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Monday, February 14, 2011

Thoughts on Capitalism--and Medieval Spain

I'm reading a very difficult book right now as research for a fantasy story I'm writing.  It is not an easy book to read.  It's not written like Michael Lewis, Big Short, or Too Big to Fail, or even Krugman's Depression Economics, all books of which I have read some, or all of in the last year.  Those three all have a talky, jokey manner, exactly what you'd expect from a blog.  I'm told that Malcom Gladwell writes like that too.

That's fine. Silver, Trade, and War, is written like a textbook, and so it is.  The book isn't too hefty, but every sentence is packed and nearly incomprehensible.  Not to mention that every other word is in Spanish, and is a reference to a medieval Spain.  In brief, the book describes the Spanish economy in the late middle ages.  Hence--the fantasy book.

Nonetheless, there are some interesting thoughts on the modern economy which it brings to mind.  The first is as Niall Ferguson would have it, the bond markets have largely determined history for at least ten centuries of recorded time.  Why?  Bonds are how countries borrow money.  Why do countries borrow money?  Generally--to finance wars.  Hence the prices of bonds are incredibly relevant to the entirety of modern history.

But what I wanted to talk about today was this idea, espoused by some libertarians, that the free market offers some panacea and saving grace for the world's economy.  Often, in discussion, they go back hundreds of years, before the welfare state hit its stride to prove their point.  That's where Stein's work comes in.  Simple lessons of Microeconomics teach us that all things being equal, prices rise with production along the standard curve.  You've seen it.  Where the demand curve hits the supply curve is equilibrium, or the actual price of goods.  The argument goes, that any time the government interferes with the economy, it creates artificial price hikes or drops.  Equibilrium can only be found in a governmental vacuum.  So economists spend a lot of time trying to find markets that actually look like this.  And it can be quite difficult, even with something that has become fairly standard, say the price of aluminium.  At this point in time, there may only be ten or twelve companies that produce aluminum though.  They've eliminated the competition, either naturally through acquisition, or through trade restrictions and embargoes.  And let's face it, its not exactly difficult to coordinate prices between twelve companies.  I confronted my Micro teacher with that argument.  He couldn't give me an adequate answer save to say, its fine for some markets to have a small number of participants.  (In fairness to my professor, in a 90 person class, you've got a lot of material to get through, and very little time to do it.)

And that's exactly the point of what I've taken over three hundred words to get to.  Free markets are unnatural and unlikely.  This doesn't make the above curve useless, but it ought to limit its application, particularly among people like myself, and other arm chair economists who don't really know what they're talking about, i.e. the GOP caucus.

Spain at this time is an interesting nation.  In fact, it's not really one nation, but the remnants of the Roman Empire, elements of the Hapsburg Empire, the Emirate of Cordova, and their inheritors, the nations of Castille and Leon.  Add to that mix, are two important trading cities, Burgos and Sevilla, two important ports, and two important products, Silver and Wool, and you get a very interesting mix.  Medieval Spain was incredibly diverse, and this diversity was not uncommon in Europe where the remnants of invading armies had left bastards, new patriarchs, and new lines all over the map.  So looking back on this era as a time of free capitalism just isn't accurate.  In Spain, the wool merchants vied for supremacy, and in some respect it was their avarice that disabled competition and lead to vast monopolies of trade, which ultimately would destroy the very instruments that a modern economy needed to survive. 

Medieval trade was all about monopolies.  And it worked well initially.  The government needed a secure tax base.  How to accomplish?  Having various guilds and agencies of the state which faciliated and eliminated the competition for a few commercial interests insured a stable tax base for the state.  However, the state became enslaved to that tax base since it was the merchants who collected the tax.  So when the government started taking out loans to pay for supplies to the colonies and to protect them from privateers, the were kept in good behavior by the same commercial interests they had built up in the first place.  How could they not?  To actually regulate would have caused a certain amount of instability, but to keep things as they were was stable only in so far as at least you could see the cliff you were about to dive off.

And so we are now, in a similar position.  Frank Rich's Sunday Op-Ed pointed this out about our current fiscal crisis.  Two years later, and the only financial industry type to swing, was Bernie Madoff, who had nothing to do with the crisis whatsoever, and was merely a symptom of the shortsightedness and greed of the financiers who have largely escaped unscathed, and certainly, unapologetic.

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