Twenty years ago, Alvin Rabushka detailed the economic history of 19th century Great Britain and its lesson for us today. His book “From Adam Smith to the Wealth of America” showed how free market reforms transformed the British Isle while increasing the income of the average Britain. These economic reforms allowed the British to become the most powerful nation on earth and help produced the Pax Britannica.
There are obviously differences in the circumstances from what the British found themselves in the 19th century than those that we find ourselves today but as Mr. Rabushka showed, there were similarities. Britain in 1815 had suffered through nearly 25 years of war with Napoleon’s France and was seriously in debt. For the British, the entire 18th century was a century of war that culminated in the Great War with Napoleon. British government debt increased 70 fold from 1700 till the end of the Napoleonic wars. The average British citizen was subject to new taxes on an annual basis and the British economy was over regulated and over protected. There were over 1000 tariffs in place on various goods with the idea of providing government revenues and to protect selected business. For the average British citizen, many consumer goods such as tea, sugar, butter and cheese were denied due to the high cost. Nearly 40,000 smugglers brought in banned or heavily taxed goods and a black market operated side by side with the open economy.
Philosopher Adam Smith in his book Wealth of Nations challenged the mercantilist doctrine of his day and argued that economic and individual freedom would produce prosperity for the greater good. For Adam Smith, the proper role of government included defending society, maintaining law and order, and building selected public works such as roads and other infrastructure along with public education. The power of government would be delineated and restricted. Smith’s idea would be the basis of the economic theory that under girded public policy in 19th century Great Britain.
Throughout the 19th century, Government spending were cut both in absolute terms as well as a percentage of the Gross National Product. At the turn of the 20th century, Government spending was less than half as a percentage of the overall economy compared to the beginning of the previous century. Actual government spending did not return to 1815 levels until 1898 and this despite a tripling of population growth and an economy that grew fivefold.
Article comments
1 - godoggo
First of all I normally just read about this sort of stuff without daring to comment because the comment boards of the econ blogs I read are frequented by smart econ degrees, or who have at least taken a class in the subject, unlike me. But what the hell.
Anyways, the reason I read this post was because the title lead me to expect a discussion of an interesting subject: the industrial revolution, which centered in England for various reasons (a lot of them cultural, though I think the government policies you mention were part of it too), and which I would think was probably the major cause of the impressive growth which England enjoyed.
Reagan. First of all, it's always worth reminding folks that the beginning of his presidency coincided with the bottom of a business cycle and ended around the top of one. My understanding is that growth since world war II has generally been around 2-3 percent. It was especially high in the 2 decades after the war, during which time the highest tax bracket got as high as 90%. Kennedy's cut down to 70% resulted in a temporary, Keynesian stimulus that actually did result in an increase in revenue - an almost unique phenomenon.
Anyways, in the 70's the economy got bogged down in stagflation, triggered by high oil prices from the Middle East. Reagan came into office, as I said, at the bottom of the business cycle, which was deliberately exacerbated (sp?) by the Fed in order to control inflation. Reagan's combination of tax cuts and massive spending increases (the latter largely as part of Reagan's plan to outspend the Soviets) led to a Keynesian stimulus, accelerating the economy's recovery (I think it's also generally conceded that he dealt well with the oil crisis). On the other had, Reagan predicted that his policies would lead to an actual increase in revenues. I read somewhere that he was actually inspired by Kennedy's experience. In any case, the idea was not taken seriously by economists, including his advisors, I believe, and it was famously ridiculed by Papa Bush as "voodoo economics." There was certainly no increase in revenues, and he left office with an enormous debt.
So this leaves us with the question of whether Reagan's tax cuts have had his intended result in the long run, if not in the short run. Were they the cause of the late '90s boom that increased revenues enough to briefly create a surplus (not that I believe a surplus is necessarily a good thing, but nevermind)? Well, the catalyst for the boom was the increase in productivity as a result of new technologies that had long been predicted, and had finally (for some reason) come to pass. These technologies were, mainly, microcomputers, which were invented by a bunch of tinkerers, some of whom cared about money, others who didn't, and the Net, which was invented by Big Government as part of the military infrastructure, and which was freed up (along with a lot of other government-developed technologies) at the end of the cold war (which I suppose you could give Reagan credit for if you buy the Outspend the Soviets plan as the cause, which I don't, although that's another story). Also crucial was the boom in new software, much of which is actually useful - although I'll note that ground zero for the computer revolution was a valley in liberal Northern California, which happened, in classic QWERTY fashion, to be the location of Steve Jobs famous garage - as well as the nearby City by the Bay. Anyways, the cause of, as opposed to the catalyst for, the boom was irrational exhuberance, tied to faith in the New Paradigm, Dow
36000 and Ayn Rand among the motleyed young geeks who benefitted from the boom, or hoped. Of course the increase in productivity persists, although it hasn't done, say, me, any good. We'll see...
And another thing. The reference to "stable monetary policy" caught my eye. This is a concept I associate with Milton Friedman, and gives me the impression that the author is trying to reinvent Smith as a modern conservative, although it's pretty hard to imagine how he might have reacted to Friedman's ideas. In any case, my understanding is that those ideas have been debunked by reality, specifically their implementation by Maggie Thatcher. Anyway, history, including 19th-century history shows that the result of overly-stable monetary policy is wildly unstable employment, which I don't happen to believe is conducive to growth.
And that's pretty much all I knows.
2 - Hal Pawluk
Interesting if incomplete (Adam Smith was for trade with "absolute advantage" rather than "free trade," for instance). Globalization is important today, but mostly because it kills the Ricardian (you missed David Ricardo, too) concept of free trade and free trade does not and cannot exist today.
Instead, what we have is globalization without free trade because money and jobs can now flow from country to country. That's what has trapped us in a situation that has resulted in the lowering of wages (jobs are being arbitraged internationally), creation of more jobs faster in other countries, etc.
I've blogged a few items that you might find interesting (links open in new window):
Free Traders and Globalizers -Waking Up At Last?
The "Cargo Cult" Is Alive And Well - Today It's Called "Free Trade"
Neocons On Jobs - Are They Totally Losing It?
Why Your Job Is Moving To Bangalore
These include links to further reading.
3 - suzypuzy101
interesting, clear to read and easy to understand. However would of liked some more info on how Britain's economic strength has changed now that we are in the 21st cent. O well, still useful and thanks!
4 - filck
this is a bad website
5 - nerdy man
flick is joking he loves this site a lot he thinks it is "interesting"
6 - STM
"Economic History of 19th Century England". I must get this book ... I love a bit of light reading just before bedtime.