Small States, Global Economy

0:00Deepak Lal, a prominent pro-market development economist, wrote the following words in his 2004 book, In Praise of Empires,

0:30by Thomas Smith. Therefore, despite their current bad name, empires have promoted peace and prosperity, close quote. Empires are natural according to Lau because they solve a Hobbesian problem of anarchy among independent states. A domestic Leviathan prevents the descent into a war of all against all by providing security essential for peace and prosperity in its own territory. In like manner, an international leviathan is needed to provide order in an anarchical international system of states. Without such an order, the global economy cannot develop. Empires arise in the following way, according to Lyle. A state originates over a territory when roving bandits settle among a developed agricultural community to exact tribute from it.

1:16In exchange, the bandits provide essential public goods such as law and order. With protected property rights, production rises and with it tribute to the state. Other bandit groups become states in the same way in other territories. Although important instances of long-distance trade do occur, the diversity of laws across different states hinders interstate trade. This suboptimal equilibrium among states is disturbed when one of them secures an economic or military breakthrough that lowers the costs or raises the revenue from conquest and administrative control of foreign territory. By enforcing a uniform legal code across its entire span, an empire creates a common economic territory, which protects long-distance trade and fosters economic progress. The greater wealth gives the empire its advantage over small competing states.

2:04Actually, Lyle has it backwards. The truth is that for the same reason there is no need for an international Leviathan, there is no need for a domestic one. Lyle's argument about the origin of the state is based on an equivocation. He wishes to establish the necessity of the state by invoking the dark Hobbesian state of nature, but desires that the state arising from it is limited in such a way that the market can develop unimpeded. But if the conditions in the state of nature make life solitary, nasty, brutish and short, it is because each person exercises his Hobbesian right of nature The Social Contract does not limit this power, but vests it in Leviathan.

2:49Nothing constrains the Leviathan state in pursuit of its survival. It tolerates private activity not as a matter of individual right, but as a grant of privilege revocable at will, hardly solid grounds for economic progress. If Lyle takes the position on the state of nature that permits the limited transfer of rights to the state in the Social Contract, So the persons could retain property rights against the state, and thereby permitting the market to develop, then the necessity of the state does not logically follow. Mises agreed with Hobbes that the state of nature is characterized by irreconcilable conflict, but the way out is not the surrender of the rights of nature to the state, but an exercise of human reason. Mises wrote, quote, What makes friendly relations between human beings possible is the higher productivity of the division of labor.

3:36It removes the natural conflict of interests. For where there is a division of labor, there is no longer a question of the distribution of a supply not capable of enlargement. A preeminent common interest, the preservation and further intensification of social cooperation, becomes paramount and obliterates all essential collisions. It makes for harmony of the interests of all members of society." What is necessary for society to develop in this case is that people have the capacity to resist the temptation to commit aggression or to suppress those who succumb to this temptation in order to gain the higher productivity of the division of labor. Why the suppression of criminals would have to be monopolized in the state is not clear. Lau rests his arguments in favor of a monopoly on the assertion that in the state of nature people do not share a common authority that could be appealed to in deciding between competing claims.

4:27Competing judges would have a fragmented law which would not command the authority of a uniform law. The social contract vests the law-making authority in the state to correct this defect. But certainly law exists without the state, and law conducive to the market actually precedes the state. As Mises wrote, quote,

4:57and statutes, those documents aimed only at safeguarding liberty and freedom firmly established by the operation of the market economy against encroachments on the part of office holders. No government and no civil law can guarantee and bring about freedom otherwise than by supporting and defending the fundamental institutions of the market economy." The law that regulates human action and interaction is woven into the fabric of reality. It is embedded in the nature of man. It operates whenever human action takes place. Legislation can neither establish nor improve the natural law. And each piece of legislation contrary to it hinders its operation. Even if the state could be strictly limited to defense of person and property, it would be unnecessary.

5:42The social order of the division of labor and exchange would arise without it. The common economic space that Lau cites as the justification for empire is the natural condition of man. Benjamin Tucker was right to include in the masthead of his publication, Liberty, the maxim of prudence, quote, liberty not the daughter but the mother of order, close quote. Lowell himself concedes this point by admitting that settled communities existed before states emerged from the intrusion of roving bands who came to live as parasites on them. It must have been the case that non-state provision of public goods, including enforcement and adjudication of law, was already in place. Just as the law governing human action and interaction is a precondition for state codification of it, judging disputes about human action and interaction must have preceded state monopolization of this activity.

6:32Moreover, this law must have transcended states for long-distance trade to have developed across state borders. Persons do not need a single authority as judged to submit to the law, as Lau claims. They only need to feel bound to the law itself. During the period of Israel's time in the wilderness, people with disputes came to Moses to judge between them. Because the task overwhelmed him, he took the counsel of his father-in-law and appointed judges from among the people. Because the people had been taught the law of God and accepted its authority, they submitted to the decisions of the judges. The system of the judges persisted in Israel until the time of Samuel when the people rejected God and his law and demanded a king to judge them. Because natural law is universal, it can operate with particular adjudication and enforcement.

7:19The common law in arbitration, for example, function consistently with the natural law, not because the state is in the background supporting them, but because the natural law itself is operating universally. If enforcement adjudication of law can be provided privately in the same market process as other goods, then the state is not merely unnecessary. Because it rests on aggression against person and property, the very existence of the state must impair the social order. Mises wrote, quote, government means always coercion and compulsion and is by necessity the opposite of liberty. Government is a guarantor of liberty and is compatible with liberty only if its range is adequately restricted to the preservation of economic freedom. Where there is no market economy, the best intentioned provisions of Constitution and laws remain a dead letter."

8:08Mises is right that the state is the opposite of liberty, and for that reason he is wrong to claim that the state, however limited, can be the guarantor of liberty. An institution resting on aggression against private property cannot be the defender of private property. If, as Lyle claims, settled communities pre-existed the state, then the account of the origin of the state given by Hans Hoppe is more plausible than Lyle's. States came from the rise of natural elites within society. Elites emerge in society from the exercise of their superior talents, which earn them wealth and respect. Others turn to them as authorities, well-suited to judge in their disputes, a public good the elite performs out of a sense of duty. From this stateless condition, the state comes into existence when the elites illegitimately monopolize the function of judging disputes.

8:54As soon as social competition in judging and enforcing the laws eliminated, the price of these services rises and their quality falls. Only competition among states remains to provide a competitive check against the state's predation. If one state plunders too heavily, production falls relative to its rivals. Some from among the productive move their persons and properties to the territory of rivals, who then have higher population and greater wealth to exploit to their advantage. Hoppe also points out that monopolization makes the state judge in its own case, and therefore the state will tend to provoke instead of solve conflict in order to rule in its favor and thereby expand its power. Justice is perverted to further the ends of the state. Natural law, immutable and impartial, gives way to state legislation, flexible and partial.

9:46Economic progress is hampered not only by the legislation's deviation from the natural law, but by the uncertainty it introduces into social life. Of greater importance than these considerations of why small states foster liberty, is that small states permit the possibility of the emergence of private institutions that transcend the state. Churches providing moral and legal codes, families raising children and caring for elderly, schools educating the young, charities giving alms, enterprises producing goods, associations producing public goods, and so on. If the institutions of society sit above the state, then they can constrain the state. Lyle would have us believe that liberty is advanced by entrusting to the centralized state law itself. It is a grave mistake to think that the perversions wrought by the exercise of monopoly power can be suppressed in the more important realms and not in the less important ones.

10:39If a monopoly garbage collector introduces inefficiencies unknown on the market, how much more so a monopoly money producer? And if a monopoly money producer is bad for the social order, how much worse a monopoly judge of the law? Surely he cannot resist the temptation to extend the perversion of the law on which his monopoly rests to rule in favor of himself and his allies. Once the state commands the law, it will systematically dismantle the constraints put on it by private institutions. Lord Acton's dictum is true, power tends to corrupt, absolute power corrupts absolutely. The weakness of Lyle's defense of empire can be seen in another way. Small states were indispensable to the European miracle. The steady economic progress starting in the high middle ages that lifted the masses out of poverty and created the prosperous middle class while sustaining an unprecedented rise in human population.

11:33As Ralph Reiko wrote in his outstanding overview of the impressive literature on the importance of decentralization to the rise of capitalism in Europe, quote, the key to Western development is to be found in the fact that while Europe constituted a single civilization, Latin Christendom, it was at the same time radically decentralized. In contrast to other cultures, especially China, India and the Islamic world, In the Islamic world, Europe comprised a system of divided and hence competing powers and jurisdictions. After the fall of Rome, no universal empire was able to arise on the continent. This was of the greatest significance." Not only did small states constrain each one's predation by the competitive process among them, but within each realm, the struggle for supremacy came to center around the assertion of rights.

12:23Representative bodies, religious communities, chartered towns, universities, etc., each claiming its rights, limited the power of the king. Eventually, private property rights came to be defined more in line with the nature of human persons and human action, leading to further gains in prosperity and liberty. Innovations in technology, organization and institutions were permitted by right, giving rise to the distinctive features of capitalism, Capital Markets, Joint Stock Companies, Entrepreneurial Activities, Capital Accumulation, and so on. From the 10th century onward, the prosperity of the merchant class began to escape the confiscatory measures of the state, and then slowly but surely, property rights enjoyed by the merchants were extended more widely, until they encompassed even the lowliest peasant.

13:10In other societies, the wealth of merchants was tolerated by the state because it served its interests. Private property was a privilege granted by a state, not a right against it, and this privilege was not extended to the average person since the ruler, unable to imagine economic progress himself, could not conceive of why doing so would be to his benefit. Innovators who began to amass wealth saw the state swiftly confiscate their property to avoid the rise of a new center of power in competition with its own. Potential innovators took notice. In Western Europe, because there were small states which permitted the assertion of rights, the rising wealth was not confiscated, but instead had a liberalizing effect on the policies of states. As Reiko noted, scholars have for a long time argued that the precondition for this breakthrough in economic development was Christian ideas.

14:00A seminal work in this area is by the great legal scholar Harold Berman. Berman identifies two important areas where Christian ideas were put into practice in ways that liberalized society. First, the rationalization of the canon law on Christian principles provided a model for the transformation of civil law codes throughout Western Europe. Second, the papal reforms under Pope Gregory VII culminated in an independent church capable of judging the state. This process resulted not only in a higher law sitting in judgment of legislation of the state, but higher law based upon Christian ideas. As Rodney Stark has argued, Christianity emphasizes the importance of human reason in unfolding God's will. Reason applies not only to understanding God himself through scripture and creation, that is systematic theology, but to understanding the nature of creation itself.

14:52To discover how creation operates is not only to reveal the mind of God, But gives man the knowledge to obey God's command to exercise dominion over the world. Man is suited to this task because he is made in God's image, endowed with reason, motivation, imagination and other such faculties. Moreover, Christianity teaches that God is transcendent, separate from and above creation and therefore the order man recognizes in the world is decreed by God and infused by him into the nature of creation. The belief that God regulates creation by the operation of natural laws is the presupposition of both the natural and the social sciences. A substantial literature exists explaining the rise of modern science in Christendom. The great historian and philosopher of science, Stanley Jackie, points out that the original formulation of the laws of motion was by the 14th century priests, Jean Buridan and Nicola Eresma.

15:46Students and later teachers at the University of Paris, center of the natural law philosophy of Thomas Aquinas, Thomas Aquinas, they began the Scientific Revolution. And because such knowledge was, in Christian thought, to inform human action, it went hand-in-hand with the Technological Revolution. It was a small step to apply natural law thinking to social science. Order in society is brought about by the operation of laws that God has built into human nature. In assessing Thomas Aquinas' contribution to economics, Murray Rothbard wrote, quote, Perhaps St. Thomas' most important contribution concerned the underpinning or framework of economics rather than strictly economic matters. For in reviving and building upon Aristotle, St. Thomas introduced and established in the Christian world a philosophy of natural law, a philosophy in which human reason is able to master the basic truths of the universe.

16:38Thomism demonstrated that the laws of nature, including the nature of mankind, provided the means for man's reason to discover a rational ethics. Working in this framework, Buridan and Aresma developed a proto-Austrian theory of money. According to Rothbard, One great leap forward in economics contributed by Jean Buridan was his virtual creation of the modern theory of money. He broke free of Aristotelian shackles and founded the medalist or commodity theory of money. That is, that money originates naturally as a useful commodity on the market, and that the market will pick the medium of exchange possessing the best qualities to serve as a money. The belief that God keeps order in the social realm by the operation of natural laws leads logically to the conclusion that the legislation of the state is unnecessary for, or even harmful to, the social order.

17:33Complementary to this belief in natural social order and supporting laissez-faire was the Christian view of the human person. Each person bears the image of God and thus stands in some respects as an equal to all other persons. Moreover, salvation is for each person, not the human race, not the nation, not any collective. Empires rise and fall, states come and go, but each individual person will live forever. God has offered salvation to each person by the incarnation of his son, who was born, lived and died as a human person. At first, this line of thought resulted in the assertion by some of their rights against the state, but eventually it led to the conclusion that each person has the same rights to liberty. The Proposition of Equality and Authority or Political Independence found in John Locke.

18:21These laissez-faire currents then fed legal reform. Legislation should conform to natural law and therefore defend private property, contract and so on. And these legal reforms became the foundation for a commercial revolution. The legal and commercial revolutions bore their first roots of liberty and prosperity in the city-states of northern Italy during the 12th century. Venice, Genoa, Florence, Milan were centers of wealth accumulation not only from trade but also profitable industries in textiles, glassware, iron and other goods. Crucial to the liberty and prosperity of these cities were the decentralization of power within them and the competing centers of power outside them that could be played against each other. With state confiscation constrained, standards of living steadily improved and population steadily rose.

19:09As the great medievalist Robert Lopez put it, at its peak in the late 13th and 14th centuries, Italian commercial power, quote, scratched as far as England, South Russia, the Oasis of the Sahara Desert, India and China. It was the greatest economic empire that the world had ever known, close quote. Stark summed up the birth of capitalism with these words, quote, quote, the rebirth of freedom in some parts of Europe was the result of three necessary elements, Christian ideas, small political units, and within them the appearance of a diversity of well-matched interest groups. There were no societies like these anywhere else in the world, close quote. In contrast, before the institutionalization of Christian ideas and where power was more centralized in the realm of Charlemagne in the 9th century, The State suppressed economic progress with burdensome taxation and what Rothbard called his despotic network of regulations.

20:08And where a centralized state suppressed the institutionalization of Christian ideas, such as in Russia, liberty and prosperity failed to arise at all. Capitalism was spread to Northern Europe by merchants from the cities of Northern Italy. Interested in trading woolen goods of Flanders with Southern Europe, Italian merchants fostered the rise of medieval fairs. The Great Fairs of Champagne, beginning in the 11th century, integrated southern and northern European economic activity into an overarching division of labor. These fares were made possible because the Count of Champagne was independent of the King of France. When this independence was lost in the late 13th century under Philip IV's consolidation, the fares went into decline from taxation. Italian merchants evaded these depredations by relying on sea routes to the free cities in Flanders.

20:57Established by merchants outside feudal claims and ruled by interests favorable to commerce that found protection from predation of local barons by agreements with distant monarchs, free cities sprang up across northern Europe in the 12th century. Bankers from the northern Italian cities established branches in Bruges from which they capitalized woolen production in Flanders. As a center of trade between English fleece producers and Flanders weavers and Flanders producers of woolens in southern Europe, Bruges became the Venice of the North in prosperity as well as canals in the late 13th and early 14th century. War with France to annex Bruges as it had southern Flanders cause merchants seeking freedom to move to Antwerp in the late 15th and early 16th centuries.

21:43By the late 15th century, Antwerp was the richest and most well-known city in Europe, Antwerp, fed by the burgeoning exchange from the Age of Exploration, the volume of trade passing through Antwerp far surpassed that of any port in history to that time. However, Charles V's subjugation of southern Netherlands led to Antwerp's decline. Charles V also incorporated Italy into the Spanish realm and state predation, which had been held at bay for half a millennium, was loosed. Venice was the only one of the capitalist cities to avoid this fate. But having lost the balance between Eastern and Western powers because of the Spanish intrusion, it succumbed to predation by city rulers. Capitalism marched on from Antwerp to Amsterdam as displaced capitalists moved north where capitalism flourished in the late 16th and 17th centuries.

22:32Eventually, Amsterdam too succumbed to Spanish and French intrusions. By the 13th century, capitalism was well underway in England. Christian ideas of equality of natural rights have made further progress in England than elsewhere in Europe which extended secure private property to a wider circle of persons than on the continent. As a result, English capitalism was not limited to cities. Farmers supplied fleece for the European wool markets and entrepreneurs innovated manufacturing processes and power supplies. Water and windmills, mechanical devices and coal power were common by the 13th century. The superiority of coal as a source of power led to innovations in mining and shipping, including wagons drawn by horses on metal rails, a precursor to the railroads, and the development of coal power led to the invention of the blast furnace for the working of iron and eventually to the steam engine.

23:23Each step forward in the development of capitalism was possible because of a decentralized political system, and each step backward was from political centralization. Ignoring the history of capitalism's origin and progress, Lao claims that the British Empire of the 18th century brought about the first global economy to experience genuine economic progress. His claim about the British Empire is an example of the fallacy Reiko calls the timeless approach to history. Of P.T. Bauer as a debunker of this fallacy, Reiko wrote, quote, rejecting the timeless approach to economic development, and the Interplay of Various Cultural Factors that were its precondition. Economic progress occurred despite, not because of the British Empire.

24:09The product of a culture of natural rights, liberty and capitalism, the American colonists thrived in the decentralized, nearly anarchic conditions. While the colonists were building civilization in the wilderness by acting on their natural rights, While the colonists were building civilization in the wilderness by acting on their natural rights, the British Crown pursued its own mercantilist interests. The resulting policies sometimes worked with America's comparative advantage and sometimes against it, but in no case did the Empire further liberty and prosperity. In the latter cases, in fact, the colonists responded with evasion, smuggling, and eventually, secession. They did the same when they felt that colonial states aggressed against their natural rights. of Rights, oppressed Virginians left and homesteaded in North Carolina, Pennsylvania too was largely without a state in its settlement period, with colonists enjoying the freedom to exit the state's realm and homestead virgin land.

25:02In contrast, areas of the British Empire that lacked these cultural traditions having no history of liberty and capitalism failed to flourish. Only now and without being imposed by empire are India and other non-Western regions like by China Experiencing the Blessings of Economic Progress And had capitalism not arisen centuries before from the decentralized political conditions in Western Europe, there would not have been a British Empire conducive, to the extent it was, to liberty and prosperity. The thought that persons had rights against the state and should be left alone to live their lives never would have occurred to any British statesman otherwise. Empires prior to the rise of capitalism were predatory of individual wealth, hostile toward entrepreneurship and failed to recognize natural rights.

25:48And even the Spanish and French empires of the 18th century, because they lacked a strong tradition of capitalism, failed to foster liberty and prosperity in their colonies. That non-Western countries today can mimic Western prosperity also rests on the precondition that capitalism arose from Christendom with Christian ideas and decentralized states. Whether or not their nascent prosperity proves to be built on the firm foundation of natural rights of Natural Rights is not yet clear. But one thing we do know, liberty was born in Christendom during the Middle Ages. It can be reborn in the same way it arose before. People can once again sanctify the natural rights of man, and civil society can be reinvigorated to once again transcend the state. Our task is to use the scope of action and wealth left to us by the state to advance natural rights and build the institutions of civil society.

26:40When liberty and capitalism were born over a millennium ago, states were small, decentralized and weak. By restoring natural rights and civil society, the state will recede once again. Foremost among those working on this task of restoration is the Ludwig von Mises Institute. Thank you very much.