Free Trade and War

In my discussion of the The Great Transformation I mentioned that Polanyi attributed the First World War and the breakdown of the Hundred Years Peace to the tensions brought about by free trade, especially in regards to imperialism.

A number of economists have also come to the same conclusion. There are a few basic theories of the underlying mechanism that caused free trade to end in the War. One of them is described in this post by economist Branko Milanovic. In it, he reviews a book called “The First World War, an Agrarian Interpretation” by Avner Offer which came out in 1991. I’m going to paraphrase his summary, so you should definitely check out the original post, or even the book if you can.

Free trade and war: a review of Avner Offer’s “The First World War: An Agrarian Interpretation” (globalinequality)

The basic problem is simple: every country has a certain finite number of workers, and they can either work in the factories producing manufactured goods or in the fields producing food.

In order to produce enough goods for export, you need to have your workers laboring in the factories. But without workers in the fields, you will not have enough food to feed them and your workers will starve.

If you keep workers in the fields, however, you will be able to feed yourself, but you will not be able to industrialize, as the workers will be stuck in low-value added raw commodity production (e.g. grain, cotton) instead of high-value-added manufacturing. In order to make industrialization viable, you need to have a huge pool of landless laborers desperate enough to provide the cheap labor needed to run the factories. But then, where will you get your food from?

In addition, you have two internal vested interests at loggerheads. The landowners derive their income from selling crops, principally grain (corn), and they want as high a price as possible. They also want high land rents.

Meanwhile the factory owners want grain as cheap as possible. The major expense in of manufacturing goods is the labor it takes to produce them, and wages are primarily set by the price of grain. Manufacturers want cheap land and cheap grain, so that they can pay their workers as little as possible. They need to pay their workers as little as possible in order to have a chance to be competitive in export markets (e.g. modern-day China)

So, in other words, to become an industrial power, you need to move your workers from the farms to the factories without having them starve in the process. Since labor is major factor in the price of manufactured goods, you also need to keep your factory wages as low as possible, so that you can undersell your competition. Finally, you cannot allow cheaper imports to undercut your own manufactured goods, otherwise you will never be able to industrialize.

Every major industrial power had to manage this tradeoff. Balancing all of this stuff is key the understanding the nineteenth century and the run up to the First World War.

The solution the British hit upon was to repeal the Corn Laws beginning in 1846. The Corn Laws specified that you could not import corn (the generic term for grain, not what we North Americans call corn), unless the price rose above a certain level. This protected to English landowners and farmers. If the Corn Laws were repealed, there would be no protection for domestic grain producers and the price would fall below what English farmers could compete with. Much of this grain came from the great breadbaskets of America and Russia. The repeal of the laws is considered a watershed where the needs of the merchants finally won over the needs of the great landowners (and thus the final nail in the coffin for feudalism). “Market Liberals,” or what we now call economists, were the driving force behind this act.

By repealing the Corn Laws, grain could be imported as cheaply as possible and the workers could be paid low enough wages to make Britain competitive in manufacturing.  Additionally, by destroying the rural economy, the landless laborers would provide the grist for the “Satanic Mills.”

So Britain would import all of the food it needed to feed its workers from the rest of the world. It would pay for the grain by selling high-value-added manufactured goods. This would free up farmers the land and force them into the factories to become the footloose industrial proletariat. Problem solved!

But by becoming dependent on imports of cheap grain from overseas to feed their people, Britain’s position became much more precarious. Any disruption to grain imports would cause prices to rise threatening that delicate balance. The newly immiserated proletariat (as described by Engels et. al.) might revolt if it could no longer afford to buy bread, or even turn to *gasp* socialism!

Because it was now dependent on grain from overseas, Great Britain could be starved into submission by a naval blockade or trade sanctions. The only solution was to have a powerful enough navy to prevent this from happening. In fact, free trade made it necessary! As Milonovich puts it: “…specialization and international division of labor directly led to the need for a strong military. Free trade was underwritten by arms.” As Karl Polanyi describes:

International free trade involved no less an act of faith. Its implications were extravagant. It meant that England would depend for her food supply upon overseas sources; would sacrifice her agriculture, if necessary, and enter on a new form of life under which she would be part and parcel of some vaguely conceived world unity of the future; that this planetary community would have to be a peaceful one, or, if not, would have to be made safe for Great Britain by the power of the Navy; and that the English nation would face the prospects of continuous industrial dislocations in the firm belief in its superior inventive and productive ability. However, it was believed that if only the grain of all the world could flow freely to Britain, then her factories would be able to undersell all the world. Again, the measure of determination needed was set by the magnitude of the proposition and the vastness of the risks involved in complete acceptance. Yet less than complete acceptance would have spelt certain ruin. (p. 138)

As Ha-Joon Chang argues, another motivation for the repeal of the corn laws was to create a large enough market for grain such that other countries would not industrialize, but choose instead to continue to specialize in agriculture and raw materials for Britain’s industry. That is, they would prefer to produce for Britain’s market rather than to try and pull off the same trick of gutting their own rural economy in favor of industrialization. And he points out that Corn Laws were only repealed AFTER Britain had gained a first-mover advantage in high-end manufacturing through a series of low tariffs on imported raw materials and high tariffs on imported manufactured goods.

The repeal of the Corn Law is these days commonly regarded as the ultimate victory of Classical Liberal economic doctrine over wrong-headed mercantilism. Although we should not underestimate the role of economic theory in the policy shift, many historians more familiar with the period point out that it should probably be understood as an act of ‘free trade imperialism’ intended to ‘halt the move to industrialization on the Continent by enlarging the market for agricultural produce and primary materials’.

Kicking Away the Ladder: Development Strategy in Historical Perspective; p. 23

However, it turned out that other countries were not satisfied keeping their workforce laboring in the fields. They wanted to get in on the industrialization act. Chief among these countries was Germany.

So Germany, too had to build a strong military to ensure that adequate supplies of grain would flow to it. Germany’s grain came from areas of Eastern Europe and the Balkans. Ensuring that they would have enough food to feed their people would continue to be an obsession of German leadership well into the twentieth century. Hitler would refer to this idea as “Lebensraum” (living space), and planned to seize the breadbasket of the Ukraine to feed a growing German population (and invade the Caucasus to ensure an abundant supply of oil for industry).

So, to make this happen, Germany, too, needed to become a military superpower. Germany built up a huge Navy at this time to ensure ships carrying grain from overseas could get to it and it could not be blockaded by the British or anyone else. The British very clearly perceived the German drive to create a world-spanning navy as a clear and present danger. While Britain and France had a vast territory of overseas colonies to exploit, Germany (and Italy) had no such advantage and instead trained their imperialist ambitions on the continent itself.

These military and colonial rivalries were the seed of the alliances that led to the First World War. Milanovich says: “It thus gradually dawned on both British and German military planners that the most effective way to fight the enemy was to disrupt its food supplies and the surest way to remain invulnerable was to have a navy powerful enough to repel all such attempts by the other side.” He concludes from the book:

Unlike those who…interpreted Ivan Bloch and Norman Angell to have believed that increasing interaction and economic links between the countries would make the war unthinkable, Offer implicitly argues the very opposite. It is precisely the decision to specialize in the production of manufactures…that led to the need to have a war machine and ultimately to the war itself…World War I was in effect the first war of globalization.

While international division of labor makes the costs of wars exorbitant for all participants, it also requires, in order that the system be maintained, a permanent armed underpinning. But that permanent armed underpinning by itself renders the war more likely because it leads more than one power to make the same calculation and come to the same conclusions…More diversified, less autarkic, countries become much more productive but at the cost of being more fragile and brittle to any disruption.

Polanyi argues that imperialism was driven by the need for overseas markets:

The import tariffs of one country hampered the exports of another and forced it to seek for markets in politically unprotected regions. Economic imperialism was mainly a struggle between the Powers for the privilege of extending their trade into politically unprotected markets. Export pressure was reinforced by a scramble for raw material supplies caused by the manufacturing fever. Governments lent support to their nationals engaged in business in backward countries. Trade and flag were racing in one another’s wake. Imperialism and half-conscious preparation for autarchy were the bent of Powers which found themselves more and more dependent upon an increasingly unreliable system of world economy. And yet rigid maintenance of the integrity of the international gold standard was imperative. This was one institutional source of disruption…

Milanovich adds a footnote concerning the book’s description of opposition to mass immigration during the first period of globalization: “…the anti-immigrant attitude of the (White) working class which saw in Asian labor a competitor against which they were bound to lose, the rise of populist politicians, inconsistent racial stereotyping… seizure of would-be migrants’ assets…and finally outright ban of Asian migration….” Of course, this is merely evidence of the Double Movement in action–people don’t want to constantly be exposed to foreign competition that undermines their wages by choice. Footloose labor and migration from poor areas to rich, both internally and externally is a feature of the Market-based world. There is no sense of place or culture.

The agrarian interpretation fits well with another essential ingredient to industrialization: fossil fuels. Not only do you need to feed your people, but you also need to have sufficient energy to fund the machines that make industrialization possible. Just as with grain, you can import it from elsewhere, but this makes you vulnerable. Germany and Britain both suffered declining fossil fuel reserves early on and turned to imports. Britain could count on the U.S. for both food and fuel, but Germany had fewer options. A popular interpretation a few years back saw the Berlin-Baghdad railway as a major cause of the war.

Milanovic has written about the causes of the war before. He favors and interpretation of Lenin/Hobson/Luxenberg. This interpretation would probably be considered in line with Polanyi’s thinking as well.

In this view, the global Market also contributes the the war. There is a hundred year’s peace based on financial interdependence, true. But what happens is that overproduction combined with extreme income inequality inside countries means that the workers are too poor to consume all the goods they are producing (sound familiar?). In order to provide the necessary export markets, colonial trade blocks are established where competitors are excluded behind various trade barriers, otherwise you will have not enough industrial output to employ your people, or raw materials to feed your industry. This interdependence on the rest of the world, and the attempts to control it led inevitably to the outcome of the major powers going to war with each other.

Here’s a good summary from Pseudoerasmus’ blog (who argues against it):

According to this interpretation the war was caused by imperialist competition, embedded in the domestic economic conditions of the time: very high income and wealth inequality, high savings of the upper classes, insufficient domestic aggregate demand, and the need of capitalists to find profitable uses for surplus savings outside their own country. In the early twentieth century, finding an external investment outlet for the surplus savings meant being in physical control of a place, and making such investment profitable required that other possible competitors be excluded even at the cost of a war…

This “competitive struggle for markets” led to the exploitation of the colonies. Economic success required creating colonies, protectorates, or dependencies, and introducing what Paul Bairoch has called the colonial contract. The colonial contract was defined by the following elements: colonies could trade only with the metropolis, with goods transported on the metropolis’s ships, and colonies could not produce manufactured goods. The scramble for colonies in Africa was fueled by the interests of European capitalists…A similar, almost equally brutal, scramble for new territories took place in Siberia, where Russia expanded eastward, and in the Americas, where the United States expanded westward to annex Mexican territories and southward to reinforce political control…

At the turn of the twentieth century, the argument linking colonialism to domestic maldistribution of income was made by John Hobson in his book Imperialism: A Study…As Hobson put it, “it is not industrial progress that demands the opening up of new markets and areas of investment, but mal-distribution of consuming power which prevents the absorption of commodities and capital within the country” (p. 85). There is an entire tradition of linking domestic maldistribution of income to foreign expansion going back to Marx, even if Marx did not develop it as thoroughly as did Hobson, Luxemburg, and Lenin…

This article adds some additional details:

Writing in “Who Stands to Gain?”on the eve of World War I, Lenin saw the arms race as a source of super-profit for capitalist investors: In Europe, “the states that call themselves ‘civilised’, is now engaged in a mad armaments hurdle-race. In thousands of ways, in thousands of newspapers, from thousands of pulpits, they shout and clamour about patriotism, culture, native land, peace, and progress – and all in order to justify new expenditures of tens and hundreds of millions of rubles for all manner of weapons of destruction – for guns, dreadnoughts, etc. … the renowned British firm Armstrong, Whitworth & Co … engaged mainly in the manufacture of ‘armaments’ declared a dividend of 12. percent. Dividends of 12.5 per cent mean that capital is doubled in 8 years. and this is in addition to all kinds of fees to directors, etc.”

War, for imperialism, is not only used to conquer and control the colonies and to prevent the development of socialism, but also to compete with other imperialist powers. Periods of peace, says Lenin, are “nothing more than a ‘truce’ in periods between wars.” World War I, to Lenin, could only be understood as an inter-imperialist war.

The superprofits of imperialism enable the capitalists to buy off the workers in the home country….According to Lenin, companies in the developed world exploit workers in the developing world where wages are much lower. The increased profits enable these companies to pay higher wages to their employees “at home” (that is, in the developed world), thus creating a working class satisfied with their standard of living and more inclined towards imperialism and war.

That “free trade is underwritten by arms” is an often overlooked fact. Just like trading doesn’t take place without some sort of authority with recourse to violence to make sure that people don’t renege (police, courts, sheriffs. etc.), at the global level you need a global “sheriff” to make sure that others who don’t participate are punished. Britain once filled this role, and now the United States does. That’s why we have the military budget we do. It has nothing to do with “defending our freedom” and everything to do with “defending their profits.” And, as always, it’s the ordinary working people who die to make sure that continues.

Leave a Reply

Your email address will not be published.