By Bas van Bavel
The Invisible Hand? How Market Economies have Emerged and Declined Since AD 500
- provides insight into more than a thousand years of economic and social developments;
- offers a better understanding of what markets and market economies really are;
- assesses the advantages and drawbacks of having markets as the dominant system of exchange and allocation;
- confronts theoretical models and ideological viewpoints with empirical historical data;
- enables the reader to take a fresh look at the present debates about the future of capitalism, the effects of inequality, and the relation between wealth and political leverage.
Gene Callahan on History: Review of New Books wrote:
"This a beautifully written book, easy to read, which makes it adequate for a wide audience. Above all, it is an original and intellectually challenging piece of scholarly work that breaks new historical grounds. Van Bavel is one of the few scholars alive who is equally an expert on history, economics, politics. This characteristic enables him a truly subtle analysis of texts and ideas. [....] Van Bavel’s book is full of new information, ideas and food for thinking thought. (We have already enough calculating thought in economics). As such, this book is going to be a vital contribution to the advancement of economic discourse as well as a crucial intervention in current political debate."
Mauricio Drelichman on Journal of Economic Literature wrote:
"The response to the crisis by free-market advocates most typically ran along these lines: Yes, the crisis was bad, but it was the result of crony capitalism, not of true free markets. [...] Van Bavel’s work provides a very important counter-response: True, but free markets produce crony capitalism, like an acorn produces and oak tree. [...] The moral principles that market advocates often posit as counterbalances to the rise of crony capitalism are also ruled out in van Bavel’s analysis, as traditional norms and institutions see their power sapped by the market. [...] A brief review such as this cannot do justice to wealth of material in this important new book, other than by noting that anyone interested in these issues should not miss it"
Economists should read the book’s conclusion first. Indeed, for someone who is not opposed to the idea of stylized facts and would rather skip the intricate detail, it might be useful to think of Van Bavel’s contribution as an engaging thirty-seven page concluding chapter, preceded by a 50-page meticulous historical prologue. The conclusion, indeed, is the only place in the book where the theoretical apparatus underpinning the argument is presented as a coherent whole. [...] No other economic system has consistently delivered the economic growth and increased quality of life that markets brought throughout history to societies the world over. While the book is definitely written from a glass-half-empty perspective, it is certainly possible to read it with a half-full glass in mind."
The Invisible Hand offers a radical departure from the conventional wisdom of economists and economic historians, by showing that 'factor markets' and the economies dominated by them — the market economies — are not modern, but have existed at various times in the past. They rise, stagnate, and decline; and consist of very different combinations of institutions embedded in very different societies. These market economies create flexibility and high mobility in the exchange of land, labor, and capital, and initially they generate economic growth, although they also build on existing social structures, as well as existing exchange and allocation systems.
The dynamism that results from the rise of factor markets leads to the rise of new market elites who accumulate land and capital, and use wage labor extensively to make their wealth profitable. In the long term, this creates social polarization and a decline of average welfare. As these new elites gradually translate their economic wealth into political leverage, it also creates institutional sclerosis, and finally makes these markets stagnate or decline again. This process is analyzed across the three major, pre-industrial examples of successful market economies in western Eurasia:
- Iraq in the early Middle Ages,
- Italy in the high Middle Ages, and
- the Low Countries in the late Middle Ages and the early modern period
These areas successively saw a rapid rise of factor markets and the associated dynamism, followed by stagnation, which enables an in-depth investigation of the causes and results of this process. Parallels are drawn to England and the United States in the modern period.
Table of contents
1. Introduction: Markets in economics and history
Keywords: economics, historiography, market economies, markets and wealth, markets and freedom, institutions
"Traditionally, both in economics and in economic history, markets and market economies (economies that exchange and allocate most of the land, labour, capital, and output through the market) are associated with modernity, economic growth, and freedom. At first sight, recent economic historical research seems to endorse the link between these elements, even though it pushes the start of this process further back in time than assumed earlier, that is, to Western Europe in the late Middle Ages. This chapter shows that a closer look at the results of recent research causes us to reconsider this link. It also develops and presents a new analytical framework for investigating the rise and decline of market economies. This framework focuses on the interaction between the institutional organization of markets, economic development, and the socio-political context in which markets develop, more particularly the social distribution of wealth and political leverage." Abstract from Oxford Scholarship Online
2. Markets in an early medieval empire: Iraq, 500-1100
Keywords: Iraq, early Middle Ages, Abbasid era, social revolts, sharecropping, financial markets, slaves, inequality
"Iraq in the seventh to ninth century, after a period of revolts that had produced a balance between various social groups, saw the development of dynamic land, lease, and labour markets, and financial markets sprang up later. Within the resulting highly monetized and market-oriented setting, inequality started to rise. A new, wealthy elite came to the fore, which combined large landholding with financial dealings. By advancing cash to the state and acquiring a pivotal role within the tax system, this elite found opportunities to strengthen its political role. Gradually, the focus of the market elites shifted to the political sphere, and to developing instruments of coercion, rather than investing in the economy. As other people had no means for investment, due to the unequal distribution of wealth, and markets became skewed to the interests of the elite, the economy of Iraq in the tenth century started to fall again." Abstract from Oxford Scholarship Online
3. Markets in medieval city-states: the centre-north of Italy, 1000-1500
Keywords: Italy, communal revolts, freedom, sharecropping, Renaissance, mercenaries, urban landholding, public debts
"The communal revolts and social movements in the centre and north of Italy had by the twelfth century resulted in a situation of relative freedom and equality, in which many of the traditional restrictions on the (market) exchange of land, labour, and capital were removed. Land and lease markets sprang up. In the thirteenth and fourteenth centuries, these were used by townsmen to expand their rural landholdings and to make them profitable through a type of sharecropping, mezzadria, in which the tenants retained almost no economic agency. The urban elites further expanded their wealth through their dealings in the developing capital markets. This enabled them to secure a hold on the heavily indebted city-states and, next, to use their political leverage to further strengthen their hold over land, capital, and labour, in part by coercion. At the same time, after a long period of florescence, the economy declined again." Abstract from Oxford Scholarship Online
4. Markets in late medieval / early modern principalities: the Low Countries, 1100-1800
Keywords: Low Countries, associations, short-term leasing, wage labour, annuities, wealth inequality, merchant entrepreneurs, Dutch Golden Age, coercion
"Many parts of the Low Countries were characterized by a large degree of freedom, and this was further expanded in the eleventh to thirteenth century, in a wave of revolts and self-organization by ordinary people. Old, feudal blockades were removed and markets for land, lease, and labour grew, followed by credit markets. By the sixteenth century, these well-organized, open markets had become dominant. This generated economic growth, but also gave rise to a new economic elite of merchant entrepreneurs, who extended their wealth in a society increasingly characterized by economic inequality. This was most pronounced in Holland, where the Golden Age saw these elites translate their wealth into political leverage, through financing the public debt, buying shares in the Dutch East India Company, supplying finances for the military and acquiring administrative positions. Their dominance made the economy and markets less open, and the economy began to stagnate." Abstract from Oxford Scholarship Online
Epilogue: Markets in modern states: England, the United States and Western Europe, 1500-2000
Keywords: England, Glorious Revolution, land markets, equity, American Revolution, market revolution, economic growth, financial markets, global capitalism
"Both early modern England and the United States were characterized by a large degree of freedom and equality, generated by a series of revolts. In this open, balanced context, factor markets developed to become dominant by the mid-sixteenth and early nineteenth century, respectively. This went along with economic growth, but also with growing wealth inequality. For the first time in history, these market cores interacted intensively with each other and with areas in other stages of market development, most notably with Western Europe. In the first half of the twentieth century, this led to a halt, or even a temporary reversal, of the growth of inequality in both countries, but after the mid-twentieth century, developments resumed again. Western Europe and the United Kingdom were brought in sync with the American cycle, characterized by market dominance, expanding capital markets and debts, growing wealth inequality, and the dominance of market elites." Abstract from Oxford Scholarship Online
Conclusion: The fundamental incompatibility of market economies with long-run prosperity
Keywords: cycle, institutions, capitalism, inequality, market elites, town and countryside, growth and decline, financial markets, states
"The cases discussed enable us to reconstruct and analyse the complete developmental path of market economies. At the start, and triggered by waves of social revolts, there is a positive feedback mechanism between increasing freedom, growing factor markets, and economic growth. After two or three centuries, as a result of increasing economic inequality and the rise of new market elites, this turns into a negative feedback mechanism, between social polarization, institutional sclerosis, markets becoming skewed towards the interests of the market elites, and economic growth stagnating or even turning into decline. Possible counterbalancing mechanisms, including those offered by the state, prove futile. The market elites acquire a grip over state power and use this to further skew the markets to their interests, thus speeding up the process. No correction mechanism is available to counter the negative feedback cycle." Abstract from Oxford Scholarship Online
About Bas van Bavel
Bas van Bavel is distinguished professor of Transitions of Economy and Society at Utrecht University. He acts as the academic director of the Utrecht University interdisciplinary priority area — Institutions for Open Societies — and he is a member of the Royal Dutch Academy of Sciences. His research activities focus on reconstructing, analyzing, and explaining economic development and social change, emphasizing long-term transitions and regional diversity, and using comparative analysis — both over time and across regions — as the main tool. More specifically, he aims to find out why some societal arrangements are successful in generating wealth, equity and resilience, and others not, and what drives the formation of these arrangements.