Monday, August 17, 2009

A History of Markets (& the Boston Tea Party)

I'm currently reading Niall Ferguson's Empire: The Rise and Demise of the British World Order. While reading the "Rise" part of the history, it's fascinating to be reminded of just how much capitalism has always been an ideal more than a practice. In a previous post I addressed the issue of some of the many things government provides for us that the free market has been unable to provide on its own. I only discussed America, but actually I could have broadened the discussion to Great Britain, the nation that gave the world the very ideals of capitalism. It is important to realize that even in Great Britain, capitalism was only a rough guiding principle but in practice there was never any such thing as "pure capitalism" or "unfettered free markets". The British conquered the world through a public/private hybrid system. Companies like the British East India company were granted monopolies by the government to control specific areas of the world market. These companies were given naval protection on the seas by the most powerful navy in the world. They enjoyed numerous favors from the government at home, and abroad they were free to dismiss the ideals of free exchange between consenting parties by forcible seizure of assets controlled by any native people they encountered.

For centuries, "capitalism" has operated with extensive government protection (i.e. "interference") and a healthy dose of coercion when "free markets" weren't producing desirable results. The British government had a long history of using protectionism and militarism to invade and conquer nations and territories, then demand that the colonized territories respect market principles and play by the rules of free exchange without protectionism. Obviously, such demands only came after Britain had firmly established its power by flouting market principles and free exchange.

I'm not picking on Britain here. The history of America has also been a mix of protectionism, government involvement and subsidy in industry, and of course exploitation of resources forcibly taken from native people.

And we need look no further than the largest developing economy, China, to see that the pattern continues today. China practices a highly regulated, authoritarian, state-run model of capitalism. Numerous enterprises compete for private gain, but the government is actively involved in the market place to insure the success of various industries.

The lessons are there all through-out history. The most successful markets have always had a strong dose of government "interference" to insure their success.

And one more note from the book...Ferguson provides the most scholarly affirmation of something I've recently read in a number of locations regarding the famous Boston Tea Party. American mythology attributes the Tea Party to a rise in taxes. In reality, the Tea Party was in response to a LOWERING of taxes. Here's a quick synopsis of the events leading to the Boston Tea Party:

America actually had it pretty good as a colony of England. We enjoyed the protection of the British navy, as well as privileged access to the British market and all that it controlled. In fact, America probably enjoyed a higher per capita income than England, thanks to the fact that they enjoyed the benefits of British government and protection, but paid no taxes for these services. Britain was able to extract some tax revenue through things such as the Stamp Act (effectively a tax on all paper) and by adding a tax to products that passed through British ports on their way to America, e.g. tea. However, the Americans did not like paying any tax at all (sound familiar?) and Britain relented to most American demands and removed most taxes. In particular, they removed a 25% tax on tea that passed through British ports and replaced it with a 3% tax on tea when it arrived on American shores. The lowering of the tax on tea proved very harmful to powerful bootleggers who had built large enterprises by smuggling tea into America without passing it through British ports and paying the 25% tax as required. These powerful bootleggers (I can't help but see them as the equivalent of modern day corporate interests) rallied the masses to protest this egregious offence of a 3% tax on tea because most people were ignorant of the fact this represented a reduction from the previous 25% rate paid in British ports. So when early Americans bravely protested at the Boston Tea Party, they were actually protesting a REDUCTION in taxes in order to allow businesses to charge higher prices.

Apparently some things never really change.


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