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.
The results for the average British were remarkable. A strong middle class grew as the century progressed and the average British saw their purchasing power doubled in the second half of the century. Alvin Rabushka wrote, “The period encompassing the free trade reforms of Peel and Gladstone showed the beneficial effects of low duties, falling retail prices and rising money wages on the average Englishman’s consumption of basic foodstuffs.”
The average British citizen could afford and enjoy a wide range of goods and services that previously reserved for the rich. This increased production of these goods as the domestic market grew with the wealth of the average worker. As the British economy grew so did British investments worldwide. British financial investments played a major role in the economic development of United States and the rest of the world. At the end of the 19th century, United States was becoming an economic power in its own rights and British investment played an instrumental role in that development.
How did this come about? Rabushka makes clear that British economic policy was the main cog of this growth. Throughout the 19th century, British politicians reduced tariffs and open up the British economy to free trade. In addition, taxes were being reduced to encourage economic growth and capital formation in the various new industries being formed.
Alvin Rabushka wrote that the 19th century British politician understood that “ A modest tax rate may accomplish the twin objectives of private prosperity and ample public receipts, so long as public spending remains moderate.” There was a point that if tax rates were too high, business activities decline and tax evasion became widespread. The results were reduced government receipts! As the British discovered at the end of the 18th century, the high tariffs and government regulations created a class of smugglers who provided goods on the black market.
What British politicians found that when tax rates were reduced; government revenues increased. Monetary stability provided a complimentary support to sound fiscal policy. Throughout the 19th century, British followed a policy of low taxes, stable monetary policy and free trade to produce economic growth that reached into the lower classes. This allowed the British the revenues to run a world wide Empire. While the British were not involved in major wars, they still had conflict to deal with and pay for. British arm forces were involved in combat throughout the world and the British Navy ruled the seas to protect the sea-lanes and help eliminate the slave trade.
What lessons can be learned from the 19th century British? In the 20th century, the United States had to fight two major world wars and maintain a major military force against the Soviet Empire during the Cold War for nearly a half of century. United States also fought various smaller military operations along with fighting major combat operations in Vietnam and Korea. While the United States was stronger financially after the Cold War that Britain was after the Napoleonic war, the United States paid an economic price for its resolve during the Cold War.
In the 1970’s, government taxation and regulations strangled the economy. It was up to the Reagan Administration to reverse many of these policies and these policies provided the basis of the present economic surge that has occurred over the past 25 years. The actual percentage of government spending relative to the overall economy has changed very little and tax rates are presently half of what they were before 1980. The first lesson is that tax rates matter and if tax rates are cut from higher rates, government revenues grow. In the last quarter of century, government spending and government revenues have grown in part due to the stimulus of the Reagan tax cuts.
The one area of weakness presently has been the increase in government spending. Government spending has grown and the Bush administration had done little to restrain spending over the past four years. Increase in government spending to cover the cost of supporting the baby boomers in their retirement are included in future spending calculation, American fiscal policies threaten to derail the present economic surge. As the British found out, it is difficult to be involved overseas if the government domestic spending is unrestrained by politicians appetites for “spend and elect” politics.
The buzz word globalization described the interdependence of the present world economy and this was even true in the 19th century. The British not only ran a world wide Empire that encompassed nearly a quarter of the world population but the British had financial reach in every corner of the world. So any economic downturn in America would affect the British economy and vice a versa. With instant communication and the ability to transfer wealth with the touch of a computer keyboard, we see the effect of globalization quickly. Globalization was as much a fact in the 19th century as today and when the Great Depression hit in the early 1930’s, the entire world was affected. It was not limited to the United States. The various protectionist legislation passed in the United States affected the whole world and led to a trade war that help depress earnings and incomes throughout the world.
Globalization is a fact and American investment worldwide is an important requirement in increasing growth in the world economy. Foreign investment in America is equally important for the continuing growth of our economy, so increase in trade and financial investment are essential to continued economic growth that will comprise the entire global economy.
As Alvin Rabushka detailed, the British showed the best economic policy for a successful American presence in the world today. What occurs in our domestic policy will affect our ability to affect world event abroad.Powered by Sidelines