Saturday, July 10, 2010

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Medieval Civilization: Venetian rise and decline.

Lessons about Statism.

by Ferdinand III

The 'Dark Ages' is a myth of course. Medieval Christian civilization for all its faults and demerits, nevertheless created the modern world. Any factual non Marxist analysis imparts the reality that Islam had no connection whatsoever with the creation of civilization. The Christian – European 'Renaissance', attributed to the Italian efflorescence in the 15th and 16th centuries, including the greatness of the Venetian empire, was simply an outgrowth of the rather astonishing achievements in all spheres of life which existed in the medieval world. There could never have been a 'Dark Age' because the Renaissance and poorly named 'Enlightenment' would logically never have existed.

The rise and fall of Venice makes interesting reading and has a lot to tell us about the current state of affairs. Debt, statism, regulations, bureaucracy and incoherent spending are markers outlining the somewhat rapid decline of the rich Italian super-trading state. The usual litany and diseases which infected and then killed the Venetian host, are fat, happy and well-fed in all Western states today.

Venice by the 16th century, was the richest of the Italian city states and along with Spain, the main counterpoise to Ottoman predations and imperial ambition in the Mediterranean basin. Venice's decline by the 17th century was dramatic indeed. Its self-immolation was a direct outcome of statism.

Venice became rich through trading with Byzantium and the Muslim empires of the Near East. Astute diplomacy; cunning; far reaching naval inventions; productive ship building; innovations in war; all allowed the small lagoon-state to play a role in world affairs out of all proportion to its size. By the 15th century Venice had carved out an island empire in the Eastern Mediterranean and had secured oligopolistic trading rights with both the Ottomans and Byzantines [before the Eastern Roman empire was ended in 1453]. The Venetian plunder of Constantinople in 1204, secured for its own merchant marine and traders privileges denied to other Italian sea-faring states; not to mention the almost endless plunder taken out of the city by the Venetian clique which ruled the state for 70 years. Constantinople's pillage made Venice.

Wealth from the rape of Byzantine was combined with adroit and very persistent trading skills. The Venetian merchant and naval forces had the best and most elaborately technical ships in the Mediterranean sea by the 14th century. No one could compete with a Venetian galley either in size, speed, or volume of load. Venetian sailors were deemed amongst the best in the entire world. A culture of trading and shipping dominated Venice's life. Venice might well be the first modern super-trading state, becoming rich and glorious on the fats and meat of commercial advantage and political opportunism.

Venice was one of the few Italian states which escaped the clutches of the Spanish empire which by the 15th century was coming to dominate vast tracts of Italy. The wealth of Venice had been built within a system of representation unique in Italy. It was a largely democratic and transparent state. Low taxes, and small government allowed Venetian business and entrepreneurs to blossom. Capital flowed in. Armories, ship building, glass making, textile manufacturer all expanded. By 1500 the best glass and highest quality textiles in the world were manufactured in Venice. Venetian mirrors had no equal. Soap, lace and porcelain were world-class. Venetian painters using casting lead-type innovations were easily the best in the world. In 1500 Venice was the marvel of the world.

By 1560 this was no longer the case. The Ottomans are partly to blame. The Muslim Turkish empire squatted over a huge area of the Near East, and Eastern Europe and the Balkans. There was no industry in the Ottoman empire – but lots of humans. What the Ottomans lacked in manufacture they made up for in slaves, human capital and ideological zeal. Ottoman galleys – inferior in every way to the Venetian – nonetheless by sheer numbers began to compete with Venetian trade. Ottoman military might threatened Venice's very survival, forcing the Venetian state to spend more budget on defence. During the mid 16th century Venice became little more than a satrapy of Istanbul. At the vital siege of Malta in 1565, the Venetians stood by and watched while fellow Christians miraculously defeated an Ottoman invasion force of nearly 100.000. Venice by 1550 was no super-trading power state; but just another close to bankrupt nation state.

The wars with the Ottomans do not explain Venetian decline. You can fight wars and still prosper. Venice's fall from 1500 is internal. Most empires fail for two reasons. The first is debt and unnecessary governmental spending. The second is inflation. Both ravaged Venice.

Though Venice escaped being directly conquered by Spain and the Turks, they fell into the same despotic trap. The city state slipped into oligarchy in the late 15th century. Its spending programs became uncoordinated and excessive. Insidious tax levels were imposed. Regulations which stymied development and capital accumulation abounded. Very quickly the Venetians became un-competitive which drained the small city state of revenues, people and energy – all of which was needed to thwart Ottoman ambitions to control trade and the political-economy of the entire Mediterranean.

As the state rose in power, good people left. Valuable craftsmen fled to England where taxes, regulations and government power were markedly less prevalent. Trade secrets went with them. Letters indicate that a Venetian glass maker in England could earn more in one day; than during one week at home. The English very quickly became competitive in glass making at both ends – the high and low. Venetian market share in glass and other industries began to rapidly shrink .

The English began to overwhelm the Venetians not only with quality, but with lower prices. Volume production was the key. The English mass manufactured high quality items which due to volume runs, could be sold at a lower price. This was foreign to Venetian practices in which smaller craft shops produced low volumes at high prices. The English were perfecting the technique of producing artifacts in high volume with high quality.

In England innovation was king. The state did not interfere to protect interest groups or unions and neuter innovation. In Venice the opposite was true. The state protected guilds and and blocked all efforts at mechanization. No effort was made in Venice to produce en masse with new machines. It was against the law.

Taxation was also far higher in Venice. During the entire 16th century taxes escalated on an almost yearly basis. By 1590 taxes consumed 40% of the selling price of cloths. Taxes included import duties on raw materials, taxes on manufactured goods, and export duties. English taxes by contrast were very low and English manufacturers enjoyed a huge price advantage in European markets. The state in effect had priced Venice out of competitive commerce. By 1630 the English were even beginning to dominate the market and trade in the Near East – long the province of Venetian exceptionalism. The free market and small government ethos which during the 14th and 15th centuries had made Venice great was long gone replaced by statism, protectionism, high taxes and mediocrity.

The lessons for today are not hard to establish. Governments rarely do anything well. As taxes and spending rise, so too must real inflation and the cost of goods. Goods and services become too expensive and commerce uncompetitive. The spiral of death begins. The state has a lack of revenues and decreasing resources – so it taxes, regulates and micro-manages more of the political-economy. This leads to the un-virtuous circle of reduced tax revenues; impaired commerce; and the fleeing of the most productive minds for fairer lands. The cycle has to lead to bankruptcy and failure.

Statism is always a failure. The history of Venice makes this clear. If Venice had been a properly managed state and had followed the right policies it might very well have survived at the centre of the world-trading economy for a long time. This is the signal lesson that US policy makers should learn.