Capitalism: Myth and Reality, Part 2... The United Kingdom of State and Market
In Part 1 of this series, we saw that the United States was, contrary to popular belief, effectively the most heavily protected economy on earth during the 19th century and a good part of the 20th century. This protection, as well as many other state interventions, were key to that country's growth into an economic powerhouse.
Before the US came of age economically and politically its mother, the United Kingdom, enjoyed the top global spot. As we shall now see, it too owed its early success and prosperity to protectionism and state intervention in the market.
The Protection of British Agriculture
The UK was a developing country until the middle of the 19th century. Its modern economic prosperity and rise to world dominance can be traced to policies mainly beginning in the 16th century, and as early as the 15th century. In the sum total of history, Britain is second only to America in its enthusiasm for protection and subsidies.
Beginning as early as the 1430s, and sustained for the next 400 years, Corn Laws were enacted in England, and held a prominent place in the economic structure of the country. The Corn Laws served simply to protect domestic agriculture from foreign imports--very important for the powerful landowners of the country, who enjoyed significant political influence.
Protection of the agricultural sector through the Corn Laws was extremely beneficial for the UK economy during these centuries because the vast majority of the economy was, in fact, based on agriculture. The resulting wealth that accrued to the barons of English agriculture would serve as investment capital that funded, among other things, the growth of industry in the 18th and 19th centuries.
Other Protectionist Measures
During the 1700s and early 1800s, the emigration of skilled workers was prohibited. Imagine a poor country of your choice today. Now imagine if the government of that country blocked all the engineers, professors, doctors, financial analysts, managers and computer technicians from leaving that country (and immigrating to rich countries like the US or UK). In the absence of "brain drain," the positive consequences for that society's economic development barely need mentioning.
In the late 1700s and early 1800s, the export of key machinery was banned. In the colonies, high value-added manufacturing was prohibited altogether, and the export of primary goods was subsidized. (These kinds of economic controls helped lead to the American revolution in the late 1700s.)
State Intervention: A Long British Tradition
In the late 1600s, in the wake of the English Civil War (1641-1651) and the fiscal crisis it precipitated, the treasurer George Downing led the way in creating a system of short term government debt--the first of its kind. He also overhauled English taxation, creating the most sophisticated tax system in Europe, which facilitated the growth of a global empire in the following centuries. The late 1600s also saw the creation of the Bank of England, one of the first central banks in history, and a prime example of central state intervention in the economic system, still vital to the British economy today.
In the 1650s and 1660s, a series of "Navigation Acts" were passed, mandating that English trade be carried in English ships. They banned foreign vessels from transporting goods to England or its colonies, and severely restricted the shipping of goods from English possessions. European goods bound for English colonies were diverted to the mother country for inspection and taxation before continuing on.
Passed during the era of mercantilism, the Navigation Acts (with some alterations) remained in force for an amazing 200 years--that is, until the mid 19th century, when laissez-faire thinking enjoyed primacy. For many decades, therefore, British shipping enjoyed lavish subsidies and legal protection, facilitating that country's growth from a poor and insignificant economy into a global powerhouse, in a time when shipping and naval power were key to a nation's prosperity. The requirement for goods to be diverted to England helped London grow into a financial center of global importance.
The Developed World's Dirty Little Secret
Beginning in the late 18th century with Adam Smith and other pro-free trade, anti-mercantilist thinkers, laissez-faire economic thought gained preeminence in Britain. This intellectual influence came to a head in the 1840s when Britain finally shed the last vestiges of its protectionist heritage, and fully embraced laissez-faire. Now that it was the most important manufacturing power on earth, it could afford to pursue policies of open trade and minimal state intervention, in direct competition with other nations.
It continued to enjoy economic success throughout the 1800s, and into the 1900s and today. This success has created and sustained the myth, against all historical evidence to the contrary, that the UK became prosperous through economic liberalism. In fact, protectionism and state intervention were key, in England and throughout the developed world. We have now seen that two of the most developed economies in the modern era followed this road to riches. In Part 3 of the series, we will take a look at other developed countries, including some whose prosperity has been attained more recently.