Thursday, April 11, 2013

Which comes first, economics or politics?

Many of the political problems plaguing many nations now stem from the fact that their political systems are no longer consistent with their economic systems. Because of the widespread growth of democracy and its natural complement, human rights, every nation is pressured to adopt the democratic process although the result of doing so increasingly will be at odds with the evolution of its economic system.

The evolution of an economy is easy to foresee because, as long as wealth accumulation is allowed to go to extremes, it always takes the path of the Monopoly board game. If you analyse the past history of ancient Greece or Rome right down to the present time, you'll be amazed that the same pattern echoes through the ages. The following Financial Times op-ed piece titled A wealth of inequalities bodes ill by Merryn Somerset Webb which came out last week, has a fascinating take on how wealth flowed among the citizens of the Italian city-states in the middle ages. Read on:
I am reading a book by historians Charles Foster and Eric Jones on this very subject (The Fabric of Society and How it Creates Wealth, Arley Hall Press). Foster and Jones traced the social and economic conditions in four societies that manufactured cotton cloth between 1100 and 1780 – northern Italy, Germany, Lancashire and Holland and looked at how and why these particular areas were so successful at generating wealth. There appears to be a clear answer. 
In each country a society emerged where a large number of families owned a small amount of capital – “wealth was fairly widely distributed” (perhaps as a result of having plural political institutions). “Vigorous technical and social innovation then occurred” which created rising wealth across the board – probably because “many families had enough wealth to permit innovators to experiment and establish their new ideas.”
In the end, however, some families worked it so that they ended up economically and politically more successful than most others, wealth became concentrated in a few hands and that was that: plural government turned to oligarchy, innovation declined and “these societies ceased to be able to generate increasing wealth for their citizens”. 
A quick look at one village in northern Italy in 1243 – Piuvica. Records (amazing that there are any, isn’t it?) show that there were 238 resident householders in the village and that the top 50 per cent controlled 80 per cent of the wealth. 
You might think that sounds a lot, but in the great scheme of history it suggests an astonishingly equal distribution. 
Similar figures exist for what was the city state of Orvieto. This was the period in which business development surged in northern Italy, when the quality of cloth (silk, cotton and wool) surged and when great innovation appeared in accounting and banking. But with wealth came greed. And after 1300 or so committees of citizens gave way to chief magistrates who often succeeded in making the position hereditary to their families. They became Signori. 
Next came rising budgets and taxes and the armies of officials needed to administer them. By 1427 you could see the changes in the records from the city of Florence: 8 per cent of the households held 80 per cent of the wealth. 
This came with some good (just as the concentration of wealth in the UK post-industrial revolution gave us 150 ornamental lakes designed by Capability Brown, the Italian concentration gave us the artwork of the Italian Renaissance) but it might also have had something to do with the fact that by 1700 “an exporting textile industry in Italy barely existed and the country was no longer rich”. 
You’ll be wondering what my point is. It is this. Wealth inequality may be, as Ridley suggested, falling across the globe, but in the west it is rising to uncomfortable levels. 
In the US the top 1 per cent of the population own more than 35 per cent of the nation’s wealth while the top 20 per cent own not far off 90 per cent. The bottom 80 per cent, between all of them own a mere 7 per cent. 
The UK looks pretty rubbish when it comes to wealth distribution as well. The top 1 per cent have something in the region of 20 per cent of the wealth and the top 10 per cent hold 50 per cent. And, as I write, a good 150 ex-hedge fund managers, chief executives or retired politicians-turned consultants are probably in the process of designing new lakes for their estates or, as Foster puts it when he refers to the UK rich after the industrial revolution, “expending their talents on trivial pursuits”.
The article doesn't explain why the Italian textile industry disappeared. Essentially the Italian city-states generated more wealth from the East-West spice trade, that is, when the trade had to pass through the overland routes. But the Dutch cut this off when they rounded the Cape of Good Hope. As always, water transport beats land transport hands down. Of course, the Portuguese pioneered the route but they missed out because they lacked credit or currency—another critical component of the 4C—to finance bigger and frequent voyages. To put the final nail in the coffin, the Dutch in the 17th century flooded the Mediterannean with cheap pepper, effectively putting the Italians out of business. And with no wealth, all other industries were similarly busted.

The main point however is not about the spice trade but the way wealth over time gets concentrated in the hands of the successful few. The only difference is that in the past, things moved at a leisurely pace. Now, 60 years is the length of one cycle of wealth growth and decline. Luckily we have been through 4 such cycles in the space of almost of a quarter of a millennium. But with every wave, the government grows bigger until eventually a large proportion of wealth creation centres on the government mainly through government deficits leading ultimately to the implosion of the government itself.

With only one cycle left, we'd better be prepared for a new of style of politics. Democracy is already passe with a growing number of hung parliaments unable to govern. Oligarchy should be revived, no matter how unpleasant it may be. Next would be fractured oligarchy as states begin breaking down. Else we can welcome anarchy, Syrian style.

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