Sunday, April 22, 2012

Parallels Between the Spanish and American Decline

In his pivotal work The Wealth And Poverty Of Nations, Harvard Professor David Landes explores the reason why Spain quickly declined after its position as the great power of the 16th Century. As I read these verses, I could not help but draw parallels between (some of) the causes Spain's economic decline and our own. First, the shift from production and investment towards consumption and borrowing, both on an individual and on a national level. Tied in with this is the rapid transition from the status of a nation of production-and-exportation to one focused on importation-and-consumption of goods. Second, wealth was squandered through constant warfare. Third, an erosion of values of hard work and industriousness among segments of the population, coupled with the belief that many forms of labor were beneath the Spaniards, i.e. "work that only immigrants should do."

Underlying all of the said phenomena is the hazards of loose monetary policy. In the case of Spain, "the large volumes of precious metals from America led to inflation, which had a negative effect on the poorer part of the population, as goods became more expensive. This (strong currency) also hampered exports, as expensive goods could not compete in international markets." In the case of the United States, the loose monetary policy of the Federal Reserve has played a significant role in market distortions that discouraged production and savings, while encouraging consumption and speculative enterprises, i.e. the housing bubble.

"The Industrial Revolution made some countries richer and others (relatively) poorer; or more accurately; some countries made an industrial revolution and became richer and others did not and stayed poor. The process of selection actually began much earlier, during the age of discovery. For some, Spain for example, the Opening of the World was an invitation to wealth, pomp, and pretension-an older way od doing things, but on a bigger scale. For others, Holland and England, it was a chance to do new things in new ways, to catch the wave of technological progress. And for others, such as the Amerindians or Tasmanians, it was apocalypse, a terrible fate imposed from without."

"The primary economic significance of the influx of wealth from overseas, however lay in its uneven effects.
Some people got rich only to spend; others to save and invest.The same with countries. Some were little richer in the end than at the beginning, while others used their new fortunes to grow more money."

"Ironically, the nations that had started it all, Spain and Portugal, ended up losers. Here lies one of the great themes of economic history and theory. All models of growth, after all, stress the necessity and power of capital - capital as substitute for labor, easer of credit, balm of hurt projects, redeemer of mistakes, great enterprises's second chance, chief nourisher of economic development. Given capital, the rest should follow. And thanks to empire, Spain and Portugal had the capital."

"Spain particularly. Its new wealth came in raw, as money to invest or spend. Spain chose to spend-on luxury and war. War is the most wasteful of uses: it destroys rather than builds; it knows no reason or constraints; and the inevitable unevenness and shortage of resources lead to ruthless irrationality, which simply increases costs. Spain spent all the more freely because its wealth was unexpected and unearned. It is always easier to throw away windfall wealth." 

"In the meantime, the wealth of the Indies went less and less to Spanish industry because the Spanish did not have to make things any more; they could buy them...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; the Indies their beaver and vicuna; Milan her brocades; Italy and Flanders their linens, so long as our capital can enjoy them. The only thing it proves is that all nations train journeyman for Madrid and Madrid is the queen of Parliaments, for all the world serves her and she serves nobody." "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 its bad. Wealth is not so good as work, nor riches so good as earnings. A Moroccan ambassador to Madrid in 1690-1691 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 agve overcome them, and you will rarely find on of this nation who engages in trade or teravels abroad for commerce as do the other Christian nations such as the Dutch, the English, the French, the Genoese and their like.

Similarly, the handricrafts practiced by the lower classes and common people are despised by this nation, which regards itself as superior to the other Christian nations. Most of these who practice these crafts in Spain are Frenchmen (who) flock to Spain to look for work...(and in a short time make great fortunes."

"Spain, in other words, became (or stayed) poor because it had too much money. The nations that did the work learned and kept good habits, while seeking new ways to do the job faster and better.The Spanish, on the other hand, indulged their penchant for status, leisure, and enjoyment, what Cipolla calls "the prevent hidalgo mentality." 

"By the time the great bullion inflow had ended in the mid seventeeth century, the Spanish crown was deep in debt, with bankruptcies in 1557, 1575, and 1597. The country entered a long decline. Reading this story, one might draw a moral: Easy money is bad for you. It represents short-run gain taht will be paid for in immediate distortion and later regrets."

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