In the sidebar at Economist's View, A theory of the rise and fall of economic leadership - Branko Milanovic. How could I resist?
The link is a review of the
recently published “The invisible hand?: How market economies have emerged and declined since AD 500” (Oxford University Press, 2016, 330 pages) by Bas van Bavel
Van Bavel’s key idea is as follows. In societies where non-market constraints are dominant (say, in feudal societies), liberating factor markets is a truly revolutionary change. Ability of peasants to own some land or to lease it, of workers to work for wages rather than to be subjected to various types of corvées, or of the merchants to borrow at a more or less competitive market rather than to depend on usurious rates, is liberating at an individual level (gives person much greater freedom), secures property, and unleashes the forces of economic growth.
I recently noted the reintroduction of money to the West in the time of Charlemagne and Offa, three or four centuries later England's move from feudal service obligations to cash payments and, three or four centuries after that, England's "An Act Against Usurie" of 1545.
In my conclusion I pointed out "Step four: Debt and interest cause the fall of civilization."
But the process, Bavel argues, contains the seeds of its destruction. Gradually factor markets cover more and more of the population...
One factor market, though, that of capital and finance, gradually begins to dominate. Private and public debt become most attractive investments, big fortunes are made in finance, and those who originally asked for the level playing field and removal of feudal-like constraints, now use their wealth to conquer the political power and impose a 'serrata', thus making the rules destined to keep them forever on the top.
Bavel is dismissive of a unilinear view that regards the ever widening role of factor markets, including the financial, as leading to ever higher incomes and greater political freedom. His view, although not fully cyclical (on which I will say a bit more at the very end of the review) is “endogenously curvilinear”: things which were good originally, when they hypertrophy, become a hindrance to further growth. It is thus a story of the rise and fall where, like in Greek tragedies, the very same factors that brought the protagonists grandeur, eventually hurl them into the abyss.
Exactly so. At the start, finance boosts economic growth. But long before the end, finance already hinders growth more than it helps.
It is not only the plausibility of the mechanism of decline that gives strength to Bavel’s thesis; it is also that he lists the manifestation of the decline, observable in all six cases. Financial investments yield much more than investments in the real sector, the economy begins to resemble a casino, the political power of the financiers becomes enormous...
What the ancient writers describe as “decadence” clearly sets it, but, as Bavel is at pains to note, it is not caused by moral defects of the ruling class but by the type of economy that is being created. Extravagant bidding for assets whose quantity is fixed (land and art) is a further manifestation of such an economy: the bidding for fixed assets reflects lack of alternative profitable investments...
The readers will not be remiss in seeing clear analogies to today’s West.
I agree absolutely: The mechanism of decline is finance... Finance provides a better return than the productive ("real") sector... The decadence that sets in is an outgrowth of the economy that has been created.
And also the analogy to the West. But Milanovic's summary neglects to explain the "lack of alternative profitable investments". The reason is that those (real sector) investments bear the cost, the perpetually increasing cost of finance.
The summary also neglects to note the reason finance provides a better return than the 'real' sector. The reason of course is those same financial costs of the 'real' sector, which are income to the financial sector. And the growth of finance only makes the problem worse.