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Saturday, 22 May 2010

Capitalism Rising: The Lessons of Lepanto

The First Shot

The 7th October 1571 is a date that ought to be engraved on the hearts of free-marketeers everywhere. The naval Battle of Lepanto, between the Ottoman Empire and the Western Holy Alliance, marks the first occasion on which a military battle was won not by weight of arms or tactical cunning but by investment banking.

Arguably the eventual triumph of capitalism was inevitable anyway, but history doesn’t run on tramlines. Had the nascent capitalist powers of the West lost that battle there may never have been the full flourishing of the Enlightenment. An all-powerful and mighty empire took on a fragmented and vaguely farcical alliance of emerging semi-states and lost, because the other side had the best financiers.

Good Orcs and Evil Elves

These lessons are obscured by religious overtones as the battle lines are simplistically drawn between the Christian West and Muslim East, often with an undercurrent suggesting that the West was good and the East was evil, rather like a real-life Tolkein fable. The truth is rather more mixed, but it’s not entirely unreasonable to view the Christian side as bunch of maladjusted and vicious hobbits rather than a set of noble and honourable elves.

The Muslim Ottoman Empire was a centre of religious tolerance and the accumulated wisdom of centuries. When the Spanish and Portuguese evicted their Jewish population in the late fifteenth century they were welcomed by the Ottoman Sultan allegedly exclaiming of the Spanish King: "Ye call Ferdinand a wise king he who makes his land poor and ours rich!"

While Europe had descended into a thousand years of anarchy following the collapse of the Roman Empire, the Islamic world became a centre for advances in science, medicine, astronomy, engineering, mathematics, agriculture and even economics. The influential Arabic philosopher, historian and palace intriguer Ibn Khaldun came up with the idea of the Laffer curve – that tax revenues first rise and then decline with rising tax rates – approximately 700 years before western economists.

Istanbul, Constantinople

Meanwhile, the Christian powers of the West were somewhat conflicted, to say the least. In 1203 an army of Crusaders, on the way to the Holy Land in their latest attempt to retake Jerusalem, decided to divert and conquer Constantinople, the capital of the Eastern Christian Roman Empire, instead. The ensuing destruction crippled the city and laid the way for its eventual capture by the Ottomans in 1453.

Elsewhere, across the Catholic countries of Southern Europe the Inquisition was busily torturing people it suspected of heretical beliefs such as thinking for themselves while other Christian communities were happily using women as fuel for bonfires more or less on the say-so of anyone with a grudge. So it’s not entirely clear who exactly were the elves and who were the orcs in this particular tale.

The Battle of Lepanto

The battle itself ranged a motley alliance of western states against the Ottoman navy. The fleet was led by Venice, supported by Spain and the Vatican plus a few other ships from other sources carrying 13,000 sailors and nearly 28,000 troops. The Ottoman forces were roughly numerically equal but the Western fleet had an advantage – six galleasses, large galleys so high as to be virtually unboardable, and carrying a formidable array of artillery. These ships were significant in the fighting from its earliest moments when the Ottomans, mistaking them for merchant supply vessels, attacked them and promptly lost 80 of their ships in that single engagement.

By the end of the battle 80% of the Ottoman fleet had been sunk and over 28,000 of their men were either dead or captured. The net manpower loss to the Holy League forces was zero, when freed slaves were taken into account: around 50 ships were lost, but over 100 had been captured. It was an overwhelming victory for the Western forces. Typically, however, the victors then proceeded to snatch defeat from the jaws of victory by squabbling amongst themselves and lost the opportunity to follow-up their advantage. Despite this, however, the Ottoman mastery of the Mediterranean was lost and not regained: never again did the Ottomans seriously threaten the security of the Christian West.

Putting Capital To Use

So much for the basic facts. Behind this lies an intricate tale of finance and innovation which, typically, we’ll sum up simplistically: the Venetian Republic was able to prosecute and win the war against the Ottomans because of capitalism. In the end they were able to raise more money and put it to better use through modern financial systems than their opponents.

Perhaps one of the more telling anecdotes of the battle is this from William Bernstein in The Birth of Plenty about the Ottoman Admiral, Ali Pasha:
"At Lepanto, Ali Pasha lost more than the battle and his life; he lost his entire family fortune as well. Like all wealthy Turks, he kept his liquid assets close to his person. Holy League sailors who boarded [his ship] found 150,000 gold pieces in Ali Pasha's treasure chest".
The Ottomans had no better system of protecting their capital than carrying it around with them: owing everything to their Sultan and without a effective means of deploying capital the entire empire was strapped for investment as the wealthy either exported their money to Europe where it could be profitably invested or simply buried it under the ground. In the latter case its value to the empire was minimal, in the former it actually counted against it.

The Rise of the Italian City States

Meanwhile the Venetians were at the heart of the beginning of the great capitalist revolution. The Italian city states of Venice and Genoa were where modern finance began, long before the Dutch appropriated their methods. Fratianni and Spinelli record that:
“... the two maritime city-states had developed many of the features that were to be found later on in the Netherlands, England and the United States”
Critical aspects of the city states' financial systems included forward committal of taxation to fund public debt. Just as the Dutch later discovered, the effect on interest rates of a credible state guarantee of being repaid is remarkable and both states were able to raise debt to fund civic improvements, innovation – and wars – at a much lower rate than less reliable borrowers. In particular the Venetians were able to deploy this cheap money to use the latest technological innovations in their prosecution of the Ottoman conflict.

Under the watchful eye of the Venetian government entrepreneurs were able to raise capital to develop specialised production techniques allowing the complete assembly and launching of a galley in a single hour. The technologically advanced ships of the western alliance were faster and more manoeuvrable than those of their opponents and overwhelmingly better armed. Despite the rapid rebuilding of the Ottoman fleet after Lepanto the dizzying economic expansion of Western Europe was underway: within twenty years of the battle a handful of British warships would boast more iron cannon than the entire Ottoman navy.

The Least Worst System

The entwining of capitalist systems, allowing people to safely invest their money productively, with an environment supportive of scientific discovery and engineering advances, was set to engender the spectacular economic growth that makes the societies we live in today what they are. Lepanto was the first time this mattered militarily but it was far from the last. Britain defeated Bonaparte as much in the banking halls as on the battlefield, Germany and Japan were condemned to defeat when the capitalist machine of the United States entered the Second World War against them and the Soviet Union eventually imploded under the strain of an economic arms race it couldn’t hope to win.

For all the hand-wringing about capitalism we’re experiencing today it still remains the case that it has pulled more people out of nasty, brutish and short lives than any other system. Whenever it's attacked, it mutates and envelops its opponents: for all its problems it’s still the worst system, apart from all the others. And on October 7th 1571 the world saw what it could do, close up and personal, for the very first time.


Related Articles: Sir HughInvents the Share and Gets Lost, Going Dutch, the Benefits of Sound Money, From the Railroad to the Internet and Back Again

3 comments:

DIY Investor said...

Interesting. Bernstein's book is on my reading list and your overview moved it up a couple of notches.
The statement
"...and without a effective means of deploying capital the entire empire was strapped for investment...", brought to mind the book by economist Hernando DeSoto "The Mystery of Capital" where he presents evidence on the wealth of 3rd world countries (greater than supposed) and their inability to deploy it due to an absence of a system of property rights. The role of property rights in the economic system is in my opinion greatly under appreciated.

DIY Investor said...

Off post comment: You and your readers will find the following of interest:


http://www.economistsdoitwithmodels.com/2010/05/25/reader-question-how-do-i-become-a-behavioral-economics-nerd/

Anonymous said...

"never again did the Ottomans seriously threaten the security of the Christian West" How about 1683? http://en.wikipedia.org/wiki/Battle_of_Vienna