The Colonial System and Its Impact – Part 3

The discovery of America and that of a passage to the East Indies ... are the two greatest and most important events recorded in the history of Mankind. (Wealth of Nations, Bk IV, chapter 7, paragraph 166)

 

             I have been discussing the impact of colonization on the home country and on the colonies themselves. In Part 1 of this series we looked at why nations establish colonies. Colonial expansion traditionally had three benefits to offer. First, raw land and its vegetable production. Second, animal production which is different yet linked to the first benefit. And third, mineral production which in the time of Smith and the colonization of South America by the Spanish and Portuguese was specifically for silver and other precious metals. Mother nations kept a tight rein on colonies to protect their markets and so tended to develop monopolies in trade and goods.

             In Part 2 we looked further at trade and monopolies particularly as they related to Great Britain and saw the other costs and expenses associated with colonies. The British people were bearing a tremendous cost to keep the colonies (America) in line and producing for the home markets as well as selling finished goods to them from the English side of the pond. It was costing England a very pretty penny to have a captive source of raw materials and a captive market for finished goods.

             So, if all this colonization was such a good thing why were so many, especially those ungrateful American colonies so unhappy? The idea of a fair deal and the ability to make a pound sterling at a reasonable expenditure of labor and materials was making many colonists very unhappy as they felt they were not getting what they wanted or deserved. This is where taxation comes to the forefront. As we saw in Part 2, Britain needed to be compensated for its costs of providing government including a stable courts system and for its protection against other nations (standing army and navy). Additionally, the colonies were expected t0 pay something towards the total cost of being a great nation since the colonies received the benefits of this umbrella coverage. However, as Smith points out, “colony assemblies... [will not] levy upon their constituents a public revenue sufficient not only to maintain... their own civil and military establishments, but to pay their proper portion of the expense of the general government of the British Empire seems not very probable.” (Wealth of Nations, Bk IV, ch. 7, para 155) Britain felt it had every right to establish the taxes necessary to cover the costs. How were the colonies who did not see or know the big picture going to have any idea what were necessary expenses for the defense and support of the whole empire. Smith assumes that Britain would be fair and reasonable because it is in the best interest of the Empire. Something that may or may not have been believed by the colonists. And the colonies had a firsthand example of Britain’s assumed  altruistic nature in the monopoly powers granted to various British trades and industries. Such monopoly powers were not fair and definitely not reasonable in the colonists eyes.

             What then could be done. The colonies were up in arms over taxes which were a symptom of the bigger problem that they felt they couldn’t get a fair deal (think monopolies). There needed to be another way of allocating costs of government. Smith suggests that there could be an assembly comprised of representatives from every part of the Empire. Such representation could be based on some measure of involvement in the Empire. He suggests the allocation of representatives could be based on the proportion of the produce of taxation. Where more taxes are generated, more representation is given. Produce or finished goods would be taxed consistently throughout the Empire so the area that is more efficient or larger for that matter, all other things being equal, has better representation. Let me let Smith summarize the possible outcome. Remember this is in the 1770’s. “Such has hitherto been the rapid progress of that county [America] in wealth, population and improvement, that in the course of little more than a century, perhaps, the produce of America might exceed that of British taxation.” “ The seat of government would naturally remove itself to that part of the empire which contributed most to the general defense and support of the whole.” (Wealth of Nations, Bk. IV, ch.. 7, para. 165)

             If the revolutionary war hadn’t happened, would we be speaking British English and governing the British Empire from somewhere along the East Coast of America? Who knows.

Reference:

An Inquiry into the Nature and Causes of the Wealth of Nations

Adam Smith (1723-1790)

http://www.econlib.org/library/Smith/smWN.html

Over Scheduled, Some Quick Wisdom and A Story

I have spent the last several months trying to survive my own mire. It was one of those situations that I just kept saying yes to projects and people. I have most of the brightly burning fires put out and actually have just a couple of major on-going projects.

 I need to write the final part (part 3) on the Colonial System and Its Impact and I have some new, what I think are exciting, ideas to discuss. I believe they will be helpful and interesting.

 For today’s economic thought I want to quote from Paul Volcker, former Chairman of the Federal Reserve, which he gave in a speech in 1999. “About every ten years, we have the biggest crisis in 50 years.” That statement needs to be plastered on every wall around your desk. Just a gentle reminder that every crisis is not new or earth shattering in spite of what the financial news or talking heads may insist.

 To get into the proper spirit of things I want to tell a story which happened to me at one of the activities I was involved in this past month. Wood Badge. For those unfamiliar with it, this is adult leadership training for the Boy Scouts of America. Very good training not only for scouting but also for corporate, non-profit or other organization assignments. Among other things it teaches principles of working with small and medium sized groups. All around good stuff.

 My story relates to something that happened during the second half of the course. For this story I will tell you that there are actually a couple of true facts, one  of which is that I damaged my little toe. It was black and blue and I think I probably broke it, the toe, and definitely broke a blood vessel in my foot. I had a bruise that spread across all my toes and a little bit up the inside of my foot. It hurt like all get out and is still a bit sore and swollen some 2½ weeks later. My wife asks me every so often if I am going to get it looked at by competent professionals (i.e. a doctor) or not. I am still deciding.

 So, I heard a commotion outside my tent one evening a couple of weeks ago. I was attending Wood Badge with several others and was in my tent in the staff area of camp. Now I know you will tell me that what I did was really dumb but I stepped out of my tent in my bare feet. I know, I know, really dumb but there you have it. Well, I stepped out and looked left across a small creek into a stand of quaking aspen, beautiful trees, just in full leaf. Our camp was up pretty high in the Uintah Mountains just south of the Utah border on the Wyoming side. We had received 5 inches of snow earlier in the week. Anyway, as I looked into the trees I was a bit surprised but not alarmed to see my friend KC coming toward our camp pretty fast and being tailed by a bear. Now you may find it a bit hard to swallow that KC was being chased by a bear but the bear wasn’t some ol’ grizzly, only a black bear, I would guess about 2 or 3 years old and if worse came to worse I figured the bear wasn't that much heavier than KC and KC knows how to fight dirty. I wasn’t too concerned for KC at first but became more concerned as I watched. The problem, the bear seemed to be gaining on KC. Now it wasn’t gaining real fast but appeared to definitely be gaining and KC was looking a bit worn. As KC was headed my direction I figured I should try to help a bit. So as KC and the bear came by I decided to reach out with my foot... Ah now, I see that you caught the implication of my act immediately. Bare foot, bear. Anyway, I reached out without fully thinking things through and with my foot roundhouse kicked the bear in the backside. Wouldn’t you know it, my little toe got caught in the bear's hide and it separated itself from its fellow toes like one of Spock’s Vulcan greetings. It really hurt and I went limping off as fast as I could in the opposite direction from KC. The bear was so startled that it stopped dead in its tracks and turned toward me. This gave KC enough time to get around a large tree and I hobbled to another one. The bear was so disgusted with the two of us he huffed and shambled off in another direction. I am afraid you won’t be able to collaborate this story with KC, however. If you ask KC about it he will tell you that the story isn’t true. He will tell you that the bear was not gaining on him but that he was running so as to keep the bear just behind him. Yes, he admits he was looking worn but it was a ruse to fool the bear into thinking he, KC, was getting tired. He says he was wearing it down and would have had it, the bear, all tired out in another 20 or 30 minutes and so didn’t need my help. In fact he accused me of cruelty to animals and thought about reporting me to the proper authorities. He decided in the end not to report me because he said he thought it would be hard to convince the bear to be a material witness. Well, that’s the story and I am sticking by it.

 Anyway, don’t believe everything you hear, either from me and not from the Federal Reserve or from economists. The sky may be falling or not but the news isn’t likely to know one way or the other regardless of what they say. Plus, always remember, bankers (investment or commercial) are always friendly but seldom are they your friends (in a professional capacity).

 

And that’s the rest of the story.

The Colonial System and Its Impact – Part 2 (Giving It All Up)

            In part 1 we began the discussion of colonies and the destructive nature of monopoly powers as discussed in Adam Smith’s Wealth of Nations. Smith is adamant that trade monopoly especially  relating to colonies is destructive. “All the original sources of revenue, the wages of labour, the rent of land, and the profits of stock, the monopoly renders much less abundant than they otherwise would be. To promote the little interest of one little order of men in one country, it hurts the interest of all other orders of men in that county, and of all men in all other countries.” (Wealth of Nations, book IV, chapter 7, paragraph 146) His sentiments are fairly plain even if the sentence structure is a bit mixed. Remember he was writing in the 1770’s.

             Smith finds great potential in colonies and colonial wealth generation possibilities. He suggests there are three things that greatly help a colony to properly prosper by their commerce. One, there needs to be a “general liberty of trade” as Smith describes it. The producers of goods need to have access to markets and the knowledge that those markets will treat them fairly and promptly. They need to be paid for their produce or goods in a consistent, reasonable and as timely a manner as possible. Two, the less interference, constraint or cost of moving goods and produce the better. Profits can quickly be lost with high or frequent duties or tariffs on transportation. Further, limits on exporting will greatly affect the ability to move goods and receive the best price. In France during and just prior to the time of Smith, farmers were barred or greatly hindered from moving grains from one district to another thereby forcing artificial prices and production based on district, not on best production practices. Smith was very aware of the need to move produce and goods easily without hindrance by laws or officials and with a minimum of costs (other than transportation expenses).

Third, and this is the most important, Smith suggests that there must be equal and impartial administration of justice. There needs to be an equality under the law regarding land, land use, selling and producing goods. He suggests that these are the most important things for allowing improvement and prosperity.  The laws must be administered in a fair, reasonable and consistent manner.

             So we return to the initial statement by Smith in Part 1 – “Great Britain derives nothing but loss from the dominion which she assumes over her colonies”. He has a novel solution. He suggests that Great Britain voluntarily give up authority over her colonies. Let them elect their own legislatures and establish their own laws. They can make war or peace as they see fit and trade with whomever they desire on whatever terms they can establish. Let them charge whatever prices for their goods and produce markets will bear. He suggests four advantages to Great Britain. First, she immediately is freed from the cost of providing a standing army and naval support. If the colonies want protection they can contract to provide such at some agreed on payment thus providing a revenue source for Great Britain’s military operations. Second, as a recognized government the colonies could enter into commerce treaties that would be of greater benefit to the majority of Great Britain at the expense of the current monopoly powers. The merchants with monopolies would lose their lucrative contracts but the general populous would benefit from cheaper goods and produce. Third, Great Britain would generate a great deal of good will with the colonists and her own citizens. The prospect of self-government is a potent medicine for the colonists and better and cheaper goods and produce a strong inducement for the citizens of Great Britain. Fourth, the colonies may in fact favor and even support Great Britain in war. Smith suggests that instead of the colonists being “turbulent and factious subjects” they would become “our most faithful, affectionate, and generous allies”. Here then is Smith’s answer to the problem of the colonies, however he suggests that most if not all great powers will not establish colonies just to let them become independent because it goes against the very nature and pride of a nation. He also suggests that the act of freeing a colony is “contrary to the private interest of the governing part of it”. He suggests that those who govern want to control, if only for the chance to build wealth or distinction for themselves or other personal interests. He suggests that keen self-interest is stronger than altruistic nation motives. So, regardless of the potential upside benefit the current status quo no matter how costly will likely prevail.

             Next paper, Part 3. If Great Britain won’t give the colonies their independence how do they get paid for their expenses and costs and just what that might lead to.