Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not (Cambridge Studies in Economics, Choice, and Society)

by Jared Rubin

  The framework laid out in this book suggests that these were not coincidences, although the framework applies differently to the Dutch case than to the English one. One difference between the two was that the Dutch Republic was not a monarchy. The Dutch states shared power; there was no central ruling apparatus. The provinces had a chief executive, the stadhouder, but by design he was weak relative to the provincial parliaments. Another important difference was that the power of the Dutch urban economic elite grew relative to the rural lords and Church leaders in the two centuries prior to the Revolt, as urban wealth and economic activity became an increasingly important part of the Dutch economy.32 The pre-Reformation “players” were therefore the same in Dutch politics as they were in England, even if their relative strengths were different; in both, power was split between the Church, landed nobility, and urban economic elite.

  The Dutch political situation changed dramatically during the early stages of the Revolt. The Revolt particularly affected the States General, a legislative body similar to the English Parliament, which brought together urban, noble, and religious elite from the various Dutch states. The States General originated in 1406, but it was relatively inactive under the Habsburgs prior to 1572, meeting at most for sixty days a year. Under the Habsburgs, issues of religion, military, and foreign policy were not within its purview. In 1572, however, the Revolt spurred activity in the States General. From that point on, the States General met on average around 200 days a year, and after 1593 it remained in a permanent, unbroken session.33 The States General formalized its role in 1579, when it reestablished itself under the Union of Utrecht as a coordinating institution for the new coalition of provinces that participated in the Revolt.34 Although the Union of Utrecht was a defensive alliance, it ended up cementing the States General’s role as an exclusively Protestant coordinating and legislative body for the newly formed Dutch Republic. This gave it the power to negotiate with foreign powers, conclude treaties, mint its own coins, draft a war budget, and specify central government expenditures.35

  The spread of the Reformation played a pivotal role in the early stages of the Revolt.36 The Reformation took hold in the Low Countries as early as the 1520s. By this time, printing spread to most cities in the Low Countries – Antwerp was arguably the leading print city in Europe – and Protestants printed their propaganda locally. Like in much of the Holy Roman Empire, the Reformation spread via the printed word largely from the ground up, rather than from above as in England. But the Spanish violently suppressed the Reformation for decades following its initial spread. Charles V, who served as both king of Spain and Holy Roman Emperor, prohibited books, sermons, and Lutheran writings,37 ordered hundreds of book burnings, established a state-run inquisition in 1522, and burned to death the first Protestant martyr in the world in Brussels in 1523. In all, the Spanish executed at least 2,000 Protestants.38

  These events were important precursors to the events of the latter half of the sixteenth century. By the 1550s, various wars placed the Spanish kingdom in a tight fiscal situation despite all of the gold and silver flowing in from the New World. In response, they turned to the Netherlands for additional revenue, increasing taxes and failing to pay back loans. Not surprisingly, this fomented the seeds of dissent. Further calls by Philip II, Charles V’s son, to persecute Calvinists and ban Calvinist worship helped ignite the first stage of the Revolt in the 1560s. The Catholic Church sided with the Catholic Spaniards – who claimed to be the “protectors of the true Catholic religion” – and it was thus easy for those with an economic interest in the Revolt to paint the Church as an instrument of economic and religious repression. Consequently, the expulsion of the Church and the confiscation of its wealth was one of the first actions taken in the early years of the revolt in the northern Netherlands. Bursts of anti-Catholic violence were common, and rioters destroyed Catholic relics seen as superstitious. But the Catholics were not the only group harmed by the Revolt. Many of the nobility and the guild-protected industries also threw in their lot with the Catholic Spanish regime – to their ultimate detriment.39

  Urbanites were the driving force behind the Revolt, and they benefited from freedom from Spanish rule for many reasons. First, Protestantism spread rapidly among the merchant community in the southern Netherlands, so many of the southern merchants moved to the northern Netherlands in order to avoid repression and confiscation of their property. Second, Spanish policy toward Protestants threatened relations with foreign merchants who had Protestant sympathies. Third, city leaders had a direct monetary incentive to support the Reformation: with its success, the cities and provinces received vast clerical properties. Fourth, once the Revolt began, the urbanites’ privileges of citizenship and economic autonomy were at stake if the Revolt failed. Fifth, and most important, the Revolt gave the urban elite the political upper hand within the States General.

  The Reformation provided the impetus, grievances, and propaganda opportunities necessary for the urban economic elite to rise against the old guard of the nobility and the Church. Over time, religion played a relatively smaller role in the Revolt; once the initial struggle with the Spanish succeeded, economic and political motives were more important.40 Yet, as in England, the institutional changes resulting from the Reformation were important in the long run. These events dramatically and permanently shifted power away from the religious establishment toward the economic elite. The consequences were even starker in the Dutch Republic than in England. Unlike in England, where the landholding nobility held onto much of its power after the Reformation, the Dutch nobility lost most of its power following the Revolt. The ultimate success of the Revolt thus meant that the Dutch economic elite gained political power that was unmatched elsewhere in Europe. To this point, Jan de Vries and Ad van der Woude (1997, p. 165) argue that the Revolt

  resulted in a transformation of political representation in the provincial states from one where before the Revolt the cities had to share power with the nobles and (usually) the clergy, to a situation in which the Revolt had removed the clergy from formal political power and the nobles (many of whom remained loyal to Crown and Church) had lost much of their influence.

  De Vries and van der Woude (p. 168) go on to suggest that these changes were a direct result of the Reformation coming to the Dutch Republic:

  [W]ithout the Reformation political relationships would not have shifted so strongly in favor of the cities. And this shift in political constitution undergirded a state in which dynastic goals would ordinarily be subordinated to those of an urban regental elite, which never lost entirely its sensitivity to economic interests.

  These dynamics were strikingly clear in the Dutch state of Zeeland, where de Vries and van der Woude (p. 507–8) point out:

  [B]efore the Revolt the States of Zeeland consisted of three orders – the abbot of Middelburg, the Zeeland nobility, and the cities – each entitled to a single vote. The Reformation removed the abbot of his franchise. Since most Zeeland nobles had chosen the cause of Philip II, they, too, were stripped of their right to participate in the provincial States … [The cities of Zeeland] were the great winners in this process.

  The rise of the urban economic elite after the Revolt changed the way the government financed itself. Soon after the States General held their first “free” session in 1572, the dominant urban interests imposed a fairer share of the tax burden between different industries and between urban and rural areas. Prior to 1574, urbanites paid most taxes and only a few commodities faced taxation, such as beer, wine, and peat.41 In 1574, the number of commodities taxed expanded, and urban and rural interests paid a more even share of the tax burden. This is not surprising, given that the urban economic elite in power previously footed a disproportionate amount of the federal tax bill. The economic ramifications of the broadened tax base were immense. The Dutch government was able to collect much more tax revenue per person following the Revolt using small, highly decentralized tax farms, with the average tax burden rising from 6
percent of income at the start of the Revolt to 20 percent by 1630. Given that both the population and per capita GDP were rising, total tax revenues exploded in this period.42 Increased tax revenues allowed the Dutch government to borrow at lower rates, since investors felt more secure that the government had the capacity to repay them. Hence, a positive feedback loop emerged. The increased fiscal capacity of the Dutch government allowed for more revenue extraction, and this revenue further stimulated commerce. Greater commercial revenue, in turn, further expanded the tax base and lowered borrowing costs. These features fed into each other, allowing the Dutch Golden Age to persist until the end of the seventeenth century.

  There were aspects of the Dutch case to which the framework elaborated in this book does not apply. There was not really a centralized Dutch “king”; the stadhouder hardly had the power of the English, French, or Spanish monarch. But the primary ideas spelled out in previous chapters remain true: it was the relative power of the economic elite versus the religious establishment, landed nobility, military, and other sources of power that matters. In the English case, the relative power of the economic elite mattered because they were part of the coalition that propagated the monarch, incentivizing him to exercise executive power in a manner that was consistent with their interests. The improved position of the English economic elite following the Reformation indirectly improved commercial outcomes, since this process worked through the change in incentives faced by the monarch. In the Dutch case, the amalgam of religious, military, economic, and landed elites combined to share executive power, so the increased power of the economic elite at the expense of the religious and landed elite led to a more direct improvement of economic outcomes.

  The book’s framework suggests that the transition to increased political power for the economic elite should have led to laws and policies that increased the level of commercial activity. Perhaps the most famous example is the establishment of the United East India Company (VOC) and the West India Company (WIC) by the States General. These were chartered joint-stock companies with the strong backing of the state – a revolutionary organizational form at the time. The charters of the VOC and WIC envisioned massive trading and military enterprises aimed at expanding Dutch economic and military power throughout the world. While these companies maintained some freedom, they were heavily dependent on the States General to conduct diplomacy, sign treaties, make alliances, provide arms, and build fortifications.43 Shares in these companies facilitated the creation of a huge secondary market, which in turn helped make Amsterdam one of the leading capital markets of the early seventeenth century.44 The first “modern” market for futures and options developed in Amsterdam in the early seventeenth century in response to the availability of VOC and WIC shares.45

  The economic elite also dominated local politics, where individual cities were free to pursue policies that benefited commerce. Most cities invested in public goods such as canals and other inland transport. By the 1660s, the Dutch had the fastest and most efficient inland transportation in Europe. Although private parties sometimes funded these goods, the States General played a key role in their supervision. Improvements in transportation had the important effect of placing the Dutch Republic, and particularly Amsterdam, at the center of seventeenth-century international trade.46 The cities also took control of poor relief, providing assistance to the working poor and seasonally unemployed. Numerous visitors to the Dutch Republic in the seventeenth century remarked on how efficient and humane the Dutch systems of poor relief and charity were relative to the rest of Europe.47 The Reformation also affected labor markets in a more direct way: the Calvinist churches abolished all of the old saint’s days promoted by the Catholic Church, extending the work year by 15 percent.48

  Because of these initiatives, the Dutch economy took off following the Revolt. Real wages grew much faster in the Dutch Republic than in the rest of Europe. Real wages did not converge between the Netherlands and even the relatively well-off southern parts of England until the early nineteenth century. The Dutch population more than doubled in this period, with urbanization rates increasing from 31–32 percent in 1525 to 45 percent by 1675. In the two most urban provinces, Holland and Zeeland, numerous cities had growth rates over 1 percent per annum during the entirety of the Revolt, an extraordinary number in premodern times and an indicator of the high wages available in most Dutch cities (see Table 7.3). By 1600, one-quarter of the Dutch population lived in cities of at least 10,000; even in England, the number at the time was less than one out of ten.49 It was not until the mid-nineteenth century that England reached the urbanization rates of the Golden Age Dutch Republic.

  Table 7.3 Urban Population Growth during the Dutch Revolt in Holland and Zeeland, 1570–1647

  1570 1647 Per annum % Change

  Amsterdam 30,000 140,000 2.02%

  Leiden 15,000 60,000 1.82%

  Haarlem 16,000 45,000 1.35%

  Middelburg 10,000 30,000 1.44%

  Rotterdam 7,000 30,000 1.91%

  Delft 14,000 21,000 0.53%

  Dordrecht 10,000 20,000 0.90%

  Enkhuizen 7,500 18,000 1.14%

  The Hague 5,000 18,000 1.68%

  Gouda 9,000 15,000 0.67%

  Hoorn 7,000 14,000 0.90%

  Source: Israel (1995, p. 328).

  This rapid increase in real wages was in large part due to improvements in productivity. Indeed, the Republic was the most productive European economy for most of the seventeenth and eighteenth centuries.50 During the revolt, Dutch cities actively recruited highly skilled workers from the southern Netherlands who fled the south for the relatively safer havens of the Republic. Emigration brought the “rich trades” to the Dutch Republic; a substantial portion of Flemish tapestry weavers and masters emigrated to Amsterdam, Leiden, Gouda, Middelburg, and Delft to rebuild their manufacture. The “new draperies” they produced were one of the staple industrial products of the Dutch Golden Age.51 Protestant Germans also fled to the Dutch Republic during the violent Thirty Years’ War (1618–1648), further increasing the stock of skilled workers. The Dutch excelled in other areas, too. Dutch hydraulic engineering and fortification and harbor construction were the envy of Europe in the seventeenth century, due in no small part to the unique geography of the Low Countries and the increased demand for land and defense.52

  The Golden Age also saw the emergence of Dutch dominance in international markets for commodities and factors of production. Capital was abundant and interest rates remained low, stimulating Dutch industry and business organization. Property rights allowing easy alienation and transfer of property buoyed Dutch labor markets and facilitated mobility in a manner unseen even in England.53 By the end of the Golden Age, the Dutch Republic was also a leading financial center, with Amsterdam serving as the primary European clearinghouse for bills of exchange. The Republic’s centrality in trade and finance made it a hub of information flows, which in turn reinforced its central economic position.54

  Yet, Dutch success was not destined to last forever. The mechanisms that led to an economic takeoff would not necessarily allow the takeoff to persist. The Golden Age lasted a little over a century, after which England surpassed the Dutch Republic. After the 1670s, urbanization and population growth stagnated or regressed, as did per capita income – although they remained high relative to the rest of Europe. The Netherlands was even late to industrialize; Belgium, which fell behind its northern neighbor after the Dutch Revolt, industrialized early and eventually surpassed the Netherlands in terms of production and wealth.55 One reason for the Netherlands’ relatively slow industrialization was that it was a victim of its own success; during the century of the “Golden Age,” economic special interests emerged. This resulted in industrial regulations that raised obstacles for newcomers, protective measures that reduced access to foreign markets, oligarchic ruling elites cut off from other social groups, and an antiquated tax system that served the interests of a narrow swath of tax collectors.56 While these interests serve
d the Dutch economy well in the early part of the Golden Age, they had incentive to block creative destruction caused by industrialization.

  Yet, the growth of the Dutch economy during the Golden Age placed the Netherlands in a position where, though it lagged in industrializing, it remained the most productive economy in Europe as late as the late eighteenth century and compared favorably with other industrialized economies by the end of the nineteenth century.57 More to the point, the fact that the Netherlands was late to industrialize does not contradict this book’s primary arguments. This book focuses on the various institutional mechanisms that made modern economic growth and industrialization either possible or unlikely in parts of Western Europe and the Middle East. By the seventeenth century, the Netherlands was clearly on a path where modern economic growth was possible, and this opportunity arose due to the vast changes to Dutch institutions following the Revolt and the Reformation. Why the Dutch did not see this path to fruition is a subject for an entirely different study.