Medieval society did not suddenly disappear. In parts of Europe, feudal institutions continued into the eighteenth and nineteenth centuries. Serfdom, for example, was not abolished in Russia until 1861. Medieval views of the world, in which religion, science and mysticism exist alongside one another, have lasted even longer. In many respects, however, the fifteenth century marks the beginning of the modern world. This is symbolized by the fall of Constantinople to the Turks in 1453, which marked the end of the Roman Empire in the East. In the second half of the century the Portuguese explored the African coastline, and reached India in 1498. The West Indies were reached in 1492, and within a few years the continents of North and South America had been discovered. The world could no longer be seen as centred on the Mediterranean.
Dramatic as the new discoveries were, however, they were only a part of an even more extensive transformation of European society that took place between the fifteenth and seventeenth centuries. Central to this process was the artistic, literary and cultural flowering, centred on Italy, known as the Renaissance. This would never have been possible without the rediscovery of the Greek and Latin classics. In the fourteenth century Petrarch (1304–74) had looked back on the preceding thousand years as a ‘dark age' in comparison with the highly developed cultures of Greece and Rome and had started the process of rediscovering ancient literature. The scholastics of the Middle Ages had, of course, rediscovered much ancient writing, but, whereas they had been interested primarily in philosophy, and above all in Aristotle, Petrarch sought to learn from the entire corpus of classical writing – poetry, history and biography as well as philosophy and science. Classical scholarship (literae humaniores) provided an alternative source of moral inspiration to that provided by the Church.
Even in artistic works commissioned by the Church – which were extensive (work on St Peter's Basilica in Rome was started in 1506) – there was an increased interest in humanity. Less and less did major works of art have a religious theme, and, when such themes were treated, the impact of the rediscovery of the classics and the new humanism was clear. To illustrate this, it is enough to cite the names of Leonardo da Vinci (1452–1519), Michelangelo (1475–1564) and Raphael (1483–1520). The same was true of music. Art and music were no longer being used solely in support of religion.
As people rediscovered classical literature, they discovered new perspectives on science, many deriving from Plato rather than Aristotle. It was a view of the world where science, astrology and pagan gods all had a place. A significant part of this was the Neoplatonic association of the sun with divinity, from which it was a short step towards seeing the world as going round the sun rather than vice versa.
The man who took this step, Copernicus (1473–1543), was driven by a Pythagorean search for a simple, mathematical formula that would explain the motion of the planets. What he objected to in the geocentric cosmology he inherited from Aristotle and Ptolemy was its inelegance as much as its inaccuracy – though deriving a more accurate system was of crucial importance because of the urgent, practical problem of reforming the calendar. (Because the calendar year was not exactly the same length as the solar year, the seasons were moving away from their traditional places in the calendar.) Copernicus turned to classical writers other than Aristotle and Ptolemy, and found there the idea of a sun-centred universe whose implications he worked out. Though the predictions of such a system were still far from satisfactory, Copernicus was nonetheless able to produce results that were superior to those derived from the old system. However, although displacing the earth from its position at the centre of the universe involved a radical break with tradition, the rest of his cosmology was medieval. Heavenly bodies still travelled in circles, at constant speed, moved by crystalline spheres. Postulating a moving earth was anomalous in that Copernicus could not answer obvious objections, such as why, if the earth was moving, objects on its surface did not fall off.
Further movement away from the medieval world view towards that of modern science occurred during the following two centuries. Kepler (1571–1630), working with the more accurate astronomical observations provided by Tycho Brahe (1546–1601), discovered that elliptical orbits, with the sun at one of the foci, fitted the data far better. He too was inspired by the Neoplatonic search for harmony and pattern in the universe. However, he still did not answer the main objections to the idea of a moving earth, nor provide any theoretical explanation of why the earth should move. It was left to Galileo (1564–1642) to develop new methods of inquiry (such as turning a telescope on the stars) and to postulate a uniformity between the motion of bodies on the earth and in the heavens. Descartes (1596–1650), again developing ideas from classical writers, took the step of seeing heavenly bodies as particles moving freely in an infinite space. Taking his lead from Galileo, he provided the first statement of the law of inertia. The system was then completed by Isaac Newton (1642–1727), who added the law of gravity. Newton was able to use his laws of motion to explain not only the movement of the planets but also that of bodies on the earth's surface. For the first time, there was a coherent and complete alternative to medieval cosmology. The universe was seen no longer as being kept in motion by God but as governed by mechanical laws. God might play a role in setting it in motion (a divine clock-maker), but thereafter his role was at an end.
Such a brief account of the rise of modern science is necessarily oversimplified, but it is enough to make several important points. The Scientific Revolution involved a profound transformation in how the world was viewed, with implications not only for the way in which natural phenomena were thought of but also for thinking about religion and society. A change of this magnitude was a long-drawn-out process. At its beginning, anticipations of the Scientific Revolution can be found in the via moderna (modern way) stemming from the work of William of Ockham (c. 1285–c. 1349), with its separation of the spheres of human reason and divine revelation. Towards the end of the transformation, even Newton retained a belief in astrology that cannot be separated from his astronomy.
The sixteenth century was also the time of the Reformation, when the Protestant Churches separated from the Roman Catholic Church. This event, or series of events, had profound political and social consequences. Although this has been disputed, it may even have been an important factor underlying the economic growth in England and the Netherlands, two Protestant countries, during the seventeenth and eighteenth centuries. However, it did not involve any significant break with traditional economic thinking, for it was essentially a conservative movement – a reaffirmation of Judaeo-Christian morality and theology against the humanistic-pagan influences of the Renaissance. The event that provoked Luther's publication of his ninety-five theses in 1517 was the arrival of a friar selling indulgences to pay for the building of St Peter's Basilica.
One of the factors that made Luther's stand against the Church hierarchy more far-reaching than the many similar protests that had been made in earlier centuries was the invention of printing. The Gutenberg Bible was printed in 1455, and by the end of the fifteenth century the number of books printed probably exceeded the number written by scribes in the previous thousand years. Printing meant that Protestant ideas could spread rapidly within Europe. Luther's protest thus became much more than a single monk's quarrel with the Church. The other factor underlying the success of the Reformation was the emerging nationalism within Europe. In the German states, Luther found protectors against both the papacy and the Habsburg Empire. Religious differences could be used as weapons in political battles.
The major figures in the Reformation – Martin Luther (1483–1546), Jean Calvin (1509–64) and Ulrich Zwingli (1484–1531) – were conservative on economic questions. Luther strictly upheld the prohibition of usury and the doctrine of the just price, even rejecting some of the exceptions that had come to be accepted. As money was sterile, for example, it was wrong to demand a premium for late payment. He endorsed the idea of a hierarchically ordered society, in keeping with medieval thinking. In general, however, Luther had little interest in economic questions and certainly no curiosity about economic matters. Similarly, although Calvin relaxed the teaching on usury, he too held strongly to the idea of the just price. Businessmen were expected to make only moderate profits, and were not to seek all they could get. Even on usury, however, his thinking was in practice close to scholastic doctrine. While he accepted that the payment of interest was legitimate, he hedged it with qualifications: people should not be professional moneylenders, they should not take advantage of the poor, and they should obey legal restrictions on interest rates. Such doctrines were all firmly in the scholastic tradition.
The Reformation had a very direct impact on political thought. In the medieval world view, good laws were judged by their conformity with God's law. Sovereignty derived from God. Thus it was on the authority of the Pope, Christ's vicar on earth, that Charlemagne was crowned Holy Roman Emperor in 800. Though there were continual disputes between secular and ecclesiastical authorities, neither side sought to dispense completely with the other. Conflict between the two jurisdictions was a defining feature of medieval politics, not something that could be eliminated. On the other hand, given the need to resolve such conflicts, a large literature grew up on the claims that secular and ecclesiastical authorities might rightly make. Radicals entertained the notion that sovereignty might come from the people, though at the same time seeking to reconcile this with the idea that God was sovereign over all.
This situation was transformed with the Reformation. There was no longer any single ecclesiastical authority to which everyone owed allegiance. If a ruler became Protestant, there was a problem for those of his subjects who remained loyal to the Catholic Church. Individual Protestants living under a Catholic ruler were in a similar situation. It was possible to conceive how subjects might find themselves in a situation in which religious scruple called for disobedience to their ruler. In short, there was now a problem of political obligation. A new basis for political structures was required. One way to obtain this was to appeal to the idea of natural law. Though stemming from Stoic and Roman thought, and developed by the scholastics, the idea of natural law was taken up by Protestant lawyers and philosophers. This had implications for economic thought, though it was not until the seventeenth century (with the work of Grotius, Pufendorf, Hobbes and Locke – see pp. 74–5, 80–82 and 108) that these were explored. In the sixteenth century, novel economic thinking arose from a different quarter.
Alongside these cultural and religious changes was a fundamental change in the way in which society was organized. Medieval society was one where a variety of powers competed with each other for supremacy. This was most clearly represented in the long struggle between the emperors (first the Roman emperor, later the Holy Roman Emperor) and the papacy. Alongside these, numerous local princes also claimed allegiance. There had, of course, been monarchies for centuries, but they rarely ruled over lands that had any strong national identity, and their power was frequently limited by the power of nobles living within their realms: kings had no monopoly over military force. However, from the fifteenth century, this began to change. There emerged several powerful nation states, each of which comprised a defined geographical area in which the inhabitants shared a common national identity and were ruled by a king who held a monopoly of military power and hence political power. The power of the nobility became subject to that of the monarch. This process was most advanced in England, which had a defined national boundary and was secure from foreign invasion, but France and Spain – much larger and then more powerful – were not far behind.
These emerging nation states had extremely meagre resources available to them. They had to raise armies and maintain navies, but their administrative apparatus and tax powers were very limited. Maintaining a permanent national army was beyond the economic capacity of any government, and rulers had to resort to such expedients as employing foreign mercenaries. Kings, even of the most prosperous parts of Europe, were chronically short of money. Thus not only did people increasingly think in national terms, they also started to consider ways in which the economic power of nations could be increased. There were changes in the economic environment too. The geographic discoveries made by the Portuguese and Spanish changed trade patterns. The opening of long-distance maritime trade routes had an enormous effect and arguably marked a turning point in western-European economic history. Spanish conquests in America brought large quantities of gold and silver to Europe. Prices, which had fallen steadily through the fourteenth and fifteenth centuries, began to rise in the sixteenth. The changing role of the Church in society meant that the state had to take on new responsibilities. The Poor Law, introduced by Elizabeth I of England in 1597–1601, to provide support for the destitute, was something that had not been needed a century earlier.
These changes were associated with two significant shifts in the economic balance of Europe. The first was the decline of independent city states. The cities that grew most rapidly during the sixteenth century were capital cities. For example, the population of London rose from less than 50,000 in 1500 to around 575,000 in 1700. Other cities did not grow to the same extent. Venice, for example, declined in importance relative to London, Paris and Amsterdam. The second shift was the increased prosperity of the countries bordering on the North Sea and the decline of the Mediterranean. It has been argued that by the end of the seventeenth century conditions were such that it is inconceivable that the Industrial Revolution could have occurred anywhere other than in England or the Low Countries. It would be difficult to come to this conclusion looking at the situation two centuries earlier.
The rise of the European nation state is often associated with ‘mercantilism’. This term has been used to describe the economic thought of the entire period from the end of the Middle Ages to the Age of Enlightenment – from the fifteenth century to the eighteenth – but the word ‘mercantilism' (along with its synonym ‘the mercantile system’) was not used until the second half of the eighteenth century. Its inventor was the Marquis de Mirabeau (see p. 100), in 1763, but the person who popularized it was Adam Smith, who used it in his Wealth of Nations in 1776 (see p. 121). Smith used it as a label for a set of policies he was criticizing. It was then taken up by economists and historians, who used it to refer to different things. As often happens when terms develop in this way, Smith grossly oversimplified his predecessors' thinking, and many of these oversimplifications were carried over into the ensuing literature. However, although some historians have argued that it would be better to avoid using the term, it can be used to describe certain broad sets of ideas and policies.
Mercantilist policies include the use of state power to build up industry, to obtain and to increase the surplus of exports over imports, and to accumulate stocks of precious metals. These stocks of precious metals, which could readily be turned into money, were believed to be important for national power. They might bring economic advantages (for example, a larger supply of money might stimulate production and employment), and they were needed to pay armies.
Mercantilist economics, unlike ancient or medieval economics, was centred on the nation state, which was viewed as being in a competitive struggle with other nations. However, the so-called ‘mercantilist' era spanned three or possibly four centuries during which major economic and social changes took place. It covered countries ranging from the prosperous, growing economies of England and the Netherlands to much more backward regions such as those in eastern Europe. There were also great differences in social and political institutions within Europe. To see why these matter, consider some of the goals that have been proposed to explain mercantilist policies. These include (1) unification of the state through a system of national protective tariffs and internal free trade; (2) provision of sufficient revenue for the state through developing the economy; (3) high employment, through encouraging trade and increases in the money supply; and (4) accumulation of treasure and wealth through trade policy. The problem is that different aims applied in different countries and at different times. Unification through customs policies was unnecessary in England, and was not achieved in Germany till the late nineteenth century. Provision of state revenue through economic development characterizes the policy of Colbert under Louis XIV in France (see pp. 89–90), but does not fit the policies pursued in other countries. Not surprisingly, therefore, it can be argued that policies have to be explained in terms of responses to particular problems rather than as the result of governments seeking to achieve some larger aim.
There is also the problem that the term ‘mercantilism' is used to denote both the economic policies pursued and the economic ideas that were used to analyse those policies. It refers both to the actions and ideas of statesmen such as Colbert and to the people who developed ideas about how the economy worked – the so-called ‘mercantilist' writers. Like mercantilist policy-makers, mercantilist writers were generally responding to immediate practical problems. Their thinking was strongly influenced by the context in which these problems arose, and by the perspectives from which they tackled them. Contributors to the mercantilist literature include academics working in the scholastic tradition (natural-law philosophers), lawyers, government officials or ‘consultant administrators’, merchants, speculators and adventurers. It is therefore not surprising that there was no uniform mercantilist doctrine. It is for this reason that the term ‘mercantilism' will be used very sparingly in this and following chapters. Though many of the writers discussed could be labelled ‘mercantilist’, in most cases it is preferable to focus on other aspects of their work and to refrain from categorizing them in this way. Sometimes, however, it is hard to avoid using the term.
The best-known political thinker of the sixteenth century and of the Renaissance was Niccolò Machiavelli (1469–1527) author of The Prince (written in 1513). Although Machiavelli's approach has much in common with the approaches of seventeenth-century writers, his book was a response neither to the problems of emerging nation states nor to the Reformation's undermining of medieval conceptions of sovereignty. Machiavelli – writing before the Reformation – was responding to the situation facing certain Italian city states.
His book broke with the past in many ways. The interests of the state were clearly separated from religion, and the science of politics was seen as separate from morality. Machiavelli offered an analysis of how rulers could most efficiently achieve their objectives – typically to increase state power. Though subsequent commentators have often focused on his precepts concerning the ruthless use of power by rulers, it is arguably the way in which he approached the problem that was more important. His methods involved both observation – drawing conclusions from the results of policies pursued by rulers in the past – and deduction from general assumptions about human nature. He based his advice on the assumption that people would behave unscrupulously, in a self-interested way – not because he believed that men had no moral principles, but because this was the safest and most reliable assumption to make. Men might behave morally or altruistically, but it was foolish for rulers to rely on this.
Scholastic thought continued through the sixteenth and seventeenth centuries, though its content changed in response to new circumstances. One place where it remained strong was Spain, where the pre-eminent school was at Salamanca. Here, theologians and jurists continued to write in the traditional scholastic style – full of questions, objections, distinctions, solutions and conclusions, quoting extensively from Aristotle and Aquinas. Their economic analysis began with Aristotle, but, despite this, they were responsive to the new problems posed by the growth of commerce and the influx of vast quantities of treasure from the New World into what was a backward part of Europe. The main problems facing the School of Salamanca were usury, prices and money, where it was necessary to bring Thomistic doctrines into line with contemporary business practices, and to explain the dramatic changes that American treasure was having.
An important figure in the line of Salamancan writers was Martin de Azpilcueta Navarro, or Navarrus (d. 1586), a Dominican who had taught law at Toulouse and Cahors before moving to Spain. Navarrus's account of the value of money is contained in ‘Comentario resolutorio de usuras’, an appendix to a theological manual published in 1556. He began from Aristotle's observation that the purpose of money is to facilitate trade. However, where earlier writers had condemned other uses of money as unnatural, Navarrus argued that changing it for profit was an important secondary use of money. In the same way that it was just for merchants to make moderate profits from buying and selling goods, money-changing was lawful if done to obtain a moderate living. He also took a more relaxed view of usury, allowing a greater range of compensation for loss.
However, how could someone make a profit at the same time as always dealing in money at its just price? Navarrus's answer was that the value of money was not constant, determined simply by its tale (the stamp on it) or the quantity of precious metal it contained. The value also depended on money's scarcity and the need for it, as well as on factors such as uncertainty about whether it would be raised or lowered in value, or even repudiated. Though it was wrong for money-changers to create artificial shortages in order to make a large profit, it was legitimate to take advantage of normal variations in the value of money, buying monies where or when they were cheap, and selling where or when they were dear.
These moral assertions rested on a supply-and-demand theory that was applied to money as well as to other commodities: that
all merchandise becomes dearer when it is in great demand and short supply, and that money, in so far as it may be sold, bartered, or exchanged by some other form of contract, is merchandise and therefore becomes dearer when it is in great demand and short supply.1
This, Navarrus contended, was why prices rose ‘after the discovery of the Indies, which flooded the country with gold and silver’.2 Though it might look as though all other goods had become more expensive, this was because money had fallen in value. He went on to explain changes in the relative price of gold and silver in a similar way.
One of the problems faced by Spain was that, though it received vast quantities of treasure from America, little of it remained in the country. Money flowed out to the rest of Europe: it was most abundant in cities such as Genoa, Rome, Antwerp and Venice. One response to this was to impose laws forbidding its export. Thomas de Mercado (d. 1585), another member of the School of Salamanca, used exactly the same arguments as Navarrus to claim that such laws would fail to keep money in. If money was being exported it was because it was more highly valued abroad than at home – in Antwerp rather than Seville, say – and so the only way to stop it leaving the country was to increase its domestic value relative to other commodities. Like Navarrus, Mercado argued that these natural variations in the value of money in different places justified making profit through engaging in foreign-exchange transactions.
The idea that scarcity makes goods dear and plenty makes them cheap has a history going back to ancient times, so it is not surprising that the Salamancans were not alone in seeing a link between American treasure and rising prices. Another to do so was Jean Bodin (1530–96), a lawyer and official in the French government. Bodin noted that prices of all goods and also the price of land had risen. He claimed that the principal reason for this was not scarcity or monopoly (two reasons often given for high prices), but the abundance of gold and silver. Bodin cited historical examples, from biblical and ancient times, to support this claim. One way in which his Response to the Paradoxes of Males-troit Concerning the Rising Prices of All Things and the Means to Remedy the Situation (1568) stands out from the Salamancan works is in its detailed factual discussion of monetary conditions in different parts of Europe, which enabled him to discuss with some authority how trade caused money to flow from one country to another.
The end of the Middle Ages in England is usually dated to the accession to the throne of Henry Tudor, in 1485. Though the Tudor monarchy confronted many of the problems facing other European rulers of the period, such as inflation and a chronic shortage of revenue, defining national boundaries was not one of them. The most interesting economic work from the Tudor period is A Discourse of the Common Weal of This Realm of England, probably written by Sir Thomas Smith (1513–77), a Cambridge don, lawyer and government official, in 1549 and revised in 1581.3 It takes the form of a conversation between a doctor (the leading figure), a knight, a merchant, a craftsman and a husbandman (farmer), in which many of the social and economic problems of the day are discussed – the major ones being inflation and the enclosure of common land so that it can be used for grazing sheep.
Inflation was, as in the rest of Europe, a serious problem in sixteenth-century England. In earlier centuries prices had fluctuated, but there had been no long-term tendency for prices to rise, whereas by the end of the sixteenth century wheat prices were between four and five times higher than they were at its beginning. The author of the Discourse clearly sees the difference between real and money incomes, for he points out that rising prices harm only those people on fixed incomes: landlords whose rents are fixed by pre-existing contracts, and workers who work for fixed wages. Those who buy and sell gain from rising prices. He also points out that it does not make sense to complain about foreign goods being more expensive if the goods that are exported to buy them have also risen in price.
People were very familiar with the idea that scarcity, or ‘dearth’, could cause high prices, but the problem now was that prices were rising even when goods were plentiful. The explanation offered by Smith was debasement of the currency – hardly surprising, given that the first version of the Discourse was written in the middle of the so-called ‘Great Debasement' of 1542–51, during which the silver content of the shilling was reduced to a sixth of its previous amount. Such changes in the value of the currency were roundly condemned. In 1581, perhaps because Smith had by now read Bodin, a new explanation of inflation was introduced: an increase in the quantity of money caused by imports of gold and silver from the Indies and other countries.
Enclosure of common land was associated with the expansion of sheep farming, to satisfy the growing demand for wool caused by rising exports of English cloth. Wealthy landlords were seen to be fencing off common land to graze sheep, causing a dearth of food and depriving poor people of their livelihoods. Not surprisingly, enclosure was bitterly controversial and was the major issue discussed in the Discourse. Smith's explanation was that enclosure was the result of the price of wool being high relative to the price of grain. He argued that men would not engage in difficult or dangerous work unless they received an appropriate reward.
Take these rewards from them… [and] what man will plow or dig the ground or exercise any manual art wherein there is any pain?… [I]f all these rewards were taken from them all these faculties must decay, so if part of the reward be diminished the use of those faculties shall diminish… and so they shall be the less occupied, the less they be rewarded and esteemed.4
Smith argued that it was necessary for ‘the profit of the plow to be as good, rate for rate, as the profit of the grazier and sheepmaster’, otherwise ‘pasture shall ever encroach on tillage for all the laws that ever can be made to the contrary’.5 The way to stop the expansion of sheep farming, therefore, was not to legislate against it, but to make it less profitable. The way to do this was to remove the tariffs that made it so profitable to export wool.
Smith saw the importance of the balance of trade, and frowned upon importing unnecessary luxuries, or goods manufactured from English raw materials. He encouraged the introduction of new industries that would create work and bring treasure into the country. These are all policies that can be labelled ‘mercantilist’. However, he showed a keen awareness of the price mechanism, assuming that men were motivated by self-interest. In this, his work marks a major break with scholastic economics.
The rise of the European nation state had an enormous impact on economic thinking. Economic strength was vital to national power, and much thought was given to designing policies that would achieve this. There was a change in the focus of economic thinking. It was also important to tackle the new problems thrown up by the Spanish conquests in America and the expansion of commerce and finance. In the longer term, the Renaissance and the Scientific Revolution were to have a major impact on economic thinking, but in the sixteenth century their influence was much less. The movement away from earlier ways of thinking was gradual – there was no sudden revolution in economic thought.
The School of Salamanca ended up with an attitude towards commercial activities that was very different from that of Aristotle or Aquinas, but its methods lay squarely within the scholastic tradition. Men of affairs, such as Jean Bodin and Sir Thomas Smith – both lawyers cum government officials – moved even further from the medieval view. To a still greater extent, moral questions were pushed aside in favour of analysing what was actually going on in the world and what could be done. Instead of disputing the morality of profit, such writers were beginning to take profit-seeking behaviour for granted and attempted to work out its implications, in much the same way that Machiavelli had worked out the implications for statecraft of people taking those actions that were in their own interests.