At the end of the section of the blog on “Financial Markets” I tentatively listed some of the conclusions that the blog is pointing to. The next section then looked at the issue of “Distribution”, and in my last post I reviewed these conclusions in the light of that analysis.
One point that stands out is the extent to which this analysis highlights a role for government in regulating, stimulating and coordinating the economy. This is likely to immediately elicit howls of protest – the richest countries in the world are those that have embraced free-market capitalism. Arguing for a role for Government is just socialism, and that’s bound to fail – look at the example of Russia.
This kind of emotional response gets in the way of rational, evidence-based thinking. Scientific thinking requires freedom from ideology, whether right wing or left wing.
So in this section of the blog I am going to examine the history of how Britain and the USA became, each in turn, the most economically successful nations of the world. These lessons of history have been completely obscured by a myth that has so dominated the political and economic conversation in the West that it is accepted as fact, and this section will go on to explore why these myths have prevailed and the implications for how we create an economy that provides enough for everyone.
So I’ll begin this week with the story of Britain’s rise to economic dominance in the 18th and 19th centuries. I’ve attempted to summarise this story as much as I can while still covering the essential points and not losing so much detail that it distorts the picture. This is quite a long post, but I thought it better to cover this in one go.
I’ll start at the end of the 17th Century, when Britain’s textile industry – the heart of its economic growth over the previous 200 years – was getting hammered by cheap Indian cotton imports.
The response of the British Government was to impose tariffs and even outright bans on some imports through a series of Acts between 1685 and 1721 (see this article for more details and references). Protected from cheap imports, the textile industry was able to innovate, grow and develop. Specific technological advances, such as Hargreave‘s spinning jenny and Cartwright‘s power loom, revolutionised the industry, making it vastly more productive. Britain could now compete internationally.
And suddenly Britain became an international advocate of free trade!
In Europe, other nations listened to these arguments for a brief time, and then realised that the British were simply arguing for what was in their own national interest. Across Europe, nations realised that they needed to do what Britain did, not what Britain said they should do. Each European nation copied Britain’s path of economic development, using protectionism to nurture those industries critical to this development. The response of the USA is even more striking and illuminating, and we will consider that next week.
In saying this, I’m not suggesting that there was a deliberate “conspiracy” by the British to convince other countries to adopt free trade policies that would actually weaken those economies and favour the British. I haven’t made the in-depth study of this period of history that would be necessary to form an opinion on the motives of the British at that time. But if we look at the modern world, almost all those arguing for free market capitalism are absolutely sincere in their arguments, arguments that have no basis in empirical or historical fact. Indeed, this section of the blog is essentially concerned with analysing this human capacity for self-deceit so that we do not fall prey to it ourselves. Similarly, free trade advocates of the time may well have been sincere in their beliefs, but believing what they wanted to believe.
Of course, it was during this period that Adam Smith’s The Wealth of Nations was published. There is no doubt that Smith was sincere and passionate in his beliefs, and in fact I am not directly challenging Smith’s analysis. Modern notions of what Adam Smith was saying are gross over-simplifications and distortions made in the context of current economic thinking, and for the purpose of raising him up as a “prophet” of free market capitalism. It would be too much of a time-consuming tangent to write a post on Smith’s work, but I would recommend Adam Smith: A Moral Philosopher and His Political Economy by Professor Gavin Kennedy, a leading scholar of Smith’s life and work.
The point here is that, whether knowingly or not, the British advocacy of free trade was in their national interest because of the strength of their industry. Had the European nations of the time adopted it they would not have developed their own industries. They quickly realised this and adopted protectionist and interventionist industrial policies until their economies were also strong enough to compete in a free trade environment. This period of history is masterfully described in Erik Reinert’s How Rich Countries Got Rich… and Why Poor Countries Stay Poor.
But let us come back to the concept that certain industries are critical to economic development. The industrial revolution, of course, was driven by technological innovations that greatly enhanced productivity, but by far the greatest contributor to the wealth of the nation was the textiles industry. It is no exaggeration to state that without the innovations in the British textile industry there would have been no industrial revolution in Britain.
This is, in fact, a pattern repeated throughout the world even today. Production of textiles is typically the first step in the development of industrial capacity. For all the technological advances, even today textile production requires significant labour to carry out physically demanding but extremely boring work. Whichever country can offer the cheapest and most docile labour force will develop a textiles industry. This sets in motion two processes. On the one hand, the development of industrial capacity raises the possibility of moving into other industries, and on the other, over time the workforce becomes less docile and less amenable to exploitation. The natural next step is for the nation to build on its industrial capacity, including the new skills of its workforce, and climb one step up the ladder of technological development, producing household electronics. Meanwhile, another impoverished country will fill the gap in the production of textiles, aiding its own path to industrial development. Japanese economist Kaname Akamatsu described this dynamic, calling it the flying geese paradigm – the most advanced country in this process of industrial development is like the lead goose in a flock, while other countries follow the same path of development in its wake. These two processes are also described in Pietra Rivoli, The Travels of a T-shirt, chapter 8.
And this all began in Britain, but without the British Government’s protectionist measures it would never have happened at all. There would have been no textile industry to innovate, it would literally have been wiped out by Indian imports. Britain owes it’s great wealth and international dominance to protectionism, not free trade.
This is not to say that free trade did not play a role. As stated, once it had revolutionsed its industry, then free trade was certainly in Britain’s interests. But as mentioned, the rest of Europe did not play ball. But where political persuasion failed, Britain had another card it could play throughout the world – military might.
The British Empire really needs its own post, or even series of posts, but I don’t want to get bogged down in the historical details. It is a deeply emotive subject, with many unable to accept the reality that the Empire was essentially a repressive authoritarian regime that squashed populations down through oppressive measures including outright slaughter, that stole their land, and in particular stole their natural resources. These resources flowed back to Britain, feeding its flourishing manufacturing industry.
I particularly recommend Niall Ferguson’s Empire. Ferguson is one of the most successful and prominent writers of history for the general public in Britain. He’s also a committed neoliberal ideologue. If he cannot make a good case for the Empire, no-one can. In the introduction to his book, he is explicit that he wants to make the case that, on balance, the Empire did more good for the world than harm.
To his credit, the body of the book reports factual history – he is not distorting it to make his case, because the book utterly fails to make his case! Occasionally, having reported some abuse by the imperial authorities, he will drop in a comment that such abuses would have been so much worse under any other ruler, whether imperial (i.e. other European powers) or indigenous. He also repeatedly tries to “trade off” the injustice of the empire against the spread of ideas of individual liberty around the world.
Even if both these points are valid (and they certainly have some merit), it does not change the evidence of his own book, that the empire ruled by military might and repression, subjugating the local people. The fact that any other ruler may have been worse does not itself justify the British, and in any case, the point here is not about whether it was justified or not. The point is that Britain became rich by subjugating nations and stealing their natural resources. This does not mean that the British were particularly bad – this is the basic pattern for the entire human race in all parts of the globe for all of human history – it simply means that there is nothing distinctive about the story of British power and wealth. It is the same old story of conquest, subjugation and theft.
And while Ferguson’s book reports on these abuses, he nonetheless glosses over them. There are many books that do detail these crimes, but I particularly like Richard Gott’s Britain’s Empire. Although Ferguson is a professional historian and Gott a journalist, Gott’s book is in fact the more scholarly work. It is much drier – he reports historical fact, then gives a reference where this fact can be verified. The book is an unrelenting account of decade after decade of severe repression in every territory that Britain conquered, while the peoples of all these countries never ceased their efforts to break free of the colonial yoke. Any idea that any colony was ever a grateful recipient of Britain’s civilising influence is pure guilt-alleviating, romantic nonsense.
To bring this back to the subject of trade, it is a moot point to say that the Empire ensured free trade – this was hardly free trade between nations, it was vassal states producing goods for their imperial master in a relationship that can be seen as an international version of the feudal system. When Britain introduced tariffs to protect it’s textile industry, the Bengali textile industry could not retaliate because by then it was in the hands of the East India Company. And of course, the owners of production facilities in the colonies were usually themselves British, so the bulk of the profits of this “trade” ended up in the hands of British businessmen living overseas. Typically, the colonies were actually forbidden from developing manufacturing industry – their role was to supply raw materials for Britain’s manufacturing industry, not to compete with it (see, for example, Reinert, pages 165-170).
To complete this picture, a word must be said about Latin America, whose story is told in Eduardo Galeano’s seminal history Open Veins of Latin America. Never actually a British colony, Britain nonetheless was able to profit from its subjugation. The Latin American colonies were largely run as raw material producers for Spain and Portugal. Initially gold and silver were the most important commodities, and as these reserves were consumed they evolved into giant cattle ranches for their imperial masters.
To take Argentina as an example, by the time of their independence in the early 19th century it had nascent rudimentary industry producing goods needed for cattle farming, such as stirrups and saddles, as well as clothing. Then along come the British with their doctrine of “free trade”. This was highly attractive to the merchants in Buenos Aires, at that time not a significant economic centre for the country. The flood of cheap British imports enriched these merchants, but annihilated the country’s nascent industries. It reached a point that all the ponchos worn in Argentina were manufactured in Lancashire. Galeano reports that even paving stones were imported from Britain! The only Argentinians to benefit were the merchants, who took over control of the political systems left behind by the colonists, systems that were designed to subjugate and keep poor the mass of the population. And in this story we see the roots and the pattern of the tragedy that has afflicted South and Central America.
In summary, Britain nurtured its early industrial development by protecting it from foreign competition. It fed that growth through the theft of raw materials from subjugated lands. It then maximised its wealth once it had developed strong industries through the imposition of free trade on other countries, initially secured through military might and only later through political persuasion.
This is not to say that these were the only factors. There are elements of truth in the myths that dominate modern thinking – for example, the concept of individual liberty and the resultant free enterprise were important elements. A full and accurate account of Britain’s economic development would reveal a multi-faceted range of factors. But the popular belief that Britain was economically successful primarily because of free enterprise, free trade, and free market capitalism overlooks and obscures many of these factors, including the ones described in this post. Similarly, this post is not a complete account of how Britain grew rich, but the factors described were absolutely indispensable, and without them Britain would not have become the richest nation in the world. The commonly accepted account of how we grew rich is so incomplete as to be wrong. It is, quite simply, a myth.
Next week we will compare this to the American experience.