A society has a choice after a major financial crash to either opt for a “Gilded Age” vs a “Golden Age”. Many politicians but also a large number of financial-economic analysts often display the bad habit of Karl Marx: present a single scenario and emphasise the outcome as “the only option” or stating a policy proposal as “There Is No Alternative”.

A major crises results in efforts to transform the institutional arrangements. Those countries/regions that make a swift transition will grow into economic dominance in the next few decades.

A very good analysis of this returning sways after major crises was published in 2002 by Carlota Perez: Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages.

In the past those countries that, due to political influences, decide to continue the institutional arrangements that benefit Financial Capital experienced a Gilded Age with a highly uneven income distribution: a Rentier State, with stagnation and slow decline, instead of a Golden Age that would foster the Real Economy and economic dynamism with new entrants and entrepreneurs.

The key point is that the choice to emphasise a specific set of institutional arrangements are political choices and strongly depend on political power by interest groups in democracies. Mistakes have been made in the past centuries.

This was a editor high-lighted comment on a New York Times column by Paul Krugman:

Rule by Rentiers (comment)
It becomes more and more obvious that the political climate in the USA is starting to resemble that of the Dutch Republic after 1713 (the Spanish War of Succession) or the one in England at the end of the 19th century.

The Dutch Republic was the first country that has implemented a Liberal Capitalist economy with government bonds loaned by the rich part of the population, a central bank, a stock market and pensions. The prototype of today’s western system of capitalism. This type of political-economy was exported to the United Kingdom in 1688 (the Dutch invasion of London which the English call the Glorious Revolution).

When one has two countries, one with a large wealthy upper class and another eager to engage in catch up development where in both roughly stable Liberal Capitalism systems are created, one will observe a flow of investment funds from the rich in the developed country to projects in the less developed country.

The precondition is one needs stable governments, that guarantee a low risk of outside investors being expropriated from their money, to get this flow of funds going.

Paying interest on the large government debts due to War efforts resulted in the Dutch Republic become a wealthy country run by Regents for Rentiers with a one-and-half century of stagnation, where high taxes were imposed on the lower classes that were used to pay for the interest on the government bonds that paid out the Rentiers.

Those bonds were reinvested by the Regent families in the UK which was a main source of funding for the English Industrial Revolution. Stagnation in the Dutch Republic incurred as hardly any new daring entrepreneurial efforts were funded after 1713. An attempt of reform by the Patriot revolution failed in the 1780s, a Patriot liberation movement aided by France in 1795 resulted in Napoleon getting access to the Amsterdam cash mountains to finance his wars. After Waterloo the Conservatives restored the systems and only after 1848 when Liberals took power and rewrote the Constitution the stagnation ended in The Netherlands.

The decline of the British Empire started in the late 19th century when the USA and Germany rose with a more or less similar pattern. Investing outside your own country, as opportunities elsewhere looked better.

Britain has observed a century of decline and reduction of industrialisation now, just like the Dutch Republic from 1713 – 1849. Britain has seen only occassional economic upswings when the financial sector was expanding and caused some spill-over effects.

Currently Asian countries begin to take over the role England had for the rich investors of the 18th century Dutch Republic and the USA had for British wealthy investors at the end of the 19th century.

The key economic point isn’t that the economy stagnates as money is transferred to a wealthy upper class via bonds, but that the owners/managers of those funds that receive the rents do not engage in investments that improve the living conditions and business climate in their own country, but instead “spread their risk” to invest around the world in search for countries with stable governments, low expropriation risks and higher returns. The latter are high returns to themselves and not to the other people in their country. People in the other country they invest in do get jobs, new infrastructure etc. Some of the locals will grasp and learn the tricks and found their own companies and often do better, as they understand their country and demands better.

Investing money from bonds outside their own country is only an attractive option for wealthy investors, when they can count on interests from bonds flowing into their coffins and do not face a high expropriation risk of their money in their own country, either by inflation or by progressive taxes or even a revolutionary movement.

Election of a political class that keeps that risk of “home expropriation” down, while preserving the monetary value of accrued assets is thus key.

As a final comment. The provincial administration leaders of the Dutch Republic were called Pensionaries and the political leader was called Grand Pensionary. What’s in a Name …