The economic and political evolution of the Roman Republic

To some, history may be a dull subject. But if you approach it with the objective of uncovering patterns, it offers the most fascinating of lessons. Particularly if it is about the Roman history because written historical records and physical artefacts abound for many writers to posit their own perspectives about the Romans.

From the Romans, many useful lessons can be gleaned, especially on economics and politics. Economics however is the more important of the two since in statecraft, economics underpins politics.

The Roman history consists of three periods of governance: monarchy, Republic and Empire. The rule of kings lasted 250 years while the other two roughly 500 years each. For this post, we focus on the Republic because Rome's rise occurred during this period. The Roman Empire will be the subject of my future post. Although Rome's territorial conquest peaked during the time of the Empire, specifically under Emperor Hadrian, the new territories were no longer prime territories and holding on to them proved to be more costly than leaving them outside the borders.

Political leaders during the Republic were initially composed of senators. Although there were elections, it was a rule by aristocracy not democracy because only patricians (the land owning nobility) could be elected to the senate. Gradually the plebeians (commoners) who had grown rich through trade were allowed into the senate.

In ancient Greece and early Roman Republic, only the propertied class and the aristocrats had the right to vote. Even in the West in the 19th century, when voting was first introduced, only those with landed property were allowed to vote. Then, as now, democracy has always been biased towards those with wealth. Over time, this requirement was relaxed. The Roman electorate citizens eventually numbered more than a million. Rome was the first to introduce the secret balloting process. After the Republic faded away, it took 1,900 years for male universal suffrage to reappear in Western Europe.

The economic wealth of the Romans was derived from agriculture, trade and conquests. Conquests brought new lands (including metals mined therefrom) and increased tax revenue to the state coffers. Trade also rose because the security provided by the Roman rule encouraged exchange of produce between distant lands.

As is commonly the case with unchecked movement of goods and labour, in the long term, the impact on the social patterns and structure can be disruptive. Arising from the conquests, thousands of prisoners-of-war were sold as slaves. Only the wealthy aristocrats could afford them and their use on the large farms outdid the yields of the peasant farms. Unable to compete, the peasants sold their farms to the aristocrats.

Cheap grain imports from Sicily and North Africa also made the small peasant farms uneconomic. Gradually wealth tended to accumulate with the aristocrats and the merchant class. It's not surprising that in modern societies, as the economy prospers, the wealth concentration as reflected by the Gini coefficient gets more polarised.

The peasants flocked to Rome and the big towns where they survived on the assistance of the wealthy citizens. Later, the state took up this responsibility and also, to keep them from getting restless, the task of providing entertainment in the form of gladiator games, chariot races and theatre plays. Modern day political leaders are well advised to dish out subsistence assistance and cheap forms of entertainment to ease the pain of economic hardships and forestall social instability.

In the provision of public services, the Republic contracted them out to private parties, known as publicani. The contracts were auctioned off: for revenue collection to the highest bidders while for the expenditure on services and goods to the lowest. Even for military duties, there was no standing army. The army was conscripted from citizens of working age who had to pay for their own armour. The wages paid to them were barely enough.

With a growing citizenship and, consequently, electorate in line with Rome's territorial expansion, the stability of the leadership could no longer be guaranteed. New citizen voters could upset the balance of votes. In 27 BC, Augustus made himself emperor and thus ended the era of the Republic to be replaced by the Empire.

Under the Empire, the state bureaucracy expanded and the public services that had been carried by private contractors were now conducted by the state. The citizen army also turned into a standing one as pre-emptive defence replaced the former strategy of post-invasion counterstrike. As with any bureaucracy, once started, it could only enlarge even though the income of the state stagnated or receded. Even in modern times, increasing budget deficits are the logical evolution of governments moving towards the end-state of their life cycles. Any attempt to minimise deficits through balanced budgets unnecessarily hastens the demise of the governments.

The Romans had no significant technology wave. As described earlier, their growth mainly came from territorial conquests which also increased trade and agriculture. Such conquests also allowed Rome to transplant its idle people to the newly conquered areas. Whatever energy technology they had was based on the muscle power of humans and animals. The main contributor of that power was captured slaves. The water mills were far and few between.

The other critical leg of any technological progress, communication, was manifested in the Roman roads - running 85,000 km across the Empire - and the Mediterranean Sea, which after the defeat of Carthage, became mare nostrum (our sea or the Roman Lake.) Beyond these, the absence of further technological advance condemned Rome to a secular decline.

In contrast, the prosperity that we are now enjoying is the fruits of the Industrial Revolution that began in the 1780's. And it's not one cycle of progress. In fact, it has been renewed four times. We are now past the midpoint of the fourth wave and there is only one wave left to power us before our civilisation sputters like that of the Roman. These waves have enabled us to be liberal with human rights, giving political freedom that heretofore can't even be imagined.

Nowadays, champions of freedom and human rights are ignorant of the fact that such rights can be conferred only if the economic needs of the populace are well taken care of. Democratisation of wealth precedes the democratisation of politics. As the world nears the end of the technological progress, the incompatibility of liberalism with an economy in its last gasps is a sure-fire recipe for political turmoil.

It is also telling that in times of crisis, the Senate of the Roman Republic elected a dictator who had absolute power for a period of six months. Later, when the Roman Republic turned into an Empire, it was partly due to a lack of opportunities for economic growth. The need for stability entailed the firm rule of emperors. Even then, usurpations of power became common reflecting the hard times that prevailed in latter day Roman Empire.

Iron rule is not the answer but merely a predictable response to tough economic times. The eventual outcome would be pluralism, a fracturing of society into self-contained units last seen in Western Europe during the Middle Ages, also known as the Medieval period. In modern times, we are witnessing the shift towards pluralism in Somalia and Afghanistan. Waiting on the sidelines are many others: Pakistan, Iraq and most of the Sub-Saharan African countries. The world's refusal to face this reality means more bloodshed ahead without affecting the final destiny one whit.

From Nixon to Bush: The debt financing of American politics

If one were to designate the most prosperous post-WW2 decade in America, without question, it would have been the 1960s. The economy was growing. Neither inflation nor deflation was evident. The American households were still saving and America was still a creditor nation. But as is always the norm, good things never last.

The 1970s heralded the start of a tumultuous era for the American economy. Thenceforth America's growth was to be financed by ever increasing amount of debt. The chart above shows the yawning gap between America's debt and its GDP. It is as if debt grows geometrically but GDP arithmetically.

A detailed examination of the debt growth from 1971 provides an instructive view of how the US gradually surrendered control of its economy to outsiders, all the while without realising so. Why 1971? Because 1971 is full of connotations.


First, it marks the year the debt first outpaced the GDP since WW2, growing by more than 10 percent. Another momentous milestone, on 15 August 1971, occurred when Pres. Nixon severed the link between the US dollars and gold in order to stem the flow of gold to other countries, notably France. It paved the way for debt (and its corollary, the money supply) to start its relentless growth. If the gold link were in place, the gold reserve would have constrained any debt increase and the consequent GDP growth.

As the money supply rose, so was the pressure on commodity prices, simply because their supplies could not be hastily bumped up. Even now, it still takes 7 to 10 years for new supplies to come onstream. The 1973 Arab-Israeli War snapped the suppressed oil prices because by then the pressure for an increase had been 2 years in the offing. The trigger was the war but the root cause was the debt (or money supply).

The debt also fueled the inflation past the 10 percent mark in 1974 as the debt growth outpaced the slowing GDP. The oil price surge upended the economy with increased oil expenditure constraining spending in other areas. Stock market and property collapsed as debts growth slowed. Nixon sought to reduce the federal deficit, slashing it to $6.1 billion by 1974. The fed funds rate was raised to almost 13 percent by July 1974. The resulting recession in 1974 cost Nixon the presidency. He had to resign during his second term to avoid impeachment. Nixon wanted to control the debt but in the end the debt got him.

Gerald Ford who replaced him for the remainder of his term was beset by persistent inflation and high unemployment, a phenomenon known as stagflation. Actually towards the end of his term, inflation dropped to as low as 4.9 percent but the high unemployment killed his reelection hopes.

The debt again rose as Carter took up the presidency in 1977, corporate financial and non-financial debts being the main cause. Towards the end of his term, he sought to rein in the debt. Again the economy slipped into recession in 1980 as inflation crested at 13.5 percent. Like how it brought down Nixon, the debt showed no mercy to Carter. Out he went.

When Reagan came into office in 1981, Paul Volcker, the Fed Chairman, attacked inflation with a vengeance. He jacked up the fed funds rate to 20 percent. Inflation tumbled to 3.2 percent by the end of 1983. As debt growth slowed to 10 percent, the wrath of the public was heaped on Volcker instead of Reagan. Without the inflation debasement, the US dollars became a stable currency, much sought after by foreign exporters.

At the same time, the Japanese had made inroads into the US market and they were happy to be paid in US Treasury bonds. Reagan soon discovered that America could borrow to the hilt without the pain of inflation. The supply capacity constraint was broken by the opening of the Japanese manufacturing spigot. So America went on a debt and import spree. Sure enough, Reagan got his second term. Aside from the Volcker induced recession at the beginning of his presidency, Reagan never had to endure another recession. In short, the American public could have its cake and eat it too.

Bush, the elder, was elected in 1988 on the coattails of Reagan's popularity. But he was alarmed by the state of the government budget. He raised taxes in departure to his election promise of no new taxes. Despite this, he actually increased the budget deficits throughout his presidential term. Yet the debt growth slowed down to 5 percent turning the US into a net exporter by 1991. The cause was the Savings & Loan Crisis which had started in 1987 following the rapid debt growth during the Reagan years. The consequent deceleration in private sector borrowings contributed to the 1990-1991 recession and sealed Bush's fate. Like Carter, Bush was shown the door after just one term.

Clinton was elected in 1991 on the strength of his slogan, "It's the economy, stupid!" Of course, he did focus on the economy, that is on enlarging the debt. That contributed to his successful second term bid. Towards the end of that term, the dotcom boom kicked in. Businesses and financial institutions piled on increasing amount of debts deluded by their optimistic view of the future. Clinton disingenuously claimed credit for the government budget surplus, after continual deficits of more than 30 years. That feat was only possible because of the private sector's tremendous debt build-up.

The dotcom boom fizzled out and a short recession ensued in 2001 as Bush, the younger, came into office. But the debt kept its relentless growth, this time powered by the households and financial institutions. The new debts were related to mortgage financing. Bush saw to the growth of these debts throughout the eight years of his tenure. These massive debts however could never be repaid. Their unwinding falls on Obama's lap. How the process will unfold is the subject of another post, "Bernanke vs. The Market."

Bernanke vs. The Market

Stock indices all over the world have recovered from their lows in March 2009. Similarly, commodities have rebounded from their nadir at the beginning of the year. Everybody is quick to point to a recovery from recession. Not so fast. Indices and prices that move with a high volatility cannot be explained simply by fluctuations in supply and demand. Something with a more powerful force could have accounted for the movement.

If you travel in a moving object, things outside the object will fleetingly pass you by. Only a fool would imagine that the world is moving while he is sitting still. In like manner, if you believe that the volatility in the stock markets and commodity prices are due to demand and supply, then you've been taken for a ride.

First, we need a primer on demand and supply. Our common understanding of demand and supply is that price is the mechanism that matches demand and supply. If demand exceeds supply, price rises and vice versa. But this law overlooks one crucial element: the medium for the price. Nowadays it is fiat money, a currency with no precious metal backing. The value is decided by the authorities. Demand and supply can remain the same but if the currency volume is increased, the price will follow suit.

This is where Ben Bernanke comes into the picture because he's in control of the one tool that significantly affects stock markets and commodity prices: money printing or also known by its current euphemism, quantitative easing (QE). Herein lies the problem with Bernanke. Abraham Maslow's quote, "If you only have a hammer, you tend to see every problem as a nail", aptly fits him. Bernanke is using his hammer to maximum effect. He keeps pounding on all economic problems regardless of whether his hammering will bring the house down.

To understand the danger of Ben's knocking, let's have some basics on modern day money supply in the US. Why the US? Because the US is the primary locomotive of the global economy that even other large economies, such as China, Japan and Germany largely depend on its growth to drive their own progress. A good indicator of the money supply in the US is not the money supply computed by the US Fed. It's actually the total debt in the US. The official money supply reflects only the debts or loans made by the US banks (debts or loans appear on the asset side of the banks' balance sheets while the liability side is made up of deposits and checking accounts, i.e., the money supply). Not only is the banks' money supply incomplete, it has also been muddled by securitisation and the banks' hiving off the loans to off-balance sheet vehicles.

As debt plays an increasingly important role in the economy, it's useful to study the chart below from the NY Times. It plots the US debt growth from 1953 to 2009. The period 1971 to 2008 marks the growth of debt that surpassed the GDP growth. This period is described in detail in another post, "From Nixon to Bush: The debt financing of America."

Another chart below shows the ratio between the total debt and the GDP. What is interesting about these two charts is not the extremities to which they are heading. Since the future is more exciting than the past, we want to identify the patterns that will unfold. After all, anybody can rationalise the past regardless of how flawed their arguments are.

Looking at the first chart, you can can see a faint outline of a bell curve while the second clearly marks the shape of a developing S-curve. Now you know the relationship between the bell curve and the S-curve. For the mathematically inclined, the bell curve is a derivative of the S-curve. Both are laws of nature from which there is no escape. You can deviate but the laws will pull you back to their predestined paths.

Both curves indicate that the American debt explosion has run its course. The debt is already past its prime. The S-curve is plateauing and probably drooping over the coming years. The bell curve shows a major correction, a big downward shift after Bush's aberrant move upward. This shift spells disaster presaging a rating plunge for Obama.

His damage control, in the face of slumping debt positions of all other sectors, is naturally to accelerate deficit spending. The just released 2009 federal fiscal (year ending 30/09/09) deficit was $1,417 billion, amounting to 10 percent of US GDP. But how does this stack against the big picture? This chart from Forbes 02/11/09 shows Obama's deficit couldn't even cover the collapse in the finance sector debts. The total debt movement may go into negative territory this year.
So now we are left with Ben Bernanke's frantic bungling in the debt market. Bernanke thinks that the problem is liquidity. Because that's what Milton Friedman and Anna Schwartz identified as the cause of the 1930s Great Depression. They couldn't have been more wrong. The real cause for the Great Depression and the present one is not liquidity but capacity (see It's capacity, not liquidity, stupid).

Because of his misguided view of the cause of the crisis, Bernanke has pumped more than $1 trillion buying all sorts of debts, from Treasury bonds to asset backed mortgages to corporate papers. Before the crisis, Fed's holding of debts was $870 billion. Now it's $2.1 trillion. He thought that with more liquidity, the credit market would start moving. But surprise, surprise, it's not budging. The extra liquidity is being used not to create more debts but to speculate in stocks, commodities and bonds. Since this is a capacity crisis, nobody would want to borrow for investment because all over the world, there's surplus capacity. Only fools believing the rising stock prices as a portent of an improving economy will rush to invest. The wise use this opportunity to reduce their debts, cut expenses and sell off surplus capacity.

Bernanke will come to realise that when confronting the laws of nature, there are limits to what the Fed can muster. And for Obama, he will come to rue his appointment as President and be sensible enough to stop harping on his predecessor's legacy. The past presidents had to do what had to be done; they were under the yoke of the debt. Obama's job is to manage the debt transition from its growth phase to the maturity phase. There are no two ways about it; the laws of nature dictate so.