Bas van Bavel has produced an important historical study, one highly relevant to current discussions about economic policy. The context in which this work is set is the ongoing debate over optimal economic policy. For a time, from the collapse of the Soviet Union until about a decade ago, it seemed that this question might be settled: neoliberalism had triumphed, and the best political economy prescription clearly involved a heavy dose of free markets. Certainly, there was debate at the margins: Should healthcare be publicly provisioned? How big a welfare state should one have? What is the proper role for central banks? But these were minor issues.
Then came the financial crisis of 2007-2008, and all that had seemed settled was at play again. 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. If the central banks and the international economic institutions had not gotten in bed with the big banks, this all could have been avoided."
Van Bavel's work provides a very important counter-response: "True, but free markets produce crony capitalism, like an acorn produces and oak tree." Van Bavel's main thesis is that free factor markets work well, for a time, at producing wealth and lifting all boats. But with the rise of factor markets and financial elites this changes. As van Bavel puts it, "the rise and dominance of markets for land, labour, and capital are self-undermining, as... feedback mechanisms results in welfare declining again and markets losing their quality in facilitating successful and rapid exchange..." (pg. 2)
Van Bavel backs his thesis with extensive evidence from three case studies: Iraq between 500 and 1100 CE, Northern Italy from 1000 to 1500, and the Low Countries between 1100 and 1800. He also touches, much more lightly, upon other instances of market societies, such as modern England, the United States, early modern China, and the Roman Empire.
After assembling a wealth of historical material, van Bavel claims:
The three main cases analyzed in the book, and also the three modern cases that are more tentatively discussed, show a similar pattern in the interaction of society, market institutions, and economy. In this pattern, an originally positive feedback cycle -- between increasing freedom, growing factor markets, and economic growth -- turns into a negative one, with the increasing social polarization, institutional sclerosis, markets that become increasingly skewed towards the interests of market elites, and economic growth stagnating and turning into relative or absolute decline. (251)
An important factor in the initially favorable results was that non-elite actors "had access to alternative mechanisms of exchange outside the market and therefore were free to choose whether to use factor markets or not" (253). (Such mechanisms included guilds, strong family institutions, barter exchange, and production for home consumption from one's own land.)
But as factor markets began to eliminate such alternatives, often through "outright attacks" (254) on them -- e.g., enclosure laws, or anti-guild legislation -- "wealth inequality rose to high, or even unprecedented levels" (255). To preserve their wealth, the new elites "tied it up in family foundations, religious foundation, or fiduciary entails" (258-259).
Van Bavel offers a number of reasons for this result, e.g., "the wealthy usually have more access to information or legal expertise. With the growing scale and complexity of markets, the advantage this offers them also grows" (263).
The moral principles that market advocates often posit as counter-balances 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. Van Bavel contends that late-cycle reform forces will fail, due to the increasing political power of financial elites. In the last phase of the cycle, he finds "growing state repression, armed violence, and warfare by state and public authorities..." (268)
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.