States Versus Markets by Schwartz
Chapter 1: The Rise of the Modern State; From Street Gangs to Mafias
States and Markets in the 1500s
Big questions are impossible to answer, yet issues can be narrowed down. Three major issues: limits
of agriculture, bad transportation and division of labor on state power, how efforts to create
something like the Asian empires led to modern states and the recentness of the modern state. State
builders wanted an ancient empire, yet created modernity.
Europeans wanted a centralized state, thus a monopoly on violence was needed. This in
order to keep control, yet it needs resources: taxation. Monopolies require resources. The only
advantage of Europe, the use of violence, lay in backwardness: conflicts among kings, nobles and
merchants.
Resources were sought outside the own state, as the backwardness of agriculture and
transport limited growth from within. Mercantilism was pursued. This sought to create a
homogeneous, monetized internal economy which could be taxed. All these patterns still exist today.
Agricultural Limits on State Formation
Until 1929, everything rested on agricultural goods. Grain was the primary good, and it set the limit
of transportation on 20 miles. Thus, all economic, social and political life took place in
microeconomies: towns and agricultural hinterland. This vicious cycle prevented economic growth
and income.
Barriers led to huge regional price differences. Trade with far-away communities only
happened with access to water. Until the era of canals and railroads, and well into that era, no
‘national economy’ existed. These barriers obstructed any attempt to move large amounts from the
microeconomies.
Yet, large organization could emerge under three exceptions: people and information could
move surplus, money could mobilize surplus and peasant labor, surplus and high value, low weight
could be transported on water. Aristocrats wanted a decentralized states, emperors a centralized,
and merchants wanted a network of independent city-states. Due to this conflict empires could vary
in size and duration.
The Nobility and the Local Economy
Nobles moved themselves to the grain, thus removing the problem of the surplus extraction. They
had direct control over surplus, law and violence and had legitimation of that control by a central
ruler.
Surplus extraction happened through custom and coercion. They made a society of mobile
people around immobile surplus. They had three problems: they couldn’t trust their peasants, thus
relying on a balance of terror, with a status competition with other nobles driving them to take more
and more of peasants. They also had a conflict with merchants from which they bought luxury goods.
They resisted monetization of their economy.
Inflation was a real problem that followed monetization. Inflation came through the
enormous amounts of gold and silver from the Americas. Nobels third problem was that they
couldn’t trust each other. They needed a collective solution. A king was needed, but how much
revenue and authority would he get?
Absolutist Monarchs, Internal Markets, and External Enemies
Kings authority weakened by the claims to land and taxation of nobility. Obligations between the two
legitimated nobility’s claim to land. How to subordinate them into a single hierarchy?
Kings tried to retain control over the nobility, who’s interest in extracting rent and passing
land to children overrode their loyalties to kings. Kings could increase their authority by replacing
,nobles’ monopoly on violence with their own, or could create a bureaucracy. Moving money to buy
grain was much more efficient than old ways.
Kings thus needed to monetize the microeconomies. Money disconnected bureaucrats from
land. In the search of money, they turned to merchants. Yet they needed also nobility support.
Wealth of kings could only increase when they took land from other kings. Organized armies were
needed, which had to be paid with money. War made kings borrow from merchants, and make pacts
with the nobility.
Merchants and the Wider Maritime World
They were based on contractual, ethnic or religious solidarity. They traded along long distance
(water) or over short distance (land). Luxury products were sold at the end of the route to gain
maximum profit. They linked communities through money and goods. Waterborne food allowed
surplus to grow, and thus cities to grow, resulting in more industrialization. They sought
independence by creating armored cities, and the kings made monetized markets for them.
Successful monarchs monetized microeconomies and thus linked them through merchants
with the global economy.
State-Building: Lawyers, Guns, Money and God
Each of the three had an own vision of the world. The weaknesses of every group and the
vulnerability to outsiders led to the combination of lawyers, guns, money and God: brokers, violence,
bureaucracies and myths were in play. Constitutions came into being, with the revival of the
conflicting Roman Law. It guaranteed absolute right to property (Nobility). Yet it stated that the kings
will was law.
This resulted in regular raising and financing of an army and the protection of property rights.
Intersection between kings and merchants created the public debt and trading companies as linked
institutions. Intersection between nobles and merchants produced lawyers. Intersection between
kings produced armies and believe in absolute sovereignty.
State building was at first a form of organized crime. Kings sought to transform a multitude of
small areas run by nobles into one large ‘gang.’ Merchants benefited from protection. Inward
violence became legitimate.
Mercantilism as the Hinge: Internal and External State-Building Projects
This all was later called mercantilism. It was two sided. Trade surpluses and accumulation of metallic
money were the most practical way for kings to monetize their realms. States thus tried to use
external resources to provide immediate revenues while cultivating long-term internal ones. Money
was thus crucial to state building. Mercantilism also removed local barriers of the nobility. States that
did this successful weakened opponents, and mercantilism itself created new markets abroad.
Each of the European stated did this in its own way. War made states and states made war,
yet war also unmade states. Why were the Asian empires so vulnerable to this?
State-Building Outside Europe
China and South-East Asia and India are the main regions. In China, there were also internal and
external threats, yet these threats continued the central rule when victorious. The economy was
highly commercialized, which made it easy to gather resources needed to contain local rulers. Also
the merchants couldn’t stand against the emperor. Merchants couldn’t fuse with armies, and most
merchant activity was inward instead of outward.
The Indian Ocean and South-East Asia consisted of many trading communities linked
together. There was relative peace, and no monopolization of the sea-lanes. So there were two
extremes rare in Europe: parallel civil and military bureaucracies controlled and paid for by the king
and barred from direct landownership. And a multitude of ports unfettered by imperial authorities,
densely linked together.
, This was harder to achieve in Europe. More microeconomies meant more mercantile
opportunities, yet they were more vulnerable as in India/South-East Asia. Yet in Europe the
monarchs were much weaker, not able to keep the merchants at bay as in China (often shielded by
geography). There was no dominance by a single state in Europe, resulting in nearly continuous war.
Chapter 2: European Mafias Abroad Not mandatory
From Mafias to States: Mercantilism’s Internal Project
States were produces out of the multitude of ‘mafias’ in Europe. They preyed on neighbors and
overseas territories. Conflicts between kings led to improvement to organize violence. Yet, constant
conflict meant constant taxing, resulting in revolts. This resulted in a law-governed compromise
between kings, nobles and merchants money. Externally, sea-based powers were pitted against land.
Land-based powers never controlled central Europe fully, yet sea-based powers could use the
revenue of the trade overseas to fight land powers with nearly unlimited manpower. Spain/the
Habsburgs were most likely to dominate, and otherwise France. Yet it became England. How? In
Spain, the nobility was never fully subordinated and there was too much reliance on silver from the
Americas the French king also couldn’t tax his nobility.
Yet in England, the War of the Roses destroyed much of the nobility, and there was a lack of
threat from a land power. Furthermore, they blended monarchial, merchant and noble interests in
Royal companies exploiting foreign economies.
Spain
Nobility subordinated itself to battle the Muslims. Yet no true center emerged (Valencia, Catalunya
and Aragon and Castille). Only Castile had a modern tax system. This gap in tax income was bridged
with stolen silver from the Americas. The crown destroyed internal sources: in made opponents
stronger by driving out Muslims and Jews, silver led to inflation while the crown wasn’t dependent
on the nobility. The Netherlands and Portugal and Catalunya revolted when they were taxed.
Silver proved inadequate as source of revenue. Silver had enormous effects in Europe: it set
off inflation which weakened the nobility. It thus changed the power balance. And externally it
allowed people to buy Asian luxury goods, wanted by mercantilism.
France
It had a larges resource base than Spain as the agricultural revolution started in France. The king had
the right to place his administration in the provinces, and a number of institutions linked the king to
the nobility. During the 100 years war, the nobles agreed to a country wide tax for an army, which
they were excluded from. Merchants and farmers had to pay. Merchants could buy positions to
collect taxes, so the farmers paid nearly everything.
This lead to rebellions. The coastal merchants and peasants were grinded into the ground.
More and more offices were sold. The mercantile community was gutted, yet France remained a
threat to its counterparts.
England
England was military and economically weak, yet had a number of strengths.
It had a central and systematic administrative apparatus, the treasury had a professional
staff, and the kings right to tax was established. It also had much coastal lines and rivers land
inwards, and trade-oriented towns and nobles. The economy was linked to the global economy, and
was easily monetized. The little army required little costs. When trying to get more control, the
English Civil War emerged for consent of taxation.
The fusion of noble and mercantile interests created a potential community of interests
between a commercial nobility interested in protection and the central state. After the civil war the
king needed consent to rule. The commercial nobility had the funds to raise an army on its own. Only
England had the fiscal base needed to sustain global operations that eventually would help fund the
industrial revolution.
, Mafias and Mercantilism Abroad: The External Side of State-Building
European states that used mercantilist policies to acquire specie (money) to widen the tax base and
pay for military and civil bureaucracies faced two problems. The division of labor and the potential
revenue were kept small, and the backwardness meant that there was a negative trade deficit with
other regions.
The constant flow of money to the east required monarchs to monetize their economies.
How did Europeans gather specie overseas? Silver from the Americas directly gave specie. Violently
taking control of trade with Asia reduced the flow. Internally states acquired enormous revenue by
taxing eastern goods. And those eastern goods could be re-exported to other countries. The pillage
of the Americas gave huge amounts of specie and had three effects. European economies were
monetized, the labor division expanded, and slave labor became normal.
Yet, real wealth lay in the Indian Ocean. European incursions into broader Asia tapped into
enormously wealthy societies and allowed a continuous accumulation of wealth.
Three European Powers in the Indian Ocean
Three countries dominated the trade: England, Portugal and the Netherlands. There were also three
major regions of trade: the western Indian Ocean, the eastern Indian Ocean and the Chinese sea.
Luxury and bulk goods were traded, and because everyone wanted something from the other, all had
to coexist. There was twofold attraction to European states: generating high revenue with controlling
large supply of goods with potentially high levels of demand, and cutting out the intermediaries in
the middle east.
The three countries fasted themselves to the Indian Ocean economies: Portugal occupied the
strategic ports, the Dutch attempted to monopolize production and the English integrated European
and Indian Ocean societies.
Portugal
They sought gold and slaves for sugar and tobacco production. Their advantage came from organized
violence: feitorias (forts with trade posts) and a state-owned military operation for the transports of
goods to Portugal and the military organization running the feitorias. They started seizing ports with
a divide-and-conquer strategy. They sold cartazes, a permit to trade.
Yet, after 50 years, the dominance started to fade. Other traders also used the technological
advantages such as the cannon and the triangle sail. The state-run military organization for the
transport of goods didn’t acquire enough revenues and the wholesale of goods in Europe lay in the
hands of Antwerp and Amsterdam. The dominance started to unravel, as the Dutch entered with
innovations.
Holland
The Dutch added to the Portuguese mix a bureaucratic, commercial organization to organize trade
and control the production and sale of spice. 5 reasons for supremacy: (1) more, better, cheaper
ships, which allowed them to trade with less costs, and to get more grain an fish from the Baltic to
feed workers. (2) these ships allowed an undercut in the Baltic trade. (3) they developed the VOC, a
stock corporation.
(4) dominance over spice production was used to control all Indian Ocean exchange. The VOC
captured islands and eliminated rival producers of spices. They controlled the flow of goods in the
three Indian Ocean circuits. (5) profits were exported in a wider variety of goods: spices, textile, sugar
and drugs. Yet they had to yield to England’s EIC. The VOC oriented to profit maximization and cost-
cutting. Eventually, under pressure from the WIC, the EIC and the war with France, de VOC became
hostile to England, and England won.
England
