Weekend Economists Celebrate Harry Potter's 35th Birthday July 31st, 2015

[Demeter]

1. England's Muggles did some nasty things....

The author Eduardo Galeano, one of Latin America’s most distinguished writers, wrote a three-volume history of the Americas, Memory of Fire, and most recently, Children of the Days: A Calendar of Human History. He was the recipient of many international prizes, including the first Lannan Prize for Cultural Freedom, the Casa de las Américas Prize, and the First Distinguished Citizen of the region by the countries of Mercosur. He died on April 13, 2015. These excerpts are taken from his history of humanity, Mirrors, translated by Mark Fried.

The sale of people had been the juiciest enterprise in the British Empire. But happiness, as everyone knows, does not last. After three prosperous centuries, the Crown had to pull out of the slave trade, and selling drugs came to be the most lucrative source of imperial glory.

Queen Victoria was obliged to break down China’s closed doors. On board the ships of the Royal Navy, Christ’s missionaries joined the warriors of free trade. Behind them came the merchant fleet, boats that once carried black Africans, now filled with poison.

In the first stage of the Opium War, the British Empire took over the island of Hong Kong. The colorful governor, Sir John Bowring, declared:

“Free trade is Jesus Christ, and Jesus Christ is free trade.”

http://www.nakedcapitalism.com/2015/07/the-previous-sole-superpower-from-the-opium-wars-to-the-origin-of-the-species.html

SO, IS THE US DOING BETTER THAN ENGLAND DID, AS A SUPERPOWER? PERHAPS NOT AS BRAZEN ABOUT IT, NOT NOW, WHEN THE GLORY AND THE POWER IS FADING.

BUT THE US HAS ITS COCAINE AND HEROIN AND SLAVERY ON ITS LIST OF SINS, TOO. JUST NOT AS OBVIOUS, NOR DIRECTLY TO BENEFIT THE CROWN...OR STATE. GOD KNOWS, THERE ARE ENOUGH TAX LOOPHOLES TO SEE THAT THE NATION BENEFITS NOT AT ALL FROM THE US'S BAD BEHAVIOR.

Debt Miracle: Why the Country that Borrowed the Most Industrialised First

http://www.voxeu.org/article/debt-miracle-why-country-borrowed-most-industrialised-first

By Jaume Ventura, Senior Researcher, CREI, Universitat Pompeu Fabra; International Macroeconomics Programme Director, CEPR, and Hans-Joachim Voth, Chair of Development and Emerging Markets at the Economics Department, Zurich University and CEPR Research Fellow.

Towering debts, rapidly rising taxes, constant and expensive wars, a debt burden surpassing 200% of GDP. What are the chances that a country with such characteristics would grow rapidly? Almost anyone would probably say ‘none’.

And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain. Britain’s government debt went from 5% of GDP in 1700 to over 200% in 1820, it fought a war in one year out of three (most of them for little or no economic gain), and taxes increased rapidly but not enough to keep pace with the rise in spending.

Figure 1 shows how war drove up spending and led to massive debt accumulation – the shaded grey areas indicate wars, and they are responsible for almost all of the rise in debt. Over the same period, Britain moved a large part of its population out of agriculture and into industry and services – out of the countryside and into cities. Population grew rapidly, and industrial output surged (Crafts 1985). As a result, Britain became the first country to break free from the shackles of the Malthusian regime.

Figure 1. Debt accumulation and government expenditure in the UK, 1690-1860



Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative. One prominent view held that investment in private industry would have been higher had Britain fought and borrowed less (Williamson 1984). Another argument is that private savings decisions undid the potentially negative effects of massive borrowing – because debt eventually has to be repaid, private agents anticipated rising taxes in the future and neutralised the effects of debt accumulation (Barro 1990).

The Revolution That Wasn’t

In a recent paper, we argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015). To understand why massive debt accumulation may have accelerated the Industrial Revolution, we first consider what should have happened in an economy where entrepreneurs suddenly start to exploit a new technology with high returns. Typically, we would expect capital to chase these investment opportunities – anyone with money should have tried to put their savings into new cotton factories, iron foundries and ceramics manufacturers. Where they didn’t have the expertise to invest directly, banks and stock companies should have recycled funds to direct savings to where returns where highest.

This is not what happened. Financial intermediation was woefully inadequate – it failed to send the money where it should have gone. As one prominent historian of the British Industrial Revolution argued:

“the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of [Britain’s] wealth found its way into the new industrial enterprises ….” (Postan 1935).

There were many reasons for this, but deliberate financial repression by the government was one of them. Usury limits, the Bubble Act, the Six Partner Rule that limited the size of banks – all of them were designed to stifle private intermediation, in part so as to facilitate access to funds for the government (Temin and Voth 2013).

Without effective intermediation, new sectors had to self-finance – rates of return stayed high because so little fresh capital entered to chase the sky-high returns. Allen calculated that the profit rate for capital rose from 10% in the 1770s to over 20% by the 1830s – capital’s share of national income more than doubled (Allen 2009).

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