Development Through Wage-Led Growth
Henry C.K. Liu

Part I:    Stagnant Worker Income Leads to Overcapacity
Part II:  Gold Keeps Rising as Other Commodities Fall
Part III: Labor Markets de-linked from the Gold Market
Part IV: Central Banks and Gold
Part V:  Central Banks and Gold Liquidity
Part VI: The London Gold Market
Part VII: Weak Political Response to Ineffective Financial Regulation

Part VIII: Gold and Fiat Currencies

Part IX: International Gold Agreements- Historical Political Context
Part X: The Rise and Decline of Institutional Economics  
Part XI: Critical Theory
Part XII: The Failed Revolutions of 1848 – The Economic Background


Part XIII: The Failed Revolutions of 1848 – The Political Background


This article appeared in AToL on June 10, 2011 


All economies, whether modern or ancient, monarchist or democratic, capitalist or socialist, cannot rely solely on market forces to meet all the needs of society or to direct the development of the nation toward a desired destiny. A properly regulated market performs many important economic functions that are necessary for any economy, feudal, capitalist or socialist. However, market forces, when unregulated or undirected by government, as neoliberals advocate for capitalist market economies, naturally allocate resources most efficiently toward efforts and investments with the highest potential return on capital rather than where it is needed most by the nation and its people.
The Washington Consensus has been largely discredited since the Asian Financial Crisis of 1997 as an effective strategy for economic development for developing economies. Its 10 propositions are: 1) Fiscal discipline; 2) redirection of public expenditure priorities toward fields offering high economic returns; 3) tax reform to lower marginal rates and broaden the tax base; 4) interest rate liberalization; 5) competitive exchange rates; 6) trade liberalization; 7) liberalization of foreign direct investment (FDI) inflows; 8) privatization; 9) deregulation and 10) secure private property rights. These propositions add up to a wholesale reduction of the central role of government in the economy and its primary obligation to protect the weak from the strong, both foreign and domestic.  (Please see my February 3, 2005 AToL article: World Order, Failed States and Terrorism)
Generally, highly efficient markets, particularly modern financial markets, aside from their fault of mis-allocating financial resources based on maximum return on capital, do not produce sustainable or balanced financial or economic outcomes if left unregulated by government.
Minsky’s Financial Instability Hypothesis
Hyman P. Minsky (1919-1996), American economist and Professor of Economics at Washington University in St Louis, developed the Financial Instability Hypothesis (FIH) in the 1960s, linking financial market fragility in business cycles with speculative investment bubbles endogenous to financial markets, in a direct challenge to the Efficient Market Hypothesis (EMH) which had been developed by Eugene Fama at the University of Chicago Booth School of Business.
A basic rule in EMH in the field of behavioral finance says that trading profit has always and will always come from reducing financial market inefficiencies,.  EMH states that prices of stocks reflect the market’s aggregate response to information. Any one market participant can be wrong about price levels, even every market participant can be wrong, but the market as a whole is always right. After the dot-com bubble burst in 2000, apologists for the EMH defended it by arguing that the dot-com bubble operated within the EMH, only the information behind the rational expectation was false. It was an argument that the operation was a success but the patient died.
By 2008, the EMH has been largely discredited by real data on the credit market crisis that had started in mid 2007 when the financial market was spectacularly wrong about the sustainability of the housing price bubble. But the market’s glaring error in defiance of common sense was not detected by most mainstream free market economists until credit markets around the world began to melt down in the short period of a few trading days in mid 2007.  In EMH’s place, mainstream economists, including those in central banks, have since rediscovered Minsky, after having ignored his insightful warnings for almost five decades.
Minsky’s FIH is based on his model of credit market cycles which he identified as consisting of five sequential stages: displacement, boom, euphoria, profit taking and panic. In the current credit and financial crisis, the displacement stage began in the early 2000s when the Federal Reserve under Chairman Alan Greenspan kept short-term interest rate (the fed funds rate target) dangerously low to first allow the dot com bubble to form and then lowered the fed funds rate to 1% in July 23, 2003, the lowest in 45 years, and kept it there for a whole year to feed a housing price bubble after the dot com bubble burst. The housing bubble eventually burst in mid 2007. The fed funds rate target has been set at 0 to 025% since December 16, 2008 by the Bernanke Fed to try in vain to revive the gravely impaired economy on its third year of recession.
The Greenspan Debt Bubble
On Greenspan’s 18-year watch (August 11, 1987 - January 31, 2006) as Chairman of the Fed, under four presidents (Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush), government-sponsored enterprises (GSE) assets ballooned 830%, from $346 billion to $2.872 trillion. GSEs are financing entities created by the US Congress to fund subsidized loans to certain groups of borrowers such as middle- and low-income homeowners, farmers and students. Agency MBSs (mortgage-backed securities) surged 670% to $3.55 trillion. Outstanding ABSs (asset-backed securities) exploded from $75 billion to more than $2.7 trillion.
Greenspan presided over the greatest expansion of speculative finance in history, including a trillion-dollar hedge-fund industry, bloated Wall Street firm balance sheets approaching $2 trillion, a $3.3 trillion repo (repurchase agreement) market, and a global derivatives market with notional values surpassing an unfathomable $220 trillion. Granted, notional values are not true risk exposures. But a swing of 1% in interest rate on a notional value of $220 trillion is $2.2 trillion, approximately 20% of US gross domestic product (GDP). (Please see my AToL series on Greenspan: The Wizard of Bubble Land).
The Federal Reserve’s extended loose monetary policy stance enabled serial debt bubbles to sustain the protracted US trade deficit which was circularly financed by an influx of trade surplus dollars from countries exporting to the US, such as China, Japan, the EU and oil exporting countries. These countries could not spend their trade surplus dollars earnings in their local economies because to do so they must first convert the dollars to their domestic currencies, which would immediately create inflation because the goods behind the new domestic currencies had already been shipped to US market to earn dollars. The exporting nations must then buy US government debt with the dollar they earned as trade surplus from the US because of dollar hegemony. (Please see my April 11, 2002 AToL article on Dollar Hegemony)
The boom stage of Minsky’s FIH was set off by the easy availability of low interest rate subprime mortgages that drove up house prices to unrealistic levels. Securitization of mortgage debt allowed banks to sell huge amounts of risky loans to the credit markets in the form of structured finance instruments of varying degrees of risk with commensurate returns to investors with varying risk appetite that will allow banks to take the toxic subprime mortgage debt off their balance sheets, so that banks could lend more loans without having to increase the reserves or capital. This housing bubble boom led to the euphoria phase and the smart money began to take profit by selling at the height of the price cycle and caused the debt bubble to burst. The selling panic caused credit markets to fail from the absence of buyers at any price. Suddenly, all market participants were driven to on the sell side by panic. Markets fail when there are no buyers at any price. (Please see my March 16 2007 AtoL article: Why the US Subprime Mortgage Bust Will Spread to the Global Finance System, posted four months before the crisis broke out in July 2007) 
FIH states that in the boom phase of the business cycle when cash flow rises beyond what is needed to pay off debt, a speculative euphoria naturally emerges to take on debts in excess of what borrowers can pay off with their normal income. This excess debt in turn leads inevitably to a financial crisis, a “Minsky Moment”, when the debt bubble bursts and liquidity dries up to cause a systemic chain reaction of credit defaults, causing credit market failure in which even financially healthy borrowers are forced into default as a result of a severe general liquidity drought in the market.
The Role of Government
Government regulatory intervention is needed to prevent the emergence of recurring Minsky Moments in financial markets before they occur, and massive central bank monetary easing, which is not without long-term negative consequences, will be needed to provide a failed market with liquidity should a Minsky Moment develop despite regulatory constraint.
In addition to state regulation to prevent financial market failure, state subsidy must be available to support and nourish needed economic activities and financial transactions that are important to long-term growth of the economy both quantitatively and qualitatively when such economic activities and financial transactions are not supported by private investment responding to market forces.
The most egregious deficiency of financial markets, and the most ignored, is its structural tendency to depress wages as the necessary condition for generating high return on capital. This tendency naturally prevents adequate consumer demand which leads excess productive capacity which in turn causes nations to seek new markets through export. Lenin’s theory of imperialism being the final stage of capitalism is based on the failure of capitalistic markets to raise wages along with rising productive capacity. World trade through globalization in its current form is an unsustainable game of cross-border wage arbitrage to depress wages world wide in order produce at low wage locations to export to economies with higher wages. This global trade is denominated in dollars that the US can produce at will, not because the US has sufficient assets of intrinsic value to back up her dollars, but because US geopolitical prowess has compelled the world’s trading of  basic commodities, such as oil, or other basic commodities, to be denominated in dollars. When trading of oil is denominated in dollars, the US essentially owns all the oil in the world, regradless who happens to be the intermediate holder of oil at any particular moment. 
Debt Bubbles Caused by Low Wages
The single most damaging outcome of globalized trade and finance in the past three decades had been increasingly low wages compared with asset prices in every economy that participated in cross-border wage arbitrage. The failure of wage income to keep up with rising asset prices, particularly home prices, created a deficiency in consumer purchasing power that left all economies with productive overcapacity. Monetary policymarkers then compensated for this overcapacity with serial monetary easing to provide easy consumer credit and low-interest home mortgages that stagnant wage income could not sustained and had to be refinanced by additional asset value from continually rising home prices. The gap between mortgage payments and wage income was closed by sharp rise in home prices that would in turn allow lenders to release more loan proceeds to borrowers to finance higher payments and everyday consumption. 
On the other side, lending institution employed all manners of structured finance to pass the liability in the form of tradable instruments of varying credit ratings with commensurate returns to investor of varying risk appetite in the credit markets to expand the total debt bubble.
This credit crisis has been thoroughly analyzed, its causes identified and listed as among others market deregulation, excessively high leverage, underpricing of risk through structured finance, etc. These causes were real and were all contributing to market failure. But the fundamental cause was the imbalance between wage income and high consumption needed to prevent productive overcapacity in the economy. In a word, the current credit crisis was fundamentally caused by insufficient wage income world wide.
The Low Wage Trap in China
China today is a visible example of economic growth driven by global cross-border wage arbitrage that has kept wages low. In theory, the socialist market economy in China seeks a balanced public/private interphase through market regulation and direct investment participation by government. The policy aim is to fill the investment gap left by the short term preoccupation on the part of private capital to invest only in projects that can produce the required immediate return on capital. Another policy aim is to regulate the market against self-induced failure. A third policy aim is to direct the economy toward national goals of long-term economic development of the nation and all its population. Projects designed for long-term economic growth will not offer short-term profit within the short operational time frame of private investment. Government credit and investment must be made to finance these project of long-term growth and development.
Still, despite appearances of success, the Chinese economy is far from being a trouble free engine for long-term growth and development. The regulatory framework is far from being adequate and the market is far from being efficient. The private/public interphase is still underdeveloped. There appears to be two separate economies in China, one state-owned and the other operated by private enterprises. The two economies work against each together, rather than complimentarily. The state-owned enterprise economy, though much improved is still plagued by residual structural inefficiency and the private enterprise economy is grossly unruly.
What is needed is to continue to improve the efficiency of the state-owned enterprises through better management nd accounting, particularly social and environmental accounting. This cannot be done through privatization. Much improvement will come from strengthening management and planning skills of state-owned enterprises, and not merely forcing management to adopted models of successful private enterprise. Measurement of state-owned enterprises performance should be based on their real contribution to long-term economic growth and development of the national economy and to social welfare and environmental restoration, rather than on short-term profit.
At the same time, private enterprises must be required to be better corporate citizens and be guided by socially responsible business ethics to serve the needs of society and the population, rather than to seek maximization of profit by exploiting legal and regulatory loopholes to engage in counterproductive speculation and to externalize the social costs of its business operations.
But the most critical shortcoming of China’s economic development policy in the past three decades has been its passive acceptance of low wages as a key prerequisite competitive advantage for its export sector in world trade. Chinese policymakers can take lesson from the case of Germany, a successful export economy with high wages. High wages in the export sector is an effective way to make export trade contribute to the domestic economy.
Furthermore, China will not be able to develop its domestic market unless Chinese wages rise to the level at which Chinese workers can afford to buy the products they produce with their own labor.

Export of surplus production after domestic demand has been satisfied is a positive economic strategy, but export of goods because domestic workers cannot afford to buy them with their wages is a dysfunctional strategy. The problem is made worse if export is denominated in dollars, a foreign fiat currency that the export economy cannot spend at home without automatically generating inflation.

The Age of New Monarchs

Starting in the mid-15th century, a new group of kings in Europe, known in history as the New Monarchs, succeeded in laying the foundation for a world order of independent sovereign nation states. The new monarchs offered the institution of monarchy as a guarantee of law and order, against aristocratic abuse of the peasants and the rising bourgeoisie who were willing to pay taxes to the king in return for peace and protection, and to let the king dominate parliament which had been a stronghold of the aristocracy.
The New Monarchs created stable and centralized governments which made possible an era of worldwide colonization and conquest in the 16th century, and paved the way for rapid economic growth in Europe. But they failed to understand the stagnant wages would eventually be the cause of their political demise.
The New Monarchies broke down the legal system of inherited feudal “common law” through which the rights of the feudal classes were entrenched, by reinstituting Roman law, which was being rediscovered and actively studied in the new universities in Europe. The New Monarchs proclaimed themselves as sovereigns by divine right and required their subjects to address them as “Your Majesty”.
According to lex regia in Roman law, the sovereign incorporates the will and the welfare of the people in his person, and upholds the principle of salus populi suprema lex (the welfare of the people is the highest law). The sovereign can make law, enact it by his own authority regardless of past customs or historical liberties by the principle of quo principi placuit legis habet vigorem (what pleases the prince has the force of law), provided that the sovereign’s law upholds the welfare of the people.
By their proclaimed role as defender of the people against aristocratic oppression and abuse, the New Monarchs derived their legitimacy of absolutism. In the name of all their subjects, the New Monarchs raised their political status as legitimate supreme rulers by divine right, changing the sovereign’s feudal role as merely First Among Equals in the aristocracy to that of an absolute monarch of the people above the aristocracy. But the new princes, while breaking down the obsolete feudal socio-economic structure and fixed economic relationships among participating groups in feudal society and economy, were not pleased by rising wages of commoners and peasants in the new emerging market economies, and thus invited a wave of revolutions that eventually overthrew their New Monarchies and swept them into the dustpan of history.
New Monarchism against the Holy Roman Empire
Ideas associated with the New Monarchy spread from France to Spain and England. Such ideas were also at work in the Holy Roman Empire in Germanic lands, with the difference that unlike the Three Estates in the New Monarchies in the West, in Germanic lands the New Monarchism took the form of princely states, duchies, margraviats, bishoprics and abbacies.
The Holy Roman Emperor was the holder of an imperial office elected by seven Electors. In 1356, the Archduke of Austria, a Hapsburg prince, was elected Emperor. The Hapsburgs remained the principal royal power clan in Europe, until after the Thirty Years’ War, which started in 1618 and ended in 1648.
The Reformation and the Rise of Nation States

The Reformation was a misnomer. Protestantism, as espoused by Martin Luther (1483-1546), was revolutionary because its doctrines held not merely that abuses in the Church must be reformed but that the Roman Catholic Church itself, even if perfect as measured by its own ideals, was wrong in principle. Protestants aimed not just to restore the medieval Church from Renaissance abuses, but to overthrow it and replace it with a new church founded on principles drawn from the Bible. Such principles should not be decreed by Church ecclessiaticals but by the individual believer's own conscience.

This anti-central-authority spirit in theology was political music to the budding German princes, who responded positively to Luther’s invitation to the princely states within the Holy Roman Empire to assume control of religion within their borders. Protestantism became entwined with social and political revolution in the Holy Roman Empire.
Charles V, as Holy Roman Emperor, was obliged to defend the faith because only within a Catholic Christian world would the Holy Roman Empire have legitimacy or even meaning. The princely states within the Holy Roman Empire saw the Emperor’s effort to suppress Luther as a threat to their own political freedom. The imperial free states and the dynastic states of northern Germany insisted on ius reformandi, the right to determine their own religion. They became Lutheran and secularized (i.e., confiscated) church properties to enrich themselves as secular sovereigns.

Stalin a Diehard Lutheran

Thus Luther, in placing theological protest under the protection of secular power politics, exploited the political aspirations of budding German principalities in the 16th century. In return, he conveniently provided the Germanic princes with a theological basis for political secession from the theocratic Holy Roman Empire.

Luther exploited the political aspirations of German princes to be politically independent from the theocratic claim of sovereignty by the Holy Roman Emperor to bolster his (Luther’s) theological revolt from the Roman Catholic Church. But he came to denounce peasant rebellion against the Protestant German princes. He did so even though such peasant uprisings against the Germanic princes claimed inspiration from the same theological ideas of the Reformation that had motivated the political revolt against the Holy Roman Emperor by the same Germanic princes for political independence. Such radical ideas had been advocated by Luther as a universal principle. However, even Luther’s professed personal sympathy for peasant demands for improved treatment from their oppressive princes did not persuade him to endorse peasant uprisings. The working poor of Europe would have to wait another century, until the Revolutions of 1848 to seize their own destiny.

In fact, Luther could be considered a Stalinist. Or more accurately, Joseph Vissarionovich Stalin (1879-1953) would in fact fit the definition of a Lutheran diehard, at least in revolutionary strategy if not in ideological essence. Like Luther, Stalin suppressed populist radicalism to preserve institutional revolution, and glorified the state as the sole legitimate expediter of revolutionary ideology.
The Rise and Fall of the Germanic States
The Holy Roman Empire under the Hapsburgs extended from Spain on the west to Poland and Hungary on the east, including the Czechs of Bohemia and a sizable French –speaking population in present-day Belgium, Lorraine, eastern Burgundy and western Switzerland. In the East, the main population was German and German-speaking. But for the Holy Roman Empire, language was less important than religion. Yet by the 17th century, Protestantism was already widely practiced in the Empire.
In the 1500s, Germanic lands were the advanced parts of Europe. Yet by 1600, evidence of backwardness and provincialism were plainly visible. The German language failed to flower further. Compared to Italian, French, or even English, German literature stagnated. Where both Catholics and Calvinists maintained international affiliations and read with interest books on foreign ideas written in other languages by foreign authors, Lutherans were xenophobic and suffered self-imposed isolation. German universities, both Catholic and Protestant, saw a decline in enrollment as intellectual energy was consumed by combative dogmatic and unenlightened arguments on absolute doctrinal truth. Superstition was rampant in German society, with gruesome fairy tales of vampires and demons dominating popular culture and with the educated elite fascinated by astrology.
Commerce in south Germany and the Rhineland was in decay due to trade shifting from mainland central Europe to the Atlantic coast. The mouth of the Rhine was controlled by the Dutch Republic of the United Provinces. Baltic trade was growing but the old German Hanseatic towns did not benefit from it, because the king of Denmark controlled the Baltic Sound while the king of Sweden controlled the shores around the Baltic Sea, and these two monarchs favored trade with the Dutch and the English, against which the German towns could not compete. German bankers, such as the Fuggers, lost their dominance as capital markets shifted to Western Europe.      
The Peace of Augsburg and Religious Self Determination
The Peace of Augsburg in 1555, with its principle of cuius region eius religio (Whose realm, his religion) provided that each sovereign state could prescribe the religion of its subjects. Small war were breaking out for the control of Aix-la-Chapelle (1593) and of Cologne (1600) over whether a Protestant or Catholic successor should assume a post vacated by death of the occupant.
After the Peace of Augsburg, the Lutherans made considerable gains in putting Lutheran administration into Catholic church states to secularize them into lay principalities, in violation of the Ecclesiastical Reservation clause of the Peace of Augsberg. The Calvinists were also gaining control of German states, with the key state of Palatinate, one of the seven  elector states strategically placed in the center of the Rhine.
In 1608, the Elector Palatine formed a Protestant union to protect its political gains by negotiating separate treaties with the Dutch Republic of the United Provinces, with England and with France under Henry IV. In 1609, a league of Catholic Germanic states was organized under the leadership of Bavaria to seek help and protection from Catholic Spain.  France, the Dutch United Provinces and Spain all harbored geopolitical intentions on the possible breakup of the Holy Roman Empire, while the Hapsburgs of Austria were stirring to eradicate Protestantism within its own domain and to revive the Holy Roman Empire into a modern imperial state based on geopolitical power rather than theological legitimacy. Austrian intentions forced Catholic France to act as protector of Protestantism outside of France in Eastern Europe, while it persecuted extremist Calvinist Huguenots domestically.
The Thirty Years War and the Westphalian World Order
The Thirty Years’ War, resulting from diverse geopolitical and religious pressures, was an exceedingly complex affair. It was a German civil war of political secession in the name of religious independence. It was a war fought over constitutional issues between the Holly Roman Emperor and the Protestant Germanic princely states struggling for political independence. The two aspects of the civil war, religious and political, were not congruent, giving rise to peculiar geopolitical and religious alliances. It was also an international war between the Bourbons of France and the Hapsburgs of Austria, between France and England, between Spain and the Dutch United Provinces, with the involvement of the kings of Denmark and Sweden and the prince of Transylvania
The Peace of Westphalia, agreed to on May 15-24, 1648, by 109 recognized sovereign entities of Europe, was based on a series of peace treaties signed between May and October of 1648 in Osnabrück and Münster. These treaties ended the Thirty Years’ War (1618–1648) in the Holy Roman Empire, and the Eighty Years’ War, also known as Dutch War of Independence, (1568–1648),  between Spain and the Dutch United Provinces, which became the Dutch Republic.
The Peace of Westphalia that began in 1648 did not bring peace to Europe, but it initiated a new world system of geopolitical order in central Europe, known in history as Westphalian sovereignty, based upon the concept of a world order of sovereign nation states governed by independent sovereigns who answered to no higher authority outside of rules established by the Peace of Westphalia. The terms of the treaties became integral to the constitutional law of the Holy Roman Empire. Peace throughout Europe, however, was not restored. France and Spain remained at war for another eleven years, making peace only in the Treaty of the Pyrenees of 1659.
The French Economy under Louis XIV
Louis XIV (1638-1715) inherited the French throne in 1643 at the age of five. Twenty years later, in 1661, at age twenty-five, he assumed personal direction over affairs of state after the death of his Prime Minister, Cardinal Mazarin (born 1602, regent 1643-1661). Louis XIV reigned over France for seventy-two years, and personally ruled his kingdom for fifty-two until his death in 1715 at age seventy-seven. No other monarch in modern European history held legitimate absolute sovereign power for such a long time.
Louis XIV was much more than a titular royal figurehead. In his adult life as king of France, he was the actual working government head of his rising nation for more than half a century. Inheriting the political and economic achievements of Cardinal Richelieu (born 1585, First Minister 1624-1642) and later those of Cardinal Mazarin, Louis XIV made France
into the greatest power in Europe, culturally, economically, politically and militarily. He personified the age of absolute monarchism and was an early instigator of balance of power geopolitics, economic planning and economic nationalism.
Colbert’s Dirigisme
Louis XIV owed much of his economic policy successes to the dirigisme of Jean-Baptiste Colbert (born 1619, Minister of Finances for France (1665-1683). Dirigisme is a policy of government direction of the economy. Even free market economies must involve government regulation to prevent the market from self destructive failure, and involve also some aspects of central planning, through which the state effectively controls areas of the economy where private enterprise and market forces cannot meet the needs of society or direct economic  activities to fulfill the destiny of the nation.
In France under Louis XIV, Colbert’s policy of state intervention in the market economy made him a respected and effective minister in the French court of royal absolutism. He achieved recognition by his contemporaries and historians for his work in improving and strengthening French manufacturing and in bringing the French economy back from the brink of bankruptcy caused by the king’s massive military expenditure. Colbert went beyond Richelieu’s mercantilist policy on international trade. In its place, Colbert aimed at taking taking advantage of the large size of the domestic market in France to make it a large, mostly self-sufficient economy, free of internal tariffs between different regions within France. He introduced a unified commercial code in France to replace outdated medieval local customs and manners. He instituted a national tax collection system to reduce the commission of tax farmers, which greatly increased tax revenue directly to the king’s treasury.
Some historians argue that, despite Colbert’s spectacular efforts, France actually became increasingly impoverished because of the Sun King’s extravagant spending on incessant wars. Yet it is indisputable that the wars waged by Louis XIV, though no doubt costly, actually enriched the French nation in the long run by enlarging the French economy. Whether expansion of territory by war is an acceptable means of growth is a legitimate question of political philosophy, but expansion of territory being a positive factor in economic growth is unchallengable.  Colbert worked to create a favorable balance of trade within France proper and greatly increased French economic territory within Europe and colonial holdings outside Europe. His policy contributed greatly to the growth of the French economy.
Clobert neglected Wages
The one area that Colbert failed in his economic development strategy was a conscious effort to raise French wages as the Industrial Revolution spread to France from England. The failure of French wages to keep up with rising wages in England was a key factor in the comparative gradual decline of the French economy and a direct economic cause of the French Revolution.
In 1789, a farm peasant or a unskilled laborer earned a wage of 15 to 30 sous a day. The price for a loaf of bread rose from 9 sous to 15 sous in 1789 due to bad harvest. A family of four needed two loafs of bread to survive, meaning that starvation wages were regular and common place while the aristocrats and the bourgeoisie lived in luxury with expensive goods provided by a small group of high-wage artisans in guilds and middle-men merchants.  
Colbert’s market reform strategy included the founding of the Manufacture royale de glaces de miroirs in 1665 to supplant the importation of Venetian glass, which would be forbidden in 1672, after French glass manufacturers were on sound footing to replace foreign competition. He also encouraged Flamish textile manufacturers to set up production in France with the purpose of technology transfer so that France could benefit from the more advanced Flemish technical expertise. The world renowned Globalin and Beauvais tapestry works were founded by royal patronage at this time under Colbert’s policy of national economic development.
Colbert founded the royal tapestry works at Gobelins and supported those at Beauvais and Aubusson. He worked to develop the domestic economy by raising tariffs on imports and by supporting major public works projects. Colbert also introduced policies and programs to ensure that the French East India Company, founded in 1664 to compete with the British and Dutch East India Companies in colonial India, had protected access to foreign markets in Asia, so that they could always obtain imports needed to sustain rising living standard and luxury in French life, such as coffee, cotton, dyewoods, fur, pepper, and sugar. In addition, Colbert founded the French merchant marine by providing state support to the construction of ocean going ships.
The Problem with Guilds
Colbert issued more than 150 edicts to regulate the guilds of craftsmen. While guilds created social capital of shared norms, common information, self regulation, self imposed sanctions against misbehavior and collective political action that benefited guild members, they hindered technological innovation and transfer, and slowed economic development and growth. The most serious obstacle to economic development was the role guilds played in keep general wage levels low, particular unskilled wages. While income of guild members continued to rise, the aggregate income of guilds as a class did not expand due to strict membership admission policies.
Both Adam Smith and Karl Marx, for different reasons, criticized guilds for their rigid gradation of social rank and for the role they played in solidifying the structural relation between the oppressed and the oppressor.  Smith criticized guilds for acting as a constraint against free trade, while Marx criticized guilds for being a system that prevents a general rise in wages.
State Directed Commerce and Culture
Having thus introduced into the role of government the responsibility of maintaining a measure of socio-economic order and development, Colbert then worked to restructure the sleepy feudal economy of France to bring about the enrichment of the kingdom by the promotion of dynamic commerce. But he neglected to establish a national income policy of rising wages.
Colbert Failed to Understand the Economic Function of Rising Wages
The state, through Colbert’s dirigiste policies, fostered manufacturing enterprises in a wide variety of fields, but Colbert and his policy makers did not understand the need for and benefit of rising wages in the economy. The authorities established new industries, protected inventors, invited into France skilled artisans from foreign countries while prohibited French workmen from emigrating to higher wage locations outside France. While the French upper classes prospered and enjoyed rising standards of luxurious living, the lower classes remained trapped at subsistence levels, contributing eventually to the popular discontent over the high price of bread that fueled the French Revolution which broke out in a century later 1789, despite the fact that France had the richest economy in Europe.
To maintain the high quality of French goods in foreign markets, as well as to provide a guarantee of supply to consumers at home, Colbert had the quality and measure of each article fixed by law, punishing breaches of the regulations by public exposure of the delinquent and by destruction of the substandard goods. While the quality of French goods improved by government standard, the prices of goods are kept low by fixed wages to provide the rich with low cost luxury at a price that the low-wage working population could not afford.
Income Disparity as a Cause of Revolution
In international commerce, Colbert imposed tariffs to protect domestic enterprises, while he reduced and equalized duties on the passage of goods between provinces within France to create a French national market. Currency exchange rates were standardized in different provinces in a policy of unification of the French monetary system to serve a national market. Colbert’s policy of dirigism  improved roads and canals to facilitate travel and trade. But no effort was made to raise French wages. Income disparity between the high-living aristocrats, the prosperous bourgeoisie and the working people increased beyond the limits required by social stability.
As the bourgeoisie as a class worked to provide the aristocracy with new luxury life styles, the cost of which was increasingly denominated in money, replacing traditional feudal economic relationship of lord and peasants sharing fairly the produce of the land. The new need for money by the aristocracy and the rising cost of new luxurious life style created a two-pronge pressure of rising costs on the one hand, and dwindling revenue on the other due to the bourgeoisie siphoning off increasingly larger and larger portions of the aristocrats’ fixed feudal income as trade profits. The aristocracy had to made up the income deficit in the new economy operating on the exchange of money with increasingly harsh demands on the peasants who worked on the lord’s land. Peasants began to get paid in cash rather than a portion of the farm produce they grew. Much of the new wealth created by the early phase of the industrial revolution, and denominated in money, went to the bourgeoisie as a class, coming largely from the loss income on the part of the peasants who became wage earners. In the end, the French Revolution was a socio-economic restructure instigated by the bourgeoisie against the aristocracy by exploiting the discontent of the peasants, which the bourgeoisie created by keeping wages low while blaming it on the high spending of the aristocracy.
Pierre Paul Rique (1604–1680), an engineer and a tax farmer responsible for the collection and administration of the gabelle (salt tax) in Languedoc-Roussillon for the King, with permission granted by the King to Rique to also levy taxes for Rique’s own account. This gave Rique great wealth in economy intermediated through money which he used to execute grand infrastructure projects with engineering expertise to increase wealth for the French nation. But most of this new wealth went to the bourgeoisie as management fees and return on capital, and very little went to the workers as rising wages.
Under Colbert’s patronage and the support of Louis XIV, Rigue planned and supervised the construction of the Canal du Midi which connects the Bay of Biscay in the Atlantic with the Mediterranean. The 240-mile-long artificial waterway links the southern coast of France to Toulouse to link to the canal/river system that ran across to the Bay of Biscay. It was one of the great engineering projects of the 17th century. The logistics were immense and complicated, so much so that engineers of earlier times, including the ancient Romans, had discussed the idea but failed to carry it out. Louis XIV gave strong support to the project to reduce the high cost and danger of transporting cargo and trade around southern Spain where threats from pirates were serious and incessant.
Effectively deploying the ample resources of French prosperity and superior culture, both of which he added to their spectacular flowering by his royal vision and policy, Louis XIV arranged a network of Francophile allies in every country of consequence in the then known world, from England to Russia to Turkey. French foreign policy and anti-French counter foreign policies of other countries set the pace of world events all through 17th and 18th century.
Sophisticated French methods of government and public administration, of war and diplomacy, of finance and commerce, of social protocol, etiquette and manners, became a model for other countries to imitate. French language and culture, thought and literature, art and architecture, landscape and garden design, etiquette, cuisine and fashion set the standard for European society and the rest of the world for centuries after. French was adopted as the language of the European aristocracy and of diplomacy.
Thanks to the long range policies of Cardinals Richelieu and Mazarin, Louis XIV succeeded in halting the further expansion of Hapsburg supremacy by constructing a network of pro-French alliances based on a balance of power strategy headed by French leadership, resulting in the Thirty Years’ War that changed the geopolitical shape of Europe. Louis XIV personified the zenith of the Age of the Absolutist Monarchs that evolved from the Age of the New Monarchs.
The Westphalian Peace
The Westphalia Peace of 1648 succeeded only because of an economic policy of trade protection and directed sovereign credit, patterned after the dirigisme aimed at creating strong sovereign nation states, as designed by France’s Cardinal Jules Mazarin and his capable protégé Jean-Baptiste Colbert.
Colbert's dirigist policy of fair trade was the most effective weapon against the liberal free trade policy of the British and Dutch oligarchies supported by national banking and  maritime power.
The Westphalian world order is a concept of independent nation state sovereignty based on two conditions: territoriality and resistance to external agents in the domestic polity of sovereign nation states. Its has been the organizing concept of world order since 1648 within which the concept of nationalism emerged. Contemporary globalists, from empire builders to neo-liberals globalization advocats, to al-Qaeda militant Islamic jihadists, have one thing in common: the abolition of the Westphalian world order of sovereign nation states in the name of universal human rights, though the definition and methods each group prefers are vastly different.
Balance of Power International Geopolitics
The aim of 17th and 18th century statesmen pursuing a balance of power strategy generally focused on preservation of full independence and maximum option of state action, the basic rule of which was to build ideologically diverse geopolitical alliances against any state on the path to world domination. The purpose of balance of power strategy was not to preserve peace, but to preserve the independence of sovereign nation states within the Westphalian world order of independent sovereign nation states. During this period, geopolitical alliance were routinely entered into by nation states of opposing religious ideologies. The Nixon/Kissinger opening to China in 1972 was a classic balance of power play.
Both the US  and al-Qaeda Pursue Similar “Transformational” Foreign Policy
Thus the post-Cold War US “transformational” foreign policy of “regime change” to spread US ideology globally is no different strategically than the ideological global strategy of al-Qaeda. In the aftermath of the March 11, 2004 Madrid terrorist attacks, Lewis Atiyatullah, who claimed to represent al-Qaeda, declared that “the international system built-up by the West since the Treaty of Westphalia will collapse; and a new international system will rise under the leadership of a mighty Islamic state.”
The difference between US ideology-based “transformational” foreign policy and al-Qaeda global terrorism is only one of degrees of tactical extremism. In that respect, Senator Barry Goldwater’s famous declaration in his acceptance speech of his nomination as candidate for the presidency at the 1964 Republican Convention: “I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue,” is tailor-made defense for al-Qaeda extremism. While the US electorate rejected Goldwater’s bid for the presidency can be viewed as rejection of extremism by Americans as a people, Goldwater, in losing his bid for the presidency, gained control of the Republican Party and fundamentally of US foreign policy.
In the 17th century, the expansionist foreign policy of Louis XIV led the Dutch to pursue a balance-of-power strategy against a rising France, led by William III, Prince of Orange who became king of England and Scotland as James I in 1603. England was the only nation west of Poland that did not participate in the Congress of Westphalia, during which time England was preoccupied with a civil war.

May 30, 2011

Next: The English Civil War