The Political Origins of a Global Economy: Power and Markets

Chapter 4

The Political Origins of a Global Economy: Power and Markets

The Origins of a Global Economy

A global economy is an astonishing thing to behold. It involves the production, transportation and exchange of goods, services and knowledge among billions of people, over thousands of miles and across national boundaries and oceans, often including investments and the movement of money over equal distances. Perhaps less obvious, a global economy involves arrangements for the coordination of economic activity as it crosses distances, boundaries, and currencies. Making economic exchange work can mean following the rules established by one dominant political entity, or from cooperation among different powers, or from ad hoc rules negotiated by traders. Further, these activities can have enormous consequences for people’s lives. This can influence the division of labor on a global scale, meaning what is produced and where; incomes may follow this division; goods from afar can improve people’s lives or disrupt their livelihoods; and knowledge, technology and military power frequently come along with goods and services.

Did a global economy always exist, at least as long as humans have lived in settled groups? Are all global economies the same? What criteria can we use to identify and classify global economies? These are some of the basic questions we consider in this chapter, as a global economy provides much of the subject matter of international political economy. Determining when a global economy exists is related to the purposes of the enquiry. For us, we are interested in the following criteria as they define a type of global economy that emerges from a particular kind of political-economic system.

There are three main criteria for locating a global economy. First, we focus on the proportion of global trade in relation to domestic economies. We are interested in those situations in which global trade is truly global in scope and is relatively large in relation to economic activity that takes place within nations.[1] Second, we want to consider situations in which industrial production generates a large part of the goods and services involved in world trade. This allows us to examine much more dynamic global economies, in which economic advantages among nations can change and in which the cost of production and transportation can rapidly decline. Third, we are concerned with systems in which there is a wide scope for consistency of the rules affecting exchange. Widespread use of similar rules makes it easier to see the processes of exchange arising from comparable circumstances. Using these criteria – large role for trade, goods arising from industrial production, and consistent rules - sharply reduces the space for discussion to about the past two centuries or so.

What have we left out? We can find several examples of large trading systems, especially in one or more regions of the world. The Roman Empire in and around Europe, and China in and around East and Southeast Asia were the centers for extensive trade in the distant past and some rules existed to govern that exchange. But there was little industrial production and trade was mostly confined to a relatively small portion of the world. A second important era, in which trade emerged on a global scale over the Eurasian landmass, followed the global military victories of the Mongols in the 13th and 14th centuries. Perhaps the most important period left out is between 1500-1800, when trade on a more global scale emerged. Connected to the new capabilities in trans-ocean sailing by Europeans and the resulting links to North America and Asia, this was a time when a new world system of capitalism was created by guns, ships and trade. The world economy during this time was the object of control by national governments, which frequently engaged in war and expanded domestic taxes to support these efforts.[2] The trading systems during these times were confined mostly to luxury goods and, and although trade growth was especially rapid in the 18th century, it remained relatively small as a proportion of overall economies.[3]

The time from 1750-1850 produced changes unprecedented in human history, created by the fundamental break in economies brought on by industrialization in Great Britain. Previously, whenever economic growth occurred this was followed by a rise in population that would negate the gains in per capita incomes. This changed when the gains from industrialization prompted additional economic and technological changes that spurred growth even faster than the growth in population. Not only did growth expand, so to did inequality. In 1500, ratio of richest to poorest region was 2:1; 1800 saw 3:1; but by 2001 this ratio had expanded to 18:1.[4]

The locus of industrialization and trade was in Britain, already a major military, colonial and economic power. The creation of new industries in the 18th century led to rapidly expanding output resulting from rapidly falling costs of production, which meant these products were competitively priced all across the globe. Between the 1730s and 1790s, a series of technological innovations emerged mainly in Britain and revolutionized the production and weaving of cotton yarn. The cost of production fell dramatically; before these innovations, by hand 50,000 person-hours were required to process 100 pounds of cotton; by 1790, only 300 hours were needed. In spite of the general restrictions on international trade at the time, increases in British exports of cotton goods were dramatic after the end of the Napoleonic Wars in 1815. Moreover, Britain became the center for importing raw materials and semi-finished goods and re-exporting these and other products to Europe. As the world’s greatest imperial power, Britain exchanged manufactured goods for raw materials with its colonies. By mid-century, Britain dominated the pig iron and railroad industries and exported locomotives, rail cars and finished rails to much of the world. During the period from about 1790-1860, a new kind of economy was created around a much greater pace and scale of industrial capabilities, technological improvements and economic growth. This quickly spilled into new forms of global trade and the beginnings of a new global economy.[5]

The political economy of this new system began to take shape over the 19th century, with forms that more and more resemble the political economy of the present. The nature of specialization based on factor endowments and chains of complementary forms of international specialization linked by trade began to emerge. Winners and losers from international trade created a series of domestic political struggles over trade policy and a set of international negotiations designed to define an international trading space followed. International capital flows deriving from large accumulated profits developed to support trade. International knowledge flows through communication and migration supported and sustained rapid technological improvements. And international monetary relations and negotiations based on a multilateral system of arrangements designed to support trade also developed.

Why Britain and not China?

During the 18th century, there was little difference between the poorest nations and the richest nations in per person incomes, as all economies were predominantly based on agriculture. The China of 1750 was not all that different from Europe, save in population size. This meant China was by far the largest economy in the world; even in 1820 the Chinese economy accounted for one-third of the entire global economy. Moreover, China had been the source of great inventiveness over the previous millennia with gunpowder, the printing press and the greatest ships in the world and was the main producer of ceramics, silk and fine cotton for export to Europe[6]. So why did the industrial revolution happen in Britain and not in China or somewhere else?

This is a question of great practical import, as the new economic world after 1750 came increasingly to separate nations in terms of incomes and growth. These differences frequently cumulate and carry into today with only some nations able to participate in global growth and with astonishing income and wealth gaps across the globe. Clearly we need to understand how industrialization has so divided nations and made them less alike.

Fortunately, this question has generated considerable investigation and discussion.[7] Though no firm consensus exists, several broad conclusions can be offered. These focus on first, the special combination in Britain of the investigation of nature based on scientific criteria, significant knowledge of mechanics across the nation and an internationally engaged commercial society with considerable investment capacity. Unlike most societies across the world, including China, economic knowledge in England developed with modern science and was distributed over a dense network of like-minded “tinkerers.”[8] Second, Britain and more generally Europe possessed a special and privileged access to the resources of the New World won as a result of global advantages in military technology. In a world where natural resources placed sharp limits on growth, access to the vast resources of the New World was a large advantage for England and Europe over China.[9]

At this point, the analysis of economic growth becomes much more controversial. A very important thesis comes from neoclassical economics focusing on the institutional basis for the creation of efficient markets.[10] Such markets arise when governments provide the rule of law for the nation but withdraw from other forms of involvement in economic life. In this environment, entrepreneurial investors will supply capital to the best use and markets for land, labor, capital and protected knowledge will result that continually reallocates resources efficiently. According to this view, efficient markets will then produce economic growth. If this theory is correct, we would expect the institutions in England and China to be quite different, thereby leading to quite different levels of market efficiency and this would account for the origins of industrialization in Britain and not China.

There were differences in the institutions relating to property rights and individual rights between China and England in the mid-18th century, with the property holders in the latter better able to control use of their property.[11] However, a detailed examination of the market systems of these areas does not reveal clear differences in levels of efficiency. Several measures of market operations provide conflicting indicators of only small degrees of advantage; there is certainly no conclusive or even significant evidence of greater market efficiency in England. Moreover, England in the 18th century had a relatively high tax rate undermining the notion of a night watchman state.[12] Though institutions seem to have an intuitively obvious role in affecting economic growth, the process is more subtle and complex than we yet understand.

The 19th Century Global Economy

The progression of industrialization within England quickly led to international consequences and over the century after 1800 helped to create a global economy unlike any that had existed before. Industrialization and economic growth not only continued across the century but, even more important, the rate of growth increased and spread to many nations in Europe, North America and to Japan in Asia. Many other nations began to participate in the global economy through the export of primary products and raw materials. Technological change cumulated and expanded with a host of new inventions, products, processes and innovations that dramatically altered economic and social life during this time. At least in urban areas, real wages began to increase and rose substantially over the century.

Table 4.1 Per Capita Levels of Industrialization During the 19th Century

Country 1800 1860 1913

Belgium 10 28 88

France 9 20 59

Germany 8 15 85

Russia 6 8 20

Spain 7 11 22

Switzerland 10 26 87

United Kingdom 16 64 115

United States 9 21 126

Japan 7 7 20

China 6 4 3

India 6 3 2

Source: Paul Bairoch, “International Industrialization Levels from 1750 to 1980,”

Journal of European Economic History, 11 (1982) 281.

Some sense of the changes from industrialization can be seen in Table 4.1. Notice that in 1800 most nations were at about the same level with the distance between England and China not that large and between England and other European states even smaller. After sixty years some nations had surged ahead, some had changed only a little and some had even regressed. By 1913, just before World War I, the gaps had increased with those between China and India on the one hand and the United States at over 40:1.

TABLE 4.2

REAL GDP PER CAPITA GROWTH RATES, 1820-1996

Nation 1820-70 1870-1913 1913-50 1950-73 1973-96

UK 1.2 1.0 0.8 2.5 1.6

US 1.3 1.8 1.6 2.4 1.6

Germany 1.1 1.6 0.3 5.0 1.8

France 0.8 1.5 1.1 4.0 1.5

Russia 0.6 0.9 1.8 3.4 -1.2

Japan 0.1 1.4 0.9 8.0 2.5

China 0.0 0.6 -0.3 2.1 5.4

India 0.1 0.4 -0.3 1.6 2.9

Brazil 0.2 0.3 1.9 3.8 1.4

Korea -0.2 5.2 6.8

Singapore 4.3 6.1

Source: Nicholas Crafts, “Globalization and Growth in the Twentieth Century,” IMF Working Paper, WP/00/44, March 2000, 14. http://www.imf.org/external/pubs/cat/wp1_sp.aspx?s_year=2000&e_year=2000&brtype=default

The differences in industrialization had profound consequences. Not only did this directly affect the levels of per capita income across nations, but the capacity for military power was also a result of industrial capabilities. As a result, in 1913 India remained under the control of England and China had succumbed to Western imperialist dominance and seen its millennia-long dynastic system collapse. Japan, by contrast, had emerged from a position of subservience to Western domination and established a position of imperialist strength in Asia.