Oscar Gill-Lewis on one of history’s most illuminating case studies about the effects of economic controls.
Allow me to set the scene for you.
The Iberian Peninsula is on fire. Buildings are destroyed, cities are in tatters, infrastructure is devastated, families are torn apart and around 200,000 people are dying from starvation.
Spain has become a military dictatorship under Francisco Franco, “El Caudillo” (“The Leader”). The brutal 3-year civil war cost hundreds of thousands of lives, with some scholars putting the death toll as high as one million.
In taking control of the country, Franco merged parties that fit his ideology and made this the only legal party in Spain. He gave himself full military control, and was free to rule Spain how he saw fit. Clearly, an excellent military strategist and leader, but his grasp and knowledge of economics left something to be desired. Despite this, Franco set about shaping Spain and its economy with his own economic theories and ideas. One of the principal guiding principles of the dictatorship was national-syndicalism, believing that liberal capitalism had failed.
The Falangists got their wish as Franco transformed the state into what Thomas Hobbes describes as a ‘Leviathan’.
“Spain is a privileged country which can be completely self-reliant. We have everything necessary to live and our production is sufficiently abundant to ensure our subsistence. We have no need to import anything.” – Francisco Franco
Franco wanted Spain to be a self-sufficient country and a world power again, and therefore introduced the totalitarian state. To gain economic independence and boost its military strength to rebuild its empire, he made industrialisation a top policy priority. Industry experienced an incredible amount of state intervention. The state became a corporation, which was believed to be a vital step to develop key industrial sectors and others related to the military. Furthermore, the private industrial sector was weighed down by many regulations including price fixing, quotas, control of foreign trade, limits on foreign capital and enterprises attempting to expand certain industries or create new ones. Rather than build a new superpower, Franco took agency away from the private sector and instead intensely regulated it, making it unproductive, concentrating power in the state, and closing the doors to foreign investment, further stagnating the economy.
Agricultural policy, however, was surprisingly not prioritised as much, despite the aim of food self-sufficiency. The distinct ideologies in Franco’s coalition were unable to agree on agricultural policy. The conservative Carlists wanted to maintain private property and entrepreneurship, while the National-Syndicalist Falange wanted radical agricultural reform with large syndicate farms and redistributive economic and land policies. These collectivist policies were never enacted, but landowners and farmers’ freedom of action was limited through many laws. These laws affected private property without requiring the owner’s consent, they compelled products to be sold at a fixed price determined by the state and introduced mandatory quotas for raw materials and equipment. These policies culminated in a chaotic agricultural sector and were largely culpable for the famine of the Years of Hunger.
As we have seen, Franco’s economic barriers blocked foreign talent and investment coming in and stagnated the remaining economy. Franco’s autarky also introduced ideological barriers, exiling and purging talented individuals, especially economists. According to Francisco Comín, “The Spanish economists of the first third of the 20th century had excellent theoretical and empirical training and were able to gain a precise understanding of the economic reality of their time. Furthermore, they advised the government, designed the most important economic reform projects and carried out valuable studies on the Spanish economy”. Economists and those in other professional fields related to politics with a high level of technical ability, though not aligned with the dictatorship, were exiled, purged or imprisoned. Even remaining economists were not given roles of authority or influence in the state. The few economists with influence were aligned with the state, as they were neo-mercantilists, discouraging the imports Spain sorely needed.
The Franco regime, after culling economists and other politics-related personnel with any technical ability, was left with military personnel, engineers and lawyers and expected them to bring about Spain’s new golden age. Instead, the country became more entrenched in its autarkic policies that had already stagnated the economy and started a famine. The New State restricted and controlled private industry for the sake of an allegedly superior national interest. Simple determination from the Francoist authorities was not sufficient to convert these people into expert economists. Manuel Gonzalez said:“[I]f something was not going well, the ideas could not be considered to be wrong. It was believed that individuals were to blame (rather than the system)” which explains the swift personnel changes and sluggish policy and ideological changes. The Spanish economy functioned this way for twenty years.
As well as purging economists, the Franco regime also eliminated the main institutions of economic studies, which had had a high level of technical competence pre-Civil War. Spain also closed the door to the economic thought that was flourishing in the most advanced and democratic countries, namely capitalism.
In 1959, with Spain on the point of bankruptcy, suffering from food shortages, with low economic growth, external pressures and the offering of international aid, Franco liberalised the economy. He placed competent technocrats in charge of the reforms and opened the doors to tourism and international firms. Economic growth exploded as Spain became the second fastest-growing economy in the world and the period of autarky came to an end, creating what is now known as “The Spanish Miracle”.
Spain suffered heavily during this period of autarky because Franco preferred to pursue his ideal society with little knowledge or understanding and refused to reduce trade barriers and allow desperately needed imports and investments. It wasn’t just Franco’s economic barriers that caused unnecessary damage, but also his geographical and ideological barriers. By refusing to allow talent into the country that could help steer the ship in a positive direction, while also exiling and censoring those already within the country that could have helped, the economy stagnated. But by lowering trade, geographic and ideological barriers, the country experienced a boom of economic growth.
We should remember Richard Cobden’s important words: “Warriors and despots are generally bad economists, and they instinctively carry their ideas of force and violence into the civil politics of their governments. Free trade is a principle which recognizes the paramount importance of individual action”.
