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World economic primacy 1500 1990

World Economic Primacy: 1500 to 1990

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World Economic
1500 to 1990
Charles E Kindleberger
Ford International Professor of Economics, Emeritus
Massachusetts Institute of Technology

New York



Oxford University Press
Oxford New York
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Copyright © 1996 by Oxford University Press, Inc.
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All rights reserved. No part of this publication
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Library of Congress Cataloging-in-Publication Data
Kindleberger, Charles Poor, 1910World economic primacy : 1500-1990 / by Charles P. Kindleberger.
p. cm. Includes bibliographical references and index.
ISBN 0-19-509902-8 (cloth)
1. Economic history. I. Title.
HC51.K49 1996

Printed in the United States of America
on acid-free paper

In Memory of the Pantheon of Greats
(far) under whom I served:
Omar N. Bradley
William L. Clayton
George C. Marshall

Allan Sproul

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This book by Professor Charles Kindleberger on world economic primacy
grew out of a larger, long-term project launched by the Luxembourg Institute for European and International Studies (I. E. I. S.) in 1990 on "The
Vitality of Nations." The purpose of this project is to look, using a
multidisciplinary and multinational approach, at the issue of the rise and
decline of countries. The project distinguishes among four analytical stages:
assessing, explaining, forecasting, and prescribing.
Within this project there have been eight major conferences on countries, regions, or specific issues. After two conferences in Luxembourg and
at Harvard University of a more general character, there have been meetings on specific topics: "The Vitality of Central and Eastern Europe," "The
Vitality of Japan," "The Vitality of Britain," and "The Vitality of the Netherlands." Finally there have been two conferences on the topic of books to
be prepared in the framework of the project, the first at Harvard, which
concerned Professor Kindleberger's book, and which brought together some
40 eminent scholars, above all, economic historians, and a workshop in
London prepared by Christopher Coker on "The Decline of the Western
Alliance: A Cultural Perspective."
In mid-May 1995 there will be a further conference to discuss the work
of David Landes, "The Wealth and Poverty of Nations: Why Some Are Rich
and Some Poor," to be followed by workshops on "The Vitality of Russia"; "The Vitality of City-States"; "The Significance of Chinese Immigrants
in the Vitality of Some Asian Countries"; "The Importance of Nurturing
in the Vitality of Nations"; "The Vitality of Spain"; and "The Vitality of
Asia: A Cultural Perspective."



Professor Kindleberger is the first to write a major study in the context
of this project. His book ranges from the Italian city-states through the Low
Countries and Britain to the United States and Japan. During these centuries, there have been times when there was a clear economic leader, and
times of uncertainty about world economic primacy. His study focuses not
just on individual countries, but also on important general and theoretical
considerations, e.g., national cycles and successive primacies. It addresses
important questions about the external as well as the internal causes of
This book comes out at a time when many people are questioning the
future economic leadership, at a moment when the United States remains
the only superpower, yet is increasingly less able to impose its political and
economic rules; a time when Japan remains an important challenger but
seems to be unable to assume the role of world economic leader; when
Germany continues to rise yet also remains vulnerable and limited in its
global reach; when the European Union appears, despite its plan for an
EMU and a CFSP, to be unable to become a decisive player in world politics; and when nobody can say with any certainty where China will stand
politically and economically in 15 or 20 years.
Charles Kindleberger's book provides a brilliant overview of the position of nations in the world economy of the past centuries and also conveys
profound insights into the cause for the economic rise and decline of
A. Clesse
Director of the I. E. I. S.


As always, I have benefited in high degree from scholarly cooperation. A
number of friends have sent me copies of books they have written or
edited: Moses Abramovitz, Rondo Cameron, Rudiger Dornbusch, Barry
Eichengreen, Gerald Feldman, Ryutaro Komiya, Henry Nau, Henry
Rosovsky, Peter Temin, and Shigeto Tsuru. Reprints, draft papers, references, and information have come from Christos Athanas, Carolyn Shaw
Bell, Daniel Bell, Paul David, Robert Forster, Robert Gordon, Koichi
Hamada, Peter W. Klein, Dr. Philip LeCompte, Joel Mokyr, Patrick
O'Brien, William Parker, Jack Powelson, and Va Nee L. van Vleeck.
A considerably heavier hand was laid on Martin Bronfenbrenner, who
read chapter 11 on Japan in draft, but cannot be blamed for my inability to
come close to his matchless understanding of the issues in that country.
Paul Hohenberg read the entire manuscript with a critical eye and encouraged me enormously, especially in failing to criticize some stretches of the
early text. Karen Smith, a graduate student in history at Harvard, tracked
down a slew of elusive references, along with Keith Morgan, the reference
librarian of MIT's Dewey Library. The conversion of my two-finger typing, replete with strikeovers and illegible insertions, to flawless processed
hard copy (if I properly understand the argot) was undertaken at MIT by
David Futato, with important help from Emily Gallagher.
The idea for research on "the vitality of nations" comes from Dr.
Armand Clesse of the Institute of European and International Studies,
Luxembourg. The Institute also provided financial support. A conference
on the notion of the changing economic primacy among nations but not
on this book was sponsored at Harvard in May 1994. Each participant, I
am sure, knew far more than I about some aspects of what I set forth. I
hope, perhaps vainly, that not all knew more about all.
I am most grateful for all this assistance, and hope I have not abused it.

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1 Introduction, 3
2 The National Cycle, 14
TheS-Curve, 15
Scanning the Future, 17
Resources, 19
Distant Trade, 21
Industry, 23
Migration, 24
The Industrial Revolution, 25
Cardwell's Law, 25
Agriculture, 26
Decline in Productivity, 27
Finance, 27
Government Finance, 28
Social Capability, 31
Mentalites, 32
Slowdown, 34
The Role of War, 35
Policy, 36
Conclusion, 36
3 Successive Primacies, 37
Catching Up and Leapfrogging, 38
Centralization and Pluralism, 39


Cooperation and Rivalry, 41
Challengers, 43
The Invasion of Monopolies, 44
Recentering in the Absence of Challengers, 45
War, 46
Kondratieff Cycles, War Cycles and Hegemonic Cycles, 47
Timing, 50

4 The Italian City-States, 54
Venice, 56
Florence, 59
Genoa, 60
Milan, 62
Causes of Decline, 63
Finance, 66
5 Portugal and Spain, 68
Portugal, 68
Spain, 72
Resources, 73
Shipping, 74
Spanish Silver, 76
Inflation, Conspicuous Consumption and the Dutch Disease, 77
War, 80
Overall Decline, 80
6 The Low Countries, 83
North Europe, 83
Bruges, 84
The Decline of Bruges, 85
Antwerp, 87
Holland, 89
Commerce, 91
Industry, 93
Finance, 95
Education, 98
Migration, 99
High Wages, Taxation and Debt, 99
Timing of Decline, 100
Was the Cause of Decline External or Internal? 103
7 France, the Perpetual Challenger, 105
Counterexample, 105
The Fronde, 106
Mercantilism and the Revocation of the Edict of Nantes, 107
The Mississippi Bubble, 108

The Eighteenth Century, 109
The Continental System, 113
Technical Education in France, 114
Plant Visits, 115
Saint-Simonists, 117
Mentalites, 119
The Interwar Breakdown, 122
The Thirty Glorious Years, 124
8 Britain, the Classic Case, 125
The Classic Case, 125
The Seventeenth Century, 126
Trade, 127
The Industrial Revolution, 129
The Nineteenth Century, 132
Finance, 135
Industrial Decline, 137
The When, 138
The Why, 141
Gentlemen vs. Players, 143
Education, 145
Finance Again, 146
Policy, 148
9 Germany, the Latecomer, 149
Overtaking England, 149
Mosaic Germany, 151
Trade, 152
Gewerbefoerderung (Industrial Policy), 153
The Zollverein, 154
The Constitution of 1848, 154
The 1850s, 155
The Tariff of Rye and Iron, 156
Attitude toward Britain, 158
The Overtaking, 159
The Interwar Period, 161
From the Dawes Plan to 1931, 163
The Immediate Postwar Period, 165
The Wirtschaftswunder (economic miracle), 167
Germany in Europe, 168
The Aging of Germany, 170

10 The United States, 172
Productivity, 175
Saving, 179
The Balance-of-Payments Deficit, 181



Finance, 182
Polarization, 184
Capital Flows, 185
The Dollar, 187
Policy, 188
America in Decline? 190

11 Japan in the Queue? 191
Pre-World War I, 191
The 1920s, 192
1945 to the Korean War (June 1950), 194
Trade and Industry, 195
Direct Foreign Investment, 200
Education and "Salarymen," 202
Keiretsu, 202
"Orgware," 203
Japanese Savings, 204
The Bubble, 206
Japan as Number One? 208
12 Conclusion, 210
The National Life Cycle, 210
Trade, Industry, and Finance, 212
The Causes of Decline, 214
External Causes, 215
Internal Causes, 217
Policy, 220
Will Decline of a World Economic Leader Be Followed
by the Rise of Another? 223
Next? 228
Bibliogmpky, 229
Index, 257

World Economic Primacy: 1500 to 1990

Entrepreneurial activity [in addition to land, labor, and capital]
is a necessary ingredient, but not a sufficient one. It is the
human vitality of a whole society which, given the opportunity, comes into play and sets loose the "creative response of
CARLO M. CIPOLLA, 1986, p. 113


This book is written as the United States is going through a debate over its
world role, both political and economic. Some in political science claim
the United States is "bound to lead" (Nye, 1990; Rosencrance, 1990; Nau,
1990). Others, with perhaps more of an eye to history, think nations can
and do fall from positions of leadership for one or another reason: foreign
policy overstretch (Paul Kennedy, 1987); consolidation of groups looking
after narrow parochial interests rather than the public interest (Olson, 1982);
slowdown in investment, savings, innovation, overall productivity; a shift
of national focus from industry to finance, and in particular financial manipulation. The point is repeatedly made that national decline is relative to other
national economies, not absolute, that the country in the lead at a given
time gets overtaken by others in a "catching-up" process that is inevitable
as knowledge of new goods and new processes spreads from one country
to another (Abramovitz, 1990). The process is thought not to apply to less
developed or developing countries, but mainly to the developed ones that
have what is called, for want of a better term, social capability. Thus sociological considerations come into the question along with more purely economic and political ones. The catching-up model explains how, among the
leading countries with social capability, differences in national income per
capita may narrow, reducing the variance among them. Such has been the
case especially since World War II in North America, Europe, and the Pacific
Rim, but was not noticeable earlier, partly for lack of reliable data. The model
does not explain why individual countries overtake and surpass others in
economic primacy, or that the country being caught up with may in some


World Economic Primacy: 1500-1990

instances decline absolutely. It has not escaped notice that after World War
II, first Germany, then France, and most recently Italy overtook Britain in
income per capita.
The distinguished historian, Fernand Braudel, asserts that there surely
is no such thing as a model of decadence. He objects especially to economists with simple theories of the collapse of vital functions such as public
finance, investment, industry, and shipping. "A new model has to be built
from the structure of every case" (Braudel, 1966 [1975], p. 1240). I am
not so certain, and readers are invited to judge for themselves. I do agree
about the simplicity. The model cannot be exclusively economic, and I
applaud the statement of Simon Schama, another historian, who would "free
the description of early modern culture from its imprisonment in nineteenthcentury terminology, especially that which planes down social paradox,
contradiction and asymmetry to the smooth surface of an economic model"
(1988, p. 568).
My interest is not in who is now "number one," a juvenile question
perhaps tolerable in team sport but hardly appropriate for serious discourse.
Rather the concern is with long-run economic growth and whether the
world economy inevitably gravitates to a hierarchical structure, or whether
it maintains the politically more attractive form of pluralism among a number
of equals. There is of course a range of compromises with a "first among
equals," which shades off into leadership, or economic hegemony as some
call it, as the gaps between primus and secundus, tertius, and so on widen.
Some years ago in a book on the world depression in the 1930s, I suggested that economic leadership imposes burdens on the leader in maintaining international markets for goods, capital, and foreign exchange; in
working to coordinate macroeconomic policies; and in acting in crisis as a
lender of last resort (Kindleberger, 1973 [1986], chap. 14). My old notebooks reveal an interest in economic decline of earlier vintage, going back
to the 1950s and Spain of the Civil War era and earlier. A paper, "An
American Climacteric?," appeared as the Golden Age was coming to an end
(Kindleberger, 1974), and a lecture on "The Aging Economy" appeared
in July 1978 (Kindleberger, 1978 [1990]). The concerns in this book are
thus not new to me.
Economic growth has been a subject of intense but largely frustrated interest among economists and economic historians. Decline, whether absolute
or relative, has received less attention until the last several decades. Attention
started largely with the debate over whether British entrepreneurship had
failed and been responsible for the country slipping from its nineteenth-century
economic world primacy, or whether the entrepreneurs had encountered
unforeseeable obstacles, such as the wrong kind of iron ore for modern
technology, or shrinking markets for cotton goods, and therefore should
not be faulted. The literature, some of which will be encountered in this
book, is voluminous and confused, in that it involved the early application
of mathematical economic theory and econometrics to an historical problem. The pioneers were for the most part revisionists, taking a widely ac-



cepted historical conclusion and standing it on its head. Revision of an
accepted doctrine is a fairly reliable way to make a fast start in academic
life. Most of the literature, however, fails to distinguish between static economic theory in which economic actors maximize output for a given cost,
minimize cost for a given output, or some of both, and situations calling
for dynamic analysis, such as those in which entrepreneurs who encounter
obstacles in their profit-making break through them, innovating by developing new processes, new institutions, or new goods. This is more readily
done, to be sure, when a company, industry, town, region, or country is
starting on the path to economic development, less so when it has traveled
a considerable distance along that route and become, if you will, mature,
aging, or even sclerotic.
This study is supported by the Institute for European and International
Studies of Luxembourg, which is engaged in a wide-ranging investigation
of "national vitality." At a conference on the subject in September 1990
there was considerable question among social scientists and historians
whether any precise meaning could be given to that term. The hesitation is
understandable. Yet as I have read economic, political, and social history
after having been sensitized to the term, I have been struck by the number
of times one encounters its synonyms and antonyms, equally difficult to
define rigorously: as synonyms, adaptive capacity, capacity to transform (i.e.,
to reallocate resources), creativity, determined responses, dynamism, elan
vital, energy, ingenuity, initiative, intelligence, momentum, resilience,
responsiveness, suppleness, verve, vigor; and among the opposites: apathy,
indolence, languor, lassitude, lethargy, passivity, sloth, torpor. Writing in
The American Challenge, Jean-Jacques Servan-Schreiber urged his compatriots to avoid "the path of Arab civilization to fatalism and impotence"
(1968). Economics uses precise definitions of such concepts as elasticity
and inelasticity, dealing with demand and supply responses to price changes,
but behind the numbers, which may range from very high to zero and even
negative, lie more elusive characteristics of consumers and producers connected with the alacrity and speed with which they respond to economic
change. National vitality, it will be claimed, moves in a cycle.
As noted, economic growth is elusive. Many economists and economic
historians focus on one or more of its aspects: population, discoveries, investment, technology, institutions, property rights, fiscal policy including taxation and debt, education (investment in human capital), public goods, attitudes toward risk, monopolies with the newly developed branch of "rentseeking" in which economic actors spend money and effort to gain monopolies from government favors. Studies of the economic growth of particular countries sometimes attempt to cover a range of such aspects in a given
country in a given period. Ambitious economic historians such as W. W.
Rostow (1960), Alexander Gerschenkron (1962, 1968), and E. L. Jones
(1981 [1987], 1988) trace the trajectory of country growth in general and
in particular, with "stages," "spurts," or "recurring growth." The present
exercise perhaps differs little from their work in ambition and scope, except


World Economic Primacy: 1500-1990

that it attempts to allow for decline and for relations among growing and
declining states in a world hierarchical economic order.
Analogies are as dangerous as in some cases they are beguiling. I suggest that a country's economic vitality goes through a cycle like that of the
human individual. Shakespeare's seven stages of man, from "infant, mewling
and puking in its nurse's arms" to "old age, sans eyes, sans teeth, sans everything," puts it too strongly, because countries are not exactly born and do
not die. The economic trajectory of a country will vary widely from case to
case. As a rule it starts slowly, then picks up speed, rockets along for a period,
and ultimately slows down, following an S-curve. Other names for this
growth pattern are the logistic curve, the curve of material transformation,
the five-phase product cycle (Berry, 1991, p. 47), and the curve of technological maturity, describing the movement from knowledge-oriented basic
research through mission-oriented basic research, applied research, development, and application (Shell Briefing Service, 1991, p. 1). (This last,
however, fails to allow for technologies that fall into obsolescence and
Like human beings, the growth of a state can be cut off by accident or
catastrophe short of old age, that is, it may be stunted by external forces.
Unlike human beings, however, economies can have a second birth. New
S-curves may grow out of old, as I suggested some years ago in fitting
a notional S-curve to the Rostovian stages (Kindleberger, 1958 [1965],
p. 56).
To complete the dangerous analogy, modern doctors as a rule specialize in a particular organ system of the human body or type of medicine—
heart, lungs, glands, viral disease, pediatrics, geriatrics, but few specialize
in the essence of the complete life. Few doctors, apart possibly from psychiatrists, go beyond their specialties into sociology, that is, the relations
of their patients to the outside world. In the same fashion, apart from those
economists dealing with growth in the large—and some of them describe
rather than explain—economists tend to specialize in markets, industry,
institutions, and technology.
Many economic historians embrace both economic and social history
and seek causes of economic history in elusive aspects of a society such as
national character, itself determined by historical, geographic, social and
economic conditions. These become especially important when the quest
goes beyond a single city, region, or nation into the relations among them,
including the question of economic primacy.
I approach economic primacy and its ending for particular countries
historically, beginning with the Italian city-states from some uncertain time
around 1350, coming to Portugal and Spain to the Low Countries—first
Bruges in Flanders, Antwerp in the Brabant, finally the United Provinces
with Amsterdam in Holland—to Great Britain, the United States, and finally
to the question of the United States' alleged (reputed? actual?) decline.
Additional chapters treat France as a perennial challenger; Germany, which
twice has aggressively sought its place in the sun; and Japan, which may or



Figure 1-1 "In the race to progress, France is held back by prices." Source: Comite pour
PHistoire Economique et Financiere de la France, 1989, p. 505.

may not now be a candidate for the role of "number one." As an introduction to the country studies there is first a generalized description of the
national cycle or S-curve, including some negative observations on the claim
of some analysts that there are long cycles—the Braudel cycle of 150 years,
the Kondratieff cycle of 50 to 60 years—and then discussion of the question whether at all or most times a single country stands out as an economic
leader or hegemon.
Fernand Braudel and his follower, Immanuel Wallerstein, write in terms
of a world center or core, and within Wallerstein's pattern, a periphery and
a semiperiphery. Braudel asserts that world economic history is a series of
centerings and recenterings, with presumably a decentering between them
(1977, p. 185). The view does not go unchallenged: it is claimed that the
great deal made in the literature about switches in economic leadership
masks how coherent and widespread progress already was in late
preindustrial Europe (E. L.Jones, 1981 [1987], p. 236). In a similar view,
it is said that this approach to history turns it into a mechanical dog race
(W. N. Parker, 1984, p. 226 note). On the other hand, a succession of single
national economic leaders has been said to be "a commonplace of history,"
a statement that fails to signify whether it is true or false (Braudel, 1979
[1984], p. 169). But a race is not a bad metaphor for a social science that
rests in great degree on the hypothesis of competition.1 Writing on the
Middle Ages, an historian observed that the European economy at the time
of the fairs of Champagne, Geneva, Lyons, and Piacenza in Italy represented
"a relay race as one town overtook another and was itself overtaken"
(Bautier, 1971, p. 176). As is already apparent, I rely to a great extent on
Fernand Braudel, whose masterly studies The Mediterranean (1966 [1972]),
Civilization and Capitalism (1979 [1984]), and The Identity of France
(1986 [1990]) I use without sufficient historical expertise to judge reliably
'The metaphor of a race was evoked by Alfred Sauvy in a comment on the program of
Pierre Mendes-France on August 5,1954, in a pamphlet reproduced as a document in Etudes
et documents (Studies and documents) (1989), no. 1, pp. 493-524. It is encapsulated in
one of many cartoons, showing France handicapped by past inflation in the race against the
United States, Germany, and the United Kingdom (p. 505):


World Economic Primacy: 1500-1990

the many controversies referred to. Braudel uses the metaphor that "France
was out of the race for years to come in the age of Venetian supremacy"
(1986 [1990], vol. 2, p. 165) and that England in 1688 was "one jump
ahead of the Continent" (ibid., p. 640).
The races described will not be timed with stopwatches. Close dating
as to what state was ahead or behind at a particular time is unpersuasive.
Historians tend to devote time to isolating "turning points," sometimes
sniping at those of others. The essence of history, it seems to me, is its complexity. Monocausal explanations are largely suspect. It is true that social
science prefers explanations that are parsimonious, that is, reduced to the
fewest and simplest causes. At the same time it recognizes that many effects
arise from a long series of "necessary" causes, without any one of which
the result would not have occurred, rather than from one or two "sufficient" causes. Aging in a person, and in my judgment in a country, is an
endogenous process, but outcomes can be affected by chance, shocks,
accident—all exogenous or outside events. History is less social physics, in
which cause and effect are tightly linked, than biology, and especially Darwinian evolutionary biology, with chance mutations that wilt or develop
depending on random or nearly random circumstances. Chaos theory now
recognizes the stochastic element in social (and physical) processes; the
nuclei of what later become wide-ranging changes are often difficult or
impossible to detect at early stages (C. S. Smith, 1975, p. 605).
For the most part, economic history is preoccupied with the pursuit of
wealth. Wealth is not the only motive for economic activity. Henri Pirenne
notes that small monetary transactions in the Middle Ages were driven by
the desire to satisfy human needs, "and also, no doubt ... to satisfy that
instinct of sociability which is inherent in all men" (1933 [1936], p. 10).
Commerce he ascribed to the love of gain and the craving for adventure
(ibid., p. 26). The dark side of human nature is stressed by John Nef, who
asserts that warlike impulses—fear, hatred, cruelty, revenge, pleasure in
destruction and human suffering, together with religious convictions, courage, and the sense of honor aroused by the obligation to fight—are not
peculiar to Western people (1952, p. 115). At the same time, a positive
force for industrial innovation has been the quest for beauty (C. S. Smith,
1970). Alongside the desire for material gain is the drive for power and
prestige, especially noticeable in the French preoccupation with glory.
Efficiency and beauty, wealth and prestige are sometimes complements,
sometimes substitutes, between which people and countries must choose.
The quest for gain cannot have been said to be general. In the Middle
Ages, "the object of labor was not to grow wealthy," for avarice was a sin,
but "to maintain oneself in the position to which one was born until life
eternal" (Pirenne, 1933 [1936], p. 13). If one insists on looking for a general attribute of human nature, apart from the evil mentioned earlier, it is
the spirit of emulation. "Monkey see, monkey do." In The Theory of Moral
Sentiments Adam Smith states that emulation runs through all ranks of men
and has its origin in admiration of the excellence of others (1759 [1808],



vol. 1, pp. 113,270). In The Wealth ofNationshe goes on: "Rivalship and
emulation render excellence, even in mean professions, an object of ambition and frequently occasion the very greatest exertions" (1776 [1937],
p. 717). In a statement somewhat limited to technology, Nef connects imitation to "intellectual vitality" (1952, p. 152). An eminent American historian puts it that "personal identification with a group of fellows is the
whole basic guide for most behavior" (McNeill, 1992, p. 15). To identify
with the rich is one widespread motive, but there are other groups to emulate: poets, painters, musicians, scholars, soldiers, athletes, some of whom
are rich as well. Writing on Germany, Thorstein Veblen thought borrowing the achievements of others for their own purposes was a notable characteristic of Baltic peoples, among them Germans (quoted in Dahrendorf,
1965 [1969], p. 41). By way of contrast, Braudel in The Mediterranean
asserted that "a great civilization can be recognized by its resistance to
certain alignments, by its resolute selection among influences offered to it"
(1966 [1972], p. 766).
War is an important element in economic growth and decline, and in
leadership. Economic conflict is a cause of war, one cause among a number, including religious belief, competition among dynasties, imperialism,
and accidents. It is evident that war has impacts on economic growth, and
a number of analysts believe that economic growth leads to war by various
paths. The question arises in chapter 3 and in particular in the country studies
that follow. The relations between war and economic growth are complex
and do not permit of simple generation.
War may be the result of "overstretch," ambition that exceeds the capacity of the actor to carry through to his or its goals. Overstretch evokes other
apothegems from Adam Smith:
Examine the record of history, recollect what has happened within the circle
of your own experience, consider with attention what has been the conduct
of almost all the great unfortunate, either in private or in public life, whom
you may have read of, or heard of, or remember; and you will find that the
misfortunes of by far the greater part of them have arisen from their not knowing when they were well, when it was proper for them to sit still and be contented. (1759 [1808], p. 351)
A great source of misery and disorder seems to arise from overrating the difference between poverty and riches; ambition that between a public and private station; vainglory between obscurity and an extensive reputation, (ibid.,
p. 347)

In his book Lucien Leuwen, Stendhal asks "Has any one ever seen a man
born rich who did not wish to double his fortune?" (1835 [1960], p. 612).
In an earlier work I have applied the concept of overstretch to speculative
manias that often ended in financial crises (1978 [1989]). It is difficult not
to see its application to individuals such as Philip II of Spain, Louis XIV of
France, Napoleon Bonaparte, and Adolph Hitler.
Economic analysis and economic history have lately been concerned
with path dependency, the impact on economic processes and institutions


World Economic Primacy: 1500-1990

of events that unfold in particular ways and render the processes and institutions rigid and unalterable. When external conditions change it is frequently difficult, to the point of impossibility, to reshape some institutions
that have evolved to accommodate earlier forces. The Coase theorem holds
in part that institutions adapt readily to economic needs except when transaction costs—the cost of making the change from one set of institutions to
another—are so high as to frustrate a desirable transformation. Old technologies frequently survive alongside new because the marginal cost of using
the old—viewing past investment as a sunk cost—must be compared with
the average cost of the new, to the advantage in many cases of the former
(Salter, 1960). The same holds true in pressures and decisions to scrap or
retain old institutions. In consequence, there is danger in forming an opinion on the value of a given institution in any and all circumstances. Monopolies, as Schumpeter insisted, can be efficient, provided that the higher-thannormal profits are reinvested in improved technology and greater capital
equipment; the profits, however, may merely go into conspicuous consumption. Again, tariffs may stimulate growth in an economy with substantial
vitality, or hasten decline in geriatric rather than pediatric circumstances.
Well-defined private property rights, which constitute the driving economic
force for economic growth in the analysis of Douglass North and Robert
Paul Thomas (1973), and have been given a central role in the privatization
movement in Western Europe and the movement from socialism to the
market economies in the East, do not constitute a universal solvent. Both
tax-farming—private financiers bidding for the right to collect princely
taxes—and irrigation schemes that allocate scarce water among thirsty properties, among other examples, require exceptions from the virtually unanimous applause for property rights.
To conclude these broad introductory thoughts, notions, and "animadversions," return for a moment to chaos theory and consider the role of
public policy. In the first place are unintended consequences, typically the
result of some force or forces that were not considered when a policy decision was taken. Ferdinand and Isabella's financing of Columbus's voyage
is perhaps the outstanding example of such a policy decision, but the
number of unintended consequences is legion. Second is the question of
the efficacy in halting decline of even the most adroit and informed public
policy. To return to the human aging analogy, there is little doubt that the
aging process can differ widely among persons, depending on good medicine or bad medicine, or even on medicine or no medicine. Economic optimists will favor governmental policies through appropriate spending, spending cuts, taxes, economic credits, subsidies, perhaps even prohibitions and
controls; skeptics will be reminded of the post-1973 disappointments in
the United States with monetary policy, fiscal policy, the inconclusive debates over industrial and incomes policy, and most recently the failure of
the 1981 tax reduction to stimulate personal savings and business investment. In Europe imperative and indicative planning have equally failed to
score unalloyed success. Since the Enlightenment, the world has believed

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