The Roman Empire: An Economic Failure

The history of economics is often only discussed from Mercantilism to the present era and the Neo-Classical school. However, Many of these economic theories that are discussed today originated over a millennia before in the Roman Empire. Prior to the insurgence of mercantilism was the era of the dark ages and the infamous feudal system that time and time again has been proven only to hinder growth or stop it all together. The feudal system didn't just appear from nowhere it was slowly developed over time and emerged out of a more complex economic system that mirrors the economies that arose from the feudal system. The Romans over centuries had developed a complex and volatile economy based on currency and free trade. However, the Roman economy was young and naive and eventually crumbled taking the empire along with it. The Romans were still able to leave their mark in the history of economics and their economic theories live on still today.

The Roman Empire was the epicenter of the world market during their reign over much of the civilized world. So why did the Romans fall? Much of their failure is due to there failing economy. The Romans made many mistakes but at the same time did make corrections but in the end their efforts were for not.

The beginning of the Roman Empire is marked by the appointment of its first emperor Augustus Caesar. Augustus was truly a classical school economist (if there had been a classical school at that time. Augustus first began a currency system moving the people from a barter economy to a more manageable money economy. The Printing of the first coins was done in copper and to give the currency it linked to a commodity. A head of cattle was used as the commodity to give value to the currency and thus the coin resembled the fact. The coin was in the shape of a cowhide complete with four legs protruding from the corners. The Mediteranian had been devastated by years of war and all neighboring economies were weak and combined with the growing Roman economy expansion was inevitable. Augustus decided that to build the economy up he would favor free trade and dismiss almost all taxes. During Augustus's reign there was only a modest duty on customs (estimated at 5 percent). Augustus also abolished several practices that were holding the economy back; such as Tax farming and regularization of taxes. Augustus almost had a fully "Lessiaz Faire" economy with the exception of Egypt, which will be discussed later.

Everything that Augustus did would seem quite beneficial by the Physiocrats almost 1700 years later. But not everything that Augustus implored was for the best. The large fluctuations of grain prices throughout the seasons made it difficult for citizens to maintain the supply that they needed. So, free food was given or at least free grained was dispersed to citizens. This practice was in place till the fall of the Roman Empire in 409 A.D. In the short run this worked well because the people were happy and thus produced more. The grain that was dispersed was only a fraction of the grain industry but yet it still hindered the industry from reaching the growth potential that it had. The Romans never did develop any theories on diminishing marginal utility and thus never realized that providing a good for free will only hinder an economy. This misallocation of resources is the reason why Egypt was not allowed the free trade of the other Roman provinces. The free grain was distributed to subdue the people and to gain support and to maintain the amounts of grain needed Rome had to have strict control over the production. Thus Egypt maintained its socialistic economy and mainly produced the amount of grain the government called for. Also Augustus developed a lager system of currency that contained more metals and slowly moved from being based on commodities to being based on rare metals mainly gold, silver, brass.

Shifting the currency to a multiple metallic economy caused many problems that were never solved even through Rome's downfall. First, any shift in the scarcity of a metal would lead to fluctuating values of the currency. Stated more clearly, if silver becomes more abundant then the (fig 1.1) demand curve shifts left and the price or value decreases. Thus if your wealth is all in silver you could lose a lot of money. It would be as if your New York Stock Notes were used as cash instead of a coin. This caused many problems for the Romans to solve.

Now putting the issue of currency to the side let us look deeper into other economic decisions that were made. The practice of distributing free food cost a large sum of money and the only way to combat this was to raise taxes. In the early stages of the empire Rome used a "wealth tax on all forms of property, including land, houses, slaves, animals, money and personal effects."(Bartlett, 1994) At this time the tax was based on what was needed to pay for the army; and the tax was levied on individuals. As the Roman Empire expanded the tax became too difficult to collect so the tax was levied on communities instead. Another wrong decision made by the Romans was to institute "tax farming". This was primarily done to ease the collection of taxes and in theory sounds to be a good choice. The system worked this way; an individual would choose a district and pay that district's taxes upfront. In sense giving the government a loan for the year, then the individual would go and collect the taxes. However, in practice this system was horrible because the tax collector would not only collect the tax but he would also add on the money lost (interest) and a little profit. This is the precursor of organized crime and extortion. A popular economist of the modern world wrote much on the topic of the evils of human nature and how that relates to economic policies. Only if Malthus had been alive during the Roman Empire a great civilization may not have been lost. Though this form of taxation did not last long and was replaced to an extent. The empire then moved to a direct taxation but this time the tax was fixed at a certain rate. So now the people knew exactly how much they had to pay and any income over that amount was purely theirs. This is a huge incentive for the people to increase production and in the short run quickly expanded the economy. However, in the long term the government was not receiving its share of the GDP and thus could not grow as quickly. This direct system though was more beneficial than the tax farming method.

Now let us discuss the money supply and how the Romans utilized this tool. The Romans had no real grasp on how to use the money supply to combat the business cycle. The money supply was increased as demand increased. This has been proven to increase inflation but at the time the Roman Empire