Economic History - Bocconi University PDF

30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Economic History First Partial Exam Michele Rossini - BIEM16 - AY: 2024-2025 1 of 46    30067 | AY 2024-2025 | Bocco...

30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Economic History First Partial Exam Michele Rossini - BIEM16 - AY: 2024-2025 1 of 46    30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Why Economic History? 3 The Pre-Industrial Society 4 Agricultural Revolution 5 Urban Revolution 6 Urban Revolution and Proto-Divergence 7 Why not Africa? 8 Features of Pre-Industrial Society 9 The Malthusian Theory 10 The Black Death: An Accelerator of History 11 Post-Black Death Observations 12 Political and Economic Institutions: 12 The Great Divergence 14 Age of Discoveries 14 Explaining the Great Divergence 18 The Little Divergence 21 Strategies for Competing with Spain and Portugal 21 Spain and Portugal’s Weaknesses 21 The rise of Amsterdam and the Dutch Republic 22 The Dutch Legacy: Birth of Capitalism and Liberal Democracy 23 Political Advantage: Republic 23 Economic Advantage: Integrated Economy 24 Economic Advantage: Entrepreneurship 25 Commercial Advantage: Old and New Routes 25 Institutional Advantage: Mercantilism 26 Institutional Advantage: New Companies 26 The Slave Trade 27 Dutch Colonialism 28 Financial Advantage: Banks and Stock Exchange 28 Competitors are envy 29 Explaining the Little Divergence 29 Industrial Revolution 33 Causes and Principal E ects of the Industrial Revolution 33 WHY ENGLAND? 34 Mercantilism and Empire 34 Adam Smith 38 David Ricardo 39 The Social Aspects of the Industrial Revolution 40 Learning to Industrialize 42 Pollard’s Regional Di usion 42 Gerschenkron’s Substitutive Factors 42 2 of 46   ff ff                                          30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Why Economic History? Analyzing the Past as a Function of the Present and the Present as a Function of the Past Importance of Context: The appropriate choice of an economic model is highly dependent on the speci c historical context. Understanding and analyzing the context is crucial to explaining economic history accurately. History as a Process, Not Just Events: History is not merely a chronological sequence of events but a series of processes. These processes must be interpreted to grasp the full picture of economic developments. The Purpose of Studying Economic History: Studying economic history involves understanding how (through which processes) and why (the causes) the world economy has developed into its current state. Main Topics of Economic History: Short-Term: Focuses on interpreting individual facts, conjectures, and economic uctuations over limited periods. Long-Term: Examines the evolution of entire economic systems, particularly structural changes in the economy and its development over time. Main Goals of Economic History: Economic history seeks to study activities and challenges within the economic sphere, but its scope is broader, involving the following key areas: Exploitation of Limited Resources Production: How goods and services are produced. Distribution: The allocation of resources and wealth. Consumption: The use of goods and services. Trade: The exchange of goods and services. Institutions Regulating the Economy: The role of institutions in shaping and regulating economic activities. 3 of 46   fi fl  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 The Pre-Industrial Society The concept of PROTO-DIVERGENCE refers to a period when certain regions, speci cally Europe and parts of Asia, began to exhibit faster GDP growth rates compared to the rest of the world. This process can be examined through several lenses, including economic, social, geographical, cultural, institutional, and demographic factors. These variables contributed to early disparities in development, which later evolved into a more signi cant divergence in economic performance. All these factors can be summarized in Agricultural revolution and Urban revolution. Economists are trying to understand why do we have a di erence in the GDP per capita, we had a proto-divergence and than a divergence (Europe alone) and then just Northern Europe. Then, starting from the 1990s economists have started to talk about the Great Convergence, Asia is reducing the gap. Jared Diamond, in his book Guns, Germs, and Steel, argues that the divergence of the West from other regions (such as Africa and Asia) can be traced back to environmental factors, rather than cultural or racial superiority. Eurasia’s geography and climate provided early advantages in domesticating plants and animals, which, over time, led to the development of stronger political, economic, and social institutions. PRODUCTIVITY is usually considered as an important factor as a basis of economic growth. We can distinguish between 2 main big theories: Theory of EXOGENOUS growth: (pre-1970s): Growth was thought to be determined externally, primarily through population growth and technological progress. Every country could, in theory, reach the same level of development in the long run (Steady State) Theory of ENDOGENOUS growth (post-1970s): Growth is driven by internal factors like education, R&D and innovation. The technological progress necessary for growth is developed within speci c national contexts, emphasizing the role of institutions in fostering radical innovations that change societies. We need democracy to stimulate innovation to stimulate economic growth. According to some economists we need capitalism, private property, free market, economic freedom and private rms. NB: Incremental innovation: an improvement in an existing technology 4 of 46   fi fi ff fi fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Radical innovation: something new, usually brining an economic change in social and cultural characteristic of a speci c society. ECONOMIC GROWTH: increase in value of good and services in a country (you use GDP to measure it or total factor productivity TFP: how much technology is contributing in a speci c country.) Agricultural Revolution Everywhere in the world human societies shifted from hunting and gathering to settled agriculture, allowing for the domestication of plants and animals, permanent settlements, and increased food production. Agriculture started to become an economic resource. We have 2 di erent streams of interpretation: Classical theory: at some point men discovered agriculture. Recent theory: men were forced by demographic pressure to change and to settle down. Demography is one important factor but agricultural revolution had some positive but also some negative impacts on the life of men. This shift was driven by both: climate changes: end of the Ice Age, warmer and more stable climate. Natural growth of wild cereals. extinction of megafauna, which forced humans to rely more on plants. These are 2 necessaries conditions, One alone is not enough: Europe's delay can be explained by the longer presence of large mammals compared to other places. demographic growth: Agriculture led to population growth, with permanent settlements increasing fertility. However, it also created pressure on resources. The di usion of agriculture and farming led to settlement, foundations of villages in good places (irrigated plains). We can see the human modi cation of the environment: selection of animals and plants (biodiversity) modi cation of rivers land clearing and deforestation This complexity brought economic and social inequalities and this is usually considered as a positive consequence, because a certain level is needed to fuel economic growth, but there are also cons. The shift to agriculture is, though, a mixed blessing: PROS: it provided more food, an increase in population and a basis for societal complexity (e.g., division of labor, accumulation of knowledge). It was the division of labour which probably gave occasion to the invention of the greater part of those machines, by which labour is so much facilitated and abridged. When the whole force of the mind is directed to one particular object, 5 of 46   fi ff ff fi fi fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 as in consequence of the division of labour it must be, the mind is more likely to discover the easiest methods of attaining that object than when its attention is dissipated among a great variety of things. Adam Smith, The Wealth of Nations You can increase productivity, specialization, e ciency, innovation, learn by doing, less resources. Division labour and expanding markets can be considered 2 important factors through which you can explain the fact that society is moving towards a new level of specialization, more market opportunities and more economic growth. CONS: resource depletion, poorer nutrition, and diseases. On the one hand you are able to produce more and able to give food to more people, population is increasing but in an environment where resources are limited. There is a struggle between population and resources. (Maltus) Even though some academics stress that there were negative consequences, we are focusing on the idea that men were able to fuel economic growth. It is considered one very important thing. Jared Diamond wrote this article in 1987: agriculture is the worst mistake in the history of human race. When men settled down it was paradise lost: “It’s better to live in caves rather than be Bocconi students.” He is considering evidences from some nomadic tribes from Africa and from skeletons and researches made by paleontologists. Here are his reasons: The working week was 12-19 hours, the diet was more various and with more proteins and the sleep time was abundant. The average height created from 5’9’’ to 5’5’’. Urban Revolution Advantages taken by the agricultural revolution can be understood only considering another major event – the urban revolution which started in Europe and Asia (a limited geographical space if compared to that of agricultural revolution). Cities are permanent spaces, have facilities, there is a growing population, collaboration among people, knowledge, they ↑productivity, are a melting pot, are safe, tiny free market, institutions, ↑ standards of living, attraction of workforce. PYRAMID of relations: 1. At the basis there is material life: relations among people are NOT centered around economics. Here there is the idea of community. You need this brick to build what is coming next. (Base of the pyramid) 2. Market economy: 3. Capitalism: born around long distance trade. When you move up the pyramid you start to see that relations among people are more and more impersonal, more based around economics. (Top of the pyramid) In the city you need to de ne a new identity for the people based on land. In the countryside everything is centered around land, family, the sense of community is strong. In cities relations among people are becoming more centered around economics. You need more institutions to regulate those 6 of 46   fi ffi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 relations. In cities you exchange goods: that’s the reason why you need to nd a way to have citizenship rights. You need to nd a way to manage the heritage family. Pros: higher division of labour accumulation of knowledge development of complex socio-political structures typical of modern state forms: - Economic organization of life in the city and the surroundings Cons: higher taxation increase in inequality (which can lead to economic growth, consumption, innovation...) The relationship between cities and the countryside has to be considered as a con ictual relationship as well as a complimentary relationship. Cities want to control the surroundings to have access to water, taxes to grow. They are aggressive worlds: an active force for unequal exchange. Moreover, cities are places where capitalism was born. Capitalism is always about growth and inequality, and inequality is always social and spatial inequality. According to French historian Braudel: “Cities are indispensable to the general process of growth and therefore are turning-points, watersheds of human history. But they are also producers and pro teers of uneven development… Cities by de nition live on asymmetrical relationships because the town only exists as a town in relation to a form of life lower than its own” Urban Revolution and Proto-Divergence The (agri-)urban revolution was a typical Eurasian phenomenon and thanks to its gains fostered a kind of proto-divergence between Eurasia itself and the rest of the world: A more productive agriculture Higher population density More complex state institutions Why Eurasia? more favourable environmental conditions stronger political, economic, and social institutions recognition of “private property” stricter inheritance systems stronger role of the family 7 of 46   fi fi fi fl fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 ENVIRONMENTAL EXPLANATION (Jared Diamond): In Eurasia, several factors contributed to its advantage: A greater number of animal and plant species that were suitable for domestication. The East-West geographical orientation facilitated human and crop migration, making it easier to move across Eurasia compared to the Americas. Fewer natural barriers allowed for easier movement and interaction. Additionally, Eurasia had a pre-existing advantage due to the earlier spread of humans from Africa. INSTITUTIONAL EXPLANATION (Jack Goody): An increasing number of scholars emphasize the signi cance of institutions, arguing that some are more e ective than others. The hypothesis is that these institutional di erences matter. Compared to Americas, in Eurasia: More complex state formations, enabling the imposition of taxes, the provision of public goods, social strati cation, and increased consumption. Large territories were necessary to produce enough food, impose taxes, and fund public expenditure. A greater variety of economic and family institutions, such as citizenship rights, private property, charitable organizations, and educational institutions. These lowered transaction costs and risks, particularly when dealing with bureaucracy. Private property was crucial for entrepreneurial attitudes, as ownership of land was o cially recognized. Families played a key role in ensuring solidarity and managing the transmission of wealth through complex marriage strategies aimed at preserving family wealth over the long term. A certain degree of inequality was necessary for economic growth. In Eurasia, but not in other regions, all sons inherited a portion of their father's assets, with males receiving goods and females a dowry. Since wealth was largely tied to land ownership, families sought to maintain control over their land to prevent the dispersion of their wealth. As a result, marriage strategies often became endogamous, aiming to avoid the excessive division of assets. This led to more intensive land exploitation methods. NB: There were internal di erences within Eurasia (which will be explored in the lesson on the Great Divergence) that became more evident in the late Middle Ages and early modern period. Why not Africa? Africa, the birthplace of humanity and early agricultural experimentation, was more easily connected to Eurasia than the Americas. However, while Northern Africa developed along similar lines to Eurasia, sub-Saharan Africa did not follow the same trajectory due to: Environmental and climatic factors (North-South orientation). Delayed urban development. 8 of 46   ff fi ff ffi fi ff  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 The dominance of trans-Saharan land routes over coastal ones. The prevalence of itinerant agricultural systems. Less diversi ed societies and simpler state formations. Without private property, innovation, e ciency and productivity were lower. Some academics argue that private property fosters economic growth, whereas common ownership hinders it. Features of Pre-Industrial Society Although agrarian societies were far more complex than hunter-gatherer ones, they were signi cantly less complex than post-industrial societies. To increase economic growth, societies could: Utilize more resources (land, labor, capital). Become more e cient (through technology). Pre-industrial societies experienced lower economic growth rates than industrial societies, and we can examine the reasons for this through several lenses: 1. TECHNOLOGY: While towns and cities were vital, pre-industrial societies had low levels of urbanization: 6-8% in Western Europe, with the exception of Italy, which reached 20-25% before the Black Death. Agriculture was the primary sector driving GDP, with a large percentage of people working in it. The division of labor was limited and often based on age and gender rather than ability, leading to a transfer of jobs from father to son, which could negatively a ect productivity. High rate of self consumption: around 90% of what was produced was consumed locally, with only 9% sold in towns and 1% exported. Low level of productivity: with only 2 Schumpeterian innovations (the water mill and the heavy plough) bringing about transformative changes. Strong solidarity system: particularly through marriage strategies, also existed. However, there was little capital accumulation, and therefore minimal investment in new technologies. 2. EXPANDING MARKETS: Historian Pierre Chaunu theorized the existence of three trade systems: Parish Circle: 90% of production was consumed locally and traded within small geographical areas (5km range), re ecting closed communities. City-Contado System: 9% was traded within a 25km radius of important cities, which played a signi cant role in economic activity. Long Distance Trade: 1% of goods were traded in the Mediterranean. According to historian Braudel, long-distance trade was linked to the rise of capitalism, a system based on exploitation. For long-term economic growth, institutions supporting development had to evolve. In pre-modern agrarian societies, cities specialized in: 9 of 46  fi  fi ffi fl ffi ff fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Producing manufactured goods (guilds) Exchanging goods (regulated market) Producing services (civil and ecclesiastical magistracies). Cities like Venice emerged as centers of commercial and nancial capitalism, long-distance trade, and knowledge dissemination, including technological, institutional, and consumer innovations. Commercialization of agriculture: The modernization of agriculture was closely tied to the rise of Dutch commercial supremacy. Specialization, driven by the demand from rapidly growing Dutch cities, was key to transforming agriculture. Dutch farmers focused on producing for the market, selling their products across Europe, including Spain and Italy, rather than simply meeting their own consumption needs. 3. TRANSPORT: E cient transportation networks were vital for connecting production sites to consumption centers, attracting talent, and ensuring the proper allocation of resources. The Malthusian Theory In 1789 Thomas Malthus published an essay titled Principle of Population. According to him the ratio between population and resources (mainly LAND) was precarious. He stated that population increased in a geometric progression (ie., 2, 4, 16, 132...) while food production increased in arithmetic progression (ie., 2, 4, 6, 8...): Thus population grew faster than food production and tended to outstrip it in a short time. His theory is based on these assumptions: Population growth is positively in uenced by income but is limited by resources available Population growth has then a negative impact on income growth In the medium-long term the ration between population and resources can be “controlled” via: - Preventive checks (control of rst marriage age) - Positive checks (epidemics, famine, wars) - Technological innovation Malthus was unaware of the transformative impact technology would have. His theory predicted a constant check on population growth due to resource scarcity, a challenge that would a ect a signi cant portion of humanity. Industrialization allowed humanity to move beyond the Malthusian trap. Pre-industrial societies experienced high birth and death rates, only escaping the trap through wars, plagues (such as the Black Death), and other calamities. 10 of 46  ffi fi  fi fl fi ff  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 It was not until the Industrial Revolution, rst in England and later in the rest of the world, that humanity escaped the trap permanently. During the demographic transition, birth rates remained high while death rates dropped due to improving living standards, though people were still inclined to have many children. Industrial revolution and the modernization of agriculture made this possible and Europe started the demographic transition. Western countries have completed the transition along 19th and 20th century. In poor countries this transition is still ongoing. Once industrialization was fully established, birth rates declined, leading to low birth and death rates. The Black Death: An Accelerator of History The Black Death, which swept through Europe in the mid-14th century, profoundly altered pre- industrial society. Although pre-industrial change was generally slow, this pandemic acted as a catalyst, accelerating societal development in unexpected ways. Positive E ects (Malthus’s Perspective): Reduced Pressure on Resources: With fewer people to sustain, there was more available land and less competition for food and resources. This improved the ratio between people and land, leading to a signi cant increase in GDP per capita. Economic Inequalities Mitigated: The drastic population reduction led to a redistribution of wealth, increasing social mobility and improving living standards for survivors. Higher Urban Wages: The sharp decline in labor supply caused wages to rise, bene ting workers and setting the stage for future economic transformations. Foundation for Future Growth: Some scholars argue that these changes laid the groundwork for the Great Divergence that would later separate Europe economically from other parts of the world. This, however, remains debated. Negative E ects: mainly the Smith’s POV Production System Slowdown: The loss of a signi cant portion of the population (30-60%), particularly skilled workers, caused a sharp reduction in agricultural and industrial production. Disruption of Trade: Both international and supra-regional trade halted as economies struggled to recover from the labor shortages and societal chaos. Loss of Human Capital: The recovery process was hindered by the large-scale death of skilled laborers, delaying the return to pre-pandemic productivity levels. 11 of 46   fi ff ff fi fi fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 In conclusion, the Black Death rebalanced the relationship between population and resources, leading to long-term shifts in Europe’s socio-economic structure. While it brought about higher wages and greater mobility for some, it also slowed production and trade, creating both immediate hardships and future opportunities for growth. Post-Black Death Observations 1. FEDECOMMESSO: After the Black Death, the legal institution of fedecommesso emerged, used by aristocratic and bourgeois families to ensure the preservation of family estates across generations. This practice helped keep wealth within the family and prevent the dispersion of assets, especially from the 16th century onwards. 2. Wages and GDP per Capita: Wages increased everywhere following the Black Death, but this did not necessarily result in a corresponding ↑ in GDP per capita. In less developed areas, wages ↑ and GDP per capita ↑. In well-developed areas, wages ↑, but GDP per capita ↓ due to economic dislocation, the decrease in economy has been higher than the increase in wages 3. Urban Development: The ↑ in wages stimulated the development of cities, as people were able to consume more goods and services, particularly meat and cheese. Political and Economic Institutions: Institutions form the foundational framework within which a society operates, shaping human interactions by determining the structure and norms of collective life. Economic Institutions play a pivotal role in structuring economic activities, governing how resources are allocated, and de ning property rights. These institutions are key drivers of national di erences, directly in uencing aggregate economic growth and the future distribution of wealth (de facto power). Since they are collective choices made by society, economic institutions are endogenous and subject to continuous evolution, shaped by the political power in place. Political Institutions, as noted, are the forces that shape economic institutions. Those who hold political power naturally align institutions to serve their interests, leading to a close relationship between e ciency and the distribution of wealth and resources. Political power itself manifests in two distinct forms: - DE JURE power: Derived from formal political institutions. - DE FACTO power: Originating from the actual allocation of resources and informal in uence. Just like economic institutions, political institutions are also endogenous and evolve according to the prevailing distribution of political power. They de ne society's collective choices, which in turn establish the framework within which economic institutions operate. 12 of 46   ff ffi fl fi fi fl  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Thus, despite numerous factors in uencing income disparities across nations, three primary causes stand out: Economic institutions, which shape growth potential and wealth distribution. Geography, which impacts labor productivity and access to technology. Culture, which in uences societal values, preferences, and beliefs, thereby a ecting economic performance. 13 of 46   fl fl ff  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 The Great Divergence It refers to the complex process by which Europe emerged as the richest area on the planet, progressively overcoming the limits of pre-industrial economies. It has a lot to do with colonization, a geographical hierarchization of the world with a core, a semi-periphery and a periphery. Age of Discoveries Until the end of the 13th century, the world was largely divided into closed economic systems. Europe, the Mediterranean, East Asia, and Central America had important trade exchanges, but these regions were not economically integrated with one another. However, the period between 1450 and 1550 , proto-globalisation began. It marked a fundamental turning point in global history due to geographical discoveries and the creation of new communication routes, which became critical sources of power, driving economic and technological transformations. The expansion of TRADE was central to Europe’s growing power and wealth during this period. More and more areas of the world began to open up to external trade, giving rise to a nascent world economic system. CONTEXT/ENVIRONMENTAL CONDITIONS (CAUSES) Availability of capital to nance expeditions: Demand for exotic/luxury goods: The Mediterranean Sea played a crucial role in connecting Europe with the North and East. Trade was largely driven by spices exchanged for raw and semi- nished materials such as metals and wool. In exchange for luxury products from the Middle and Far East, such as silks, brocades, spices, and raw materials like alum and cotton, Europe exported woolen and linen cloths, metal products, paper, and glass. However, this "opening up" was more of an extension of existing trade routes rather than the creation of entirely new ones. Technology: Reward Structure: THE TIPPING POINT Pre-conditions were mature enough for the burst of the tipping point. CARAVEL: a small, highly maneuverable sailing ship developed by the Portuguese, was a transformative innovation that made it possible to explore new trade routes across the oceans. The vessels used in Mediterranean trade at the time, such as galleys and cocche, were ill-suited for oceanic voyages. Early attempts by Italians to reach the Indies via the Atlantic Ocean, like the failed 1291 expedition, demonstrated the limitations of contemporary naval technology. The breakthrough came with the development of the caravel, a new type of ship designed by the Portuguese in the mid-15th century. This vessel combined knowledge from both the Mediterranean (the galley) and northern Europe (the cocca), along with innovations such as the straight rudder. It can be considered as a transformative innovation. The expansion during this 14 of 46  fi  fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 period also involved warfare and struggles for supremacy, which made the use of cannons a critical part of European naval dominance. SCHUMPETERIAN-LIKE ENTREPRENEURS: The period also saw a surge in entrepreneurial activity, which was facilitated by institutional settings that created strong incentives for risk-taking and exploration. This fostered the path toward modern economic growth, ultimately leading to the Industrial Revolution. E.g. Colombus and Henry the Navigator. According to William Baumol, every society has a certain level of entrepreneurial spirit. What di erentiates societies is the way they create incentives and reward structures for that entrepreneurial activity. The institutional setting in Europe, particularly in Portugal and Spain, fostered a favorable environment for exploration and risk-taking. Baumol categorizes entrepreneurial activity into 3 types: - Productive: Encouraged for-pro t economic activities that bene t society and stimulate economic growth. - Unproductive: Rent-seeking activities that may involve exploiting the system for personal gain without contributing to overall growth. - Disruptive: Activities that are socially or economically destructive, such as ma a-style operations. Prince Henry the Navigator of Portugal earned this title because he funded expeditions and assembled a group of maritime experts to design new ships, maps, and navigational instruments. Henry then funded expeditions and used this knowledge to sail the High Seas and explore the West African coast. It was the presence of the Ottoman Empire that stimulated the search for other routes to the East to continue the rich trade in spices and high-value goods. Under his guidance, Portuguese explorers succeeded in rounding Cape Bojador in western Morocco in 1434, a feat that had previously eluded Italian navigators. DISRUPTION IN THE WAY TRADE IS CONDUCTED: CONSEQUENCES MERCANTILISM: Mercantilism was driven by the idea that NATIONAL WEALTH = NATIONAL POWER and it encouraged states to adopt aggressive policies aimed at expanding trade and accumulating wealth, primarily in the form of gold and silver. Trade served political power (wealth was a way of strengthening military power). - Adam Smith re ects on how future interactions among di erent nations may lead to a balance of power. He suggests that through mutual fear and respect, nations might overcome injustice. The communication of knowledge and commerce between countries is seen as a powerful force for improvement, fostering equality of strength and resources. One signi cant outcome of these discoveries, according to Smith, has been the elevation of the mercantile system, bringing it to a level of splendor and glory that it would not have reached otherwise. - Thomas Mun emphasizes the principle of mercantilism, where the nation's wealth is increased through foreign trade by ensuring that more goods are exported than imported. The idea is 15 of 46  ff  fl fi ff fi fi fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 that a positive trade balance—selling more to foreigners than buying—would bring wealth into the country. - Cameron & Neal underscores the dual purpose of economic policies during this time: to build economic power in order to strengthen the state and to use this state power to foster national economic growth. This re ects the strategic goal of combining economic prosperity with political power, ensuring the nation's global standing and stability. NB: Royal Monopoly (Spain and Portugal) and Join Stock Companies (Dutch and the English) are tools of mercantilism. It’s a di erent way of managing long distance trade, but the goal is the same: the state is trying to get the best from this activity. Royal monopoly was a re ection of the political institution and of the way resources were distributed among groups of people. Spain and Portugal were monarchies where land was the primary resource, controlled by the king, nobility, and the Church. They both opted for a centralized economic institution known as the ROYAL MONOPOLY, which allowed the Crown to maintain signi cant control over economic activities. In Spain, this system led to the establishment of the Casa de la Contratación, while in Portugal, the Casa da Índia was created. Both institutions were responsible for training sailors, overseeing the quality of imported and exported goods, setting prices, collecting taxes, determining the quantity and type of goods for each cargo, and issuing licenses. Notably, in Spain, all ships had to pass through Seville, which concentrated economic power in one city. From the perspective of the Crown, this system was highly bene cial as it ensured direct control over trade and generated substantial revenue. However, one signi cant downside was the lack of free entry into the market: this led to adverse selection, as only those with the necessary wealth could participate, excluding smaller merchants and creating an ine cient market. Over time, this monopoly re ected the nature of the political institutions and the unequal distribution of resources. In the long run, the rigid structure of the Royal Monopoly likely contributed to economic stagnation and created systemic problems for both Spain and Portugal. Furthermore, Spain was heavily invested in territorial expansion, seeking to control increasingly large areas of land. The Portuguese gradually integrated into the trade between the Mediterranean and the North Sea. Their expeditions to the west coast of Africa, and later to the East Indies, allowed them to wrest control of valuable trade goods like spices, gold, and ivory. They focused on: Establishing outposts rather than large territorial conquests, preferring to control trade routes Maximizing resource extraction. Slave trade: very important in enriching Europe. They started the Colombian Exchange. With this accomplishment, the Portuguese shifted the balance of power in the Mediterranean and began establishing a global empire, controlling trade routes and high-value goods. They were able to become the leaders of long distance trade. Genoa and Venice had a lot of troubles. The Spanish Empire wanted to enter into the game. After completing the Reconquista, the Spanish rulers funded Christopher Columbus’s expedition in an attempt to reach Asia by sailing 16 of 46   fi ffi fl ff fl fi fi fl  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 west. Although Columbus reached the Americas instead, this New World provided Spain with an abundance of gold, silver, and slaves, laying the foundation for Spain’s empire in the Americas. There is the idea that Christians are superior to the Muslims. The Treaties of Tordesillas and Zaragoza were blessed by the church: it’s good to colonize. The Chinese had made some expeditions with Admiral Zheng-He was nanced by the emperor and made a lot of voyages. He reached India and Africa (1401-1434). The emperor was forced to stop expeditions because Chinese didn’t want to exploit territories and colonize: they had cultural and diplomatic goals: they o ered protection in case of a possible war. They thought they were superior to anyone else in the world. Zheng-He was a eunuch and created huge tensions in the empire: the emperor wanted to nance the expeditions but the people in the palace were afraid that this could have created tensions within the Chinese society. Zheng-He was gaining a lot of wealth and so the bureaucrats were afraid of this. We have a tripartite institution in managing the nancial policy of the empire: king, eunuchs and bureaucrats. MERCANTILE CAPITALISM: The Age of Discoveries contributed to the development of a system that became synonymous with capitalism. From a Marxian perspective, capitalism is understood not merely as a mode of exchange but as a system of organizing production. It involves a hierarchical division of labor, where the workforce is organized into classes, with some owning the means of production and others providing labor. This creates an inherently unbalanced system of production, where the surplus value generated by labor is concentrated in the hands of the owners, reinforcing inequality and exploitation. NATIONAL STATES FORMATION AND STATE COMPETITION: Mercantilist activities required signi cant nancial investment, which was closely tied to the formation of national states. These states needed robust bureaucratic structures to manage the complexities of international trade and expansion. To nance these e orts, governments raised funds through debt, taxation, and international bankers. This led to the development of sophisticated nancial systems to support state policies, especially as the state required signi cant capital to maintain and expand its in uence. To keep the trade balance active (export > import) nations used: - Import Restrictions: Governments imposed tari s and prohibitions to reduce imports, thereby protecting domestic industries and keeping wealth within the country. - Exports Enhancement: States granted royal monopolies or provided subsidies to speci c industries, particularly those involved in lucrative trades such as spices, to stimulate exports. - Trade Privilege: Laws like the Navigation Acts in England ensured that trade was conducted on national terms, often restricting foreign competition in key industries. - Colonial Expansion: Mercantilist states sought to expand their empires to secure new sources of raw materials and markets, increasing their wealth and geopolitical power. Thanks to these policies, Europe became the center of the rst world economic system, with Spain and Portugal leading initial colonial expansions. This division of the globe into spheres of in uence was intended to limit con ict between the two powers. As more countries entered this global economic race, continuous innovation was required in both technology and institutions. 17 of 46 fi  fl fi  fi fi ff fi ff fl ff fi fi fi fi fl fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Over time, royal monopolies began to show weaknesses and faced challenges in adapting to new circumstances, leading to the emergence of new economic models and systems. ECONOMIC WORLD SYSTEM: Proto-Globalization refers to the period between 1435 and 1550, during which previously distant markets became increasingly integrated, laying the foundation for the modern global economy. Several key factors contributed to this process: - Geographical Discoveries: The creation of new communication routes through exploration enabled more areas of the planet to become connected to global trade networks, giving rise to a world economic system. - Colonial Empires: Europe’s colonial expansion, particularly by the Spanish and Portuguese, established global spheres of in uence, dividing the world into colonial empires with competing interests and trade routes. The World System: division into 3 spheres. This theory has been developed by I. Wellerstein. Core: The core regions drove the global economy, concentrating the highest value-added production and technological advancements. Semi-Periphery: These regions had signi cant economic weight but limited political in uence. They often acted as intermediaries in the global system. Its dependent on the core and on the periphery. Periphery: Periphery regions had limited political and economic power, focusing on the production of raw materials and lower-value goods. WARS: GEOPOLITICS: GREAT DIVERGENCE (for some scholars): Explaining the Great Divergence Di erent starting points according to di erent scholars: A. Black Death: B. Age of Discoveries: C. Industrial Revolution: D. Mid-XIX Century: From the 1500s onwards, Europe embarked on a divergent development trajectory comp ared to Asia, as shown by: The gap in urbanisation rates The dominance of the seas, trade and intercontinental empires Technological and scienti c superiority, which began to assert itself in these years 18 of 46  ff  fi fl ff fi fl  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 However, scholars do not agree on the origins and causes of the Great Divergence. We can group the explanations into three categories: 1. DEMOGRAPHICAL EXPLANATION: Europe had a higher population density, so: Ideas circulated quicker More pressure on resources So there is space for innovation. According to the historian G. Clark, The Black Death (A) temporarily lifted Europe out of the Malthusian trap by reducing population pressure on resources. This allowed for higher wages and better living conditions, fostering innovation and economic growth. Scholars used urbanization rates or welfare ratio. Historians have created a basket of g 2. INSTITUTIONAL EXPLANATION: There was a di erence between European and asian institutions: European institutions stimulated economic and scienti c technical innovation that led to the Great Divergence: Private initiatives: Private property, free markets, and legal systems, played a key role in fostering economic and scienti c innovations. These institutions created a conducive environment for capitalism and technological progress. Universities and Knowledge: The spread of knowledge through universities and the scienti c method contributed to Europe’s ability to innovate and grow economically. Mercantile Cities: Cities in Europe, such as Venice, became centers of economic dynamism, fostering innovation, trade, and the development of a bourgeois entrepreneurial class. 3. GEOPOLITICAL EXPLANATION: Natural barriers (J. Diamond): - Europe’s geography, characterized by small, competitive states, fostered innovation and competition. - In contrast, Asia’s large empires prioritized social stability over innovation. Access to the Americas (K. Pomeranz) (D): - Europe’s colonization of the Americas provided access to vast new resources, helping it overcome the resource constraints that previously limited its economic growth. - There was a transition from a labour-intensive to a capital-intensive economy - There was the development of energy-intensive sectors, such as coal-based industries. Colonialism (I. Wallestein): - European powers extensively exploited their colonies, creating a system with a core (Europe), semi-peripheries, and peripheries. This system allowed Europe to extract resources and labor 19 of 46   fi ff fi fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 from the colonies, driving its economic growth while contributing to underdevelopment elsewhere. 20 of 46    30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 The Little Divergence This process ts within the larger framework of the Great Divergence. It’s the historical period during which northern Europe, particularly the Dutch Republic, began to outpace southern Europe economically, politically, and institutionally. Initially, Spain and Portugal were the rst movers during the Age of Discoveries, yet they struggled to maintain their competitive edge. As rivals sought to enter the game and take over, the Dutch not only found ways to compete but eventually surpass these southern powers. We should not think it as a revolutionary change of position. Rather, it was a long and complex process Antwerp became the new centre of the world economy, the emporium of European economy. Antwerp was favorable geographical position between the mediterranean and the baltic. There was mercantile and manufacturing tradition and it was an important nancial centre as well. Collecting gold and silver to nance military operations in continental Europe and to purchase goods later destined for the American colonies. However, Antwerp remained under the rule of Spain, accelerating its decadence and favoring the rise of Amsterdam as a new centre of European economy Strategies for Competing with Spain and Portugal New Routes and Markets: The Dutch Republic excelled in this aspect, expanding trade routes beyond those dominated by the Iberian powers. However, more than their success in geographical exploration, their enduring advantage lay in innovation. Technological Innovation: They built the uyt, a ship faster and more e cient than the Spanish caravel, which allowed them to reduce travel times and costs, giving them a vital edge in trade. Such technological advances were crucial, but more important were the Dutch Republic’s institutional innovations. Institutional Innovations: Unlike Spain and Portugal, the Dutch decentralized their colonial a airs, allowing private merchants to take control through joint-stock companies like the Dutch East India Company and the West India Company. They avoided the model of state-owned enterprises that hampered Spain and Portugal, placing trade and commerce in the hands of private actors who were better equipped to manage risk and pro t. Wars as a Tool: The Dutch also used warfare strategically to take over key trade routes and colonial territories, particularly targeting Portugal’s holdings in Asia. This military strategy often supported their commercial ambitions. Spain and Portugal’s Weaknesses While Spain and Portugal were the initial pioneers of global exploration, their weaknesses soon became apparent. Portugal: Limited economic and demographic resources hindered long-term competitiveness. Dependence on Flemish merchants to access Northern European markets for spice trade. 21 of 46   fi fi fl fi fi ffi fi ff  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Dutch and English competition on African and Asian coasts steadily eroded Portugal’s control. Spain: The vastness of its empire and the immense cost of maintaining control over it led to multiple bankruptcies. Wars of religion and political con icts further drained its resources, particularly in e orts to hold onto the Netherlands. Abusive exploitation of its American colonies, particularly through gold and silver mining, led to in ation and economic destabilization in Spain. The rise of Amsterdam and the Dutch Republic In 1566, the people of the Netherlands sought to break free from Spanish rule for both economic and religious reasons. The religious aspect was deeply intertwined with their economic philosophy: Catholicism held a view that being rich was often seen as morally questionable. Wealth could be associated with greed or excess, and the church encouraged humility. In contrast, Protestantism, particularly Calvinism, embraced a very di erent attitude toward wealth. In Calvinist thought, prosperity was a sign of being favored by God. Wealth was not something to be ashamed of but rather a re ection of hard work and divine selection. Moreover, wealth was seen as bene cial not only to the individual but also to the wider community. The economic pressures on the Netherlands were equally signi cant. At the time, the region had many dynamic cities that were centers of trade, commerce, and manufacturing. These cities were heavily taxed by Spain, with much of the revenue going toward nancing Spain's wars, particularly against Protestant forces in Europe. The merchant elites in the Netherlands believed that Spanish rule was sti ing (so ocavano)trade and manufacturing activity. They saw Spanish control as an obstacle to economic growth, as the Spanish government prioritized territorial expansion and land ownership over commerce. These economic and religious di erences culminated in a rebellion, which eventually led to the birth of the Republic of the Seven United Netherlands (Republiek der Zeven Verenigde Nederlanden) in 1581. However, the path to independence was long and fraught with con ict. It wasn’t until 1648, with the Treaty of Westphalia, that the Republic was o cially recognized as independent, marking the end of the Eighty Years' War with Spain. From 1581 to 1648, the Dutch Republic experienced a Golden Age, becoming one of the most prosperous and powerful nations in Europe. They dominated international trade, developed innovative nancial institutions, and made signi cant advancements in arts and sciences. The interaction between these advantages made the Dutch the true pioneers of capitalism, assuming a key role in the construction of the world economy. However, after the Dutch Republic's golden age, England began to overtake them in terms of global in uence and trade dominance. The English, having learned from the Dutch model, adapted and innovated, eventually "stealing the cake" from the Dutch by becoming the next major global power. 22 of 46  fl fl  fi fi ff fl fl fi ffi fi fi ff fl fl ff ff  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 There was a new political institution: the republic and a new way of distributing resources that led to a new economic institutions re ecting these settings. The Dutch Legacy: Birth of Capitalism and Liberal Democracy The Dutch Republic marked a turning point in history, laying the foundation for modern capitalism and liberal democracy. These developments would have been impossible without the unique political and economic systems fostered by the Dutch. The First Bourgeois Revolution: The Dutch revolt against Spanish rule represented the rst great bourgeois revolution, with a new economic ruling class: merchants, bankers, traders, rising to power. This social and political transformation was vital for the development of capitalism. Political Freedom and Economic Liberalism: The Dutch revolt was not only about economic independence but also about political freedom. They wanted a society where every man could think freely and speak freely, a foundation of political liberalism, they wanted to be free to use the sea, trade and commerce to become rich. This was in stark contrast to Spain’s feudal system, which sti ed trade and industry. Spinoza’s Vision of Freedom: Spinoza emphasized the importance of being guided by reason rather than emotion or belief, a mindset that aligned well with the Republic’s mercantile spirit. There is a divergence in views about wealth and growth which led to two competing economic ideologies that de ned the struggle between Spain and the Netherlands: Spain (static idea): Wealth was seen as stemming from territorial occupation and land ownership. Spain’s focus was on expanding and controlling vast territories, a model that required heavy taxation and military spending to maintain. The Spanish crown's economic approach was static, centered on land property, and it heavily taxed its population, especially the urban merchant elites, to nance its mercenary armies and wars. This feudal system sti ed trade and industry, limiting economic dynamism. The Netherlands (dynamic idea): In contrast, the Dutch embraced a dynamic idea of wealth centered on trade, banking, and manufacturing, believing that wealth came from being active in the market rather than through land ownership. The Dutch sought to break free from the chains of heavy taxation imposed by the Spanish crown, and their economy was driven by merchants, bankers, and traders, who became the new economic-ruling class. For the Dutch, wealth was about economic freedom and the right to make money through commerce, re ecting their focus on creating a more open and prosperous system. Political Advantage: Republic The Dutch Republic introduced a political system that recognized and expanded political rights, particularly for the emerging social classes. It balanced the military interest of the federation with the well-being and economic ambitions of the separate provinces and their main cities. The political organization that took shape during the Republic was distinct from the monarchies that dominated Europe at the time, and it can be outlined as follows: 23 of 46  fl fi  fi fl fl fl fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Stadholder: The highest authority in the Republic, responsible primarily for military policy. Though powerful, the Stadholder’s authority was balanced by a more decentralized political structure. Electoral System: 58 cities had the right to elect representatives, who would then send delegates to the Seven Provincial States. These provincial bodies, in turn, sent their delegates to the national Parliament, the States General. Parliament’s Role: The States General played a crucial role in defending the Republic's economic, commercial, and nancial interests, making it responsible for key policies that protected trade, commerce, and foreign relations. In contrast to monarchies, where central power often curtailed merchant freedoms, the Dutch Parliament worked actively to ensure a prosperous and free economic environment. These civil institutions were controlled by regents, an elite of about 2000 drawn from the wealthy upper middle class of bankers and merchants One of the most unique features of the Dutch Republic was that many of the elected representatives in the Seven Provincial States and the States General came from the new social classes, particularly merchants, traders, and bankers. This marked a signi cant shift from the traditional feudal aristocracy seen in most European nations at the time. The Republic was built by these new social classes, and the state was seen as existing for the bene t of society, especially to defend and promote the interests of the people. The goal of this political system was not only to maintain power but to ensure the entire society grew richer through policies that favored trade and economic freedom. Economic Advantage: Integrated Economy In the Dutch Republic, trade and commerce were at the very center of life, driving a highly integrated economy, also due to the high population density both in cities and small towns that stimulated the continuous exchange of ideas and knowledge. This urbanization had a transformative e ect on the entire economic structure, becoming market-oriented, with a focus on agriculture (primary sector), which led to a greater productivity and specialization. In these thriving cities, you found an abundance of merchants, traders, and bankers. These individuals drove economic activity by organizing voyages, trading goods, and providing nancial services. Given that voyages were both risky and expensive, insurance quickly emerged as a necessary nancial innovation. The increasing number of voyages required systems to mitigate risk, leading to the development of insurance markets that played a pivotal role in stabilizing trade and encouraging further economic expansion. This economic dynamism had positive ripple e ects on the secondary and tertiary sectors. The rise in trade and commerce stimulated manufacturing (secondary sector), as goods needed to be produced, processed, and re ned for export. The tertiary sector (services), particularly in nance, banking, and logistics, also grew rapidly to support the growing demands of trade and urbanization. The interconnected nature of these sectors created a self-sustaining cycle of growth, making the Dutch economy one of the most advanced in Europe at the time. The integrated economic system, 24 of 46  ff  fi fi ff fi fi fi fi fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 driven by trade and urbanization, not only supported the expansion of the Dutch Republic but also allowed it to maintain a competitive edge over other nations. Economic Advantage: Entrepreneurship The Dutch Republic fostered a remarkable level of entrepreneurship, which played a crucial role in its economic success. One of the most striking examples of Dutch entrepreneurship was the immense wealth built around what became the rst global commodity: herrings. The Dutch were able to dominate the herring trade due to both technological innovation and commercial superiority. Central to this success was the development of the herring-buss, a specialized ship designed for large-scale shing. These ships sailed in eets of 400-500 units to the rich shing grounds around the Dogger Bank and the Shetland Isles. Technological Advantage: The herring-buss allowed Dutch shermen to stay at sea for extended periods, sometimes weeks, while processing and preserving the sh on board. This innovation allowed them to bring home preserved and salted herring, which could be sold far and wide. Naval Protection: The English were often displeased with the Dutch shing in waters they claimed, so the Dutch shing eets were escorted by naval vessels (nave militari) to protect them from potential seizures by competitors, particularly during wartime when the risk of losing ships was high. Commercial E ciency: To further maximize e ciency, the Dutch employed ventjagers, special ships that would transport the catch back to port while the eet remained at sea, allowing the shermen to continue working without having to return to shore. This practice greatly enhanced the volume of sh they could harvest and sell. Supporting this large-scale shing operation required signi cant infrastructure and a host of satellite activities. Ship maintenance, the production of nets and shing gear, the processing and preservation of the catch, and the provisioning of sailors all stimulated economic growth in the secondary and tertiary sectors. Entire industries developed around these needs, further fueling the Republic’s economy. Commercial Advantage: Old and New Routes One of the key elements of Dutch commercial success was their ability to capture and control trade routes, particularly from the Portuguese. Initially, the Dutch aimed to seize Portuguese trade routes, often using military force. However, when force proved impractical, they demonstrated enough strategic foresight and resourcefulness to discover new routes to the Indies, securing access to the lucrative spice trade and other valuable commodities from Asia. Wars and Seizures: The Dutch gained commercial primacy by wresting control of trade routes and colonial possessions from the Portuguese, particularly in Asia. The Dutch managed to secure nearly all of Portugal’s key trade hubs, with the notable exceptions of Goa (India) and Macao (China). This shift in power marked the decline of Portuguese dominance and the rise of Dutch commercial superiority in the region. 25 of 46 fi  fi  fi fi ffi fl fi fi fi ffi fi fi fi fl fi fi fl  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 North Sea, Baltic, and Mediterranean Trade: While their activities in Asia were crucial, the foundation of Dutch commercial success lay in their dominance over European trade routes. The Dutch Republic controlled the movement of goods across the North Sea, the Baltic, the Bay of Biscay, and the Mediterranean. Dutch merchants were responsible for transporting approximately three-quarters of all goods traded between the Baltic and Mediterranean regions, giving them a major share of European commerce. At the heart of this vast trade network was Amsterdam, which became Europe’s primary trading emporium and nancial center. The city’s importance was bolstered by the large in ux of religiously persecuted populations, including Jews from Spain and Portugal and Huguenots from France. These groups brought with them capital, skills, and commercial networks, which further strengthened Amsterdam's role in global trade. The combination of skilled merchants, commercial network, and nancial innovations contributed to the creation of an e cient commercial system in Amsterdam. The city’s growing in uence resulted in lower transaction costs for doing business, which in turn made Dutch merchants more competitive in global markets. The ability of the Dutch to capture old trade routes while simultaneously pioneering new ones gave them a decisive advantage in global commerce, allowing the Dutch Republic to dominate European and Asian trade during its Golden Age. Institutional Advantage: Mercantilism The Dutch Republic's economic policy was rooted in mercantilism, where the state played an active role in shaping and protecting trade and commerce to strengthen national power. Unlike a free- market system, state intervention was essential to guide economic growth and ensure dominance in global markets. Grotius' Mare Liberum (1609) championed the idea of free navigation and trade on the high seas, opposing the monopolies of Spain and Portugal. His work supported the Dutch right to trade in the Indies, which was recognized in the Treaty of Antwerp that same year. Grotius' ideas, while aimed at Spain and Portugal, also sparked tensions with other nations like Great Britain, whose ruler, James I, was angered by the notion of free shing rights in other states’ waters. Institutional Advantage: New Companies Unlike Spain and Portugal, where overseas trade was controlled by royal monopolies, the Dutch took a more innovative approach by delegating trade and governance over colonial territories to private joint-stock companies. These companies were not just given control of trade but also signi cant powers typically reserved for states, such as administering territories, maintaining eets and armies, and entering into diplomatic treaties. The Dutch East India Company (VOC), founded in 1602, had a monopoly on trade with the Levant and became a key player in global trade. 26 of 46   fi ffi fi fi fl fl fl fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 The Dutch West India Company (WIC), founded in 1630, controlled trade across the Atlantic and even temporarily held parts of Brazil between 1630 and 1654. These companies were prime examples of private interests serving public power. They operated as early forms of multinational corporations, with shareholders, limited liability, and a separation of ownership and management, an innovative structure that balanced private pro t with national interests. To ensure these companies aligned with the public good, their boards of directors included members nominated by parliament, creating accountability to the state. However, this setup sometimes led to governance challenges, such as the risk of minority shareholder expropriation. Ultimately, the Dutch joint-stock companies were more e cient and exible than the traditional royal monopolies of Spain and Portugal, enabling the Dutch Republic to become one of the wealthiest and most powerful nations through trade and commerce. Join stock companies were privileged because the parliament granted them a monopoly. These companies were di erent from royal monopolies because they were allowed by the parliament to sign commercial and diplomatic treaties with other countries, recruit and maintain a eet and an army and administer independently form the parliament, the territory they were able to occupy and control. The Slave Trade Over the course of 200 years, the Netherlands was deeply involved in the transatlantic slave trade, during which more than 500,000 people were enslaved in Dutch colonies. This forced labor became a major source of wealth for the Dutch economy, with enslaved people working on large-scale plantations in places like Brazil and the Caribbean islands, producing valuable commodities such as sugar, tobacco, cocoa, co ee, and cotton. The wealth generated from slave labor played a crucial role in nancing the Dutch Golden Age. The goods produced on slave plantations were exported to Europe, driving economic growth and making the Dutch Republic one of the wealthiest nations of the time. Amsterdam bankers were instrumental in funding these plantations, particularly in Suriname and the Antilles, and many of the ships used to transport enslaved Africans were constructed in the Netherlands, further intertwining the Dutch economy with the slave trade. It is estimated that slave-based activities contributed around 5% of the Dutch GDP during this period, underscoring how the pro ts from the slave trade were deeply integrated into the Republic's economic system. 27 of 46   ff ff fi ffi fi fl fl fi  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Dutch Colonialism By around 1650, the Dutch merchant eet surpassed those of France, Spain, Portugal, and England combined, making the Republic the dominant player in trade between the Baltic and the Mediterranean. This vast eet allowed the Dutch to control key maritime trade routes and maintain economic superiority. Beyond Europe, the Dutch achieved signi cant global penetration: In Asia, they established footholds(punt appoggio) in Ceylon (Sri Lanka), Java, and the Moluccas (Spice Islands). In Africa, they controlled the Cape of Good Hope, a strategic point for ships traveling to and from Asia. In the Americas, the Dutch held territories like Brazil (until 1654), New Amsterdam (modern-day New York, until 1664), Suriname, and the island of Curaçao. The Dutch saw themselves primarily as merchants, not soldiers, and their investments were concentrated in expanding their commercial eet rather than building a large military presence. This approach contrasted with England, which invested heavily in both military and commercial eets. While the English and Spanish sought territorial expansion, the Dutch, much like the Portuguese, were more focused on controlling trade routes, especially those leading to the Far East. Financial Advantage: Banks and Stock Exchange The Dutch Republic’s nancial institutions were key to its rise as a global economic power, with the Amsterdam Stock Exchange, founded in 1602. It was the rst true stock exchange in the world, providing a marketplace where shares of companies, particularly the Dutch East India Company (VOC), could be traded. This innovation allowed for the pooling of capital from a broad range of investors, facilitating large-scale ventures that drove Dutch dominance in global trade. Alongside the stock exchange, the Amsterdam Wisselbank (Amsterdam Exchange Bank), established in 1609, played a pivotal role in the Republic's nancial success. It functioned as the public bank of Amsterdam, holding a monopoly over the handling of foreign bills of exchange, essential for international trade. By the 18th century, the Wisselbank had become the largest bank in the world, underpinning the Dutch Republic’s nancial system and making Amsterdam the leading nancial hub of Europe. Adam Smith, in his seminal work The Wealth of Nations, praised the Dutch nancial system as a model for other European nations to follow. He admired the way the Amsterdam central bank and stock exchange facilitated trade, commerce, and investment, serving as a blueprint for nancial systems throughout Europe. The Dutch Republic, with its advanced nancial institutions, quickly became “the envy of some, the fear of others, and the wonder of all their neighbours.” The Dutch were remarkably forward- thinking in their understanding of what was required to support the expansion of trade and commerce on a global scale. 28 of 46   fi fl fi fl fi fi fl fi fi fi fi fi fl  30067 | AY 2024-2025 | Bocconi University | Michele Rossini | BIEM16 Competitors are envy After England’s rise during the I