David R. Henderson  

Adam Smith on the Public Choice of Foreign Intervention

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Why the 13 colonies are a net loser for Great Britain:

A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expence of maintaining and defending that empire. For this purpose, and for this purpose only ... a new debt of more than a hundred and seventy millions has been contracted over and above all that had been expended for the same purpose in former wars. The interest of this debt alone is not only greater than the whole extraordinary profit which it ever could be pretended was made by the monopoly of the colony trade, but than the whole value of that trade....

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776, IV.8.53.

And the public choice part, why this persists despite the fact that the costs to Britain exceed the benefits:

To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow-citizens to found and maintain such an empire. Say to a shopkeeper, 'Buy me a good estate, and I shall always buy my clothes at your shop, even though I should pay somewhat dearer than what I can have them for at other shops'; and you will not find him very forward to embrace your proposal. But should any other person buy you such an estate, the shopkeeper would be much obliged to your benefactor if he would enjoin you to buy all your clothes at his shop.

From Smith, Wealth of Nations, IV.7.149


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COMMENTS (14 to date)
Jeff writes:

Far be it from me to refute the esteemed Mr. Smith, but one of the points Niall Ferguson made in his defense of the British Empire was that it was actually remarkably cheap to maintain. Who is right? Who is wrong? I'm not qualified to answer that, but I'd point out that Britain was still a pretty wealthy country then despite the supposedly staggering costs of maintaining its empire, at least in comparison to European countries that didn't go in for empire building.

And how far should we push the "empire bad, too expensive" idea? Should North America never have been colonized in the first place? Should the Brits have just left it for the Iroquois and their ilk? Pretty odd argument for a (white) Canadian/American to make. I mean, it's pretty obvious that the value created in establishing the 13 colonies today far outweighs the costs the British incurred in running it/defending it from Jamestown to the Treaty of Paris. I would argue that the proper conclusion to draw is that colonizing undeveloped, sparsely populated areas is really, really profitable; you just need to figure out how to recoup the large military expenditures that come with defending it in its early stages.

Ted Levy writes:

Ahh...those were the days, when an entire empire could be maintained for a mere $170 million...

Charley Hooper writes:

@Jeff

You raise a number of points. Here are some comments:

(1) The fact that Britain was wealthy does not mean that all its actions were wise or economically productive. Consider Smith's famous quote that there is a lot of ruin in a nation. For instance, the United States is still wealthy after many poor policy decisions.

(2) Adam Smith was saying the colonies didn't make economic sense to the British citizens or British businesses. The colonies did make sense to the politicians, because it helped keep them in power.

(3) You are correct that the American colonies ended up being quite valuable. This does not necessarily mean that nations should engage in empire building. Just look at who derived value from the American colonies--it wasn't the average British citizen.

Jeff writes:

Charley,

Plenty of average British citizens benefited from the American colonies. To suggest otherwise is a fallacy. Hundreds of thousands of mostly working class Brits (many as indentured servants) risked life and limb to get to the United States and start a new life here. Many of them benefited tremendously. Here's a brief excerpt from the wikipedia article on a chap named Andrew Carnegie:

Andrew Carnegie was born in Dunfermline, Scotland, in a typical weaver's cottage with only one main room, consisting of half the ground floor which was shared with the neighboring weaver's family.[2] The main room served as a living room, dining room and bedroom.[2] ... In 1836, the family moved to a larger house in Edgar Street (opposite Reid's Park), following the demand for more heavy damask from which his father, William Carnegie, benefited.[2] ... Falling on very hard times as a handloom weaver and with the country in starvation, William Carnegie decided to move with his family to Allegheny, Pennsylvania in the United States in 1848 for the prospect of a better life.[3] Andrew's family had to borrow money in order to migrate. Allegheny was a very poor area. His first job at age 13 in 1848 was as a bobbin boy, changing spools of thread in a cotton mill 12 hours a day, 6 days a week in a Pittsburgh cotton factory.

72 hour work weeks. And that was an improvement! That's an extreme example, sure, but I think the general pattern still holds: lots of poor and working class Brits (many of them Irish and Scottish) had, as a result of colonialism, the opportunity to snap up land and natural resources in abundance on the wide open, undeveloped continents of Australia and North America. A few became extremely wealthy, but most eventually joined a thriving middle class in what became three of the wealthiest countries in the world (US, Canada, Australia).

Did this come at a cost to the people who stayed home? Sure. Was it a large sum? Eh...I'm skeptical on that but someone who really knows what they're talking about could probably convince me otherwise. On the whole, was the world better off for it? As an American, my answer is an emphatic yes! Perhaps Smith's ghost would prefer the inhabitants of former colonies of Britain cut a check back to the mother country to cover these expenses. Fine. I suspect that we could easily afford it, though.

The returns to colonization have fallen as commodity prices and birthrates in the developed world have also fallen. But back in the day, colonization really was a tremendously profitable enterprise. If you want to complain about the distribution of costs and benefits, fine, but those could easily have been overcome with changes in tax policies or tariffs/duties/etc, could they not? So what you're really arguing about is taxes more than colonialism.

Douglass Holmes writes:

The British Empire enabled the Christians to bring the slave trade to tiny fraction of what it had been. Would countries like Brazil have ended slavery if not for the end of the trans-Atlantic slave trade? I don't think so. Yes, the British did pay a lot for their empire. And they weren't the only ones who benefited from it.
To David's point, the costs to maintain an empire do not always benefit the people who support that empire. While the British and Roman empires had some spectacular benefits for us, how much benefit did anyone get from the French Empire? The Japanese Empire? The Third Reich? The list goes on.

Ted Levy writes:

Even if the costs are low in some absolute sense, Jeff, the opportunity costs remain high, since the same benefits can be obtained through free trade without paying the costs of war and empire.

Chris Coyne writes:

Excellent post. Abby Hall and I raise this same point, and several other related points, in a recent paper comparing the views of Smith and J.S. Mill on empire and foreign intervention.

Bedarz Iliaci writes:

Don't the revealed preference of British people and of nations generally show that empire-building was desired and hence its gains exceeded its costs?

Consider the nations today that did not go in for empire-building: the Indians, the Africans, the Indo-Chinese, the Aborigines, the Slavs. All cases you find them to be poorer than the nations that went for empire-building.

Andrew writes:

Ted, wouldn't the opportunity cost depend on the correct counter-factual? That is, if the British Empire didn't engage in colonization and mercantilism, the American colonies wouldn't have existed to trade with.

Purely regarding Britain's mercantile policies, as Dani Rodrik as noted, it seems hard to believe that intercontinental trade would have got off the ground without the incentives states provided. Further, it doesn't appear that there are ANY examples of rich countries who didn't initially use mercantile/industrial policies. Heck, even Hong Kong's government intervened by providing land for housing.

Jeff writes:

There wasn't any sugar to be bought in the Carribean until French/British/Spanish merchants decided to build sugar cane plantations. Unfortunately, if you're French and you build a sugar plantation in Guadalupe or Haiti, you need to protect it militarily from the Spanish and the British. Maybe you could sit them down and explain how in the long run, everyone would be better off if they'd buy your sugar instead of taking it by force, but as enormously profitable as Cortez's adventures in the new world proved, do you think they're likely to listen?

Brian writes:

Adam Smith has one thing right--building empires cannot be justified on the basis of obliging the colonists to buy the nation's products. There's just not enough gain in that activity alone to overcome the costs.

But in the larger sense, empire building as practiced by Britain in the 18th and 19th centuries was immensely profitable for the nation and for the world. Jeff and others have outlined the main points. The opportunity costs of not creating empires are MUCH higher. And in the case of the British empire, can we imagine the rapid rise of the global industrial revolution and free-market capitalism without it? Would the world be united in a universal language of trade (English)? Whether these benefits accrued to the British shopkeepers at the time is debatable, but it can't be doubted that the benefits accrued to their descendants and their country. They would surely approve of that, no?

As for other empires, it appears, as noted above, that those countries have done well, better than those with no empires. French? Yes. Spanish? Yes. Japanese? Yes. The Third Reich was cataclysmic, of course, because it was used for evil ends, but even there Germany has done very well for itself.

The poster child of all this is China. When they were into empire building, they were the wealthiest, most advanced country in the world. When they turned themselves inward and embraced isolationism, the relegated themselves to an extraordinary level of poverty that they are only now escaping.

Yes, empire building is good indeed. As time goes on and (hopefully) military intervention becomes less common, we will see more of the cultural empire building that has come to dominate the Pax Americana.

Charley Hooper writes:

Jeff,

The example you gave of Andrew Carnegie is interesting. Carnegie was born long after the Revolutionary War. So the taxpayers who paid for the British empire were not necessarily the ones who directly benefited, and if anyone did, it may have been the children of their children.

In fact, it sounds like the empire was a global public good and that people from all over, not just the British Isles, came to live in America and took advantage of that public good.

Ted Levy writes:

Andrew says: "Ted, wouldn't the opportunity cost depend on the correct counter-factual? That is, if the British Empire didn't engage in colonization and mercantilism, the American colonies wouldn't have existed to trade with."

Well, if that were true as a general matter, Andrew, it implies one could never truly assess opportunity costs, which seems too strong a claim.

And it seems to me there are two problems with your "if not mercantilism and empire, then no American colonies" thesis. The first is that market exploration could also have led to European settlement in the New World and subsequent American-European trade. The second problem is that even if that hadn't happened, the population would not have drastically shrunk. Instead, PEOPLE that would have been Americans would instead have been Europeans, but the populace engaged in trade would still have existed. It is the trade per se that is beneficial, not that the trade was trans-Atlantic.

Tracy W writes:

In The Wealth of Nations Adam Smith clearly regards colonies in the sense of people immigrating and setting up new states as a generally good thing. He speaks of the violence in the Americas as a very bad thing both in purely moral and in economic terms, but attributes that to the bad luck of contact coming when there was such a big disparity in military prowess that the Europeans could commit atrocities against Americans without fear.
He comments several times on how good high labour wages in the British colonies are for labourers. And he comments a lot on the benefit to Britain of more people to trade with. His argument is clearly that colonies would be even more profitable without trying to incorporate them in an empire. Maybe some funding to start up (though he argues that small governments in the British colonies compared to the other European colonies were a major factor in their relative success), then once the colony is a going concern, offer a free trade treaty and friendship to the independent state.
Or give them seats in the British Parliament in proportion to electors.
Really, read the whole thing. The book's available free.

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