The Industrial Revolution is seen as the spark that lit Europe’s economic prosperity.  In her analysis of markets over many hundreds of years, economist Dr Victoria Bateman presents a compelling argument for a broader global perspective. 

My research has built a picture of the evolution of markets across the long span of history using one particularly abundant data source – the prices of goods.

Dr Victoria Bateman

In the modern world, we take for granted the fact that our economies become richer and more sophisticated decade-on-decade – and that our grandchildren will live a better life than our own, just as we live a better life than our grandparents. However, for the greatest part of human history, the standard of living was low and subject to little improvement.

One of the most important questions that economists seek to answer is how we made the shift from stagnation to continued growth, a shift commonly thought to have occurred with the Industrial Revolution in late 18th-century Britain. The stakes are clearly high: being able to answer this significant question would give us the potential to unlock millions of people from poverty across the world today.

The most popular answer to the question of who or what created lasting growth can be found on the reverse side of the British £20 note, which bears the face of Adam Smith, champion of the free market. Following Smith’s Wealth of Nations, published in 1776, liberalisation and free trade have become familiar to us all, and the state and the market are commonly seen in opposition, with the release of the market requiring reining in the state through privatisation and deregulation.

In the tradition of Smith, modern day economists argue that the reason why economies were poor in the past was that absolutist monarchs undermined property rights (reneging on debt and forcibly extracting wealth from minority groups), and that the state too heavily regulated the economy, including granting monopoly privileges to guilds and international trading companies, all of which limited the incentives and ability of people to buy and sell goods freely. The result was that people lacked the incentive to produce, invest and invent – economic growth was thereby hampered.

Only with the onset of the Glorious Revolution in Britain in 1688, which transferred power from the monarch to an elected parliament, were markets supposedly set free, culminating in the Industrial Revolution a century later. In the century which followed, the collapse of the Communist regime in Russia and the success of market liberalisation in China, seemed to add credence to this free-market led view of growth. By 2003, following decades of market liberalisation across the globe, the President of the American Economic Association stood up and publicly announced that the future was bright for the global economy. Instead, what happened was the very opposite: we now stand in the middle of the greatest global economic crisis since the Great Depression.

So, with the economic crisis in mind, what evidence is there to support the claim that markets really do deliver in the long term? As my recent book Markets and Growth in Early Modern Europe has uncovered, very little historical evidence exists to support this claim, despite its power and influence on policy-making over the last two centuries.

Looking at evidence from as far back as ancient Babylonia and through to medieval, early-modern and modern Europe, my research has built a picture of the evolution of markets across the long span of human history using one particularly abundant historical data source – the prices of goods. The prices originate from sources as wide as the clay tablets of ancient Babylonia to the account books of Oxbridge Colleges, and include those for a number of commonly consumed goods (such as candles, soap and linen), with the most abundant being for cereals (which provided around 80 per cent of calorie intake in pre-modern Europe).

Where markets became more developed, one should find that in response to trade flows, prices became less volatile and, for the same good, converged across different locations. By applying statistical techniques to measure price behaviour, I have been able to measure market development in a consistent and comparable way across different parts of Europe and across many hundreds of years. 

If the free-market view were correct, the picture revealed should have been very simple: poorly-developed markets throughout history until the 17th and 18th centuries, at which point new previously unseen levels of market development were achieved (particularly in Britain), culminating in the Industrial Revolution and the birth of modern economic growth. Instead, the picture I found was very different indeed: markets were certainly not a ‘modern invention’.

Indeed, the presence of markets in Europe as far back as Roman times would not surprise any visitor to museums, many of which have on display a great abundance of coins indicative of market-exchange, together with artifacts such as vases which had been traded across hundreds of miles to the point at which they were unearthed in an archaeological dig. Such markets were supported by the vast state infrastructure for which the Romans are famous – a stable coinage system, a taxation system that funded transport and utilities, and a common legal system to uphold contracts.

Once the Roman state began to crumble, so did the markets it supported, leaving Europe in what was once called the ‘Dark Ages’, falling behind Byzantium and the Orient. Indeed, it was only with the development of institutions in medieval Europe which substituted for the state (such as the Church, guilds and city-states) that markets began to recover – a process which took many centuries.

My research shows that, by the end of the medieval period, markets were around two or three times as developed as in the early ancient period and were highly active throughout Europe. At this time, Venice was the leading long-distance trader on the continent, sourcing exotic silks and spices that had travelled along the ‘silk road’ from the Orient and Middle East all the way to Constantinople. In an effort to sell their goods to European customers, the Italians carved out and linked themselves into trade routes across Europe, exchanging the exotic goods from the East together with the produce of the Mediterranean (oil, soap and wine) for the woolen cloth of north-western Europe (where 45 per cent of the residents of Bruges worked manufacturing cloth in the early 14th century), and the grain, metals, amber and furs of central and eastern Europe.

The customs records of Southampton reveal a constant battle between the English authorities and the Italians, with one official refusing in 1423 to disembark an Italian ship on which customs duties were owed, only for the captain stubbornly to set sail, with the official eventually having to give in and disembark on the Isle of Wight.

Not only were markets for goods advancing in the medieval period, but so were those for finance, as along with the medieval trading boom came a demand for credit. It was in medieval Italy that Europe’s financial markets first began to develop, benefiting from the mathematical techniques which flowed from the East alongside the spices and silks. For this reason, many modern day banking terms have their origins in the Italian language, including the old symbols for the British currency (L, s and d), and, more generally, why the ‘intellectual fizz’ that was the Renaissance originated in the part of Europe most closely tied with the East.

Looking in envy at the wealth created by the Italian cities through trade with the East, other parts of Europe soon started to take advantage of developments in trading technology (such as sturdier ships, navigation and maps) to search for their own route to the Middle East and Orient. In the late 15th century, Christopher Columbus sailed across the Atlantic to find a ‘back door’, stumbling on the Americas along the way (some say that he took some convincing that he was not on Chinese soil). The result was the birth of the Atlantic economy, and the first major globalisation of the world economy: as calculated by O’Rourke and Williamson, world trade in the first half of the 16th century grew at a rate of 2.4 per cent a year, a figure not far off that in the twentieth century.

The level of market development achieved by the end of the medieval period was already so advanced that, as my book argues, it was barely surpassed by the time of the Industrial Revolution three centuries later, only after which did markets witness a second phase of significant improvement. This is evident in the reduction in the disparity of wheat prices across Europe in the course of the 19th  century, when the average price-gap fell from 45 per cent to only 4 per cent, indicating significantly more connected markets. This second major phase of improvement was an outgrowth of the Industrial Revolution itself, based on the application of the steam engine to ships and rail, which drastically cut transport costs, making the world ‘smaller and flatter’.

With these greater flows of goods came significant flows of people – around 30 million people emigrated from Europe to the USA in the century after 1820. This was a process of globalisation that worked on all levels: goods, people and money, and it was not surpassed until towards the end of the 20th century. As with that most recent round of globalisation, it was economic growth itself (or the technologies it brings) that enables markets to reach a new level of development.

In sum, what my research has shown is that the two most significant phases of market development occurred either side of the period traditionally emphasised  - and that they took place well before the Industrial Revolution, and then subsequent to it, as opposed to during the 17th and 18th centuries. The idea that markets are at the root of the modern age of sustained economic growth is therefore seriously in doubt when we look at the historical evidence. Instead, it makes much more sense to argue that markets, while necessary, are both insufficient for growth and are as much a consequence as a cause.

If we want to understand why the Industrial Revolution occurred and so how Europe and the West grew rich, we need to continue to pursue this long-span historical approach; looking back at economies throughout the past to work out in which ways they were similar and, more importantly, in which ways they truly were different to those of the modern age.

For economists immersing themselves in theory and models, economic history provides a wealth of evidence that is yet to be fully exploited – and which has the potential for revolutionising economic policy and, with it, the lives of many people in the present and future. Until the lessons of history are learned and we realise that more than markets were required to light the fire of continued growth, we may find it difficult to escape the current economic crisis and return to the sustained growth we had begun to take for granted.

Dr Victoria Bateman is Fellow and College Lecturer in Economics at Gonville and Caius College, Cambridge. She is author of Markets and Growth in Early Modern Europe (Pickering and Chatto, 2012) and contributor to RJ Van der Spek, Jan Luiten van Zanden and ES van Leeuwen (eds), A History of Market Performance: From Ancient Babylonia to the Modern World (Routledge, forthcoming).


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