C H A P T E R 2
The double life of Daniel Defoe
How did the rich countries become rich?
Daniel Defoe, the author of Robinson Crusoe, had a colourful life. Before writing
novels, he was a businessman, importing woollen goods, hosiery, wine and
tobacco. He also worked in the government in the royal lotteries and in the
Glass Duty Office that collected the notorious ‘window tax’, a property tax levied
according to the number of a house’s windows. He was also an influential
author of political pamphlets and led a double life as a government spy. First he
spied for Robert Harley, the Tory speaker of the House of Commons. Later, he
complicated his life even further by spying for the Whig government of Robert
Walpole, Harley’s political arch-enemy.
As if being a businessman, novelist, tax collector, political commentator and
spy wasn’t providing sufficient stimulus, Defoe was also an economist. This
aspect of his life is even less well known than his spying. Unlike his novels,
which include Robinson Crusoe and Moll Flanders, Defoe’s main economic work,
A Plan of the English Commerce (1728), is almost forgotten now. The popular
biography of Defoe by Richard West does not mention the book at all, while the
award-winning biography by Paula Backscheider mentions it largely in relation
to marginal subjects, such as Defoe’s view on native Americans.[1]
However, the
book was a thorough and insightful account of Tudor industrial policy (under
23
Chapter 2 T H E D O U B L E L I F E O F D A N I E L D E F O E
England’s Tudor monarchs) that has much to teach us today.
In the book (henceforth A Plan), Defoe describes how the Tudor monarchs,
especially Henry V I I and Elizabeth I, used protectionism, subsidies, distribution
of monopoly rights, government-sponsored industrial espionage and other
means of government intervention to develop England’s woollen manufacturing
industry—Europe’s high-tech industry at the time. Until Tudor times, Britain had
been a relatively backward economy, relying on exports of raw wool to finance
imports. The woollen manufacturing industry was centred in the Low Countries
(today Belgium and the Netherlands), especially the cities of Bruges, Ghent
and Ypres in Flanders. Britain exported its raw wool and made a reasonable
profit. But those foreigners who knew how to convert the wool into clothes
were generating much greater profits. It is a law of competition that people who
can do difficult things which others cannot will earn more profit. This is the
situation that Henry V I I wanted to change in the late 15th
century.[2]
According
to Defoe, Henry V I I sent royal missions to identify locations suited to woollen
manufacturing.[3]
Like Edward III before him, he poached skilled workers from
the Low Countries.[4]
He also increased the tax on the export of raw wool, and
even temporarily banned its export, in order to encourage further processing
of the raw material at home. In 1489, he also banned the export of unfinished
cloth, save for coarse pieces below a certain market value, in order to promote
further processing at home.[5]
His son, Henry V I I I, continued the policy and
banned the export of unfinished cloth in 1512, 1513 and 1536.
As Defoe emphasizes, Henry V I I did not have any illusions as to how quickly
the English producers could catch up with their sophisticated competitors in
the Low Countries.[6]
The King raised export duties on raw wool only when the
English industry was established enough to handle the volume of wool to be
processed. Henry then quickly withdrew his ban on raw wool exports when it
became clear that Britain simply did not have the capacity to process all the raw
wool it produced.[7]
Indeed, according to A Plan, it was not until 1578, in the
middle of Elizabeth I’s reign (1558–1603)—nearly 100 years after Henry V I I had
24
TH E D O U B L E L I F E O F D A N I E L D E F O E Chapter 2
started his ‘import substitution industrialization’ policy in 1489—that Britain
had sufficient processing capacity to ban raw wool exports totally.[8]
Once in
place, however, the export ban drove the competing manufacturers in the Low
Countries, who were now deprived of their raw materials, to ruin.
Without the policies put in place by Henry V I I and further pursued by his
successors, it would have been very difficult, if not impossible, for Britain to have
transformed itself from a raw-material exporter into the European centre of the
then high-tech industry. Wool manufacture became Britain’s most important
export industry. It provided most of the export earnings to finance the massive
import of raw materials and food that fed the Industrial Revolution.[9]
A Plan
shatters the foundation myth of capitalism that Britain succeeded because it
figured out the true path to prosperity before other countries—free market and
free trade.
Daniel Defoe’s fictional hero, Robinson Crusoe, is often used by economics
teachers as the pure example of ‘rational economic man’, the hero of neo-liberal
free-market economics. They claim that, even though he lives alone, Crusoe
has to make ‘economic’ decisions all the time. He has to decide how much to
work in order to satisfy his desire for material consumption and leisure. Being
a rational man, he puts in precisely the minimum amount of work to achieve
the goal. Suppose Crusoe then discovers another man living alone on a nearby
island. How should they trade with each other? The free-market theory says that
introducing a market (exchange) does not fundamentally alter the nature of Crusoe’s
situation. Life goes on much as before, with the additional consideration
that he now needs to establish the rate of exchange between his product and his
neighbour’s. Being a rational man, he will continue to make the right decisions.
According to free-market economics, it is precisely because we are like Crusoe
that free markets work. We know exactly what we want and how best to achieve
it. Consequently, leaving people to do what they desire and know to be good for
themselves is the best way to run the economy. Government just gets in the way.
The kind of economics that underpins Defoe’s Plan is exactly the opposite
25
Chapter 2 T H E D O U B L E L I F E O F D A N I E L D E F O E
of Robinson Crusoe economics. In A Plan, Defoe clearly shows that it was not
the free market but government protection and subsidies that developed British
woollen manufacturing. Defying signals from the market that his country was an
efficient raw wool producer and should remain so, Henry V I I introduced policies
that deliberately distorted such unwelcome notions. By doing so, he started the
process that eventually transformed Britain into a leading manufacturing nation.
Economic development requires people like Henry V I I, who build a new future,
rather than people like Robinson Crusoe, who live for today. Thus, in addition to
his double life as a spy, Defoe also led a double life as an economist—without
realizing it, he created the central character in free market economics in his
fictional work, yet his own economic analysis clearly illustrated the limits of free
market and free trade.
2.1. Britain takes on the world
Defoe started his double life as a spy for the Tory government, but later, as I
mentioned, he spied for the Whig government of Robert Walpole. Walpole is
commonly known as the first British prime minister, although he was never
called that by his contemporaries.[10]
Walpole was notorious for his venality—he
is said to have ‘reduced corruption to a regular system’. He deftly juggled the
disbursement of aristocratic titles, government offices and perks in order to
maintain his power base, which enabled him to remain the prime minister for a
staggering 21 years (1721–42). His political skills were immortalized by Jonathan
Swift in his novel, Gulliver’s Travels, in the character of Flimnap. Flimnap is
the prime minister of the empire of Lilliput and champion of Dance of the
Rope, the frivolous method by which the holders of high offices in Lilliput are
selected.[11]
Yet Walpole was a highly competent economic manager. During
his time as chancellor of the exchequer, he enhanced the creditworthiness of
his government by creating a ‘sinking fund’ dedicated to repaying the debts. He
became prime minister in 1721 because he was considered the only person who
26
TH E D O U B L E L I F E O F D A N I E L D E F O E Chapter 2
had the ability to manage the financial mess left behind by the infamous South
Sea Bubble.∗
Upon becoming prime minister, Walpole launched a policy reform that dramatically
shifted the focus of British industrial and trade policies. Prior to
Walpole, the British government’s policies were, in general, aimed at capturing
trade through colonization and the Navigation Act (which required that all trade
with Britain should be conducted in British ships) and at generating government
revenue. The promotion of woollen manufacturing was the most important
exception, but even that was partly motivated by the desire to generate more
government revenue. In contrast, the policies introduced by Walpole after 1721
were deliberately aimed at promoting manufacturing industries. Introducing the
new law, Walpole stated, through the King’s address to Parliament: ‘it is evident
that nothing so much contributes to promote the public well-being as the exportation
of manufactured goods and the importation of foreign raw matrial’.[12]
Walpole’s 1721 legislation essentially aimed to protect British manufacturing
industries from foreign competition, subsidize them and encourage them to
export.[13]
Tariffs on imported foreign manufactured goods were significantly
raised, while tariffs on raw materials used for manufacture were lowered, or
even dropped altogether. Manufacturing exports were encouraged by a series
of measures, including export subsidies.[14]
Finally, regulation was introduced
to control the quality of manufactured products, especially textile products, so
that unscrupulous manufacturers could not damage the reputation of British
products in foreign markets.[15]
These policies are strikingly similar to those
used with such success by the ‘miracle’ economies of East Asia, such as Japan,
Korea and Taiwan, after the Second World War. Policies that many believe, as I
∗
The South Sea Company was set up in 1711 by Robert Harley, Defoe’s first spymaster, and
was granted exclusive trading rights in Spanish South America. It made little actual profit, but
talked up its stock with the most extravagant rumours of the value of its potential trade. A
speculative frenzy developed around its shares in 1720, with its stock price rising by ten times in
seven months between January and August 1720. The stock price then started tailing and, by
early 1721, was back where it had been in January 1720.
27
Chapter 2 T H E D O U B L E L I F E O F D A N I E L D E F O E
myself used to, to have been invented by Japanese policy-makers in the 1950s such
as ‘duty drawbacks on inputs for exported manufactured products∗
and
the imposition of export product quality standards by the government—were
actually early British inventions.[16]
This is a practice where the government sets the minimum quality standards
for export products and punishes those exporters who do not meet them. This
is intended to prevent substandard export products tarnishing the image of
the exporting country. It is particularly useful when products do not have wellrecognized
brand names and, therefore, are identified by their national origin.
Walpole’s protectionist policies remained in place for the next century, helping
British manufacturing industries catch up with and then finally forge ahead
of their counterparts on the Continent. Britain remained a highly protectionist
country until the mid-i9th
century. In 1820, Britain’s average tariff rate on
manufacturing imports was 45–55%, compared to 6–8% in the Low Countries,
8–12% in Germany and Switzerland and around 20% in France.[17]
Tariffs were,
however, not the only weapon in the arsenal of British trade policy. When it
came to its colonies, Britain was quite happy to impose an outright ban on advanced
manufacturing activities that it did not want developed. Walpole banned
the construction of new rolling and slitting steel mills in America, forcing the
Americans to specialize in low value-added pig and bar iron, rather than high
value-added steel products.
Britain also banned exports from its colonies that competed with its own
products, home and abroad. It banned cotton textile imports from India (‘calicoes’),
which were then superior to the British ones. In 1699 it banned the export
of woollen cloth from its colonies to other countries (the Wool Act), destroying
the Irish woollen industry and stifling the emergence of woollen manufacture in
America.
∗
This is a practice where a manufacturer exporting a product is paid back the tariff that it
has paid for the imported inputs used in producing the product. This is a way of encouraging
exports.
28
TH E D O U B L E L I F E O F D A N I E L D E F O E Chapter 2
Finally, policies were deployed to encourage primary commodity production
in the colonies. Walpole provided export subsidies to (on the American side)
and abolished import taxes on (on the British side) raw materials produced in
the American colonies such as hemp, wood and timber. He wanted to make
absolutely sure that the colonist stuck to producing primary commodities and
never emerged as competitors to British manufacturers. Thus they were compelled
to leave the most profitable ‘high-tech’ industries in the hands of Britain
which ensured that Britain would enjoy the benefits of being on the cutting edge
of world development.[18]
2.2. The double life of the British economy
The world’s first famous free-market economist, Adam Smith, vehemently attacked
what he called the ‘mercantile system’ whose chief architect was Walpole.
Adam Smith’s masterpiece, The Wealth of Nations, was published in 1776, at
the height of the British mercantile system. He argued that the restrictions on
competition that the system was producing through protection, subsidies and
granting of monopoly rights were bad for the British economy.∗
Adam Smith understood that Walpole’s policies were becoming obsolete.
Without them, many British industries would have been wiped out before they
had had the chance to catch up with their superior rivals abroad. But once
British industries had become internationally competitive, protection became
less necessary and even counter-productive. Protecting industries that do not
need protection any more is likely to make them complacent and inefficient, as
Smith observed. Therefore, adopting free trade was now increasingly in Britain’s
interest. However, Smith was somewhat ahead of his time. Another generation
would pass before his views became truly influential, and it was not until 84
∗
However, Smith was a patriot even more than he was a free market economist. He supported
free market and free trade only because he thought they were good for Britain, as we can see from
his praise of the Navigation Acts—the most blatant kind of ‘market-distorting’ regulation—as
‘the wisest of all the commercial regulations of England’.
29
Chapter 2 T H E D O U B L E L I F E O F D A N I E L D E F O E
years after The Wealth of Nations was published that Britain became a genuine
free trading nation.
By the end of the Napeolenic Wars in 1815, four decades after the publication
of The Wealth of Nations, British manufacturers were firmly established as the
most efficient in the world, except in a few limited areas where countries like
Belgium and Switzerland possessed technological leads. British manufacturers
correctly perceived that free trade was now in their interest and started campaigning
for it (having said that, they naturally remained quite happy to restrict
trade when it suited them, as the cotton manufacturers did when it came to the
export of textile machinery that might help foreign competitors). In particular,
the manufacturers agitated for the abolition of the Corn Laws that limited the
country’s ability to import cheap grains. Cheaper food was important to them
because it could lower wages and raise profits.
The anti-Corn Law campaign was crucially helped by the economist, politician
and stockmarket player, David Ricardo. Ricardo came up with the theory
of comparative advantage that still forms the core of free trade theory. Before
Ricardo, people thought foreign trade makes sense only when a country can
make something more cheaply than its trading partner. Ricardo, in a brilliant
inversion of this commonsensical observation, argued that trade between two
countries makes sense even when one country can produce everything more
cheaply than another. Although this country is more efficient in producing
everything than the other, it can still gain by specializing in things in which it has
the greatest cost advantage over its trading partner. Conversely, even a country
that has no cost advantage over its trading partner in producing any product
can gain from trade if it specializes in products in which it has the least cost
disadvantage. With this theory, Ricardo provided the 19 th-century free traders
with a simple but powerful tool to argue that free trade benefits every country.
Ricardo’s theory is absolutely right—within its narrow confines. His theory
correctly says that, accepting their current levels of technology as given, it is better
for countries to specialize in things that they are relatively better at. One cannot
30
TH E D O U B L E L I F E O F D A N I E L D E F O E Chapter 2
argue with that.
His theory fails when a country wants to acquire more advanced technologies
so that it can do more difficult things that few others can do—that is, when
it wants to develop its economy. It takes time and experience to absorb new
technologies, so technologically backward producers need a period of protection
from international competition during this period of learning. Such protection is
costly, because the country is giving up the chance to import better and cheaper
products. However, it is a price that has to be paid if it wants to develop advanced
industries. Ricardo’s theory is, thus seen, for those who accept the status quo but
not for those who want to change it.
The big change in British trade policy came in 1846, when the Corn Laws
were repealed and tariffs on many manufacturing goods were abolished. Free
trade economists today like to portray the repeal of the Corn Laws as the ultimate
victory of Adam Smith’s and David Ricardo’s wisdom over wrong-headed
mercantilism.[19]
The leading free trade economist of our time, Jagdish Bhagwati
of Columbia University, calls this a ‘historic transition’.[20]
However, many historians
familiar with the period point out that making food cheaper was only one
aim of the anti-Corn Law campaigners. It was also an act of ‘free trade imperialism’
intended to ‘halt the move to industrialisation on the Continent by enlarging
the market for agricultural produce and primary materials’.[21]
By opening its
domestic agricultural market wider, Britain wanted to lure its competitors back
into agriculture. Indeed, the leader of the anti-Corn Law movement, Richard
Cobden, argued that, without the Corn Laws: ‘The factory system would, in all
probability, not have taken place in America and Germany. It most certainly
could not have flourished, as it has done, both in these states, and in France,
Belgium and Switzerland, through the fostering bounties which the high-priced
food of the British artisan has offered to the cheaper fed manufacturer of those
countries’.[22]
In the same spirit, in 1840, John Bowring of the Board of Trade, a
key member of the anti-Corn Law League, explicitly advised the member states
of the German Zollverein (Custom Union) to specialize in growing wheat and
31
Chapter 2 T H E D O U B L E L I F E O F D A N I E L D E F O E
sell the wheat to buy British manufactures.[23]
Moreover, it was not until 1860
that tariffs were completely abolished. In other words, Britain adopted free trade
only when it had acquired a technological lead over its competitors ‘behind high
and long-lasting tariff barriers’, as the eminent economic historian Paul Bairoch
once put it.[24]
No wonder Friedrich List talked about ‘kicking away the ladder’.
2.3. America enters the fray
The best critique of Britain’s hypocrisy may have been written by a German,
but the country that best resisted Britain’s ladder-kicking in terms of policy
was not Germany. Nor was it France, commonly known as the protectionist
counterpoint to free-trading Britain. In fact, the counterbalance was provided
by the US, Britain’s former colony and today’s champion of free trade.
Under British rule, America was given the full British colonial treatment.
It was naturally denied the use of tariffs to protect its new industries. It was
prohibited from exporting products that competed with British products. It was
given subsidies to produce raw materials. Moreover, outright restrictions were
imposed on what Americans could manufacture. The spirit behind this policy is
best summed up by a remark William Pitt the Elder made in 1770. Hearing that
new industries were emerging in the American colonies, he famously said: ‘[The
New England] colonies should not be permitted to manufacture so much as a
horseshoe nail’.[25]
In reality, British policies were a little more lenient than this
may imply: some industrial activities were permitted. But the manufacture of
high-technology products was banned.
Not all Britons were as hard-hearted as Pitt. In recommending free trade
to the Americans, some were convinced that they were helping them. In his
Wealth of Nations, Adam Smith, the Scottish father of free market economics,
solemnly advised the Americans not to develop manufacturing. He argued
that any attempt to ‘stop the importation of European manufactures’ would
‘obstruct instead of promoting the progress of their country towards real wealth
32