Key Takeaways
1. War and state-making are deeply intertwined economic processes driven by violence specialists.
For almost all of human history making war and preparing to make war – what economic historians call ‘the gift of Mars’ – has defined states and their development.
The gift of Mars. War-making and state-making have historically developed side by side, with early states emerging from successful warbands. Those with a comparative advantage in violence extracted agricultural surpluses from farmers in exchange for protection.
Institutions and incentives. Economic outcomes are heavily determined by institutions, which are expected manners of behavior and rules of society. Over time, the threat of violence has sat behind most forms of economic exchange, shaping these institutions.
A useful framework. Combining economics and history allows us to understand not just what happened, but why it happened. By analyzing the incentives of "violence specialists," we can explain seemingly irrational conflicts through a rational lens.
- Early states were built by "violence specialists" who extracted agricultural surpluses.
- Institutions shape the incentives that drive human behavior and conflict.
- War-making and state-making developed hand-in-hand throughout history.
2. The Vikings used superior technology and rational economic incentives to transition from roving to stationary bandits.
While most people would prefer to be robbed by no kind of bandit at all, given the choice, a stationary one is far preferable to a roving one.
Comparative advantages. The Vikings succeeded due to two distinct advantages: superior naval technology and a lack of Christian faith. Their lightweight, dual-propulsion longships allowed them to navigate shallow rivers and launch surprise attacks on wealthy, undefended monasteries.
The transfer problem. When European rulers began paying "Danegeld" to buy off Viking raiders, they engaged in a massive fiscal transfer. This taxation actually stimulated under-capacity medieval economies by forcing peasants to produce more agricultural surplus to pay their taxes.
Stationary bandits. Over time, roving bandits realized that settling down and taxing a population was more lucrative than repeatedly raiding them. As stationary bandits, they began providing public goods like law and order to protect their tax base.
- Dual-propulsion longships allowed surprise attacks via both oceans and rivers.
- Danegeld payments acted as a fiscal transfer that stimulated economic output.
- Roving bandits eventually transitioned into stationary bandits, laying the foundations for modern states.
3. Genghis Khan acted as the father of globalization by aligning incentives and creating a secure Eurasian trade network.
His political and economic unification of Eurasia makes him the father of globalisation.
A meritocratic empire. Genghis Khan united the nomadic tribes of the Eurasian Steppe by breaking traditional kinship ties and implementing a strict meritocracy. He pooled the region's massive horse population to create a highly mobile, world-conquering military force.
The Pax Mongolia. The resulting Mongol Empire operated like a massive protection racket, demanding tribute in exchange for peace. This political unification created a century of relative security along the Silk Road, enabling the first great era of globalization.
Microbial common market. This trade boom had vastly different long-term consequences for the two ends of Eurasia. While China was devastated by conquest, Europe enjoyed the benefits of trade without the destruction, though it eventually imported the Black Death.
- The Mongols leveraged an economy of scale by uniting disparate nomadic tribes.
- The "yam" postal system and standardized paper currency facilitated rapid trade.
- The Black Death, carried along trade routes, ultimately raised European wages by creating labor shortages.
4. Medieval rulers rationally chose inferior weapons like the crossbow over the longbow to protect internal political stability.
Choosing between the longbow and the crossbow was not simply a case of picking a weapon for the battlefield.
The longbow puzzle. The English longbow was vastly superior to the crossbow in rate of fire, range, and cost. Yet, despite repeatedly losing to English archers, rival nations like France and Scotland refused to adopt the weapon.
Internal versus external security. The longbow required years of intensive, state-mandated training and was cheap enough for any peasant to make. Rulers of politically unstable kingdoms feared that training their populace in such a lethal, easily produced weapon would invite domestic rebellion.
Revealed preferences. Rulers rationally chose the more expensive, less effective crossbow because it could only be produced by specialists and required little training. This preserved internal security at the expense of battlefield performance against external enemies.
- Longbows could fire up to six times faster than mechanical crossbows.
- English domestic stability allowed the crown to safely encourage a national culture of archery.
- Unstable French and Scottish monarchs prioritized disarming their populace over winning foreign wars.
5. The influx of New World silver counterintuitively impoverished Spain by bypassing institutional bargaining and fueling inflation.
Rather than enriching Spain, American silver helped to make it poorer.
The resource curse. The discovery of vast silver mines in the Americas seemed to make Spain the wealthiest nation in Europe. However, this sudden influx of precious metals triggered the "Price Revolution," causing a six-fold increase in prices across the continent.
Bypassing the parliament. Because the silver flowed directly to the Habsburg monarchs as personal property, they had no need to summon parliaments to raise taxes. This bypassed the institutional bargaining process that helped rivals like England and the Netherlands build state capacity.
The borrower from hell. Free from domestic financial constraints, Spanish kings engaged in endless, expensive wars of choice. Spain defaulted on its debts ten times between 1550 and 1660, ultimately leaving its domestic economy weak and uncompetitive.
- The Price Revolution caused sustained inflation that eroded real incomes across Europe.
- Representative institutions in England and the Netherlands built higher long-term borrowing capacity.
- Spain's reliance on silver diverted entrepreneurial talent away from productive domestic industries.
6. The European witch trials functioned as a form of non-price advertising in a highly competitive religious marketplace.
As strange as it may sound, the persecution of witches functioned much like a form of advertising in the battle for religious market dominance.
A contested market. The Protestant Reformation shattered the Catholic Church's monopoly on religious services in Europe. Unable to use force to exclude competitors in divided regions, both Catholic and Protestant churches turned to non-price competition.
Witch trials as marketing. Actively prosecuting and executing supposed witches served as a powerful public demonstration of a church's protective power. These highly publicized, dramatic events signaled to the local populace that the prosecuting church was best equipped to fight the devil.
Confessional battlegrounds. Data shows that witch trials were incredibly rare in religiously unified areas like Italy or Spain. Instead, they spiked dramatically in highly contested border zones like Germany and Switzerland where churches competed fiercely for followers.
- Ninety percent of all witch trials occurred during the height of the Reformation and Counter-Reformation.
- The Little Ice Age and crop failures increased the demand for scapegoats.
- Public executions and monuments served as visual advertisements for religious brands.
7. Renaissance art and culture were funded by the conspicuous consumption of wealthy mercenary captains.
Warfare, in the words of one economic historian, ‘was an economic activity that redistributed wealth in Italy in a way that did not happen elsewhere in Europe’.
The business of war. Late medieval Italy was highly urbanized, wealthy, and politically fragmented. Rather than maintaining standing armies, rich city-states like Venice and Florence hired professional mercenary companies, led by captains known as condottieri.
Incentives of the hired. The condottieri captains were motivated by profit and survival rather than patriotism. They developed a highly strategic, bloodless style of maneuver warfare designed to minimize casualties and prolong their lucrative contracts.
Conspicuous consumption. This system redistributed vast wealth from rich merchant cities to mercenary captains of humble origins. To legitimize their newly acquired social status, these captains engaged in lavish patronage of the arts, funding the masterpieces of the Renaissance.
- Condottieri captains earned fortunes that dwarfed those of traditional landowning nobles.
- Maneuver warfare was designed to avoid costly battles and protect the mercenaries' assets.
- Conspicuous consumption of art and architecture served to cement the social standing of self-made warlords.
8. Pirate ships pioneered highly democratic and egalitarian corporate governance to align crew incentives.
In an honest service there is thin commons, low wages and hard labour.
Egalitarian outlaws. Operating entirely outside the protection of state laws, pirate crews had to find ways to prevent internal conflict. They did this by drawing up written "pirate codes" that established remarkably democratic and egalitarian systems of governance.
Aligning incentives. Unlike merchant or naval vessels where captains held absolute power, pirate captains were democratically elected and could be deposed. Booty was distributed according to a flat, transparent scale, and crews even enjoyed a rudimentary form of health insurance.
The power of signaling. Pirates also mastered game theory through the use of the "Jolly Roger" flag. By cultivating a credible reputation for slaughtering those who resisted but sparing those who surrendered, they minimized the costly business of actual battle.
- Pirate captains typically received only double the share of a common sailor.
- Written codes banned gambling and regulated behavior to prevent internal disputes.
- The skull and crossbones flag acted as a powerful economic signal to encourage immediate surrender.
9. Britain's financial revolution and institutional credibility allowed it to out-borrow and out-fight larger rivals.
Britain’s victory over France was achieved as much through financial strength as raw military power.
The financial revolution. Following the Glorious Revolution of 1688, the British Parliament established permanent control over the nation's finances. This institutional change separated the personal debts of the monarch from the newly created "national debt."
Credibility and low rates. Because lenders knew that Parliament had the authority and willingness to raise taxes to service its debts, Britain's borrowing costs plummeted. While absolutist France struggled to borrow at high interest rates, Britain could borrow massive sums at just three percent.
The fourth arm of defense. This financial credibility acted as a massive force multiplier during the global conflicts of the eighteenth century. It allowed Britain to maintain a dominant navy, subsidize continental allies, and ultimately conquer vast territories like Canada and India.
- The Bank of England was chartered in 1694 specifically to fund the war against France.
- Parliamentary oversight of spending gave lenders unprecedented confidence in British government bonds.
- Financial strength allowed Britain to consistently punch above its demographic weight.
10. Total war shifted the economics of conflict from battlefield tactics to industrial production and resource allocation.
In the long run, getting them right mattered more to the outcome of the war than what actually happened on the battlefield.
The scale of total war. The world wars of the twentieth century transformed warfare into a contest of industrial output. Belligerent states were forced to devote up to fifty to seventy percent of their entire national GDP directly to the war effort.
The planning challenge. Success in total war required managing complex domestic trade-offs between military manpower and industrial production. Governments had to implement command economies to allocate scarce raw materials, labor, and food without triggering domestic collapse.
Economic warfare. Both sides actively sought to destroy the enemy's productive capacity through blockades and strategic bombing. While modern economies proved remarkably resilient and capable of substituting scarce resources, the side with the greater raw industrial weight ultimately triumphed.
- The German general staff failed by seeking purely military solutions to grand economic problems.
- The United States functioned as the "arsenal of democracy," supplying its allies through Lend-Lease.
- Modern economic warfare proved to be a slow, cumulative process of attrition rather than a rapid knockout blow.
