Missing the Point: On The Economic Advantages of Eighteenth Century England

You will notice a "Blog Comment Follow-Up" tag this week.

And how! Anyway, this is Brad Delong quoting "the mysterious Pseudoerasmus" commenting on Robert Allen. 

I love the work of Robert Allen... steel... the Soviet Union... English agriculture. And his little book on global economic history—is there a greater marvel of illuminating concision than that?... . . . Yet I always find myself in the peculiar position of loving his work like a fan-girl and disagreeing with so much of it. In particular, I’m sceptical of his theory of the Industrial Revolution.

Allen has been advocating... [that] England’s high wages relative to its cheap energy and low capital costs biased technical innovation in favour of labour-saving equipment, and that is why it was cost-effective to industrialise in England first, before the rest of Europe (let alone Asia).... Allen’s is not a monocausal theory... but his distinctive contribution is the high-wage economy.... The theory is appealing, in part, because the technological innovations of the early Industrial Revolution were not exactly rocket science (a phrase used by Allen himself), so one wonders why they weren’t invented earlier and elsewhere. (Mokyr paraphrasing Cardwell said something like nothing invented in the early IR period would have puzzled Archimedes.) But... as Mokyr has tirelessly argued, inventions were too widespread across British society to be a matter of just the right incentives and expanding markets—and this is a point now being massively amplified by Anton Howes....

These are skillful economic historians, well-grounded in the data, and it would be the height of folly for me to say that they are wrong.

Rayon gloves substitute for silk; but I took this photograph because I am reminded of when women's gloves were of kid leather, from Morocco; the point being that there was time, not so long ago, when every country exported items of fine apparel to every other country. 

But they're wrong. 

Why are they wrong? Because their paradigm is the postwar neo-liberal (or whatever we're calling it now) world order, in which democracies and semi-democracies trade with each other in pursuit of shared prosperity, in which the only unsightly slopes on the otherwise level  playing field of comparative advantage are tariffs, subsidies and gaming the exchange rate. The only way in which the state is supposed to intervene is by producing (and equitably disbursing) unlimited quantities of education/research spending; and by fine-tuning tax policy. 

This is not the Eighteenth Century prder. Oh, sure, it is how the official propaganda arm of the European states represented them to the world --and to themselves-- but the gap between what was said, and what was done, is vast. The United Kingdom, in particular, was not a tolerant state. It was not a "liberal" regime. On the contrary, for  a good part of the Eighteenth Century, it was a one-party state. Political, like religious dissent, was all but criminalised. I could go on, but I'm just quoting: here's a link to the polemic I'm riffing off.  

More importantly, Eighteenth Century states were not peaceful states. This is easy to miss, because, in their own accounts, wars just happened, like the mess that descends on a toddler left unsuipervised. It's not until you begin to tally them up that one is forced to conclude that toddlers make messes. 

Specifically, this peaceful England, competing in the realm of comparative advantage, fought:

1702--1712: The War of the Spanish Succession

1715: The '15

1718--1720: War of the Quadruple Alliance

1739--1748: War of Jenkins' Ear

1754--1763: French and Indian War

1775--1783: American Revolutionary War

1792--1800: French Revolutionary Wars

By assorted miracles of statesmanship, the United Kingdom managed not to be drawn into the War of the Polish and Bavarian Successions, and even threw its weight on the scales in favour of no war at all in 1725; on the debit side, it twice armed for war against Spain over various remote islands, only to be recalled to peace by Spanish concessions. The last two confrontations, in particular, strongly suggest that this nominally peaceful, enlightened state, was, in fact, a warfare state that spent just fewer than half the years of the Eighteenth Century at war. The numbers are probably deceptive, however, in that the Eighteenth Century is bracketed by wars that consumed almost the entirety of the last decade of the Seventeenth and first decade of the Nineteenth Century, while containing within it the determinedly pacifistic "Age of Walpole."

So the story is that James II (1633--1701), son of Charles I, became King at the ripe old age of 52 in 1685. In 1660, James married Ann Hyde, and had two daughters, Mary (1662--1694); and Anne (1665--1714). Anne died in 1671, and James remarried, Mary of Modena (1658--1718) in 1671. Through 1688, the marriage was childless, although Mary had several miscarriages and stilbirths. Then, Mary's pregnancy was announced, in the fall of 1687. Given her age, and her previous history, the pregnancy was not expected to come to terms, but, three months premature, and while Anne was in seclusion in Bath, taking the waters, Mary gave birth to "the Old Pretender." It is common in these cases for people to allege that the pregnancy is faked. James' grandfather, James VI and I, had been dogged by rumours of a suppositious birth. The rumours in this case attached themselves to an alleged baby brought into the birthing chamber in a warming pan. In itself, this is just your usual fake news; but notice the hanging inference to be drawn about the actual mother of the "warming pan baby." Anne, Queen Anne, as she was through the War of the Spanish Succession, never had a child of her body, and was not succeeded by her (alleged) brother, as she wished. Not that anyone spelled any of this out explicitly, but --Oh, hey, notice how Edward Teach named his ship the Queen Anne's Revenge? The point of all this? That Walpole had very good reason for trying to keep the United Kingdom peaceful through the accession of George II.

So what has this to do with trade? I have been down this road in the past. I did a long and leisurely tour through the history of the steam engine. to show the importance of subsidies --"bounties" on the price of coal during the early development of that engine (which, I am pretty confident, would have flummoxed Archimedes --latent heat, indeed!), and about the direct economic stimulus on the West Country provided by the  Western Squadron, which was raised and maintained as a proactive defence of English trade in the Atlantic as well as a counter-invasion arm; but there is something to be said for narrowing things down a bit. England had never been in a war like the Spanish Succession, but it had just been through a dress rehearsal. It did not go well.

Source

This is a hammered coin of Charles I, recently recovered near Colchester by a metal detectorist. It is a relatively rare coin type, since the English mint started emitting milled coins, with their distinctive, raised edges, in 1663, and recalled the hammered coins during a recoinage in 1696. 

According to contemporaries, the background was this: in 1689, England, now under the benevolent rule of William and Mary, entered a general European war with Louis XIV over things and stuff. Starting in  1691, after dealing with the Irish's annoying habit of persisting in being Irish, the English sent an army to fight for ground in the Spanish Netherlands (as they then were). 

Jean-Baptiste the Elder, Siege of Namur (1,

It was hard. Probably nothing summarises the futility of the fighting more than the fact that the turning points of the war were the two sieges of Namur. The French took the old Walloon town on the confluence of the Sambre and Meuse in 1692; William III took it back in 1695. 

Jan van Huchtenberg, Siege of Namur (1695)

It was also expensive, as wars usually are; but it was expensive in a very important and particular way. William took Namur just in time, as England was about to descend into an economic crisis. Further, unlike the French harvest failures of 1693 and 1694, this was a decisive crisis. The commune of Ghent loaned the English army in Flanders enough money that it did not dissolve in 1696, but for the most part the last year of war was a "scramble for peace."

Why was it a decisive crisis? Because the insular armies (look, Scotland wasn't part of the United Kingdom yet, and that's not even including the Prussians. It's complicated!) were not, and could not be, supported by "direct supply." Anticipating more pushback than anyone has mustered since 1712 or so, in his War and Economy in the Age of Marlborough, Dwyrd Wyn Jones calculates that William III's royal army required a quarter million tons of supplies a year by a generous estimate, and spends some time showing that this could not possibly have been shipped from the United Kingdom. Instead, it had to be procured from local supply. This meant paying for it, which meant paying with a negotiable instrument. The King's commissariat could, and did, pay in English shillings sometimes, but. . . 

Should a country export bullion? The traditional answer to this question is that the old time "mercantilists" thought that you shouldn't, that you should strive to make sure that your country steadily accumulates ever more bullion at home, because more (gold and silver) money equals more prosperity. Then Adam Smith came along and pointed out that it was all silly tosh, and we've been paying for things with paper ever since. 

But it's not that simple: D. W. Jones, who immersed himself in contemporary literature, puts it in lapidary form. 

England needs silver for plate, for export to India, and to maintain its circulating currency, which is mainly silver by value. It must import silver, because besides exports to India, the coinage suffers steady erosion. (Less obviously, the money supply has to expand with the economy, especially in rapidly-growing North America.) To pay for silver, it must export domestic goods, or re-export colonial goods, such as cod, furs, hides, tobacco and sugar from the Americas; and cotton goods, silk, spices and exotica from the East. By rough and ready calculation, it looks as though England's trade surplus is a half-million a year, which, in peacetime pays for not only replacement silver, but foreign investment --which, confusingly, is in no small part silver for India and China. 

War cuts into production for export, and damages trade, reducing the country's ability to pay for silver, even as the army eats up the trade surplus. This means that the army and navy's needs are made up by (exported) silver. As the amount of silver in circulation declines in England, the country suffers from a shortage of ready money, or a hiatus of money, or whatever you might want to call it: in contemporary terms, a deflation, as money becomes more valuable. This is not what happened for most of the 1690s, 

Coin milling machine; On Isaac Newton and the recoinage.

That, of course, did not happen. On the contrary, there was even an inflationary episode in 1695. Why? Because the coinage was very industriously stepped on by "clippers." Clippers trimmed the edges of the coins, reducing their weight by 12.5%, says the Treasury, which began auditing the coins it received in tax payments in 1694. This was reflected in a rise in the accepted value of the (gold) guinea to 28s, by the end of 1694, which was apparently as far as the government was ready to go before accepting that something had to be done. That something was the "strict" recoinage of 1696, which effectively crashed economic activity in Britain in 1696 and 97, ending the war. 

Jones (implicitly) argues that clipping was a social consensus. While it was blamed (of course) on the Jews, in reality, "[C]lothiers, dyers, drovers, dyers graziers, and even clergymen" weighed their receipts,sorted out the heavy (and probably milled, if anyone were so extravagant as to spend them), and took them to a clipper, who cut them down by that magic 12.5%. The clippings were then taken to a goldsmith, who paid for them, below market bullion price, in clipped coins, with the clipped coins going back to the customer, plus some share of the additional clipped coins.

Everyone makes a profit, the money supply is maintained, the war can go on --until the crisis. By this time, Jones estimates, or probably, his sources estimate, 9 million ounces of silver had been lost to circulation in England, of which 8 million are covered by exports to India, which were running at a particularly high rate in this period for political reasons having to do with both England and India. [!]

 So that's the story of the Recoinage Crisis. Why did it happen in wartime? Because, given the consequences of exporting silver, it was better to pay the army with  bills "negotiable on Antwerp," or local money bought with those same bills.

So how do you get a bill negotiable on Antwerp? You go to someone who has one, and who is willing to buy it at a price that you are willing to pay. Since you are the King's government, and the money you are spending is British taxes, that person is a British subject, probably in London, and the payment is, in some way or another, tax receipts, or anticipation of future receipts. And how does a person in London get a bill negotiable in Antwerp? By selling things in Antwerp.

I've just made pretty heavy weather of the basic point that the United Kingdom (I give up) army overseas is supported out of the country's exports: it can make war up to the limit of its trade surplus.

This table is a reproduction of one which appears in Jones, War and Economy, 129--30. It is his research, and reflects the lacunae in the data as he found it:

English Trade, 1686—1712 in £000s (average customs valuation) [Jones, War and Economy, 129-30)

Near Europe					The North				The South
Year	Export	Reexport	Sum	Imports	Exp	Re-	Sum	Imp	Exp	Re-	Sum	Imp
1686	1445	989	2436	2310	296	78	375	613	976	219	1195	1260
1693	1512	324	1837	1276	255	42	297	548	906	58	964	924
1694	1511	366	1877	1601	431	49	480	468	978	117	1099	836
1695	2015	499	2513	1087	289	63	353	499	976	57	1034	1347
1699—1701	1859	1163	3033	1328	255	80	335	583	1484	224	1708	1555
1702	1923	711	2634	1056	248	41	289	410	876	83	958	1227
1703	2130	975	3105	1186	348	77	425	598	1318	151	1469	536
1704	2046	1204	3250	1433	346	75	422	714	1273	176	1449	115
1705			2693	1249			264	526			1319	540
1706	2523	992	3515	980	276	26	303	463	1437	159	1596	861
1707	2522	983	3505	1436	388	90	479	532	1114	135	1249	646
1708	2605	951	3563	1235	371	40	411	603	1461	142	1603	1142
1709	2587	879	3466	1112	241	37	278	452	1392	118	1511	1260
1710	2573	972	3545	1106	312	33	345	465	1877	154	2031	722
1711	2325	1299	3623	1064	227	42	270	471	1402	133	1536	1254
1712			3658	1110			240	483			2470	820

I know that the format isn't all that friendly, but notwithstanding the way it reflects the old-time division of the British government, the distinction between North (source of naval stores), South (Mediterranean, where the Allies were fighting on "Direct Supply") and "Near Europe," where the war was funded out of the trade surplus, is important. As you can see, British direct exports of British-made goods increased by 50% between the peace year of 1686 and 1711. That's a pretty big increase in comparative advantage!

Only, of course it's not. The English had a war to win, so they subsidised exports. Here's an explanation of the policy of putting export bounties on wheat. As the title of Hilton Root's monograph suggests (The Political Economy of Collective Violence), it was not popular with consumers. 

Of course, we don't care here about boring old wheat bounties. It is the bounty on coal, tin, lead and copper exports, which led to the success of the first steam engine (the "Newcomen atmospheric engine") which is important here, because it is the invention (etc, etc) that led to the Industrial Revolution --flying shuttle quite apart. 

I have more to say about this, and given some time I might even be half-arsed to turn some of Jones' eye-watering tables into argument-winning charts. (It might also help if I knew what the coal bounty schedules were, instead of making it up as I go along.)

In the mean time, if people would at least stop talking about how England had a comparative export advantage due to structural factors, that would be nice.