Alternative Histories: not proven

Neil Craig writes in a ‘A Place to Stand’ HERE:

"THE FAILURE OF FREE TRADE LIBERALISM - VICTORIAN BRITAIN"

“I have made it clear I believe that free enterprise, free trade & traditional liberalism is the most successful way to run an economy & modern practice shows this. Yet there is one quite overwhelming counter example. Up to about 1850 Britain was easily the world's leading industrial power. At that stage it repealed the Corn Law tariff by the Importation Act 1846 which represented the triumph of Adam Smith's commitment to free trade & of the liberal ideal. Yet by 1914 Britain had fallen to 3rd place behind the USA & Germany, both of which, while no bastions of socialism had significant tariff barriers. Indeed Bismark's Germany did have a significant amount of government, if not planning, at least encouragement of particular industries.”

Comment
But what would have been the effect of not repealing the Corn Laws on Britain’s relative place in the table?

Much else happened both in Britain and in other major economies. The 19th century decades were also the years of the second British empire, which drained off capital investment in either defence expenditures (military technologies were increasingly expensive to acquire and to service with men and materials leading up to the First World War) and overseas unproductive state administration, added to which the far more significant overseas British investment which soared in North America. All of which reduced productive domestic capital investment in Britain.

Case: not proven (as we say in Scotland) either way.

Adam Smith on Defence

The Public Choice Capitalist (‘shifting your thought consumption’) HERE writes on:

“Rent Seeking during Wartime: A Smithian View of Military Action”

“Adam Smith believed that British Imperialism was bankrupting the country. He believed that most of the time the cost of the action was much higher than the benefit for the public. This is an area of research I have done a lot in. Scholars from Hobbes, Sumner, Cobden, and Schumpeter have all concluded at one time or another the companies that benefit from war either foreign or abroad will lobby the government for the exclusive contract. This is no different than domestic lobbying from teachers unions to Department of Education. The lobbying will allow the politicians who support more war actions to stay put in place. This is likely why the Democrats have not been as strong in their actions as they have been in their rhetoric.”

Comment
A good start to the post (a bit exaggerated: he didn't suggest that Britain would be bankrupted - its rate of growth would be curtailed), but needs to go further to explain Smith’s views on ‘military action’.

Smith's first duty of government action was the defence of the country from invasion and violence of other societies (WN Book V, Chapter 1: apologies; my Smith library is in Edinburgh; I am in France; it would take too long to consult my 1818 edition of WN, given my other tasks this morning). This was not a trivial duty, especially on a shared continent, riddled with dynastic conflicts and ambitions. It was, however, a defensive stance, not an ambitious stance for the covetous.

Smith’s critique of mercantile political economy (WN Book IV) including those policies that were based on ‘jealousy of trade’, suspicion of neighbours, and what we call ‘zero-sum’ trade relationships.

Smith saw the dangers of colonial ventures, especially when accompanied by monopolistic measures beyond their initial role when setting up trading posts in distant countries (India and North America). However, for an island power, such as Britain, which was exposed to naval sanctions by foreign kingdoms, he saw the minimal commercial necessity for the Navigation Acts (to provide sufficient experienced naval personnel to man warships in defence emergencies), though he had severe reservations about their role in enforcing commercial monopolies of trade as they had become by the mid-18th century with the North American colonies.

Overall, for Smith, defence was of more importance than opulence (without the former, you would lose prospects for the latter). The implied question he posed was how much defence was enough? The slope from sufficient defence to sufficient war capacity to engage in interventions in the affairs of foreign countries was slippery. And Britain was too easily dragged into such conflicts (partly a product of the prevalence of dynastic kingdoms dominating Europe and their colonies).

Smith was not opposed to defence industries where necessary for the defence of the country. For the commercial defence industries their contribution to commerce was productive (they existed to make profits by paying for their costs, which included their owners’ profits; the government’s expenditure on the costs of defence supplies, including the wages of soldiers and seamen, was unproductive – they did not reproduce their costs).

Modern questions relating to ‘how much defence is enough’ are not much different now than in Smith’s time. Britain was projecting its interests with an increasing global reach; its colonies were showing evident signs of becoming major commercial players (held down by the UK Navigation Acts in Britain’s, not the colonies’, interests). The 18th century was a busy century for major, and expensive, wars, and just over the horizon was the even longer, and more expensive, Napoleonic wars (Smith complained at the expence of the 7-years war at £125 million – which could have gone into growth-inducing productive investment).

The crucial decision point was the loss of the British colonies in 1776-83 (itself no mean expense). Smith advised:

‘If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expence of defending those provinces in times of war, and of supporting any part of their civil or military establishments in times of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.’ (WN last paragraph, last page).

Smith’s principled advice was disregarded: Britain went on to build a second empire, bigger than the first, which with the smaller 19th-century wars, and the two much bigger world wars, was to cost unprecedented amounts of gross annual product. It many senses, Britain has still not reconciled herself to the ‘real mediocrity of her circumstances’, and still plays, or pretends to play a role as a world military and diplomatic player.

Adam Smith on Government Roles

Leon Fink, a history professor at the University of Illinois at Chicago, writes (16 April) on “The piratical world of commerce” at the Chicago Tribune HERE.

“Unlike the 18th Century Barbary pirates, to whom they have been compared on the superficial grounds that they are both poor Muslims feeding off oceanic traffic, today's pirates are stateless actors generally operating in a medium (the ocean) of weak or even fictive states. Moreover, though they may be the most violent actors at sea, the pirates' mercenary motives and ethics place them in the mainstream of today's shipping world.

In "The Wealth of Nations," 18th Century political economist Adam Smith famously anticipated a world in which an unfettered marketplace would maximize production, trade and wealth. Yet, even as he counseled restraint from governmental interference, Smith allowed himself wiggle room when it came to commerce and the sea. Maintaining access to the navigable world and, if possible, control of the world's trade, was a crucial mark of national power.

For the most part, world shipping today is the prototype for "globalization," the reign of private marketplace competition over any national or political consideration. In keeping with a pattern of deregulation that has steadily grown since World War II, shipowners (commonly centered in the richer, Western countries and Japan) have evaded the labor and tax laws of their home states by registering their vessels with governmental weaklings like Panama, Liberia and the Marshall Islands as "flags of convenience".”

Comment
Smith was far too much a ‘man of the world’ to have ‘anticipated a world in which an unfettered marketplace would maximize production, trade and wealth’ (much of that notion was invented by modern economists in the 20th century).

Also, he was not confident that free trade would be established (he called that idea utopian) [WN IV.ii.43: 471], and he criticised the French Physiocrats for demanding that ever aspect of their philosophy or 'precise regimen' (which some of them called ‘laissez-faire’) be implemented in full (WN IV.ix.28: 674].

Smith did not anticipate 'a world in which an unfettered marketplace would maximize production, trade and wealth' nor counsel against all government interference as a principle; he certain counselled against those 18th-century examples of government interference, some of them going back to Elizabethan times (Acts of Settlement, Statute of Apprentices, Incorporated Trades and Guilds, Mercantile Political Economy, legislators and those who influenced them imposing legal monopolies and tariff protections, and general arrogance that they knew better than individuals about managing their affairs.

But it is essential to understand that Smithian political economy saw important roles and major roles for government in infra-structure investment (roads, canals, harbours, city sanitations, pavements, and street lighting), administration of justice, and in public-interest activity (Royal Mail, banking regulations, interest rate ceilings, cloth stamping, gold assaying, palliative health care, education and ecclesiastical freedoms).

To these must be added his acknowledgement of the government’s ‘first duty’, to protect the society from invasions, among which he recognised the need for an island society like Britain to ensure a sufficiency of naval power to protect its foreign trade (the Acts of Navigation). Of course, British governments, captured by special interest groups, took these sensible measures to the extremes of armed unnecessary interventions beyond defensive necessity to wilful intervention in Continental dynastic disputes, in unprofitable trading companies and colonies, and general hostilities based on toxic ideas of ‘jealousy of trade’, mercantile monopolies, and excessive expenditures (the seven-years war being typical at £120 million).

However, Professor Leon Fink’s article on the modern problem of piracy, apart from these observations, is an excellent read and I recommend that you follow the link above.

Apologies for some duplicate postings but I could not post this afternoon for some reason and my attempts led to duplication off screen.

Britain's Strategic Error After 1776

There was a discussion this morning on BBC Radio 5 asking the question: ‘What are the British military forces for?’ Now I shall not comment on the ‘phone-in’ callers’ views – listening to those members of the ‘public’, who air their views on ‘phone-ins’ about the ‘big issues of the day’, often raises unwelcome doubts about the benefits of universal suffrage – but I will comment generally.

Presently, I am preparing an essay for the David Hume Institute (Edinburgh) on the defence interests of Scotland (currently interrupted by my more important paper on the 'Alleged religiosity of Adam Smith' for the annual conference of the History of Economics Society in Denver, Colorado), but, while listening, I thought of something Adam Smith wrote in 1776, which given the history of Britain since its defeat by its former colonists in North America, has poignant meaning for Britain in the 21st century.

Recall that Wealth of Nations was written as a critique of the policies of British governments since the 16th century (Elizabethan times) on domestic policy (saddling the country with what became meddlesome monopolies in the Town Guilds - ‘members of the same trade’, etc.,), restrictive monopolies in the Statute of Apprentices (limiting the spread of human capital), the Settlement Acts (corralling labourers and their families to the Parish they were born or married in), and the Navigation Acts (meant to enable Britain to defend itself as an island from marauding Continental princes, but which became an instrument to monopolise North American trade).

Wealth Of Nations also promoted the policies that Smith called mercantile political economy – jealousy of trade, wars with trading partners, political interference and rivalry in the dynastic successions of Continental sovereigns, trade protection using tariffs and prohibitions and boycotts, a preference for exports over imports, and the hoarding of gold and silver bullion. It also had the effect of participation in the slave trade, and not a little piracy.

That first empire ended fortuitously; if only legislators and those who influenced them had listened carefully to what Adam Smith said in the very last paragraph of the last chapter of Wealth Of Nations and had acted accordingly. Instead, in a crass strategic error of historical magnitude, British governments slid into a second Empire in India, Canada, Caribbean islands, Australia, New Zealand, Hong Kong, South-east Asia and, later, Africa. The millions that the North American colonies cost in two 18th-century wars, pale into insignificance beside the millions that the Victorians spent on the Royal Navy and British occupation armies (not a few of the personnel of which came from Scotland), and which British governments in the 20th century continued to spend, on top of what was exported as capital despite these costs, is unimaginable.

But Adam Smith’s proposal for a different path in 1776 was ignored by legislators and those who influenced them, and the rest, as it is said, is history:

‘The rulers of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been, not an empire, but the project of an empire; not a gold mine, but the project of a gold mine; a project which has cost, which continues to cost, and which, if pursued in the same way as it has been hitherto, is likely to cost, immense expence, without being likely to bring any profit; for the effects of the monopoly of the colony trade, it has been shown, are, to the great body of the people, mere loss instead of profit. It is surely now time that our rulers should either realize this golden dream, in which they have been indulging themselves, perhaps, as well as the people, or that they should awake from it themselves, and endeavour to awaken the people. If the project cannot be completed, it ought to be given up. If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expence of defending those provinces in time of war, and of supporting any part of their civil or military establishments in time of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.’ (WN V.iii.92: 946-947; Edwin Canaan, 1937 edition, 899-900)

In the 21st century, Britain still imagines itself militarily as an, albeit, leading military police power (its defence forces are of excellent quality but their political masters are, er, not), politically as a leading player at the United Nations, in the European Community, and the Commonwealth, the G8 and G20, and the WTO. Surely it is time that British governments should distinguish between what exists 'in imagination only' and ‘endeavour to accommodate her future views and designs to the real mediocrity of her circumstances’?

Not Quite Accurate About Wealth Of Nations

John Clark, the creator of Provocate, a Senior Research Fellow at the Sagamore Institute, a think tank in Indianapolis. He was a Senior Fellow at the Hudson Institute and director of the Center for Central European and Eurasian Studies.

I comment upon selected pieces from John Clark’s discussion paper on Adam Smith’s Wealth Of Nations’ for HABEAS LOUNGE, A Public Art Project Focus on the Economy, One New York Plaza, this coming Wednesday in New York (details HERE:

'Comments from John Clark on Adam Smith’s “Wealth of Nations”'

John Clark asserts that pins, discussed in Chapter 1 are not what they seem:

“Pins” really means nails, which were essential in an economy in which everything was still made of wood rather than steel or plastic.”

Comment
They were not nails, they were household pins, drawn from iron wire and fully explained in Diderot’s ‘Encyclopédie’ (Paris, 1755) under the heading ‘Épingles’, French for pins.

Smith reports on his visit to a pin factory, saying that the division into 18 operations (the French norm) was undertaken by 10 men, where sometimes an individual man ‘consequently performed two or three distinct operations’ (WN I.i.3: p 15), the last one of which was to wrap the pins in paper, as appropriate for pins but not for nails.

“Democracy favors the development of industry by multiplying without limit the number of those engaged in it.”

Comment
Smith did not speak of democracy, except theoretically in ancient Greece. He did not have a vote under the existing electoral franchise in Scotland. His concern was more with Liberty, not democracy, hence he is not represented by Alexis de Tochville’s 19th century writings on the USA (Smith died in 1790).

“It’s the coat of a poor laborer. He ends the chapter may strike our enlightened 21st century ears as un-PC, but it’s a valid point: if an economy functions well, even the poorest members of societies can attain decent levels of consumption. In fact this is the rule of thumb for public policy he uses throughout the Wealth of Nations: if a policy improves the standard of living of the poor and workers (often the two categories overlap) it’s a good policy; if it hurts their standard of living, it’s a bad policy. This is important!”

Comment
Adam Smith’s example of the production of the day labourer’s common coat is a much stronger example of the (international) division of labour than the local manufacture of pins, which raised labour productivity, whereas the numerous workers engaged in the multiple supply chains necessary to produce the simplest coat for the poorest employees, indicated how complex the division of labour was becoming already by the mid-18th century.

Each step in the entire production process was capable, in practice, of improving its productivity if the extent of the markets for each bit of the process made it worthwhile to do so. As each bit of the process served the needs of many different products, as well as those needed for coats, this would tend to lower unit costs and intensify commercial society. As more employment opportunities were created this too would raise demand for labour and raise real wages.

“Before, the idea was that a wealthy economy was a big economy, with lots of resources at the disposal for the ruler to conspicuously consume or mobilize armies and navies. Smith says what matters isn’t the Wealth of the Sovereign, it’s the Wealth of the Nation, which means the wealth of the bulk of the people who make up the nation: that’s what he means by comparing the American colonies with Britain with China. Note his comments on Bengal (a declining state), where famine made things even worse than stagnant (stationary state) China. He knows who is to blame for the impoverishment of India — the Brits. And the Americans could prosper because the Brits left them alone. (See the notes for his criticisms of British policy toward the colonies later in the book).”

Comment
Adam Smith’s actual points were more interesting than the way it is presented here:

‘The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries. The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards.” (WN I.viii.27: p 91)

His point was that whereas in the British colonies of North America, which were governed according to British laws and practices, the colonists (though not the indigenous people, nor the slaves) were protected by the rule of law, and the state governors and other officials were subject to removal from office for malfeasance (and were), while in Bengal the local populations were governed by the East India Company, noticeable for its oppression by the rule of men, many of whom were corrupt, nearly a year’s sailing from Britain, and beyond accountability for their actions.

In the British colonies in North America the colonists were industriousness, lived under civil order, and relative prosperity; in India there was appalling misbehaviour, poverty, and violence.

To say: “He knows who is to blame for the impoverishment of India — the Brits. And the Americans could prosper because the Brits left them alone,” is hyperbole, at least, as well as inaccurate.

The ‘Brits’ who colonised the eastern seaboard of North America and the ‘Brits’ who tyrannised Bengal were from the same stock of British people. If anything, it was from the circumstances that the ‘Brits’ in India were ‘left alone’ and beyond the remit of the rule of British law, that their worst excesses were encouraged and left unpunished.

The constitutional changes from the rebellion of the British colonists in North America led to major and lasting improvements in constitutional government (much of the jurisprudence of the USA has its roots in British jurisprudence), but it is no improvement to distort Adam Smith’s actual views in such a manner.