LECTURE 6: North Italian City States, Institutions, and Gunpowder
HISTORY 4100-101: Topics in
Economic History
Dr. Jari Eloranta
Assistant Professor of Comparative Economic and Business History
Appalachian State University, Department of History
Office: Old Library 1059 (Office hours: Tuesdays 1-3 pm in person; by email or
appointment, Thursdays 11 am – 5 pm)
Phone: 262-6006
E-mail: [email protected]
http://www.appstate.edu/~elorantaj
LECTURE 6: North Italian City States, Institutions, and Gunpowder
A. THEORY: TRADE AND INSTITUTIONS
1. Gains from trade
2. The “Fundamental Problem of Exchange” (Avner Greif)
3. Merchant Guilds and the FPOE
4. Competition between states
B. PRACTICE : THE VENETIAN REPUBLIC AND THE REVIVAL OF LONG
DISTANCE TRADE
1. Role of the state
2. Population
3. Shipping and commerce
4. Finance
5. Industry
6. Agriculture
7. The relative decline of Venice
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da Vinci, Mona Lisa
LECTURE 6: North Italian City States, Institutions, and Gunpowder
da Vinci, Mona Lisa
In 1503 Leonardo da Vinci began his
most famous work-- the Mona Lisa. The
subject of the painting is Lisa Gherardini
del Giocondo, the wife of a prominent
Florentine businessman. She is posed
half-length in the seated position, her
posture is relaxed, and her gaze is direct.
The softening of the edges of the
background, effecting a fine haze called
sfumato, creates a sense of intimacy and
psychological drama. (Erich Lessing/Art
Resource, NY)
Copyright © Houghton Mifflin Company. All rights reserved.
Brunelleschi's Dome
LECTURE 6: North Italian City States, Institutions, and Gunpowder
Brunelleschi's Dome
Filipo Brunelleschi, the foremost
architect of the Early Renaissance,
lost the competition for the
commission for the north door of the
Baptistery to Ghiberti. In 1417 he
bested Ghiberti for the commission to
build a dome for the Florentine
Cathedral. Between 1420 and 1436 he
built a drum--a vertical supporting
wall--on the existing 138-footdiameter octagonal cross of the
cathedral. He then assembled the
dome on the drum, essentially creating
an eight-sided Gothic vault.
(Scala/Art Resource, NY)
Copyright © Houghton Mifflin Company. All rights reserved.
2
Michelangelo, David
LECTURE 6: North Italian City States, Institutions, and Gunpowder
Michelangelo, David
The concept of genius as divine inspiration is
nowhere exemplified more fully than in the
life and work of Michelangelo Buonarrotti
(1475-1564). And Michelangelo was a
sculptor--more specifically, a carver of
marble statues--to the core. His David is the
earliest monumental statue of the High
Renaissance, and the city fathers eventually
chose to put it in front of the Palazzo
Vecchio, as the civic-patriotic symbol of the
Florentine republic. Michelangelo fashioned
the marble in a new, more natural manner.
David's bare skin contrasts with the rough
leather strap of the slingshot, and his right leg
leans against a realistic tree trunk. He blends
the classical model of a victorious athlete
crowned with a laurel wreath with the biblical
hero as a defender of the faith. David is a
mature young man of consummate beauty.
(Scala/Art Resource, NY)
Copyright © Houghton Mifflin Company. All rights reserved.
LECTURE 6: North Italian City States, Institutions, and Gunpowder
A. THEORY: TRADE AND INSTITUTIONS
1. GAINS FROM TRADE:
● Absolute advantage (Smith): gains from trade obvious; each country
specialises in product it can produce with less inputs
Comparative advantage (Ricardo): still gains from trade even when one country
better at producing both goods
● Example of ABSOLUTE ADVANTAGE: Labour costs for production of one
unit of each commodity (labour is the only input)
● Example of COMPARATIVE ADVANTAGE: Labour costs for one unit of each
commodity:
Cloth vs. Wine
England A
100
120
Portugal B 90
80
• Portugal has an absolute advantage in this example in both commodities, but
a comparative advantage in wine. The comparative cost of cloth: wine is
10/12 for England and 9/8 for Portugal. After trade, specialisation occurs.
England specialises in cloth and produces 2.2 units, while Portugal
specialises in wine and produces 2.125 units: Both countries have more of
at least one commodity after trade.
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
A. THEORY: TRADE AND INSTITUTIONS
1. GAINS FROM TRADE:
● DYNAMIC GAINS FROM TRADE: Above analysis static, assuming given
technology. Trade may bring about dynamic changes and act as
“engine of growth”: (on increasing returns from trade, see e.g. Paul
Krugman)
(a) economies of scale: specialisation →production for bigger market
(b) Exchange of knowledge → new economic opportunities
(c) Competition on world markets →stimulate efficiency
(d) Capital imports possible →overcome shortage of domestic savings
● Country may also specialise in commodities with few spin-offs (e.g.
agriculture), and get stuck in dead-end (especially if industrialised
countries then protect their own agric sectors)
In sum: Absolute advantage: each country more efficient in production of
one good; Comparative advantage: one country more efficient in
production of both goods, but specialises in production of good where
its advantage is greatest.
LECTURE 6: North Italian City States, Institutions, and Gunpowder
2. THE FUNDAMENTAL PROBLEM OF EXCHANGE (FPOE)
Based on Avner Greif’s work! (SEE THE ASSIGNED READING AS WELL)
● Even if potential gains from trade exist, trade may not occur. FPOE: how can
you be sure that the other side to a bargain will fulfil their contractual
obligations?
● Key issues: trust, information (or the lack of it), property rights, repeated
interactions, monitoring (who, how) plus monitoring costs, power relations
● Lender will not lend if he can’t be sure borrower won’t just run off with money.
Investor won’t invest unless assured that government won’t come along &
expropriate assets
● In modern economy, many institutional features mitigate this FPOE. These
issues v. important in Third World. We take these institutional features for
granted; until recently little research on how they evolved in the West!
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
2. THE FUNDAMENTAL PROBLEM OF EXCHANGE (FPOE)
Figure 1. Arms Race Game Dynamics Among Nations in the Interwar Period
NATION 1
LIMIT ME
ESCALATE ME
NATION 2
LIMIT ME
ESCALATE ME
4,4
8,-16
-16,8
-12,-12
DOMINANT STRATEGY: ARMS RACE, GIVEN THE ABSENCE OF TRUST
(REPEATED INTERACTIONS) AND/ORCOMMON SYSTEM OF SECURITY
GUARANTEES (I.E, LEAGUE OF NATIONS)
The two participating nations have two strategies: either to limit or escalate one’s military spending. The hypothetical
payoffs presented arise from four strategy combinations: 1) Both countries limit their ME; 2) Nation 1 limits while
nation 2 escalates; 3) Nation 2 limits while nation 1 escalates; 4) Both countries escalate their military spending. The
first number in a cell indicates the payoff to nation 1, whereas the second the payoff to nation 2. The matrix shows
that each nation is best off when it escalates and the other limits ME. In the absence of trust or some type of
guarantee (or repeated interaction), the escalate-escalate strategy would prevail, producing the worst outcome in
terms of the maintenance of peace between the two nations.
LECTURE 6: North Italian City States, Institutions, and Gunpowder
2. THE FUNDAMENTAL PROBLEM OF EXCHANGE (FPOE)
● Medieval European merchants concerned about FPOE, and the solutions
they found very important in laying foundations of “European miracle”
(=growth of markets)
● Greif analyses FPOE using game theory, based on assumption of
individual self-interest. “Game of trust” or “one-sided prisoner’s
dilemma” -Example (two players): If player 1 (e.g. merchant) initiates
trade, individually rational for player 2 (e.g. king) to renege. But player I
can anticipate this response, and so should not initiate trade. This
means gains from trade will not be realised. (Third World countries
today and Europe in Dark Ages).
● How do we get out of this situation in theory? And what light does this
shed on how Europe laid the foundations for prosperity?
• In theory, player 2 must be able to credibly commit not to renege. In
practice, Europe developed institutions for mitigating the FPOE, in the
form of merchant guilds. Also, merchant fairs → institutional
enforcement mechanisms (regional, collective). Also, nation states →
monopoly of violence, enforcement of laws improves.
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
3. MERCHANT GUILDS AND THE FPOE
● Greif examines how merchants developed institutions to deter opportunistic
behaviour among merchant community (private relations) and between merchant
community and the state.
● Within merchant community: one possibility is to trade through networks of
kinship & exchange hostages when trading. Networks build up reputation, hence
have something valuable to lose if behave opportunistically (repeated
interactions)
Network analysis: possible both quantitative and qualitative terms!
● Evolution of institutions governing relations between merchants and rulers. Strong
state could expropriate foreign merchants. But without secure property rights,
trade won’t take place: monopoly of violence not enough in the absence of trust.
(see North!)
● Example: In 1293, English King Edward I notes: “Many merchants [fearing lack of
protection] are put off from coming to the land with their merchandise to the
detriment of merchants and the whole kingdom”.
● Solution: make rulers commit credibly not to expropriate merchants. Merchants
could do this by organising boycott of a state that abused rights of a merchant.
● This works because state has a lot to lose if it violates rights of an individual
merchant. But difficult to organise; some individual merchants tempted to
renegotiate with ruler, so collective boycott breaks down (collective action
problem → free-riding!)
● Merchant guilds (e.g. Hansa) & Italian city states (e.g. Venice, Genoa) important
institutional development to mitigate FPOE. (=early interest groups)
LECTURE 6: North Italian City States, Institutions, and Gunpowder
MAP. Europe 1519
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
MAP. Europe After the Peace of Augsburg
LECTURE 6: North Italian City States, Institutions, and Gunpowder
4. COMPETITION BETWEEN STATES:
Contrast between Europe and Asia
Competition between states helped secure the rights of
merchants
Some states open to immigration and refugees: A) Venice treated
foreign merchants well; B) Portugal accepted refugees from Spain
during Inquisition; C) Dutch were tolerant of ethnic groups
Drove development of military technology
Incentive for the creation of nation states
Table 3.1. Wars involving great powers
Number of wars
Average
duration of wars
(years)
Proportion of
years war
underway (%)
16th
34
1.6
95
17th
29
1.7
94
18th
17
1.0
78
19th
20
0.4
40
20th
15
0.4
53
Century
Source: Tilly 1990.
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
B. PRACTICE: THE VENETIAN REPUBLIC AND THE REVIVAL OF LONG
DISTANCE TRADE
1. ROLE OF THE STATE
-Venice, major player in the Mediterranean economy, revival of North Italy
-Revival based on sea power, Genoa a major rival for Venice
-War frequent, strong state needed to protect the merchants
-Venetians good also in diplomacy, not just warfare
-State created the institutional foundations of merchant capitalism:
a) Political and legal foundations (property rights)
b) Government loans
c) Fiscal system
d) Tolerant state
e) “Democratic” system of government
2. POPULATION
-City of Venice in 1171: 66,000, remained one three largest cities in Europe
until 16th century
-Hard to overcome population crises, Venice had an overseas empire
-Venetian expansion on Italian mainland, terraferma
LECTURE 6: North Italian City States, Institutions, and Gunpowder
Source: Maddison 2001
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
3. SHIPPING AND
COMMERCE:
Venetian Arsenal (construction phases)
Vital role of seapower
Venetian organization of
shipping:
a) state a major
shipbuilder
b) leased galleys to
private enterprise
c) organization,
timing of convoys
Reduced costs to private
traders, protection
Venetian Arsenal
Major technological
changes in ship construction
and technology
LECTURE 6: North Italian City States, Institutions, and Gunpowder
Modern day picture from the Arsenal
The water entrance to Arsenal, from the 18th century
View of the Arsenal from the 1750s
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
3. SHIPPING AND COMMERCE:
Main kinds of Venetian ships: cogs and galleys
What were the galleys?
Other technologies: compass, charts
Seapower: trade routes
Institutional basis of commerce
Commenda
Vera societa
4. FINANCE:
Search for stable currency in Europe
Banking
Importance of private order institutions (see North!), legal
framework conducive to merchant capitalism
Insurance, book-keeping
LECTURE 6: North Italian City States, Institutions, and Gunpowder
5. INDUSTRY
Trade in various kinds of goods
Glass industry
Silk
Sugar
Book production
Decorative arts
6. AGRICULTURE
High level of development, high productive required in food
production
Imports
Abandonment of feudalism
Commercialization of agriculture: a) technology (flood control,
irrigation etc.); b) higher value crops; c) more individualistic
system; d) more intensive use of land; e) livestock farming
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LECTURE 6: North Italian City States, Institutions, and Gunpowder
7. THE RELATIVE DECLINE OF VENICE
Expansion to terraferma, remained rich but surpassed by others
Two developments: 1) Ottoman Empire restricts trade; 2)
Competition from the Portuguese
Shipbuilding technology and the Atlantic
High productivity in the economy, nonetheless
Thus, gradual loss of leadership in per capita income
LECTURE 6: North Italian City States, Institutions, and Gunpowder
ANY QUESTIONS ON TODAY’S LECTURE?
ANYTHING ELSE?
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