|Author(s):||van Bavel, Bas |
|Reviewer(s):||Rubin, Jared |
Published by EH.Net (May 2018)
Bas van Bavel, The Invisible Hand? How Market Economies Have Emerged and Declined since AD 500. Oxford: Oxford University Press, 2016. xi + 330 pp. $60 (hardcover), ISBN: 978-0-19-960813-3.
Reviewed for EH.Net by Jared Rubin, Department of Economics, Chapman University.
What are the key drivers of economic prosperity? Why do societies that were at one point world economic leaders often end up falling behind? What role do factor markets play in this process? These are the questions addressed in Bas van Bavel’s fascinating entry into the “big think” literature, The Invisible Hand? How Market Economies Have Emerged and Declined since AD 500. In this book, van Bavel proposes a theory of cyclical economic growth and decline, and he supports this theory with three case studies: early medieval Iraq (c. 500-1100), high medieval northern Italy (c. 1000-1500), and the late medieval and early modern Low Countries (c. 1100-1800).
Van Bavel’s framework can be conceptualized as an economics counterpart to Ibn Khaldun’s political cyclical theory of empires. The (somewhat neo-Marxian) argument suggests that economic decline is a natural consequence of the type of economic growth that happens via factor markets. In other words, the growth of factor markets is a self-undermining process. This is a fairly significant departure from conventional economic history accounts, which largely view the development of market economies as more of a linear process.
Van Bavel’s argument can be summarized as follows. In societies with some sufficiently high level of personal and economic freedom as well as some degree of prosperity (due to non-market mechanisms of exchange for land, labor, and capital) factor markets are likely to emerge. In the process, a positive feedback loop occurs in which underutilized resources are more productively used, specialization and division of labor arise, economic growth results, which results in greater use of factor markets, and so on. However, with factor market growth comes inequality — both economic and political. As those who own the factors of production gain more political power, they use this power to dominate the markets for land, labor, and capital, as well as financial markets, making these markets less free in the process. This precipitates the economic decline of the society, as vested interests squeeze the little remaining productive power out of the economy, leaving little for the rest of society. The decline that van Bavel proposes is therefore endogenous to the very processes that contributed to the rise in the first place.
Perhaps the most ambitious aspect of The Invisible Hand? is the cases to which van Bavel applies the theory: early Islamic Iraq, Commercial Revolution Italy, and the late medieval and early modern Low Countries. These are not randomly plucked cases: one could make the case that they represent the world’s (or, at a minimum, western Eurasia’s) economic frontier from about 750 to 1700. Van Bavel must be commended for picking these three cases: few scholars have the breadth of knowledge to dig so deeply into three such vastly disparate cases. And indeed, the cases work quite well for the theory. Iraq of the Abbasid period was probably the wealthiest and most advanced region of the world. Indeed, in 800 the population of Baghdad was greater than the top thirteen Christian cities of Western Europe combined! Yet, it clearly started to fall behind at some point well before the Mongol invasion crushed what remained of the Abbasid Empire in 1258. Van Bavel convincingly points to the rise and decline of factor markets as a culprit. Although the evidence is scanter than it is for the others cases, van Bavel makes a strong case that the development of markets in labor, capital, finance, and especially land (and land lease) played an important role in the region’s growth, while the accumulation of these factors of production in a small number of hands ended up stifling growth and, ultimately, the very markets that spurred growth in the first place. Indeed, van Bavel presents data indicating that the Gini coefficient on wealth inequality in tenth century Iraq was a startling 0.99, making it one of the most unequal societies in world history.
Similar evidence is provided for the cases of northern Italy during and after the Commercial Revolution and the Low Countries in the late medieval and early modern periods. For these cases, the data and secondary sources are much more complete and the narratives are quite compelling. Indeed, one might suspect that the Low Countries case that van Bavel has researched so deeply was the motivating example behind the book (and it is indeed a good example). In both of these cases, societies that were wealthier than their neighbors — but not by much — saw a growth in factor and financial markets, with the resulting proceeds initially being relatively widely distributed. Over time, it was precisely access to these factor and financial markets that enabled the accumulation of wealth in a small amount of hands. This gave the economic elites access to political power and the capacity to buy up most of the rural hinterlands, which ultimately led to the (relative) decline of factor markets and, more generally, these economies. Seen from this perspective, the cultural achievements of the Renaissance or the Dutch Golden Age — funded as they were by the ultra-wealthy — were a symptom of decline, not vibrancy.
As one is reading the book, it is natural to think, “an economic rise followed by the accumulation of factors of production in a small amount of hands sounds a lot like the modern day U.S.” While historians are often hesitant to make such conjectures on more recent events, van Bavel provides a quite welcome chapter overviewing (in only slightly less depth) the trajectories of the UK and U.S. since the eighteenth century. Not surprisingly, he argues that both are reflective of the cyclical theory of economic development propounded throughout the book. These are important insights, as they suggest that modern day inequality may be a structural feature of the American and British economic rise.
I began reading this book not knowing what to expect (beyond the fact that I know and like van Bavel’s other academic work), but I came away convinced that factor markets can help explain both the rise and decline of economic fortunes. One always has a few small quibbles with any book — for instance, I think van Bavel misses a golden opportunity to discuss how the rise of socialist and communist thinking in the nineteenth century was a direct result of the processes he describes in the book — but these are mostly not important enough to include here. That said, there is one rather important question the book leaves largely unaddressed: on balance, what role have the rise and decline of factor markets played in the “great divergence” between the “West and the rest”? The Dutch Republic, England, and the U.S. — three of the five societies discussed in the book — played an enormous role in the rise of the modern economy. Even if these societies eventually declined in relative terms, they are still rich (a point that van Bavel concedes) and, more importantly, these riches have spread to some degree to the rest of the world. Indeed, even if the intra-society income and wealth distributions have become much more unequal in the past four decades, the inter-society income and wealth distributions have become somewhat more equal, at least if one is most concerned with the well-being of the poorest among us. The economic forces unleashed in the last two centuries have lifted billions out of poverty. This is a true economic achievement, and it finds its roots in the historical cases studied in this book.
In short, any social scientist interested in “big think” questions will benefit greatly from reading The Invisible Hand? While it presents only a piece of the “great divergence” puzzle, it is an understudied piece that is an important complement to existing theories based on institutions, culture, and governance.
Jared Rubin is an associate professor of economics at Chapman University. His recent book Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not (2017, Cambridge University Press) analyzes the role that religious authorities and institutions played in the economic development — or lack thereof — of Western Europe and the Middle East.
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|Subject(s):||Economywide Country Studies and Comparative History|
Markets and Institutions