Balance: The Economics of Great Powers from Ancient Rome to Modern America by Glenn Hubbard and Tim Kane. (Simon and Schuster 2013), 296 pages.
One of the perennial questions historians address is why empires fell. In his 1987 bestseller, The Rise and Fall of the Great Powers, Yale historian Paul Kennedy theorized that every empire reaches a tipping point when its military is unable to police the vast amount of land under the empire’s control. This “imperial overstretch,” in Kennedy’s view, caused empires to inevitably shrink and decay.
Kennedy’s prime example is China in the 15th century. In the 28 years from 1405 to 1433, a fleet of more than 300 ships led by Admiral Zhang He went on several lengthy voyages, including two to Africa. The four-masted treasure ships, the largest ones of their time, brought spices and exotic animals to China. But after 1433 the voyages stopped. Zhang He had no successors, and China retreated from the world stage and turned inward.
What happened? For Kennedy the Zhang He episode is the classic case of “imperial overstretch.” Kennedy explained that the costs of maintaining such a large navy so taxed the Chinese empire’s resources that the state could not afford to maintain the costs of such a huge fleet. Kennedy felt that, after Zhang He’s last voyage, the Chinese thought that a large fleet was too costly.
Hubbard and Kane think Kennedy’s answer is too simplistic. They note that Zhang He’s patron, Emperor Zhu Di, believed in free trade and opened China’s doors to foreign investment. According to historian Louise Levathes, the emperor declared, “Let there be mutual trade at the frontier barriers in order to supply the country’s needs and to encourage distant people to come” to China.
China was at the time controlled by mandarins who believed in the principles of government taught by Confucius. According to Confucius, the best form of government was one where bureaucrats led by being good moral examples, unconstrained by the rule of law. The state completely controlled the Chinese economy, private property was outlawed, and corporations were never created.
Emperor Zhu Di and his grandson, Emperor Zhu Zhanji, temporarily blocked control of China by the mandarins. But after Zhu Zhanji’s death in 1436, the mandarins once again regained control. The navy was curtailed not because of its expense, but because the mandarins saw the treasure ships — and the merchants who profited from overseas trade — as threats that had to be eliminated.
Once in control, Hubbard and Kane write, “the mandarins did what any economically ignorant, myopic bureaucracy would do: they undercut their potential rivals.” By 1551 the Chinese outlawed private construction of any ship. The mandarins also outlawed imports because they saw foreign goods as a threat to the emperor’s absolute rule. Why should the Chinese be allowed to have mechanical clocks, which challenged the emperor’s authority to tell the time?
It is the mandarins’ rule, Hubbard and Kane claim, rather than “imperial overstretch,” that determined China’s decline as a great power. The risk-averse bureaucrats “locked the Manchu institutions into inflexibility” which ultimately led to “weakness and exploitation at the hands of imperial Europeans.”
The Chinese example is one of eight case studies Hubbard and Kane examine in this informative and important book. What they show is that time and again empires decline because taxes rise, a centralized bureaucracy emerges and becomes more burdensome and more resistant to innovation, and a once-great nation becomes calcified as it steadily declines.
Hubbard, the dean of the business school at Columbia University, and Kane, chief economist of the Hudson Institute, are weakly, not firmly, on the side of liberty. They spend the concluding chapter arguing that since the bloated welfare state cannot be rolled back, a balanced-budget amendment is the best way to reduce the crippling deficit and restore economic growth. But it’s likely that, given the track record of Congress, politicians would deal with the restraints of a balanced-budget requirement with draconian increases in taxes rather than any serious cuts in spending.
Rome
However, the inside-the-Beltway punditry in Balance is only one chapter of a lengthy book. Nearly all this book is history, and as historians, Hubbard and Kane are fresh and imaginative. Nearly every chapter takes familiar stories of imperial decline and shows how curtailing free markets and strengthening rule from the center of an empire ultimately led to decay.
Consider the Roman Empire. At its zenith under the rule of Emperor Trajan (ruled AD 98–117), the Roman Empire was the largest free-trade zone ever created. Moreover, the empire had two hidden strengths: cities were ruled with a light hand and were largely self-governing without interference from distant authorities; and the chief Roman coin, the mostly silver denarius, was a trusted piece of sound money whose worth was unchanged from one generation to the next.
But Roman decline, Hubbard and Kane observe, was due to “an ongoing inability to match its fiscal outlays with available revenues. Like most rich nations today, Rome made fiscal commitments that it could not square with taxation, with monetary debasement, or with dictatorial central planning.”
The first warning sign came with Trajan’s successor as emperor, Hadrian (ruled 117–38). In 122 he announced that no loans taken from the state in the previous 15 years had to be repaid. To dramatize that, the loan agreements were publicly burned in an elaborate ceremony. He also decreed that any city willing to give up its independence and submit to imperial rule would have its debts forgiven as well. Scores of cities took up the empire’s offer.
The result of Hadrian’s decision was that rich Romans increasingly engaged in wildly speculative behavior knowing that if they got into debt the state would bail them out. Moreover, the state increasingly became overburdened with debts — and since bonds had not been invented yet, the debts had to be repaid quickly.
The Roman emperors had two means to raise revenue. One of them was to collect tribute from defeated enemies, so Rome’s legions increasingly were directed to endless skirmishes so that Roman forces could extract tribute from foes. The denarius was also debased, largely during the reign of Septimius Severus (ruled 193–211). In 192 the denarius was 87 percent silver; by 196, its silver content was reduced to 54 percent. The result was that massive inflation wiped out the wealth of most Romans, and merchants responded to the debasement by dramatically raising prices. Gresham’s Law — bad money drives out good — was in force and decades of persistent, uncontrollable inflation severely damaged the Roman Empire’s economy.
The Roman Empire in the third century was highly unstable until Diocletian became emperor in 284. He decided to solve the empire’s inflationary problems. In 301 he issued a decree called edictum de pretiis, or price controls. Merchants who raised prices above state-decreed levels were executed. Eventually nearly all businesses were nationalized.
But Diocletian’s socialism didn’t end there. The Romans subsequently imposed occupation controls, so that every son had to follow the trade of his father. The result of this crippling regulation was that landowners, unable to pay crushing tax burdens, abandoned the few remaining productive farms. The Roman Empire staggered along for another 150 years, but Diocletian’s dictatorial decrees ensured that the Roman economy, once productive, would largely be destroyed.
The Ottoman Empire
Hubbard and Kane don’t deal only with well-known historical examples. One of their most interesting chapters concerns the Ottoman Empire. In 1600 this empire was one of the world’s greatest, yet by 1800 Turkey had become “the sick man of Europe.” What happened?
In the 16th century Turkey was a relatively open market. Many nations of that era persecuted Jews, and many Muslim-dominated countries persecuted Christians. Turkey welcomed Jews and Christians, and encouraged their entrepreneurial talents. At its peak under the reign of Suleiman I (ruled 1520–66), immigrants could own property and sue Muslims in Muslim courts. Historian Amy Chua notes that non-Turks increasingly dominated many parts of the Ottoman Empire’s economy, including “banking, shipbuilding, wool and tobacco production, and the luxury trades.”
All this changed after Suleiman’s death. His 13 successors were largely incompetents. The Ottoman Empire was increasingly dominated by the Janissary Corps, which started off as the emperor’s personal bodyguards but became, like the mandarins in China, a ruling class whose sole goal was eliminating all rivals to preserve their power. Historian Sevket Pamuk explains that while under Janissary dominance, increasingly the Turkish government “took pains to preserve as much of the traditional structure of employment and production as possible. It tended to regard any rapid accumulation of capital by merchants, guild members, or any other interests as a potential disruption of the existing order.”
The power of the Janissaries was broken in the 19th century. In 1807 they revolted against Emperor Selim III, capturing and killing him. His successor, Mahmud II, spent the next two decades creating an army rival to the Janissaries.
In 1827 he used this army to crush the Janissaries, slaughtering thousands of them and ensuring that they would never again dominate the Ottoman Empire.
In the 19th century the Ottoman Empire had a somewhat freer economy than in the two proceeding centuries. But the “institutional stagnation” of the two previous centuries had made Turkey “vulnerable and weak” and able to be picked apart by stronger European and Russian armies. Had Turkey not created economic stagnation in the 17th and 18th centuries, it might have faced the 19th in far better shape than it was.
Hubbard and Kane’s trenchant analysis includes three other empires, those of Spain, Great Britain, and Japan, and two entities that are not empires, the European Union and the state of California. In each case, they show that the entities suffered from the vicious circle of a powerful bureaucracy, ensuring higher taxes and economic decline.
Studying economic history is a productive way for a reader to deepen his appreciation of liberty. In Balance, Glenn Hubbard and Tim Kane provide important evidence from the past to show how the unchecked growth of government inexorably leads to the decline of once-great powers.
This article was originally published in the April 2014 edition of Future of Freedom.
