china's challeng; a lesson from history?

!

Seventeenth'Century'Mercantilism,'Trade'&'Empire:'!!!!!!!!!!!!!!!!!!!!!!!!!!!!!An!Analogue!of!Decline!for!China?!

David!K.!Cherrett!

ABSTRACT:'

In!the!early!twenty!first!century,!the!top!7!politico!economic!entities!control!less!of!the!world’s!landmass!than!at!any!period!since!1650.!This!reduction!in!terraEconcentration!has!had!two!obvious!effects.!Firstly,!we!are!witnessing!a!surge!in!resource!nationalism!as!states!look!to!secure!economic!resources!increasingly!perceived!to!reside!outside!the!traditional!borders!of!the!nation!states.!Secondly,!this!economic!imperative!has!coincided!with!the!rise!of!a!neoEmercantilism,!not!just!in!the!actions!of!the!nation!state!but!also!as!a!frame!of!reference!for!commentators!looking!to!predict!the!champions!of!the!new!great!game.!As!China!has!been!the!most!forthright!and!effective!of!the!neomercantile!challengers!to!the!existing!order,!it!follows,!the!neomercantilists!argue,!that!the!Chinese!state!will!triumph!and!become!the!world’s!biggest!superpower.!It!is!the!contention!of!this!paper!however!that!if!we!reverse!the!analysis!and!instead!ask!in!the!last!period!of!resource!nationalism!and!reduced!terra!concentration!ratios,!the!seventeenth!century,!who!was!expected!to!triumph!and!who!ultimately!triumphed!and!examine!the!causes!of!these!outcomes,!then!by!analogy!we!would!draw!very!different!conclusions!as!to!the!likely!winner!of!today’s!struggle!for!global!politicoEeconomic!hegemony.!

!!!!!!

17th!Century!Mercantilism,!Trade!&!Empire:!An!Analogue!of!Decline!for!China?!

!

September!2010! 2!

!

1. The! seventeenth! century,! mercantilism! and!

expectations!

The!‘long!century’,!loosely!defined!as!opening!with!the!failure!of!

the!Spanish!Armada!1588!and!closing!with!the!Treaty!of!Utrecht!

1713!that!defined!the!failure!of!French!ambition!at!the!end!of!the!

War!of!the!Spanish!Succession,!should!be!enjoying!a!resurgence!

of! interest.! For! whilst! attempts! to! compare! the! postOindustrial!

age!with!previous!centuries!are!wrought!with!difficulty,!the!early!

twenty!first!century!is!displaying!a!number!of!politicoOeconomic!

characteristics! that! were! definitive! to! its! earlier! cousin! the!

seventeenth! century.! ! From! a! sluggish! price! environment1,! to!

surging! resource! nationalism! given! a! perceived! shortage! of!

industrial! resources2,! there! are! shared! uncertainties! that! the!

significant!differences! cannot!obliterate.!The! similarities! can!be!

distilled! into! one! striking! observation.! The! top! seven! politico!

economic!entities!control!less!of!the!world’s!landmass!today!than!

at!any!period!since!1650.!!

!

Such!a!restriction!in!the!terraOconcentration!ratio!has!resulted!in!

both! periods! being! dominated! by! concern! over! resource!

availability.!In!the!words!of!one!historian!of!the!Spanish!Empire,!

the!seventeenth!century!witnessed!the!spreading!of!“the!roots!of!

European! imperialism! (which)! lay! in! the! competition! for!

resources!among!its!dynastic!states”3!Meanwhile!Goldman!Sachs!

has! coined! the! phrase! the! “revenge! of! the! (old)! political!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1!See! for!example!Thomas! J.!Sargent,! “The!Conquest!of!American! Inflation”!Princeton!University!

Press! ,!2001!for!a!technical!analysis!of!the!control!of! inflation!past!1970.!For!17th!century,!data!

series!compiled!by!Milja!van!Tielhof!and!Jan!Luiten!van!Zanden.!

2! See! for! example! Jeff! Currie! et! al,! Goldman!Sachs!March!14,! 2008!Commodities!Research! “The!

Revenge!of!the!Old!‘Political’!Economy”.!!

3!Maltby,!“Rise!and!Fall!of!the!Spanish!Empire”!2009.!He!goes!on!to!identify!that!during!much!of!

the!16th!and!17th!century!warfare!consumed!ten!times!more!revenue!than!all!other!functions!of!

Spanish!government!combined.!


!

September!2010! 3!

economy”! to! describe! the! state! based! competition! for!

commodities! in! the! 21st! century! and! the! secular! bull!market! in!

commodity!prices!experienced!since!20044.!!

!

Securing! resources! may! be! a! shared! characteristic! of! both!

epochs;! but! the! mechanics! of! securing! supply! has! of! course!

changed.! Currently! that! competition! is! played! out! in! the!

commercial! world,! between! corporate! and! sovereign! wealth!

funds,! whereas! the! seventeenth! century! used! combat! as! the!

primary!means!of!control!of!the!exchange!of!goods.!“War!rather!

than! the! promotion! of! social! or! economic! welfare,! was! the!

primary!business!of!the!early!modern!state”!argues!Maltby.!!

!

Nevertheless,! though! the! twenty! first! century! has! yet! to! have!

seen! outright! resource!wars,! the! scale! &! nature! of! commercial!

competition! has! increased! dramatically! in! recent! years.! The!

recent! sentencing! to! seven! years! imprisonment! of! a! senior!

Australian! mining! executive! by! the! Chinese! state! was! widely!

seen!as!an!unprecedented!attempt! to!politicize! to! the! level!of!a!

national! confrontation! an! ostensibly! commercial! dispute.! ! The!

perceived! intransigence! of! “Australian”! mining! corporations! in!

iron! ore! price! negotiations,! a! commodity! key! to! the! health! of!

China’s! benchmark! steel! industry5,! following! the!blocking!of! an!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4! Goldman! Sachs! March! 14,! 2008! Commodities! Research! “The! Revenge! of! the! Old! ‘Political’!

Economy”.!This!seminal!piece!by! Jeff!Currie!and!his! team!first!highlighted!the!similarity! in! land!

control!between!17th!and!21st!centuries.!Spot!prices!for!commodities!have!doubled!since!2004.!!5! See! for! example! Jakarta! Globe,! March! 29,! 2010.! “The! arrests! of! the! Rio! Tinto! employees! in!

August!were!initially!thought!linked!to!Beijing’s!anger!over!high!prices!it!paid!for!iron!ore!—!a!key!

commodity! for!China’s!booming!economy.!Rio!Tinto..! is!one!of! the! top!suppliers!of!ore! to!China!

and!a!key!industry!negotiator!in!price!talks!with!China’s!stateOowned!steel!mills.!!!The!secrets!the!

four! Rio! Tinto! employees! were! accused! of! obtaining! were! largely! related! to! the! annual! price!

negotiations.”!See!also!summary!from!Stratfor,!14th!July!2009!“Anshan!Iron!and!Steel!Group!Corp.!

came!under!investigation!on!July!14,!as!the!Chinese!Ministry!of!State!Security!continues!to!round!

up!people!involved!in!the!Rio!Tinto!espionage!case.!This!is!the!first!espionage!case!since!China!has!

passed!amendments! to! its! laws!guarding!state!secrets!at! the!March!National!People’s!Congress,!


!

September!2010! 4!

attempt! by! a! Chinese! aluminium! producer! to! take! over! assets!

from! Australia’s! leading! mining! company6,! allegedly! prompted!

the! Chinese! state! to! escalate! a! trade! dispute! to! the! diplomatic!

level.!!!

!

If! it! is!reasonable! to!consider! the!seventeenth!century!with!one!

eye!on!the!twenty!first!it!may!also!be!instructive!to!identify!why!

some! economies! succeeded! in! the! Early! Modern! period,! some!

failed!and!what!characteristics!they!shared,!with!a!view!in!part!to!

consider!implications!for!the!twenty!first!century!competitors.!!

!

2. The!seventeenth!century!trade!competitors!The! single! most! striking! observation! concerning! early! modern!

trade! competition! is! the! disparity! between! expectation! at! the!

beginning! of! the! period! and! actualisation! by! its! close.! Early!

sixteenth!century!“Spain,!scarcely!unified!under! the!domination!

of!Castile,!appeared!destined!under!the!new!Hapsburg!dynasty!to!

realize! the! medieval! mirage! of! a! universal,! that! is! world! wide!

catholic! empire”7.! However! the! outcome! was! very! different.!

Within! 100! years! economic! wealth! (silver)! had! “became!

inextricably! involved!with! defending! the! dynastic! and! religious!

hegemony! of! the!House! of!Hapsburg…colonial! silver! reinforced!

and! impoverished! an! outmoded! society.”! Spain!was! reduced! to!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!which!expanded!the!scope!of!economic!and!commercial!espionage.!Although!many!questions!still!

linger!on!how!this!will!affect!SinoOAustralian!government!relations!and!whether!this!qualifies!as!

an!espionage!case,! a! state!agenda! to! reconsolidate! central! control!over! the!Chinese!economy! is!

one!of!the!main!drivers!behind!Beijing’s!crackdown!on!Rio!Tinto.”!

6!So!also!the!escalating!dispute!between!China!and!Japan!over!fishing!rights!manifested!itself! in!

resource!conflict.!China!banned!the!export!of!rare!earths!to!Japan!following!the!political!spat!over!

the!fisherman!according!to!the!New!York!Times.!The!initial!embargo!will!last!through!the!end!of!

this!month.!China!had!accounted!for!97%!of!world!supply!of!rare!earth!minerals! in!2009,!and!a!

72%!cut! in! its! export!quotas! in!H2!has! already! sent!prices! soaring.!China’s!Ministry!of! Foreign!

Trade!has!denied!the!report.!7!Stein,!“Silver,!Trade!&!War:!Spain!&!America!in!the!making!of!Early!Modern!Europe”,!Baltimore,!

2000,!pg!104!


!

September!2010! 5!

“marginality!and!growing!backwardness.”!So!also! it! is! the!story!

with!that!other!colossus!of!the!early!phase!of!the!period,!France.!

“Once!omnipotent! in! the! late!seventeenth!century,!France,!after!

the! loss! of! Canada,! seemed! ‘feeble,! flabby! &! decadent’! to!

Gandara,!a!Spanish!anglophile!of!the!1750s.”8!!Yet!the!true!Titans!

of! the! period,! England! and! Holland,! were! of! relatively! minor!

international!consequence!in!the!middle!of!the!sixteenth!century.!

!

It! is! worth! examining! the! causes! behind! these! vastly! different!

trajectories! before! daring! to! draw! implications! for! our! own!

century.! Nevertheless,! the! story! of! the! failure! of! imperial!

ambition! is! at! least! a! gentle! reminder! of! the! lesson! in! hubris!

history!delivers!proponents!of!inevitable!outcomes!in!any!period.!

Such!awareness!may!be!of!use!in!discussion!of!the!inevitability!of!

the!Asian!century.!

!

3. The! Nature! of! political! organization:! a! precursor! to!

trading!success.!To!understand!the!common!theme!in!commercial!empire! in!the!

Early! Modern! period,! begin! with! the! winners.! In! his! masterful!

study!on!Dutch! trade,! Jonathan! Israel!noted!“the!ability!of!state!

institutions!to!further!the!objectives!of!the!mercantile!sector!has!

been! identified! as! a! most! significant! factor! in! the! rise! of! the!

Dutch!Republic!in!the!seventeenth!century”9.!Such!causality!was!

not! limited!to!the!Dutch!republic.!So!too,!British!success!was!as!

much!a! function!of! political! organization! as!military! victory.!As!

one!observer! of! the!period!notes,! “Britain!dominated!France! in!

the!nineteenth!century!because!it!could!organize!public!finances!

most! effectively! to! wage! war,! not! because! of! the! individual!

successes! of! its! battlefield! commanders.! British! superiority! in!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8!Stein,!pg!257!9!J.Israel,!“Dutch!Primacy!In!World!Trade!1585O1740”,!Oxford,!1989,!pg!12!


!

September!2010! 6!

this! field! of! public! finance! was! directly! related! to! British!

commercial! activities”10!which! in! turn! grew! out! of! seventeenth!

century!trading!success.!!!

!

In! examining! the! causes! of! trading! success,! local! and! regional!

studies!have!proved!a!rich!seem!to!mine.!Local!studies!of!British!

trading! activity! have! allowed! historians! to! explore! the!

relationship!between!the!state!and!the!trader!in!great!detail.!One!

feature! recurring! in! studies! of! trade! in! the! subcontinent,! for!

example,! is! the! emphasis! on! the! role! of! private! traders! in!

conducting! actions! that! led! to! English! commercial! victory! over!

the! French! in! India11,! rather! than! top! down! political! will! from!

London.! Critically! however,! the! success! of! the! English! private!

trader! was! not! the! product! of! his! innate! superiority! over! the!

French! negociant.! Indeed,! as! the! latter’s! successes! in! the!

Canadian! pelt! &! fishing! markets12! demonstrates,! when! French!

traders!were!freed!by!the!accidents!of!geography!or!whim!from!

direct!political! interference!they!could!compete!very!effectively,!

unlike!their!less!successful!comrades!in!the!subcontinent.!Rather,!

mercantile!success!was!a!function!of!a!(sometimes!unconscious)!

political!organisation!that!encouraged!commercial!innovation.!It!

is! significant! that! this! could! mean! an! absence! of! involvement;!

certainly!this!condition!was!notably!lacking!in!the!more!controlO

orientated!economies!of!say!France!and!Spain.!

!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10!Rothermund!“Asian!Trade!&!European!Expansion!in!the!Age!of!mercantilism”!1981!pg!xii!11!I.B.Watson,!“Foundation!for!Empire:!English!Private!Trade”,!New!Delhi,!1980;!P.Nightingale,!

‘Trade!&!Empire!in!Western!India,!1784O1806”,!London,!1970!

12!see!for!example!the!map!of!Augustine!FitzHugh!“a!chart!of!Newfoundland”,!Wapping,!1693,!

purporting!to!show!the!expanse!of!French!fisheries!as!against!the!small!proportion!of!sea!claimed!

by!English!fishermen!graphically!illustrates!British!concern!at!the!apparent!success!of!French!

traders!in!the!region.!


!

September!2010! 7!

Quantifying!such!a!claim!is!of!course!difficult.!However,! turning!

to! another! market! popular! with! historians! of! local! trade! it! is!

interesting!to!see!the!sheer!size!of!the!role!of!private!traders! in!

British! trading! activity! in! China,! in! contrast! to! the! strictly!

controlled!French!trading!system.!!

!

Tonnage'China'Trade,'Canton'(metric'tonne)''

We! can! assert! that! the! growing! role! of! private! traders!

corresponded! with! the! period! when! British! dominance! in! the!

Eastern! trade! accelerated.! Establishing! causation! is! more!

complex,! but! the! correlation! at! least! points! to! the! utility! of! the!

private! trader! in! developing! growth! in! trade! share! if! not! in!

actually!causing!it.!

!

Critically!of! course,! this!does!not! assume! the!private! individual!

per!se!was!a!superior!trader!to!the!state!organization.!Indeed,!the!

Figure'1.'source:'Rothermund'


!

September!2010! 8!

Dutch!also!enjoyed!success!over!commercial! competitors! in! the!

East,! yet! rather! than! emphasizing! the! private! trader,! here! we!

need! to! consider! the!unique! collaboration!between!VOC! (Dutch!

East! India! Company)! and! the! Dutch! state.! Although! “most! of!

Dutch! trade! and! shipping…was! characterized! by! free!

enterprise”13,! the! VOC! made! a! unique! contribution! to! Dutch!

commercial! success.! From! its! founding! in! 1602,! the! VOC! as! a!

trade! body! enjoyed! a! much! closer! relationship! with! the! state!

than!that!in!England,!and!a!far!more!successful!one!than!that!in!

France.! As! Israel! observes,! “the! VOC! was! a! unique! politicoO

commercial! institution,! and! one! that! could! not! be! imitated!

anywhere!else! in! the!world,!because!the!United!Provinces!were!

the!world’s!only! federal!republic! in!which!a!collectivity!of! town!

governments,! committed! to! the! advancement!of! trade,! industry!

and!navigation,!also!wielded!great!military!and!naval!power.”!!As!

a! result! the! VOC! was! relatively! free! of! direct! interference!

enabling!it!to!act!like!a!private!trader!rather!than!an!extension!of!

the!state.!!

!

Contrast! the! status! of! the! VOC! with! its! sister! organization! in!

France.! Cole! notes! the! ongoing! interference! of! the! state!

appointed! controleurOgeneral! in! Levant! trade;! controlling!

shipping! patterns,! banning! sailors! from! the! right! to! trade.!

Meanwhile,! the! Dutch! model! was! not! only! of! relevance! in! the!

East.! Rather! “the! unique! suitability! and! aptitude! of! the! Dutch!

federal!state!for!the!advancement!and!protection!of!trade!in!the!

seventeenth! century...! also! powerfully! buttressed!maritime! and!

commercial! expansion! internally,! through! its! impact! on! public!

and!private!conduct.!The!United!Provinces,!as!a!republic,!enjoyed!

all! the! advantages! of! commercial! and! financial! stability! which!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13!M.Tielhof,!“the!Mother!of!all!Trades”,!Baltic!Grain!Trade!in!Amsterdam!from!the!late!16th!Century!to!the!early!19th!century”,!Brill,!2002!


!

September!2010! 9!

early! modern! princely! and! absolutist! regimes! generally!

lacked.”14! It! is! therefore!neither!the!private!trader!nor!the!state!

trade! in! itself! that! succeeded;! rather! it! was! the! nature! of! the!

merchants! relationship! with! the! state! and! visa! versa! that! lay!

behind!commercial!success.!

!

Let!us!explore! the! character!of! the! relationship!between! trader!

and!state!further.!One!way!to!illustrate!the!differences!in!attitude!

towards! the! organization! of! trading! systems! is! comparing! the!

iconography! of! authority! in! the! period.! Consider! for! example!

from!Holland!Abraham!Storck’s!“A!River!View”15,!painted!in!the!

last!decade!of!the!seventeenth!century!with!Dutch!trading!power!

at!or!just!passed!its!peak.!In!this!typical!Dutch!riverscape!we!see!

in!the!centre!of!the!image!a!Dutch!'boeier!yacht',!and!on!the!right!

a!'tjalk',!a!Dutch!sprigOsail!barge,!which!served!as!the!workhorse!

of! the! short! haul,! trades.! Tucked! in! behind! is! a! 'statenjacht',! a!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!14!Israel,!pg!412

!

15!National!Gallery!London!


!

September!2010! 10!

vessel!used!by!the!States!General!(the!chamber!of!representative!

of!the!Dutch!United!Provinces),!for!the!transport!of!its!members!

or! foreign!dignitaries,!with! the!arms!of! the!Province!of!Holland!

on!her!stern!and!a!Dutch!ensign.!The!trinity!of!figures!places!the!

vessel! of! state! alongside! two! trading! barges! typical! of! the! bulk!

trades.!Together!trade!and!state!approach!the!military!trappings!

of! imperium,! a! warship,! approaching! from! the! opposite!

direction;!empire!as!a!function!of!trade!and!state.!

!

In! contrast! Spanish! art! shows! a! remarkable! dearth! of! the!

iconography! of! state! involvement! in! trade! for! an! economy! that!

“depended!absolutely!on! specie! and!principally!on! the! treasure!

of!the!Indies!landed!at!Seville!for!the!king.”16!Where!the!imagery!

exists,!such!as! in!the!cartography!of! the!period,! the!emphasis! is!

on! the! imperial! rather! than! the! commercial! strength! of! the!

crown.! Gutierrez’! “Map! of! Empire”! 1562! displays! Philip! II! as! a!

new! Neptune,! bedecked! in! martial! glory,! warding! off! the!

monsters! that! threaten!his! imperium.!But!not! a! trading!boat! in!

sight,!unless!we!consider!the!galleon!to!the!top!right,!scuttling!for!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!16!Parker,!“The!Army!of!Flanders”,!1972,!quoted!Stein!pg!40,!interestingly!the!National!Maritime!

Museum!at!Greenwich,!home!to!an!impressive!collection!of!17th!century!marine!art!houses!257!

works!from!the!17th!century!of!which!only!1!(and!that!is!a!painting!of!the!Somerset!House!

conference)!is!by!a!Spaniard.!The!Maritime!museum!in!Barcelona!has!no!equivalent!collection.!!


!

September!2010! 11!

shelter! under! the! imperial! wing.! The!message! is! clear.! Empire!

was!secured!by!power!and!only!then!could!trade!flow.!

!

Now,!it!is!important!to!recognize!that!the!distinction!in!attitudes!

of! state! and! merchant! was! not! clearOcut.! As! Gauci’s! work! on!

attitudes!to!seventeenth!century!British!merchants!attests17,!the!

English! establishment! view! of! the!merchant!was! ambiguous! to!

say! the! least.!Nonetheless! it!does!appear! that!national!attitudes!

towards!the!merchant,!and!the!organizations!that!supported!this!

attitude,!were!distinct!between!the!nation!states.!!

!

4. Economic!models!of!trading!success!So!why!was!political!organization!more!central!to!trade!success!

rather! than! say! financial! conditions?! After! all,! contemporaries!

were!very!clear!as! to! the!cause!of!Dutch! trading!success.!As!Sir!

Josiah!Child,!governor!of!the!East!India!Company!and!proponent!

of! mercantilism,! bemoaned! in! 1672,! the! cause! of! Dutch!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!17!P.Gauci,!“The!Politics!of!Trade,!The!overseas!merchant!in!state!and!society!1660O1720”,!OUP,!

2003!

Figure'2.'Source:'Tielhof'&'Van'Zanden'


!

September!2010! 12!

supremacy!was!clear.!Low!Dutch! interest!rates!“hath!robbed!us!

totally! of! all! trade! not! inseparably! annexed! to! this! Kingdom!

(England)”.!Dutch!merchants!borrowed!at!2.5%!whereas!rates!in!

England!were!5%!and!Germany!higher!still.!

!

It! is! important! however! to! put! financial! conditions! as! a!

prerequisite! for! growth! in! context.! Using! the! data! compiled! by!

Milja!van!Tielhof18!and!Jan!Luiten!van!Zanden!which!basis!prices!

at! 100! for! 1450O75! (see! figure! 2)! we! see! prices! rose! 800%!

between!1560O1660!with!resultant!upward!pressure!on!interest!

rates!yet!this!was!the!Golden!age!of!Dutch!prosperity.!In!contrast,!

prices! and! rates! actually! stabilised! 1660O1670,! the! very! period!

when! this!hegemony! came!under! threat,!while! interest! rates! in!

the! period! of! decline!were! 2O3%! lower! than! in! the!Golden! age.!

Indeed,!Dutch!interest!rates!remained!very!low!into!the!1790s,!a!

period! when! their! share! in! trade! had! dramatically! declined.!

Cheaper!interest!rates!may!have!been!commercially!significant!in!

a! high! rate! environment,! but! became! far! less! so! as! the! panO

European!rate!environment!eased.!Interest!rate!differential!alone!

is!not!therefore!sufficient!to!explain!Dutch!trading!success.!

!

An! alternative! economic! thesis,! Hamilton’s! famous! “profit!

inflation”! model! of! early! modern! economic! advancement! has!

been!similarly!critiqued19.!In!this!model!the!seventeenth!century!

saw! prices! raise! more! than! wages,! resulting! in! supraOnormal!

returns!for!industrial!owners!that!were!ploughed!back!into!new!

technology,! particularly! smelting.! The! result! was! a! proto!

industrial! revolution! and! English! &! Dutch! trading! supremacy.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!18!Milja!van!Tielhof!!and!Jan!Luiten!van!Zanden!19!see!J.Munro,!“Money,!prices,!wages,!and!‘profit!inflation’!in!Spain,!the!Southern!Netherlands,!and!

England!during!the!Price!Revolution!era,!ca.!1520!O!ca.!1650”!Department!of!Economics,!

University!of!Toronto,!May!2008!


!

September!2010! 13!

However,! for! half! a! decade! now! the! data! assumptions! of! this!

model! have! been! under! attack.! Munro! points! out! firstly,! citing!

David!Felix,!“there!is!no!correlation!either!between!the!degree!of!

price!inflation!and!the!degree!of!profit! inflation,!or!between!the!

rates! of! profit! inflation! and! the! apparent! rates! of! industrial!

growth”20.! Secondly! and! even!more! strikingly,! he! demonstrates!

that!even!if!there!was!a!connection!it!did!not!apply!in!the!earlyO

modern!Low!Countries.! In!his! study!of!Brabant,! a! region!which!

throughout!this!period!“was!economically!much!more!advanced!

than!England,!let!alone!Spain:!with!far!more!extensive!and!richer!

industrial,! commercial,! and! financial! sectors! …! Brabant! almost!

consistently! experienced,! in! Keynes’! terminology,! ‘Profit!

Deflation’,! at! least! in! terms! of! the! ratio! of! nominal! wages! to!

industrial! prices,! without! any! apparent! negative! consequences!

for! industrial!growth,!certainly!not!during! the! twoOthirds!of! the!

sixteenth!century!preceding! the!Revolt!and!during! the! first! two!

decades!of!the!seventeenth”21!

!

Low! interest! rates! or! profit! inflation! arguments! alone! cannot!

fully! explain! Dutch! or! English! success! despite! the! claims! of!

contemporaries.!A!purely!mechanistic!argument!for!empire!does!

not!hold!up.!

!

5. Innovation! lead! to!success!–!Dutch,!English!&!French!

trading!models!

Rather,! in! the! cases! of! the! Dutch! Republic! &! England,! the!

organization! of! the! state! was! key.! And! above! all,! that!

organization!was!not!necessarily!conscious;!it!was!an!accident!of!

the! political! origins! of! the! respective! state.! But! it! had! a! shared!

characteristic:! the!ability! to! leave!merchants! to! innovate,!either!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!20!Munro!pg!15!citing!Felix,!‘Profit!Inflation’,!pp.!441O43

!

21!Munro!pg!21O23!


!

September!2010! 14!

as! private! traders! or! as! trading! bodies,! whilst! protecting! their!

interests! at! home! and! abroad,! through! coercion,! taxation! and!

law.!Let!us!be!clear:!by!innovation!we!mean!an!economic!act;!to!

innovate! is! to! optimize! the! allocation! of! surpluses! (whether! in!

bulk,! rich,! producer! or! factor! markets)! to! areas! of! deficit,! and!

visa!versa,!to!the!mutual!benefit!of!trader!and!state.!So!also,!we!

assume! an! antithesis! to! innovation,! subcontracting.! Here! we!

define! subcontracting! as! the! suboptimal! or! uneconomic!

allocation!of!resources.!This!definition!of!course!means!an!action!

is! judged! by! its! effect! not! its! intent;! two! similar! actions! in!

different!states!therefore!can!be!opposite!types!of!behaviour.!So!

we!can!describe!the!act!of!the!East!India!Company!tendering!the!

building!of!boats!to!subcontractors!as!being!an!act!of!innovation!

in! that! the! (unintended)! effect! was! to! stimulate! new! vessel!

design! for! the! commercial! benefit! of! all! parties.! In! contrast! the!

Spanish! government’s! lease! of! trade! offices! resulted! only! in!

shortOterm!financial!benefit!and!longerOterm!abuse!of!office!and!

as!such!under!our!definition!was!an!act!of!subcontracting.!

!

It!is!interesting!in!the!context!of!discussing!attitudes!of!the!state!

to! innovation! to! compare! the! French! state!with! the! Dutch! and!

English! models.! “The! period! 1683O1700...(was)! of! the! utmost!

importance…tariffs!were! raised! again! and! again,! and! industrial!

regulations!were!extended!in!scope!and!made!more!meticulous,!

while! the' vigorous'attempt' to'maintain' the' industrial' status'quo'

by'regulation'amounted'in'some'degree'to'a'new'departure”22!(my!

italics).! Indeed,! throughout! the! period,! the! state! maintained! a!

“sturdy!adherence! to! the! idea! that!French!manufactures!should!

be!protected!by!high!import!duties.”!Cole!lists!71!distinct!decrees!

1683O1701! imposing! new! tariffs.! Most! early! modern! states!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!22!Cole!“French!Mercantilism!1683O1700”!


!

September!2010! 15!

applied! tariffs.! But! there! was! a! particular! quality! to! French!

regulation.! The! Calico! legislation! of! the! 1680’s! and! 90s’! “was!

merely! one! of! a! number! of! instances! in! which! the! French!

government!tried!to!restrict!or!arrest!the!forces!of!technological,!

industrial!or!commercial!change.”23!So!in!a!declaration!of!1694!it!

was! forbidden! that! buttons! be! made! of! wool! instead! of! silk;!

beaver!hats!were!restricted!to!protect!French!milliners;!stocking!

looms! for! woolen! stockings! were! attacked! 1680.! All! these!

measures! and! others! shared! one! defining! characteristic.! They!

were!largely!socioOeconomic!rather!than!fiscal:!to!prevent!unrest!

driven!by!innovation!upsetting!the!established!order,!rather!than!

as! a! means! to! securing! trade.! The! unintended! consequence!

however! was! the! inefficient! development! of! markets! and!

ultimately!domestic!economic!decline.!

!

It!now!beholds!us! to!ask!what!conditions!enabled!merchants! to!

innovate,!a!freedom!lacking!in!top!down!state!sponsored!trading!

bodies!(as!in!France)!or!state!run!trade!systems!as!in!Spain.!!Jaco!

Zuijderduijn! examination! of! the! late! medieval! Dutch! state! has!

drawn! attention! to! the! phenomenon! of! innovation.24! He!

examined! the! political! conditions! existing! in! the! Dutch! state!

during! its!rise! to!preOeminence.!Significantly!he!noted!“a!strong!

state! does! not! automatically! create! the! prerequisites! for!

economic!growth.!The!opposite!is!rather!true:!without!a!certain!

balance! of! power! the! state! is! likely! to! neglect! the! economic!

interests! of! its! subjects.! The! possibilities! for! economic! growth!

thus!depend!on!the!precise!composure!of!the!political!climate.!In!

Holland! two! phenomena! stand! out:! the! weak! position! of! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!23!Cole,!“French!Mercantilism!1683O1700”!24!Jaco!Zuijderduijn,!“Capital!market!and!interest!rate!in!medieval!Holland”!Global!Economic!

History!Network!Seminar!“The!Rise,!Organization!and!Institutional!Framework!of!Factor!

Markets”!Utrecht,!June!2005.!


!

September!2010! 16!

nobility!and!clergy!and!the!strong!position!of!cities!–!a!position!

that! never! became! a! hegemony! though!! The! result! was! state!

formation! in! consultation! with! the! Holland! citizens.”! And! this!

consultation! lies! at! the! heart! of! creating! an! environment! for!

innovation!to!foster.!!

!

This! is! a! crucial! distinction! from! any! grand! theme! of! social!

determinism.! For! as! Stein! warns25! “it! is! a! gross!

oversimplification! to! blame! the! absence! of! the! enterprising!

bourgeoisies!found!in!northwest!Europe!in!the!late!seventeenth!

and! early! eighteenth! century! solely! on! the! antiObusiness! value!

system! of! a! society! dominated! by! a! landed! aristocracy! of!

seigniorial! privilege.”! But! it! is! maybe! not! so! gross! to! draw!

attention! to! the! importance! of! a! political! organization! in! the!

effective!development!&!maintenance!of!trading!power.!

!

In!this!model,!trade!success!doesn’t!grow!out!of!urbanization!or!

protoOindustrialisation;! rather! successful! urbanization! is! itself!

the! product! of! a! certain! type! of! benign! political! organization! –!

often! accidental! or! unwitting,! but! benign! nonetheless,! which!

itself! is! the!primary!cause!of! trade!growth.!Gauci’s!work!on! the!

merchant!and!parliament! in!England!shows!the!growing!role!of!

the! mercantile! interest! not! just! in! promoting! policy! through!

increased!presentation!of!petition!and!appeals,!but! in! the!act!of!

making! law;! by! the! mid! seventeenth! century! 7%! of!

parliamentarians! could! be! classed! as! merchants! by! origin26.! If!

much! of! Britain’s! success! was! a! function! of! mercantileOstate!

organization!however,!much!of!it!was!accidental.!Whilst!The!East!

India! Company! cannot! be! confused! with! the! English! state,!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!25!Stein!&!Stein,!“Silver,!Trade!&!war:!Spain!&!America!the!Making!of!Early!Modern!Europe”!

Baltimore,!2000,!pg!266!26!Gauci,!pg!199,!table!5.1!


!

September!2010! 17!

nonetheless,! the! reaction! of! the! company! is! illustrative! of! the!

phenomenon.! For! example! in! response! to! escalating! new!

building!costs,!as!mentioned!above!the!company!evolved!a!policy!

of!renting!ships!rather!than!building!their!own.!!This!accident!of!

balance! sheet! stimulated!private! contractors! to! create!new!and!

more! efficient! designs,! which! went! on! to! trump! the! state!

sponsored!vessels!designed!under!government!contact!at!French!

and! Spanish! yards27.! Superiority! in! merchant! marine! was! one!

factor! contributing! to! British! penetration! of! the! Spanish! silver!

market!by!the!mid!seventeenth!century.!Securing!such!lucrative!

shipments! became! easier! when! English! freight! rates! were! “six!

times! lower! than! the! Spanish! could! provide”! from! Seville! to!

Caribbean,!a!function!largely!of!better!design.28!!

!

6. Subcontracting:! the! road! to! trading! failure! –! Spain,!

Portugal!

To! ensure! commercial! hegemony,! the! political! organisation! of!

the!state!therefore!needed!to!encourage!the!innovation!required!

to!maintain!its!dominance!as!trade!evolves.!The!interests!of!state!

and! merchant! needed! to! be! aligned.! Critically,! encouraging!

innovation! by! delegating! is! distinct! from! subcontracting! or!

delegating!with!an!abnegation!of!authority.!!Both!innovation!and!

subcontracting!are!types!of!economic!outsourcing!or!delegation,!

but!the!distinction!lies!in!the!effect!of!the!act!of!outsourcing.!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!27! Rowan!Hackman,! “Ships! of! The!East! India! Company”! 2001,! page!31! “At! first! the! [East! India]!

Company!bought! its!own!building!yard!at!Deptford,!but!by!1627!this!was!sold,! it!being!realised!

that!it!would!be!better!financially!to!have!ships!built!in!private!yards!for!private!owners,!subject!

to! the!company’s! specifications.!Although! the!Company!owned!a!number!of!vessels,! these!were!

mainly!smaller!ships!used!for!dispatch!purposes!around!the!coasts!of!India!or!to!China!or!Britain.!

A!fewer!larger!ships!were!actually!warships!used!to!protect!the!Company’s!property!and!vessels!

against! pirates,! both! Eastern! and! European,! which! swarmed! in! the! Indian! Ocean! in! the!

seventeenth!and!first!half!of!the!eighteenth!centuries.!Apart!from!these,!the!vast!majority!of!East!

Indiamen!were!privately!owned,!but!built!expressly!to!the!Company’s!specifications.”!

28!Taylor,!“Trade!Neutrality”!


!

September!2010! 18!

Subcontracting!was! superficially! attractive! in! that! it! offered! an!

immediate! return! for! the! appropriated! right! i.e.! revenue,! but!

because! of! the! legist! nature! of! the! exchange! it! was! far! more!

insidious;! for! at! its! heart! subcontracting! can! be! defined! as! the!

inefficient! allocation! of! the! states! resources! to! the! individual;!

innovation! as! the! efficient! allocation! to! the! individual! in! the!

states! interest.! If! the! case! studies! for! innovation! are! the!

successful! states! of! England! and! the! Dutch! Republic,!

subcontracting!is!at!the!heart!of!the!great!trading!failures!in!the!

seventeenth!century.!In!its!rawest!form,!this!seems!to!have!been!

the!fate!of!the!Spanish!empire!from!the!late!sixteenth!century.!!

!

In!contrast!to!the!Dutch!world!trade!system,!Spain!put!in!place!a!

“transatlantic!trading!system”.!But!before!examining!the!Spanish!

system!an!important!qualification!is!required!to!avoid!the!charge!

of! reductionism.! Subcontracting! is! not!unilateral! in! the! Spanish!

or!in!any!system.!Indeed,!“mining!and!commercial!activity!in!the!

American! colonies! remained! as! in! the! peninsula! the! sphere! of!

private! initiative”29! increasing!mining! technology!and!efficiency!

impressively,! a! clear! example! of! efficient! innovation.! Yet! at! the!

same! time! as! such! independent! action! was! underway! in! the!

colonies,! in!Madrid! officers! of! the!mints!were! able! to! purchase!

their!positions,!“a!practice!that!could!lead!to!gross!malfeasance”,!

which! Stein! argues! lay! at! the! heart! of! the! Spanish!model.! This!

corruption! at! the! top! of! the! commercial! system! ensured! that!

resources! would! not! be! allocated! efficiently! and! undid! the!

benefits! accrued! from! provincial! &! technical! innovation.! In! its!

starkest! form,! such! subcontracting! of! office!meant! assets! were!

misappropriated!from!the!state,!either!internally!or!externally!in!

the!form!of!piracy.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!29!Stein!&!Stein,!pg!22!


!

September!2010! 19!

!

This! is! apparent! from! comparing! American! silver! production!

with! Spanish! tax! receipts.! From! around! 1620! production! and!

receipts!diverge.!From!an!average!mean!loss!of!around!9%!in!the!

previous!50!years,!losses!rise!to!account!for!a!staggering!80%!of!

production!being!misdirected!by!1655.!

'

The' price' of' subcontracting:' Spanish' tax' receipts' and' American'

silver'production''

By! examining! the! percentage! trend! rather! than! the! absolute!

numbers! in! the! loss!one!does!not!have! to!enter! into! the!debate!

over!the!proportion!of!silver!usefully!redirected!(e.g.!retained!in!

the! colonies! for! payments)! as! opposed! to! misused.! The!

percentage! figures! show! unequivocally! that! the! system! was!

breaking! down! progressively! from! the! early! 1600s.! The!

innovation! of! individuals! appears! to! be! working! against! the!

political!organization,!rather!than!for!it.!State!and!trader!interest!

Figure'3.'Source:'Stein'&'Stein'


!

September!2010! 20!

(common!or!individual)!were!no!longer!aligned;!in!fact!they!were!

diametrically!and!destructively!opposed.!

!

Most! importantly,! this! helps! us! refine! our! definition! of!

innovation.! Clearly! there! was! significant! individual! and! even!

systematic! innovation!underway! in! the!Spanish!silver! trades!by!

the!mid!seventeenth!century.!But!it!was!not!assisting!the!state!in!

its! primary! trading! function.! Profitable! participation! in! foreign!

trade! and! economic! growth! depends! on! a! nation’s! ability! to!

allocate!resources!so!they!are!always!available!where!growth!is!

most! intensive.30! In! effect,! surpluses! should!move! as! efficiently!

as! possible! to! areas! of! deficit,! a! process! assisted! under! our!

definition!by!innovation.!The!most!effective!states!will!therefore!

be!those!able!to!encourage!the!most!efficient!mechanism!for!this!

allocation.!In!the!case!of!Spain,!the!state!was!singularly!unable!to!

allocate! the! American! resources! efficiently! to! developing! the!

economy,!or!indeed!for!much!of!the!period!was!unable!to!allocate!

the! stolen! resources! at! all,! the! ultimate! failure! of! a! states!

economic!policy.!

!

Contrast! this! failure! with! the! Dutch! and! English! states.! All!

trading! nations! need! a! natural! advantage! like! the! Venetians! in!

the!Med!and!the!Portuguese!with!pepper.!The!Dutch!had!access!

to!the!grains!and!timber!from!the!Baltic.!But!this!access!was!not!

the!sufficient!cause!of!their!success;! indeed!for!decades!prior!to!

1560!the!Hanseatic!League!cities! in!both!perception!and!reality!

was! the! champion! of! the! trade.! It! was! only! when! the! Dutch!

harnessed!their!natural!advantage!of!location!with!advantages!of!

political! organization! (the! creation! of! an! educated! shipbuilding!

community!who!innovated!new!designs,!extensive!investment!in!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!30!Rothermund!pg!126!


!

September!2010! 21!

shipbuilding! encouraged! by! the! developing! system! of!

shareholding,! itself! a! product! of! the! Dutch! state’s! need! to! find!

unconventional! sources! of! funding),! driven! in! part! by! need! to!

master! the! elements! and! the! disadvantages! their! small! state!

faced,!that!the!Dutch!were!able!to!master!the!trade.!!

!

We!need!to!identify!more!exactly!how!the!innovation!required!in!

the!early!modern!state!to!support!trading!success!evolved.!From!

this!we! can! draw! some! general! conclusions! as! to! the! nature! of!

political!organization!required!to!promote!trading!success.!!

!

7. The! mechanics! of! innovation;! Dutch! Republic! &! the!“mother!trade”!

Historians! have! talked! of! three! revolutions! underpinning! the!

early! modern! era.! First! the! Commercial! revolution! of! the! late!

seventeenth!century,!that!is!Dutch!use!of!capital!to!finance!trade.!

Second,! a! financial! revolution:! British! link! private! and! public!

finance!to!pay!for!wars!in!Europe!and!expand!in!Asia.!Finally,!the!

late!eighteenth!century!industrial!revolution.!

!

If!we!focus!on!the!commercial!revolution!so!significant!to!Dutch!

hegemony! Israel! identified! four! major! areas! of! innovation.!

Firstly,!concentrating!domestically!on!the!most!profitable!lines!of!

trade! and! production,! while! buying! grains! and! raw! materials!

abroad.! Secondly,! intensification! of! agricultural! production! at!

home.!Thirdly,!the!mechanisation!of!shipbuilding;!and!finally,!the!

development! of! large! scale! credit! provision! for! trading.! The!

result! of! these! innovations,! he! argues! was! that! “in! the! closing!

decades!of! the!seventeenth!century,! the!growing!reliance!of! the!

Dutch! entrepot! on! the! rich! trades,! and! therefore! on! export!


!

September!2010! 22!

industries,! was! turning! Holland! into! the! technical! research!

laboratory!of!the!western!world.”31.!!

!

What!mechanism! drove! this! process! of! innovation?! Braudel,! in!

his!seminal! “Civilisation!materielle”,!postulated!a! long!sequence!

of! western! world! economies! each! revolving! around! a! single!

predominant! centre,! from!Venice! in! the!1400! through!Antwerp!

and!Genoa!to!Amsterdam!by!1600,!to!be!surpassed!by!London!by!

1800.!He!argued!the!mechanism!for!control!lay!with!dominance!

of!bulk!trades.!Dutch!domination!of!the!bulk!trades!(as!opposed!

to!trade!in!rich!goods)!from!the!end!of!the!sixteenth!century,!at!a!

time!of!rising!famine!and!economic!stagnation!in!most!of!Europe,!

accounts! for! Dutch! success.! As! Dutch! bulk! freight! contracted!

after!1650,!then!it!follows!that!point!marks!the!apogee!of!Dutch!

success.! Yet! Israel! argues! this! emphasis! on! success! in! the! bulk!

trades!is!misplaced!and!inaccurate.!He!argues!Lubeck!dominates!

much! of! Baltic! trade! as! late! as! 1585,! long! after! Dutch! had!

achieved!trading!hegemony.!!

!

According! to! Israel,! Braudel! “misses! the! crucial! shift! both! in!

scope! and! degree! of! concentration! of! economic! power”! in! the!

early!modern!global!economy.!Given!the!limited!scope!of!political!

entities!before!the!nineteenth!century,!markets!were!subject!to!a!

host! of! influences! and! changing! foci! at! any!one! time.!Moreover!

the!teleology!of!empire!was!characterized!by!action!followed!by!

prolonged!periods!of!stasis!rather!than!a!continuous!dialectic.!As!

such,! the! transfer! of! power! articulated! in! Braudel’s! view! is! a!

misrepresentation.! Rather! than! a! transfer,! there! are! sudden!

surges!of!influence.!Israel!believes!the!reason!to!these!surges!lies!

in! success! in! the! rich! trades,! rather! than! the! bulks.! This! is! a!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!31!Israel,!pg!357!


!

September!2010! 23!

significant!departure,!and!of! interest! to!students!of! the!modern!

global! economy!with!bulk! trade!dominated!by!China!while! rich!

trades!remain!the!preserve!of!the!west!and!specifically!the!US.!

!

However,! it! may! be! premature! to! discount! the! relationship!

between! economic! power! and! control! of! bulk! trades32.! Early!

modern! bulk! trades!were! dominated! by! salt,! grain! and! timber.!

Grain! was! crucial! to! survival;! meat! and! fish! could! only! be!

preserved!with!salt.!In!an!age!of!timber!construction,!lumber!was!

the!primary!raw!material!of!industry;!the!great!northern!forests!

supplied! the! bulk! of! Europe’s! timber!while! the! northern! states!

were! the! breadbasket! of! Europe;! therefore! the! trade! route! to!

ship!grain!&!timber!from!the!Baltic,!and!salt!on!the!way!back,!was!

akin! to! the!modern! trade! flow!West–East! of! iron! ore!&! coal! to!

supply! the! Asian! steel!mills! and! power! plants! and! the! grain! to!

feed! its! people,! the! unglamorous! but! vital! work! horse! of! the!

global!economy!in!the!twenty!first!century.!!

!

8. Bulk! trade! and! the! factor! markets:! shipping! as! the!

preSindustrial!cost!determinant!

Was!trade!in!bulk!commodities!with!the!Baltic,!and!above!all!the!

“mother! trade”,! grain,! fundamental! to! Dutch! prosperity,!

surpassing! the!more! exotic! rich! trades! such! as! the! spice! trade!

with!the!East!Indies?!The!Danish!shipping!tolls!collected!from!the!

late!fifteenth!century!provide!a!thorough!and!revealing!database!

of! shipping! movements! by! nationality33.! In! the! age! before! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!32!see!Van!Zandern!“de!“nieuwe!visie”!van!Israel”!BMGN!106,!1991!is!among!other!critiques!of!Israel’s!thesis!prompting!Israel’s!1997!counter!!“The!Dutch!Bulk!Carrying!Traffic”!33!Guide!&!Concordance!to!The!Sound!Toll!Registers,!1497O1857!on!microfilm,!Moran!

Micropublications,!Amsterdam,!The!Netherlands,!2006.!!“!The!Sound!(Øresund!in!Danish)!is!the!

long!narrow!body!of!water!separating!Denmark!from!Sweden!that!forms!the!passage!from!the!

North!Sea!to!the!Baltic!Sea.!For!centuries!it!has!been!one!of!the!busiest!waterways!in!the!world.!!

!

Tolls!were!exacted!there!going!back!to!approximately!1429.!From!1497!until!it!was!abolished!in!


!

September!2010! 24!

active!trading!and!chartering!of!vessels,!vessels!were! flagged!to!

their! own! state;! flag! is! therefore! a! good! indicator! of! control! of!

trade!in!a!way!it!never!can!in!the!modern!age!of! flag!states!and!

chartered! tonnage.! So!by!analyzing! flag! state!alone! in! the!Early!

Modern! period! it! is! possible! to! quantify! a! nation’s! trading!

success;!tonnage!lists!for!this!trade!are!a!uniquely!good!corollary!

for!commercial!control!of!a!trade.!

!

Moreover!the!Baltic!trades!were!primarily!bulk!trades.!The!start!

of!Dutch!influence!in!the!region!far!precedes!any!involvement!in!

the! rich! trades.! It! began! with! that! most! basic! and! vital! bulk!

commodity,! salt.! By! the! mid! fifteenth! century! the! Hanseatic!

League!began!to!lose!its!monopoly!of!the!salt!trade!in!the!Baltic!

as!Dutch!full!rigged!boats!undercut!rates!by!reducing!the!ballast!

leg;! they! picked! up! cheaper! salt! from! Iberia! and! wine! from!

France.! Technical! and! design! supremacy! was! key! to! Dutch!

success.! The! herring! buss! and,! above! all,! at! the! end! of! the!

sixteenth! century! the! fluyt,! were! superior! to! the!more! general!

Hansa!and!English!boats.!!

!

This!technical!edge!was!coupled!to!new!types!of!financing!often!

born!of!necessity.!The!absence!of!big!merchants!in!the!early!days!

of!the!Dutch!republic!encouraged!multi!part!ownership!of!boats,!

a! phenomenon! that! became! apparent! by! the! middle! of! the!

sixteenth! century! and! spurred! a! rapid! expansion! in! Dutch!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1857!the!details!of!the!Sound!Toll!levied!by!the!Kingdom!of!Denmark,!which!actually!consisted!of!

several!different!types!of!charges,!were!recorded!in!registers!by!Danish!customs!officials!at!the!

customs!house!near!the!fortress!of!Kronborg!that!dominated!the!strait!at!Elsinore.!Most!of!these!

registers!are!still!extant!and!form!a!remarkable!series!running!to!more!than!700!volumes!

occupying!58!meters!on!the!shelves!of!Denmark's!National!Archives!in!Copenhagen.!A!series!of!

such!length!and!detail!is!found!nowhere!else!in!the!world!and!is!of!incomparable!importance!for!

the!history!of!trade!and!shipping!and!more!generally!for!the!economic!history!of!western,!

Northern!and!Eastern!Europe.”!Publishers!preface.!

!


!

September!2010! 25!

merchant!marine.!Above!all,!the!accident!of!hosting!a!number!of!

small!ports! in!the!trade,!rather!than!a!single!dominating!centre,!

ensured!collectivism!would!dominate!the!Dutch!trading!mindset!

in!contrast!to!the!Hanseatic!League.!To!all!of!this,!the!1572!Dutch!

revolt,! culminating! in! the! Spanish! withdrawal! 1590,! was! the!

spark!that!lit!this!torch!paper!to!Dutch!trading!success.!!

!

Sound'toll'registers'5'year'totals;'1497O1540'implied34'

Critically,! Israel!argues!that! it!was!the!provinces’!control!of!rich!

trades!after!this!point!was!the!lever!that!opened!the!Baltic!bulk!

trades!to!the!Dutch.!He!points!out!much!of!the!previous!shipping!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!34!Data!is!adapted!from!work!by!Ole!Degn!"introduction!to!the!Sound!Toll!registers!1497O1857.”!

1495O1570!data!is!left!blank!where!no!continuous!5!year!data!is!available;!it!is!estimated!on!mean!

of!preceding!and!following!periods!for!1530!and!1550.!!Tielhof!has!done!similar!work!(see!Mother!

Trade!pg!193!but!focused!on!grain!shipments!rather!than!drawing!broader!conclusions.!

!"

#!!!!"

$!!!!"

%!!!!"

&!!!!"

'!!!!"

(!!!!"

!"

'!!!"

#!!!!"

#'!!!"

$!!!!"

$'!!!"

#&)'"

#'#!"

#'$'"

#'&!"

#'''"

#'*!"

#'+'"

#(!!"

#(#'"

#(%!"

#(&'"

#((!"

#(*'"

#()!"

#*!'"

#*$!"

#*%'"

#*'!"

#*('"

#*+!"

#*)'"

,-./01"23451"6789.01:"2;<.01:"=>-08"?418-0"@>4;A"<3BC8-"01.D0"D;00.<E"41->3E1"2;<.01"6>3<9"

@>4;A"=3BC8-"D;00;E80"

Figure'4.'Source:'adapted'with'interpolation'of'missing'data'from'Ole'Degn,'“Introduction'to'the'

Sound'Toll'registers'1497O1857,'plus'from'Bang'and'Korst'“Tabeller”'1930'


!

September!2010! 26!

had!been!characterized!as!low!value!or!ballasters.!By!implication!

Dutch! trading! hegemony!was! a! function!primarily! of! control! of!

the! rich! trades! rather! than! the!bulks.! Indeed,! the! absolute!data!

for! the! Sound! toll! presents! an! unconvincing! case! for! the!

significance! of! control! of! bulk! freight! (see! figure! 4).! Dutch!

shipments! peak!with! a! double! top! in! 1585! and! again! 1615!but!

remain!relatively!static!at!lower!levels!from!1630O1780,!the!key!

period! of! the! loss! of! Dutch! trading! hegemony.! By! implication!

therefore!we!can!see!little!causal!link!between!control!of!the!bulk!

freight!market!and!trading!hegemony.!!

!

Looking! again! at! the! tonnage! lists! from! Oresund! however,! but!

this!time!examining!nationality!of!vessels!as!a!percentage!of!total!

trade!rather!than!as!absolute!numbers,!reveals!a!subtly!different!

picture!(figure!5).!Now!the!extended!time!series!of!market!share!

in! shipments,! largely! by! definition! bulk! trades! rather! than! rich!

trades,!tracks!the!rise!and!fall!of!Dutch!hegemony!with!precision.!

Dutch!share!in!the!trade!rises!1530O1560!from!40%!to!over!70%!

before! embarking! on! a! secular! decline! from! 1620! marked! by!

collapse!1660O1705,!a!brief!recovery!1705O!1710!and!then!steady!

decline! to!oblivion!1720O1795.!Moreover,! it! is!worth!noting! the!

impressive! rally! in! market! share! 1530O60! precedes! by! some!

years!Dutch!success!in!the!revolt!against!Spain!and!control!of!the!

rich! trades,! again! calling! into! question! the! causal! nature! of! the!

rich!trades!in!trading!success.!

!

Indeed,! looked!at! overall,! the! course!of! the!bulk! freight!market!

correlates! so!neatly! to! the!political! rise!and! fall!of! the!Republic!

that!emphasis!on!the!significance!of!the!rich!trades!as!opposed!to!

bulk! trades! to!mercantile! success!may!need! to!be! reOexamined.!

Looking!at!the!data!in!market!share!terms,!dominance!of!the!bulk!

markets!suddenly!seems!central!to!a!nation’s!trading!success.!


!

September!2010! 27!

Sound'toll'registers'5'year'totals;'1497O1540'implied35''

Figure'5:!Source:'adapted'with'interpolation'of'missing'data'from'Ole'Degn,'“Introduction'to'the'Sound'Toll'registers'1497O1857,'plus'from'Bang'and'Korst'“Tabeller”'1930'

Indeed,!the!data!suggests!dominance!of!the!bulk!markets!allowed!

the! Dutch! to! successfully! develop! the! rich! trades! that! would!

define! the! Golden! Age.! It! is! interesting! to! note! that! the! Dutch!

merchant!saw!his!world!in!this!light.!A!map!of!the!world!drawn!

1617! by! Cornelius! Claesz! and! Janssonius! has,! perhaps!

fortuitously,!the!Oresund!as!the!epicenter!of!the!map;!the!staging!

post!for!the!bulk!trades!as!a!New!Jerusalem.36!

!

If!we! look! in! closer!details! at! the!period!1660O1760! the!data! is!

equally!revealing.!In!absolute!terms,!beyond!showing!the!growth!

in! total! trade!and! the!decline!of!Dutch! shipping!after!1770,! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!35!Data!is!adapted!from!work!by!Ole!Degn!"introduction!to!the!Sound!Toll!registers!1497O1857.”!

1495O1570!data!is!left!blank!where!no!continuous!5!year!data!is!available;!it!is!estimated!on!mean!

of!preceding!and!following!periods!for!1530!and!1550.!!Tielhof!has!done!similar!work!(see!Mother!

Trade!pg!193!but!focused!on!grain!shipments!rather!than!drawing!broader!conclusions.!36!Cornelius!Claesz!and!Janssonius,!British!Library!exhibition!2010!

!"#

$!"#

%!"#

&!"#

'!"#

(!"#

)!"#

*!"#

+!"#

$',(#

$(!(#

$($(#

$(%(#

$(&(#

$('(#

$(((#

$()(#

$(*(#

$(+(#

$(,(#

$)!(#

$)$(#

$)%(#

$)&(#

$)'(#

$)((#

$))(#

$)*(#

$)+(#

$),(#

$*!(#

$*$(#

$*%(#

$*&(#

$*'(#

$*((#

$*)(#

$**(#

$*+(#

$*,(#

-./012# 34562# 789:/12;#3<=/12;#>?.19# @529.1#


!

September!2010! 28!

data! reveals! little! of! surprise! (figure! 5).! Total! trade! volumes!

accelerate! from! the! 1730s,! inline! with! a! healthier! European!

economy,!while!Dutch! share! in! the! trade!declines! sharply! from!

the! 1770s,! overtaken! by! British! and! Scandinavian! tonnage.! In!

itself!however! the!data!reveals! little!about! the! trajectory!or! the!

causes!of!Dutch!trading!success!and!failure.!

!

Number'of'ships'passing'west'through'the'sound'by'nation.'

Yet! in! percentage! terms! the! picture! is! strikingly! different! (see!

figure! 6).! The! data! uncannily! tracks! the! ebb! and! flow! of! Dutch!

commercial! success! and! loosely! characterized!as! arguing!Dutch!

supremacy! peaks! 1660s,! commences! a! dramatic! decline! from!

1740!and!is!surpassed!by!1760!(figure!7).!!

!

Figure'6.!Source:'adapted'from'Bang'and'Korst'“Tabeller”'1930'!


!

September!2010! 29!

Ships' passing' West' through' the' sound' by' nation;' percentage' of'

total'movements.'

Using! the! data! in! percentage! terms!we! clearly! see! two! distinct!

phases! of! decline.! Firstly,! from! 1660O1690,! loosely!

corresponding! with! the! AngloODutch! wars! and! rising! tension!

with! France,! Dutch! share! falls! from! 60O35%.! The! next! phase!

commences! 1740! which! sees! the! terminal! decline! in! Dutch!

market!share.!It!is!a!clear!quantification!of!the!magnitude!of!the!

defeat! inflicted!on!Dutch!hegemony!by! the! treaty!of!Munster! in!

1748.!!

!

To! highlight! the! value! of! this! approach! to! the! data,! it! is!worth!

noting! that! in! absolute! terms,! Dutch! shipment! levels! were!

approaching!their!highs!in!1770.!The!data!is!deceptive!however,!

for! in! the! decade! 1760O1770! when! tonnage! rose! from! 885! to!

!"#

$!"#

%!"#

&!"#

'!"#

(!"#

)!"#

*!"#

$))!#

$)*!#

$)+!#

$),!#

$*!!#

$*$!#

$*%!#

$*&!#

$*'!#

$*(!#

$*)!#

$**!#

$*+!#

$*,!#

-./012# 34562# 789:/12;#3<=/12;#>?.19#

Figure'7.!Source:'adapted'from'Bang'and'Korst'“Tabeller”'1930'!


!

September!2010! 30!

1339! transits,! market! share! dropped! from! 34%! to! 23%.! It!

appears!that!only!by!analyzing!the!data!in!terms!of!market!share!

can!the!true!story!of!Dutch!trading!decline!be!told.!

!

Correlation! is!not! causation;!but! the!closer! the!correlation!over!

an!extended! time!series,! the!more! improved! the! chances!of! the!

significance! of! the! observation.! This! new! analysis,! emphasizing!

market! share! over! absolute! numbers,! reasserts! the! importance!

of!control!of!the!bulk!trades!in!Early!Modern!trading!success.!!

!

9. The! Bulk! trades! as! an! indicator! of! 17th! century!

commercial!power!Why! were! the! bulk! freight! markets! so! significant! in! the!

seventeenth! century?! The! nation! that! commands! the! cheapest!

cost! of! goods! is! the! one! that! best! controls! the! factor! markets;!

controlling! the! factor! markets! (achieving! lowest! costs)! has!

always!meant!securing!cheapest!energy!cost.!!

!

In! the! preOindustrial! age! of! the! seventeenth! century,! the!major!

energy! input! was! kinetic;! the! movement! of! goods.! As! such,!

dominance! of! the! factor!markets!meant! controlling! shipping! &!

delivery! costs,! especially! for! bulk! goods.! ! It! is! no! accident!

therefore!that!the!period!of!strongest!economic!growth,!from!the!

late! sixteenth! century! to! middle! part! of! the! next! century,! saw!

European! freight! rates! (costs)! treble.! Securing! relatively! cheap!

freight! rates!was! therefore! the! “mechanism!by!which! industrial!

efficiency! is! transposed! into! commercial! efficiency”37! and! by!

which! the! state! therefore! achieved! commercial! hegemony.! In!

effect!between!about!1560O1660!bulk!freight!was!the!key!factor!

market!for!trading!competitors.! In!this!environment,!optimizing!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!37!I.!Wallerstein,!“The!Modern!World!System:!Mercantilism!&!Consolidation!1600O1700”!pg!55.!


!

September!2010! 31!

freight! rates! 1560O1660! would! deliver! a! real! commercial!

advantage!(see!figure!8).!!

!

Achieving!cheap!freight!rates!required!either! introducing!better!

technology! or! securing! the! quickest! trade! routes! through!

commerce! or! conflict.! So,! new! technology,! from! the! fourteenth!

century!Herring!buss!to!the!late!sixteenth!century!Fluits,!allowed!

the!Dutch!to!continue!to!offer!competitive!freight38.!It!was!about!

as!expensive!to!charter!a!ship!for!a!single!voyage!from!Gdansk!or!

from!Bordeaux!to!Holland!as!to!charter!a!ship!for!a!return!voyage!

to!these!destinations!starting!in!Holland,!although!the!latter!trip!

would!take!twice!the!time.39!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!38!see!Luiten!van!Zanden!and!Milja!van!Tielhof,!‘Roots!of!Growth!and

!Productivity!Change!in!Dutch!

Shipping!Industry,!1500O1800’,!in:!Explorations!in!Economic!History!2009.!See!also!Tielhof,!“the!

mother!trade”!pg!188O192!for!further!detail!on!innovations!in!shipbuilding!and!design.!39!a!series!for!return!voyages!from!the!Dutch!Republic!to!Gdansk!and!nearby!ports!based!on!482!

individual!prices!(1591O1758)!(Van!Tielhof!2002:!198,!203,!340O345)!Tielhof,!Milja!van!(2002),!

The!‘mother!of!all!trades’.!The!Baltic!grain!trade!in!Amsterdam!from!the!late!16th!to!the!early!

19th!century.!Leiden/Boston/Köln:!Brill.!Tielhof’s!exhaustive!study!of!the!trade!is!an!invaluable!

guide!and!source!of!data.!

Figure 8.!source: adapted from Milja van Tielhof and Jan Luiten van Zanden

!"#!"$!"%!"&!"'!!"'#!"'$!"'%!"'&!"#!!"

'$(#"

'$$)"

'$%#"

'$))"

'$*#"

'+!)"

'+##"

'+()"

'++#"

'+%)"

'+&#"

'+*)"

'%'#"

'%#)"

'%$#"

'%+)"

'%)#"

'%&)"

')!#"

')')"

')(#"

')$)"

')%#"

')))"

')*#"

,-./0"12"3/4567/."8197"12"964::4-5"'%!!;'!!"

5<1376":6=9/""'+%!>'%%!"

97=949":6=9/"'%%!>')&!"


!

September!2010! 32!

However,! as! overall! economic! activity! slowed! in! the! late!

seventeenth! century,! freight! rates! flat! lined! for! the! next! 100!

years,! only! starting! to! rise! again!with! economic! recovery! from!

the! 1780s.! The! commercial! advantage! delivered! by! cheaper!

freight!would!be!undermined!in!this!environment.!As!bulk!freight!

ceased!to!be!the!dominant!factor!market,!control!of! it!ceased!to!

ensure!commercial!hegemony;!the!resultant!decline!fed!back!in!a!

vicious!circle!to!undermine!dominance!of!the!bulk!market.!

!

Moreover! this! argument! can! be! strengthened! by! looking! at!

freight! on! a! relative! basis,! or! relative! to! other! industrial!

commodity!costs.!Adapting!the!data!provided!by!Tielhof!and!Van!

Zanden!for!timber!prices!and!freight!costs,!the!parabolic!rise!and!

fall! in! the! significance! of! the! freight!markets! can! be! illustrated!

(figure!9).!Freight!costs!were!rising!inexorably!as!a!percentage!of!

costs! until! the!mid! seventeenth! century,! from! a! low! of! 30! to! a!

high!of!80%!on!an! index!basis!before!drifting!down! to!50%!by!

the!1740s! and! then!declining! sharply.! In! short,! in! absolute! and!

Figure'9.'Source:'adapted'from'Tielhof'and'Van'Zanden'


!

September!2010! 33!

relative! terms,! freight! rates! were! declining! in! value! and!

significance!terms!from!the!late!seventeenth!century.!

!

In! this! context! it! is! worth! noting! as! Europe! wide! freight! rates!

stagnate! into! the! eighteenth! century,! so! also! Dutch! industrial!

production!(using!cloth!making!or!laken!production!at!Leiden!as!

a!corollary)!started!to!fall.!The!question!is!whether!rates!stagnate!

as! a! result! of! Dutch! production! decline! or,! more! likely! as! rate!

stagnation!was!a!pan!European!phenomenon,!Dutch!production!

decline! partly! followed! the! stagnant! freight! market,! which!

undermined!the!natural!Dutch!edge!in!bulk!freight!rates.!

!!!

To! conclude;! control! of! the! bulk! markets! meant! control! of!

shipping! costs;! shipping! in! the! seventeenth! century! was! the!

!!"#

!!$#

!%"#

!%$#

!&"#

!&$#

!'"#

$"""#

!""""#

!$"""#

%""""#

%$"""#

&""""#

!(""#

!("%#

!("'#

!(")#

!("*#

!(!"#

!(!%#

!(!'#

!(!)#

!(!*#

!(%"#

!(%%#

!(%'#

!(%)#

!(%*#

!(&"#

!(&%#

!(&'#

!(&)#

!(&*#

!('"#

!('%#

!(''#

!(')#

!('*#

!($"#

+,-.,-#/0#12345#2-#647845#95,:;4<#.74=4>#.4<#255,:?#

@>-AB584C#/0##DE7..75F#=/>->#9G25#H741E/0#I#G25#J25845?#

5,:;4<#7-4:>#K<47FE-##7584C#

Figure'10.''Source:'adapted'from'Tielhof'and'Van'Zanden''


!

September!2010! 34!

major!factor!determining!production!cost!differential;!control!of!

shipping! therefore!meant! control!of! the! factor!markets.!Control!

of!the!factor!markets,!rather!than!bulks,!rich!goods!or!production!

per!se,!lay!at!the!heart!of!trading!hegemony.!When!the!key!factor!

market! in!which! they!had!an!edge! shifted!away! from! freight! to!

say! labour! costs,! the! traditional! masters! of! the! original! factor!

market!lost!their!trading!advantage.!

!

10. Sterile! economic! enclaves,! the! exhaustion! of!

innovation!&!the!failure!of!Dutch!state!

So! whilst! Dutch! success! helps! build! a! view! on! the! causes! of!

trading! success,! the! demise! of! the! Dutch! trading! entrepot! is!

perhaps! as! instructive! as! to! the! characteristics! of! success! in! a!

trading! nation! in! the! seventeenth! century! as! was! the! rise! to!

hegemony.!!

!

Israel! posed! the! key! question! the! republic! faced,! namely! did! it!

“possess! enough! of! a! technological! edge! to! survive! in! a! hostile!

world,! infused! with! an! increasingly! protectionist! attitude?”! He!

answered!the!Dutch!were!able!to!face!the!French!threat!alone!by!

developing!an!industrial!mercantilism!of!their!own!in!thought!of!

van!Beuningen!et!al.!“But!for!all!that!the!Dutch!entrepot!was!still!

in!essence!a!world!reservoir!of!commodities! that!could! flourish!

for!only!so!long!as!its!products!enjoyed!access!to!the!markets!of!

the! world.! (It)! was! living! on! borrowed! time.”! This! puts! the!

significance! of! bulk! freight! as! the! key! factor! market! for! the!

seventeenth!century!Dutch!Republic!into!context.!Not!only!were!

freight! costs! overall! rising! in! this! period! adding! to! cost! of!

production!Europe!wide!and!favouring!those!who!could!innovate!

in! this! market,! but! for! an! entrepot! market! (as! opposed! to! a!

domestic!economy)!optimising!transport!costs!has!added!weight.!

When!either!it!ceased!to!innovate!in!freight!or!freight!ceased!to!


!

September!2010! 35!

be!the!major!factor!market!(i.e.! in!periods!of!stagnant!economic!

activity!and!therefore! low!freights)!trading!hegemony!would!be!

threatened.!

!

The! loss! of! their! lead! in! innovation! was! therefore! primarily! a!

function!of!the!Achilles!heel!at!the!heart!of!the!Dutch!model,!the!

lack! of! a! meaningful! domestic! market! to! shelter! the! economy!

from! economic! storms.!Without! it,! there! would! not! be! enough!

energy!to!allow!development!of!an!Industrial!Revolution.!A!state!

needed!a!home!market!as!in!Britain!to!come!under!attack,!evolve!

and!overtake.!So!also,!absence!of!a!home!or!protected!market!is!

devastating! in! the! face! of! systematic! mercantilist! response,!

which! Israel! identifies! as! occurring! 1750O1770.40! The! Dutch!

were! by! no!means! alone! in! this! fate.! Rothermund41! coined! the!

phrase!“sterile!economic!enclaves”!to!describe!export!dependent!

entrepots.!The!classic!example!is!Surat!in!eighteenth!century;!the!

city!achieved!great!wealth!driven!by!exports!in!the!early!part!of!

the! period! but! then! collapsed! as! political! instability! set! in.!

Rothermund’s!explanation!for!the!fall!is!strikingly!familiar!to!our!

case:! “the! institutional! framework! for! a! stable! economic!

development! were! missing”.! In! addition! however,! change! in!

trade!patterns!left!Surat!economically!exposed!in!the!absence!of!

a! domestic! market.! Cole! argues42! the! French! government’s!

limitation! of! the! import! of! calico! prints! (toiles! peintes)! in! the!

1686! &! 1691! decrees! to! protect! the! old! established! French!

textile! industry,! undermined! both! the! East! India! company! and!

Surat!given!its!role!as!centre!for!export!of!calicos.!!

!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!40!Interesting!to!note!Linder’s!model!for!nations!that!don’t!have!developed!internal!market.!Their!

economy! splits! into! export! and! domestic.! Export! market! dominated! by! exogenous! factors! as!

dependent!on!foreign!demand;!domestic!production!eliminated!by!inefficiency.!41!Rothermund,!“Asian!trade!and!European!Expansion!In!the!Age!of!Mercantilism”!1981!42!Cole,!“French!Mercantilism!1683O1700”!


!

September!2010! 36!

In!this!light!contemporary!discussion!about!the!need!for!China!to!

develop! a! domestic! market! to! offset! its! export! market! is! of!

course!relevant.!There!is!of!course!one!striking!difference.!China!

poses! a! scale! and! potential! for! a! domestic! market! that! the!

seventeenth! century!Dutch,! hemmed! in! on! all! sides! and!with! a!

limited!population!or! the! tiny! cityOstate!of! Surat,!never!did.!Yet!

for! one! other! European! economy! that! failed! to! develop! a!

domestic! market,! and! yet! size! was! no! obstacle.! It! is! of! course!

Spain.!

!

It! is! interesting! to! note! that! Spain’s! failure! to! develop! a!

significant! domestic! economy! was! partly! a! function! of! the!

absence! of! the! conditions! we! have! already! identified! as! being!

necessary! for! trading! success.! In! particular,! an! accident! of!

topography! meant! Spain! could! never! master! freight! costs,! the!

key! factor! market! of! the! seventeenth! century.! This! was!

particularly!true!of! internal!domestic!costs;! in!the!words!of!one!

historian! “the! isolation! of! interior! markets! continued! into! the!

nineteenth! century! and! the! sharp! regional! differences! in! price!

levels!did!not!diminish!until!the!1880s.”43!!

!

Secondly,!Spanish!political!organisation!was!not!conducive!to!the!

innovation!seen!elsewhere.!This!can!be!illustrated!by!examining!

the!oldest!and!most!important!domestic!industry,!the!wool!trade.!

From! the! sixteenth! century! the! Spanish! crown! took! charge! of!

marketing!wool!exports,! to! the!exclusion!of! the! trade!body,! the!

Mesta.44! Klein’s! observation! on! the! effect! is! noteworthy! “The!

(royal)!committee!was!to!assign!the!proper!shares!of!the!profit!to!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!43!D.R.Ringrose,!“Madrid!and!the!Spanish!Economy!1560O1850”,!University!of!California!Press,!

1983!pg!5.!44!J.Klein,!“The!Mesta,!A!Study!In!Spanish!Economic!History!1273O1836”,!Harvard!University!Press,!

1920,!pg!39!


!

September!2010! 37!

each! of! the! growers! and! merchants! contributing! wool! for! the!

transactions!of!the!Consulado.!These!claims!of!Mesta!members!…!

were!frequently!used,!during!the!financial!difficulties!of!the!first!

Hapsburgs,! as! securities! for! heavy! loans! to! the! crown! by! the!

Mesta.! It' is' clear,' then,' that' although' the' latter' had' no' share'

directly' in' the' development' of' improved' marketing' methods…in'

the'end,'the'Mesta'profited'heavily'in'the'large'sums'it'was'able'to'

raise' from' the'Medina' bankers' during' the' sixteenth' century' (my!

italics),! thanks! to! the! annual! liquidation! of! the! wool! export!

obligations! at! the! great! fair.”! Albeit! from! an! earlier! age,! such!

royal! domination! of! the! marketing! of! an! industrial! good! is! in!

marked! contrast! to! say! developments! in! England! where!

merchants!witnessed! the! declining! influence! of! the! crown!with!

“lobbyists!acknowledging!the!lower!house’s!supremacy!over!the!

crown!in!revenue!matters.”45!!

!

Interestingly,!the!Consulado!reforms!are!considered!amongst!the!

more! successful! in! the! history! of! Spain’s! wool! trade.! They! can!

certainly!be!compared! favourably!with!Philip! II!1559! levying!of!

export!duties.! !Klein!colorfully!elaborates!the!effect!of!this!piece!

of! intervention.! Duties! “were! administered! by! a! corps! of!

energetic! officials,! the! ‘alcaldes!de! sacas’! or! export! judges,!who!

realized!keenly! that! their! income!would!be!commensurate!with!

their!zeal.!It!was!not!long!before!they!became!notorious!both!for!

their!wealth!and!for!their!ruthless!shortsightedness!in!taxing!the!

wool! trade! practically! out! of! existence.”46! In! both! cases,! despite!

the! wellOintentioned!motivation! for! the! intervention,! the! effect!

was! the! same;! the! inefficient! allocation! of! resources! fits! neatly!

into!our!definition!of!subcontracting,!a!negative!economic!act.!As!

Ringrose! suggests! in! his! more! general! critique! of! the! Spanish!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!45!Gauci,!pg!218!46!Klein,!pg!46.!


!

September!2010! 38!

empire!“the!durability!of!central!bureaucracy!in!the!seventeenth!

century,!and!the!apparent!successes!of!the!Bourbon!monarchy!in!

rebuilding!and!unifying!Spain!in!the!eighteenth,!only!masked!the!

tensions!inherent!in!the!situation.”47!

!

11. Conclusion!

Our! brief! survey! of! trading! empire! in! the! seventeenth! century!

therefore! highlights! a! number! of! preconditions! behind!

commercial! success! in! the! period.! Firstly,! the! existence! of! a!

political! organisation! that! allowed! economic! innovation,! the!

optimization! of! the! allocation! of! tangible! and! intangible!

resources! available! to! the! state! from! surpluses! to! deficit.! In! so!

doing,! the! interests! of! state! and!merchant! should! in! general! be!

aligned.!

!

The!existence!of! such! innovation!allowed! the! second!condition:!

dominance! and! maintenance! of! hegemony! in! the! key! factor!

market,!which!was!the!bulk!freight!market!during!the!first!half!of!

the! seventeenth! century.! At! the! same! time! the! state! needed! to!

avoid! the!subcontracting!of!office!and!process! that!undermined!

the!alignment!of!interest!between!merchant!and!state.!Third!and!

finally,! the! state! needed! to! provide! a! selfOsustaining,! scaled!

domestic!market.!

!

How!useful!is!this!analysis!for!a!study!of!contemporary!political!

economy?! First!we! need! to! establish! a! connection! between! the!

periods.! It! is! unclear! at! the! start! of! the! twenty! first! century!

whether!we! are! embarking! on! a! new! long! century! of! resource!

constraint,! sub! optimal! growth! and! returns.! However,! such!

conditions!do!at! least!currently!exist.!There!should!therefore!be!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!47!D.R.Ringrose,!“Madrid!and!the!Spanish!Economy!1560O1850”,!University!of!California!Press,!1983!pg!6.!


!

September!2010! 39!

some! value! in! attempting! to! understand! the! characteristics! of!

successful! and! failed! states! in! similar! environments.! As! the!

seventeenth!century!shared!these!characteristics!it!may!be!useful!

to!draw!from!the!lessons!of!that!age!and!apply!those!principles!to!

a!provisional! analysis! of! the! rising! economic!hegemonist! of! the!

twenty!first!century,!China.!

!

Turning!first!to!the!ability!of!political!organisation!to!encourage!

innovation,!we!have!already!suggested!that!the!innovative!nature!

of!an!act!can!only!be!judged!by!its!effect.!By!definition!therefore!

current! policy! cannot! be! declared! innovative! or! an! act! of!

subcontracting.! But! we! can! attempt! to!measure! the! innovative!

nature! of! a! state.! Quantifying! innovation! is! of! course! difficult.!

However!one!possible!starting!point!is!patent!applications.!There!

is!a!major!drawback!with!this!approach.!A!patent!award!does!not!

account! for! the! quality! of! the! patent,! i.e.! its! significance.!

Invention! is! not! innovation! under! our! terms.! Nonetheless,! the!

approach!can!shed!some!light!on!the!innovation!taking!place!in!a!

society,! if! only! in! indicating! the!willingness!of! individuals! to!be!

seen!to!take!ownership!of!new!ideas.!!

!

In!this!context,!examining!the!UN’s!WIPO!patent!database!sheds!

some! light! on! the! innovation! in!China! since! the! introduction!of!

patent! law! from! 1985.! Two! things! stand! out.! Firstly,! although!

innovation!is!increasing!in!China,!indeed!patent!application!from!

Chinese! citizens! surpassed! that! from! those! of! the! EU! in! 2004,!

application! remains! significantly! below! that! in! the!US! at! under!

two! thirds! the! number! of! applications!made! by! citizens! of! the!

world’s!largest!economy.!

!


!

September!2010! 40!

!Figure'11.!source:'WIPO!

But!secondly,!it!is!interesting!to!note!that!the!vast!bulk!of!Chinese!

citizens!making! application! for! patent! do! so! in! the! PRC! rather!

than!overseas;!in!contrast!just!65%!of!US!citizens!making!patent!

applications! do! so! in! the!US,! the! balance! being!made! overseas.!

The! preponderance! of! domestic! applications! in! China! may!

suggest! more! a! catch! up! with! international! standards! than!

genuine! innovation,! which! will! by! definition! foster! overseas!

applications.!As!indicator!of!Chinese!innovation,!this!data!at!least!

is!challenging.!

!

0!

100,000!

200,000!

300,000!

400,000!

500,000!

application!for!patents!at!US!patent!ofxices!

application!for!patents!at!Chinese!patent!ofxices!

EU!patent!ofxice!


!

September!2010! 41!

!Figure'12.!source:'WIPO!

So! what! about! the! second! precondition,! control! of! the! factor!

market?! If! bulk! markets! were! the! dominant! factor! of! the!

seventeenth! century,! so! in! the! postOindustrial! age! when!

technology! has! largely! arbitraged! away! the! advantages! of!

achieving!cheaper!freight!costs,!labour!costs!have!dominated.!But!

with!the!globalization!of!markets!leading!to!a!rapid!arbitraging!of!

labour!advantages!as!witnessed!by!rising!Chinese!concern!at!the!

cost! of! labour,! increasingly! the! dominant! defining! factor!

distinguishing!economies!is!power!and!fuel!costs.!!

!

China!faces!critical!disadvantages!in!the!energy!markets.!Firstly,!

an!absence!of!domestic!oil!reserves!requires!significant!overseas!

projection! to!maintain! its!newfound!offshore!supplies!currently!

secured!though!tolling!deals!with!client!states.!Secondly,!a!power!

grid! dependent! on! coal! resources! increasingly! distanced! from!

the! production! areas! leaving! a! very! vulnerable! and! expensive!

supply! chain.! The! key! to! maintaining! a! competitive! advantage!

40%!

50%!

60%!

70%!

80%!

90%!

100%!

%!patents!made!by!PRC!citizens,!made!in!china!

%!patents!made!by!US!citizens,!made!in!US!


!

September!2010! 42!

will!be!the!ability!of!the!state!to!allow!the!innovation!required!to!

produce! and! maintain! an! advantage! in! this! area,! whilst!

maintaining! the! strength! to! project! power! overseas.! If! it! fails!

then! by! implication,! just! as! the! Dutch! lost! their! edge! in! bulk!

shipping! through! a! failure! of! innovation! as! the! entrepot! trade!

model! broke! down! under! pressure! from! pan! European!

mercantilism!(and!with!it!lost!their!economic!hegemony)!so!also!

would!not!China’s!rise!to!hegemony!be!curtailed?!It!is!interesting!

indeed! that! in! 2010! the! Chinese! state! appears!more! and!more!

concerned!with!loss!of!competitiveness!from!rising!labour!costs!

and!domestic!energy!prices48.!The!question!however!is!whether!

the! current! structure! of! Chinese! political! organisation! will!

wittingly! or! unwittingly! stimulate! the! real! solution! required!

which!will!be!innovation!in!the!power!markets.!!

!

Finally,! China’s! need! to! develop! a! sustainable! domestic!market!

for!goods!is!underlined.!If!it!does!not,!China!is!doomed!to!repeat!

the! fate!of!Spain! in! the! seventeenth!century;!blessed!with! scale!

and! apparent! opportunity! but! humbled! by! the! accident! of! its!

political! organization! (which! may! be! in! turn! an! accident! of!

topography)! that! ultimately! prevents! the! innovation! necessary!

to! encourage! the! development! of! domestic!markets.!Will! China!

be! haunted! by! the! ghosts! of! the! Spain’s! decline! where! “the!

economies! of! coast! and! interior! were! responding! to! different!

situations! and! were! being! drawn! apart”! as! in! seventeenth!

century!Iberia,!despite!the!best!efforts!of!the!centre?49!

!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!48!I!am!indebted!to!Andy!Lees!of!UBS!who!has!emphasized!these!points!in!numerous!briefing!notes.!49!Ringrose!pg!12!


!

September!2010! 43!

British!&!Dutch! commercial! success! in! the! seventeenth! century!

was! primarily! the! product! of! a! particular! political! system.!

Political!organization,!we!have!argued,!needs!to!be!optimum!for!

encouraging! innovation! among! the! mercantile! community.!

Where!it!was!subOoptimal,!as!in!the!French!East!Indies,!the!result!

was! trading!(and!ultimately!political)! failure.! Indeed,!where! the!

state’s! involvement! in! trade! was! overbearing! or! unlucky,! the!

unintentional! consequences! could! be! highly! destructive.!

Douglass!North’s! framework! for! the! stages!of! economic!growth!

identifies! the! need! for50! coercive! political! order! in! an! early!

industrial! society! as! business! becomes! more! complex! than!

simple! local! exchange! within! villages! and! traditional! coercive!

measures! become! insufficient.!However,! as! commerce! becomes!

more! sophisticated,! and! above! all! more! specialized,! with! the!

development!of!secondary!and!derivative!markets!(and!the!need!

to!innovate!becomes!more!pressing)!one!implication!of!our!work!

is!that!the!efficacy!of!coercion!declines.!In!this!context!the!attacks!

on! information! server!Google!by! the!Chinese! state!have! echoes!

of,! in!Cole’s!words,! the!French!attempts! to! “arrest! the! forces!of!

change”.!!

!

Clearly,!however,!our!brief!survey!does!not!establish!the!absence!

of! the! three! preconditions! in! twenty! first! century! China!

identified! above! as! being! the! necessary! causes! of! seventeenth!

century! trading! success.! As! such,! we! in! no! way! demonstrate!

China’s!inevitable!decline.!!

!

Nevertheless,! we! hope! that! our! analysis! does! provide! a! fresh!

framework! for! addressing! the! risks! facing! Chinese! economic!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!50!D.C.North,!“Institutions,!institutional!change!and!economic!performance”,!Cambridge!University!Press,!1990,!pg!119O121!


!

September!2010! 44!

hegemony! in! the! twenty! first! century,! one! based! on! political!

organisation! rather! than! economic! determinism.! For! the!

implication! is! striking.! If! the! preconditions! for! an! innovative!

system! do! not! exist! in! China,! and! yet! the! threats! of!

subcontracting!do,!then!the!absence!of!this!(often!unintentional)!

system! could!mean! China’s! ability! to! remain!master! the! factor!

markets! is! compromised! and! her! rise! to! economic! hegemony!

would!be!stillborn.!

!

china's challeng; a lesson from history?

Documents