Economic History of The Netherlands - First Modern Economy

First Modern Economy

While the inland provinces retained their premodern character for much longer, the Dutch Republic by about 1600 had maritime provinces Holland, Zeeland, Friesland, Groningen, and a part of Utrecht that possessed:

• Reasonably pervasive and free markets for both commodities and factors of production
• An agricultural productivity sufficient to sustain a far-reaching division of labor
• A political structure which guaranteed property rights, enforcement of contracts, and freedom of movement
• A level of technology and organization capable of sustained economic development and of supporting a material culture that could sustain market-oriented consumer behavior

The Dutch economy established a leadership role in Europe that was widely admired, and copied in part in England.

Through productivity-enhancing investments in fixed capital, the use of a large amount of energy (heat energy from peat as an industrial fuel, wind power) per worker, and a substantial investment in human capital (as witnessed by the high literacy rate), the Dutch managed to raise labor productivity above the levels prevailing in other European countries. This is illustrated by the fact that in the mid-17th century the agricultural sector, employing less than 40 percent of the labor force, could already almost be a net food exporter (which it became by 1800), and the fact that nominal wages between 1600 and 1800 were the highest in Europe. In the open economy of the Republic such a wage gap could only be sustained by enduring productivity differences.

Another essential characteristic of a modern economy: the continuous accumulation and effective preservation of capital presented a problem (productive employment of capital) that for the Dutch capitalist was solved by a broad array of investment options, mediated by the Beurs, and later the merchant banks. Eventually, these financial structures proved unable to withstand the crises of the Revolutionary and Napoleonic era, but the determining criterion here is that they were at least present during the period in question.

A defining characteristic of a modern economy is diversification and an advanced division of labor. By the mid-17th century under 40 percent of the labor force was employed in agriculture, whereas 30 percent was engaged in a highly diversified industrial sector, the balance of the labor force being engaged in commerce and other "service" industries. The numerous cities formed a complex web of interdependencies, with the lesser ports performing specialized functions to the major ones; the industrial towns specializing in specific types of production; the countryside becoming highly differentiated by agricultural specialization, with the villages evolving into service centers (or later sometimes centers of "out-sourced" industrial production). However, the integration of specialized agriculture and industry with the growing entrepôt functions of the ports (at least before these functions became disaggregated again in the 18th century) imparted a special dynamism to the Dutch economy during the Golden-Age economy.

A counterargument against the "modernity" of the Dutch economy may seem to be the undeniable fact of the decline in per capita income growth at the end of the 18th century. However, at closer inspection it will become clear that this actually was a "modern" process of restructuring in the face of adverse circumstances, as may be seen in current modern economies, like the U.S.A. and European countries, that also undergo major structural upheavals. The 18th-century deindustrialization was in large part a consequence of a too-high real wage level, combined with protectionist policies of foreign governments, closing access to major markets. The agricultural depression was a general European phenomenon. The crisis in foreign trade was answered, and partly parried, with commercial innovations. The financial and fiscal crisis, that proved the Republic's undoing was altogether modern in nature (unlike the comparable crises that regularly brought the Spanish Crown to its knees), but simply happened before the modern means of dealing with it (expansion of the tax base and/or monetary inflation) were at hand.