by Jared Rubin
Precursors of the Modern Economy
In 1500, it was far from obvious that the economic world of the next four centuries would find its locus in two small nations in northwestern Europe. But the sixteenth century was one of massive institutional change in England and the Dutch Republic. Both adopted the Reformation – in England, Henry VIII imposed the Reformation for dynastic reasons, while the Dutch Reformation was deeply entwined with the revolt against Spanish rule. Although there were differences in the specific histories of the two nations, there was one crucial similarity: in the post-Reformation world, the economic elite gained political power at the expense of the Church. The resulting institutional arrangements fostered an environment where pro-commerce policies were the norm. In England, economic interests in Parliament had more say in policy-making vis-à-vis the Church and the Crown, while in the Dutch Republic, the urban economic elite were increasingly among the most important political decision-makers at the national and local levels.
By 1600, this institutional shift affected laws and policies in England and the Dutch Republic. Sure, battles remained in both nations to ensure that the shift would last – in England the civil wars and the Glorious Revolution in 1689; in the Dutch Republic the Eighty Years’ War with Spain. And the institutional shift hardly secured permanent economic dominance: the Dutch lost their worldwide economic lead to England in the eighteenth century, and England lost its lead to the United States in the twentieth century. But that is not the point. Unlike other nations that once dominated the world economy, the economic world ushered in by the Dutch Republic and England was distinctly modern, with power over laws and policies increasingly concentrated in a decentralized matrix of economic and political elites rather than religious and military elites. Understanding how this came about is a worthy undertaking, because the ultimate result was the modern economy: an economy that reduced poverty, increased the standard of living for people of all classes, and fostered an environment where sustained institutional and technological change was the norm rather than the exception.
It is one thing to analyze the histories of successful states to see what went right; it is quite another to analyze those that were once successful but ultimately stagnated. Analyzed in isolation, it is far from obvious that the path-dependent series of events that were so important to the ultimate successes of England and the Dutch Republic were as important as they were. It is just as necessary to understand why similar institutional changes did not occur in many parts of the world – especially those that were at one point in time in an economic position where such change was feasible. The arguments made in this book suggest that the importance of religious legitimation in the Islamic world – and, to a lesser extent, the post-Reformation Catholic world – discouraged the type of pro-commerce changes seen in England and the Dutch Republic. Given the greater weight placed on religious legitimation, it would have been unnecessary and costly for Muslim or Catholic rulers to cede rules and rights to the economic elite. The next chapter suggests that this logic sheds a great deal of light on the institutional and economic fortunes of Catholic Spain and the Muslim Ottoman Empire – two states that, as of 1500, rivaled northwestern Europe in economic and military might.
8
Stagnation: Spain and the Ottoman Empire
If one asked a knowledgeable person living in the middle of the sixteenth century which nation would be the first to undergo rapid and sustained economic growth two centuries hence, she almost certainly would not have guessed England, and although she might have guessed the Netherlands, she would have identified the locus of growth as modern-day Belgium. The Low Countries were Spanish territories anyhow, so much of the wealth would have accrued to Spanish coffers. Indeed, two very reasonable guesses, based on geopolitical power, would have been the Spanish and Ottoman Empires. These two empires were arguably the two strongest political entities of the sixteenth century. The Spanish Empire became one of the largest the world has ever known, including much of the modern United States, Mexico, Central America, numerous Caribbean islands, the western half of South America, the Philippines, southern Italy, the Low Countries, and parts of Morocco (see Figure 8.1). At its peak, the Spanish Empire covered 13.9 percent of the world’s inhabitable land – the largest empire of the time and trailing only Russia and ultimately the British Empire in the early modern period (see Table 8.1). Gold and silver flowed in from the Spanish colonies in the Americas, and its territories in the Low Countries were among the world’s economic powerhouses. Meanwhile, the Ottoman Empire expanded throughout the century and eventually ruled most of the North African coast, the Arabian Peninsula, the Balkan Peninsula, and most of the Middle East. These territorial gains allowed the Ottomans to control the important commercial links connecting east and west – including the Red Sea and parts of the Persian Gulf – as well as the eastern Mediterranean and Black Sea. Why shouldn’t the Spanish or Ottomans have been able to turn their territorial and trade advantages into a long-run economic advantage? From the perspective of the sixteenth century, the answer to this question was far from obvious.
Figure 8.1 Spanish and Ottoman Empires in the Sixteenth Century
Table 8.1 World’s Largest Empires in the Early Modern Period
Empire Peak Area (Million km2) % of World’s Habitable Land
British 36.6 26.8%
Russian 22.8 16.7%
Spanish 19.0 13.9%
Qing 14.7 10.8%
French 11.2 8.2%
Portuguese 10.4 7.6%
Ming 6.5 4.8%
Ottoman 5.6 4.1%
Mughal 4.0 2.9%
Maratha 2.5 1.8%
Inca 2.0 1.5%
Lithuania-Poland 1.1 0.8%
Sources: Turchin et al. (2006); www.mtholyoke.edu/acad/intrel/empires.htm.
It was hardly preordained that success for both of these empires would be fleeting. As of 1500, Spanish per capita GDP was slightly higher than England’s, on par with the southern Netherlands (modern-day Belgium), and trailed only the northern Netherlands and northern Italy among the European powers (see Table 8.2). Even as late as 1570, Spanish and English per capita GDP were similar, even if Spain fell behind the rest of the economic leaders. Over the next 180 years, however, Spanish per capita GDP stagnated – dropping slightly – while the wealth of the other Western European powers steadily increased (save Italy, which began the early modern period with a head start). By the end of the early modern period – and, importantly, before the onset of industrialization – Spanish per capita GDP was less than half of England and the Dutch Republic, and it was only around two-thirds that of Belgium and Italy.
Table 8.2 Per Capita GDP in Five Western European Countries, 1500–1750 (Netherlands 1750 = 100)
Year Spain England Netherlands Belgium Italy
1500 46–51 46 62 49 71
1570 46–51 46–48 62 59 69
1650 41–51 57 101 56 64
1700 41–47 73 100 59 61
1750 43–44 89 100 65 65
Source: van Zanden (2009, table 10).
The Ottomans underwent a similar economic degeneration. At its height in the sixteenth century, the Ottoman Empire threatened the great powers of central and southern Europe – Spain, Venice, and the Holy Roman Empire. Its incursions into Europe, while primarily military in nature, also threatened important European trade and commercial centers. Yet, by the end of the seventeenth century, the Ottomans had offered trade capitulations to many of the European powers, giving the European economic elite customs relief, legal jurisdiction, and freedom from prosecution within the empire. These capitulations were merely one of the more overt symptoms of the greater divergence that occurred between the Ottoman Empire and the leading Western European states prior to industrialization.
What happened? Why did two states that seemed at least as primed for takeoff as, say, England fall behind while Protestant northwestern Europe surged ahead? This chapter proposes that underneath the geopolitical expansion of these empires were inherent econo
mic weaknesses traceable to the institutions that propagated political power. It was no coincidence that neither Spain nor the Ottoman Empire experienced a fundamental institutional change akin to those that occurred in Protestant nations. The mechanisms through which the Spanish and Ottoman propagated rule allowed them to ignore the economic elite, and this in turn had a detrimental effect on their long-run economic fortunes. The deterioration is explicable through the arguments made in earlier chapters. The histories of the Spanish and Ottoman Empires provide a telling counter-story to the histories of England and the Dutch Republic. In all four histories, the same message holds: it matters who propagates political rule. Unlike England and the Dutch Republic, however, the identity of the Spanish and Ottoman propagating agents mattered for the types of laws not passed.
Ironically, the strength of the Spanish monarchs and Ottoman sultans was the long-run undoing of both of their economies. Because these rulers were so strong, they did not have to bring the economic elite to the bargaining table, and they consequently never enacted the types of laws that facilitate long-run economic growth. This was the key similarity between the Spanish and Ottoman Empires that was not present in early modern England or the Dutch Republic: the Spanish monarch and the Ottoman sultan were too legitimate. In other words, there is some optimal middle ground for a ruler’s legitimacy: a weak ruler will not have people follow him, and the benefits associated with centralized governance will be lost, while a strong ruler does not have to negotiate with the economic elite in order to propagate rule. Early modern Spain and the Ottoman Empire had the latter problem, while the relatively weak (though not too weak) legitimacy of rulers in England and the Dutch Republic fostered a situation that eventually enabled prosperity.
Long-Run Economic Stagnation in Spain
Like elsewhere in Western Europe, the propagators of the Spanish king placed constraints on what he could do and encouraged him to adopt policies to their benefit. In the language of economics, Spanish rulers faced a constrained optimization problem – they chose the best option they could given their own desires and the constraints they faced. The key point of this chapter is that the constraints faced by the Spanish Crown were fundamentally different than those faced by Dutch and English rulers. These constraints did not emerge out of thin air; they were the path-dependent results of the histories of these regions that emerged over centuries. By the sixteenth century, and especially after the Reformation, these differences were large enough that the rulers of England and the Dutch Republic were “solving” a very different problem than the Spanish Crown was. But what were these differences? Why did they emerge in the first place? What were their consequences?
Answering these questions requires historical context. Religious conflict, primarily between Christians and Muslims, was among the most important legacies of Spain’s medieval history. The relevant history commenced in 711, when Muslim Umayyad warriors first entered the Iberian Peninsula. The Umayyads conquered most of the peninsula and inhabited some of the most important and wealthiest towns of the period, including Seville and Valencia. Over the following six centuries, Christian forces slowly took back parts of the peninsula. The legacy of the reconquest established a religious dynamic in early modern Spain that existed nowhere else in Western Europe.
The manner in which the Iberian Peninsula was reconquered played a major role in structuring the institutions of Spanish government. Spanish rulers gave loyal members of the military tracts of land within recently conquered towns as a reward for their service. Since rulers relied on these newly urbanized nobles for military support, the towns gained a much greater say in governance than anywhere in Europe at the time. These events presaged similar events in northern Europe by at least two centuries. Indeed, the first European parliaments (Cortes) arose in Spain. The earliest known Cortes was in Léon in 1020, and the first one where towns had a voice was the Cortes of Burgos in 1169. The Cortes’s power increased over the twelfth and thirteenth centuries, and by the reign of Ferdinand IV (r. 1295–1312) they were meeting once a year – a development that did not occur elsewhere in Europe for centuries. The Cortes of Castile – by far the most economically important region of Spain – formed in this period and consisted of the nobility, clergy, and “commons,” much like the parliaments of England.
It is impossible to discuss the propagation of medieval Spanish rule while ignoring the role of religion. This is even more true of the “Catholic monarchs” Isabella of Castile (r. 1479–1504) and Ferdinand II of Aragon (r. 1479–1516). Their reign was important for numerous reasons. First, by uniting the crowns of Castile and Aragon, they mobilized enough resources to finalize the reconquest of Spain. They finished the Reconquista on January 2, 1492 with the capitulation of Granada, the last Moorish kingdom on the Iberian Peninsula. The papacy supported the Reconquista: it funded around three-quarters of the fight against Granada, and the pope crowned Ferdinand and Isabella the “Catholic Monarchs” in 1494.1 Granada gave the Spanish crown an additional 300,000 subjects, an important new source of wealth, security on the southern coastline, and perhaps more importantly an invaluable source of prestige in the broader European “fight against Islam.”
The Catholic Monarchs bolstered their religious credentials through the establishment of the Inquisition. Spain was easily the most religiously diverse region of Western Europe at the time, with hundreds of thousands of Jews and Muslims, and perhaps even more recent converts (conversos) intermingling with millions of Catholics. The expressed purpose of the Inquisition was to create a “unity of religion.” The pope thus gave the crown the authority to root out heretics in 1478. The Inquisition terrorized Jews and conversos for decades, and later terrorized Muslim converts (moriscos), causing the death or expulsion of thousands of religious minorities.2
The brutal persecution of religious minorities during the Inquisition is prima facie evidence that religious legitimacy was important to the Spanish crown. This was a costly policy – not only in terms of establishing the institutions of the Inquisition but in the loss of human capital and labor of those who were either murdered or fled Spain as a result of persecution. But the Crown must have considered the benefits of the Inquisition greater than its costs. Such persecution could have only been beneficial for the Crown if there were something tangible to gain by tying itself to the Church. There were less expensive ways to gain religious legitimacy – endowing churches, enacting religion-friendly policy – but even a costly policy like the Inquisition still might have been optimal from the Crown’s perspective if the perceived benefits were great enough. Indeed, Anderson et al. (2016) find that the persecution of Jews in medieval and early modern Europe (and especially Spain) was much more likely when weather was unseasonably bad and crops more likely to fail – precisely the type of precarious circumstance under which a ruler would want to secure as much legitimacy as possible.
The nobility also benefited from the reconquest of Spain, amassing vast amounts of recently conquered territory. The Crown neutralized them through economic and political incentives – tax exemptions, titles, grants, and the legitimation of their new landholdings and offices. This quid pro quo was great for the nobility’s pocketbooks, but it also meant they had almost no bargaining power with the Crown over laws and policies.3 Ferdinand and Isabella were also able to successfully petition Rome to support their preferred candidates for high ecclesiastical office, helping bring the Spanish religious establishment under their purview.4
Ferdinand and Isabella passed this institutional legacy down to their Habsburg grandson Charles V – who also became emperor of the Holy Roman Empire and inherited the crown of Spain in 1516 – and his son Philip II, who succeeded Charles in 1556. Charles V inherited the Spanish crown through his mother (Joanna the Mad), who was the daughter of Ferdinand and Isabella. He also inherited the Low Countries from his Habsburg father, Philip of Burgundy. Combined with the Spanish possessions in the New World and the Aragon possessions in Sicily, Sardinia, Naples, and northern Africa, th
e Habsburg kings were heirs to a global empire.
Charles V and Philip II desired above all to grow their empire. Hence they engaged Spain in numerous expensive and bloody conflicts between the large and growing European imperial powers. Spain fought nineteen wars in the sixteenth century against all of the major powers: eleven against France, eight against the Ottoman Empire, six against England, three against the Dutch, and three against Venice, among others (these numbers sum to more than nineteen due to alliances). Throughout the sixteenth century, Spain was not at war for all of eighteen years. Some of these conflicts were over religion; others were merely imperial expansion. Importantly, these wars were costly, and one of the key economic stories of the sixteenth century – in Spain as well as elsewhere in Europe – was the search for revenue to fund wars. As with England, the Dutch Republic, and other European nations, how the Spanish Crown funded these costly wars depended on the manner in which they propagated their rule and the access they had to funds beyond the control of the economic elite.
The framework proposed in this book sheds light on why and how Charles V and Philip II pursued the laws and policies that defined their reigns. Like other European rulers, Charles V and Philip II had numerous goals – gaining “glory” and wealth from the expansion and protection of territory, increasing specie production from the New World, and “battles against Islam,” to name a few – and they faced budget constraints based largely on the funds they were allotted by the Cortes and the vast amount of gold and silver flowing in from the New World. The strength of their bargaining position against the Cortes was a result of the manner in which they propagated their rule. On top of being the legitimate heirs through heredity, the Habsburgs inherited the role of “Catholic monarchs.” In the sixteenth century, the Spanish Crown co-opted the Spanish church, winning the right to appoint bishops. In return for these lucrative appointments, tax exemptions, and the occasional call to arms against enemies of the Church, the Church provided support to the king. For example, the see of Toledo – the second-wealthiest see in Christendom outside of Rome – granted the king 300,000 ducats for the fight against Protestant England and the rebuilding of the Spanish Armada.5 The papacy also provided the Crown with funds from time to time. To support the Spanish fight against the Ottomans, the pope renewed the crusade subsidy (cruzada), which it gave to Ferdinand and Isabella in the fight against Granada, and it became a regular source of revenue.
