With your permission, I want to use my column today to “pressure” you into looking at some European history and some economic development theory, with the case of Spain as a teaching model.
As “British subjects,” we Belizeans were never taught enough about Spain, which was England’s great rival in the sixteenth century. Our British colonial masters, understandably, were focused in Belize’s schools on glorifying Protestant Great Britain and demeaning Roman Catholic Spain.
Because of Christopher Columbus, in the first instance, and later the good will of the Papacy, Spain got a great jump on the rest of Europe where plundering the gold, silver, and precious stones of the so-called New World was concerned. The English were mere pirates trying to hijack the fabulously wealthy Spanish galleons sailing from Mexico, Cuba, and Peru to Spain in the sixteenth century. And yet, by 1814, it was the English who led the defeat of the French emperor, Napoleon Bonaparte, who had dominated Europe for almost two decades, while Spain had crumbled before Napoleon’s armies.
In today’s supposedly post-colonial world, the English still enjoy the prestige and influence of their quasi-imperial British Commonwealth, while Spain is a second-tier member of the European Union. What happened to all the gold and silver which poured into Spain from America? What went wrong on the Iberian Peninsula?
A brief explanation is offered by the following paragraphs excerpted from pages 84 to 88 of ErIk S. Reinert’s HOW RICH COUNTRIES GOT RICH AND WHY POOR COUNTRIES STAY POOR. A 2007 publication of Constable & Robinson, Ltd., Dr. Reinert’s book was the Winner of the European Association for Evolutionary Political Economy Gunnar Myrdal Prize.
From the mid-1500s the theatre of Europe provided further elucidation in economic theory and policy, setting an example of what a country should not do. Spain had long been an important industrial state. In Europe, to describe the best silk one once said “the quality of Granada.” To describe the best textiles one once said “the quality of Segovia,” wrote a Portuguese economist in the 1700s. By then Spanish manufacturing industry was history and the mechanisms that had diminished its manufacturing capacity and its wealth in tandem were eagerly studied across Europe. Their conclusions on what had happened were virtually unanimous.
The discovery of the Americas led to immense quantities of gold and silver flowing into Spain. These huge fortunes were not invested in productive systems but actually led to the de-industrialization of the country. The landowners primarily profited from the “funnel of gold” from the Americas, as they had a monopoly on the export of oil and wine to the growing markets of the New World. The supply of such goods is highly inelastic, and subject to diminishing rather than increasing returns. To increase production, particularly to make new olive trees yield as old ones, takes a long time. This expansion would produce the opposite of increasing returns, that is, diminishing returns which cause the cost of production per unit to rise rather than fall. The result of the increased demand was consequently a sharp increase in the price of agricultural products. At the same time, nobility owning land were exempt from paying most taxes, so the tax burden fell increasingly on the artisans and manufacturers. Their competitiveness was, on the other hand, already being squeezed by the rapid rise of prices of agricultural goods in Spain. This undid the synergies and division of labour in Spanish cities, causing a de-industrialization from which Spain only finally recovered in the nineteenth century.
Just as Venice and Holland were regarded as examples to be copied, in the sixteenth century Spain gradually came to be seen as an example of the type of economic policy and economic effects a nation should avoid at all costs. It became clear that the riches from the colonies had in fact impoverished rather than enriched Spain’s own capacity to produce goods and services. In contrast to England – which ever since Henry VII came to power in 1485 had actively protected and encouraged her industry – Spain protected her agricultural production, like oil and wine, against foreign competition. By the end of the sixteenth century, Spain, who had had a considerable industrial production, was severely de-industrialized.
It became clear to the observers at the time that the enormous wealth, all the gold and silver flowing into Spain, just flowed out again, and ended up in a couple of places – Venice and Holland. Like a slow-moving tsunami, it is possible to study the giant wave of inflation that spread through Europe with its epicenter in southern Spain. What distinguished Venice and Holland, where so much of the flow of Spanish gold and silver came to a halt, from the rest of Europe? The answer was that they had extensive and diversified industry, and at the same time hardly any agriculture. The realization spread through Europe that the real gold mines of the world were not the physical gold mines, but manufacturing industry.
In pre-Smithian economics the establishment of manufacturing came to be seen as part of a wider mission of civilizing society. Capitalism was advanced as an argument for repressing and harnessing the passions of mankind, for channeling the energies of human beings into something creative. Italian economist Ferdinando Galiani (1728-87) stated that “from manufacturing you may expect the two greatest ills of humanity – superstition and slavery, to be healed.” This became the principle on which European economic policy was founded, and which industrialized European nations one by one over a long period. Building “civilization,” building a manufacturing sector, and later building democracy, were seen as inseparable parts of the same process.
Around 1550, many Spanish economists began to realize what was happening in their country, and produced both good analysis and sound advice. As American historian Earl Hamilton, an expert on Spanish economy and economics of this period, points out: “History records few instances of either such able diagnosis of fatal social ills by any group of moral philosophers or of such utter disregard by statesmen of sound advice.” In 1558, Spain’s Minister of Finance, Luis Ortiz, describes the situation in a memorandum to King Philip II: From the raw materials from Spain and the West Indies – particularly silk, iron and cochinilla (a red dye) – which cost them only 1 florin, the foreigners produce finished goods which they sell back to Spain for between 10 and 100 florins. Spain is in this way subject to greater humiliations from the rest of Europe than those they themselves impose on the Indians. In exchange for gold and silver the Spaniards offer trinkets of greater or lesser value; but by buying back their own raw materials at an exorbitant price, the Spaniards are made the laughing stock of all Europe.”
The fundamental idea here – that a finished product might cost from ten to a hundred times the price of the raw material needed for the product – would recur for centuries in European literature on economic policy. Between raw materials and the finished product lies a multiplier: an industrial process demanding and creating knowledge, mechanization, technology, division of labour, increasing returns and – above all – employment for the masses of countries. Today, the economic models of the World Bank assume full employment in developing countries, even though in some places no more than 20-30 per cent of the workforce has what we would call a “job.” Those who were involved in economic policy in earlier times recognized the extent of the unemployment, the underemployment and the vagrancy, and understood that the labour involved in transforming raw materials into finished products in and of itself would increase the wealth of cities and of nations. The main point, however, was that the economic activities coming into existence when the raw materials were refined into finished products followed different economic laws than did raw material production. The “manufacturing multiplier” was the key both to progress and political freedom.