All Commentary
Thursday, August 1, 1985

A Reviewers Notebook: The Wealth of America

In his From Adam Smith to the Wealth of America (New Brunswick, N.J., Transaction Books, 237 pp., $29.95), Alvin Rabushka has written one of the really searching books of our time. But its title, though apt as an indication of the validity of principle, is somewhat misleading. Taken literally, it implies a straight line process in history. But the sad truth is that Adam Smith lost caste in England at the very peak of his success. His principles took hold in America in the nineteenth and early twentieth centuries, but they went out of vogue in the depression of the Thirties.

If that were all there was to it, Rabushka might as well have called his book The Decline of the West. Both Britain and America have been throwing their wealth away. But it so happened that several geographically small countries on the rim of eastern Asia (Hong Kong, Taiwan, Singapore, South Korea) decided to follow the path of economic freedom, a phenomenon which is now teaching us to have a new look at things. Rabushka devotes part two of his book to the Oriental experience. With rebirth in mind he might better have called his book The Phoenix. Or even, There’ll Always be an England—Somewhere.

Certainly we in the West have been honoring Adam Smith’s laissez faire philosophy in the breach. But there is a lesson in Rabushka’s story. The lesson is that it can take fifty years for a common sense proposition to take over. When Adam Smith wrote The Wealth of Nations England was in the grip of the mercantilist philosophy. The younger William Pitt was fascinated by Smith’s work, but the war with Napoleon kept him from doing much about it.

“In the aftermath of the Napoleonic Wars,” so Rabushka writes, “Britain paralleled the contemporary United States.” The list of regulations in the British statute book covered all sorts and conditions of work. There was a stiff tariff wall around manufactures, and the corn laws were regarded as an absolutely necessary crutch for agriculture. The export of machinery was banned and skilled artisans were denied the right to emigrate. The Navigation Acts stipulated that all seaborne trade going in and out of British ports should be carried in British ships. The ships themselves had to be built in British yards. There were restrictions on joint stock compa nies, and foreign trade was in the hands of royally-chartered monopolies. A huge public debt, the legacy of the eighteenth-century wars, consumed half of all public spending.

Says Rabushka, “the government’s heavy-handed approach to the economy reflected mercantilist thinking and practice embellished by wartime controls . . . The British economy was a mixture of deliberate economic decisions of her rulers to achieve specific national goals and a collection of ad-hoc taxes and measures solely reflecting urgent wartime needs for more revenue or economic protectionism.” Sounds very much like Washington, D.C., today.

The Cotton Industry

It so happened that the British controllers in 1815 had overlooked the cotton industry, which was just coming into existence. There were hundreds of regulations to prevent growth in silk and woolen manufacture. But the cotton industry had, for a moment, the unchecked advantage of the nascent industrial revolution. It began to show its heels to silks and woolens.

Adam Smith had been a long time dead when the British really began to heed his words. And it took a full half century, from 1815 to 1865, before the economic reform had been completed. Some great men were involved in it. Rabushka doesn’t give enough credit to the evangelists of free trade, John Bright and Richard Cobden. His heroes are William Huskisson, Sir Robert Peel and William Gladstone. Huskisson started the ball rolling by the tariff reform of 1825, with reduction in the duties on rum, fabrics, minerals and manufactured goods. In 1832 the first important electoral reform brought manufacturing representatives into the House of Commons.

Sir Robert Peel continued the tariff reduction crusade, but he had to compromise by accepting a not too onerous income tax in order to keep the budget balanced. The Corn Laws persisted, and Peel, as a Tory, didn’t dare go too strongly against the landed aristocrats who insisted that agriculture should not be left to the mercies of the international market. But the potato famine in Ireland changed the intellectual climate a bit. Despite the opposition of the Duke of Wellington, who said “damned rotten potatoes put Peel in his fright,” the Corn Laws were finally repealed.

A Stimulus to Trade

Then came the Gladstone budget of 1860, with a total abolition of duties on dairy products and cuts on timber. The favor to imports had a magical effect on exports. “The export trade of 1860,” says Rabushka “was the largest on record, having risen in value to 136 million pounds from the 1859 figure of 130 million.”

Modern supply side theorists would be fully justified in claiming that the history of England between 1815 and 1865 proves the case for the Laffer Curve. Money continued to pour into the exchequer in steadily increasing amounts with each round of tariff reductions. The lower the tax rate, the bigger the tax volume. But Britain’s increase in wealth, coupled with the new electoral laws that extended the franchise to all males regardless of property qualifications, was its own undoing. The Fabians, with their philosophy of redistribution, set the new intellectual climate in the Eighties and Nineties, and the Welfare State was the end result.

Rabushka more or less drops the British story at this point. He continues to accentuate the positive by switching to what happened after 1946 in Hong Kong, Taiwan, Singapore and South Korea, where the British experience of the 1815-1865 half century has repeated itself. Ra bushka’s penultimate chapter, entitled “What happened to the American Dream?,” is pure melancholy. The final chapter, “Recipe for Prosperity,” calls for a return to Adam Smith’s principles.

With the fifty-year struggle in Britain in mind, Rabushka obviously doesn’t think anything is going to happen overnight. But “Ronald Reagan,” he says, “has taken a modest first step, perhaps no more than that of William Huskisson . . .” Some modest reforms, he says, have been achieved. And the “determination and success of three giants in nineteenth-century Britain gives cause for optimism in our country. As the intellectual currents increasingly demonstrate the flaws in big government and the benefits of the market economy, politicians . . . will find the attractions of more economic freedom irresistible. On this view, the future is not so black.”

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.