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Introducing the Italian economy

The Italian economy is generally included today as part of the periphery of Europe alongside other Mediterranean countries. This might give a correct picture of its relative economic position at the beginning of the twenty-first century, but it conceals the fact that Italy has played a central role in Europe for very long stretches of time over the last two millennia and a half. To understand Italy today one must keep in mind two historical strands: a far from brilliant present and the legacy of a glorious past, which lives not only in the immense artistic heritage concentrated in this very small country (300,000 square kilometres), but in its living scientists, businessmen, artists, sportsmen and in the very character of its people and its communities. Italy is a country of contrasts, hosting side by side examples of excellence and signs of retardation, in a social context that is capable of ensuring their unlikely coexistence.

The aim of this chapter is to highlight the most important components of this legacy from a past that has made Italy a unique place in the world: a country having experienced three quite different civilizations: Roman, the city-states/Renaissance, and the modern industrial age, alternating with two declines. In the first two civilizations, Italy was a leader, in the last a follower of only partial success. The Italian past is not simply a historical memory – it has left important marks on the urban, economic, cultural and social structure of the country that are visible today.

THE ROMANS

We have evidence of the presence of man in the Mediterranean peninsula, later called Italy, from the Paleolithic era (1.5 million years ago). Its position at the centre of the Mediterranean Sea made the Italian peninsula with its surrounding islands a crossroads for Indo-European peoples, mixing local inhabitants and newcomers and forming settlements. Among them, the Etruscans (who inhabited the region later called Tuscany) developed a sophisticated civilization between the eighth and sixth century BCE along the Tyrrhenian part of Italy, federating several cities, including the villages that were later to form Rome. Sicily and Sardinia hosted Phoenician settlements and in the south of the peninsula and in Sicily there were Greek settlements. In the eighth century BCE the villages of the central part of the Tyrrhenian coast proclaimed a kingdom with Rome as its capital. The inhabitants organized the new state and built an army to defend it from its neighbours. According to ancient accounts, Rome had seven kings, before becoming a republic around 500 BCE, with a collegial form of governance, which was to come to include representation from the lower classes (hence the famous slogan Senatus Populusque Romanus – SPQR – the Senate and People of Rome, which conveys the idea of two institutions jointly governing the republic, the senate and popular assembly).

During the republican period, the Romans first unified southern Italy, defeating the Greek army, before embarking on a long and difficult confrontation with the Phoenicians (from northern Africa, having their capital in Carthage), that finally ended with victory and Rome’s control of the western Mediterranean. In the second century BCE, Rome completed its defeat of Greece, hegemonizing part of the eastern Mediterranean, before commencing the conquest of the northern peoples of continental Europe (the Gauls and the Istrians). All of these conquests were achieved by a republican government, despite the increasing difficulties of exercising control over such a vast territory. Despite reforms that included the extension of Roman citizenship to the other peoples of the Italian peninsula (later Roman citizenship was further extended beyond the peninsula) and the improvement of the conditions of its slaves, the survival of the Republic was jeopardized by civil war among its leaders until the de facto transition to an authoritarian government with Rome’s first emperor, Augustus in 31 BCE. However, the Senate remained in place until the sixth century CE, albeit with different prerogatives, and the position of emperor was not automatically inherited and could be appointed by the Senate.

The Roman Empire came to encompass the entire Mediterranean coast and the northern European belt including England, becoming truly multi-ethnic. In the fourth century CE it was forced to defend its borders, and in the fifth century it partitioned into eastern and western parts. The western part was later conquered by the northern peoples (generically called barbarians because of their more primitive societal organization), who deposed the last Roman Emperor in 476, while the eastern part, centred on Constantinople (or Byzantium) lasted until 1453, when it was finally conquered by Ottoman Turks, who built the Ottoman Empire on its ashes.

This brief history of the milennial Roman Empire shows that it did not resemble other empires in one important respect: it had lived for centuries as a republic practicing shared power and when it became an empire it was not as absolute as others because of the continued presence of the Senate and the diffusion of Christianity, which was first seen as a challenge to authority and then became organized as a separate power. Civil society in the Roman state always had the opportunity to organize and to have a voice. Against this background the Romans were able to develop an extremely important body of legislation – collected in 529–34 by Justinian (the last eastern Roman Emperor) in the Corpus Iuris Civilis – that became the basis of all later European legislations. The necessity to balance powers, the readiness to grant citizenship to different peoples, the need to produce a well-established order that could be observed everywhere, were powerful incentives to use the legislative instruments creatively, fixing rules in codes that could be applied universally based on general principles rather than simply on local customs or religions.

Amid their conquests, the Romans assimilated philosophical, scientific and artistic contributions from many peoples, to which they added their own contributions. Alongside law, they excelled in engineering and architecture. Aqueducts, dams, amphitheatres, sewers, thermal baths, public and private palaces built in stone, temples, basilicas, roads, bridges, arches, domes and public toilets were built across the Roman state, bequeathing to its cities a way of living that was indeed the best of the time. The city of Rome hosted up to one million inhabitants and several other Italian cities were of substantial size. In technological innovation the Romans eclipsed their contemporaries, with the use of water mills, concrete, cranes, agricultural machinery, metal leagues, pumps, skew presses, looms, rudders, new types of sails, glass and mirrors. Even the principle of the steam engine was known to them, although never used for productive purposes. Military technology and logistics became increasingly sophisticated, not only in the strategies of deploying infantry and cavalry in the ways most appropriate to different battlefields, but also in the use of machines during sieges and the capability to build encampments and structures to allow rapid mobilization (carriages, boats, bridges).

After having lasted around a thousand years, the Roman state collapsed, invaded by peoples from continental Europe (mostly Germanic), who came to rule its former territories without stable government and amidst continued conflict with Byzantium, leading to general destruction and civil decline. In the eighth century the Franks appeared in Italy and a century later the Arabs arrived, creating further instability. What happened next in Italy was an unanticipated reversal of fortune.

THE FLOURISHING OF THE CITY-STATES AND THE RENAISSANCE

Taking advantage of the chaos in which the Italian peninsula had plunged, some of the early cities slowly rebuilt themselves and, being distant from an established power, they developed an original form of self-government that proved instrumental to the birth of the modern economy, science and art. Beginning in the eleventh century, the coastal cities (Genoa, Pisa, Amalfi, Nola, Gaeta, Venice, Ancona) that were able to develop trade as the Mediterranean Sea had become safer, and some of the cities of the centre-north that had been in existence in the Roman period (including Milan, Verona, Bologna, Florence, Siena, but also many other smaller ones) became self-governed republics, a form of government which had not been unknown in the country, and made freedom (libertas) their flag. While the independence of the communes in the south did not last long – the area was unified by foreign rule (first by the French, later by the Spanish) in alliance with the local landed aristocracy – the communes of north and central Italy had long lives as independent city-states. The efforts by foreign powers to end their independence were successfully resisted and foreign dominance came only some centuries later, allowing the Italian city-states the time to flourish economically and artistically, in spite of the countless conflicts between them to acquire more land and exert control over neighbouring communes.

The city of Rome had a separate destiny. Since the sixth century it had slowly fallen under the administration of the Christian papacy, in conjunction with local aristocratic families. Territorial donations from the conquests of various kings and barons enabled the pope to gradually enlarge the papal controlled lands, which would eventually become a true papal state in the sixteenth century, and which would last until the unification of Italy itself. As the home of the Holy See, the city of Rome witnessed the building of beautiful churches, palaces, squares, monuments and parks, but never developed economically along the mercantile lines of the other Italian city-states.

The urban shape of these Italian cities clearly conveys the idea of shared governance of a place, with a central square devoted to a market, festivals and celebrations. Facing the main square were the public palaces – the cathedral, the municipal palace, the guildhall – and from the central square the main streets led away to the private palaces of merchants and aristocratic families, to the houses and workshops of artisans, to convents, hospitals and other churches. Protective walls were raised, and often enlarged to accommodate more people and more activity. Buildings were built in stone and brick (not wood), explaining the longevity of architecture in these cities.

The civilization born out of these city-states was a consequence of the institutions that made self-government viable and of the wealth that was accumulated in them. Table 1.1 details comparative estimates of per capita income in Europe 1000–1600 and shows the rise of north-central Italy above any other area of Europe. It also shows the growth over the period of the low countries (Holland), which imitated the Italian city-states by creating its own republic, while England lagged behind and Spain, Portugal, France and Germany were never in a position to catch up.

Which of the Italian city-states’ institutions facilitated such an unexpected economic flourishing? Of the most important was the corporation, an institution born with a very general meaning of association among non-family partners who shared common goals and governed themselves. The university – the earliest in Bologna in 1088 – was a corporation of professors and students who were free to teach and learn; the monastery or convent was a corporation of monks or nuns, who shared a specific mission and a specific brand of religiosity within the Catholic church; the chamber of merchants was a corporation of merchants who developed their own rules and also administered justice in the case of disputes; the guilds were corporations of specific manufacturing trades, and so on. Being democratically self-governed on the basis of statutes drafted by its members, the corporation acted in the common interest of its members, who were in the best position to develop the most appropriate rules, including establishing common standards and apprenticeships. It is only many centuries later that corporations became outdated institutions incapable of keeping up with the need for innovation and as such were abolished. However, the business corporation retains to this very day the older meaning of an organization uniting people who work for a common goal. The municipal government had the role of balancing the power of the various corporations and of ensuring public goods (including education) – a role that was not easily exercised and which gave rise to conflicts, but for many centuries was successfully maintained. Since the fourteenth century, governance became increasingly concentrated in the hands of the signoria, strong men and their descendants capable of maintaining law and order.

Table 1.1   Per capita GDP (in 1990 dollars) in some European countries, 1000–1850

Source: Bolt and van Zanden, The First Update to the Maddison Project: Re-estimating Growth Before 1820, Maddison Project Working paper 4, 2013.

Notes: * From Maddison’s original database, www.ggdc.net/maddison

Entrepreneurs able to develop their businesses inside the corporations showed great creativity in establishing economic institutions suited to growth. The following lists some of the most important ones, which have left a permanent mark on the evolution of the world economic system:

1. The commenda (also known in Venice as collegantia ). The twelfth century saw the development, primarily in the maritime cities, of a form of business based on capital advanced by people without family ties and which was managed by business agents. Those who provided capital ran the risk of losing only that portion employed in the business (limited liability). This was the first form of the joint-stock company.

2. Insurance . The first steps towards building up insurance funds were taken in the twelfth century in the maritime republic of Venice to address the high risks taken by ship-owners who carried goods by sea. Insurance significantly lowered their business risk.

3. The bank . Lending practices existed everywhere, but the banks created in the Italian medieval cities were linked to merchants’ activities. The banking practices that were developed – such as letters of credit or currency exchange – enabled credit flows to finance commerce over vast areas. As credit allowed merchants to invest in increasing jobs for citizens, the Catholic Church slowly abandoned condemning usury for such practices as credit for productive purposes, making them morally acceptable. Credit to consumers, instead, was made available through special institutions with donated capital – the Monti di Pietà (pawn banks) – that were the earliest form of microcredit. Public banks also emerged, originally specializing in loans to states – public debt – in order to, for example, support a war, provide famine relief, or finance public infrastructure. These public banks were the earliest form of central banks.

4. Double-entry accounting . This way of comparing revenues with expenditures was already known in the Islamic world, but was perfected by Italian merchants, beginning with Leonardo Fibonacci in Pisa in 1202. The Franciscan monk, Luca Pacioli, mathematician and economist, who also collaborated with Leonardo da Vinci, theorized this approach in 1494 in a dedicated treatise.

The necessity of recording an ever-increasing number of contracts also led to the emergence of a new profession, the public notary, who played the role of guarantor of the legitimacy of a transaction concluded in his presence, which took on the value of a public act. At the University of Bologna a special curriculum was developed to prepare these new professionals.

The wealth generated in the Italian city-states through their innovative approach to business enabled the birth of the Renaissance. Beginning in the fourteenth century a vast cultural movement originated in Italy and spread throughout Europe encompassing literature, art, music, education, philosophy, science, politics, religion, fashion and the way of living, greatly assisted on the one side by the invention of printing (of German origin in 1454, but immediately adopted in Italy), and on the other by the diffusion of patronage among the rich merchants and aristocrats as well as the Catholic clergy. Patronage facilitated the decoration of churches, palaces, public buildings, squares, gardens, hospitals and also the creation of cultural centres, libraries, academies and theatres. Patronage together with the demand for furnishings for private palaces created a market for