David Landes on The Wealth & Poverty of Nations

David Landes' six hundred-fifty page tome, The Wealth and Poverty of Nations: Why some are so rich and some are so poor (W.W. Norton 1998) provides rich insight into the causes of economic growth and decline, although he is careful not to emphasize the mercantilist implications of his writing. Landes is keenly aware that the countries of East Asia do not, and will not, practice free trade, preferring to build up their industrial strength by seizing foreign markets.

Landes' discussion of Spanish decline resonates with my own interpretation of the sources of later Dutch, British and American decline. Landes picks up an argument made by the 20th century American economic historian Earl Hamilton (one that is applied to many natural resource exporters today in the form of Dutch Disease arguments). As Landes observes, Spanish industry withered as a consequence of gold and silver inflows from the New World. Importantly, Landes draws out the comparison between the attitudes of Spanish Nobility and the views of contemporary American elites:

"In 1545, Spanish manufacturers had a six-year backlog of orders from the New World. At that time, in principle, the overseas empire was required to buy from Spanish producers only. But customers and profits were waiting, and Spanish merchants turned to foreign suppliers while using their own names to cover the transactions...Nor did the American treasure go to Spanish agriculture; Spain could buy food. As one happy Spaniard put it in 1675, the whole world is working for us:

"Let London manufacture those fabrics of hers to her heart's content; Holland her chambrays, Florence her cloth.....so long as our capital can enjoy them. The only thing it proves is that all the nations train journeyman for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody." [Alfonso Nunez de Castro] (p. 172)

"Such foolishness is still heard today, in the guise of comparative advantage and neoclassical trade theory. I have heard serious scholars say that the United States need not worry about its huge trade deficit with Japan. After all, the Japanese are giving us useful things in exchange for paper printed with the portrait of George Washington. That sounds good, but it's bad. Wealth is not so good as work, nor riches so good as earnings. A Morroccan ambassador to Madrid in 1690-91 saw the problem clearly:

"....the Spanish nation today possesses the greatest wealth and the largest income of all the Christians. But the love of luxury and the comforts of civilization have overcome them, and you will rarely find one of this nation who engages in trade or travels abroad for commerce as do the other Christian nations such as the Dutch, the English, the French, the Genoese and their like. Similarly, the handicrafts practiced by their lower classes and common people are despised by this nation, which regards itself as superior to the other Christian nations...." (p. 172)

Landes concludes: "Reading this story one might draw a moral: Easy money is bad for you. It represents short-run gain that will be paid for in immediate distortions and later regrets." (p. 173)

Unfortunately, in spite of this keen awareness, Landes does not point to the obvious policy implication, namely that the US and other declining societies should adopt the same mercantilist policy tools deployed with such fantastic success across East Asia. Landes writes:

"Withal, I do not want to advocate any particular national policy, the less so as activist intervention can as easily make things worse as better. Each case must be judged on the merits, and governments are capable of as many mistakes, and bigger, than the businessmen who try to shape and play the market" (p. 523). Landes then offers a strong dose of weak tea for wealthy countries with eviscerated industrial sectors:

"To be sure, the rich, industrial countries can defend themselves (ease but not eliminate the pain) by remaining on the cutting edge of research, by moving into new and growing branches (creating new jobs), by learning from others, by finding the right niches, by cultivating and using ability and knowledge. They can go a long was on cruise control and safety nets, helping the losers to learn new skills, get new jobs, or just retire." (p. 523)

These are certainly nice sentiments, and it's hard to argue that people in the developed world shouldn't "cultivate and use ability and knowledge." But does anyone believe that will prevent the entire US from sinking down to the level of slums like Flint or Camden? Is it really the case that individual-level population features (lack of creativity, sloth) is what pushed industry out of towns and cities across America?

[Landes is an emeritus professor of economics at Harvard.]