When we learn about Mercantilism in History of Economic Thought classes, we generally tend to associate this intellectual movement with policy makers like Thomas Mun and Jean Colbert and with ideas like the monetary balance of payments and trade protectionism. However, as Eric Roll reminds us in his "A History of Economic Thought," Mercantilism was far from being a homogeneous set of ideas and thinkers. Each Nation-State in Europe produced different forms of mercantilist thought, specific to its economic needs.
Furthermore, what we see in the texts of mercantilist authors are often contradictory opinions among themselves about what the course of economic policy should be; especially related to the regulation of interest rates and the need for the formal establishment of monopolies by the so-called chartered companies. And perhaps no country produced such an unusual variety of Mercantilism as the Holy Roman Empire.
In this entirely strange (and often forgotten) country , unlike what occurred in France and England, a non-utilitarian and Aristotelian form of economic doctrine known as Cameralism was developed, which would not only mark generations of German and Austrian economic thinkers until the beginning of the 20th century, but also influence the way we conceive today the so-called "German public efficiency" and the very concept of optimal bureaucracy. In this text, I will explore this economic doctrine forgotten in the sands of history.
Cameralism emerged in the context of the Thirty Years' War of 1618–1648. In this conflict, the German states composing the Holy Roman Empire were totally devastated. The total population of the Empire fell from 21 million to 13 million. The population of Württemberg fell from 400,000 to 50,000. The Palatinate lost more than 90% of its population. Three million people in Bohemia were reduced to 800,000. Berlin and Colmar lost half of their populations, and Augsburg lost about 30,000 people. The human factor became a limited resource within the Empire.
Furthermore, with the Peace of Westphalia, German territory was divided into more than 300 sovereign political units with various restrictions on access to the sea, access to natural resources, and were under constant international pressure exerted by their unified and centralized neighbors, such as France, which did not want a unified Germany as a threat on its borders.
There were constant political disputes among the member states of the Empire as a result of disagreements caused by the directions of the Protestant Reformation. Within this scenario and considering the ideological division created by the Reformation, German princes found themselves in the difficult task of rebuilding their states with limited territories and resources, especially human capital.
They did not have the vast and rich colonial empires of Portugal or Spain, they did not have the fertile lands of France, they did not have a large navy like England or the vast natural resources of Russia. Since their lands were extremely fragmented and their political units were diminutive price takers in international trade, unable to influence the terms of trade like the great mercantilist empires with their colonies, the focus of the first German economic thinkers was the survival of their political entities. This survival depended on the utilization of their most precious economic factor: Labor.
Taking a endogenous growth model into account, the German principalities would require productivity from their limited military capacity, economic development, technological innovation, manufacturing productivity, and population growth.
Most of the major European nations of the period, such as France, Spain, and Great Britain, adopted as economic policy the series of measures that would come to be known as Mercantilism. In the eyes of the first European writers on finance and economics, the economic growth of a nation would be a product of the surplus difference between exports and imports, the trade balance, and the measure of wealth would be given by a nation's public accounts, especially its balance of payments in terms of gold.
To generate this growth, the state should promote the competitiveness of its exports and control the balance of payments account, minimizing gold outflows and maximizing gold inflows. This thinking was the product both of the accounting mindset of the oligarchies that controlled these states [1], and of a need for monetary policy, since gold outflows could cause monetary contractions and a shortening of the economic cycle.
But in the German states, a rather peculiar type of mercantilism developed due to competition among the political units of the Holy Roman Empire. In the great mercantilist empires, there was a great incentive for rent-seeking. Given their large unitary territories and administrative centralization, there was considerable immobility of resources along with large differences in organization costs between interest groups. As a result, there was a greater incentive for rent-seeking activity than for productive activity given the relative profitability of the former.
In the Holy Roman Empire, however, resources were extremely mobile and organization costs varied little between interest groups, so there was almost perfect competition between them. The German states existed in a competitive environment, where the scope of taxation was restricted both by ancient feudal institutions (derived from Germanic law) and by the extreme geographical fragmentation of the territory. With more than 300 sovereign states with common language, there was easy mobilization of people and capital between political units when any negative change occurred, such as a tax increase [2].
It would be suicide for a diminutive political unit, like the states of the Holy Roman Empire, to engage in protectionist policies like those of the great mercantilist empires.
Unlike large political units that can depend on the breadth of their consumer market and their capital market to sustain themselves, albeit inefficiently, a tiny political unit, such as a city-state, would not be able to sustain itself if it applied a policy of economic isolation. According to Alesina and Wacziarg (1998), there is a strong relationship between the geographical size of a political unit (delimited by its political borders), the size of its government, and its level of trade liberalization.
To the extent that the size of a national market influences the productivity of an economy (through economies of scale from integration into a large common market), "large" countries, like the mercantilist empires, can offset the efficiency costs of protectionist trade policies by parasitizing their large internal economy. However, a diminutive political unit, like a German principality, does not have a large internal market to compensate for the losses suffered from protectionist measures; so the rational choice for this political unit is not to adopt such measures on the same scale as the large empires.
Given this chaotic political reality, cameralism emerged as the central doctrine of public administration in the Protestant nations of the Holy Roman Empire when the Universities of Halle and Frankfurt created the chair "Oeconomia, Policey und Kammer-Sachen" to train their bureaucratic corps, although the content that would be taught there had already been outlined in the works "Teutscher Fürsten Stat" by Ludwig von Seckendorff and "Fürstliche Schatzund Rentkammer" by Wilhelm von Schöder.
Cameralism emerged as an effort to generate economic growth and provide the sovereign prince with resources for the defense of his domain in this environment of political decentralization and low cost of factor mobility across borders, limiting the adoption of extractive economic policies, such as high taxation or trade protectionism.
To address these limitations, cameralists took the mercantilist view of seeing the state as a large business beyond the accounting paradigm. Although rulers had little power over which policies to adopt, they had property rights over various resources (such as canals, roads, manufactures, etc.). Cameralist public finance treated state lands and enterprises as the main source of state revenue. The state model of cameralist councilors was that of a private company.
To survive, the prince had to take care of his forests, build mines, or open businesses (such as breweries and glassworks) without placing barriers to competition and without subsidizing himself; since this could bring costs to the royal treasury that would not be offset by tax extraction from the internal market. The principles of cameralism essentially made kings and princes sovereign CEOs, with their businesses being state operations.
For them, public and private administration were intertwined. The political domain was no different from a property, a "home." Resources, as in a family or firm, were limited and should be managed as efficiently as possible to promote both the Protestant moral value of "work well done" and the financial value of properties.
This view of the nature of principalities brings cameralism very close to the notion of proprietarian monarchy, as formulated by Hoppe (2001).
According to Hoppe, a proprietarian monarchy is a state regime governed by private governmental property. What characterizes private governmental property is the fact that the monopoly of legitimate use is owned by an individual who personifies the state; a king or a prince. The resources extracted by state mechanisms belong to this individual, and he has the right to use and allocate his property freely. This contrasts with what Hoppe calls public governmental property, which predominates in liberal democracies. In public governmental property, the right to this property belongs to the collective subject represented by the republic (the "people"). However, due to the coordination problem of taking into account all preferences for the use of the resources of this property, it tends to be managed by a specific agent, an administrator. In liberal democracies, these administrators are represented by public officials and representative political agents. According to Hoppe, the public form of governmental property is inefficient because administrators have no incentive to maximize its wealth but rather to extract as much as possible.
Administrators are responsible for overseeing the various levels of the corporation's management process and, because they are directly linked to each stage of the process, they have more information about the company than those at the highest points of the corporate hierarchy. However, administrators do not have rights to the profits originating from productivity improvements in the corporation; this right belongs to its shareholders. Thus, administrators are not able to appropriate the profits they create. To compensate for this, they use means to raise the monitoring cost for shareholders and disguise inefficient and illegitimate appropriation of corporate profits: great bureaucratic complexity, a dispersed body of employees, longer production processes, etc.
However, Hoppe's formulation of an optimal maximizing monarch is not entirely correct. Olson (1993) had already leveled a harsh criticism at the possibility of an efficient absolute monarch. Although a king has incentives to care for his private property (his kingdom), his incentives, his personal wealth, and the social welfare function may diverge. A monarch will only provide public goods and efficient institutions to the extent that this action provides private marginal benefits superior to the costs of the action. He has little incentive to care about divergences between social marginal benefits and their costs, unless such has the consequence of motivating subjects to depose him. Furthermore, the king, as wealth maximizer, has an incentive to treat his kingdom as investment.
Moreover, this may seem positive, since he will have an incentive to maximize its long-term value, but this disregards the nature of the returns on this investment. The expected returns on the part of the monarch translate into future tax gains he will have, so he has an incentive to tax economic agents in order to extract the gains from an income increase derived from a period of economic growth. Considering that this is done in such a way that agents form an expectation that they will be taxed in equal proportion to the increase in their earnings, this can inhibit long-term economic growth. Hoppe's model fails and generate economic backwardness.
However, such criticism considers only the internal incentives a monarch would have. Hoppe's formulation takes into account that such a monarch will be inserted in a scenario of extreme political fragmentation. Competition from external political units can create the correct incentives to inhibit the monarch's extractive behavior. As Qian and Weingast (1997) put it, even if a ruler does not have incentives within his political unit to adopt optimal policies, external incentives can modify his behavior through competition between political units [3].
A concrete example of this is given by federalist systems. Just as competition in the market creates incentives for administrators to reflect the interests of a company's shareholders, competition between local governments limits the predatory behavior of rulers. Competition between political units for mobile resources, such as people, prevents rulers from adopting debilitating policies and ensures that only those measures preferred by their citizens are adopted.
Politicians in centralized states may find it easy to subsidize inefficient companies, carry out protectionist policies, and have large fiscal deficits. In a confederate system, however, mobile resources, the possibility of exit, raise the opportunity costs for inefficient measures. Since the outflow of resources will mean a loss of revenue, competition ends up serving as an exogenous shock for improving internal political governance.
This is the case of the German principalities. Cameralism advocated that the citizens of a political unit be seen as clients and not as means of the state. This almost Kantian influence in the writings of German authors is clear in the concept of cammerwesen (cameral governance), with this serving as a source for the negation of Machiavellian and general utilitarian influence in public administration.
Cameralism is generally placed, within the social sciences, as a primitive branch of economics. The focus of the early cameralists on “Oeconomie” (individual happiness) and “Polizey” (general happiness), in the view of modern economists, characterizes them as primitive investigators of fundamental economic problems; generally being placed alongside mercantilists. But this would be to identify these terms with their modern valuations and not with the meanings they had when cameralism was conceived.
For cameralists, “Polizey” has an Aristotelian sense and not a utilitarian one as for modern economists. The political unit is not organized solely for the promotion of well-being, but for a series of other values (civility, freedom, beauty, etc.) and is organized around an order regulated in a non-legalistic way; by the need for the formation of the polis by the social animal. “Oeconomie,” on the other hand, meant rather the normative form of administration of this order, following the inviolability of individuals, than a concern with the individual sphere. Cameralist economic policy preached that the interests of the ruler and the subject were linked by a thread of mutual self-interest.
This created an optimal institutional balance. States facing problems with lack of population could improve their economic conditions by making productivity-enhancing reforms and attracting people from other political units to their territory. The ruler gained new taxpayers and the people better government and living conditions. Even with advances in tax extraction technologies, such as the invention of income tax or inflationary seigniorage, cameralist analysis focused mostly on the limits of taxation.
They argued for prudence in taxes and elaborated various rules to promote the interests of princes. These rules can be described as the ideas that: tax rates should be low, tax revenue should be used for urgent and beneficial purposes, and taxes should be easily administered. The principle that taxes should be low so as not to discourage economic activity or encourage the flight of physical and human capital to other units.
The principle of urgent purposes developed by cameralists stated that the burden of taxes could not exceed the cost they were willing to bear for services. Therefore, taxes should promote well-being only to the same level as their efficiency cost. Cameralist views that there should be limits to the fiscal powers of the state were quite similar to those of classical liberal economists, but went beyond them. While liberals modeled limits on how far the state could finance itself with taxes, the ideal cameralist state would not levy any form of tribute.
The revenues of an ideal cameralist state would come solely from the properties of the princes. The cameralist author and Prussian finance minister, Johann Gottlob von Justi, created the important concept of “finanzwissenschaft,” according to which the ruler's tax base could not disturb the order of the political unit; that is, it could not be used by means that violated the legal institutions of society, such as the church, property, or the individual integrity of citizens.
For this reason, Von Justi considered seigniorage an immoral and illusory form of state wealth, as it violated the principles of the contract between citizen and ruler established in the monetary order. The accumulation of metals was considered a curse that only shrank a nation's growth potential, as it turned its citizens into mere traders of cheap objects (without added value) and caused ruinous price increases [4] that ultimately worsened the balance of payments of a political unit.
Cameralists believed that wealth was a product of the productivity and industriousness of a people, their human capital seen as skilled workers. Von Justi's own life can serve as an example of the rational coldness of cameralist rulers. For part of his life, he was Frederick II's personal financial advisor. The advisor proposed to Frederick to use funds from the royal treasury for the construction of a steel complex in Neumark to end Prussian dependence on imported steel from Sweden and Saxony. However, in the end, the enterprise was a failure and, as punishment, Frederick personally sent Von Justi to the Küstrin prison for crimes of maladministration against the Prussian treasury. Something that can be theorized from this episode is that this rigor of the Prussian monarchs towards their bureaucracy is possibly the origin of its legendary efficiency.
Something that can be theorized from this episode is that this rigor of the Prussian monarchs towards their bureaucracy is possibly the origin of its legendary efficiency. The Prussian bureaucracy, the maximum historical example of Weberian-type bureaucracy, may have originated from extreme negative incentives from monarchs wanting to increase the efficiency of their kingdom. For these reasons Wagner (2011), analyzing the episode of cameralism under the analytical prism of Public Choice, states that cameralism is perhaps a unique case of validity of the model of a benevolent despot [5].
However, this system met its end with the Napoleonic Wars.
The French Empire that was born after the French Revolution invaded the neighboring Germanic countries in response to the aggressions suffered by the forces of the League (Prussia, Russia, Austria, Germanic principalities, and Great Britain), which sought to nullify the revolution and prevent its ideals from spreading to other European monarchies. After the Battle of Austerlitz in 1805, the various German states were incorporated into the French Empire, and the Holy Roman Empire formally came to an end.
After Napoleon's defeat at the Battle of Waterloo and the end of the First French Empire, the victorious nations and France, represented by its Machiavellian ambassador Charles de Talleyrand, met at the Congress of Vienna in 1814 to discuss the re-establishment of European borders that had been erased by the French advance. The territories that once formed the Holy Roman Empire were largely absorbed by the victorious monarchies of Prussia and the Austrian Empire. The States that were not absorbed, such as the Kingdom of Bavaria, were gathered into a union of States known as the Confederation of the Rhine. The idea was that the same fragmentation as before would be maintained to prevent the formation of both Prussia and Austria as hegemonic powers. However, this balance was not maintained. Internal destabilizing forces would lead to the complete end of the system. Even after Napoleon's defeat at Waterloo, Europe would be haunted by the ghost of the French Revolution.
Even after the political defeat of the revolution by the coalition forces, revolutionary ideas continued to be sown across the continent by different intellectuals. From the discourse of liberation of peoples and the cry for an end to aristocracy, mixed with the multi-ethnic context of many European States (such as the Germanic Confederation and the Austrian Empire), there was a transformation into ideas of "national liberation"; where oppressed peoples (Czechs, Hungarians, Serbs, Germans, etc.) would fight for the independence of their nations against the "oppressors" (notably the Austrians). From these ideas of affirming the concept of nation, together with French revolutionary political radicalism, arose the ideology that historians call "liberal nationalism."
Thanks to this set of factors, the German principalities were unified in 1871, and Germany was born with the colors of the House of Hohenzollern. However, a small reminder of this era still remains alive today: Liechtenstein. The small principality was founded in 1699 by Prince Johann-Adam von Liechtenstein, who bought the counties of Schellenberg and Vaduz and unified them into his own principality, which then integrated as a member of the Holy Roman Empire. The principality was not invaded by Napoleon, who considered the reigning prince Johann Joseph I a respectable military leader and maintained the country's sovereignty. Even with the process of German unification and the various wars that devastated German territory since then, Liechtenstein has maintained its sovereignty. Notably, Hans Adams (2012) outlines a clear cameralist instruction manual for public managers in the 21st Century.
Furthermore, it should be noted that the House of Liechtenstein is the richest royal family in Europe, with a fortune of 300 billion dollars. However, this does not come from public coffers, but rather follows the cameralist principle that the monarch should act as an entrepreneur, from the LGT bank owned by the family. It is the last surviving part of the Holy Roman Empire and the last country in the world to still be governed by cameralist principles.
— TRIBE, Keith. Cameralism and the Science of Government. The Journal of Modern History, v. 56, n. 2, p. 263-284, 1984;
— EULAU, Heinz H.F. Theories of federalism under the Holy Roman Empire. American Political Science Review, v. 35, n. 4, p. 643-664, 1941;
— CUNHA, Alexandre Mendes. Johann Heinrich Gottlob von Justi (1717-1771) and cameralist economic thought. Annals of the 41st National Meeting of Economics. Foz do Iguaçu: ANPEC, 2013;
— CLARK, Christopher M. Iron kingdom: the rise and downfall of Prussia, 1600-1947. Harvard: Harvard University Press, 2006;
— BACKHAUS, Juergen; WAGNER, Richard E. The Cameralists: A public choice perspective. Public choice, v. 53, n. 1, p. 3-20, 1987;
— SALTER, Alexander William; HEBERT, David J. Tullock’s Challenge: A Reconsideration of Constitutional Monarchy. Procesos de Mercado, v. 11, n. 2, 2014;
— TRIBE, Keith. Strategies of Economic Order: German economic discourse, 1750-1950. Cambridge University Press, 2007.
Eric Roll reminds us that most of the early mercantilist writers, especially English ones, were financiers or commercial agents;
With low exit costs (given linguistic and cultural proximity, an optimal monetary area, and open borders) there is a natural fiscal constraint on local governments. An individual who feels that the marginal tax cost of his permanence in a territory with an extractive fiscal policy may leave and move to a territory where the local benefit is equal to or greater than the marginal tax cost. Thus, he will "vote with his feet" and transmit the signal to his former territory that, if it wants him back, it will have to reduce fiscal extraction;
The case studied by the authors is that of the Chinese provinces, where competition between their distinct governance models creates incentives for more efficient management by the bureaucrats of the Chinese Communist Party;
At this time, Europe had already experienced the hyperinflationary process caused by the introduction of American gold and silver by the Spanish Empire into the continent's monetary markets, in an event known as the Price Revolution;
However, Wagner makes it clear that such a case, because it is a specific historical scenario, is not sufficient to attest to the validity of this model today;