Great Britain and Laissez Not-so-Faire Economics

NOTE: The Growth Economics Blog has moved sites. Click here to find this post at the new site.

I recently finished State, Economy, and the Great Divergence by Peer Vries. It’s a comparison of the activities of the state in Great Britain and China in the period running up to and including the Industrial Revolution, roughly 1650-1850.

Vries critiques the standard view on the role of the state and the divergence between these two places, encapsulating that view in the following:

In the Smithian interpretation of British economic history, that fits in quite neatly with the Whig interpretation of Britains overall history, the primacy of Britain and its industrialization are by and large regarded as the culmination of a long process in which Britains economy increasingly became characterized by free and fair competition and in which government increasingly tended to behave according to Smithian logics.
….
For those who endorse them, the predicament of imperial China, that it did not industrialize, has always been quite easy to explain. They only need to refer to the fact that China was characterized by some kind of oriental despotism. This notion has a long pedigree whose beginnings can be traced back at least to Marco Polo.

The alternative that Vries proposes is that China is far more “Smithian” than Great Britain in this period, in the sense that it operated a very hands-off government that mainly served to provide some subsistence insurance to its population, while Great Britain had a relatively large, intrusive, and active government managing its economy and actively interfering in the process of industrialization. With regards to the idea that Great Britain enjoyed a meaningful advantage in institutions (re: property rights) after the Glorious Revolution, Vries has this to say:

I, moreover, see no concrete direct links between changes in property rights and the emergence of modern economic growth during industrialization in Britain, or rather I do not see any major changes in that respect just before and during take off. In several respects property rights in Britain after 1688 were not better protected, as a strengthened central government had acquired more power to interfere with them on the basis of national interest. More in general, one has to realize that, as will be discussed later on, the history of Western Europe was not exactly lacking examples of expropriation and that well protected, entrenched property rights including patents can also be an obstacle to growth.

Vries then spends a good portion of the rest of the book laying out the evidence on government expenditures, taxes, employment, and transfer payments to support the idea that Great Britain had a much more intrusive state than China in this period.

I’ll leave you to the book for the full details, but here are some essential highlights. Taxes per capita in Great Britain were approximately 20 times higher than in China. As a percent of GDP, the figure depends on exactly your preferred source for GDP data, but taxes were again much higher in Great Britain (3-5 times higher depending on the measure). Further, taxes were rising in both per capita and percent of GDP terms over this entire period in Great Britain, while they were essentially flat in China. Finally, the government in China never ran deficits in this entire period. If you are familiar with the history of Great Britain, then you know that government debt as a percent of GDP was essentially zero in 1689, right after the Glorious Revolution. From there it rose steadily, reaching a peak of almost 250% of GDP after the Napoleonic wars. It wasn’t until after 1850 that debt fell back below 100% of GDP. In terms of the number of government officials, Vries cites data that China had between 20,000 and 30,000 civil servants in the 18th century. Great Britain had an equal amount, for a population roughly 30 times smaller. Great Britain spent a much larger fraction of GDP on welfare and poor relief than China ever did.

Drawing on the excellent War, Wine, and Taxes by John Nye, Vries also talks about the attitude of Britain towards free trade:

In the 1820s, for example, the average tariff rate for imported manufactured goods was between 45 and 55 per cent. It was only after 1850, and even then only quite temporarily, that Britain really became a free-trading nation. Overall, its tariffs in the first half of the nineteenth century were so high, higher for example than in France, and continued to be high for so long that any explanation of the first industrial revolution by reference to the existence or emergence of a free-trade economy is extremely improbable. When Britains economy took off, the country definitely was not a free trader in matters of international trade.

Compared to Britain, China was much closer to a free trade nation, declining to interfere or promote imports or exports actively.

Vries wraps up his argument with

This book maintains that the historical evidence now is so heavily in favour of industrial and military policies successfully encouraging long-term economic development in England, admittedly through far more complex means than simply setting tariffs to encourage domestic manufactures, that the burden of proof falls on neoclassical economics, not on the historic record.

Mercantilism, as practiced throughout this period in Great Britain, was not simply a fascination with collecting gold. The British government actively looked to strengthen manufacturing (of imported raw materials) and used military and naval power to open markets with that purpose in mind. To do this it taxed heavily, borrowed heavily, and spent heavily.

What to make of this? There is no necessary link between strict laissez-faire policies and growth. The first industrial nation in the world was anything but laissez-faire, and it intervened far more deeply into its economy than China, which functioned in some sense as the idealized “night watchman” state of Adam Smith. There is little to no evidence that government “just getting out of the way” leads to development. The interventions Great Britain did make certainly resulted in massive monopoly rents to small groups of people at times. So let’s not go overboard in the other direction and conclude that massive state interventions are necessary or optimal. But it is valuable knowing just how un-laissez-faire Britain was during this period.

Why did Britain take off even with all this government interference? Vries doesn’t say this explicitly, but I think his answer is partly that large-scale industrialization has big fixed costs. I want two things before I undertake big fixed investments: a large market and low risk. The British government used the high taxes to fund a military that could ensure large markets around the world, and could ensure that those markets remained open so I could earn enough to pay off my fixed cost. That military (directly or by proxy) could also actively ensure that other markets did not develop competitive industries, again ensuring that I could earn enough to make the fixed costs worth it. Without the market size and low risk, maybe British capitalists are not willing to create the large-scale industries that drove the IR. In that sense, the large size of government was necessary to the industrialization of Britain.

Advertisements

16 thoughts on “Great Britain and Laissez Not-so-Faire Economics

  1. Awesome post! This fits nicely with Robert C. Allen’s narrative of the time during and after “Engels’ Pause”. Technical change (and, presumably, state-managed industrial policy) led to high returns on capital, stagnant wages, and high inequality. Eventually, the capitalists saved and re-invested some of their wealth in capital so that capital was increasing at the same rate as augmented labor. This stabilized the return on capital and finally wages began to rise (but not until about 50 years later):

    http://www.bradford-delong.com/2015/03/todays-economic-history-robert-allen-engelss-pause.html

    “A higher rate of technical progress… reduced the ratio of capital to augmented labour…. With an elasticity of substitution less than one, the higher marginal product of capital translated into a higher share of capital in national income…. Inequality increased and the real wage stagnated. The first stage contained the seeds of its own undoing, however. As the share of profits increased, the economy-wide savings rate rose… capital accumulation accelerated…. Once steady state growth was achieved, so capital grew as rapidly as augmented labour, productivity growth boosted the real wage as well as GDP per worker…. The transition from the first stage to the second, which occurred around the time of the publication of the Communist Manifesto (1848), provides a wry commentary on Marx’s expectations. The acceleration of productivity growth did, indeed, shift income from workers to capitalists, as he expected. The result, however, was not continually increasing immiseration, for the capitalists invested a portion of their extra income and the increase in the capital stock eventually allowed rising productivity to be manifest as rising real wages. History did, indeed, exhibit a stage pattern of evolution, but the stage of flat real wages was followed by the most sustained rise in real wages ever seen–not by socialist revolution. The integrated growth model captures the logic of history.”

    So what’s the lesson? Maybe high inequality allows a few capitalists to make investments that require huge fixed costs. You’ve made the point before that perfect competition isn’t optimal for growth since market power and the corresponding rents it allows creates an incentive to innovate. It seems like mercantilism and the british military-industrial policies would be wrong to replicate in modern times, even if they could improve potential growth. I’m curious as to how you think this applies to the 21st century and the robots question.

    • Thanks. You might make the case that inequality and merc were good for initial industrialization, but that’s different than being good for the long run growth.

      On robots? Not sure. I’d have to think about it more.

  2. It is tough to critique a book I haven’t read, but it seems a bit off to compare such fundamentally different societies and then focus on the degree of “strict laissez-faire policies” as the determining factor.

    Even those who do list free enterprise and property rights as critical or necessary factors don’t usually suggest they are sufficient. Other requirements often include such factors as:
    –The temporary reprieve from Malthusian forces (ghost acres and emigration)
    — High degrees of urban concentration
    — Intermediate levels of fragmentation and competition within neighboring states
    — Widespread decentralized printing and literacy
    — Exit freedom and opportunity by location and class
    — Alternative sources of stock energy rather than dependence upon solar flows
    — Freedom from tradition and clan
    — Banking, insurance, bookkeeping and freedom of organization
    — A culture of innovation, progress and bourgeois dignity
    Etc

    China was simply missing many of these factors.

    The more relevant comparison is parts of Europe to each other.

    That said, Vries summary seems 180 degrees from that of pretty much every other historian in terms of interference with freedom and markets. Here are just a few that were at hand:

    David Landes:

    http://web.stanford.edu/~avner/Greif_228_2007/Landes%202006%20Why%20Europe%20and%20the%20West%20JEP.pdf

    “First, China lacked a free market and institutionalized property rights. The Chinese state was always stepping in to interfere with private enterprise—to take over certain activities, to prohibit and inhibit others, to manipulate prices, to exact bribes. At various times the government was motivated by a desire to reserve labor to agriculture or to control important resources (salt and iron, for example); by an appetite for revenue (the story of the goose that laid the golden eggs is a leitmotif of Chinese history); by fear and disapproval of self-enrichment, except by officials, giving rise in turn to abundant corruption and rent-seeking; and by a distaste for maritime trade, which the Heavenly Kingdom saw as a diversion from imperial concerns, as a divisive force and source of income inequality in the ecumenical empire, and worse yet, as an invitation to exit… People were to stay put and move only with the permission of the state—at home and abroad. People who went outside China without permission were liable to execution on their return. The Ming code of core laws also sought to block social mobility, with severe penalties…

    These matters reached a wretched climax under the Ming dynasty (1368–1644), when the state attempted to prohibit all trade overseas. Such interdictions led of course to evasion and smuggling, with concomitant corruption (protection money), searches for contraband, confiscations and punishment. All of this neces- sarily acted to strangle initiative, to increase risk and the cost of transactions, and to chase talent from commerce and industry.

    A second reason why China did not realize the economic potential of its scientific expertise involved the larger values of the society. The great Hungarian- German-French sinologist, Etienne Balazs, saw China’s abortive technology as part of a larger pattern of totalitarian control. He recognizes the absence of freedom, along with the weight of custom and consensus and what passed for higher wisdom. His analysis (pp. 22–23) is worth repeating:

    Start Balazs quote. . . if one understands by totalitarianism the complete hold of the State and its executive organs and functionaries over all the activities of social life, without exception, Chinese society was highly totalitarian. . . . No private initiative, no expression of public life that can escape official control. There is to begin with a whole array of state monopolies, which comprise the great consumption staples: salt, iron, tea, alcohol, foreign trade. There is a monopoly of education, jealously guarded. There is practically a monopoly of letters (I was about to say, of the press): anything written unofficially, that escapes the censorship, has little hope of reaching the public. But the reach of the Moloch-State, the omnipotence of the bureaucracy, goes much farther. There are clothing regulations, a regulation of public and private construction (dimensions of houses); the colors one wears, the music one hears, the festivals—all are regulated. There are rules for birth and rules for death; the providential State watches minutely over every step of its subjects, from cradle to grave. It is a regime of paper work and harassment, endless paper work and endless harassment.

    The ingenuity and inventiveness of the Chinese, which have given so much to mankind—silk, tea, porcelain, paper, printing, and more—would no doubt have enriched China further and probably brought it to the threshold of modern industry, had it not been for this stifling state control. It is the State that kills technological progress in China. Not only in the sense that it nips in the bud anything that goes against or seems to go against its interests, but also by the customs implanted inexorably by the raison d’Etat. The atmosphere of routine, of traditionalism, and of immobility, which makes any innovation suspect, any initiative that is not commanded and sanctioned in advance, is unfavorable to the spirit of free inquiry. End quote

    In short, to go back to Elvin (1973), the reason the Chinese did not develop based on their scientific knowledge is that no one was trying. Why try? Especially since the Chinese were not without their own quiet resources to thwart bureaucratic interferences and frustrations—reliance on personal and familial collaboration, for example, in place of arbitrary or institutional practice in business. In such matters, personal trust could yield more dependable performance than legal rules.

    In all this, the contrast with Europe was marked. Where fragmentation and national rivalries compelled European rulers to pay heed to their subjects, to recognize their rights and cultivate the sources of wealth, the rulers of China had a free hand.”

    Acemoglu comes to a similar conclusion:

    http://press.princeton.edu/chapters/s6_8764.pdf

    “But the Chinese economy never came close to sustained growth. Authoritarian political institutions have regu­ lated economic activity tightly for most of Chinese history. The society was hierarchical, with a clear distinction between the elite and the masses. This system did not allow free entry into business by new entrepreneurs who would adopt and exploit new technologies and unleash the powers of creative destruction. When prospects for economic growth conflicted with political stability, the elite opted for maintaining stability, even if this came at the expense of potential economic growth. Thus China tightly controlled overseas and internal trade, did not develop the broad-based property rights and contracting institutions necessary for modern economic growth, and did not allow an autonomous middle class to emerge as an economic and political force.”

    Eric Jones, Rosenberg and Birdzell, Mokyr, McFarland and so on all seem to sing the same story. I certainly agree that China had neither high tax rates or a heavy hand in promoting trade and markets. But I am not sure that was ever the argument against them.

    • A few things to unpack in your comments. Vrees is very much arguing that all those other historians and economists are *wrong*. Why? Because they accepted a given notion about China without actually exploring the data. My post does not do justice to the amount of hard data Vrees brings to his argument. The conclusion – shared by a sizable and growing portion of scholars of Chinese history – is that China was *not* the despotic government supposed by Landes, Acemoglu, Balazs and others. That notion of China as having “Oriental despotism” is, to Vrees, a trope that has been repeated over time so often people assume it is true without examining the evidence.

      Am I qualified to referee this debate? No, but I’ll say that Vrees’ evidence is really compelling.

      The first point you raised is absolutely valid, that China was not held back uniquely because of its government. But Vrees does not argue this. His book is not about explaining a unique drive of industrialization, it is about the role that government played (positive or negative relative to other factors) in China and Great Britain. You could think of Vrees as arguing that “laissez-faire” is neither a necessary nor sufficient condition for industrialization. He then argues that mercantilist and/or interventionist policies do not prevent industrialization. That’s it.

    • A common theory regarding China was that it had a particularly despotic government – authoritarian and dictating economic activity. This was supposed to have meant that innovation, entrepreneurship, etc.. were not able to flourish. de Vries notes that this idea goes back to Marco Polo, who asserted that China was particularly despotic – but this may be an outgrowth of viewing China right after it was taken over by Mongols.

  3. I posted a link to this post on the economics teaching listserv, tch-econ. One of the subscribers to that list, Michael Nuwer, of the State University of New York-Potsdam, posted this response, which I thought I would share:

    At the end of the blog entry, the author states: “Why did Britain take
    off even with all this government interference? Vries doesn’t say this
    explicitly, but I think his answer is partly that large-scale
    industrialization has big fixed costs.” What’s your take on this point,
    Don?

    It seems to me that the problem of large fixed costs arises only after
    1820 with the development of the railroads. Before 1820, in places like
    Manchester (cotton goods) and Birmingham (iron goods) the building of
    factories was relatively cheap.

    The blog author’s question is a bit strange in that he or she would like
    to know why Britain was first “even with” all this government. However,
    Vries maintains in an earlier work, Via Peking Back to Manchester:
    Britain, the Industrial Revolution, and China (2003), that the military,
    administrative, and cultural role played by the British state was the
    reason (or one of the reasons) for the take off. In other words, the
    British economy took off because of state action, not in spite of that
    action.

    In this earlier work, Vries agrees with many of the claims of the
    so-called Californian School (e.g. Bin Wong, China Transformed, 2000;
    Kenneth Pomeranz, The Great Divergence, 2001) regarding the dynamics of
    “Smithian growth” in China as compared to Britain. Vries offers little
    that is new in this regard. As for the reasons for a take-off in
    Britain, Vries offers four reasons in the earlier book:

    1) greater technological innovation in eighteenth-century Britain fueled
    by closer ties between thinkers and doers, a point also emphasized by
    Jack Goldstone and Joel Mokyr.

    2) much less proletarianization in China which reduced incentives to
    transform agriculture and, thereby, limited the workforce that might be
    employed in factories.

    3) greater ecological slack in Britain compared to China at the time of
    British industrialization.

    4) a British state which intervened energetically and often violently to
    create and seize opportunities for profit. Merchants in Britain had far
    more influence over state policy than their counterparts in China. In
    this regard Vries is in general agreement with Eric Mielants and Janet
    Abu-Lughod: “unlike their European counterparts, [the Chinese merchants]
    could not use the state to advance their interests”

    Yes, this new book does sound interesting. But the literature in which
    it is embedded draws fine distinctions between the various contending
    positions, and the blog author might need to explore these distinctions
    in some greater depth.

    • Thanks for posting the comments here. The “even with” comment was made in the sense of “the conventional wisdom is that government intervention is bad for growth, so why did Britain take off despite this?”. Just a little too lazy to say all that in the post.

      As for the final paragraph: “But the literature in which it is embedded draws fine distinctions between the various contending positions, and the blog author might need to explore these distinctions in some greater depth.” That is a comment that is literally true about every single academic question asked or discussed, ever.

  4. Well, first off, not all state intervention is created equal. There’s a reason the Philippines failed to achieve sustained economic growth, while Indonesia (and, to an even greater extent, China) did, in the later 20th century. All had substantial state intervention in their economies. But the content of that state intervention is crucial as well.

    Secondly, who says China failed to achieve take-off in the 19th century? First, we must understand that China was always poorer than Britain. Second, it must be understood that China was fairly closed off to foreign trade until the Opium War. Britain had a managed trade policy in the 18th century, but it was much more open to trade than China. Third, it must be understood that, after the Taiping Rebellion, China’s real wages (at least, according to Robert Allen) took off roughly as fast as those in Japan and Italy right up until the beginning of the 20th century. Though this is slower than in the U.S. and Britain, it’s still significant.

    Thirdly, I doubt China’s property rights protections were as solid as Britain’s. China had rural banditry problems in the 19th century that Britain simply didn’t have.
    http://www.academia.edu/3183761/Wages_prices_and_living_standards_in_China_1738_1925_in_comparison_with_Europe_Japan_and_India
    “Compared to Britain, China was much closer to a free trade nation, declining to interfere or promote imports or exports actively.”
    -As you well know, before the Opium War, China had exactly one port open to Europe, meant to be as distant from the capital city as possible. That’s not free trade by any measure.

    • Your first point is obviously correct. There is state intervention, and then there is state intervention. The point of the book, and the post, was that states with relatively light government burdens did not develop quickly. But that is different than saying that any and all government intervention is good for development.

      On you second point – *why* was China always poorer than Britain. *Why* did Britain pursue open trade and China did not? The book’s point was that this is in part because Britain had an activist government that promoted development and trade.

      • But China could also have gotten a non-activist government that allowed emigration and European trade outside Guangzhou. Yet, it didn’t, at least, before it was opened by the British navy. Also, a complete ban on emigration certainly sounds like a heavy government burden to me.
        “*why* was China always poorer than Britain.”
        -The nature of crop production, I suppose. In a time when the prosperity of most nations is determined by agriculture and there is little movement of labor, capital, and consumer goods, the most important variable is likely the natural conditions for producing crops. In those times, Argentina was naturally rich, and Japan was naturally poor (on a per capita basis).

  5. “There is little to no evidence that government “just getting out of the way” leads to development.”
    -Hong Kong. I’m sure you’ve heard of it. Also, Chile.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s