The stages-of-growth models of Gerschenkron and Romeo

Italy's “Southern question” has been on the table for over a century. The failure of the South to industrialize and develop is at the heart of the question; the State's responsibility for that failure is at the heart of the historians' debate.

The State's specifically regional policies are not at issue: in the half-century following Unification the special laws to further the development of specific areas were few, tardy, and in any case in favor of the South. Public investment in physical and human capital, too, reduced the initial disparities. The State spent heavily on roads and railroads, but disproportionately so in the South; the State imposed compulsory education, boosting literacy far more in the South than in the North.

Tariff policy, much debated at the national level, had complex effects even within the North and the South. According to Italy's economists of the time the benefits obtained by the protected activities – some industries located primarily in the North, grain-growing widely diffused in the South – were outweighed by the damage suffered by the sectors that were naturally export-oriented: other industries again located primarily in the North, specialized agriculture important to the North but even more so to the South, where it was the only patently dynamic sector. Those who believe protection promoted industrial growth, mainly in the North, and limited the “agrarian crisis,” mainly in the South, see net benefits rather than net losses; but the effect on the North-South differential remains ambiguous, the difference between effects of the same sign.

Methodology: the measurement of “real” product

The product of an industry can be measured in physical units (“tons of sugar”); but to compare or sum different industries measurement must be in a meaningful common unit, a unit of value. Industry does not create, it transforms; its product in value terms is identified with its value added, measured by the difference between the value of its output and the cost of the corresponding raw material.

Value measures suffer however from the inconstancy of the value of the monetary unit; to obtain “real” measures the measures at current prices must somehow be deflated.

The traditional method calculates the “real” product series through the so-called “double deflation” of value added, that is, by valuing both the output and the raw material at constant prices. This is equivalent to the deflation of value added by a price index – an index of output and raw material prices – that not only depends on the “base year” that supplies the prices that are held constant, but is also specific to the industry in question.

The indices used to deflate the value added of different industries are accordingly different. As relative prices change, their paths will differ; the ratios among different industries “real” value added will accordingly differ from those calculated at current prices, except of course in the base year itself. Any year can be selected as the base year: the traditional procedure generates multiple alternative measures, as many as the possible base years, of the relative “real” size of different industries.

This book summarizes some decades of research on the economic history of Italy between Unification and the Great War. It is equally concerned with what happened then, and with how we gradually came to understand it as we now do: it is at once social science, and history of that science.

This twin concern reflects the author's sense of his discipline. Economic history invites rigorous logic, parsimonious explanations, and a confrontation with evidence that is naturally quantitative: it is, or at least can be, science in its style. Substance is another matter. Economics, history, the social “sciences” are not the cumulation of objective knowledge, but the contemporary form of the stories our distant forefathers would tell when they gathered around the campfire. Our theories, our facts – our stories, like their stories – are constructs that define and project an image of ourselves; they are shaped by fears and aspirations so deep we do not admit them to our conscious minds, by prejudices so strong we do not recognize them.

So too, specifically, economic history. The process and context that generate an interpretation, and can signal the alternatives that were never allowed a hearing, are as central to its proper evaluation as the more conventional evidence it invokes: we would have a better sense of what there is to be seen if our predecessors had told us not only what they saw, but who they were, where they stood, and how they got there.

The possible cases

The possible effect of a tariff on the market price of the protected good is illustrated in Figure A1.01. From one graph to the other domestic demand, the world price, and the tariff are kept constant, and the assumption of a competitive domestic market is maintained; domestic supply varies. At the world price foreign producers can provide, and foreign consumers absorb, “unlimited” quantities of the good in question: the home country is assumed small, in the sense that its own sales and purchases cannot materially affect world-market equilibrium.

In the first case domestic supply and demand intersect at a price above the world price augmented by the entire tariff: the tariff limits imports, but does not eliminate them. In this case the domestic market price exceeds the world price by the full amount of the tariff: foreign supply allows domestic consumers to purchase goods without paying more than the world price plus the tariff, and at that (tariff-inclusive) price domestic demand exceeds domestic supply.

In the second case domestic supply and demand intersect at a price that exceeds the world price, but by less than the tariff. The domestic price is generated directly by that intersection: the tariff eliminates the imports that would otherwise take place, but precisely because it is thus prohibitive the domestic market price exceeds the world price by only part of the tariff itself.

In the third case domestic supply and demand intersect at a price lower even than the world price.

The stages of growth

In the nineteenth century England and the Western World experienced industrial development, sustained economic growth, unprecedented material progress. Progress became the new religion: in Its name, as formerly in that of the True Faith, the West justified colonial conquest and the new imperialism.

That same faith foretold the future, and interpreted the past. The future held out limitless improvement; the past was the history of progress, specifically of technical progress, of that particular progress that was the pride and miracle of the West. The triumph of that ideology has been complete: to this day we have no mental categories to describe the vast sweep of human history other than technological ones, from the “Stone Age” on.

The faith in progress would be shaken only in recent decades. Public opinion has become increasingly aware of the limits to growth, especially from the absorptive capacity of the environment. In the 1960s, too, a small number of maverick scholars – working in different disciplines, on different problems, and not, apparently, in touch with each other – produced works that shared a heterodox tendency to redeem the “primitive,” and to interpret past innovations in terms of growing human effort rather than effort-saving technical progress. Together, their analyses suggested an alternative interpretation of human history as a long decadence, a progressive decline in living standards, from the late Stone Age on, due essentially to the relentless growth of the human population. Eden was not a dream, it was a distant memory.

The evolution of trade policy and protection

Protection has a long history: the medieval city-states, the first nation – states protected their industry and trade with every means, including violence. In the nineteenth century England, the first industrial nation, became the first to embrace free trade. The Continent followed England and also liberalized trade both with unilateral tariff cuts and with treaties that guaranteed the contracting parties the lowest duties, those granted “the most favored nation” by other, even later, treaties.

This liberalization had its intellectual support in the new “political economy” that proclaimed the advantages of untrammeled exchange in external trade as in domestic markets. It had its practical, political support in the natural complementarity between England, the “workshop of the world,” and the still traditional, agricultural Continent.

That political support would disappear, on the Continent, after just a few decades. Continental industry grew, despite its increased exposure to English competition; it was always protectionist, and that lobby became progressively stronger. In the 1880s, with the growing competition of overseas agriculture and the collapse of grain prices in European markets, significant agricultural interests also became protectionist. England would not abandon free trade; on the Continent industry and cereal-growing joined forces to push through a wave of tariff increases, and by the end of the century protection was again the rule.

Italy followed these Continent-wide shifts. Cavour's Piedmont had taken part in the first liberalization of trade.

The railway in history and in the literature

Transport costs determine the location of economic activity. Relatively immobile resources attract the relatively mobile, low-value goods high-value goods: man lives next to water, even in prehistory salt was traded over great distances.

Traditional technologies allowed relatively low transport costs only on water, on safe rivers or seas. On land, even on the sea if the cargo had to be defended, only the highest-value goods could bear the cost of long-distance transportation; low-value goods were limited to short distances, to local trade. An inland city not on a navigable waterway was nourished by the nearby countryside, and the short distances over which low-value goods could be moved set a limit to the city's size; over the centuries transportation technology barely changed, and Europe's cities did not grow beyond their medieval walls.

The resistance to movement is reduced if the road is improved. Investment in such improvement is particularly profitable where traffic is not only heavy but homogeneous, for with standard vehicles, of invariant gauge, the road itself can be reduced to two parallel strips: wooden tracks were laid down at the mines, to increase the hauling power of the draft animals.

In eighteenth-century England the iron industry rapidly improved its methods, much reducing the cost of castings, of wrought iron bars and plate. Iron tracks were laid down to serve general traffic, with horsedrawn cars and carriages: the common-carrier railway was born.

Italy and the world economy: cyclical movements

The economic development of post-Unification Italy cannot be understood by examining Italy alone. Italy was already then part of a wider world characterized by the ready movement of goods, ideas, men and money; it developed as and to the extent that the mobile resources of that transnational economy chose to locate on Italian soil.

From 1861 to 1913 Italy's total product grew, even in per-capita terms, relatively steadily. It did not always grow from year to year: agriculture was the dominant sector, especially in the early years, and total product fell if bad weather or outbreaks of disease caused poor harvests. But these downturns were short-lived, and over the medium term agricultural production grew without significant interruption.

The longer cycle was in the industrial sector; it grew stronger over time, and became much the major source of aggregate production movements. Within that sector, the cycle was specific to the industries that produced durable goods – construction, engineering – and those that supplied their raw materials. The dominant economic cycle in post-Unification Italy was an investment cycle.

The upswings of that investment cycle were the quinquennia from Unification to 1865 and again from 1869 to 1874, under the Right; the decade from 1879 to 1887, dominated politically by Depretis; and the even longer period, from 1896 to the War, dominated by Giolitti.

The “political cycle”: birth, death, and life after death

The first index constructed by the present author was dominated by the cycle of the metalmaking and engineering industries, which followed the parallel cycle in the consumption of their products.

Since those products were then almost exclusively “producer durables” (investment goods), that consumption cycle was interpreted as an investment demand cycle. Investment demand is naturally unstable, precisely because it is a demand for durable goods. Investment renews, and “net” investment increases, the stock of physical capital; and the durability of that stock has two immediate consequences. First, the desired stock of capital depends on the expectations of the businessmen who plan production; those expectations are surrounded by uncertainty, and, like those that determine the movements of financial markets, subject to sudden change. Second, a permanent increase in the desired stock of capital generates only a transitory demand for the net investment that increases that stock. Investment will be high when business wants to increase its stock of productive capital, and low when it wishes only to maintain it or even to reduce it.

The desired stock of capital increases as expected production does: as the latter grows so does the former, raising investment demand. In the case at hand, however, the investment cycle did not seem to have been set in motion by a cycle in the growth of the other sectors, which grew quite steadily; rather, the investment cycle seemed due to changes in the desired stock of capital for given levels of production.

Of failure and success

Italy is again rich. It had been rich in ancient times, in the centuries of Rome's hegemony and the pax romana. From the collapse of the West Italy recovered sooner and better than anyone else: in the reborn medieval economy of the new millennium Europe's leading maritime, commercial, financial, finally even manufacturing powers were all Italian. For many centuries, again, Italy was rich.

That primacy was not maintained. Italy was still prosperous in the sixteenth century, the siglo de oro of the Iberian nations that conquered the ocean sea. But by the seventeenth century naval and commercial leadership, and financial hegemony, had passed to the Dutch; England then wrested these from the Low Countries, and in the eighteenth century it was challenged only by France, by then Europe's leading manufacturer. Italy became peripheral, underdeveloped, an importer of the manufactures and commercial services it once exported.

In the nineteenth century Italy fell further behind the leaders. The Napoleonic wars had confirmed England's naval, colonial and commercial preeminence; and England pioneered the industrial revolution, the transition to the modern world of factories and machines, of sustained productivity growth, eventually of rising living standards even for the working masses. England was soon followed by her former colonies in America, and also, on the Continent, by Belgium, by Switzerland, and again by France, once more England's rival in the final triumph of European imperialism.

Conditions in the 1880s

The fluctuations in industrial production, and in investment, have been interpreted in different ways; but on the “stylized” facts themselves, on the time paths of the corresponding variables, there has long been relatively general agreement. There has been no agreement, however, even on the time paths of agricultural production and of consumption, and, with these, of the aggregate economy.

The controversy specifically concerns the 1880s, and stems from the weakness of the agricultural statistics of the time. The quantitative evidence improved only slowly, but the later years are in any case clearly characterized by the crisis of the early 1890s, and then by the growing prosperity of the Giolitti years; both were clearly general, and involved consumption as well as investment, agriculture as well as industry. The 1860s and '70s are less transparent; for the old believers the rapid growth of agricultural production allowed Romeo's “original accumulation,” but the orthodox opinion has long been that over those decades the changes in the real economy, for good or ill, were relatively mild. The 1880s appear marked instead by strong but heterogeneous movements, with progress in industry but a crisis in at least a good part of agriculture. The path of the aggregate economy depends on these sectors' relative weight; it is not self-evident, and has been evaluated in very different ways.

Over the 1880s, two major external developments impinged on the Italian economy.

The gains from trade

The ricardian model of trade can be illustrated by Figure A2.01. The axes measure the physical quantities of grain and of wine; in the sense to be explained forthwith, these represent land-intensive goods (cereals), and labor-intensive goods (the products of specialized agriculture, and industry), respectively.

Curve W4–G4 is our production possibilities curve (with our given resources, and our technology); under autarky it also represents our consumption possibilities. The autarky equilibrium is, by assumption, point (1), that is, (W1, GM3). At point (1), the production possibilities curve is tangent to the “price line” (not illustrated on the graph): the slope of the former, which corresponds to the goods' relative costs, equals the slope of the latter, which corresponds to their relative prices.

In the world market, by assumption, relative prices differ: grain is relatively cheaper, the price line is correspondingly flatter. If our country opens itself to free trade, domestic relative prices align themselves to world relative prices. The production equilibrium therefore shifts from (1) to (2), that is, to the point where the slope of our production possibilities curve equals the slope of free-trade price line: “grain” production falls from G3 to G2, “wine” production grows from W1 to W2. The free-trade consumption-possibilities curve is the price line tangent, in (2), to the production possibilities curve; we can consume more “wine,” and more “grain,” than under autarky, and the new consumption equilibrium will be a point on the segment (2)–G5 above, and to the right of, point (1).