The curse of silver (and oil)

Andre Frank, in his Re-Orient:Global Economy in the Asian Age, overstates his main thesis but the book is full of fascinating information about the operation of the global economy from 1400 to 1800.

Franks’ thesis in Re-Orient is to assert the general superiority of Asian manufacturing and economic activity over European prior to the Industrial Revolution, that Europe was far from exceptional (indeed disadvantaged) in the world economy, that it was only silver which allowed Europe to participate in the world economy seriously. Frank is at pains to debunk any notion of European exceptionalism.

Frank outlines the evidence about the flow of silver around the globe after Iberian invasion of the Americas. Basically, silver flowed from the New World, via Europe (or the Spanish Philippines) to China. Silver was cheap in Europe, expensive in China. Which means the Spanish (and later Portugese) exploitation of American silver encouraged Chinese exports. They priced Chinese manufactures even more into the global economy.

And they priced European (particularly Iberian) manufactures out of the global economy, a point Frank entirely misses. Chinese manufactures were silver-cheap, European manufactures were silver-expensive. Wherever silver was the dominant medium of exchange (throughout Asia), European manufactures were priced out of markets [unless there were no close equivalents]. The so-called "triangular trade" with Africa was not a sign of the strength of European manufacturing exports, but their silver-flow disadvantage. They were most effective where silver was not the medium of exchange (Africa) or was even cheaper than in Europe (the Americas).

So, far from an automatic boon, the influx of American silver was a disaster for the global export of European manufactures [where they competed with other producers]: it was particularly a disaster for Spanish manufacturing. After the initial Price Revolution, (some of) Europe evolved out of its production blocks. The influx of silver was slower and more diffuse in Asia, so less of a shock.

But the silver boom was a bigger long-term disaster for Spanish development rather than just undermining its manufacturing. It entrenched predatory, anti-commercial rulership. Iberia was under much less pressure to develop efficient institutions or consensual government. What had been quite a commercial power-house in the C15th (and a pioneer of representative institutions) became "under-developed" and stagnant by the end of the C17th and effectively remained so (at least by European standards) until well into the C20th. Latin America remains institutionally cursed by its Iberian legacy.

Which throws light on the disaster that is Arab (and Iranian) government. It is essentially the same problem. Oil exports screw their exchange rates, ensuring uncompetitive manufacturing. A sign being

total nonfossil fuel exports from the entire region amount to less than the total exports of Finland.

Their rulers are under little or no pressure to evolve commercially or otherwise socially efficient institutions. They are under little or no pressure to build social consent. As long as you have control over the oil-income goodies, and can fund your enforcement thugs, you are basically fine. Politics becomes a matter of gaining and keeping hold of the oil honey-pot. In the words of Iranian journalist Akbar Ganji:

Oil is the greatest hindrance to democracy in all oil-producing countries. Instead of promoting the development of these societies, oil, this gift from God, has held them back. Because we don't work. We just devour the money. If the state had to live off my money, it would have to consider my demands. But when money just falls into the lap of a state, that state doesn't need its people. We need the state but it doesn't need us. We are beggars of the state, we devour its bread. So no class can develop that's independent of the state. Civil society and democracy require the separation of state and society. To create a civil society that has influence and can hold its own against the state, we need free enterprise. But we don't have that. Instead, 85 percent of the economy is controlled by the state. That's our weak spot. And not just ours. We share it with all oil-producing countries.

Another similarity between silver-flooded Iberia and oil-flooded Araby (and Iran) is an extravagant and intolerant religiosity. But this is hardly surprising: in both cases authorities were shielded from the downsides of religious intolerance while religious “purity” can be used as a basis for rewarding, or excluding, from the silver or oil honey pot.

True, not all Arab governments sit on pots of oil. But it sets the dominant pattern (particularly given some of the inter-Arab aid flows). Competitive jurisdictions do not work, as they generally did in Europe, to encourage better provision of public goods for wealth is a matter of "manna from heaven". And it is noticeable that the better-governed Arab states tend not to be oil rich (Morocco, Lebanon, Jordan, Tunisia, Dubai). Oil is not the only reason for dysfunction, but it is a big one.

Which, once again, marks me down as something of a sceptic about cultural explanations—such as, for example, merely blaming Islam.

Frank is surely correct in his attempt to look at global trading systems in a holistic way. But, in his desperate urge not to be “Eurocentric”, he manages to miss the central effect of silver, deriding European production as “inferior” on the grounds of its inability to export to Asia when that was clearly a price effect of the silver flows he regards as Europe’s only entree into the Asian trading system: the silver which ensured European production was not competitive in Asia [if there were equivalent Asian products].

What is even more remarkable, his book includes quotes from Adam Smith on the subject of silver flows (e.g. p.131: Frank quotes Smith a fair bit: a healthy sign in itself) that Frank seems to have missed the significance of.

It is good not to exaggerate the economic dysfunction of Asia: indeed, to note the high levels of trade and commercial activity. It is true that Europe was peripheral to the world economy prior to 1500. But it is not true that silver was Europe’s only real advantage: silver was a curse [for the export of many European manufactures] and it was those parts of Europe which were both global traders and least afflicted by it whose success still needs explaining. Frank may have missed a central point in his anti-Eurocentric enthusiasm, but it is a value of the book that it is so full of information one can see where he went wrong.