From 1700s, an economics lesson for today

Why did England have such powerful economic growth in the 17th and 18th century, while France languished? Why did England lead the way in technological achievement, advancing into the Industrial Revolution, while France remained mired in the past and oppressed by poverty and tyranny? And what’s the relevance of their contrasting experiences for us today?

Perhaps the contrast was due to England’s limited government. The Magna Carta forced the king to call Parliament if he wished to levy a tax, however Parliament usually demanded a voice in government, so the Stuart kings of the 17th century preferred to rule without them. This kept taxes low or nonexistent, and enabled the English to accumulate vast amounts of capital, which they invested and built wealth. Near the end of the 17th century the Stuarts kings were replaced in a bloodless revolution. The new monarchs agreed to an English Bill of Rights, which limited royal power and granted even greater political and economic freedoms.

Assured of low taxation, of their rights as freeborn Englishmen, and of a free market economic system which rewarded hard work and thrift, they began to accumulate wealth. Soon London became the financial capital of the world. Their merchant ships spanned the globe, and their financial sector provided capital for world markets. By the 18th century wealth continued to accumulate, helping to catapult Britain into modernity, allowing then to be at the cutting edge of innovation, building the factories which became the industrial revolution, and exporting their products world-wide.

Across the channel their French neighbors were ruled by absolute monarchs. There was no Magna Charta, no Parliament to control the crown’s taxing and spending powers. The Bourbon monarchs of the 17th century, Louis XIII and Louis XIV, squeezed every centime they could out of the French people to build spectacular palaces and massive armies. They also forced the Protestant minority, which was most of their entrepreneurial class, to convert to Catholicism or leave France. These Huguenots emigrated to Holland, England or the 13 colonies in America, where they blessed their new homelands with their knowledge and skills. Rockefellers, DuPonts, and Gettys settled in New York, where they built fortunes free of the taxation and persecution they experienced in France.

The Bourbon monarchs of the 18th century, Louis XV and Louis XVI, continued their heavy taxing and spending policies until their entire system collapsed into the chaos and bloodbath of the French Revolution. Dickens’ Tale of Two Cities confirms this comparison of London and Paris. While England was busy investing, creating and producing, France was beheading their population and setting government price controls on their commodities, which further decreased productivity. When farmers hoarded their grain, rather than selling it at government imposed prices, they too were executed. Who would go to the trouble of producing a crop, if forced to sell it at a loss or forfeit one’s life. In their hunger and fear the French sought the personality cult of a strong leader, Napoleon Bonaparte, who promised them “liberty, equality and fraternity”, but actually brought more tyranny, then marched them to their death across Europe.

What lessons can be learned from 17th and 18th century England and France? Low taxes, limited government, and free markets produce wealth and freedom. High taxes, government-controlled markets and charismatic leadership produces hunger, suffering, and tyranny. If we do not learn from history, we are doomed to repeat it, but one thing we learn from history is that we usually don’t learn from history.

2 thoughts on “From 1700s, an economics lesson for today

  1. Trevor Simmons

    Dear Dr. Watson,

    I basically agree with your comparison (the French always make an easy target), but several statements are misleading. First, the massive credit raised during this period had more to do with the creation of the Bank of England than with low taxation. The Bank was created in 1694, just after the Revolution of 1688, for the express purpose of serving as the Government’s banker; it also served the purpose of making credit available to English enterprise at a time when France remained a peasant-based society with virtually no credit. Britain’s ability to raise and service debt was crucial to their victory in the Napoleonic Wars, just as it was crucial in giving British merchants a head start in building a merchant marine, in capturing overseas markets, and in securing investments safeguarded by the British Crown.

    The Bank of England, far more than low taxes, was the key innovation that catapulted London to the pinnacle of world finance.

    It also was a key innovation for the rapid century-long expansion of the British Empire, which relied on vast credit and a stable currency as much as any process possibly could. Even Niall Ferguson acknowledges this point (ironically, he does so in his plea for the United States to cast aside concerns about the national debt and to instead expand America’s role of policing the world). The Bank of England thus allowed the British government to expand its commitments without raising taxation *precisely* because its functions operated on credit, rather than land rents like France.

    This is one of those instances where history provides few obvious lessons for the present: credit and debt greatly assisted British success in the eighteenth and nineteenth century; credit and debt, without proper limits, also created the crisis that presently faces us.

    The second point involves your argument that "a free market economic system" lay behind Britain’s economic success. I agree that there were certain *elements* of a free market system during this period. But the idea of "free trade" as we know it was far from being accepted, much less implemented, during the seventeenth and eighteenth centuries. Hence the later influence of Adam Smith’s "The Wealth of Nations" in 1776, which provided the first comprehensive exposition of the theory of capitalism, and which complemented the ideas of Hume, Ricardo, and several others. These figures, though now canonized, were far from the mainstream during their time.

    In practical terms, the Navigation Acts provide strongest evidence that a "system of free trade" was far from reality in the seventeenth and eighteenth centuries. The Navigation Acts were first implemented in 1651 and remained in effect for nearly two centuries. The purpose of the Navigation Acts was to protect English trade, primarily from the more competitive Dutch traders, and their political justification rested on the theory of mercantilism. Only in 1849 were the Navigation Acts repealed, which marked the moment when mercantilism officially gave way to laissez-faire capitalism for the first time—incidentally, this moment occurred when British exports were at their most competitive and when Richard Cobden and his laissez-faire followers were at the height of their influence.

    Third, I’m a bit perplexed as to why you would include "charismatic leadership" as a factor that creates "hunger, suffering, and tyranny." You and many others may *think* this about Obama, but one could hardly call charismatic leadership destructive if the leader under discussion was the likes of George Washington, Thomas Jefferson, or Ronald Reagan.

    With all of this said, I hope you understand that I agree that the fundamental principles of capitalism provide the most efficient, the most successful, and the most dynamic economic system the world has ever known. At the same time, however, its virtues should not be exaggerated, and we should be cautious in assuming that the "lessons of history" point to only one solution.

    Trevor Simmons

    Reply
    1. William Watson

      You seem to favor the John Brewer interpretation of the growth of British Power (see his work Sinews of Power, Harvard, 1990).
      In spite of that we are closer than you think, but I would recommend a few reading assignments on the role of the rule of law and
      limited government in Britain (not the royal/revolutionary tyranny, high taxation, high customs duties, and social turmoil in France):
      William Rosen, The Most Powerful Idea in the World (Univ Chicago Press, 2010), especially chapter 3 on patent laws
      Rosenberg & Birdzell, How the West Grew Rich (Basic Books,1986) especially chapter 4 on institutions favorable to commerce
      + both Adam Smith and Milton Friedman who saw the reduction of custom taxes in the 18th century as a primary impetus.
      Bill Watson
      Milton Friedman makes a case that lower customs duties provided an impetus for increased trade and the growth of economic power.

      Reply

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