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Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy by JOHN E. SILVIA

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Chapter 4

Economic Dynamism: Growth and Overcoming the Limits of Geography

In 1453, the Ottoman Empire conquered Constantinople, the ancient capital of the Eastern Roman Empire. From this position of power, Muslim authorities controlled the trade routes to the east and extracted taxes from all who sought to enhance their fortunes. For Western Europe, the trade over the Silk Road1 had been the path to economic growth and prosperity. How, then, could they overcome the challenge to growth and the barrier the Ottoman Empire presented in terms of geography? The answer, and the unintended consequence of this situation, was the incentive to find a way to avoid these taxes and the beginning of the great age of European exploration. Despite the dangers involved, by the end of the fifteenth century the Portuguese had rounded the Cape of Good Hope at the southern tip of Africa and reached India. By 1510 they had reached the Spice Islands, the source of spices such as pepper that yielded fabulous profits once brought to Europe.2

The Portuguese opening of a new trade route in order to make money possesses the elements that still drive trade today. There was a consumer demand for commodities and or services that could not be produced domestically, but could be obtained from abroad. Entrepreneurs took the risks to meet this need, especially because high taxation creates an incentive to circumvent these tolls. Success generated huge returns to the first successful entrepreneur, Portugal, which ...

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