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What causes the decline of capitalist economies?

melian          4 January 2016 06:27 AM

In the 15th century, Northern Italy was the most economically developed region in Europe. In the 16th century the primacy passed to Netherlands while the Italian industries entered a prolonged decline. In the 18th, England took Netherlands’ place resulting in the decay of many Dutch towns. In the early 20th century Germany surpassed England and despite the devastation of the WWI and WWII remained Europe’s undisputed economic leader. In turn, the British industrial towns entered a long period of decline. Is there a common cause to these developments?

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FrameBenignly 5 January 2016 10:29 AM

Garrett Jones recently wrote a book arguing that IQ is the primary driver. I think war and oil reserves would be strong candidates as well. But I think the best answer is organized labor.

Through the Renaissance, Italy built up powerful trade guilds which would have actively resisted industrialization. The United Kingdom in the early stages of industrialization meanwhile strongly opposed organized labor. I'm not sure about the history of the Netherlands, but there are other more modern examples as well. The Catholic Church has been very supportive of organized labor as in Rerum novarum. Southern parts of Europe have fared much worse than its northern cousins with fewer ties to the church. Ireland which is mostly Catholic has similarly struggled.

The car industry presents another example. Great Britain has the most trouble with its union, and their car industry gradually collapsed. Japan has had the cheapest labor, and gradually took over the industry while GM's pensions killed them. Labor unions have been more common in Europe than they have in America, which I think is a major reason why America is wealthier. Today America's biggest union is the teacher's union, and many states have passed Right to Work laws preventing unions from forming monopolies, which has led to their decline.

Germany appears to be unusual in that they've managed to make organized labor work for them without driving the cost of labor above market equilibrium. I'm not sure why.

Innovation in markets will frequently entail replacing some workers with other workers, or in a reduction of the size of the labor force in that industry. If labor unions are in place, they will actively prevent this innovation from taking place. They also raise the cost of labor, which makes it difficult for companies to compete on price. And they protect their members, which makes it more difficult for companies to fire poorly performing employees.

If I'm worried about the plight of low wage workers, redistribution is a much better solution. Regulating the labor market is a really bad idea.


FrameBenignly 5 January 2016 11:14 AM

Also, see this summary of Mancur Olson's The Rise and Decline of Nations.