The Dark Side of Historical Prosperity

            As discussed in my previous post, ‘The Ill Gotten Gains Problem’, for the sake of analytical clarity, wealth amassed through serving the world’s consumers and wealth amassed through the use of coercion and political privileges must be mentally isolated, and analyzed separately. This applies to the wealth amassed by individuals, and it also applies to analyzing the wealth or prosperity achieved by different societies in the historical past. We shall apply the analysis to historical societies in this post.   

Throughout history, there have always been two ways of obtaining wealth: the peaceful means of production and exchange, and the violent means of robbery, coercion, and special political privilege. Advancements in the peaceful means of production and exchange will result in a long-run, peaceful rise in the living standards of the whole market society, which currently comprehends the vast majority of the earth’s inhabitants.

Unfortunately, there is another way for individuals and groups of individuals to attain wealth: through violence and coercion. An individual or group of individuals can sabotage the system of production and exchange by interfering in the market order with violence. In the short-run, this violence will redistribute wealth from the coerced to the coercer. In the long-run, this violence, if it becomes a more widespread means to obtain wealth, will result in the impoverishment of the market society as a whole, as the violent means displaces the peaceful means, resulting in less prosperity for all.

            

           One of the reasons why many people continue to consider war and commerce as two aspects of the same thing is that throughout history, people involved in commerce have tried to use violence to give themselves an advantage. Medieval merchant and craft guilds sought to do so by seeking monopoly privileges for themselves and restrictions on potential competitors. The mercantile city-states of Genoa and Venice fought bloody wars in order to control the trade lanes on the Mediterranean and obtain special monopoly privileges from eastern states. Nation-states have sought to develop ‘their’ industries through mercantilism (favouring export industries at the expense of imports and establishing state monopoly companies) and imperialism.

            

           There is much debate about the historical role of these violent interventions in producing the wealth of various regions of the world. Particularly, the policy of mercantilism, or protectionism, is debated hotly. As a specific example, let us take the protectionism of the 17^th century English government. There were heavy duties placed on foreign manufactured products. Also, the Navigation Acts were passed, which required that all imports into England were to be imported on English ships or on the ships of the countries where the imports originally came from, no non-English middlemen (the Dutch, in particular) allowed. The intent of these acts was to help English manufacturing and English shipping develop, protected from the threatening competition of more efficient, foreign manufacturers and shippers (mainly the Dutch).

            

           Before even examining the historical circumstances and results around these policies, let us consult economic theory to ascertain the general effects that protectionism of this kind will produce. They are: 1. The English consumers of the time are injured. In the absence of these restrictions, they would have preferred to buy foreign manufactures and to employ the services of foreign shippers such as the Dutch as middlemen, or else the restrictions would have had no effect whatsoever. 2. The people involved in the protected industries are benefited.  They no longer have to worry about foreign competition as certain segments of the market are reserved for them exclusively, and they can thus afford to operate less efficiently and perhaps reap some monopoly gains, although in this case, domestic competition would still threaten them, making it less egregious for the consumers than a full monopoly grant such as the East India Company possessed. 3. The make-up of industry in the protected country changes. The make-up of industry moves away from that determined by the country’s place in the international division of labour in an open market. Resources are diverted to the protected industries, industries which must grow as the domestic consumers, who were just deprived of the services of foreign countries’ industries of this type, demand the services of these industries. In this case, English manufacturing and shipping in general gets a boost, at the expense of particular English specialities in these two fields and of other fields such as agriculture.

            

            It is this third effect that tends to lead certain people to advocate protectionism. They believe that certain economic activities, such as manufacturing, are superior to other economic activities, such as agriculture. It is thus the duty of governments to employ protectionist policies in order to assure that the superior economic activities become the speciality of their countries in order to raise the living standards of their population. There are several difficulties with this position though. Firstly, what makes one economic activity superior to another? There is a stigma associated with agriculture because of its role in history. Because food is absolutely vital to life and because raw land comes before the production of capital goods, agriculture was the basic economic activity for a very long time. Some people lived off of subsistence agriculture, where people grew enough for themselves and their families to survive and exchanged very little with others. In the European Middle Ages, when agriculture again advanced beyond the subsistence level and more and more produce was exchanged for money, it was the inhabitants of the towns who seemed to be the dynamic force in economic development. Short and long-distance trade, manufacturing, and financial services were the advancing frontiers of the developing economy. It was in the towns where new ideologies and political systems were developed, while the agricultural countryside was still enmeshed in the crippling traditional feudal system. Thus, agriculture came to be seen as the economic activity of economically undeveloped people, while the townsmen seemed to be the ones getting rich. 

           When one thinks about agriculture and resource extraction in general though, rather than their historical manifestations, there is no reason why they can’t be operated like any of the ‘developed’ industries. There is room in agriculture and resource extraction for capital investment, there are benefits from having more skilled practitioners and advanced techniques, and the products can be mass produced and traded to other regions of the world. 

           One objection is that in resource extraction in particular, but also in agriculture due to soil depletion, countries can run out of the resources necessary for these industries and deplete the vital economic force of the country, while in manufacturing and services the country is not extracting its own economic life force in order to prosper but using that of others. In response, I would say that a lot of the problems around resource depletion are due to an insufficient designation of property rights in the resources, not due to the nature of the industries in question. In land, sometimes the owner’s property right in the land is only confined to use, rather than to full ownership of the land and its capital value. Thus, it pays to deplete the resource as quickly as possible, without taking into account its long-term use value or capital value, because the possessor does not own this part of the land. This is rarely a problem in manufacturing, as manufacturers will usually own both the machine/factory and its products, thus taking into account effects of current production levels on the capital value of these things and acting accordingly. Also, even if particular, non-conservable resources such as oil deposits were exhausted, what’s to prevent the people in these countries from moving to others fields once the resource is depleted? Granted, it would be a shame that the specific skills of all those in the oil industry were no longer useful, but the free-market economic system is flexible, and eventually people would move out of this industry and carve out another niche in the international division of labour for that country, they won’t just sit around and bemoan their ‘underdeveloped’ fate.

            

           Besides the dubiousness of whether some industries are inherently superior or more developed than other industries, another serious problem with protectionism is that the consequences of its universalization are disastrous. The 17^th century English government, when it put heavy duties on foreign manufactured products, did not want other countries to do the same to them, far from it. The whole point of developing the manufacturing and shipping industries was so that English manufacturers could be shipped all around the world in English ships and traded for the goods of other countries, thus making England prosperous. If every government adopted the same policies, then impoverishing autarchy, not English prosperity, would have resulted. Just as the division of labour within countries vastly increases their prosperity, the international division of labour, due to the differences in natural conditions and individual skills between countries, vastly increases the prosperity of the whole world. If the English government had adhered to philosopher Immanuel Kant’s categorical imperative, and had acted so that their actions could be the basis for a general, universal rule of conduct, than autarchy and impoverishment, not economic development, would have been the logical result.    

            

           Some historians have interpreted the historical result of 17^th century English protectionism as paving the way, by changing England’s industrial make-up, for subsequent English economic dominance and the Industrial Revolution starting in England. Some historians, by contrast, argue that 17^th century English protectionism was mostly unenforceable and was constantly evaded by smugglers, as previous English attempts at protectionism had been, and that when it did have effects, these were pernicious and English prosperity and industrialization happened despite, not because of, this protectionism. More extravagantly, some thinkers such as Alexander Hamilton, Frederick List, Ha-Joon Chang, and Erik Reinert, assert that every economically successful country developed under protectionism, and only after their manufacturing industries had reached ‘maturity’ did it make sense to adopt a policy of free-trade. On the other hand, some overzealous libertarians have asserted that protectionism could not be responsible for any kind of prosperity for any country, and that protectionism was always an obstacle to a country’s economic progress. 

           One fact that both sides need to take into account is that the ‘country’ or ‘nation’ is not the subject of economic theory. Economic theory deals with the individual, a grouping of individuals for a common purpose known as a firm or corporation, and the market society (now virtually the whole world) as a whole. The individual is the basic unit of analysis, while the whole world is what economic theory has in mind when it says that freedom  leads to more prosperity than coercion. A ‘country’ or a ‘nation’ is not a meaningful term economically, when they can range from tiny city-states (such as medieval Genoa or modern Singapore) to vast countries covering half a continent (such as the United States). These political groupings are only meaningful when the interventionism of their respective governments and its effects on the international division of labour are considered. If the governments of these countries all adopted a laissez-faire policy, they would again be meaningless economically except for the different qualities of protective services that each country offered.

            

           Keeping that in mind, we can now examine the claims of the two sides of this debate. No libertarian with any sense would deny that through robbery and coercion, an individual or a group of individuals can become more prosperous than they otherwise would have been using peaceful means alone. Likewise, no protectionist of any sense would deny that a world where robbery and coercion are acceptable and are popular means of acquiring wealth will be a less prosperous world than one where robbery and coercion are not acceptable and are rarely used. Thus, when medieval Genoa dominated a certain trade lane, excluding all potential competitors through violence or the threat of it, this action enriched the merchant class of Genoa at the expense of Europe’s consumers, potential competitors, and norms of justice conducive to world prosperity. Whether in the short-run, the citizens of medieval Genoa itself were better or worse off from this action becomes a matter of conjecture and counter-factual history. 

           With 17^th century English protectionism, these policies enriched privileged English shippers and manufacturers at the expense of England’s consumers, potential competitors, and norms of justice conducive to world prosperity. Whether in the short-run, the citizens of 17^th century England itself were better or worse off from this action becomes a matter of conjecture and counter-factual history. As for the changes in the industrial make-up of England brought about by these policies and the possibility that these changes led to future English prosperity and the Industrial Revolution, this again is a matter of conjecture and counter-factual history. One could argue that these changes would have happened anyway without the protectionism, or that something even better would have happened without the protectionism. Suffice it to say that to observe a correlation between previous protectionism and the subsequent shifting of Europe’s trading hub to England and the Industrial Revolution occurring first in England, and then assigning protectionism as the sole cause of these incredibly complex economic and societal changes and advocating for the use of protectionism everywhere as a means of economic development, is an incredibly simplistic view of history.

            

           In general, history is a complex web of cause, effect, and unintended consequences. Adopting the ‘empiricist’ approach to the social sciences and using history as a laboratory to test the effect of certain policies is futile and leads to absurd results. Thus, it is a fairly well-accepted fact that the English privateers that raided Spanish bullion ships and brought the loot back to England contributed to England’s initial large-scale capital accumulation that permitted the development of capital-intensive English manufacturing and trading ventures. Using the crude ‘empiricist’ approach, we would have to conclude that piracy is a good means to kick-start economic development, and a policy to be recommended to all governments. 

           Similarly, some economic historians, not without cause, argue that the Black Death contributed to European economic growth. They argue that its tremendous mortality figures assured higher wages for surviving workers, recapitalized surviving family members from families involved in the financial and trading industries, and prevented European economic development from being stifled by the overpopulation characteristic of the Eastern  countries. Seeing this, the crude ‘empiricist’ would have to argue that killing two-thirds of your country’s population is a good way to ensure the future economic development of your citizenry, and should be adopted by all developing countries. 

            I bring up these seemingly absurd examples because similar reasoning is used in the advocating of protectionism based on its historical record. So protectionism may have contributed to the economic prosperity of certain regions of Europe at certain times such as some medieval Italian city-states and pre-modern England, so what? It injured more efficient competitors, hurt consumers, disrupted the international division of labour, and, if universalized, would have led to norms of justice not consonant with world prosperity, but ones leading to autarchy and impoverishment. And in fact, this really happened in the 20^th century. The protectionism, nationalism, imperialism, and socialism of the late 19^th and early 20^th century contributed to the European belligerence resulting in the First and Second World Wars. Nazi Germany and other expansionist powers had just taken the logic of the English protectionists to its logical conclusion: we should not have to depend on foreign countries for anything but should be self-sufficient (ie. autarchic), but to do so we need more resources and Lebensraum (living space), thus we must conquer, there is no other choice.

            

            For too long, the historian has contributed to nationalism. Many historians portray history as some sort of competition between different political groupings of men for wealth and power, and call policies that advance the wealth and power of the political grouping in question “successful” and those that don’t “failures”. Rare is the historian who concerns himself with the fate of the whole world, and concerns himself with the effect of historical actions on the development of ideologies/norms of justice that either lead to world prosperity and peace or world impoverishment and war. Any violent intervention in the market order leads to less prosperity for the consumers of the world, not more, and leads to perverse ideologies which in turn lead to even less prosperity and even more misery. How widely the benefits of coercion are spread is a complex question that will depend on the specific circumstances, but widespread coercion will never lead to an augmentation of world prosperity or an ideology more suited to world prosperity than freedom, and these are the vital issues which more historians should consider.