The chart below tracks the ratio of Spanish to British income per person between 1277 and 2024, and it records one of the most dramatic economic reversals in European history. In a new working paper, Leandro Prados de la Escosura of Universidad Carlos III de Madrid has produced the most careful account yet of why the gap opened. His answer is that Spain stopped being good at using what it had. Using sophisticated price data to measure economic efficiency, he finds that Spain and Britain were roughly equal in worker productivity as late as the 1590s. Then Spain fell behind. By 1800, British workers were more than twice as productive as Spanish ones. The culprit was not a shortage of land or capital. It was a collapse in what economists call total factor productivity—basically, how efficiently an economy turns its resources into output. Spain had the inputs. It just stopped using them well.
Why?
Prados de la Escosura points to several causes. The most important, in his view, is de-urbanization. Between 1591 and 1646, the share of Spain’s population living in cities fell from nearly 15 percent to under 9 percent. That might sound like a small reduction, but it wasn’t. Cities are where commerce, specialization, and productivity gains happen. In northwest Europe, especially England and the Netherlands, growing cities were pulling agricultural workers to be more productive, because urban demand gave farmers a reason to produce surpluses and earn money to buy city goods. Spain ran this engine in reverse. Escosura’s research with Carlos Álvarez Nogal shows that as King Philip II doubled consumption taxes to pay for his wars across Europe, Castilian cities shrank, trade contracted, and incentives for productivity improvement disappeared. Real wages and land returns fell.
Remarkably, Philip II was compelled to raise taxes despite the massive amounts of silver that Spain received from the New World. Scholars continue to debate the effect of silver inflows on the Spanish economy, but silver’s damage to Spanish institutional development is widely accepted. The crown used silver-backed borrowing to finance wars without seeking the consent of the Cortes, or Spain’s parliament. That allowed Philip II to present the Cortes with fiscal faits accomplis: spend first, demand taxes afterward, leaving representatives little choice but to comply. The Cortes, which had genuine potential to evolve into a meaningful constitutional check on the monarchy, as happened in Britain and the Netherlands, was gradually sidelined and eventually met only ceremonially after 1663.
That matters for a much larger debate. A popular argument holds that Western prosperity was built on colonial plunder. Spain’s experience cuts against this story on both logical tests. Was colonial wealth sufficient for prosperity? Clearly not. Spain extracted more treasure from the Americas than any other European power, yet fell into seven bankruptcies between 1556 and 1656, as well as prolonged relative poverty. Was it necessary? Also no. Most scholars, including the Nobel Prize-winning economist Douglass North and the Nobel Prize-winning economic historian Joel Mokyr, agree that Britain’s great productivity surge (the one that left Spain so far behind) was driven by better domestic institutions, including parliamentary checks on the power of the monarch, and the concomitant commercial, scientific and technological dynamism—not by what was taken from foreign territories.
True, Britain also had an overseas empire, though it was less extractive and came later. The most decisive evidence in favor of domestic reforms and endowments rather than colonial exploitation as drivers of prosperity, therefore, comes from countries that had no colonies at all. Switzerland became rich without a single overseas possession. Ditto Norway and Finland. Swedish colonies amounted to little more than St. Barts in the Caribbean. The German colonial footprint was trivial before 1884—by which point the country had already become an economic powerhouse. In that sense, the German Empire in Africa was a result, rather than a prerequisite, for prosperity.
The engine of Western European prosperity was ingenuity and good institutions—things that could be built at home and destroyed there too. Spain’s story, in the end, is not about what was seized abroad. It is about what was wrecked at home by war, by taxes, by the slow suffocation of the parliaments, cities and industries that might have carried Spain into modernity alongside Britain.
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