Arnold Kling  

Trade and Hegemony

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My latest essay says,

In the absence of hegemony, trade is impaired. If Marco Polo wants to buy goods in Afghanistan and sell them in China, he has to be able to avoid having his goods stolen, either by bandits along the route or by criminals or government rulers at his destination. Without protection from a hegemon, he is unlikely to be able to complete his trade mission.

See also Kris James Mitchener and Marc Weidenmier.

Our augmented gravity model shows that belonging to an empire roughly doubled trade relative to those countries that were not part of an empire. The positive impact that empire exerts on trade does not appear to be sensitive to whether the metropole was Britain, France, Germany, Spain, or the United States or to the inclusion of other institutional factors such as being on the gold standard. In addition, we examine some of the channels through which colonial status impacted bilateral trade flows. The empirical analysis suggests that empires increased trade by lowering transactions costs and by establishing trade policies that promoted trade within empires. In particular, the use of a common language, the establishment of currency unions, the monetizing of recently acquired colonies, preferential trade arrangements, and customs unions help to account for the observed increase in trade associated with empire.

I argue that these facts are uncomfortable for libertarians. We would like to think of trade and military hegemony as substitutes. Instead, they appear to be complements.

Make sure you read the appendix to my essay, where I stake out my position that early markets had a low ratio of produced goods to plundered goods.

Comments and Sharing

COMMENTS (9 to date)
Horatio writes:
I argue that these facts are uncomfortable for libertarians.

Not if the countries that were under a hegemon were more liberal than those that were not.

Randy writes:

"I argue that these facts are uncomfortable for libertarians."

Uncomfortable for anarchists maybe. I for one am perfectly comfortable with the idea of free people freely choosing to hire security services.

Troy Camplin writes:

Not uncomfortable for this libertarian. I'm quite comfortable with the U.S. Navy's role of keeping the seas relatively free of piracy. I'm also glad that it's the U.S. doing it, since we will be less likely than many countries to not participate in what we are trying to get rid of. All in all, though, the reason why nobody wanted to mess with an empire was due to size and power. You can still be a relatively hands-off country and still be big and powerful enough for people to decide not to mess with your trade ships.

TGGP writes:

Uncomfortable for anarchists maybe. I for one am perfectly comfortable with the idea of free people freely choosing to hire security services.
I don't have the option to freely choose to hire security services. The government has a monopoly on the legitimized use of violence and if I were to refuse to pay the taxes that support the police & military in favor of using that money to hire my own private security, I would be jailed.

I used to hear that trade/economic integration does not prevent violence with the period preceding World War 1 as an example. Wasn't then there trade between rival powers rather than just intra-hegemonic trade?

The libertarian merits/demerits of empire were discussed here by Roderick Long. I went over some related issues here.

michael gordon writes:

1) A good little think-piece, Arnold --- especially for libertarians, who tend, virtually one and all, to think that the role of states in international life is largely mercantilist, predatory, and exploitative, and that all would be right if markets would just expand globally and any state role fade or disappear. Cobden made that clear when he argued that Britain's switch to free trade would, sooner or later, remove any need for the Foreign Office and diplomats and soldiers, all of whom could be put on "outdoor relief".

In fact, Britain ended up the most aggressive of the traditional imperial expansionists after 1849, the year free trade was adopted in that country. It repeatedly used gun boat diplomacy to open up markets and fought three "opium wars" with China to force it to open up to trade. It also continued, fortunately, to use its huge naval power to end the slave trade. In 1899, it nearly fell into war with France (also a democracy) over French expansion into West Africa and toward the source of the Nile river.

2) The current number 2 at the Interior Department, Lynn Scarlett --- a former under and Ph.D. student of mine at UC Santa Barbara --- asked me back in the late 1980s or early 1990s when she was the book review editor for Reason to write an article on the role of liberal states like the US or the UK . . . so naive and uninformed were the dominant views of the writers for the magazine. (With a Ph.D. in both economics and political science from Harvard, I was a specialist in international relations and global political economy until I retired in 2004).

3) Lynn, a former TA of mine in several undergrad IR courses, knew just how much at odds libertarian thinking was with the realities of international life. Do you really think, any of you reading Arnold or sharing libertarian views, that the expansion of free trade since the 1850s --- with tremendous closures between the 1870s and 1945, as the Long Great Depression of the 1870s on and the Great Depression of the 1930s struck and extremist ideologies emerged like Communism and Fascism and Nazism and Militarist Darwinianism --- that state leaders would sit around and negotiate, a la Coase bargaining theory, free trade and not worry about the distribution of those gains, the minimization of domestic losses (short or mid-term), and what all that might mean for domestic stability and relative power in IR life?

Even in market relations, Coase warned in his Nobel Prize speech that the information and transactions costs might be formidable in dealing, say, with externalities.

4) Relative gains are not something free-market economists, even those who wouldn't regard themselves as thumping libertarians, are used to thinking in terms of.

Absolute gains --- does any market transaction improve "my" economic welfare irrespective if the other fellow or firm gains more form it --- are what market relations encourage us to largely consider, and maybe rightly so for the most part within a country or voluntary regional group like the EU, where a rule of law prevails, property rights are clearly established, and there are limits to what can be done by aggrieved individuals, firms, and groups who dislike the distribution of outcomes except, within limits, by voting and legislation.

International life isn't like that. All civilizations have known warfare, and all organized human communities, from clans upward to states and empires, have engaged in it. It is almost certainly hard-wired into our brains over hundreds of millions of years . . . a finding that has continually been validated by social psycyhological work in conflict theory and group-identity for decades now.

5) The outcome? State leaders, even in relatively free market, democratic countries, will often approach international economic relations with concerns about relative gains in mind . . . worried that diplomatic and military rivals, potential or actual, will be able to gain the most in relative-power terms.

Hence the current Administration in Washington has rightly been concerned of late with clamping down on certain technological transfers to China that, presumably, make no sense to libertarians.

More generally, most good studies of trade over history find that it is freest not just when there is a hegemon --- liberal or, more narrowly, imperial and mercantilist (Rome, Aztec etc) --- but, among major states, between allies and least extensive with clear adversaries. The worries here that impede trade are not some simple ruse by a predatory state like the American federal government to exploit taxpayers for the benefit of politicians, bureaucrats, and their pet interest-group supporters. It has a sound foundation at time.

The pivotal question is: WHEN will state leaders forgo "absolute" gains because of worries about the "relative" gains.

6) The idea that a good functioning global or regional system of trade and investment flows needs a hegemon was first broached, around 1970, by Charles Kindleberger of MIT, an economist. Several IR theorists then took this idea of a liberal hegemon and turned it into a theory of "institutional liberalism", inspired by Coase theorems and Axlerod's tit-for-tat strategy for overcoming defection in an iterated Prisoners' Dilemma game. Institutions, on this theory, provide a rich environment of information and minimize the transaction costs of monitoring an agreement (say, in trade) that further encourage movements toward the Pareto-Frontier by distributing gains (or even losses) among several participant measures. The idea here is clear to economists: don't think about bilateral trade.

7) Two problems intrude here:

(i.) In the tit-for-tat strategy, defection --- think of Japanese-American negotiations in the summer and fall of 1941 over the US embargo of oil to stop Japanese aggression and expansion --- might be WWII in the Pacific. In the end, of course --- after tens of millions of dead in Asia alone and Japan destroyed and occupied by the US --- Alexrod's theory was justified. Retaliation for Pearl Harbor worked. The US forced changes in Japanese political and economic life, and Japan became a trade partner after 1954 with the US not worried (until the 1980s) about the lopsided bilateral trade and barriers to US goods and multinationals in Japan.

(ii.) More generally --- unless any of you can clearly show that as China becomes richer and morre technologically advanced,it will become ever more liberal, open, and pacific in its diplomacy and military programs --- do you think the US government should simply ignore all market-oriented technological transfers and not be concerned about the impact in the next two or three decades in Chinese foreign policy and the balance of power in Pacific Asia?

This is quite apart from noting, please observe, that the post-1979 Chinese regime has renounced Maoist autarky and encouraged the development of both some free-market reforms at home and ever increasing trade with the outside world, at any rate on Chinese terms concerning 1) the value of the Yuan in dollar terms, 2) multinational investments in the CHinese markets (what firms must bring in and how and when), and 3) the foreign goods and services that can enter the Chinese market.

To ignore relative gains here for diplomatic-military purposes is, in my opinion, to have a very stubbornly rooted hope that somehow, over time, more trade and investment into China will lead to more openness there, more decentralization, more free market expansion, and consequently the self-immolation of the Chinese CP monopoly of power . . . something that no monopolistic dictatorship in world history, whether royal, imperial, or President-for-Life, has ever done before.

Again, Arnold: a nice thought-piece that should get many of your libertarian colleagues to start rethinking some of their more cherished axioms about markets vs states in international life. I add that I am an independent in political persuasion and have written extensively about how lucky we are in this country not to have had a socialist tradition of any note on the left and a pre-industrial, pre-democratic statist-conservatism found all over Europe, even in the Tory wing historically of the British Conservative Party.

Michael Gordon, AKA, The Buggy Professor

michael gordon writes:

Just a quick postscript comment, nothing more. Institutional liberalism --- remember, the application to bargaining among states, even presumably in military matters, of Coase theorems and Axlerod tit-for-tat straetgy for overcoming a PD defection by turning the bargaining into an iterated game of reciprocity, with a long-term view of your gains or losses. In effect, such institutional liberalism --- libertarian economics applied, if you want, to state bargaining --- assumes that all sorts of Pareto-movements toward the Pareto frontier will be exploited by negotiating states within the framework of an institution like WTO or IMF. Nothing will be left on the table. Rational calculating agents will ensure that.

Maybe so --- but only if absolute gains are the sole concerns of the bargainers.

If, however, concerns over relative gains intrude into the bargaining calculi of certain states, then it matters a great deal to them WHERE, on the Pareto frontier, your state and certain rivals might end up. The use of a "frontier" to describe efficiency gains among bargaining states is food for thought, no? Almost all frontiers, you see, have been opened up by men with guns or earlier forms of weapons, not by traders and merchants. And if they were ever kept open, similarly by men with weapons, maybe reinforced by bribes to local tribes or nations or coopting their elites or by ethnic cleansing or extermination in way too many cases ignored by free-market enthusiasts, including, it seems, most economic historians.

And presumably nobody wants another WWII --- a single-shot defecton by militarist Japan in December 1941 --- followed by US retaliation to ensure that the Axlerod strategy of cooperation out of anarchy materializes again in the Pacific, only with China as the bargaining defector or maybe a nuclear-armed North Korea transferring nuclear weaponry to Islamic fanatics.

Michael Gordon, AKA The Buggy Professor

Mark Koyama writes:

Hi Arnold, I think I made this point a few weeks ago in the comments but I will reiterate it here. The Polanyi view of the pre-industrial world is at odds with almost all of the historical research of the past twenty years. I suggest you have a look at the papers by Keith Thomas, Peter Temin, or Bryan Ward-Perkins on the Roman economy if you have not already read them before you dismiss the Roman economy as a plunder economy. As you note the high urbanization rates for the pre-industry world are a problem for your argument. The general consensus estimates for Roman urban populations is that Rome may have had a population of 1 million for much of the Principate. Admittedly, part of this was due to the imperial system of taxation and hence corresponds to your definition of 'plunder'. But there were other very large cities in the empire, Alexandria with a population of 400,000 perhaps. Cathage and Antioch with 200,000 - 300,000. Ephesus, Smyrna, and Peragamon are all thought to have had populations exceeding 100,000 in the 2nd C. AD. There are dozens of cities with populations around 50,000. My point is that these cities were not at the political center of the Roman empire and they were not dumping points for plunder. Rather their size reflected the fact that the Roman empire was a market economy and a Mediterreanan wide free-trade area. Moreover, many parts of Europe were not as urbanized until the 18th or 19th centuries.

Troy Camplin writes:

There are some pretty strange claims in the appendix, like the claim that, though the evidence is clear that places like ancient Athens had a population of 100,000 people, that it is more likely to have been just a few thousand, because people didn't have enough sense to clean up after themselves. Never mind the fact that there were running sewers and running water in ancient Athens. I've been to Athens and seen the ancient sewers. It is also well established that the cities were set up as places where people could trade. Perhaps they were founded to sell plunder, but as the cities grew, there became more and more trade. How do we know this? Well, there is substantial textual evidence. Aristophanes complains about how the war is preventing free trade among the cities. I guess the plunder from the war wasn't really enough for him. Odd, if plunder provided more goods than did trade. More, we know that people specialized. If you have specialists, you have people who expect to be able to sell their products so that they can get the products they need but don't produce. Further, there was money and accounting. The alphabet was invented for accounting purposes, showing that people in ancient Mesopotamia traded. Why else would they need to keep track of goods and money? The fact that there were robbers and pirates doesn't mean the economies were based primarily on plunder -- in fact, the fact that the Athenian navy and the Roman navy both worked to get rid of piracy suggest that they were, again, trying to make the Mediterranean Sea safe for trade. Yes, Pinker is right about very primitive people counting "1, 2, many," but the ancient Greeks, Romans, or Marco Polo were not THAT primitive. Numbers were invented a long time ago. There are, for example, Roman numerals. Some pretty advanced mathematics were invented in ancient times. Ever heard of the Pythagorean theorem? Well, Pythagoras was around about 500 B.C. The mathematical precision needed to make such things as the Parthenon and the pyramids should make it more than abundantly clear how mathematically advanced the ancients were.

Polyani was wrong about the ancient world. Precisely, he was 50 years or so behind on his archaeological information. He can be excused, but come on. We have learned a lot about the ancient world since then. Some of it should have been apparent even to him had he given even a cursory reading of the incredible number of ancient texts we have available.

Joshua Holmes writes:

A couple of points:

1. What was the trade in? It's quite right to say that trade increased substantially when Europeans visited Africa. Unfortunately, much of that trade was either slaves or built on slave labor. Today, much globalization consists of throwing people off their ancestral land and giving it to large corporations, such as in the Green Revolution. GDP doesn't measure this.

2. If a place is more easily visited by conquerors, it is probably more easily visited by anyone. Put another way, if a country is isolated from trade, it is probably also isolated from conquest. And vice versa. The lack of trade and the lack of conquest may both be due to being hard to reach.

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