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Herman Schwartz's States vs. Markets Summary
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Schwartz Chapter 1: The Rise of the Modern State: From Street Gangs to MafiasThe modern state and global economy have emerged together, and are inseparable from one another.
The history of the emergence of states is therefore important to the rise of the global economy. It is
curious that Europe has managed to acquire so much power over time. This was possibly because they
used a combination of “lawyers, guns, money and god” (= conflict resolution, organised violence,
income generation and legitimation) so that they could subordinate larger economies/empires. First of
all, organised violence posed as a comparative advantage in Europe. Today the monopoly of violence
forms one of the starting points of the modern state. Collaboration/compromise in conflict over the
control of agricultural resources between kings, nobles and merchants led, in the long term, to a
relatively stronger state than countries where one of the said groups won this conflict.
Agricultural boundaries on state formation:
80% of the economic activity consisted of agriculture from the 15th until the end of the 19th century.
The agricultural structure places limits on the formation of a state organization. Agricultural resources
were used to build the army, which was fundamental for the state (organised violence).
However, there was hardly any opportunity for trade because of:
Inability to create a surplus (i.e. commodity is limited): by ignorance/lack of knowledge
impossible to increase the harvest.
Underdeveloped transport systems: even when surplus was generated, this could hardly be
transported due to expenses; surpluses difficult to organise at the government level (e.g. from
research into how far grain could be transported by Von Thünen → only profitable because of
grain to a limit of 20 km).
Economic/social/political life, due to these transport restrictions, existed in so-called micro-economies
consisting of a market centre circled by 20 km farmland. Adam Smith's view (more division of labour
→ more productivity → higher wages) did not apply, because the population and the area did not
stretch. The price differences per region were also huge during this time. There was hardly any trade.
There was virtually no national economy until the advent of new transport options. There was also no
national state as we know it in its contemporary; forms of social organization require surplus from
agriculture armies/bureaucracy. In itself this surplus was there, but the transport barrier led to inability
to actually "spend" the surplus. Only small states existed, consisting of linked micro-economies.
Exceptions to the limit on building larger social organizations are: water and wind energy used
operation and utilisation of mills; water-transportation of goods and investments in ship-building; and
trade in goods with a high value-to-weight ratio, e.g. money or information. These exceptions were
used as efficiently as possible by the three social groups: kings, nobles, and merchants. In a feudal
system, sovereignty spread across different social groups.
Nobility, kings and merchants
Social group I: Nobility
The first exception of utilisation of water and wind energy was in the hands of the nobility. The
nobility moved themselves instead of the economic means, which solved the problem of transportation
- consisted mainly of persons in possession of certain means of power, such as weapon and located in
places without central authority. Nobility claimed economic means and surplus by habit and coercion.
The amount they could claim was limited by a possible peasant revolution. Nobility opposed the
monetisation of local economies with the exception of small amounts of money, even if they were able
to conquer more due to more monetisation. But, there was a possibility they would be exposed to fixed
interest rates - regardless of inflation, and led to the fact that interest rates were no longer equal to
actual value; clash with the kings regarding monetisation.
1
, Social group II: Kings
Kings benefit from taking parts of the surplus from nobility for themselves by means of monetisation.
Nobility claimed the right to land and rent, and owned military strength, which undermined the kings
in central authority. However, kings had a common interest with nobility: controlling the peasantry
and expelling hostile states. Kings attempted to subordinate the nobility by linking multiple micro-
economies together in an administrative hierarchy. Weakness of European administrative possibilities
meant the weakness of European kings – there was hardly any centralisation. The king received
military service of the nobility in exchange for land, but this turned against king, because loyalty to the
king was overruled by self-interest. The nobility was an important part of 'government', e.g. collecting
tax, because they were on location, in contrast to the kings. There was barely any cooperation between
kings and the nobility, and power was not centrally exercised. In order to strengthen central authority,
kings faced two possibilities: they could replace local monopolies of violence by centrally controlled
monopolies of violence, and replace the nobles law/taxation through 'own' centrally managed
bureaucracy. This was only possible if there was a monetised economy. The benefits consisted of
additional economic resources under control, an there was no need for the nobility to act as a mediator.
To enable monetisation, kings cooperated with merchants. Merchants were in possession of money
and raw materials. In addition, money and merchant cooperation was also needed to be able to cope
with the maintenance of mercenary armies.
Social group III: Merchants:
Merchants were divided into two categories: One group consisted of local trade, and the other of long
distance trade instead of usual classification based on luxury or commodity goods. For this, they used
local price differentiations to get the best prices for goods. The network was based on contracts instead
of social obligation or sovereignty. Local trade mainly consisted of luxury goods because of high
transportation costs; long-distance trade mainly consisted of commodities, as it preferred the low
interference of other social groups, so they cooperated with armed cities. Similar interests with the
nobility: did not want the kings too powerful; similar interests with the kings: needed money/loans.
‘’Lawyers, guns, money and god’’
Every social group had a different vision of the ideal organisation of the world and of states: absolute
states, a federal system, and a network of trading cities and city states. In Europe, these different forms
were combined due to a lack of force majeure of one of the groups. This mixture consisted of
“lawyers, guns, money, and god’’ – constitutions and political obligations; monopolies of violence
based on territories; bureaucracy for revenue extraction; and national myths to unite the population.
Constitutions developed because of intersecting conflicts and interests among the nobility and kings.
There were two conflicting principles: absolute right to private property by the nobility, and the will of
the sovereign is law by the kings to preserve nobility taxes. Parliaments formed because of threats
from both inside and outside, and this one principles regulated the central authority and sovereignty of
the king and the enforcement of property rights. Government debt was created by entanglement
between merchants and kings – money support in exchange for protection. Lawyers arose from mutual
interests and conflicts between nobility and merchants. These groups were both for private property
law and were against king's possibility of taxation and savage control exercising on income, which
created the basis for the establishment of a legal framework.
Mercantilism
2
,The reaction of most European states was mercantilism. Mercantilism means that state power, i.e.
organised violence, is used to create economic prosperity, through lots of exports and little imports.
This created an externally oriented policy whereby states try to increase the inflow of capital. This
external policy also led to an internal advantage: the emergence of one homogeneous, monetised
economy, dominated by a central authority that defines property law. It resulted in limited land
transportation compared to water transportation – growth of global economy. It was possible to trade
superfluous surpluses within the global market for money. European states each used their own
division of “lawyers, guns, money and god”. A number of factors that contributed to the survival of
states were the efficiency of income generation, deployment of the army and internal compliance
through submission instead of coercion.
Outside Europe: China
In Imperial China, the monarchy triumphed entirely over the other social ones groups. This became a
more absolute rule than ever known in Europe. China's economy was commercialised and monetised
and consisted of micro-economies what were linked in a hierarchy of cities, with transport options
through major rivers. The centrally controlled authority managed the surpluses from agriculture to a
great extent trade and the money earned was used to help pay for the bureaucracy. As a result, the state
was not dependent on the nobility. Merchants received no military power, and worked domestically.
Outside Europe: Southeast-Asian Island Groups
Within the Southeast-Asian island group, merchants triumphed entirely over the other social groups.
The economy consisted of a complex network of trading communities. These communities were quite
isolated from inland powers and authorities, and maintained reasonably peaceful relations. There was
no struggle for monopoly on water and cultural clashes were rare. Piracy only existed in an
unorganised form.
These two forms were hardly possible in medieval Europe. Geographically, there were more European
trading centres on the coast than inland, which meant more opportunities for long distance trade. The
merchants of Europe were more powerful than the monarchy in China, however the merchants in
Europe were strongly influenced by domestic authorities as opposed to merchants within the
Southeast- Asian island groups. The domestic authorities in Europe were very weak due to lack of
central guidance, yet they had enough military strength to prevent merchants from building city-states.
The European states that the survived constant wars (1500-1814), developed different, balanced
combinations of “lawyers, guns, money and god”.
European state-building has benefited enormously from trade from the Indian Ocean. States tied to the
Indian economy were able to monetise their economies. States without access to the Indian economy
found themselves severely lagging behind.
Schwartz Chapter 3: States, Markets, and the Origins of International Inequality
3
, Each question centres on the fact that a novel kind of economic inequality emerged after 1500, and
even more strongly after 1800: enormous disparities of income across societies. The expansion of the
north-western European maritime economy created a novel spatial, international inequality: not just
inequality inside societies but also persistent inequality among regions and nations.
Theories based in neoclassical economics (NCE) claim that the international market and international
trade are benign forces – they affect all economies the same way, and any success or deficiency in
growth is due to unitlevel (local) institutional successes and failures. A set of quasi-Marxist theories
going by the name of world systems theory (WST) or dependency theory argues the reverse: the
international economy and international trade are malign forces that sort different areas into a ‘core’,
‘semi-periphery’, and ‘periphery’. This is a system-level argument, in which the units merely express
forces playing out at a global level. Local institutions matter very little. Finally, there is an
intermediate position. It argues that global markets create a hierarchy of potential production sites
globally. These sites potentially have different income levels – thus the hierarchy. But the kinds of
state institutions and policies that emerge from local political struggles determine in part which
particular outcome will emerge from the set of possibilities revealed by an area’s position in the world
market. These struggles are not fully independent of the global market, because state revenues and
thus power ultimately rest on the revenue available in the local economy (combination of von Thünen
and Krugman models).
State and social actors determine whether these structural forces push a given region into relative
poverty or not. We can label the two generic strategies available to those actors as Ricardian and
Kaldorian. Ricardian strategies accept a country’s position in the global division of labour and try to
maximize growth and current consumption based on their existing portfolio of exports. Kaldorian
strategies try to change a country’s position in the global division of labour and shift to higher-value-
added production and exports at the cost of some current consumption.
Neoclassical economic explanations
Neoclassical economics (NCE) argues that differences in local governance institutions typically cause
global economic inequality but reject any argument for automatic inequality or exploitation.
Backwardness is relative, not relational: rising income in industrial societies makes non-industrial
societies look backward. International trade helps all economies, by maximizing allocative efficiency,
that is, by allowing them to produce whatever they make most efficiently and to exchange it for goods
they are less efficient at producing. In principle, the market might even produce global equality if
everyone had the same governance institutions.
The diffusion of innovation and of an increasingly complex division of labour produces spatial
inequality because not all areas take up innovations or continue innovating at the same rate. NCE
argues that the diffusion of innovation produces only relative inequality: while laggards may never
catch up, they usually do not regress either. Similarly, since innovation is endogenous, it obviously
cannot be true that development in one place causes regression in another, or that this decline is
necessary for innovation to take place in areas with high or rising income. Thus NCE says trade links
between rich and poor areas speed technological diffusion and lead to efficient resource allocation.
NCE arguments derive from Adam Smith and David Ricardo.
World systems theory and Marxist explanations
For WST, the development of capitalism in north-west Europe both required and caused not just
relative but also absolute backwardness elsewhere, as trade generated and exacerbated spatial
inequalities. WST argues that participation in the world economy determines domestic class structures,
the structure of export production, and ultimately state power. The spatial expansion of the world
economy differentiates national economies into core and periphery, but this specialization benefits
only core areas. Trade forces peripheral areas into the production of low-value-added goods that do
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