"Gunpowder Empire": Should We Generalize Mark Elvin's High-Level Equilibrium Trap?: Hoisted from the Archives

The suprasecular stagnation VOX CEPR Policy Portal


Suppose that you were a rich person in Europe, and wanted to diversify and put some of your wealth not in landed estates or commercial ventures or bureaucratic office or mortgage loans, but instead simply wanted to lend it to the least-risky sovereign you could find. Paul Schmelzing has collected the data. It is very interesting.

I have only one data complaint: I think he should swap out the debt of the Italian city-state average—Genoa, Florence, and Venice—that he regards as the safest sovereign from 1300 to 1500 for the debt of Barcelona, which was as financially sophisticated and was secure under the aegis of the crown of Aragon in a way that the Italian city-states were not. None of them was sacked and defaulted from 1300 to 1500. But they could have been. And I read the higher interest rates of the late 1400s as powerful evidence that the debts of Genoa, Florence, and Venice ere not regarded as safe: they might decisively lose in the wars of the condottieri, or the Turk might come.

Do note that these interest rates are a different concept than the Piketty rate of profit on capital. These are, I think, best thought of as the profit rate minus an interest-rate discount for the safety and liquidity that the debt of the world's most prudent sovereign could offer. It thus depends not just on the then-current long-term rate of profit but also on perceived risks of other investments, risk tolerance, and the safe asset supply the sovereign is currently offering: Paul Schmelzing: The ‘Suprasecular’ Stagnation: "Growth rates have been stubbornly low since the financial crisis, and many have noted that the interest rate environment has been weakening since the 1980s. This column places recent episodes in the context of longer-term economic history, going back to the 14th century. Trends over recent decades are generally in line with a long-term ‘suprasecular’ trend of declining real rates. Negative real rates could become a more frequent phenomenon, and indeed constitute a ‘new normal’...