Why Study History?
Modern (theoretical) economics has failed us.
By following pied-piper theorists like Milton Friedman, or Alan Greenspan, we’ve abandoned empiricism (the use of evidence and historical analogical reasoning) for Platonism (theory-first, model-driven analysis).
We’ve exchanged robustness for fragility, and predictive power for coin-tosses. There’s a reason economists never get it right.
To fix this, the National Economics Editorial will publish an piece of corrective history every Friday.
We will explore what economic, and trade, policies worked best throughout history, using successful states as case studies.
This week we’ll look at the economic history of the Venice, from the Medieval to the Baroque period.
An Economic History Of Venice: City of Trade
Venice’s early success came down to three factors: location, location, location.
Why was its location so important?
- Venice was built on one of the old Roman trade routes that linked Europe to the Orient. This gave them prime access to the lucrative spice trade.
- Venice was nestled in a snug lagoon at the head of the Adriatic sea, which protected it from the scourge of Islamic piracy that ravaged Christendom between 700 and 1100 AD.
- The Port of Venice was the fastest route between France and the Holy Land. This third reason is how Venice made its first mark.
Between 950 and 1150 Catholic Europe underwent a religious revival. This popularized, among other things, pilgrimages.
People went on pilgrimages for many reasons. Some sought spiritual awakening. Others wanted to be healed of their sicknesses. And many just wanted to travel and see the world. Some stayed close to home. Some travelled to the Holy Land to see Jerusalem itself.
The one thing they all had in common was that they needed to get to where they were going. Venice helped them get there.
Increased pilgrim traffic to the Holy Land gave Venice their first taste of gold.
But Venetians weren’t content with being Medieval Europe’s cruise line. They reinvested their profits into shipping, greatly expanding their merchant fleet and navy.
This set them up perfectly to cash in during the Crusades. Venetian ships carried most of the crusaders to the East. By 1418 Venice had acquired a monopoly in Mediterranean pilgrim transport, and was pushing hard for a monopoly in the lucrative spice trade as well.
The Spice Monopoly & The Venetian Arsenal
Together, pilgrims and spice supported Venice’s booming economy, and gave rise to a host of ancillary industries.
Chief among them was shipbuilding.
Venice commanded such an enormous navy that in 1423 Tommaso Mocenigo, the Doge of Venice, boasted about it on his deathbed: there were over 3,000 small transports, 300 trading cogs, and 45 war galleys. In total Venice employed some 36,000 sailors. This naval power allowed Venice to service its vast clientele, and to defend its hold—they stamped out competition through force of arms.
Not only did it take an enormous amount of manpower to sail the ships, it took an equally impressive amount to build them. At its height Venice’s shipyard, called the Venetian Arsenal, employed ~40,000 people who made everything from the ships themselves to gunpowder, rope, sails, and anything else their ships required.
Big as it was, what made it truly impressive was its efficiency.
In the 1350s, the Venetians invented a new galley design that allowed the ship’s frame to be built independently of the hull. This meant that multiple ships could be in different stages of production at once, and thus multiple gangs of specialists could work simultaneously on different vessels.
This did for shipbuilding what the assembly line did for automobiles—it increased productivity and decreased costs. In fact, the Venetian arsenal could build a galley a day, as opposed to one every few weeks (even months), which was typical for the period.
Needless to say, this gave the Venetians an enormous cost advantage over their competitors (another Italian city state called Genoa). This snowballed into greater trade dominance, which again boosted demand for ships.
The cycle became self-fueling, and Venice became richer than Croesus and Midas combined.
How The City Of Venice Became Rich
With that in mind, let’s boil it down to its key points. How did Venice get rich?
- It’s location allowed it access to the pilgrim and spice trades.
- This access generated wealth, which stimulated demand for more ships.
- Venice invented a new ship design, which greatly improved their shipbuilding productivity. This made them much cheaper.
- This productivity reinforced their monopolies, which they jealously defended through force of arms.
Also note how the pilgrim and spice trades anchored the shipbuilding industry. This, in turn, anchored a host of other industries, from rope-making to sail-weaving, from munitions factories to bakeries.
Importantly, not all industries were equally valuable. Some depended upon others. For example, without shipbuilding, there would be no need for textile weavers to make cloth. Venice’s key industries supported everything else, like a how a trunk supports the branches of a tree.
No trunk, no branches.
Venetian Mercantilism: The Key To Venice’s Economic Growth
The Venetians knew this. To retain their key industries, they did two things.
1. They protected their monopoly in the pilgrim, and spice trade with their naval might. They were willing to wage war to protect their economic interests, and defend their key industries from foreign competition.
It’s why they fought the Ottoman Empire, occupied the Dalmatian Coast, and conquered a host of Aegean islands. They knew that if they lost their monopoly, everything predicated upon it would suffer.
2. They adopted highly protectionist trade policies, that sheltered Venetian merchants and industries from foreign competition. They did this by outright prohibiting foreign merchants, banning imports, and forcing all shipping traffic to flow through Venice.
For example, if a boatload of spice from Constantinople was destined for Bruges, the ship was forced to stop in Venice for provisioning, inspection, or transfer—even if it was more efficient to proceed directly to the final destination.
These measures forced Venice to be economically independent (if she couldn’t import it, she had to make it), and ensured it was the center of economic activity. This may seem counter-intuitive, but it worked.
Venice was the richest city in Europe for centuries. It only declined when its trade routes dried up due to the advent of ocean-going shipping in the post-Columbian era (as they feared).
A Venetian merchant observed the success of their strategy, stating that:
Nothing is better to increase and enrich the condition of our city than to give all liberty and occasion that commodities of our city be brought here and procured here rather than elsewhere, because this results in advantage both to the state and to private persons.
Venetian policy put Venice first, above its customers, rivals, and even its citizen’s individual interests. They realized that if Venice succeeded, individual success would follow—a rising tide raises all boats.
Although trade made Venice rich, it was not free trade. The same was true in early America.
In fact, the most successful trade regime throughout history has been that of mercantilism, or economic nationalism. No doubt about it.
Venice became rich by creating monopolies, excluding rivals, and protecting its industry from foreign competition. This was a time-tested winning formula. It worked for centuries.
Trade generates wealth, but only when it serves the national interest.
Crowley, Roger. City of Fortune. London: Bloomsbury House, 2011.
Dolinsky, Anton. “Inventory Management History Part Three: Venetian Arsenal- Ahead of Their Time.” Almyta Systems, Accessed August 2, 2016. http://www.almyta.com/Inventory_Management_History_3.asp
Kaon Consulting. “The Venetian Arsenal: the World’s first assembly line.” Accessed August 2, 2016. http://www.kaon.com.au/index.php?page=venetian-arsenal
Reinert, Eric. How Rich Countries got Rich and Why Poor Countries Stay Poor. New York: Carroll & Graf, 2007.