economic enterprisesthose mainly concerned with producing goods and services other than ~rotection-found opportunities for profits arising out of the way viOlence was used. These opportunities were created by the g~vernments, primarily-by the fact that the prices charged by the VIOlence-controlling enterprises were different for different classes of customers, there being some degree of customer control, or, to put it in more usual language, by the fact that the exactions levied by the government were different for different enterprises. One very important aspect of this is the fact that in the later Middle Ages land rents gradually become so distinct from the protection payments embodied in seignioral dues and taxes as to be susceptible to Ricardian analysis. I have no time for that subject, for I wish to explore another important aspect, the nature and source of the profits made in international trade. The profits of a merchant engaged in trade over long distances were

57~--------~E~CO~N~O~M~IC~C~O~N~SE~Q~U~E~N~C~E~S~O~F~O~R~G~AN~l~Z~E=D~V~l=O=LE=N~C=E~---------

limited by the real or potential competition of other merchants. If one merchant or one group was as good as another in gathering information and guessing about supply and demand, the one able to operate with lower costs would gain larger profits. A very substantial part of costs was what had to be paid for protection and for insurance against losses that might be inflicted by violence-using enterprises if their exactions were not paid. Some trading enterprises secured more protection than others, or equally good protection at less cost, and this difference in their costs enabled them to make extra profits which I call protection rents. 9 . . . A simple example in a modern context will clanfy what I have m mind. If two producers of copper sell at prices set by the London market and have the same costs of extracting, refining, and transporting ore, but pay different tariffs on the way to market, the one that pays lower tariffs receives protection rent. I would have no excuse for giving a special name to profits resulting from favorable tariffs if that were all I had in mind. But the situations in which I am interested were not that simple. All kinds of navigation laws were involved. The enterprises engaged in international trade or colonization during the later Middle Ages and during the first centuries of Europe's oceanic expansion had to make many kinds of payments to secure protection. I propose "protection rent" in order to have a term to apply to profits arising from differences in the whole range of costs incurred in using or controlling violence. These included convoy fees, tribute to the Barbary pirates, or higher insurance for voyages into pirate-infested waters, bribes or gifts to customs officials or higher authorities, and other kinds of smuggling costs. It included some expenditures by trading or colonizing enterprises to organize. th~ir. own armed forces-from placing extra guns and soldiers on an Individual ship to dispatching an army for the defense or even the conquest of a colony. The diversity of ways in which enterprises could obtain protection enabled them to choose among alternatives, pay different amounts according to the choice made, and receive different kin~s or degrees. of protection in return. They could freight wares ?n hea:lly armed sh.ips and pay low insurance, or freight on less defensible ships a~d pay ~igh insurance. They could use ports where established treaties requned

58

PROFITS }'ROM POWER

them to pay high duties but in return gave reasonable assurance against seizure, or they could go to ports where no treaties applied and trust to their own guns, diplomacy, and well-placed bribes. Operating with lower payments for protection was often the decisive factor in the competition between merchants of different cities or kingdoms and was achieved by complicated mixtures of public and private enterprise. The fleets of merchant galleys for which Venice is famous were successful partly because their sailing qualities were adapted to the seas in which they operated and partly because they were for a time the best solution to the problem of protection-not only safety from pirates, but a flexible marshaling of the flow of trade so as to secure favorable treaties and take quick advantage of them. Any effort to explain why Venice was more prosperous than its rivals, or more prosperous at some times than at others, must consider how far the Venetians were more secure, at less cost, from disruption by violence in their purchases of wares in one place, their shipments, and their sales in good markets. During the Middle Ages and early modern times protection rents were a major source of the fortunes made in trade. They were a more important source of profits, I believe, than superiority in industrial techniques or industrial organization. The wealth gained in mercantile and colonial enterprise from protection rents gradually increased to the point where it began to rival that which governmental enterprises obtained from tribute.l 0 Like the landlords, whom I have not time to discuss, merchants became recipients of a surplus which they could consume in luxuries or could invest. The amount merchants invested was relatively high. Their habits, abilities, and involvements as traders made them on the whole the class most inclined to save and invest their part of the surplus product of the economy. By surplus I mean that part of the total production which did not have to be consumed in order to maintain the existing level of production. The following three conclusions regarding surplus result from the foregoing analysis of the use of violence: First, the higher the costs of production in the protection-producing enterprise, the less the surplus.t 1 When violence-producing enterprises were controlled by employees, they made little or no effort to minimize

59

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

costs, and as a result a large part of total production was consumed in militarism. Second, when the protection-producing enterprise was controlled by an absolute monarch, he had an interest in reducing costs. If he was able to do so, the surplus was increased, and much of it went to the monarch's court where it was available for conspicuous consumption or investment. Third, in international trade and colonization competing mercantile enterprises paid highly variable amounts for protection, and those paying less received protection rents, a kind of profit which placed in their hands a part of the surplus production. Since this third effect occurred later than the others, it suggests a stage theory of economic development, which I offer as a kind of prologue to the Schumpeterian sequence of capitalism, democracy, and socialism. In my first stage anarchy and plunder dominate. Viking raids and feudal warfare reduce western Frankland almost to this kind of "primitive anarchy" about A.D. 900. The use of violence is highly competitive, even on land. The second stage begins when small regional or provincial monopolies are established. Agricultural production then rises, and most of the surplus is collected by the recently established monopolists of violence. When, as in twelfth-century feudalism, the monopolists formed loosely organized cartels constantly bickering over the production and market quota of each, the surplus is kept relatively small by the high military costs, and what there is of it is widely distributed among a tribute-taking class. During a later phase of the second stage many tribute takers attract customers by special offers to agricultural and commercial enterprise. They offer protection at low prices for those who will bring new lands into cultivation, and special policing services to encourage trade such as that organized by the Counts of Champagne for merchants coming to their fairs. When profit-seeking princes are able to consolidate larger, tighter monopolies, they reduce costs of production and increase the amount of tribute. Somehow in the process land rent becomes more clearly differentiated from taxes and seignioral dues. Production increases. A larger surplus, although mostly tribute, makes

60

PROFITS FROM POWER

61

consumption more varied and stimulates interregional trade. Differences in what competing traders have to expend for protection gives rise to protection rents. A third stage is reached when the merchants who collect protection rents and the landowners who collect land rents are getting more of the economy's surplus than are fief holders and monarchs. In this third stage the enterprises specializing in the use of violence receive less of the surplus than do enterprises that buy protection from the governments. Protection rent and land rent replace tribute as the chief sources of large incomes. Since successful merchants devote much of their ~ncome to capital accumulation, a higher proportion of the surplus is mvested in expanding commercial enterprises, in agricultural improvements, and in new industries. T~e passage from the third stage to a fourth occurs when technological Improvements-industrial innovations-become more important t~an protection rent as a source of business profits. Violence-using and VIOlence-producing enterprises come increasingly under the control of their customers as a whole; governments become more democratic. Credit formation-the creation of deposits, the floatation of bonds, and the whole mec~anism of a capital market-having been created largely to serve protectiOn-producing enterprises, now responds to the needs of the industrial innovator. We have reached capitalism of the Schumpeterian model, my prologue is finished, the curtain rises on the main show. I confess that my capsuling of a thousand years of history into four paragraphs contains some grains of satire. No sequence of stages can enable us to predict the future or to explain particular past events. The ~tages are abstract models. A stage theory is only a device for emphasizmg or overemphasizing some factors among many. But I hope that my capsules contain some grains of truth. The four stages ~re distinguished by the changing relation of violence-using enter~nses to the amount and distribution of surplus. They focus attentiOn on the way the surplus was distributed among different kinds of producers, including the "producers," as I call them, of protection. The distribution of the surplus affected the way it was used-whether in new forms of consumption, in attempts at hoarding, or in agricultural, commercial, and industrial improvements.

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

These alternative uses of surplus, and its total amount, were important for economic growth. There has been so much fruitful study recently of the economic growth accompanied by industrialization which has occurred during the last two centuries that many modern preoccupations have been carried back into the study of ancient and medieval times with stimulating results. But with the longer perspective in mind, I would like to suggest that the most weighty single factor in most periods of growth, if any one factor has been most important, has been a reduction in the proportion of resources devoted to war and police. Those princes or statesmen who organized government in such a way as to reduce the costs of protection contributed to economic growth just as did the industrial or agricultural innovators who reduced the costs of other products. Entrepreneurial princes were all the more important because they were reducing not the cost of some luxury that was a small item in total consumption but the cost of a widely consumed necessity. In many centuries the main way in which governments influenced growth was through decisions that determined how much should be expended on the use and control of violence. Debatable, however, is the effect on economic growth of the monarchs who maintained or raised their exactions while reducing their costs, and who thus collected as tribute a large part of the surplus available for capital accumulation. If all the tribute was used for conspicuous consumption, a term which seems paticularly appropriate for the court of a prince of the ancien regime, growth was slowed by lack of investment. Merchants who gained protection rents from international trade and colonization, although not entirely inconspicuous in their consumption, probably had a lower propensity to consume. If so, lower profits for governments and higher profits for trading enterprises meant more capital accumulation and more growth. I have used the device of a stage theory to emphasize the relation of violence-using enterprises to the distribution of surplus. Their relation to monopoly in economic life, basic in this connection, has other aspects deserving of even more emphasis. In my fourth stage, which roughly corresponds to a commonly accepted model of industrial capitalism, monopoly appears. in temporary forms as a result of technological and commercial innovation and

62

PROFITS FROM POWER

attains relative permanence in those industries in which technology so developed as to give monopoly decisive advantages. In earlier stages very few industries had undergone such technical development as to become natural monopolies, but government had already attained that status. I am tempted to call government the earliest natural monopoly. Priestly activities, another basic service industry, were widely organized on a comparable scale at as early a date, and irrigation was an even more compelling natural monopoly in some regions. But apart from special regional conditions concerning the use of natural resources, monopoly-inducing advantages of size were most effective on the two closely connected service-rendering organizations-priesthood and government. Monopoly in one field can be used in seeking a monopoly in others; control of a basic ingredient can lead to control over finished products. Since protection is in a sense a basic ingredient in nearly every other product, a government could use its monopoly in its own field to establish monopolies in others. When irrigation as well as government and religion were combined into one huge, centrally directed enterprise, it reached out and became the monopolist of many other products, from salt to papyrus. Where there was no irrigation and where warriors and priests were separately organized, extension of monopoly into other fields was in part checked by disadvantages of scale, in part directed, as well as checked, by the influence of various consumer groups on the control of the protection-producing monopoly. One aspect of the extension of monopoly is the effort of businessmen to become less "entrepreneurial" and more "bureaucratic," their desire for what have been called "security zones of investment, protective shells built with the use of political influence." 12 Another aspect is the pressure from within the governmental enterprise itself to expand into fields which, although not directly involving violence, are closely connected with military power. Today atomic physics has become a sensitive field in which some scientific and engineering services are being monopolized by governments on the ground that national security requires it. In the nineteenth century railroad building had overriding military importance in many countries. In the later Middle Ages and early modern times the pressures for and against monopoly

63

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

collided in maritime transportation, an industry then occupying a strategic position in both commercial and political riva,lries. Efforts to protect shipping led to situations in which cargo space was under monopolistic control, and this control could be used to obtain a monopoly over the wares bought or sold at the ports of destination. The links from monopoly of protection to monopoly of transport to monopoly of the products transported are all the more clearly revealed in the regulation of shipping by the commune of Venice because Venice broke the chain. Its government was firmly controlled by one group, mostly wholesale merchants, and they opposed monopolistic sales on the Venetian market. Transportation of wares from a Levantine port to Venice was not, as transportation, a natural monopoly. Purely from a navigational point of view it was more advantageous for ships to sail at various times on various routes and offer competing services. But because there were advantages of scale when organizing protection, ships were directed to sail in convoys in periods of danger and Venetian merchants were then required, if they wished to ship at all, to freight specified wares on these convoys only. When defense was thus monopolistically organized, only a limited number of ships could offer cargo space to shippers. Selected operators had to be given a monopoly. Since the ship operators were also merchants, they tried to use their control of cargo space to secure monopolistic advantages in buying or selling the wares shipped-at Cyprus or at Venice, for example. The Venetian government resisted such monopolies of merchandising by regulating the convoys as public carriers, and it had many difficulties indeed making the regulations effective.1 3 In contrast, the enterprises of the Portuguese kings, the Dutch East India Company, and many others during the first two centuries of oceanic commerce combined monopolies of protection, of transportation, and of products transported. Since monopoly is more efficient in some fields, competition in others, their distribution in the economy affected the total output of wealth. But that is not their chief interest. The running battles between monopolistic and competitive tendencies in Venetian shipping, or in British colonial trade, to name but two examples, cannot be fully evaluated in terms of the effect on the output of goods and services. Monopoly affected not only efficiency. It brought with it more or less

64

PROFITS FROM POWER

freed~~ and_ equality, more or less security and stability; and these quah_ties, qmte as much as efficiency, determined the outcome of the confhcts between monopolistic and competitive forces. we cannot ~nderstand how_the p~rti~ipants in the battle behaved without inquirmg ':hat they, m theu ume and their society, meant by freedom or sec~nty, ~nd how _they rel~ted it to happiness, virtue, and justice, whiCh, ':'lth all theu changmg meanings, are the ultimates that men have stnve~ _for. And we i~ turn also evalute monopoly not only in terms of effiCiency but also m terms of justice. "Wit~out justice,_ wha_t is government but a great robbery?" declared A_ugustme. From his pomt of view he might have said the same of all ~mds of ec?nomic organization, and in effect did: Without justice what Is any_ b~smess but thievery? Not government alone but many other ?rgamzauons through which men receive the necessities of life are J~dged by standards of justice and liberty. Governmental monopoly of viOlence, _even when in itself good, has led to the formation of other m~no~oh~s tha~ were _not g~»od, either because they were not efficient, bemg m helds m which a monopolistic scale of operations had no advantages or because gains in efficiency, even if they occurred, were overbalanced by losses in liberty and justice. In short, the function of government that I have been analyzing has a~ least two_ aspec_ts. As producer of a necessary service, protection, the VIOle~ce-~sm_g, viOlence-controlling enterprises affected the amount an_d distnbutiOn of material wealth through the costs incurred and the pnces exacted. At the same time, being natural monopolies they affected. the extent to which monopoly prevailed in other fi:lds of productiOn, a~d in this way affected human relations throughout the whole economiC organization. This second aspect ~eem_s to me the more important because I regard ~no':'ledge of the social situations created by men's efforts to gain a hvehhood and accumulate wealth as the bedrock of economic history. ~e w~nt t~ know wh~t men were like in the ordinary business of life, m thei_r daily occupatiOns-the kind of problems they faced and what they did about them. Connections between their daily lives and what they p~oduce~ :vere very close indeed, so that part of our answer is found m statistics on the number of calories consumed on th · f h · · . . , e vanety 0 t eu diet, and m their other material satisfactions. Explanations of

65

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

craft routines, of the emergence of new techniques and of commercial practices also form part of the answer. But how men have dealt with each other in the process of production is more important than how they dealt with soil, plants, or tools. "Knowing what men were like" means, above all, knowing how they behaved toward other men. How much they produced was one factor in determining how they behaved, but only one. The economic interpretation of history is a mistake, I think, because it declares that economics is the all-important result. Concentration on economic growth would be a mistake if it were to imply that the quantity of material goods is the all-important result. Knowledge of changes in output and in techniques is vital, absolutely vital, but not so much for its own sake as because it is necessary in order to understand the social structure of production. In ultimate interest, the way men have dealt with each other in producing material goods is more important than the goods themselves. Many of us, without believing in the economic interpretation of history, yet share the feeling that economic history is in some sense the most important part of history. We believe that knowing the economic life of any society is fundamental to understanding that society, not because the process of production has a unique causal importance shaping all other aspects of culture and being itself reshaped only by changes generated within itself, but, quite simply, because the qualities expressed in economic activities constitute the largest part of what life has been. Most men most of the time have been occupied in making a living. The values that existed for them, not merely as aspiration or as ideas to be talked about, but in action and as qualities of personal character, were those embodied in the daily activities by which they made their living. If bullying and fawning, arrogant command and servile obedience were the rule in economic life, that is the way men were-that is what society was like. Other themes-religious aspiration, artistic feeling, and creative intellectual vigor-reward endless historical investigation for their own sake, even when they have no discernible connection with social organization, but historians interested in justice, freedom, or any other qualities of social life have reason to give primary attention to the human relations entered into during the processes of production and distribution.

67

FIVE MEANINGS OF CAPITALISM

/

While it is inevitable that the word "capitalism" will be used by various participants at the Congress in various senses, some mutual understandings concerning the different meanings likely to be intended may help to clarify the discussions. The following is an attempt (a) to indicate the different usages which will probably occur, (b) to suggest modifying adjectives or substitute terms by which the different meanings may be distinguished, and (c) to indicate relevant historical questions. Capitalism commonly refers to both a system or method of produce tion and to a social and political system. 1

CAPITALISTIC PRODUCTION

• :i ::111

Fundamental are its meanings with reference to a method of producing goods and services. (Among "services" are included all those involved in getting products to consumers.) At a particular time and place the production of some goods and services may be in capitalistic form, while the production of others is not, or is much less so. Capitalism is sometimes used in such a very broad and literal sense as to mean any system of production which uses capital; and in some discussions of economic growth capital is sometimes so broadly defined as to include all past production used for further production. Reprinted from The Journal of Economic History, March 1969, Volume XXIX, Number l.

MEANINGS OF CAPITALISM

Narrower definitions are certainly more useful in discussion of the development of capitalism between 1400 and 1800, as will be indicated below, but the broader usage points to one necessary element in any method of production called capitalistic, namely, it is what has been called a "roundabout method of production." A simple illustration is when a man who wishes to pile hay does not begin piling with his hands but begins by making a rake. A more significant example of "roundabout production" is the replacing of the hand-copying of books by punching dyes and casting type. It would be quite pertinent to inquire whether production was more capital-intensive and thus more roundabout in Europe in 1700 than in other parts of the world. Did Europeans use more capital per man or per unit of product? Although I cannot conceive an aggregate calculation of the amount of capital, comparisons of the techniques employed might lead toward an answer. Printing has furnished one example. The metallurgical industries could furnish others. What is called capital in the broad sense of the word is also required in order to engage in interregional trade and to enjoy the advantages of specialization. In the main the capital needed for such purposes does not take the form of fixed equipment, although some is embodied in means of transport, but consists of surpluses to live on while exchanges are being effected, and is referred to as commercial capital. In common usage, a roundabout method of production is not called capitalistic unless it is combined with a system of private property in which goods are bought and sold. It is agreed that production should not be called capitalistic unless the capital used is private property and the production is for the market with goods and services obtained from markets. In this respect capitalistic production implies a commercial economy and contrasts with either (a) production and consumption within one household or clan, or (b) centrally administered production, distribution, and consumption as that of a war economy, a modern socialized state, or the Egypt of the pyramid builders. 2 It should be generally understood, however, that while capitalism does indeed imply buying and selling and much attention in studying the beginnings of capitalism has quite properly been given to the growth of markets, an exchange economy is not necessarily capitalistic. Not all commercial production is capitalistic production. One can

68

'i ',il

I

PROFITS FROM POWER

distinguish between a simple commercial economy, or simple commodity production, and capitalistically organized production. The distinction is desirable even though it gives rise to the main difficulties and controversies regarding the definition of capitalism. 3 In order for a commercial (market) economy to be capitalistic there must ...be some buyers in its markets who are making purchases, not for their own consumption, but with the intention of reselling what they have bought or of using it in a process of production of which they will sell the product. Their purchases represent the investment of capital. They are the capitalists in the sense in which the term is here used. Moreover, conditions must be such that these investors of capital accumulate wealth, i.e., that their purchases and sales bring them increases in capital for further investment. 4 For many writers, including Karl Marx, the essential condition for this accumulation of wealth through investment of capital is wage labor, a labor market in which human labor power has become en masse a commodity. Certainly the size and structure of the labor market are among the main subjects to be considered. 5 In examining how much capitalism there was before the industrial revolution (either in Europe or elsewhere) the following questions about the labor market are pertinent: (a) its size: What proportion of the labor input was obtained through a labor market? The answer will of course vary from place to place and industry to industry. At a given time and place there may be much wage labor in mining and almost none in agriculture, or vice versa. (b) The structure of the supply: the amount of unemployment, the response to wage increases, the existence of labor unions or cartels. (c) The structure of demand: for example: (i) Were the buyers of labor services ultimate consumers who were many and unorganized, employing skilled laborers; e.g., were they farmers hiring blacksmiths and wheelwrights for occasional jobs under conditions in which there was more sellers' surplus than buyers' surplus? (ii) Were they landlords employing wage earners for the production of crops which would be consumed on the estate under familial distribution? Or crops to be marketed? Were these landlords monopsonists of various pools of labor? The transformation of systems of agricultural labor which were governed by family, clan, and seigniorial ties into a system using wage labor is bound up with the development simultaneously of modern

69

MEANINGS OF CAPITALISM

systems of taxation and land sales. (iii) Were the buyers of labor services public authorities using the product for public services, not for sale? Was there any economic surplus in those cases and who received it? (iv) Were the buyers of labor using it to produce with variable costs for sale in competitive markets, either as owners of capital equipment (factories) or as merchant employers, investing little or no fixed capital? To what extent were they local monopsonists able to practice price discrimination in setting wages? To the extent that laborers did not work for wages (but were unfree or self-employed, or employed in a household or clan of which they were a part), to that extent the labor markets were less important for capitalists than other markets. 6 Prior to a capitalistic system of production which extensively employed wage labor, money capital was accumulated as private property through commercial transactions, credit operations (loan capital), and by other means (from piracy to exceptionally high wages for exceptional services). This process of accumulation is often called commercial capitalism. 7 Since money capital and commercial activity by capitalists developed before the capitalistic system of production extensively employing wage labor, studies of the development of capitalism pose the following questions: l. How did accumulation take place under commercial capitalism and loan capitalism? For example, economic surplus would flow to capitalists from commercial transactions in cases in which they benefited from: (a) a legal monopoly; (b) a de facto monopoly because of their personal skill or knowledge or luck; (c) an oligopolistic position of sellers facing extensive competition among the buyers; or (d) a wide range in the production costs (acquisition and transportation) of the various suppliers serving the market and the persistence of these differentials over long periods of time, with the result that low-cost suppliers received a large profit. Particularly important in medieval and early modern times were the differentials in political or protection costs. 2. How did commercial capitalism and loan capital affect production which was carried on by other systems than that of wage labor (e.g., production using forced labor, or production by the selfemployed)?

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3. How far and in what ways did commercial capital and loan capital lead to increased use of wage labor and shape the structure of the labor market? Factual answers to these questions are to be sought in particular industries and particular communities. A third element in the usual definition of capitalism is its rationalism. This rationalism is notable for a readiness to innovate in economic activities, and contrasts with the traditionalism present in most systems of production. But not all innovation and rationalization of production are to be regarded as capitalistic for they do not always seek maximization of profits. A maximizing of output with the least possible cost can be highly rational, as in a war economy, while the "profit" resulting, if any, is a mere bookkeeping category, not available for capital investment. Also it is just as rational to maintain a desired level of income while minimizing input of effort. In capitalism, rationalization is devoted to the maximizing of profits or the increase of assets.

AS A SOCIAL SYSTEM I,

A society as a whole may be called more or less capitalistic according to the extent to which its total economic output is produced by what has above been defined as capitalistic methods of production. According to this conception, capitalism is a matter of degree: It is hard to find a society 100 percent capitalistic or 0 percent capitalistic. To characterize a society as predominantly capitalistic, however, may have either a statistical or an institutional meaning. Statistically it may mean that more than 50 percent of the total output was produced by capitalistic methods. Institutionally it may mean that the government and customs of the country, its written and unwritten laws, favor capitalistic forms of production over other forms. This favoring of capitalistic methods may be either deliberate or unintentional. When it is deliberate, expressing the view of capitalists who are conscious of themselves as forming a class and deliberately exerting political and social pressure to favor capitalistic organization of production with such success that a high percentage of the total output is so produced,

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under these conditions we have a clear case of a capitalistic social system. Although some historians prefer to think that all societies are more or less capitalistic, others maintain that there is an essential dividing line. These latter maintain that in every civilized society there has been a class dominance which made a given society either slave-owning, or feudal, or capitalistic. Other historians believe that just as in most societies some branches of production were capitalistically organized and some were not, so also in most societies some institutions somewhat favored capitalistic forms and some institutions somewhat hampered capitalistic activity. 8 9

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SIX PUBLIC DEBT AND PRIVATE WEALTH: PARTICULARLY IN SIXTEENTH -CENTURY VENICE

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How could Venice, in spite of military defeats at the beginning of the sixteenth century and in spite of Ottoman advances and oceanic trade routes, remain to the end of that century so prosperous as to deserve to be characterized as "still the richest and most luxurious city in the world"? 1 Part of the answer is to be found in the management of the public debt. For many decades the well-to-do paid less in taxes than they were paid in interest and redemption of principal. The bases for such a situation were laid earlier in the century by the relatively good condition in which Venice emerged from the Italian wars of 1494-1529. The financial burden of those wars was temporarily severe but they left Venice in a position in which its rulers could work out a system of loans and taxes which tended to reinforce the wealth of the rich. Theoretical models make it easy to imagine how wars, loans, and taxes could be combined to add to the wealth of a city or of its ruling class. Model A: Assume that a war results in a city's being able to collect more revenue than before, either because it can take tribute from conquered lands or because it can levy higher tariffs or tax a larger volume of trade. Assume that the cost of the war is met by borrowing from the rich citizens to whom the city pays interest. If the increase in revenue resulting from the war covers the payment of interest on the loans at a rate higher than the well-to-do could have obtained from Reprinted from Melanges en l'honneur de Fernand Braudel: I, Histoire economique du monde mediterraneen 1450-1650.

PUBLIC DEBT AND PRIVATE WEALTH

other investments had there been no war, the war is profitable. By increasing the return on capital received by the lenders it has, ceteris paribus, increased the total "national income" of the city. Such a war may be additionally profitable to a city by enabling its citizens to increase the profits of their individual enterprises, perhaps by preferential tariffs. Since my present concern is government finance, this possibility, althugh historically very important for Venetian merchants, is relevant to my model only in so far as the profits so gained by individual enterprises contribute to increasing the government's revenue. A war could be profitable for lenders, whom I will refer to hereafter as "bondholders" without trying to define exactly their position as creditors, while impoverishing other parts of the city's population. Model B: Assume that the war does not result in any increase in government revenue but has been financed by loans as assumed in Model A. Assume that in this case also the government pays the bondholders a return on their loans at a higher rate than they would have received from investments available had there been no war. Assume further that the revenue of the city comes mainly from regressive taxes, such as sales taxes. This combination of wars, loans, and taxes results in a shift of income distribution within the city, increasing the income of the bondholders and decreasing that of the rest of the population. An alternative, Model C, contains the same assumptions as Model B except in regard to the sources of government revenue. If the interest to bondholders is paid by levying an income tax or some other tax proportionate to wealth, the effect of the system of wars, loans, and taxes is merely (a) a spreading out over time of the financial burden, and (b) a shift of wealth within the class rich enough to buy bonds and pay income taxes, the nature of the shift depending on the mechanisms of the income tax and of the bond market. These models hardly fit any real historical situation because they are too simple and because of the difficulty of determining the amount of increase in government revenue that was the result of an individual war. Special difficulties are encountered in attempting to particularize regarding what the return on investment would have been had there never been war. More realistic counter-factual assumptions could be

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made regarding particular situations, however, envisaging longer or shorter wars with various results, especially since most tax collecting was at least to some extent the result of the outcome of previous wars. And the models serve to suggest some criteria for judging the degree to which particular wars may have been more or less unprofitable and of the extent to which the burden fell differently on different groups. Less unprofitable wars may be called relatively profitable. Speaking of profitable wars in this comparative sense, the models are relevant to the realities of the history of Venice and of most medieval cities. During the couple of centuries before 1260 Venice's wars were accompanied by such gains in revenue and such general economic growth as to approximate Model A. After Genoese competition became severe, Model B becomes increasingly relevant. Beginning in 1262 wars were financed by a funded debt to which all citizens of substantial property in Venice were ordered to subscribe. These forced loans, which were consolidated into the monte vecchio, were levied on the basis of assessments that depended mainly on real estate and were revised infrequently, so that bondholders and well-to-do were not fully identical. Some rich merchants with wealth abroad avoided subscribing. Since bonds were readily negotiable, men well supplied with cash bought up bonds at low prices from others who were short of cash but compelled to subscribe because of their holdings of real estate. This tended to concentrate ownership in a relatively small group. On the other hand, many bonds passed by bequests to charitable foundations administered for the benefit of the poor. In the main, however, bonds were held by the wealthy and the revenue assigned to pay interest on the monte vecchio came from indirect taxes such as those on salt and wine. Since part of the indirect taxes fell on wares passing through Venice they were in the end paid in part by foreigners. Some revenue came also from the colonial empire overseas. In the fifteenth century an increasing proportion of the income of the Serenissima began to come from conquered cities of the Terraferma. Subject to these substantial qualifications, the payment of interest to bondholders was a transfer of income from the poor to the rich. The fiscal systems of all medieval cities were of this general pattern and most of those including large public debts involved transfers from

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the poor to the rich larger per capita than in Venice. The fourteenth century Florentine republic, for example, depended much more than did Venice on quasi-voluntary loans on which it paid a much higher rate than the 5 percent which both cities promised on regularly funded debt. Venice was able more than most cities to shift some of the tax burden from the city's own population to outsiders. Moreover bondholding at Venice was widely diffused. In some instances after particulary costly wars bondholders were severely squeezed. After the War of Chioggia when all interest had been suspended, 1379-82, and the price had fallen from about 90 to 18, the rate of interest was reduced and subjected to a withholding tax. During the 1430's interest rates were further reduced and soon fell so in arrears as to amount in practice to about I percent a year. At the worst of the political crisis about 1453, there was a desperate resort to direct taxation, which led in 1463 to a regular income tax, called the decima. In 1482 income from the income tax was assigned to pay the interest on a new series of government bonds, the monte nuovo. For a time then the Venetian fiscal system more closely approximated Model C. Indeed many cities moved from Model B closer to Model C during the fifteenth century by creating more direct taxes. A third major squeezing of bondholders occurred in Venice in 15091519 following the defeat of Agnadello. But the crisis of those years was resolved by measures which had the net effect over the rest of the century of contributing to the prosperity of Venice's upper class through a fiscal system which combined sorn'e elements from all three of the models mentioned. When in 1519 the military and diplomatic situation permitted a reassignment of funds, four elements in the public debt could be clearly distinguished: 1) The floating, unfunded debt, essentially short-term borrowing. It included both arrears by government bureaus and loans to cover such arrears. It included also special emergency loans such as those that had been wrung during the war from the great council, senate, etc., by the doge's personal exhortations and by desire for honors. These emergency loans were being paid off during 1517-21 or absorbed into the funded debt. 2) The monte novissimo, a new series of forced loans begun in 1509

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with an assignment of new taxes to pay a yearly 5 percent. Creditors with short-term obligations were encouraged to convert them into monte novissimo, which thus rose to a total of 400,000 ducats in par value in 1520. Payment of interest on the monte novissimo was given priority over the claims of other manti by the emergency decrees of the Council of Ten but had fallen a half year behind in 1519. Thereafter interest was paid with fair regularity and all arrears were made up during the 1530's. 3) The monte vecchio which was carried on the books as having outstanding a par value of 8,254,279 ducats. The indirect taxes, the datii, originally assigned to pay interest on the monte vecchio had been so largely diverted to more urgent neeqs that interest payments were far behind. In 1518 it paid the coupon due in September 1477. In paying l percent of par each year it was paying about 5 percent on the market price, for good times, of 20. More than half of it was held by benevolent foundations such as the scuole. 2 In February 1521 the Senate decreed that interest payments on the monte vecchio should continue at the current rate but that if the funds assigned to the monte vecchio yielded more, the extra amount should be used, not to pay additional back interest, but instead be used to buy in these bonds in the open market at the low prices of 2 to 5 to which they were then reduced by the precariousness of future interest and the removal of any prospect of restoration of the full rate. 4) The monte nuovo, the most acute problem. It now totaled over 3,000,000 ducats in par value, it had been at par only ten years before, and it had been and still was the subject of so much trading that much of it was in the hands of men who had bought at low prices. Among these speculators were some of Venice's leading politicians, most notably Antonio Grimani. There was strong feeling against paying the 5 percent to men who had paid only 50 or perhaps only 20 for their bonds. That was what Venetians regarded as usury. After the price of monte nuovo had been driven down to 50 during the Turkish war of 1499-1502 and had bounced back to 100 after the conclusion of peace, the Camera degli Imprestidi sold new bonds at 100 and used the proceeds to call in those which had changed hands at low prices, paying their holders only the amount they had paid. The justice of calling in bonds at whatever price their owners had paid for them was

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debatable as a general proposition, but had been provided for as early as 1491. But reducing the debt by this kind of refunding could not be applied to the monte nuovo in 1519 because in November 1509 in an effort to bolster the then sagging market for monte nuovo the Senate voted that bondholders could not be forced to turn them in at less than the market price at the time of redemption. After much bitter debate it was decided to liquidate the monte nuovo by repaying the principal and accrued interest for the years 1510-18 inclusive, but no further interest. Repayment took two forms. Bonds of the monte nuovo could be used to buy government land at auction, chiefly reclaimed land in the Polesine and estates confiscated from "rebels," that is, from nobles on the mainland who had gone over to the enemy when these enemies, the king of France or the German emperor, had occupied the Terraferma. Gasparo Contarini, the future cardinal, who had just begun his political career in charge of surveying newly drained lands in the Polesine, was reported to have bought 20,000 campi there at high prices, and Antonio Grimani purchased a great deal for which he paid with monte nuovo he had bought at 20. 3 In spite of inflated prices, enough of the bonds were used to buy land (more than 1,000,000 ducats at least according to their par value) so that the monte nuovo left to be redeemed was about 2,500,000 ducats, counting both principal and accrued interest. The revenues from the decima previously assigned to paying interest, 150,000 a year, were now assigned to paying off that 2,500,000 in 17 installments. 4 Although one installment a year was promised, in fact funds were diverted for other purposes so that repayment took 30 years. 5 In 1526 a new war financed by a forced loan creating a new series of government bonds, the monte di sussidio. They fell to half price, as did the monte novissimo, before peace was solidified in 1530. With peace restored the government was able in 1531 to reduce the amount of these manti by selling at 83-l/3 new bonds in these series and using the proceeds to call in bonds which had been purchased a few years earlier at 40 to 60. Thereafter restraint was used in making new issues of forced loans which would have increased unduly the size of the monte novissimo and monte di sussidio. They paid interest regularly and sold above par in the 1550's and 1560's. After the monte nuovo was liquidated, there was talk in 1554 of redeeming these two other manti,

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although instead the funds were assigned to building a reserve for emergencies. The monte novissimo then outstanding was estimated as 620,159 ducats paying 31,008 ducats a year; monte di sussidio as 1,306,083 ducats paying 65,304 each year. 6 To finance hostilities against the Turks in 1536-40, a different kind of borrowing was used, the free sale of annuities by the mint. Deposits in the mint had been used extensively earlier but only for short term borrowing until in Aprill538 the mint was authorized to accept up to 100,000 ducats of deposits on which it would pay 14 percent a year during the lifetime of the depositor, 'with no obligation to make any repayment of principal after his death. About the same time, 500,000 ducats was borrowed through the mint on other terms. At least 200,000 ducats of this was obtained by the promise to pay 8 percent annually. In 1559 when the interest rate had fallen, these depositors were offered cash or new deposits paying only 6 percent. 7 As a result of all these arrangements, in the mid-sixteenth century bondholders were receiving a total of 200,000 or 300,000 ducats a year in interest or repayment of principal about as follows: Monte vecchio . .. . .... . ... . ... . .. .. ... ... . .. .. .... .... .. .. . ... . . ...... I I

80,000 ducats

Monte nuovo (tilll552) ········-································· 100,000 ducats Monte novissimo ............ ......................................... 35,000 ducats Monte di sussidio .................................................... 65,000 ducats Depositi in Zecca . .................................................... 20,000 ducats 300,000 ducats The total of 300,000 ducats a year was more than twice what Venetians paid in direct taxes at mid-century. The total income of the government rose from 1,145,000 ducats at the beginning of the century to about 2,000,000 in 1569. In the latter total, 500,000 came from the stato damar (including salt of Cyprus), 800,000 from the Terraferma, and 700,000 from Venice itself. Of that 700,000 ducats, about 550,000 came from the dacii, the indirect taxes falling heavily on consumers, and only 150,000 ducats or less from direct taxation. The most important of the direct taxes was still the decima, a levy of one-tenth of the income from real estate according to the declaration of the taxpayer and a catasto compiled parish by parish of all city property. It was supplemented by the tansa, which was proportioned to an estimate of

PUBLIC DEBT AND PRIVATE WEALTH

the taxpayer's wealth in all forms. Each tansa yielded about two-thirds of a decima. New assessments in 1565 raised the figure for decima and tansa combined from 111,000 to 169,000 ducats. Account books of taxpayers show that between 1543 and 1570 they paid on the average slightly less than one decima a year and about half as many tanse. So light was the tax burden that the rich as a whole were paying less in direct taxes than they were receiving from government bonds. 8 The War of Cyprus, 1570-1573, changed the picture. Behind the great fleets which Venice put to sea was the expenditure of about 6,000,000 ducats financed by the sale of annuities by the mint, most of which paid 8 percent a year until the restoration of the principal. These were voluntary, not forced, loans. In 1577 the mint was paying out 514,993 ducats a year on annuities totaling 5, 714,439, while at the same time the Camera degli Imprestidi was paying current interest on the monte novissimo and the monte di sussidio and long overdue interest on the monte vecchio, and the Salt Office was paying interest on a large floating debt. Annual interest on the funded debt totaled about 750,000 ducats, about a third of the state's income, which had suffered from the loss of Cyprian salt and from the reduction of the population and thus of sales taxes during the plague of 1575-77 but then quickly recovered. More was being collected from the Terraferma, additional indirect taxes were levied, a direct tax on all government salaries raised some 80,000 ducats a year, and reassessments for the decime on real estate and for the tansa raised the return from these two taxes to about 220,000 ducats. Even so, more than half of the payments on the debt about 1578-82 came out of receipts from the indirect taxes within Venice or the levies on the mainland cities. To reduce the burden of interest the government accepted in 1577 the plan of GianFrancesco Priuli for "freeing" the mint, by devoting to the retirement of its debts part of the proceeds of the decime, which after the retirement of the monte nuovo had been assigned to a reserve for emergencies. He planned to use the 360,000 ducats in that reserve and the 120,000 ducats which was the yearly yield of the decima to retire first the annuities paying the highest interest and then the others and to use the interest saved on bonds redeemed to increase the amount that could be retired in the following years. Once the plan was begun, the discovery of fraudulent entries reduced the amount that had to be

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repaid. Also funds freed by auditing and revision of other accounts were assigned to the liquidation so that it was completed in 7 years instead of 17.9 The liquidation of the monte novissimo and monte di sussidio was then ordered. These two funds had grown to about 2,400,000 ducats but revenues were found for redeeming them between 1596 and 1602 without touching the special wartime reserve being built up after the freeing of the mint.l 0 Meanwhile the liquidation of the monte vecchio was begun, a relatively minor operation because holders were offered only 2->2-5 percent of the par value of their shares. 11 Such a complete liquidation of the long-term debts of the Republic created difficulties for scuole and other philanthropic foundations which had been endowed with such funds. Accordingly it was provided that the bonds owned by such institutions should be the last called for redemption and that the Senate should then make some provision for reinvestment. The Scuola di San Giorgio dei Greci, which had bought 1,800 ducats of monte novissimo in 1589 was able to collect interest on it in 1601, and in 1604 converted it into a deposit in the mint. 12 Except for such funds, the Venetian Republic was free of funded debt at the opening of the seventeenth century. The decime on real estate and the tanse were collected so little that they were calculated together in the budget for 1602 as only 80,000 ducats.l 3 In paying out close to 10,000,000 ducats to bondholders between 1577 and 1600 the government supplied a significant portion of the capital which rich Venetians were in that same period investing in farm lands and villas. A part of that total was being taken from the well-to-do during the same decades in yearly installments through the income tax, to be sure, but of the total amount used to refund the debt and pay interest on it until it was refunded at least half came from indirect taxes and from the subject Italian cities. To that extent, Venice's fiscal system was closer to Models A and B than to Model C. Another way of looking at the city's contribution to the prosperity of its richer citizens is to consider how little of their income was drained off by taxes. How far the assessments for the decima and tanse fell short of real incomes cannot be estimated, but comparing the receipts from this source with the state's total income makes clear that the main burden of financing the government fell elsewhere.

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Clearly the wars of the opening decades of the sixteenth century had not been ruinous. Far from it! They were financed in a way which in a relative sense contributed to Venetian affluence and to the possibilities of placing the costs of Venice's sumptuous government elsewhere than on its ruling class. Venetian industries and the city's population expanded because Venice offered better security within its lagoons than did the declining industrial centers it replaced. Later agricultural production and tax revenues increased in the very fertile section of northeastern Italy where Venice preserved its capacity to tax and generally to protect the taxpayer from the ravages of war. These longrun results of the Italian wars were vital ingredients in Venice's ability throughout the century to impress distinguished visitors by its luxury and pomp.

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SEVEN THE ROLE OF GOVERNMENTS IN ECONOMIC GROWTH IN EARLY MODERN TIMES

I I

A discussion fifty years ago of comparative economic history would have taken a bmader view and would probably have been concerned very largely with exploring along the trails blazed by Max Weber and Marc Bloch. They were interested in many other aspects of economic history besides economic growth and I hope that similar broader interests will shortly show signs of reanimation. In spite of the present popularity of quantitative studies of changes in production, I hope some discussions at this meeting will examine comparative studies of forms of economic organization and the human qualities those structures reflected or generated. But my remarks here accord with the present preoccupation with that kind of economic history in which the all-important questions relate to the causes of economic growth. And I limit myself to one aspect only, the influence of governments. The opportunity to express reflections on that subject is all the more welcome because of the publication during the last year of the book in which Douglass North and Robert Paul Thomas attempt a synthesis explaining the "Rise of the Western World." 1 My interest in their interpretation is heightened by their having taken as one of their starting points, as they acknowledge in a bibliographical note, some ideas from the address I delivered to this Association in 1958. 2 In that address some of my thoughts were presented with a brevity which deliberately bordered on satire. But I was entirely serious in shooting at Reprinted from The Journal of Economic History, March 1975, Vol· ume XXXV, Number l.

THE ROLE OF GOVERNMENTS IN ECONOMIC GROWTH

much the same goal at which Douglass North, Lance Davis, and Stanley Engerman are also aiming, namely, using methods of thought developed in economics to analyze social arrangements excluded from traditional economics because these arrangements involve coercion and governmental monopolies of violence. My central idea was that governments be viewed as economic enterprises which produced a product having utility, a product I called protection. This is only one aspect of government, of course, but it is an aspect of economic importance, obviously so in medieval and early modern times. Studies of the influence of governments on economic development should start with analyses of the costs of protection, of the costs to the governments producing protection, and of how much other enterprises had to pay governments to receive protection. North and Thomas have much improved the formulation of one set of the resulting problems by specifying that what governments protect are property rights. They have developed sweeping theories concerning the effects of giving protection to some kinds of property rights instead of other kinds. They explain the different degrees of economic growth in various parts of Western Europe in the early modern period, that with which I am most concerned, by the differences in the property rights that were protected. If the property rights were of a kind which provided men with incentives for productive activities, growth resulted. If governments protected property rights which gave incentives for actions that decreased the total product of the economy, although yielding profits to the owner of the rights,, the government's protection impeded economic growth. The different degrees of economic growth in various parts of western Europe are thus explained by differences in legal institutions. This is not meant to imply that governmental action is viewed as the prime mover in the rise of the Western world. Changes in science and technology or in population are treated as the prime movers of economic growth, governmental policies as part of what has been called "social adjustments." 3 Governments responded in various ways to the pressures and opportunities created by changes in population and in knowledge. The differences explain whether the result was increasing returns and growth or diminishing returns, stagnation, and decline.

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That authors who style themselves champions of the "New Economic History," and give their book the subtitle "A New Economic History," should thus return to concern with institutions and with explaining variations in growth by institutional differences might well seem to make this an appropriate occasion for a certified Senior Citizen like myself, seasoned in the old economic history, to rejoice at the prodigals' return and in their honor to kill the fatted calf. But I am more inclined to ask whether the wild oats they have been sowing so defiantly cannot yield some better harvest. As a preliminary, I must register here, in view of what is to follow, my reservations regarding purely economic interpretations of historical developments. To assume that men act to advance their economic well-being and that governments as well as private enterprises act to maximize profits is useful in constructing models-not only models to use in analyzing what is called free enterprise, but also in models to use in analyzing governmental activities. But for explaining any particular situation, even in a market economy, the adequacy of such a model, or any other, for the particular case should always be doubted. In the century-old classic example of Silesian workmen, the model found most useful assumed, not maximization of income, but maintenance of traditional income with minimization of labor. A Pygmalion model-maker is a nuisance in economic history or political economy, for the model-maker who falls in love with his creation cannot by his prayers bring it to life as part of historical reality. The relation between any model and specific occurrences in the past, present, or future unfolding of history is problematical. That problem must always be acknowledged as requiring additional investigation. With that reservation I applaud and join the attempt to apply to institutions usually assumed by economists as "given," and exempt from economic analysis, the methods developed for understanding what is traditionally defined as "economic." Such attempts will prove worthwhile even if they have no other effects than to incline economists to pay more attention to what historians regard as realities. Accepting on these terms the desirability as well as the danger of constructing economic models to be used in historical analysis, I turn to my major theme, namely, the need to analyze the effects governments

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have had on the formation of capital and of potential capital. Together they constitute the social surplus, namely that portion of a year's production which is in excess of the amount which has to be consumed to keep the economy functioning at the existing level. Surplus is a portion of the product available for investments that would increase future production. 4 Some writers refer to it as "income available for redistribution."5 Surplus as thus defined includes not only the net addition to capital investment but also the expenditures on "conspicuous consumption" and unnecessary unprofitable wars. The distribution of this surplus is in part determined by the property rights protected by the government. 6 Where there were property rights in slaves it entered into the income of slave-owners, as Stanley Engerman made clear in this meeting two years ago when he analyzed the possibility of "excess of output above [the] maintenance cost" of the slave.7 Under a system of landownership and a free and active landmarket such as that developed in England during early modern times, when agriculture was still the largest sector of the economy, most surplus took the form of what Ricardo later defined as rent. 8 During the same period, diversities in the way international trade was protected gave merchants chances for large profits arising from what I have called protection rents. 9 In all branches of trade and industry, some went as producers' surplus to beneficiaries of superior capacities, fortuitous circumstances, or monopolies and similar privileges. Employers of labor received it to the extent that a proletariat and a reserve army of unemployed gave them a kind of consumer's surplus in their hiring.1o But most important within western Europe in the early modern period were land rents and protection rents, and a form of income not yet mentioned but to which I will now turn, namely: tribute. What do I mean by tribute? When a government has secured a monopoly in using violence and collecting payments for protection, it can raise prices above the cost to it of producing the protection it provides; that is, it can collect in taxes more than is needed to police its territory and defend it against attack from the outside. Viewed as an economic enterprise, a government which seeks to maximize its profits can use its monoply to set the price of its product above the amount that the government spends to produce it. It can in this way take from

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those whose property rights it protects much of the society's surplus production. This "take" by the government I call tribute, for it is useful to have a word to designate the difference between the cost of producing protection and the price charged for it; that is, the difference between the protection's cost to its producer and to its consumers.1 1 Treating governments as enterprises which seek to maximize profits creates a model which, it must be admitted, is more appropriate for the seventeenth century than for the nineteenth. The democratic revolutions at the end of the eighteenth century and the subsequent growth of representative government have given popularity to model building on the assumption that governmental expenditures reflect the demands of those governed. The formula "We, the People" is now a more acceptable expression of wishful thinking than "L'etat, c'est moi." But for the early modern period it is more pertinent to assume that expenditures were determined by those who were the government. Whether the tribute collected by a government was made productive as capital depended on how it was spent. If it was used to build roads and drain swamps, it served to increase future production. If it was used to build pyramids, or cathedrals, or in riotous living, it did not contribute, certainly not directly, to economic growth. If it was spent in maintaining a large military establishment just because the rulers, being soldiers, liked it that way, its use was similarly non-productive. References to riotous living by a government is a figure of speech. It means that salaries, pensions, or contracts were granted to individuals with that result. Similarly, military expenditures means salaries, bonuses, contracts, and subcontracts to individuals and enterprises. The recipients of these disbursements might receive enough so that they could invest portions of their incomes in ways productive from the point of view of the society as a whole, or they might devote themselves entirely to personal enjoyment of riotous or resplendent living, to military parades and feuding, or to other non-productive uses of society's products. Royal favorites, bureaucrats, and generals, as well as landlords and successful merchants, had surplus which could be used as capital. Economic growth depended not only on the incentives to invest but also on the capacity to invest. In recent times it is estimated that nearly all individuals' savings, and thus capacity to invest, is in the hands of

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ten percent of the population.l 2 The poor may have the incentives, but they lack the capacity. There is reason to believe that such was also the case in early modern times.l 3 Economic growth then depended very largely on whether or not the system of property rights, and the use by governments of the tribute they collected, put surplus under the control of men who invested it and thus increased total production. North and Thomas devote many interesting pages to fiscal policies and to the effects of fiscal policies on property rights, but their concern with incentives for investment crowds out concern with capacity to invest, a capacity which depended on control of some of that portion of production which was in excess of what was necessary to maintain the existing level of production. Moreover, their focus on the incentives for private investment diverts attention from the extent to which governments determined directly the uses made of surplus through their taxes and disbursements. Following the lead suggested by Gregory King and many successors, I suggested in 1958 that essential to the economic rise of the West in early modern times was a shift in the distribution of the surplus so that relatively less went to landlords and courtiers who spent it in conspicuous consumption, or to generals who spent it in ways calculated mainly to enhance their own importance, and relatively more to merchants and petty manufacturers or farm managers who used it to increase the total productivity of the economic structure. 14 Recent studies have made me' keenly aware of the inadequacy of such a crude class formulation. Especially Ruth Pike's st~dy of Seville suggests that the rich merchant's propensity to consume increased more than geometrically as he became rich enough to aspire to becoming a noble, whereas the man whose noble ancestry overbore any aspersions avidly invested in trade and navigation.l 5 The questions of where the surplus went and the effects of its distribution need far better analysis. But that analysis, or the connected, more restricted analysis of sources of capital investment, deserves to be stressed quite as much as does the effects on incentives of different systems of property rights. Indeed, I am tempted to twit these self-proclaimed protagonists of the "New Economic History" for underselling its potential. Because they have turned to speculating about the incentives connected with property rights, they risk bogging down in traditional conclusions or

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controversies. Comparison with a memoir published in the year of the founding of this Association by John U. Nef will illustrate my point. 16 Nef's Industry and Government in France and England, 1540-1640 expounds the same theme accentuated by North and Thomas in their last chapters: why economic growth was greater in England than in France in the period considered. The periods are different but are sufficiently similar to make the comparison relevant. Nef concluded that the cause of the difference in industrial development in the two countries was the greater "government interference with economic life" in France. Nef's study must have been written in the 1930's, when a major preoccupation in American life was the New Deal's interference with the system of markets and of property rights which seemed like the natural order of things to Herbert Hoover, as it had to John Locke. In that atmosphere Nef referred to private property and private enterprise as rights which would have existed naturally if the government had not interfered. I think North and Thomas are on much sounder ground in believing that government has always played an essential role in economic growth by its creating and protecting of property rights of a kind favorable or unfavorable to economic growth. Apart from that difference, the conclusions of the studies thirty-five years apart are strikingly similar in maintaining that the differences in economic development are to be explained by the differences in the relations between government and private enterprise. But I recall also the review of Nef's study by Charles W. Cole suggesting an alternate interpretation, namely: " . . . the fact that during that period England was almost continually at peace and France was almost continually at war. ... " 17 Like Nef's memoir of 1940, North and Thomas's models focus attention on a government's regulation of private enterprise. Like Charles Cole's comment, my suggestions call for using models that focus on a government's own protection-producing enterprise, especially its wars and its collection and distribution of tribute. The immediate need is to link the concepts used to statistical estimates. Here is where the skills of the "New Economic History" are most needed, for on some problems it has tackled it has shown admirable ingenuity in constructing relevant series from seemingly irrelevant sources. What proportion of the gross domestic product was

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spent on protection? In various countries? At various dates? How did military expenditures compare with the gross or net capital formation? Is some breakdown of figures possible so as to distinguish armaments for wars of conquests, for defense of frontiers, for internal police, for domestic propaganda and pageantry which helped minimize the need for police, and for all the other items which modern students of national accounting lump under some such phrase as "the maintenance of internal peace and external security"? Some pertinent figures for the early modern period are given by Phyllis Deane and Jean Marczewski. They show, roughly speaking, that in 1688 or 1685 in France and England the central governments' expenditures accounted for seven percent of the national product. In France it rose to thirteen or fourteen percent at the end of the wars of Louis XIV and was at twelve percent in 1774. In England it fell to only four percent by 1770. 18 The difference between four percent and fourteen percent seems on its face very significant, since the net capital formation in those years has been estimated as less than five percent. 19 In these figures, what has been included and excluded from government expenditures and national product needs close examination. No doubt they do not exactly correspond to what would be desirable in order to apply such theoretical concepts as protection costs, surplus, and tribute. But the totals put out by our modern statistics-producing bureaucracies also do not fit exactly the needs of economists. The figures are organized by governments and receive soothing labels such as "national defense and internal security.'; 20 Tribute, surplus, monopoly of violence-these are harsh words by comparison, but no more misleading, I think, even if also in need of discipline. For modern statisticians the problem was posed sharply by Simon Kuznets in 1948 when he objected that military expenditures were not considered "intermediate costs" as he felt they should be. He wrote then that "the maintenance of internal peace and external security" is "not a direct service to consumers; it is rather an antecedent and indispensable cost of maintaining society at large and a condition of economic production rather than an activity yielding final economic goods. And in time of war the proportion of government activity, the share of goods it [the government] purchases that is devoted to services to consumers, is minor indeed." He justified his stand by saying, "the

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total we are seeking is that of the product, the end result of activity, not the volume of the activity itsel£."2 1 Although much of national accounting since 1948 may seem concerned less with the "end result" than with "the volume of the activity itself," in 1971 in his Economic Growth of Nations Kuznets is still arguing for more "functional analysis of government consumption" to separate out expenses for the function that he there calls "sustaining social and economic fabric," as distinct from other elements such as "final consumer goods in the form of health and educational services." 22

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Let us hope that functional analysis of governmental expenditures in earlier centuries will also succeed in breaking down aggregate figures so as to distinguish the proportions spent on police, on the lavishness of courts, and so on. If we consider wars as capital investments, as Kuznets once suggested,2 3 it is necessary to judge which were productive and to estimate how much bad military investments absorbed surplus that might have been used more productively. Measuring will be difficult, but, as Kuznets says with reference to analysis of the modern figures, "the fact that the difficulties ... are formidable is no reason for dismissing the major problems involved." 24 For the seventeenth century some estimates have been made. Here again Gregory King provides some suggestive starting points. His concluding sections concern the costs of wars. He estimated that in the revenues of the French Crown, in time of peace, about one-fifth (two million pounds) were what he called "a Yearly surplus applicable to the Increase of shipping and to Naval and Military stores or to lay up in money."25 Could not the "New Economic History" check these or come up with better figures? Starting thus in the seventeenth century and then working back, could we not with rough estimates give substance to comparative analyses of the amounts of tribute that governments collected and of the ways in which they spent that tribute?

EIGHT ECONOMIC GROWTH IN WALLERSTEIN'S SOCIAL SYSTEMS. A REVIEW ARTICLE

Outside of Great Britain and North America, that is, in most of the world, history as a whole is given a meaning shaped by Karl Marx's theory of progress. Within Britain and the United States and to a notable extent also in some other countries, especially in western Europe, historians generally do not feel a need to articulate any view of history as a whole. They are passionately fond of analyzing and interpreting evidence concerning some small segment of human experience. Immanuel Wallerstein maintains that those things that occurred in such small fragments of the past cannot be understood unless their relation to the whole is correctly conceived. Selection of an appropriate unit of analysis also preoccupied him in earlier works concerning Africa. He questioned whether the tribe or the colony was such a unit, then whether parts of Africa or the whole continent was an appropriate subject.! Now he has concluded that the world as a whole must be considered in order to understand developments within parts of it and that to analyze change at a particular point of time requires a knowledge of past developments. Many a student who has concluded that nothing can be understood without understanding everything has felt relief at so logical a conclusion and under the comfort of the burden has promptly fallen asleep, or at least silent. But not Immanuel Wallerstein. His solution has spurred him on to an extensive examination of historical literature, of hundreds of titles in a half-dozen languages, and he has fitted his findings together into a meaningful scheme of world history. 2 Reprinted from Comparative Studies in Society and History, October 1976, Volume XVIII, Number 4.

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In spite of large obvious differences, this scheme is comparable in some respects to the one with which Arnold Toynbee attracted much attention, especially outside professional historical circles, shortly after the end of World War II. Toynbee also began by seeking an intelligible 3 unit of study. He and Wallerstein both declare that the nation is not such a unit. Both are butting their heads against the stone wall of "tribalism" that still limits, as Louis Hanke has reminded us, the majority of our historical profession. 4 Both Toynbee and Wallerstein feel. the need of a specialized vocabulary to expound their supranatiOnal scheme of history. One suspects that their terms-such as "outer proletariat" or "time of troubles" (Toynbee) and "core," "periphery," and "arena" (Wallerstein)-although useful in expressing their thought, will not enjoy popularity for long, and Toynbee's have semi-poetic overtones that Wallerstein's lack. Toynbee plotted the development of cultures, Wallerstein focuses more narrowly on social systems. The main influence of Wallerstein may be on a small scale similar to that of Toynbee, namely some geographical broadening of the conception of "world history." But Wallerstein's main title should not mislead. His book for 1974 has a more restricted scope than is suggested by The Modern World System. It is intended to be merely Volume I in a series of four volumes which, taken together, would deserve that title. It covers the years from 1450 to 1640. Later volumes are envisaged that will cover 1640 to 1815, 1815 to 1917, and the period after 1917 (approximately).s The theme of the present volume is defined in the subtitle's reference to Origins of the European World Economy. Wallerstein does not maintain that before 1640 Europeans had already created an economic system embracing the entire globe. That was to come later. But he does maintain (and since this is a central thesis of the book I will consider later how well he supports it) that economic growth in Europe between 1450 and 1640 depended on an expansion outside Europe of trade and agriculture organized by Europeans. Having abandoned a "sovereign state" or a "national society" as the unit of analysis, Wallerstein turns instead to what he calls a "social system." This unit includes all those people whose economic life is interdependent. He distinguishes three types of social systems: a minisystem, an empire, and a "world system." 6 The latter is a multistate

I

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economic system, and I believe it would be much better to call it that, but Wallerstein uses "world" not only sometimes in a geographic sense, but also sometimes in a categorical sense, to mean not necessarily a system embracing all the globe but a system embracing all members of a category. He emphasizes that the dynamics of a world system are very different from those of an empire. The monopoly of political power within an empire permits its rulers (generals, bureaucrats, or prebendaries) to get into their hands most of the surplus produced in the system. They are concerned with the defense of their monopoly, their empire, but have no incentives to spend their wealth in ways that change productive processes and increase productivity. 7 Mini-systems, which by definition are rather small self-sufficient communities, are absorbed into an imperial system by political subordination expressed in tribute, or they are absorbed into a multistate social system by trade. 8 In the multistate (world) systems, the competition between and within states can lead either to the triumph of one state over the others and thus to the transformation of that social system into an empire, or it can lead to vigorous ecomomic growth under capitalism. The process led to empires in the Hellenistic-Roman world and in China, but the multistate economic systems that were centered in northern Italy and in northwestern Europe during the later Middle Ages developed during the sixteenth century into the the modern capitalistic "European World-System." As a world-system expands geographically, regions within it become differentiated according to the functions they perform in the system's exchange of goods and services. There is a distinguishable "core" in which strong governments support the institutions that favor the system's exchange relationships and the accumulation and investment of surplus. In the core landowning is commercialized, labor is legally free, with relatively high and varied skills, and manufactures are developing. At the edges of the system is a "periphery" which is under colonial administration or weak rulers and in which labor is servile or at least partially coerced. The periphery is devoted to mono~ulture .of staples; in the core the trend is toward diversity and toward mdustnal production for export to the periphery. Between .the. co~e and the periphery lies a "semi-periphery" that supports the mstltuUon~ favorable to the core and shares in the surplus derived from the penphery.

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The relations of a particular social system with the area beyond the periphery, dubbed the "external arena," may be extensive but are not vital to the system's functioning. In Europe's expanding world-economy of the sixteenth century, England, the Netherlands, and France became the core, in which surplus production in agriculture and industry was increased by the use of free labor and in which governments increased their power. Eastern Europe became a peripheral area, exporting grain essential to the economic growth at the core. The weak governments of this periphery permitted native landlords and foreign merchants to divide among themselves most of the surplus produced by the relatively unskilled labor exploited by the "new serfdom." Much of America also became a peripheral area, producing raw materials and food stuffs, notably sugar, needed by the core and employing either unskilled slave labor or something close to serfdom that Wallerstein lumps under the name "coerced cash-crop labor." 9 Italy and the Iberian countries, which had led in the expansion, were reduced by 1640 to the status of semi-periphery. They became intermediaries in keeping within the system and in exploiting the peripheral areas like those in the New World. While obtaining much for themselves, the ruling and mercantile classes in Spain, Portugal, and Italy functioned so as to transfer to the capitalists of the core control over much of the surplus produced in the periphery. This scheme, which I have had to oversimplify in order to compress it into a few paragraphs, obviously owes much to Marx, and it is presented in a way that shows concern with appealing to Marxists. It pictures capitalism as a temporary stage of historical development, a system of production that has dominated recent centuries but is only a passing phase of human history. It will ultimately be replaced, Wallerstein believes, by another economic system that he calls "a socialist world government." As a matter of personal commitment, he has declared his wish that capitalism should be displaced by a system that will distribute materials, goods, and personal freedoms more equally.I 0 The justice or injustice of economic arrangements concerns him throughout his analysis. It not only underlies his emphasis on systems of labor, it pops up when he gives ethical meaning to such terms as "maldistribution," 11 although the whole tone of his exposition

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is calmly analytical, devoid of heated invective. He cites Marx on a number of points and always with respect, and he leans heavily on many writers known for Marxist leanings. Indeed, one of the valuable contributions of his book is the introduction it provides in English to the work of many scholars of continental Europe during recent decades, not only a variety of leftists but also many on the other side. Wallerstein thus stresses the extent to which his thought is rooted in the Marxist tradition and makes quite explicit some points on which he diverges from prominent contemporary interpreters of that tradition. In this connection it is pertinent to note Wallerstein's idea of objectivity. He believes that "'Truth' changes because society changes," and that the maximum of objectivity possible would be that of a scholar "rooted in" all the major interests, attitudes, and institutions of his time "in a balanced fashion." At this moment of history he believes such balance impossible. But a scholar or scientist should not take this conclusion as an excuse for becoming an apologist or advocate. While recognizing that the way in which he searches for facts is socially conditioned, he must not distort the facts because of any particular application to be drawn from them. 12 Although Wallerstein's statement of his position is cryptic, it at least makes clear that he believes in a standard of truth-seeking that imposes obligations superior to any immediate political purposes or party lines. Concerning official Marxist doctrine, Wallerstein has remarked elsewhere that the fecundity of the Marxist tradition has depended on its being concerned with society as a whole and on its being a critical, oppositional doctrine. Where it has become not a doctrine of attack but of defense of powers that be, it has lost that advantage.I 3 Leftist critics of Wallerstein may well choose as their points of attack not his position on these matters but his handling of three of their basic concepts: capitalism, class, and the state. For him the essentials of capitalism are production 1) with an eye on the market, 2) with an effort to maximize profit, and 3) with a consequent accumulation of wealth by men who use part at least of that wealth to increase productivity. The legal status of labor and the kinds of compulsion applied to labor he regards as secondary. He emphasizes the point by referring to situations in which the labor of

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slaves or serfs was used to produce profits from sales as "capitalistic slavery" and "capitalistic serfdom." They are part of what his subtitle means by Capitalistic Agriculture.l 4 More is involved than a mere change in terminology This is clear as soon as one asks: Were Polish nobles who employed serfs, English landlords or their tenant farmers who employed hired laborers, and Brazilian plantation owners who employed slaves all part of the same class? Wallerstein's affirmative answer is qualified by his definitions. Basic is his principle that classes are to be understood by their relation to the world-system in which they exist. They arise from production oriented toward meeting demands expressed in the system of exchanges embodied in that world-system and contributing to the concentration of wealth at its core. But Wallerstein does not adhere to economic analysis at all consistently in his definition of classes and related terms. His categories are based on more complicated principles. He notes that many groups are potentially classes because they have certain common characteristics. Such, on the one hand, are "occupational interest groups" which we can recognize from information obtained about them-for example, the size of incomes and their sources. Such also are ethnic or cultural groups which we can distinguish when we have information about their languages, religion, and so on. These groups may overlap in an almost infinite variety of ways. None of them becomes a class, in the sense in which Wallerstein prefers to use that term, unless it is self-conscious about its identity and interests. Self-consciousness is aroused or very much intensified by conflicts among such groups. An element of ambiguity seems to me to enter here in his reference to "status groups" as distinct from classes. Status implies consciousness of rank or at least consciousness of position in a social structure. But does it imply consciousness of conflict with other status groups? Wallerstein's position seems to be that classes come into existence only when there is class struggle. From that premise he leaps to the conclusion that there can never be more than two classes in a social system. He argues that conflict forges alliances and that only through conflict do various status groups and occupational or ethnic groups acquire self-consciousness sufficiently intense to make them part of a class.I 5 Under the pressure of conflict they line up on one or the other

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of two sides. In the period 1450 to 1640, he puts on the one side all the men whose thinking and actions were oriented toward the increasing profits to be made from the expanding world market. Whether they were aristocratic landowners, newly rich merchants, enterprising yeomen and craftsmen, or government officials, they were all in his view part of the capitalist class. On the other side were landowners and officials with traditional rights called "feudal," as well as peasants and tribesmen who were resisting exploitation. Each resisted in the name of its group status. Although there can never be more than two classes in a social system, there may in fact be only one class. The situation can arise, he says, if a victorious class should prevent groups outside it from becoming conscious of forming an opposing class. In historical reality both two-class and one-class social systems seem to function in Wallerstein's thought as ideal types, which are approximated, even if they are not fully historically real. Thus he says: The European world-economy of the sixteenth century tended overall to be a one-class system. It was the dynamic forces ... who tended to be class conscious .... It included persons who were farmers, merchants, and industrialists .... The crucial distinction was between these men, whatever their occupation, principally oriented to obtaining profit in the world market, and others not so oriented [italics mine]. The others, Wallerstein says, "fought back in terms of their status privilege" but not with any common class consciousness,l6 This formulation of an alignment into no more than two classes is his way of reconciling an overarching conception of class struggle (similar to that embedded since 1848 in a famous sentence of the Communist Manifesto) with a recognition of the varied kinds of social groupings, often antagonistic, described in the many monographs he has studied. It seems to me unconvincing, for the argument that conflicts forge alliances will not bear all the weight he places upon it. His view of the state is consistent with his conception of classes. He regards governments not as instruments of class dictatorship but as organizations which are in themselves combinations of occupational groups that have their own interests and peculiarities as status groups.

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I am happy to find Wallerstein thus supporting the view I have expressed at various times, namely, that governments should be considered as producers of a utility (protection) and as enterprises interested in maximizing returns.1 7 By organizing and controlling violence they serve their own ends in the governmental enterprises they belong to, and they also respond to pressures that make them also serve, more or less, the ends of persons engaged in other enterprises, such as farming. Kings, and the men who organized royal power and made a good living from doing so, were one of the interest groups that was making alliances with others. Sometimes they allied with anticapitalist groups, but on the whole, strong states helped capitalism in the long run. They were needed to break down obstacles that stood in the way of transforming both core and periphery in ways that increased productivity and profit. In looking to the future, Wallerstein expects opponents of the capitalist class to continue their struggles. He believes that capitalism contains conflicting tendencies; on the one hand, it needs to concentrate control of surplus production so as to increase productivity; on the other, it needs to disperse expenditures of surplus so as to have adequate markets. Lack of balance between these tendencies will produce crises, even if they do not become progressively worse in the way that Marx anticipated. In these crises the capitalists will yield more and more, now here, now there, to opponents.l 8 The struggle will continue under governments calling themselves Socialist or even Communist, as well as in governments denouncing socialism.l 9 But this vision of the future leaves little room for apocalyptic revolution. Wallerstein's conception of status groups and classes makes more of his developmental scheme recognizable in the historical record, but it takes the elemental force out of the evangel with which Marx galvanized champions of the proletariat-Marx's proclamation that scientifically discovered laws of economics and history were proof of the inevitable triumph of the underdogs. Yet there are several reasons why Wallerstein's form of Marxism should find supporters. It puts Europe in its place. It represents African, American, and many Asian countries as essential parts of the picture. It does not call on them to subordinate their desires for internal national unity to the class struggle.2° It does not try to explain their

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social development by applying a series of stages such as slave economy, feudal economy, commercial capitalism, and so on, formulated to describe European experiences and which "developing countries" are expected to repeat. It does not confuse a purely economic model with complex social reality. It retains that belief in progress which Marx inherited from an earlier century. It has a universal humanistic appeal in that it seeks the meaning of man's life in the whole record of human experience, not in particular revelation embodied in one set of sacred books. Efforts by anthropologists and sociologists to expound the meaning of history in sweeping terms may well seem naively presumptuous to theologians and philosophers. Their professions have made the seeking of God in history a deeply rooted part of our JudeaChristian cultural tradition, a part that both historians and philosophers have been slighting recently. Now sociologists and anthropologists seem to be moving over to take the lead in the search. Historians, even when they are feeling very professional and brush aside Wallerstein's teleological sequence as a vain enterprise in theology, should feel challenged by the strengths and weaknesses of his solution of a problem that is undeniably historical, that is, the emergence of capitalism. The word "capitalism" they can of course avoid, but not the problem, for it is inseparable from the one of finding the causes of "modern economic growth." Although that growth is usually defined statistically as beginning in the eighteenth century, its historical causes must be sought in preceding developments. Unless they are pursued outside the social system into exogenous developments, explicable perhaps by epidemiology or by a dialectic within scientific thought, they must be found in the social and economic conditions and institutions that had come into being before the eighteenth century. The problem is to discover what it was in those conditions or institutions that generated modern economic growth, how they developed, and why in Western Europe rather than elsewhere. Whether the institutions are called capitalism or not, the problem remains. The problem in causation is like the effort to explain the emergence of other novelties like a mechanical invention or a new biological species. A neat specification of necessary and sufficient conditions is not to be hoped for. Each particular novelty is in some respect unique,

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or it would not be a "novelty." But in those respects in which it is not unique it may be compared with other instances of invention or of the evolution of new species. This use of comparative method permits conclusions concerning preconditions the absence of which would have made the novelty impossible (or extremely unlikely). It can also reveal the successive appearances of preconditions that made the occurrence of the novelty more and more probable. But a random element remains. 21 We cannot demonstrate, in addition to necessary conditions, the sufficient conditions that made the emergence of the new machine, the new species, or the new institution inevitable. Because Wallerstein takes the "social system" as the unit of analysis, he makes basic the comparison between different social systems, rather than a comparison between different nations, which is the more usual form of comparative method. 22 This serves to accentuate the difference between imperial and multistate social systems. As we have seen, Wallerstein finds his crucial difference in the use made of surplus production. If the whole social system is under one imperial government, the surplus goes to the holders of government offices who use it either to enhance the power of the empire or for consumption, either grossly or by refined enjoyment of the arts. In the "European worldsystem" in contrast, the competition between governments permitted much of the surplus to pass into the hands of men whose efforts to increase their own wealth and power led them to invest their riches in ways that increased productivity. He thus highlights Europe's lack of political unity as a characteristic that distinguishes Europe's world system from other advanced social systems and as a necessary condition of its phenomenal economic growth.2 3 Another necessary condition, closely connected with the coexistence of many states within one social system, is the pattern of class struggle. In the changing class structure he finds the succession of developments that made a sort of "take-off" into capitalistic growth more and more likely. Princes, nobles, and merchants, competing not only as classes for power, wealth, and status, but also competing individually with other members of their class, sought advantages in oceanic expansion. Their "job requirements" gave them "convergent wills" regarding colonization and explain Europe's overseas expeditions. 24 Their conquests and commerce provided Europe's world economy

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with more space. Because of the larger area thus available, Europeans could invest in producing a diversity of crops with various systems of labor appropriate to diverse regions and crops. Wealth drawn from the surplus production of the periphery then had a cumulative effect on productive investment at Europe's core. By an analysis of the various occupational and status groups inside and outside those governments within Europe's social system, he links the successive steps of geographical expansion, state building, and capitalistic business organization assuring economic growth. Comparison among social systems appears in Wallerstein's evaluation of many factors to which causal importance has been attached. Sufficient technology was a necessary condition, he admits, but other social systems-most notably the Chinese at least as late as the fifteenth century-had as good a technology yet did not use it for similar purposes. Growth of population was a stimulus, but under some conditions population growth resulted in economic decline. The influx of bullion speeded changes, but only because of the channels through which it was spent. By considering the effects of similar occurrences in other social systems he concludes that in this period population increase and price changes were contributory causes but were neither essential nor sufficient. It is noteworthy that in all this analysis Wallerstein depends heavily on assertions about the use made of surplus production. The control and use of surplus serves not only to characterize the different effects on growth of an imperial or multistate economy; it serves also to distinguish between the core and the periphery within the multistate economy. The word surplus seems to have become taboo among orthodox economists because it brings to mind either Marx's theory of value or utopian visions of how much more surplus our economy could produce if organized according to socialist plans. But Celso Furtado, after a critique of Marx's elaboration of a meaning of surplus that suited Marx's special purpose, has demonstrated, I think, that some analysis of the creation and uses of surplus production is necessary in a general theory of economic development. 25 A purely economic theory may avoid it by starting instead with a discussion of savings and investment, but such theories assume a social system in which produc-

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tion exceeds needs. They assume a surplus and its appropriation as one of those "givens" that economics does not pretend to explain. 26 For a historian, or for a sociologist such as Immanuel Wallerstein, the historical transformations of the ways in which surplus production has been appropriated (by its producers or by others) and of the social determinants of its uses are at the heart of his problems. I wish Wallerstein had been more careful and specific in clarifying his concept of surplus and particularly in distinguishing a) the production of surplus, b) its appropriation and the concentration of control over its use, and c) the exercise of that control in ways that turned surplus production into social capital, increasing productivity and the creation of more surplus. He might then have been more appreciative of Schumpeter's contention that institutions such as royal taxation and public debts, which increased the control of surplus but led to its use for destructive wars, resulted in less growth than would have resulted from concentration, even if less intense, by private commercial exchanges.27 Other weaknesses in Wallerstein's conception of social systems appear when he attempts to locate a particular social system in time or space. The attempt reveals the difficulties that obtain in drawing even a rough line separating one social system from another geographically, and it misrepresents the reactions of distinct social systems on one another. In his conclusion he says that what characterizes a social system "is the fact that life within it is largely self-contained and the dynamics of its development are largely internal." He promptly admits that he cannot quantify "largely" and therefore will be accused of "academic weaseling." 28 Yes, indeed! And of insufficient analysis even of his own empirical studies. Consider his problems in determining the limits of his "European world-system." He must distinguish between the periphery within the system and the "arena" outside the system. He presents a clear argument for putting the European colonies in the New World within the periphery in the sixteenth century while in that period leaving in the external arena the Asiatic countries opened to trade by new oceanic routes. He pictures Russia as a frontier area where efforts were being made, under Ivan the Terrible and later under Peter the Great, to prevent absorption into the European world-system and to create

103

ECONOMIC GROWTH IN WALLERSTEIN'S SYSTEMS

instead a separate imperial social system. These discussions show that he fully realizes that social systems, as they appear in history, are constantly changing in size and structure. It follows that "empire" and "world-economy" are ideal types in Max Weber's sense. So also are core, periphery, and so on. That is, they are models which in historical reality are only approximated in changing degrees in various times and places. Not only are they ideal types, they are complex composites. To test their degree of relevance or to verify truths concerning them, they must be broken down into the elements of which they are composed. The result may be to demonstrate that the composite ideal type contains disparate or even contradictory elements. This becomes evident when we apply his concept of separate social systems to the sixteenth-century Mediterranean. Like Fernand Braude!, he stretches the century from 1450 to 1640. 29 At the beginning of this "long sixteenth century," the flows between the eastern and western Mediterranean were obviously so essential that one can hardly argue that each part was "largely selfcontained." At the end of the period, the Levant was still supplying Western Europe with some essential raw materials, such as cotton and silk, and providing an important market for many manufactures, from Venetian brocades to English draperies, while buying also from the northwest commercial and shipping services. Is there good reason for considering Poland part of the periphery within Europe's worldeconomy and regarding the Ottoman empire as part of the external arena? One might try to quantify the extent of the difference by asking such questions as: How many workmen were employed in producing cloth for Poland compared to the number producing cloth for Ottoman lands? Where? When? But for Wallerstein the basic question that he probably has in the back of his mind is: Was not the surplus production in the Ottoman empire being channeled by that imperial government in such fashion that Ottoman production did not contribute so much to the accumulation of capital in the West as did Polish production? It is hard to imagine the finding of evidence for a definitive, quantitative answer, but some indications about the volume and profitability of the Westerners' trade in the two areas would be relevant. My main point is that such questions, because they are much more specific, have an advantage over repeated references to periphery

104

PROFITS FROM POWER

and external arena; the more specific questions suggest ways in which propositions might be verified, or falsified, by a search for evidence. Moreover, a consideration of what happened in the sixteenth-century Mediterranean suggests that Wallerstein's assertion that the dynamics of the development of a social system are largely internal is either false or meaningless. The consolidation into a single empire of a multistate system, or the expansion of an empire by the absorption of neighboring mini-systems, or the dissolution of an imperial economy into fragments-these depend very much on the character of the neighboring social systems. The contrast between Europe's penetration of America and its failure to penetrate Asia in the same period is explained, even in his account, less by a dynamism internal to Europe's own world-system than by the characteristics of the social systems encountered in America and Asia. And the structure of Europe's own world-system was influenced, it seems to me, by the expansion of the Ottoman imperial system during the crucial "long sixteenth century." Also, was not the diversion of European energies westward a factor in permitting the consolidation of so much of the Islamic world under Ottoman leadership? In short, there are grave difficulties in demonstrating that the two social systems were separate and in deciding which countries are part of which. Even if that can be done, perhaps on the basis of commercial exchanges and the flows of surplus, little is gained by treating their dynamics of development independently. A breakdown of composite ideal types into their elements is also necessary to verify (or falsify) his statements about the relations between the zones within a world-system-between core, semiperiphery, and periphery. He assigns to the core several characteristics: strong states, commercialization of land, legally free labor, skilled agricultural techniques, manufacture for export, etc. He maintains that a core possessing these characteristics could not have developed in Europe without exchanges with a periphery where production was made possible by the less skilled work of slaves and by coerced cashcrop labor. That proposition is essential to the whole thrust of his book. Although Wallerstein expounds many ways in which, he believes, the productivity and concentration of capital in the core was dependent

105

ECONOMIC GROWTH IN WALLERSTEIN'S SYSTEMS

on the core's relations with the periphery, he does not present enough evidence to give really solid support for that contention. To do so he would have had to take his composite ideal types apart and formulate more specific propositions. For example he would have had to document the connection between grain prices and imports from Eastern Europe, between grain imports and wage levels, between specialization in animal husbandry and the price of grain. It remains questionable whether one could in this way build an empirical demonstration to prove that the costs of the various factors of production, the costs which made profitable the enterprises characteristic of the core, were dependent on trade with the periphery; or that the profits of these industries depended on selling, at prices kept high by markets in the periphery, industrial products and commercial and shipping services. 30 It would be unreasonable to criticize Wallerstein for not having brought together all the relevant figures that could be found in monographs (let alone archives) to prove or disprove such positions, and he must be credited with being quite explicit concerning several of them; 31 but one can wish that he had spelled out these implied propositions and the evidence for them more fully. When any new set of labels is proposed to explain causal relations in history, its utility is to be judged, at least in part, by an historian's ability to recognize in his sources those conditions or acts to which the labels refer. The sources are mainly documents formulated in the terms in which the compilers referred to tho11;ght. Moreover, the way they thought of themselves and each other was causally important. Sometimes Wallerstein's labeling makes the men or movements he is referring to almost unrecognizable. A glaring case concerns Emperor Charles V. Wallerstein believes the crucial point of no return in the development of Western Europe into a capitalistic world-economy, instead of an imperial economy, was the failure of this Habsburg to consolidate his power, a failure marked dramatically by the financial crisis of 1557, the Emperor's retirement, and the division of his lands. Many historians have also seen his generation as the one that lived through events that made a return to European unity impossible, although many have sought the crucial change in the fields of religion or national cultures. Pertinent to Wallerstein's approach are two

106

PROFITS FROM POWER

questions at least: If Charles V had succeeded in his en~eavors ~ould that have turned Europe's multistate social system mto a smgle empire? What were the causes of his failure? Answering the former question requires a very precarious kind of counterfactual history, but without taking off beyond the range of evidence we can pertinently ask what Charles' aims were. I would answer: To vindicate his inherited rights and to be the champion of Christendom. It is hard to recognize him as seeking "to dominate politically European world-economy," or as a man to who~ the construction of such an empire "had seemed a reasonable thmg to attempt."32 And it is even harder to consider adequate an analysis of reasons for his failure on pages that contain not a single mention of the most powerful of his opponents, the Ottoman Empire. 33 The formulae that Wallerstein derives from his general scheme are useful in describing some conditions that made Charles' failure probable, such as his financial limitations and the force of the many opposing status groups, but they quite fail to consider the relevance of other conditions which certainly commanded Charles' attention, affected his use of his resources, and resulted in failure. Are the Ottomans and the earlier multistate social system of Islam slighted because they are hard to fit into Wallerstein's scheme or because he has been unable, given the present state of historical studies and in spite of his efforts, to escape economic history's traditional Europa-centrism? On the other hand, Wallerstein's distinctions between classes and interest groups of various kinds do serve to bring his analyses closer to historical realities. It enables him to include more references to the thoughts and feelings of the men he is writing about. For example, his description of the revolt in the Netherlands against Philip II does distinguish between the causes and the political outcome of the revolt, which is clearly described in recognizable terms, as is its economic effects on the world-system.3 4 In his approach to the English Puritan Revolution, the elements of ambiguity in his concepts of class provide flexibility. If distinctions between status groups, ethnic or religious groups, occupation or economic groups, and self-conscious conflicting classes seem fuzzy, it is, as he says, because the meaning of such groupings as "gentry" was changing in the minds of contemporaries. Wallerstein spends many pages seeking a path through "the storm over

107

ECONOMIC GROWTH IN WALLERSTEIN's SYSTEMS

the gentry" and through similarly complicated contemporary developments in France (Chapter 5). Here, as elsewhere, his long footnotes give an idea of the range of interpretations recently advanced, although they do not by any means always support the conclusions or summaries he presents in the text. In picking his way through the blizzard of controversy, he emphasizes the extent to which the changes in social structure reflected or promoted the capitalistic agriculture appropriate to the core of the world-system. Taken as a whole, Wallerstein's attempt at synthesis, in spite of its shortcomings, seems to me to focus on worthwhile questions and to embody many good ideas. He comments intelligently on a plethora of topics in addition to those I have mentioned: on cycles and their relation to long-term trends, on effects of climatic change, on the meaning and use of stages in economic history, and so on. There are sentences that could be paraded as "boners," at least if pulled out of context, but most of them seem to be verbal slips resulting from hasty composition. Both the index and the bibliography (of some seven hundred entries) are useful, and the final chapter, "Theoretical Reprise," does much to clarify those terms whose meanings have seemed hazy when he applied them to diverse historical contexts. The range of his thought and learning leads to digressions that sometimes make it difficult to follow the presentation of his main themes, but many readers will find highly enlightening sections passed over in this appraisal as merely incidental. And if some of his ideas, even some at the center of his vision of history, seem to me not thoroughly digested, that may well be because he has so many good ideas.

NOTES

INTRODUCTION

l.

2. 3.

4.

5. 6.

Frederic C. Lane, Venice, a Maritime Republic (Baltimore, Md: The Johns Hopkins University Press, 1973), chapters I and 3-7 Ibid., chapters, chapters !0, 24, 20, 23. Karl Bucher's Die Entstehung der Volkswirtschaft, first published in 1893, had many successive enlarged editions until 1918. It was translated from the third German edition under the misleading title Industrial Evolution by S. Morley Wichett (New York: Henry Holt, 1901; reprint, N.Y.: Augustus M. Kelley, 1968). On its relations with the Historcial School headed by Schmoller see Schmoller's review and Bucher's reply in Schmoller's ]ahrbuch fur Gesetzgebung XVII (1893), 1259-1264, esp. 12601261; XVIII (1894), 318-320; and my, "Some Heirs of Gustav von Schmoller" in Architects and Craftsmen in History, Festschrift fur Abbot Payson Usher (Tubingen: J.C. Mohr, 1956) as reprinted in Venice and History: The Collected Papers of Frederic C. Lane (Baltimore: The Johns Hopkins Press, 1966), pp. 463. "The Aims of Economic History," in Studies in Economic History: The Collected Papers of George Unwin (London: MacMillan for the Royal Economic Society, 1927), pp. 18-36. In the works of A. H. Cole, A.P. Usher, and N.S.B. Gras. See Lane, "Some Heirs", as above cited, p. 463. Max Weber, General Economic History, translated by Frank H. Knight (New York: Greenberg, 1927; Glencoe, Ill.: Free Press, 1950; Collier Paperback, 1961). In the "Begriffliche Vorbemerkung", not included in the translation, Weber said (p. 15) ... "in gewissen Sinn and in gewissen Grenzen ist die gesamte Wirtsschaftsgechidlte die Geschichte des heute zum Siege gelangten okonomischen, auf Rechnung aufgebauten Rationalism us". And in explaining in the last chapter "Die Entfaltung der kapitalistichen Gesinnung" he said (p. 308-309), "Die Magie zu brecken und Rationalisierung der Lebensfuhrung durchzusetzen hat es zu allen Zeiten nur ein Mittel gegeben: grosse rationale Prophetien .... Prophetien haben die Entzauberung der Welt herbeigefuhrt und damit auch die Grundlage fUr unsere moderne Wissenschaft, die Technik und den Kapitalismus geschaffen." Max Weber, Wirtschaftsgeschichte, Abriss der universalen Sozial-und wirtschafts-geschichte, aus den nachgelassen Varlesungen, herausgegeben von S. Hellmann und Dr. M. Palyi (Munich and Leipzig: Von Duncker & Humblot, 1923).

110

PROFITS FROM POWER

7. "Some Heirs" as cited, pp. 467-470, 476-482. 8. Some were published with, the paper reprinted here in The Journal of Economic History, XXIX, 1 (March 1969) and the rest with other proceedings of the conference: Fourth International Conference of Economic History, Bloomington, 1968, ed. by F. C. Lane (Ecole Pratique des Hautes Etudes-Sorbonne, Sixieme Section: Science Economiques et Sociales. Congres et Colloques, XIV. Paris and the Hague: Mouton, 1973), pp. 1-149. 9. Through having there as friend and colleagues a leading economic historian of the intermediate generation, T. S. Ashton. John Hicks, A Theory of Economic History (Oxford: Clarendon Press, 1969) pp. v, 3, 7. 10. Edward Ames and RichardT. Rapp, "The Birth and Death of Taxes: A Hypothesis", in The Journal of Economic History, XXXVII, I (March 1977) pp. 166-67, 161. II. Douglass C. North and Robert Paul Thomas, The Rise of the Western World: A New Economic History (Cambridge: at the University Press, 1973), pp. I, 2-3.

NATIONAL WEALTH AND PROTECTION COSTS

I. The efficacy of the use of force is not, of course, the only point at issue between the two traditions. The general conflict and its implications in historical writing were stated particularly clearly and thoughtfully by George Unwin. See, for example, his remarks on the assumptions of Professor W. E. Lingelbach and the assertions of B. Hagedorn. Studies in Economic History: The Collected Papers of George Unwin (London, 1927), pp. 134-35, 168, 215-16. Unwin even denied that force was a decisive factor in the expansion of Britain. Ibid., pp. 341-43, and cf. pp. 23-28,224-25. 2. The way protection is usually dismissed by economists is illustrated by L. M. Fraser, Economic Thought and Language (London, 1937), p. 210. 3. Stewart L. Mims, Colbert's West India Policy (New Haven, 1912); and Charles Wolsey Cole, Colbert and a Century of French Mercantilism (New York, 1939). 4. Girolamo Priuli, I diarii (Vol. I, Citta di Castello, 1911; Vol. II, Bologna, 1933), in Rerum Italicarum scriptores, 2d ed.; II, Tome XXIV, Part III, p. 156. 5. Priuli, Diarii, I, 16, 48, 65, 75, 143, 159, 238; II, 74, Ill; Marino Sanuto, I diarii, eds. Rinaldo Fulin and others under the auspices of the R. Dep. Veneta di Storia Patria (Venice, 1879-1903), III, col. 1445. 6. This conclusion is based not only on the quotations for the few years given by Priuli but also on quotations for more than a dozen scattered years earlier in the fifteenth century, quotations found mainly in merchants' letters and account books in the Archivio di Stato at Venice. I am indebted to the Social Science Research Council for a grant-in-aid which made it possible to use material in Venice. 7. Priuli, Diarii, II, 335, 431; Rinaldo Fulin, Diarii e diaristi veneziani (Venice, 1881), pp. 165-68, 174, 178, 188, 191-92, 203, 206, 208, 211; Sanuto, Diarii, V, cols. 133-34, 319; VI, col. 384; XI, col. 672; Eugenio Alberi, Le relazioni degli ambasciatori veneti al senato (Florence, 1863), XV or Appendix, 13, in the report of Vincenzo Quirini; J. Lucio de Azevedo, Epocas de Portugal Economico (Lisbon, 1929), pp. 91-95, 110, 127. 8. In the recently published studies of the price revolution, the only series of pepper

111

NOTES

prices I have found sufficiently complete in these years are those for Klostemeuburg. A. F. Pribram, Materialien zur Geschichte der Preise und Lohne in Osterreich (Vienna, 1938), I, 615. Pepper prices for Cambridge are given in J. E. Thorold Rogers, A History of Agriculture and Prices in England (Oxford, 1882), III, 521. 9. Braamcamp Freire, Maria Brandiio, a do Crisfal: Vol. II, A Feitoria de Flandres ("Archivo Historico Portuguez"), VI, 414; VIII, 24. 10. Sanuto, Diarii, XXXIII, pp. 177-79. II. Histoire de I'expansion des peuples eumpeens (Brussels, 1907), I, pp. 191-202. 12. Epocas de Portugal economico, p. 155; cf. also pp. 118-31. Francisco Antonio Correa, Historia economica de Portugal (Lisbon, 1929), I, pp. 194-95. 13. See Chapter 2 above for discussion. 14. A. H. Lybyer, "The Ottoman Turks and the Routes of Oriental Trade," English Historical Review, XXX (1915), 587; Fraw;:ois Charles-Roux, Autour d'une route: l'Angleterre l'isthme de Suez e l'Egypte au xviii siecle (Paris, 1922), pp. 14-15; Halford Lancaster Hoskins, British Routes to India (Philadelphia, 1928), pp. 9, 43. 15. Alberi, Le relazioni, XV or Appendix, 15-19; Leonardo de Ca' Masser, Relazione sopra il commercia dei Portoghesi nell'lndia, I497-1506 ("Archivio storico italiano"), Appendix, II, p. 34 (1845). 16. Colbert's West India Policy (New Haven, 1912), p. 339. On the East India Company, d. C. W. Cole, Colbert and a Century of French Mercantilism (New York, 1939), I, p. 523. 17. The conflict between Colbert and conservative merchants, at Bordeaux at least, seems to me to have been such a conflict between the concern of the merchants with present profits and the ambitions of Colbert for the future. See Chap. 19, above. 18. Alfred Marshall, Principles of Economics (8th ed.; London, 1936), p. 672.

THE ECONOMIC MEANING OF WAR AND PROTECTION

I. Assuming no change in the extent to which the nation's capital and labor is employed in some form of production. Ia. This article was written before December 7, 1941. 2. L. M. Fraser, Economic Thought and Language, London, 1937, p. 210 and note. 3. Ibid., note. 4. Parker Thomas Moon, Imperialism and World Politics, New York, 1926, p. 174. 5. The term protection rent seems preferable to the term protection profit because this element in income arises so largely from conditions which are beyond the control of the individual entrepreneur and are unaffected by his ability as a business manager. Admitted! y the analogy to land rent is imperfect. Land rent normally refers to what an entrepreneur pays for the use of land, whereas protection rent does not refer to what an entrepreneur pays for protection, for that payment is here called protection cost. In the case outlined in the text, the protection rent is paid by the consumer; it is what he pays to secure the offering of the producer whose offering is marginal by reason of high protection costs. If we look at protection rent from the point of view of the nation, instead of looking at

112

PROFITS FROM POWER

it as in the text above from the point of view of individual enterprises, we may say that protection rent for a nation arises from the geographical or cultural conditions which make the production of protection easier for one nation than for another. These conditions may be called gifts of nature or gifts of history. Whether the protection rent will be collected by the government or will be passed on to private enterprises depends, as is indicated below in note 9, on the form of government. 6. Frank William Taussig, Some Aspects of the Tariff Question, Cambridge, Harvard University Press, 1915, Chaps. IV and V. The protection rent was, to a certain extent, a result of the strategic geographical position of the islands. 7. H. Kretschmayr, Geschichte von Venedig, Vol. I, Gotha, 1905, pp. 361-4; Adolf Schaube, Handelsgeschichte der romanischen Volker des Mittelmeergebiets bis zum Ende der Kreuzzuge, Munich and Berlin, 1906, pp. 226, 229. For the full story of Venetian-Byzantine relations see Kretschmayr, Vol. I, Chaps. VII and VIII; Schaube, pp. 19-25, 223-247; Wilhelm von Heyd, Histoire du commercedu levant au moyen age, Leipzig, 1886, Vol. I, pp. ll6-120, and Richard Heynen, Zur Entstehung des Kapitalismus in Venedig, Stuttgart and Berlin, 1905, Chaps. III-V. 8. StewartL. Mims, Colbert's West India Policy, New Haven, Yale University.Press, 1912. 9. The possibilities are clarified by considering the two "ideal types" of states contrasted by A. De Viti de Marco, Principii de economia finanziaria, Turin, 1934, pp. 12-19. In the "ideal" popular state, in which all groups freely compete to arrive at power so that all equally shape the financial decisions of the government in their interests, the costs of protection for private enterprises would be equal to the cost to the government of producing their protection. In the "ideal" absolute state, or monopolistic state as De Viti there calls it, in which one man or one ruling class determines the financial decisions of the state entirely in their own interest, the government's monopoly of protection would be fully exploited. In the latter case the amount collected is not limited by the shape of the demand curve, since protection is a necessity, but it may be restrained by the danger that too high a tribute will stimulate attempts to break the monopoly, i.e., will attract invaders, stimulate smuggling, or provoke insurrection. 10. If a ruling class collects more tribute and, while thus making its position more enviable, spends its added income on luxuries, it is more likely to be overthrown by invasion or insurrection. It has, in this sense, good reason to spend its increased income on armies or police forces. If it does so, the cost of production of protection in that society is thereby increased. Accordingly, the higher the tribute paid to a ruling class, especially a ruling class of military traditions, the higher is likely to be the cost of producing protection. Escapes from this vicious circle have come through the fact that most states have not been ruled simply by one all-powerful ruling class. ll. This does not allow adequately, I confess, either for the directly received pains of fear, anxiety, or wounds, nor for the directly received pleasures of those who found satisfactions in killing and glory. Except when soldiers are hired for war in a free labor market, how do these satisfactions or dissatisfactions manifest themselves in action in such a way as to be measurable in prices or wages? Perhaps, even if they were reflected in the price of mercenaries, the pleasure one man may take in killing should not be counted part of the total satisfactions which form national income, but the pain caused

113

NOTES

by wounds should be counted as diminution of the total satisfactions? The question emphasizes the inability of economic analysis to deal with the relative worth of various satisfactions except in money terms and the resulting limitations of the meaning of national income as commonly used and as used here. Cf. Alfred Marshall, Principles of Economics, 8th ed., London, 1936, pp. 14-25,57-60,76. 12. Although the tariff differentials were 4 per cent or 10 per cent, many more than one tariff were added to the price of wares sold during a year's trading. 13. Stewart L. Mims, Colbert's West India Policy; Charles Wolsey Cole, Colbert C:.nd a Century of French Mercantilism, New York, 1939. 14. The Portuguese policy and particularly its effect on pepper prices is presented more fully in my paper, "National Wealth and Protection Costs in War As A Social Institution, edited by Jesse D. Clarkson and Thomas C. Cochran, New York, Columbia University Press, 1941. 15. A. H. Lybyer. The Ottoman Turks and the Routes of Oriental Trade, in English Historical Review, Vol. XXX, p. 586 (1915). 16. Frederic C. Lane, The Mediterranean Spice Trade, in The American Historical Review, Vol. XLV, pp. 581-590 (1940). 17. ~pocas de Portugal economico, Lisbon, 1929, p. 155. Also, pp. 118-131. 18. Girolamo Priuli, I diarii, Vol. II, Bologna, 1933, in Rerum Italicarum Scriptores, 2nd ed. Torno XXIV, Parte Ill, Vol. II, p. 156. 19. The motive of the Portuguese king may have been to add a new title to his name as Joao de Barros implies, Da Asia, Lisboa, 1727, Decada I, Parte II, Libra VI, Cap. I, pp. 8-9; but this discussion is concerned with results of historic actions not with the motives. 20. Mi.ms, Colbert's West India Policy, p. 339. 21. Colbert and a Century of French Mercantilism, Vol. I, p. 523. 22. Principles of Economics, p. 672.

OCEANIC EXPANSION, FORCE AND ENTERPRISE IN THE CREATION OF OCEANIC COMMERCE

I. Agostino Cesareo, "L'Arte della Navigatione con il regimento della tramontana, e del

2. 3.

4. 5. 6.

sole; e Ia regola del flusso, e reflusso delle Acque," MS in my possession. Another copy, dated 1570, is referred to in E. G. R. Taylor's edition of Roger Barlow, A Brief Summe of Geographie (The Hakluyt Society, 2d series, No. LXIX; London, 1932), p. 184. Edgar Prestage, The Portuguese Pioneers (London: A. & A. Black, 1933), chap. xiv. Clarence Henry Haring, Trade and Navigation between Spain and the Indies in the Time of the Hapsburgs (Harvard Economic Studies, Vol. XIX; Cambridge: Harvard University Press, 1918), p. 35. Cf. also pp. 3-4, 298-314. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (2d ed.; New York: Harper & Brothers, 1947), pp. 169, 201. Fernand Braude!, La Mediterranee et le monde mediterraneen a l'epoque de Philippe II (Paris: Armand Colin, 1949). Frederic C. Lane, "The Mediterranean Spice Trade," American Historical Review,

ll4

PROFITS FROM POWER

XLV (1940), pp. 581-90; idem, "National Wealth and Protection Costs," in War as a Social Institution, eds. Jesse D. Clarkson and Thomas C. Cochran (New York: Columbia University Press, 1941), pp. 32-43. 7. Alexander Marchant, From Barter to Slavery: The Economic Relations of Portuguese and Indians in the Settlement of Brazil, 1500-1580 (The Johns Hopkins University Studies in Historical and Political Science, Series LX, No. l; Baltimore: Johns Hopkins University Press, 1942), pp. 48-52,77-78,94. 8. Gabriel Soares de Sousa, quoted in Marchant, p. 55. 9. Duarte Coelho to John III, November 24, 1550, in Historia da colonizaciio portuguesa do Brasil, ed. Carlos Malheiro Dias (3 vols.; Porto, 1924-26), III, p. 321. 10. Marchant, Chap. iv. ll. Haring, pp. 3-4; Samuel Eliot Morison, Admiral of the Ocean Sea: A Life of Christopher Columbus (Boston: Little, Brown & Co., 1944), pp. 104-5, 355-56, 390-92, 430-44. 12. Leslie Byrd Simpson, The Encomienda in New Spain (University of California Publications in History, Vol. 19; Berkeley: University of California Press, 1929), pp. 25-33. 13. Haring, pp. 32, 49, 51, 201-6, 283; Roger B. Merriman, Rise of the Spanish Empire in the Old World and the New (4 vols.; New York: The Macmillan Co., 1918-34), III; 576-667; Andre-E. Sayous, "Partnerships in the Trade between Spain and America and also in the Spanish Colonies in the Sixteenth Century," Journal of Economic and Business History, I (February 1929), pp. 282-92; idem, "Les debuts du commerce de l'Espagne avec !'Amerique (1503-1518)," Revue Historique, CLXXIV (1934), 19192, 195-97, 200-2. On mining enterprises and bullion merchants, see Earl J. Hamilton, American Treasure and the Price Revolution in Spain, 1501-1650 (Harvard Economic Studies, XLIII; Cambridge: Harvard University Press, 1934), pp. 15-16, 26-28. 14. Frederic C. Lane, "The Economic Meaning of War and Protection," Journal of Social Philosophy and .Jurisprudence, VII (Aprill942), pp. 254-70. 15. Economic .Journal, XXXVIII (December 1928), pp. 527-40.

115

2.

a.

b.

c.

3.

4.

ECONOMIC CONSEQUENCES OF ORGANIZED VIOLENCE

I. Strictly speaking, the production of protection depends on the control of violence;

the use of violence is only one among a number of possible means to that end. Theoretically one might say that violence is productive when it is used to control violence and is not productive when it is used to transfer wealth from one person to another. In regard to advertising and salesmanship in g_eneral, a comparable distinction would declare them productive when they increase a consumer's knowledge of products available and of his own needs, but unproductive when they cause the consumer to misjudge the products available and to be confused about his own wants. It would be difficult to apply such a distinction in analyzing advertising budgets, and it would be similarly difficult to apply the first distinction in analyzing governmental budgets, for courts and police are used to collect taxes as well as to control robbers, and in the collection of taxes the control of violence is used to transfer wealth from

5. a.

NOTES

the taxpayer to someone else. The question is: What does the taxpayer receive in return? If a government rendered no service except "protection," the taxes it collected might theoretically be divided into two categories: a part that were payments for the service rendered and another part that one is tempted to call plunder. How distinguish between them, even in theory? One might consider as payment for service only what had to be paid in order to be protected from third parties and call plunder all that was exacted under threat of violent seizure by the government itsel£. But this distinction would be of very limited usefulness. Only in some aspects of the feudal system and of early maritime trade did violence-controlling enterprises punish refusals to pay their price, not by themselves using violence against refusers, but merely by leaving them exposed to the violence of third parties. Even governments that rendered good service required payments for it (but see note 5 below on forced sales). One might consider as payment for service the amount the government collected to cover its necessary costs, all else as plunder. I attempt below some analysis along this line but do not in this connection use the word plunder. I would prefer to reserve it for the extreme case, namely: Plunder I would define as the exaction by a violence-using enterprise of such large payments from another enterprise that the other enterprise is unable to keep up such payments and also maintain its production. I am inclined to stretch the phrase "payments for protection" to cover all exactions below this limit, even if they are in excess of real or necessary costs and are imposed by the violence of the collecting enterprise itself. Compare the discussion of military expenditure as part of national income, and the comparison with deceptive advertising, in Simon Kuznets, National Product in Wartime (New York: National Bureau of Economic Research, 1943), pp. 4-7. Crudely, this means only that military expenditures were higher in times of civil war, which is obvious enough. A more careful historical analysis would have to consider how changes in the art of war, in transportati~n, etc., have changed the advantages and disadvantages of scale for violence-using enterprises and thus have changed the amount of territory embraced by a "natural monopoly." In much of medieval Europe, governing more territory than one province brought disadvantages of scale. In contrast, by the seventeenth century it had become almost impossible for a government to maintain against outsiders its monopoly of even a single province unless its military establishment was strong enough to conquer a national kingdom. The size of the natural monopolies have changed, and there have been periods of competition and higher costs of protection while new natural monopolies in accord with new techniques were being established. In our age of atomic weapons there i.s perhaps no natural monopoly smaller than the whole world. To the objection that a "forced sale" is really no "sale" at all, and that concepts applicable to exchange do not apply, it may be answered: "Forced" is a matter of degree. At one extreme the "buyer" may have the alternative of payment or death, or taking extreme chances of dying. This choice faces not only

116

b.

c.

d.

6.

7.

8.

PROFITS FROM POWER

those who pay for "protection" but also those who depend for water on a supplier who has a monopoly of the supply. During a desperate famine many buyers of food have only this choice. In some cases of illness patients are in this sense practically forced to agree to the fee asked. Such extreme cases may arise more often in the purchase of protection than in the purchase of water, food, or medical care, but the purchaser of protection has very often had other, less extreme, alternatives. Admittedly, protection is not as easily divisible as is water, and the amounts paid to a monopoly for protection cannot so easily be varied in accordance with the amount received as is done when water is purchased from a monopoly. But many other goods and services are also of very limited divisibility. Again, the fees of a hospital which is the only one within reach come to mind. And there have been many historical situations in which the amount of protection may be said to have depended on the amount and form of the payment made. The amount of protection may be measured in time, in space, in the degree of risk, and in the range of the activities that are protected. Calling the taxpayer a purchaser of protection is no more inadmissible than saying that the servile laborers of an eastern German landlord were "selling" their labor services to their landlord, yet an economist describes that situation by saying: "The Lord of the manor was a monopsonist with a dosed demand" (Walter Eucken, The Foundations of Economics [London: Hodge, 1950], p. 155). When laborers had to work for the landlord at the wage he offered or else have no means of livelihood, there was a "forced sale" with the "force" in the hands of the buyer. "Sales resistance" by taxpayers might take the form of flights into the "desert," as in Ptolemaic or Roman Egypt, or of serfs running away from their seignioral lords to towns where they could hide for a year and a day. It might take the form of local riots against tax collectors, or pot shots by moon shiners at revenuers. In border regions it could take the form of smuggling, so that a salt tax, for example, could be higher in the center of a kingdom than on the frontiers. These examples suggest that many taxpayers could find alternatives to the more excessive of the payments demanded. Some aspects of the mixture of governmental and business enterprise and their gradual differentiation are considered in my "Force and Enterprise in the Creation of Oceanic Commerce," The Tasks of Economic History, supplemental issue of The journal of Economic History, X ( 1950), pp. 19-30. Military entrepreneurs are being fruitfully studied by Fritz Redlich, who has nearing completion a two-volume work to be published by the Harvard University Press. Byproducts that have already appeared are "Der Marketender," Vierteljahrschrift ft:tr Sozial- und Wirtschaftsgeschichte, XLI (1954), 227-52; De Praeda Militari: Looting and Booty, 1500-1815 (Beihefte 39 of the Vierteljahrschrift ft:tr Sozial- und Wirtschaftsgeschichte, Wiesbaden, 1956); and "Military Entrepreneurship and the Credit System in the 16th and 17th Centuries," Kyklos, X (1957), !86-93. Tax farmers are one example. The officeholder who uses his office as an enterprise of which he seeks to maximize the income is discussed in a different context but in terms significant in relation to my theme by Jacob von Klaveren, "Die historische

117

NOTES

Erscheinung der Korruption," Vierteljahrschrift fi:tr Sozial- und Wirtschaftsgeschichte, XLI (December 1957), 291 ff. 9. Frederic C. Lane, "The Economic Meaning of War and Protection," journal of Social Philosophy and Jurisprudence, VII (Aprill942), 257-59. 10. Of course there was no sharp line between those who made fortunes by subcontracting governmental activities and those who traded with political privileges that yielded protection rents. II. Ceteris paribus. As I was reminded by H. J. Habakkuk, in a society where there is chronic underemployment of resources, increased military expenditure has often stimulated more production of other kinds so that the amount of surplus rose in time of war. But can it not be said that over the long run, other things being equal, a society that is able to attain a high level of employment of resources only by high military expenditure produces less surplus than if it were able to attain that same level of employment of resources with less military expenditure? 12. W. T. Easterbrook, "Long-Period Comparative Study: Some Historical Cases," The journal of Economic History, XVII (December 1957), pp. 574-75. 13. Some aspects of the problem are discussed in Gino Luzzatto, "Sindicati e cartelli nel commercia veneziano dei sec. xiii e xiv," Rivista di storia economica, 1936, and in his Studi di storia economica veneziana (Padua: Cedam, 1954), pp. 195-200; in my Andrea Barbarigo, Merchant of Venice (Baltimore: The John Hopkins Press, 1944), PP· 45-52, 77-84; and in my "Family Partnerships and Joint Ventures in the Venetian Republic," The journal of Economic History, IV (November 1944), 191-94.

MEANINGS OF CAPITALISM

Comment by J. F. Bergier: On peut dire "a cultural system" aussi, sans aucun doute; voir la controverse autour de la these de Max Weber. 2. Comment by S. P. Pach: Since these comparisons and distinctions are mentioned here only as examples, I do not enter into their detailed consideration. For the same reason I do not want to deal with what are the main characteristics of socialist economy (and socialist society), and in what ways it differs both from capitalism and from other economic (and social) systems. (This concerns the second part of the memorandum 1.

also.) 3. Comment by S. P. Pach: While in the earlier systems of production, goods-and the part of goods used not for subsistence but for marketing-were mainly produced by slaves or serfs or by peasants and artisans, with the rise of capitalism (i.e., capitalistic system of production) a more and more considerable part of commodities is produced by wage laborers. These laborers, contrary to the slaves or serfs, are not in physical or personal dependence, but are personally free; they are labor-power owners who may sell their labor-power generally freely, being compelled only economically (by the necessity of earning their livelihood); and contrary to the serfs or to the peasants and artisans, these wage laborers do not possess means of production and are left out of the conditions of "roundabout" production; they work with other persons' instru-

118

4.

5.

6.

7.

PROFITS FROM POWER

ments, and their production is possessed by others; they receive wages for their work from the owners of the production instruments and products, i.e., from the capitalists. Under these circumstances means of production, held in private property, become capital; "roundabout" production becomes capitalistic production, since commodity production changes into capitalistic commodity production, i.e., into capitalism. Comment by F. C. Lane: When capitalists are thus increasing their capital, they may be said to receive "economic surplus." I use the phrase in almost the same sense in which it was used by Kenneth Boulding (American Economic Review, Vol. XXXV, p. 851) to mean that "which may be said to be present whenever a seller makes a sale for a sum greater than the least sum for which he would have been willing to sell (or could have sold and still have continued to produce), or whenever a buyer (or investor) makes a purchase for a sum smaller than the greatest sum for which the buyer would have been willing to make the purchase (i.e., that for which the investor could have made the purchase without Joss)." (Passages between brackets are my additions or elaborations of Boulding's definition, since his is phrased for short-run analysis.) Comment by F. C. Lane: The bulk of what Karl Marx called surplus value may be described in Boulding's terms as a "buyer's surplus" received by the employers of labor. Employers hiring unorganized workers who had to compete with the "reserve army of the unemployed" were getting labor services for less than the value produced by those services and for less, therefore, than the employers would have been willing to pay if necessary. They were buying labor for less than they could have paid and still have stayed in business. Comment by S. P. Pach: As it appears to me, surplus value cannot be identified with the "economic surplus" in the sense of Kenneth Boulding or with a special sort of this "economic surplus," namely, with a "buyer's surplus" received by the employers of labor who are buying labor-power for less than they would have been willing to pay if necessary. Surplus value as clarified by Karl Marx (e.g., Capital, Vol. I, Ch. 5) derives from buying and utilization of human labor-power even if then this commodity is bought by the capitalist at its value, because human labor-power during its utilization is able to create bigger value than its own. Consequently, surplus value received by the capitalist consists fundamentally in the difference between the value produced by the labor-power and the value of the labor-power itself. The capitalist appropriates, therefore, a part of the value produced by the labor-power without compensation, even then if he fully pays in wages the value of labor-power. Of course, if he does not pay for the full value of labor-power, he receives an extra surplus value. Comment by F. C. Lane: So far as the profit of the merchant capitalists came from buyers' surpluses it came from buying commodities, especially raw materials, on such terms that the merchant received all or part of any surplus derived from the laborers employed by the original producers. Comment by P. S. Pach: I suggest that it is best to use the terms "commercial capitalism" and "loan capitalism" between quotation marks, because capitalism means a system of production. The process of accumulation of money capital through commercial transactions, credit operations, etc., has formed, however,

119

NOTES

certain important preliminaries for the development of capitalism (capitalistic system of production). 8. Comment by J. F. Bergier: Les criteres du capitalisme proposes ici par F. C. Lane sont d'ordre economique et social. Economique, dans Ia mesure ou ils mettent en cause Ia notion de profit maximalise. Social, des Iars qu'ils se fondent sur les rapports entre capital et travail, entre detenteurs et utilisateurs des moyens de production. Ces criteres sont fundamentaux, puisqu'ils de£inissent Ia structure d'une economic (notion de profit; relations capital-travail) et Je systeme qui Ia fait fonctionner (propriete privee, libre entreprise, recherche concurrentielle du profit). Mais nous pensons qu'ils ne sont pas les seuls. F. C. Lane est sensible Jui-meme a leur insuffisance, puisqu'il observe que Je caractere capitaliste ou non d'une societe donm'e tient plus au degn~ de ces {Mments qu'a leur nature meme. Nous pensons qu'une societe-et l'economie qui lui permet de vivre et de se developper-peuvent etre dites capitalistes lorsque deux conditions supp!ementaires sont rem plies, deux conditions au rests fort voisines: (a) L'existence, au sein de cette societe, d'un groupe (qui peut etre relativement restreint) d' "entrepreneurs," au sense que Schum peter donnait ace terme; c'est-a-dire d'individus, ou de families, ou meme d'entreprises dirigees collegialement qui, pour assurer librement leur profit, prennent des risques (ce qui signifie que certains echoueront, qu'une selection interviendra), innovent dans les methodes et les formes de production, d'investissement, de commercialisation, de transport, etc. En d'autres termes, il ne saurait y avoir de capitalisme sans emulation dynamique, entrainant le developpement de Ia societe consideret', dans son ensemble (quelles que soient, par ailleurs, Ia nature et Ia position de l'Etat qui Ia repn'sente et Ia governe). Example: les villes italiennes de Ia Renai.5sance, et plus particulierement Genes. (b) Mais cette condition est elle-meme insuffisante si !'esprit capitaliste qui anime ces quelques individus n'est pas insu££Je, si peu que ce soit, a !'ensemble de Ia societt', a ses differents echelons de production et de vie sociale. Jacques Coeur ou Cosima de Medici furent des capitalistes, mais Ia France de Charles VII ni meme Ia Florence des Medici n'etaient des nations ou le capitalisme dominat. L'esprit capitaliste, meme s'il est fait d'individualisme, est necessairement collectif et son dynamisme gagne de proche en proche. II convient des Iars, croyons-nous, de porter une attention particuliere aux individus qui nous apparaissent comme des leaders du capitalisme (cf. Ia ze seance de cette section), mais aussi aux moyens de diffusion, dans Ia societe, de cet esprit capitaliste, eta Ia fac;:on dont celui-ci agit sur ell e. 9. Comment by Arthur H. Cole: Perhaps the foregoing survey of terminology relative to the meaning of the word "capitalism" should be extended to cover an abandonment of the term as proposed by a modern group of scholars or implied in their writings. I have in mind the proponents of entrepreneurial history. To be sure, no unanimity of , view will be found within this band of infidels, but the essays in this area offered by such men as Cochran and Cole, Redlich, Chandler, and Hughes surely place explanation of economic change upon business management-broadly interpretedrather than upon any magic in the operations of capital. All of the traditional "factors of production" -land, labor, capital, and entrepreneurial guidance-seem to

120

PROFITS FROM POWER

be given equal weight, while the last element, entreprenurial or administrative activity, is given prime importance, if one factor is to be chosen. Even the economist's ancient guide in analysis, the maximization of profits, becomes modified in their schema. In this contemporary mingling of economic and business history, a trilogy of dominant approaches may perhaps be differentiated. Cochran, Landes, Jenks, and others would lay stress especially on the social milieu out of which the entrepreneur derives and from which he acquires his intellectual equipment and his appraisal of motives; Chandler and often Redlich seem to emphasize the internal structuring of specific business units; while Cole is currently calling attention to the importance of the proliferation of diverse business units-in functional and spatial institutional division of labor-which together form the business system and seem to contribute an independent forward push to economic expansion. Even though this particular trend of concepts is now approximately a quarter of a century old in America, quite possibly the deviation will subside with the physical passing of its initial prophets. Surely the disease has not made appreciable inroads in foreign countries, except perhaps in Germany and Japan, but in an intellectual congress on American soil, it may be proper to make mention of this New World effort at schematic innovation.

121

NOTES

busta 50, the Journal of Maria Bragadin, which covers fewer years but for those years confirms the completeness of the record in Antonio Barbarigo's books. 9. Ugo Corti. "La francazione del debito pubblico ... proposta da Gian Francesco Priuli", Nuovo arch. veneto, VII (1894), 344-350. Comparison of Doc. 182, 183 in Bilanci generali with the account in Historie di Nicolo Contarini in the appendix to Gaetano Cozzi, II Doge Nicolo Contarini (Civilta Veneziana, n° 4, 1958) shows that Contarini's figures are inaccurate. Also, Contarini slid over the scandals mentioned in the chronicles of Francesco Molin and the Trevisana: Bib!. Naz. Marciana, MS. It. Cl. VII, Cod. 110 (8612) ff. 101, 106-7, and Cod. 519 (8438), ff. 329, 339. 10. Total calculated from the amount of interest, Bilanci generali, I, I, pp. 226, 369, 391. 11. ASV, Senator Terra, reg. 70, ££. 123-4 and filza 156, Nov. 16, 1600. Cf. Senato Terra reg. 70, f. 159; Museo Civico, Cod. Cicogna 3276/11. 12. ASV Compilazione Leggi, busta 230; Istituto Ellenico, Venice, Archivio, Armadio A. Reg. 7, i.e. Maestro B, ££. 74-5, 162; registro 8, i.e. Maestro C, f. 8, 30, 38. I am grateful for the generous guidance of Professor Manoussakas, the Director of the Istituto Ellenico which enabled me to use these account books of the Scuole di San Giorgio dei Greci. On the investments of the scuole grandi see Brian Pullan, Rich and Poor in Renaissance Venice (Oxford: Basil Blackwell, 1971), Chapter 5. 13. Bilanci generali, I, 1, p. 368. The decima del clero was calculated separately as 40,000 ducats.

PUBLIC DEBT AND PRIVATE WEALTH: PARTICULARLY IN SIXTEENTH-CENTURY VENICE

THE ROLE OF GOVERNMENTS IN ECONOMIC GROWTH IN EARLY MODERN TIMES

l. Fernand Braude!. "La vita economica in Venezia nel secolo xv1", m La Civiltii

2.

3. 4.

5. 6.

7. 8.

veneziana del Rinascimento (Venezia: Centro di Cultura e Civilta della Fondazione Giorgio Cini and Sansoni, 1958), p. 84. These and later estimates of the size of the monti and of government revenues are based on the documents and commentaries in Documenti finanziari della Republica di Venezia, especially ser. II, Bilanci generali (Venice, 1912) and ser. III, I Prestiti (Academia dei Lincei, Padua, 1929) and Archivio di Stato di Venezia, Compilazione leggi, busta 230. Museo Civico Correr, Cod. Cicogna 2848, Diarii di Marcantonio Michie!, f. 300; Marino Sanuto, Diarii, XXVI, cols. 483; XXVII, cols. lll, 116, 138, 154, 241, 466. The complicated story of war finance and reorganization with particulars about the speculators and the debates can be worked out in detail from the contemporary diarists, Girolamo Priuli, Marcantonio Michie!, Pietro Dolfin, and Marino Sanuto. Repayment is so recorded in the account books of the descendants of Andrea Barbarigo. Venezia, Arch. Grimani-Barbarigo. Ibid., busta 46, reg. 14, ledger of Antonio Barbarigo, and reg. 12, his Journal, under date February 5, 1555/6; Museo Civico Correr, Venezia, Arch. Morosini e Grimani, busta 302, booklet entitled "Libra della francation et di pro della camera d'imprestidi." Bilanci generali, I, i, Doc. !59, 162, 165 and p. cxcv. Ibid., Doc. 172 and p. 241; ASV, Arch. Grimani Barbarigo, busta 46, reg. 14 and in

I. 2.

3.

1.

5.

Douglass C. North and Robert Paul Thomas, The Rise of the Western World: A New Economic History (New York: Cambridge University Press, 1973). Frederic C. Lane, "Economic Consequences of Organized Violence," The journal of Economic History, XVIII (1958), 401-410, and in Venice and History (Baltimore: The Johns Hopkins Press, 1966), pp. 412-428. As in the framework formulated by Simon Kuznets, Towards a Theory of Economic Growth (New York: Norton, 1968), reprinted from National Policy for Economic Welfare at Home and Abroad, ed. Robert Lekachman, Columbia Bicentennial Series (New York: Doubleday, 1955), pp. 12-85. A clear simple statement of the concept of surplus I have in mind and of its use in analyzing growth is in Celso Furtado, Development and Underdevelopment (Berkeley and Los Angeles: University of California Press, 1964), pp. 78-81. Furtado also uses a concept of tribute (pp. 86-89) similar to that explained below, although he does not define tribute the same way. Lance E. Davis and Douglass C. North, Institutional Change and American Economic Growth (New York: Cambridge University Press, 1971), p. 216. On p. 213 it is defined in the sentence: "Not too surprisingly, effective redistribution requires that there exist some income that can be distributed without causing the death (economically or physically) of the previous recipient or without causing that recipient to withdraw the service that produced the income."

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PROFITS FROM POWER

6. The distinction between "distribution" and "redistribution" fades away once it is recognized that payment for the "service" referred to in the sentence quoted in footnote 5 is made only because of a property right created by a government. Governments can distribute income differently not only by a change in tax collections and disbursements but also by changes in property rights. 7. Stanley Engerman, "Some Considerations Relating to Property Rights in Man," The .Journal of Economic History, XXXIII (1973), 46-7. 8. On the connection between rent and surplus in the thought of Adam Smith,