Nineteenth century liberalism

Background: the Industrial Revolution

The escape from the Malthusian trap

But the IR did not generate a very significant discontinuity and a sharp break

• Economic growth during the IR was slower than previously thought– Some think “IR” is a misnomer

• “Total factor productivity” (TFP) grows at – Roughly 0% before 1780– And at 0.5% between 1780 and 1860– Compared to

• 1% post-1960 for rich countries• 1.3% during 1960-80 in Latin America• 4.5% post-1980 for China• 1.7% post-1980 for India

• Real wages in urban areas did not begin to increase noticably until the mid-1800s

– Evidence of rapid increase in living standards (consumption, height, life expectancy) is hard to find at the height of the IR

• What stands about the IR is that it: – (a) enabled, for the first time, a sustained increase in population without a decline

in living standards– (b) it established dynamic new industries that would put Britain (and later

followers) on a permanently higher growth trajectory

Sources of the increase in TFP

So what was the IR about?

• Application of science and technology to production, enabling higher labor productivity– Innovation

• steam engine (Newcomen 1712; Watt 1765)• mechanical spinning (Arkwright water frame 1769; Hargreaves spinning

jenny 1765; Crompton mule 1779)– Most significantly in cotton textiles

• Changes in social and industrial organization– The factory system

• Moving people from agriculture to factory work– Dualism between traditional and modern activities

• Higher productivity and growth in the latter– Structural transformation as a key driver of economy-wide growth

• Eventual demographic transition, at the end of 19th century– Decline in fertility– Malthusian link between higher incomes and higher population growth

broken

The demographic transition

Role of trade in IR

• Promotion of domestic manufactured industries through mercantilist policies– High tariffs on finished good imports, low tariffs on raw materials

=> high rates of effective protection of domestic industry

• Profits and markets acquired during mercantilist age– Success in trade creates a (relatively) high wage and cheap

energy economy, which stimulates technological change that is labor saving (Bob Allen)

– Profits from Atlantic slave trade? (Williams thesis)– Outlets for British supply of manufactured goods

• Supply of cheap raw materials from Americas (cotton esp.)

19th century: a significant turning point

• Very rapid expansion of international trade and finance• Modern ideology of liberalism

– Smith, Ricardo• As well as new ideologies of directed industrialization

– Hamilton, List• New forms of trade policy

– Old prohibitions and monopolies disappear – Both free trade and protectionism

• Colonialism• Large labor flows from old world to new• A new center-periphery model of the division of labor: export of

industrial goods in return for raw materials• The beginnings of the “great divergence” between center and

periphery countries (North-South divide)

The state of trade policies, c. 1820

The fight over the Corn Laws

• Heavy protection of agriculture in early 19th century Britain

• Represents clash between pro- and anti-trade groups• Who benefits from agricultural protection?

– landlords

• Who loses? – Manufacturers, through effect on wages

• Therefore fortunes of trade policy reflected relative power of different groups

• Repeal of corn laws (1846) and Navigation Laws (1849)Free trade result of the ascendancy of urban manufacturing

interests

Different country, different politics

• Tariff policies historically at the center of U.S. politics– Man is “an animal that makes tariff speeches” (a Pennsylvania

legislator)

• U.S. Civil War (1861-65) a fight between North and South over slavery, but also over trade policy

• Agricultural South wants free trade (cotton, tobacco)• Nascent manufacturers in the Northeast want protection

(against British imports)• Victory for North ushers an era of high protection• Counterfactual: what might free trade have done to the

U.S. economy and polity over the longer run?– Free trade not always benign politically

US tariff history

Smoot-Hawley tariff (1930)Start of civil war (1861)

The spread of Free Trade

• The Anglo-British treaty of 1860 (Cobden-Chevalier)

• Followed by other treaties between France and continental countries

• The use of the most-favored-nation (MFN) clause– A tariff reduction provided to one partner

automatically gets extended to another

• Policies of empire and informal empire

Tariff levels in Europe before the rise of protectionism

The return to protection in continental Europe after 1879

• Economic recession from 1870 on• Especially marked in agriculture

– Due to influx of grains from New World– Due to transport revolution + trade liberalization

• Politics: coalition between agricultural and industrial interests– The former hurt by grain imports, and the latter by competition

from more advanced nations (e.g. Britain)– Marrriage of “iron and rye” in Germany

• Bismarck:“Hitherto the wide-opened gates of our imports have made us the

dumping-place of all the over-production of foreign countries. …[It] is the surfeiting of Germany with the over-production of other lands which most depresses our prices and checks the development of our industry and the restoration of our economic condition. Let us once close the door and erect the somewhat higher barriers which are proposed, and let us see that we at any rate preserve the German market … for German industry.”

Reaction in Britain

• Demands for “fair trade”– The Fair Trade League – Demands for retaliatory tariffs

• Parallels with today• Gladstone:

“An institution has been formed in the imposing name of the Fair Trade League. What in the world, you will ask, does that mean? Well, gentlemen, I must say it bears a suspicious likeness to our old friend Protection. (Cheers and laughter). Protection was dead and buried 30 years ago, but he has come out of the grave and is walking in the broad light of day, but after long experience of the atmosphere underground, he endeavours to look somewhat more attractive than he used to appear... and in consequence he found it convenient to assume a new name (Laughter)... can you strike the foreigner hard by retaliatory tariffs? What manufactures do you import from abroad? In all ,£45,000,000. What manufactures do you export? Nearer ,£200,000,000 (cheers)”

(Note the mercantilist argument in favor of free trade!)

The role of the state in promoting and maintaining global trade

• Did domestic liberalism (where it existed) carry over internationally?

• Not really• Problem redux: how do you ensure security and contract

enforcement in international commerce?– Under mercantilism, these functions were devolved to (or shared

with) chartered trading companies– Under 19th century liberalism, states took them on

• Through both formal (e.g. India) and informal empire (“gunboats”, e.g., Latin America, Asia)

• Niall Ferguson: the British empire brought law and order to societies which did not have any…

• “The imperialism of free trade”– Formal and informal influence are a continuum, and applied by

Britain depending on the circumstances

“Anglobalization”

“no organization in history has more to promote the free movement of goods, capital and labour than the British Empire in the nineteenth and early twentieth centuries.”

-- Niall Ferguson (2003, xxi)

“The imperialism of free trade”

“One principle then emerges plainly: it is only when and where informal political means failed to provide the framework of security for British enterprise (whether commercial, or philanthropic or simply strategic) that the question of establishing formal empire arose. In satellite regions peopled by European stock, in Latin America or Canada, for instance, strong governmental structures grew up; in totally non-European areas [e.g., Africa], on the other hand, expansion unleashed such disruptive forces upon the indigenous structures that they tended to wear out and even collapse with use. This tendency in many cases accounts for the extension of informal British responsibility and eventually for the change from indirect to direct control.”

-- Gallagher and Robinson (1953)

Evidence: the trade effects of formal empires

“Our augmented gravity model shows that belonging to an empire roughly doubled trade relative to those countries that were not part of an empire. The positive impact that empire exerts on trade does not appear to be sensitive to whether the metropole was Britain, France, Germany, Spain, or the United States or to the inclusion of other institutional factors such as being on the gold standard. In addition, we examine some of the channels through which colonial status impacted bilateral trade flows. The empirical analysis suggests that empires increased trade by lowering transactions costs and by establishing trade policies that promoted trade within empires. In particular, the use of a common language, the establishment of currency unions, the monetizing of recently acquired colonies, preferential trade arrangements, and customs unions help to account for the observed increase in trade associated with empire.

-- Mitchener and Weidenmier (2008)

Evidence: independent countries outside Europe

• Enforced policies of free trade– China: Opium War of 1839-42 (remember the East India

Company?) and opening up of the country; tariff levels restricted to 5% by treaty

– Japan: Treaty with U.S. in 1854 restricts duties to 5%; tariff autonomy gained slowly starting at the end of 19th century

– Turkey: treaty with Britain in 1838 puts ceiling of 5% on duties and abolished import prohibitions and monopolies

Trade policies in 1913

Trade policy and growth

Trade policy and growth: more details distinguishing by type of tariffs and with controls

Dependent variable: growth of GDP per capita over 5-year periods

Source: Lehmann and O’Rourke (2008)

Trade and growth

• Gains from trade refer to one-time, level effects• Trade policies may also have dynamic, growth effects• These depend on how trade policies interact with the

source of economic growth and dynamic sectors– If open trade policies pull resources into sectors (e.g.,

manufacturing) that are the engines of growth, positive effects– Negative effects otherwise?

• Adverse effects of primary product specialization

• Will return in the context of discussion on development