Chamberlain, Tariff Reform and the Edwardian Economy:
A Social Accounting Perspective
Mark Thomas
University of Virginia
University of Warwick
March 2011
Please do not cite or quote.
'Sixty years ago England had leadership in most branches of industry. ... It was inevitable that she should cede much of that leadership to the [United States]. It was inevitable that she should yield a little of it to [Germany]. It was not inevitable that she should lose so much of it as she has done.'
Alfred Marshall, 1902
'Sugar is gone; silk has gone; iron is threatened; wool is threatened; cotton will go! How long are you going to stand it? At the present moment these industries ... are like sheep in a field.'
Joseph Chamberlain, 1903
As the twentieth century opened, concern over Britain's relative decline as an industrial power was in full voice. As Clapham has noted, by 1900 'every one recognized the shift in the balance of power since the 'seventies and the need for internal and external adjustment to it.'[1] Brassey's call, made a generation previously, was by now commonly approved: 'it is a matter of national importance to ascertain and, if possible, remove the causes which have led to the present melancholy state of affairs.'[2] Deciding how best to solve Britain's economic problem depended in turn on a proper diagnosis of its origins and nature. The domestic crises of poverty and unemployment, and the external problems of foreign competition in third markets and encroaching import penetration at home were commonly perceived as the major symptoms of malaise. Various theoretical explanations, orthodox and unorthodox, of the causal links between British performance abroad and social and economic conditions at home were developed, each with its own policy implications.
The protectionist interpretation of Britain's economic difficulties emphasized the role of external factors. Tariff reformers argued that Britain imported poverty and unemployment; the implied policy solution was a system of protective tariffs designed to exclude manufactured goods competitive with British production. In his amendment to the King's speech in February, 1910, Austen Chamberlain, heir to his father’s fallen mantle, put the Tariff Reform case to Parliament:
'It is not that we have fluctuations of trade. There must always be fluctuations of trade. It is not that a boom is followed sometimes by a period of depression. It is not that you have hard seasons, or that at particular moments in given trades there is distress and unemployment. It is that unemployment is now a chronic and a continuous symptom of our social system, that it is with us whether trade is good or bad, and that in the most prosperous of the years through which we have recently passed unemployment was present with us to as large an extent as in the preceding ten years. ... Why is that? ....it is because the demand for productive labour in this country and the production of the country have not kept pace either with the increase in the world's demand or with the growth in our population.'[3]
Manufacturers, it was argued, found it harder to sell their goods at home or abroad at profitable prices because of changes in the institutional environment of international trade. Britain, alone among the major industrial nations, maintained a free trade policy, while its manufacturing competitors raised tariffs so as to reserve their domestic markets for home producers. In the protectionist analysis, such secured markets lowered production costs by promoting economies of scale. Protected economies were therefore better able to compete abroad. In particular, they were better able to compete against Britain both on her home territory and in third markets. By failing to follow the tide of international policy, 'magnanimous Albion' was presenting its competitors with a significant proportion of its home and foreign trade. The lack of tariff walls allowed German and American competitors to practice dumping, enabling them to maintain full employment at minimum cost production at the expense of both British worker and British capitalist. The clear solution to the tariff reformer was for Britain to reverse its free trade policy and to claim the same advantages for its manufacturing industry as did the Germans and Americans.
The major obstacle to an assessment of the macroeconomic implications of Tariff Reform for Edwardian Britain is the lack of a coherent statement of the structure of protection envisaged by Chamberlain and his supporters. Unionist leaders did not embrace a formal party programme of tariffs with detailed schedules of proposed rates. Nor indeed would we expect them to have done so. Political manifestos were not common electoral currency in Edwardian Britain, and the comparatively cool reception of the tariff case by the party leadership, their appraisals couched in conditionals and caveats, by reservations concerning retaliation and reciprocity, did not encourage precise formulation. Chamberlain, moreover, although prepared to make a vehement case and concrete proposals, preferred to leave the detailed assessment and construction of a 'scientific tariff' to an impartial inquiry. And when such an inquiry was established, albeit singularly lacking in anything deeper than a veneer of impartiality, it produced nothing either scientific or concrete. The Tariff Commission made recommendations for specific rates only in the case of the iron and steel industry. The scientific nature of that particular tariff calculation was, it appears, based more on the equilibrium of competing demands from iron and steel producers and consumers, rather than on market conditions at home and abroad. The commission's reports on industries other than iron and steel refer only in the vaguest of terms to an average tariff of ten per cent.[4]By so doing, the commission was echoing the words of Chamberlain in the speech that formally announced the 'Case for Tariff Reform.' Faute de mieux, it is to this that we must turn as the best source for understanding the probable direction of a Chamberlain tariff.
In his speech at St. Andrew's Hall, Glasgow, in October, 1903, Joseph Chamberlain gave most detailed attention to the agricultural aspects of his programme. He emphasized two key aspects of the Highbury proposals--that industrial raw materials be excluded from duties, and that the consumer be protected as much as possible from those taxes that were essential if the principle of colonial preference was to be pursued. So while Chamberlain specified duties of 2s. a quarter on all foreign meat, cereals and dairy produce, bacon was exempted, 'because ... (it) is a popular food with some of the poorest of the population,' as was maize, 'a food of some of the very poorest of the population, and ... a raw material for the farmers, who feed their stock with it.'[5] Moreover, in an attempt to be seen as organizing a tariff without cost to the consumer, Chamberlain proposed remission of the existing duties on tea, sugar and coffee. On the basis of figures drawn from the Board of Trade's famous Fiscal Blue Book,[6] it was suggested that this action would more than offset the priceraising effects of the 'stomach taxes,' which had most exercised his critics in parliament and the press. When Chamberlain turned to his proposals for an industrial tariff, he declined to elaborate on particulars, and merely advocated 'a moderate duty on all manufactured goods, not exceeding 10 per cent on the average, but varying according to the amount of labour on the goodsthat is to say, putting the higher rate on the finished manufactures upon which most labour would be employed.' None of his later speeches provide any more detailed a statement of his plans.
Before proceeding to an evaluation of the sectoral implications of fiscal reform, we should briefly address the issue of how contemporaries perceived its viability and potential. We do not propose to deal with the debate among politicians, the press, and professional and lay economists in any detail. The contributions made by almost all parties to this protracted dispute were largely valueless, except as guidance to the political vagaries of the period and the level of ignorance of economic issues among a large part of the body politic. We therefore concentrate primarily on the empirical treatment of the tariff problem.
To begin at the source, Chamberlain's own evaluation of the gains from tariff reform was not overly modest:
'it has been calculated, and I believe it to be accurate, that £26,000,000 a year of trade might come to this country which now goes to Germany and France and other foreign countries, if reasonable preference were given to British manufactures. What does this mean? The Board of Trade assumes that of manufactured goods onehalf the value is expended in labourI think a great deal more, but take the Board of Trade figures£13,000,000 a year of new employment. What does this mean to the United Kingdom? It means the employment of 166,000 men at 30s. a week. It means the subsistence, if you include their families, of 830,000 persons.'[7]
The following day, at Greenock, Chamberlain revised his figures and argued that, given tariff reform, British production could rise by as much as £52m., enough to provide 'constant employment at 30s. a week for 333,000 workpeople ... If you gained this employment tomorrow, if any trade suddenly sprang up anywhere which employed 330,000 men and kept 1,500,000 people in comparative comfort, would you not say the person who brought it to you was the greatest philanthropist you had ever known?'[8]
The philanthropy extended to the Treasury coffers themselves, which, it was claimed, would be better off to the extent of 'at least £9,000,000 a year, while it might be nearer £15,000,000 if we accept the Board of Trade estimates of £148,000,000 as the value of our imports of manufactured and partly manufactured goods.'[9] Chamberlain readily admitted that he was no economist. He summarized his study of economics to Hewins, Secretary to the Tariff Commission, in the terse statement, 'I once read Mill and tried to read Marshall.'[10] It is perhaps, therefore, not surprising that his arguments on the economic benefits of import duties should have been inconsistent. On the one hand, the purpose of the tariff was to raise domestic employment by reducing import penetration. However, by invoking such large gains for government revenue, Chamberlain was clearly making no allowance for a reduction in imports. The contradiction was fundamental to the avowed intent of the fiscal programme. Chamberlain's attack on the problem of national efficiency required both import substitution and revenue for domestic social reform. The success of tariffs in the former quest would clearly narrow the potential for the latter. The optimal tariff for Chamberlain was one that maximized employment subject to a revenue constraint. The interdependence of the objective and the instrument remained unexplored.
The calculation of the potential revenue gains from import taxes rapidly became a popular numbers game among critics of fiscal reform. In a letter to the Times in July 1903, 'A Revenue Official' estimated the net receipts from a five per cent tax on agricultural imports at £7.5m. This figure excited a certain amount of comment in the freetrade press, mostly pointing out that by ignoring the increased price of domestic and colonial foodstuffs, it understated the full cost of protection to the consumer.[11] Similar calculations of the revenue raising possibilities of a tariff were made within government. One such enquiry, made by the Treasury in 1912, estimated the additional revenue from a general tariff of ten per cent at £6m. This calculation assumed that 'onethird of the imports are excluded as the result of the 10 per cent duty,' an implied price elasticity of import demand of slightly over three. The tariff appeared to be a powerful means of curtailing imports, but a weak vessel for raising revenue.[12] Increasing customs and excise receipts by twenty per cent represented a useful addition to government income, but it was far from enough to underwrite the social reform policies that Chamberlain envisaged. The annual financial requirement of the pension scheme alone was over £9m., excluding administrative costs.
The majority of professional economists distanced themselves from these sort of probabilistic calculations. Hewins, in his position as economic adviser to the tariff reformers, was anxious to demonstrate the viability of protection, but the majority of his economist fellow travellers used historical statistics rather than political arithmetic to argue their case. The remainder of the profession rejected protection on theoretical terms, supplemented by arecognition of the political imponderables inherent in any scheme. Marshall,consistent with his argument that economists should remain aloof from political matters, refused to be drawn publicly into the tariff reform debate.[13] It was left to his student and eventual professorial successor, A. C. Pigou, to present the Marshallian orthodoxy against protection in language amenable to the educated layman. Pigou's resolution of 'TheRiddle of the Tariff' was founded upon the twin pillars of rational profit seeking and dynamic comparative advantage. In response to the industrial anecdotage of the witnesses to the Tariff Commission, he dutifully pointed out that 'dislocation through foreign competition is only a single species of a far larger genus ...[when]... the push and energy of growing firms begin successfully to attack the market of oldestablished revivals,' an attack made more forthright by technological progress.[14] The dangers of 'an improper allocation of resources' were rendered more formidable by the inevitability that the tariff would become 'an instrument of political manipulation.'[15] Pigou's manuscript was completed before Chamberlain formally opened his campaign. When the preface was penned, the day after the Glasgow speech, Pigou had only this tart observation to add: 'the case against his scheme as a whole is stronger than it was when I drafted my discussion ... to make up a deficit in the revenue by means of protective tariffs may, perhaps, be popular, but ... economically speaking, it is one of the worst possible methods of raising the required funds.'[16]
Theoretical justifications for protection were not entirely absent. The infantindustry argument, developed by Mill, posited that a tariff was beneficial if it nurtured potentially profitable industries that could not otherwise survive in the face of competition from more advanced societies. Edgeworth, a pioneer in the application of marginalist analysis to trade theory, accepted the point in principle but warned that it was practicable only 'if there was a government wise enough to discriminate (the correct) cases and strong enough to confine itself to them'an unlikely circumstance.[17] The emergence of the neoclassical paradigm introduced a further rationale for tariffs. This was the notion of the optimum tariff, introduced by Charles Bickerdike in 1906.[18] Bickerdike concluded that, 'with taxes not exceeding some definite height, there seems to be a certain theoretical correctness in the methods followed by Protectionists,' the definite height being set by the elasticity of demand for the taxed article. Bickerdike, however, did not lend his support to Chamberlain's version of Tariff Reform, and it was as much for this reason as for the theoretical innovation of 'the beautiful mathematical construction,' that Edgeworth heralded it as an important contribution. Staunch in his defence of free trade, Edgeworth concluded, that 'the direct use of the theory is likely to be small. But it is to be feared that its abuse will be considerable. It affords to unscrupulous advocates of vulgar Protection a peculiarly specious pretext for introducing the thin edge of the fiscal wedge.'[19] Edgeworth's fears were unfounded. Bickerdike's proposition had no impact on the tariff reform debate, probably because its overt mathematical basis made it inappropriate (even if understandable) as a vehicle for pursuing protection. Only the historian has been unscrupulous enough to employ the concept of the optimum tariff to argue that Britain's reliance on free trade in the Victorian period was mistaken philanthropy in the international community.
II
The terms of trade argument for the imposition of a tariff deals with the case of the potential monopolist in world trade. Succinctly put, if one country has the ability to influence the world prices of its products and of its purchases by regulating output and demand, then it can increase its income by exploiting this advantage. The income maximizing strategy for a 'large country' in the international community is the very same as for the monopolist at home: manipulate the quantity of output available in the market so as to equalize the marginal cost of production with the marginal revenue from sales. The level of protection that maximizes income is the optimum tariff. For a large country, the optimum tariff will always be greater than zero. How much greater depends on the conditions of world trade, in particular on the elasticities of export demand and import supply overseas. The lower the elasticities, the higher the optimum tariff.
In view of Britain's dominance of world markets in both manufactures (exports) and primary products (imports), a strong case has been made that its adherence to Free Trade after 1846 was in error, an error that became more serious as the century continued. D. N. McCloskey argued that the optimum tariff for midVictorian Britain was considerably higher than the tariff rates then in place.[20] Britain was large enough to affect the terms at which she traded, so that the pricemaking gains of a tariff would have outweighed any income losses from reducing the volume of exports. The elasticity of demand facing British exporters was likely to be low, given the preponderance of U.K. manufactures on world markets (and consequent lack of substitute suppliers); similarly the elasticity of supply of imports into Britain was probably low, given its large share in commodity markets. Only towards the end of the Victorian period, when German and American exporters began to undermine Britain's monopoly position in world markets for manufactures, did the loss of national income due to free trade begin to decline. In the meantime, by failing to recognize the extent of its monopoly power in world markets and setting its tariffs accordingly, Britain effectively transferred some of its national income to the rest of the world.