Markets and Economic Growth in Ancient Times

Ever since John Maynard Keynes famously wrote in his essay, The Economic Possibilities of our Grandchildren,

'From the earliest times of which he have record-back, say, to two thousand years before Christ - down to the beginning of the eighteenth century, there was no very great change in the standard of life of the average man living in the civilised centres of the earth.'

Economists interested in economic growth have focused on the comparatively recent past. The implication they took from Keynes, and later from Simon Kuznets, who first came up with long run GDP tables, was that the period before the industrial revolution was of historic, rather than economic interest.  Most economists assume that because per capita income was on average flat for the entire world before 1800, (see this) it must have been flat for each region of the world. But this is not necessarily the case. Living standards could fluctuation considerably within the pre-industrial world.

In a similar spirit, Arnold Kling over at Econlog maintains here, here, and  here that pre-industrial economies were plunder economies based on violance rather than on market exchange. He writes

' I do not believe that historically there were enough people with the intelligence, discipline, and capacity for trust to create a market economy.

The archaelogists can find markets in the ruins of great empires. But that does not mean that people routinely operated in a market economy. Those markets may have existed to allow imperialists to exchange goods plundered during conquests'

As Kling notes, this was also the view of Karl Polyani expressed in his major work, The Great Transformation.  The influence of Polyani is one reason why many people including some economists believe that market based exchange is a modern phenomenon.  This view is utterly at odds however with the historical research of the past fifty years.  Below the fold I argue that earlier societies (focusing on ancient Rome) did experience economic growth - albeit at rates that seem very slow compared to modern growth) and that the economics of pre-industrial societies remains relevent today.

Contra-Polyani, I believe that ancient empires like Rome were complex market economies which experienced Smithian growth based upon falling transactions costs and increases in specialization and the division of labour.

To support this claim I cited the archaeological evidence Bryan-Ward Perkins describes in The Fall of Rome: And the End of Civlisation that large volumes of manufactured goods, particularly vases and pots were transported in all directions across the Mediterranean for mass consumption. Older views of the Roman empire as a customary, slave based economy associated with Moses Findley have been largely overturned (see this article A Market Economy in the Early Roman Empire or this one by Keith Hopkins Taxes and Trade in the Roman Empire, 200 B.C - 400 AD).

Kling however is  not persuaded by archaeological evidence or by evidence of urbanization.  The criteria he specifies for a pre-modern economy to be regarded as a market economy is,

'For me, the key question is the production/plunder ratio. If it was as low under the Roman, Islamic, Incan or Mongol empires as I believe it to be, then there was no modern market economy during those times. On the other hand, if the production/plunder ratio was fairly high, then it is reasonable to interpret those hegemonies as market economies.'

This ratio cannot be directly measured. But let me give an indication of why I think it would be very high for an economy like the Roman one (I believe the say to be true of the Abbasid caliphate as well as numerous other pre-industrial empire). 

First, the volume of goods traded is significant. Almost all societies have some trade but in many basic societies, the main trade is a luxury commerce or it is involves trading for some valuable resource that is located outside of the political control of the polity.  This would often correspond to Kling's definition of a plunder economy since the elites of these societies typically used the plunder they have captured through war or intimidation to buy status goods such as gold, spices, gems, or silks that they would not otherwise have access to.  The same thing occured when an important resource like iron became traded in first millennia B.C. But in the great agrarian empires such as Rome, there was a large volume of trade in ordinary goods. Grain, wine, olive oil, ceramics,  were traded on a tremenous scale.  They were not plundered and then redistributed as Kling supposed - rather, they were in many cases produced for the market.

Second, according to Peter Temin's recent article the Roman empire had a functioning labour market. Robert Allen has done a rough calculation of real wages in the Roman empire in 301 based upon the price edits of the Emperor Diocletian here which indicates that Roman living standards were comparable to those Southern and Eastern Europe in the eighteenth century. Since the Rome empire in 301 had just undergone the crisis of the third century this estimate puts a lower bound on Roman living standards in the early empire.

Temin also provides convincing evidence that merchants had access to sophisticated financial instruments in another article. In plunder based economies there is no need for financial instruments of any kind since goods are acquired through coercion and labour is typically bonded or enslaved.

Third, the high level of urbanization recorded in the ancient Roman empire testifies to a considerable agricultural surplus. In addition to Rome - a city of about 1 million in 50 AD entirely dependent on grain imported from Egypt, there were a number of other cities which were extremely large for pre-industrial standards. Alexandria for instance may have had 600,000 inhabitants at its height making it about as large or larger than any European city in 1800 apart from London. Carthage and Antioch had 200,000 - 300,000 inhabitants while Ephesus, Smyrna, and Pergamon are all thought to have had populations exceeding 100,000 in the 2nd C. AD. There were dozens of cities with populations around 50,000.

Cities of this size supported a complex division of labour dependent on market exchange. Each city was at the heart of its own complex regional economy. Such cities were only possible because the Roman empire greatly reduced transaction costs by creating a Mediterranean wide free-trade zone free from piracy and war. The rise and fall of Mediterranean shipping is best illustrated by the following graph taken from the previously cited paper by Hopkins who notes that in the early Roman empire, 'there was more sea-borne trade in the Mediterranean than ever before, and more than there was for the
next thousand years.' (p 106).

To conclude, I hope I have shown that the Roman economy cannot be dismissed as a plunder based economy. What is notable about the Roman economy however, was that there was little technological innovation and what innovation did occur, was typically not harnessed for profit-making purposes and that as a result the Roman economy never made the transition to modern rates of economic growth.  Why this is the case, despite `peace, justice, and easy taxes' is a matter for another post.

Comments

[Anders G.]

In most Norwegian lexicons the stock market is dated back to the 15th or the 16th century. Then when I read foreign literature I see the stock market dated back to the Roman Empire. I wonder if there is a difference between our present stock market and the stock market back in the Roman Empire. Can someone tell me ?