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EMPIRE and TRADE
•
Britain is an open economy, with a considerable part of the
economy relying on foreign trade.
Two important questions:
•
•
What was the role of foreign trade in promoting technological
progress and economic growth in Britain between 1700 and
1900?
Britain controlled large amounts of non-British territory. To
what extent was the “British Empire” an essential part of
foreign trade and to what extent did it contribute to economic
growth?
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Economics suggests that Foreign Trade and
Economic Growth affect each other.
Growth
Foreign Trade
1.
Technological change affects trade simply because
some of it takes place in the area that reduces trading
costs (shipbuilding, navigation, telegraph, development
of insurance and financing).
2.
Growth for any reason leads to more imports because
many imported goods tends to have a high income
elasticity (tea, sugar, tobacco, chinaware, silks, fur
hats). Still true in US today?
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Growth
Foreign Trade
(cont’d)
3. Possible economies of scale makes trade less costly (e.g. in naval
force protecting trade routes; setting up stations for provisioning;
or in information gathering). [But: some small economies did
historically very well in international trade such as the Netherlands
and Venice].
4.
Technological progress demands certain specific inputs that
sometimes have to be imported, meaning the country has to
export to pay for this. Example: cotton.
5.
More than anything else: as technological progress took place
and certain tradeable goods fall in price, they will become more
competitive on the world market and exports will increase (which
will also lead to a rise in imports in the long run).
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Reverse direction?
Growth of Foreign Markets
1.
2.
3.
4.
5.
Economic growth?
In the simplest terms, gains from trade increase economic welfare and
income.
Larger markets for goods that a country specializes in lead to economies
of scale and learning by doing.
The possibility of imports makes domestic markets more competitive,
since producers have to worry about foreign competition.
Competition with other nations constrains governments from outrageous
acts since it always has to worry about foreign competition.
International trade exposes countries to new goods, new technology, and
new ideas.
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In the British Industrial Revolution
The British Empire is often argued to be a “cause” (or facilitator)
of the Industrial Revolution. The Empire provided it with
broader markets, and this demand triggered a supply response.
Does this make sense?
An subset of this view is the “Williams Thesis” (named after
Eric Williams): profits from the Atlantic trade in slaves and
sugar helped trigger the Industrial Revolution.
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This causality seems to be less persuasive.
•
In part, the History does not work. Many other European
nations had successful empires by 1800 (France, Spain,
Netherlands) yet these did not trigger an Industrial
Revolution in those economies that early. Moreover, Britain
lost its most successful colony in 1783.
•
In part the Economics does not work. We can easily
compute the contribution of foreign markets as opposed to
domestic demand.
•
Assume foreign demand is perfectly elastic at some “world
price” [small economy assumption].
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S
S’
E
E’
P
Df
E’’
P*
Dd
O
d
j h
f
g
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•
•
Explanation: the domestic demand curve is Dd; the
foreign demand curve is the flat line Df. The effective
demand curve is the kinked blue line. That means that if
Supply is at S, the economy is at point E and does not
export (but imports if it can). A technological change that
moves the supply curve from S to S’ will make the
country a net exporter. The amount it sells abroad is now
hg.
Without exports, the economy would be at f and the price
would be P* < P.
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Is export the “cause” of growth?
•
•
The cause is obviously whatever caused the supply
curve to shift from S to S’. The role of exports is to
prevent the price of the good subject to innovation from
falling too much. Without the export market it would have
fallen much more, to P* (this is known as a worsening of
the terms of trade).
In that respect export markets were important. But that is
not the same as being a “causal factor” in the Industrial
Revolution or of causing the shift of S.
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•
•
But could the shift in the supply curve be caused
somehow by larger (or expanding) markets?
Famous statement by Matthew Boulton: In 1769
Matthew Boulton wrote to his partner James Watt, "It is
not worth my while to manufacture your engine for three
counties only, but I find it very well worth my while to
make it for all the world" --- this means that there were
fixed costs that would only be covered in large markets. -- but this statement is incorrect.
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•
•
Did foreign markets “stimulate” demand and led to
“demand-induced” innovation?
We should keep in mind that all the manufacturers in
Britain’s textiles and other goods were fairly small
relative to the market (except machinery makers) so that
they took demand as parametrically given.
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What about Empire?
•
•
The point about controlling overseas territories is not that
it allows the mother country to trade with these areas,
but that they could trade at advantageous terms, and
perhaps exclude others.
Yet the striking thing is that much of Britain’s overseas
trade is with areas that are not part of its Empire. Above
all, of course, the U.S. after 1783, but also later Latin
America, Otttoman Empire, China. Most important: trade
with other European countries.
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By the mid-nineteenth century, India had become the
most important part of the British Empire
• Yet India was poor and remote (ships had to sail around Africa until
1869), and became a major destination for British cotton goods only
after mechanization was in full swing.
•
•
•
Some Britons made a lot of money in India in the eighteenth
century (“nabobs”) but “corruption” was regarded with alarm in
Britain.
Most other parts of the British Empire were very thinly populated
(Canada, Australia).
The Caribbean Islands were an exception, sugar trade very
profitable and textiles for slave workers were an important export.
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However: Foreign trade was important to technology
•
The importation of foreign techniques (many of them copied or
adapted from other cultures). Most important examples: the
introduction of potatoes to Ireland, chlorine bleaching from France.
•
The importation of foreign goods stimulated imitative technologies
that may have been better in the long-run than the ones they
imitated (chinaware, cotton goods such as calicots and muslins).
•
More indirect: The existence of long-distance trade led to
institutional changes that prepared the ground for further changes
(urban merchant class in Atlantic Ports) (Acemoglu et al.)
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The statistical history of British foreign trade:
composition of imports (in %)
1785
1795
1805
1815
1825
1835
1845
1855
Manuf
Raw
Materials
Foodstuffs
of which:
cereals and
meats
10.5
47.1
42.4
2.6
7.1
44.7
48.2
6.4
3.4
54.2
42.4
5.7
1.1
56.3
42.6
3.2
1.6
62.3
36.1
4.2
2.7
67.9
29.4
2.9
4.3
62.3
33.4
10.3
5.1
59
35.9
15.4
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What were the sources of imports? (in %)
N&NW
Europe
South
Europe
NE &
Africa
Asia (inc. USA
China)
Canada,
Austral.
W. Indies,
Latin
America
1785
29.7
14.1
2.1
24.3
5.7
1.7
22.5
1795
30.3
13.5
1.7
21.4
5.7
1.6
25.8
1805
26.1
12.6
1.2
15.8
8.2
1.9
27
1815
23.3
11.8
1.7
18.2
6.1
3.5
35.3
1825
30
10.5
3.2
19.3
10.6
5.7
20.5
1835
29.1
8.3
4.7
16.4
18.8
6.5
16.1
1845
29.7
7.1
5.7
17.2
17.1
9.8
13.2
1855
29.6
6.7
7.6
17.0
20
7.0
12.1
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What this shows is:
•
Britain was trading with the entire world.
•
But Europe and US always close to 50-60% of all trade
•
Trade with Asia important but not overwhelming.
•
Importance of W. Indies declining, Canada and Austr. rising
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British Exports, by main sectors (in %)
Manuf.
Foodstuffs
Raw Materials
1785
84.0
9.2
6.8
1795
87.4
8.8
3.7
1805
90.0
7.1
2.9
1815
85.5
11.2
3.3
1825
92.4
4.6
2.9
1835
91.1
3.4
5.5
1845
88
3.1
8.9
1855
81.1
5.6
13.3
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British Exports, by destination (in %)
N. and
NW
Europe
S.
Europe
NE and
Africa
Asia
USA
Canada
W.
&
Indies &
Australia S.
America
1785
22.6
19.5
4.3
14.3
22.4
5.5
11.3
1795
13.9
11.5
2.5
16.2
29.4
5.4
21.0
1805
27.2
9.4
3.5
7.2
27
3.3
22.3
1815
29.7
17.9
1.3
6.2
16.5
7.3
21.1
1825
24.8
14.6
2.9
10.4
16.1
5.3
25.9
1835
25.2
12.9
4.9
10.5
20.4
6.2
19.8
1845
29.7
10.1
7.5
17.6
12.3
7.6
16.3
1855
24.2
8
9
13.1
19.6
13.5
12.6
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History of Textile Exports
Wool
(in £
1000s)
Cotton
(in £
1000s)
Cotton
as %
Europe
of total
1785
3700
766
17.1
1795
5194
3392
1805
6172
1815
Wool (%)
Cotton (%)
Asia/
Africa
America
/Austr.
Europe
Asia/
Africa
America
/Austr.
67.8
7.4
24.7
40.5
21.4
38.1
39.5
34.6
12.9
48.6
22.6
5.8
71.6
15871
72
28.2
18
53.6
45.5
4.3
50.2
7866
18742
70.4
36.6
14.1
49.2
60.1
1.9
38
1825
5737
16879
74.6
31.9
17.9
50.2
51.4
10.1
38.5
1835
7037
22398
76.1
30.2
14
55.7
47.4
18.1
34.5
1845
8328
25835
75.6
42
12.5
45.4
39.2
36.3
24.5
1855
10802
34908
76.4
41.1
7.6
51.2
29.4
39.6
31
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•
•
•
The last tables show the meteoric rise of cotton, but wool
exports did not decline, they actually grew.
Most of the markets were in Europe and North America.
The importance of the Indian market for cotton only
comes late, after 1840 or so.
We can therefore not assign causality to Imperial
Markets for the Industrial Revolution.
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What about Ireland?
•
Until 1800 it was governed by Britain as an independent Kingdom.
•
In 1800 the Act of Union combines the two Kingdoms, but trade statistics
are still separate until 1830.
•
In many ways it was treated like a colony. In the eighteenth century it was
prohibited from competing with British woolen industry. What little
manufacturing there was was located in Ulster (around Belfast) and
specialized in linen. Britain decided on a policy that forced Ireland to
specialize in linen, while they had wool.
•
Irish economy is very different from British: agrarian, backward, poor.
Little industrialization, and a heavy dependence on subsistence crops.
•
Yet it was an agricultural exporter and helped supply Britain with essential
foodstuffs in some key years.
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Percentage Ireland of British International Trade
Exports
Imports
Total
Manuf
Cotton Total
Grains
Meat
Butter
Linen
1785
6.8
4.7
3.9
10.4
30.0
100
99.2
61.2
1795
9.4
7.6
10.8
9.5
16.5
98.0
87.0
69.8
1805
9.0
7.0
2.9
8.9
23.3
93.0
71.5
72.9
1815
7.2
5.3
1.3
9.8
57.0
96.7
77
94.6
1825
11.5
8.8
2.9
14.2
70.0
94.4
66.8
98.3
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Was Ireland “exploited” by Britain
Clearly Ireland played an important role in “feeding Britain”, in
part taking advantage of its proximity.
It also specialized in linen manufacturing as long as linen was not
mechanized (that changes around 1830, with disastrous
consequences for Irish linen weavers). British had prohibited
its wool industry around 1700 so as to not compete with theirs.
Much of this was made possible by the Irish “potato economy” in
which peasants grew a subsistence crop on very small plots
and labored on fields that raised grains and animals that were
mostly for export to Britain.
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The role of Empire in British economic development
•
There were costs and benefits.
•
•
The main benefits were more security of property and
contracts, buying and selling at advantageous terms,
keeping competitors out, and (in some cases) extracting
resources and taxes (that is, robbing the colonized and
their environment as well as innocent third parties such
as Africans).
Other benefits: strategic advantages (e.g. military bases), a
place to send criminals and undesirables, prestige (“Sun
never sets over the Queen’s Empire”).
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At times, some individuals made great profits:
•
Indian “Nabobs” such as Warren Hastings and Robert
Clive and many of the representatives of the East India
Co.
•
West Indies planters
•
Opium traders to China
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•
•
But such profits did not mean that they stimulated or
even aided the Industrial Revolution.
There is not much evidence that such profits were used
to finance industrial entrepreneurs or R&D efforts that
resulted in technological progress.
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Costs vs. benefits
•
•
•
•
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Moreover, the costs of Empire were huge: most of the wars
fought by Britain were partially about control of overseas
colonies, navy, administration, provisions and so on.
During these wars, privateers and raids destroyed the very trade
they were supposed to protect and enhance.
Not to mention costs to indigenous populations and Africans.
Empire also diverted and distorted the flows of trade away from
their natural and most efficient trajectories.
The problem, then as now, is that the costs were not paid by the
same people who enjoyed the benefits. If the former have little
influence on decisions and the latter call the shots, Imperialist
policies will be resorted to even if it makes no sense for the
economy as a whole.
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Why did European Nations have Empires?
•
•
•
Not clearly an economically rational action from the point
of view of the entire economy (costs > benefits in most
cases).
But some groups stood to benefit a lot and they were
well-organized and concentrated.
Headrick hypothesis: between 1800 and 1914
technological change increased the power gap between
Europeans and non-Europeans, which reduced the costs
of Imperialism.
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Examples:
•
•
•
•
Better firearms
Quinine
steamboats
telegraph
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Another explanation of Empire:
•
•
Like a Prisoner’s dilemma game: Given that Britain’s
rivals (France, Spain, United Provinces) engaged in
Imperialism, wouldn’t it be better off to do so as well
even if everyone would be better off without it?
Of course, the reason these other nations engaged in
Imperialism was because Britain did. Good historical
example of a Nash equilibrium.
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• Many of the more insightful thinkers of the time
were anti-Empire.
“A great empire has been established for the sole purpose of
raising up a nation of customers who should be obliged to buy
from the shops of our different producers, all the goods with
which these could supply them. For the sake of that little
enhancement of price which this monopoly might afford our
producers, the home-consumers have been burdened with the
whole expense of maintaining and defending that empire. For
this purpose, and for this purpose only, in the two last wars,
more than two hundred millions have been spent, and a new
debt of more than a hundred and seventy millions has been
contracted over and above all that had been expended for the
same purpose in former wars.”
Adam Smith, Wealth of Nations, Book ii, p. 180.
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The role of commercial policy
•
In 1700, Britain, like most mercantilist countries, was heavily
protectionist. Many high tariffs on goods. Also bounties on
export goods, such as cereals. Most notorious: Navigation Acts.
Britain is aggressive in protecting its dominance of the oceans
and its colonial possessions (“blue-water policies”).
•
High tariffs were meant to keep competing imports out, harm
Britain’s main competitors and enemies, and provide revenues
for the government.
•
Some of them were purely meant to favor one small but
successful special-interest pressure group (such as brewers who
wanted a tariff on wine).
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Another example: Calicot act
•
•
•
Passed in 1721 on behalf of woolen and silk
manufacturers, banning calicots, printed cotton cloths
imported from India.
Response to the so-called Calico riots.
Repealed in 1774 on behalf of cotton-manufacturers who
felt this Act could be used against them.
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Heavy tariffs on many commodities
in the eighteenth century
•
Wines
•
Sugar, tobacco, tea
•
Cereals (if prices were low)
•
Soap, glass, pottery and many other products.
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From an economic welfare point of view, tariffs are
normally a bad thing.
•
•
•
•
Yet until about 1770 most mercantilist nations, including
Britain, imposed heavy tariffs on imports.
It was believed that nations should discourage imports.
But a lot of rent-seekers took advantage of these bad
economics and benefited from these tariffs.
Adam Smith and his colleagues exposed this rentseeking for what it was and called for free trade.
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What was the point of these tariffs?
•
To benefit certain groups who were protected at the expense of others
•
To create employment (“beggar thy neighbor” logic).
•
To raise government revenues
•
To affect the Balance of Payments (mercantilist doctrine)
More recent arguments for protection :
•
Strategic arguments
•
Deterrent-retaliatory
•
Infant industry – Economies of scale or learning by doing.
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What was their effect? In a static model:
Sd
Consumer
Surplus
Sf
D
domestic
production
Imported
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Now what does a tariff do, cont’d
Sd
New
Consumer
Surplus
Sf + T
Sf
D
domestic
production
Imported
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In the static elementary model:
•
•
•
•
The losses in consumer surplus are the difference between the big red
triangle and the smaller one.
They consist of: White trapezoid+Dark blue triangle, light blue rectangle and
yellow triangle.
The yellow triangle is the “deadweight” loss. The lightblue rectangle go to
the government as tax receipts, the dark blue triangle are gains in producer
surplus for this good, the white trapezoid are gains that go to the owners of
the factors used in producing the good domestically.
Yet, while there are winners and losers, the gains of the winners are always
smaller than the losses of the losers (because the deadweight loss is
always positive)
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These losses are an understatement.
•
•
Dynamic losses:
•
Lower level of competitiveness in the economy may
mean further distortions, lack of innovation.
•
Fewer imports mean less exposure to foreign technology,
ideas, and ways of thinking.
These might be offset to some extent by domestic
economies of scale or external economies in
production
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So why can’t the losers buy off the winners?
•
•
One answer: gains are concentrated, losses widespread,
so very hard to overcome free-riding. This is not always
the case, some tariffs are imposed on goods that are
inputs in other industries.
Another: if you start this, there is a big incentive for any
industry to hold up consumers, so even if they don’t want
a tariff they might pretend as if they do.
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•
•
•
Most famous example: British Corn Laws. Classic example of “rentseeking”.
First passed in 1670, these tariffs placed heavy duties on imported
cereals, later supplemented with a system of export bounties (=
subsidies) with similar effects. Reformed in 1773 so that the tariff
only kicked in if domestic prices were low.
In 1815 they were re-instated, but by now power and ideology had
changed and they were being criticized, reformed and weakened in
the 1820s and in the end abolished in 1846 (will come back to this).
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Growing sentiment in favor of free trade
•
•
•
Tariff reductions after 1770.
Eden Treaty 1786 between Britain and France, falls between the
peace of Paris (1783) and the renewal of war between them in 1793.
Reduced tariffs on a host of textiles and colonial goods between the
two countries.
There is considerable evidence that those who pushed the Eden
Treaty through Parliament were influenced by a more “liberal” (i.e.,
free trade) ideology promulgated by Adam Smith and his students.
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In this regard, ideology played an important role
•
The eighteenth century produced the kind of political
economy that later was known as “classical political
economy”.
A. Smith, Hume
Ricardo,
Malthus
J.S. Mill
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Beneath this was a profound Enlightenment insight:
•
The economic game, and especially international trade is NOT a
zero sum game. If my partner gains from a deal, that does not
mean ipso facto that I lose.
•
This is true at all levels of trade and economic transactions.
•
Odd thing is that this is counter-intuitive and hard to accept. Yet
Smith and other writers in his tradition gradually persuaded
others that this was so.
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Why should we care about what people thought?
•
•
Because policy makers were influenced by them and
thus had their basic ideology inculcated into them by
these political thinkers.
Among the politicians influenced (by their own admission)
were William Pitt the Younger, William Huskisson, Robert
Peel --- all of them, in the end supporters of free trade.
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Policy makers were influenced by their beliefs
•
Two years after Smith’s death (i.e., in 1792), Pitt referred
in the House of Commons to “the writings of an author of
our own times, now unfortunately no more, (I mean the
author of a celebrated treatise on the Wealth of Nations,)
whose extensive knowledge of detail, and depth of
philosophical research, will, I believe, furnish the best
solution to every question connected with the history of
commerce, or with the systems of political economy.”
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•
Many of the leading liberal politicians who influenced
policy in the first half of the nineteenth century were
influenced by Smith’s teaching, especially through his
students such as Dugald Stewart.
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Yet the irony of history was:
•
In 1793 war broke out between Britain and France, which lasted
for 22 years.
•
During this war, commercial connections between Britain and the
Continent were never totally severed, but clearly they were
disrupted. Use of privateers and attacks on colonies and trade.
•
Both sides tried economic warfare: Napoleon imposed a
“Continental Blockade” on Britain (prohibiting the sales of all
British-made in countries5050 under French control). Britain
retaliated by the “orders in council” stopping the import of all
colonial goods into France.
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To make things worse
•
Commercial Relations with the US also went bad.
•
“Jefferson’s embargo” --- 1806-07.
•
Then the war of 1812-14.
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During the Wars, Britain desperately sought new export
markets for its industrial products
•
Found some in Buenos Aires and Asia, but these never made
up for the loss of the main export areas which was Europe.
•
After 1815 it hopes to get back to the European and North
American markets, but by that time many of its European
partners had imposed high tariffs to protect the “hothouse
industries” that had grown up during the decades of war.
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Yet the period 1790-1815 was one of rapid
technological change
•
One conclusion might be that while export markets are
nice and good, they are not indispensable in the sense
that losing them does not imply a complete halt to
industrialization.
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•
•
After the peace of Vienna (1815), Britain is subject to a
fierce struggle between protectionists and free-traders.
[So is the rest of Europe]
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•
•
•
In 1815 the Corn Laws were reinstated despite the fact that by this
time protectionism had come under heavy criticism. Obviously
landowners still had a lot of power.
It got rid of the subsidies but still imposed a stiff tariff and prohibiting
import altogether if the price was below 80s a quart (later amended
to 70s). In 1828 weakened even further but still had “some bite.”
Abolition of the Corn Laws: popular resistance against it became
stronger and stronger.
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•
The Anti-Corn-Law League (Richard Cobden and
John Bright)
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The struggle over the Corn Laws
For free trade:
•
•
Manufacturing interests in industrial counties.
•
Labor
•
Free trade ideologues.
• Some believed: it would increase economic welfare
• Some felt it would reduce rent-seeking
• Still others: free trade would enhance world harmony and peace.
Against: Landed interests (both landowners and farmers).
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Interesting issue in political economy:
•
Why did the landlords lose? They still ran the government.
•
But they had de iure, not de facto power. Agriculture declining as
source of income and employment.
•
Many landlords had diversified in industrial or commercial
interests. Still, it could have gone the other way.
•
In fact, protectionism returns to Europe after 1880. But not in
Britain.
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As a result
•
•
•
Britain after 1850 becomes increasingly a free trade
country.
It sticks with this policy until deep into the twentieth
century, despite growing pressures to move to a more
protectionist position.
Its failure to protect its farmers meant specialization in
non-farm products after 1875 and growing dependence
of food imports --- which makes sense in peace time but
was costly in 1914-18.
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