Thoughts on economics and liberty

Category: Public policy

Gurcharan Das concluded that Britain’s colonial prosperity was NOT founded on the exploitation of India

I’ve been sporadically writing on this issue and have never had time to sort out all relevant facts. [see my posts here and here. And, of course, Naoroji’s book makes a strong case. And Shashi Tharoor has been jumping up and down about this issue.]

But this extract from India Unbound by Gurcharan Das is worth noting. I’ll include it in the SBP training manual. In any event, I believe it is a total falsehood that British rule harmed us so much that we are unable to recover from it. British rule doesn’t hamper India. It is socialism that does.

Gurcharan’s conclusion:

“Britain did not become poorer after losing India. Instead, it enjoyed shocking prosperity in the 1950s and 1960s, at the very rime that it was losing its colonies. So did France, Holland, and other colonialists. The fact is that Britain’s colonial prosperity was not founded on the exploitation of India.”

Extracts from his analysis:

scholars mostly confirmed my uncle’s classic analysis of India’s poverty. Britain’s trade policies, they agreed, had encouraged the import of manufactures and the export of raw materials. And by heavily taxing the farmer, Britain contributed to the stagnation of Indian agriculture.

As the years went by, however, a new generation of historians emerged who began to challenge the classic picture. These serious scholars expended great time and effort interpreting the historical data. One of them concluded that the land tax had not been exorbitant—by 1900 it was only 5 percent of the agricultural output, which was less than half the average per capita tax burden. Another agreed that there had been a “drain of wealth” from India to Britain, especially in the nineteenth century, but it  was only 1.5 percent of GNP every year. The revisionist historians argued that India’s payments to Britain were for real military and civilian services and to service capital investments (which increased India’s wealth). Also, the overhead cost to maintain the British establishment—the so- called home charges—was in fact quite small. If India had maintained its own army and navy, it might have had to spend more money. They conceded that India did have a balance of payments surplus which Britain used to finance its part of its deficit, but they said that India was partially compensated for it through the import of gold and silver into India. Only a part of that precious metal was minted  for coinage and most went into private Indian hands. Indians have always been mesmerized by gold and silver. Even the Roman Pliny had observed this, and had called India the “sink of the world’s gold.”

The revisionists’ most serious challenge was to the nationalist thesis that Britain had deliberately deindustrialized India. They agreed with my uncle that Indian industry declined in the nineteenth century. They calculated that India enjoyed 17.6 percent of the world’s industrial production in 1830, while Britain’s share was 9.5 percent. By 1900, India’s share had declined to 1.7 percent while Britain’s had grown to 18.6 percent. But this decline, they argued, was caused by technology. The machines of Britain’s industrial revolution wiped out Indian textiles, in the same way that traditional handmade textiles disappeared in Europe and the rest of the world. Fifty years later Indian textile mills would have destroyed them. India’s weavers were thus the victims of technological obsolescence.

Handlooms all over the world gave way to mill-made cloth, and weavers everywhere lost their jobs no less than in India. Unfortunately, there were more weavers affected in India because India was the largest maker of textiles in the world. This is not to take away from the great misery and enormous suffering caused by their impoverishment. If the British Raj had been sensitive to their plight, it might have erected trade barriers in India. This might have cushioned the impact and Indian handmade textiles might have survived for a period. (It is true that the British government did put up barriers in eighteenth-century England against Indian textiles.)

After 1850, Indian entrepreneurs began to set up their own modern textile mills. By 1875, India began to export textiles again and slowly recaptured the domestic market. In 1896, Indian mills supplied only 8 percent of total cloth consumed in India; in 1913, 20 percent; in 1936, 62 percent; and in 1945, 76 percent. Both British and Indian capitalists made large profits during the First World

War. While the British businesses remitted their wartime profits to England, Indian businessmen reinvested theirs in new industrial enterprises after the war. Thus, Indian industry began to grow rapidly after the war. G. D. Birla, Kasturbhai Lalbhai, and a dozen other entrepreneurs built  significant industrial empires in the interwar years. Manufacturing output grew 5.6 percent per annum between 1913 and 1938, well above the world average of 3.3 percent. The British government finally provided tariff protection from the 1920s. This helped industrialists to expand and diversify. The Birlas went beyond textiles and jute into sugar, cement, and paper. Hirachand, the construction magnate, diversified into shipping; Shri Ram, in the north, went into sewing machines; and Tatas, in Bombay, started an airline which later became Air India.

By the Second World War, the pre–First World War supremacy of British business was broken and Indian entrepreneurs were now stronger and in a position to buy out the businesses of the departing foreigners. The share of industry in India’s GNP doubled from 3.8 percent (in 1913) to 7.5 percent (in 1947). The composition of India’s trade also changed—the share of manufactures in its exports rose from 22.4 percent (in 1913) to 30 percent (in 1947), while the share of manufactures in imports declined from 79.4 percent to 64 percent. Industrial employment, however, did not grow in tandem. Modern industry could not make up for the loss in jobs suffered by handloom weavers.

Indian nationalists have exaggerated the economic importance of India to Britain. They thought that the Indian empire was hugely profitable. They got the idea from Cecil Rhodes, the great imperialist of the nineteenth century, who used to say, “The Empire is a bread and butter question … [we] must acquire new lands for settling the surplus population of the country, to provide new markets for the goods produced in factories and mines.” Churchill was a leading exponent of this view in the twentieth century. Conservatives certainly believed it, but even the left wing of the Labour Party thought so. Bevin told the House of Commons: “If the British Empire fell … it would mean the standard of life of our constituents would fall considerably.” The truth is that the Indian colony was not terribly profitable to Britain. After the crude period of exploitation in the eighteenth century was over, Britain’s rising prosperity in the next century owed more to its free trade with the “new world” and to its investments in America. If there was a “drain,” it was by the transfer of dividends by English companies from America. Certainly, a few Englishmen became very rich from India—the owners of the tea and indigo plantations, the shareholders of the East India Company and other commercial firms, the employees of the managing agencies, the railway builders, the civil and military personnel, and others connected with India. But the profit to Britain as a whole was meager.

My uncle’s prediction also turned out to be wrong. Britain did not become poorer after losing India. Instead, it enjoyed shocking prosperity in the 1950s and 1960s, at the very rime that it was losing its colonies. So did France, Holland, and other colonialists. The fact is that Britain’s colonial prosperity was not founded on the exploitation of India. In the end, whether Britain impoverished or enriched India is really an academic question. What is more relevant is why the forces of global capitalism in the second half of the nineteenth century and early twentieth century did not release widespread growth and development in India, as they did, for example, in Japan. The rapid building of railways and canals and the simultaneous expansion of foreign trade should have acted as a strong engine of growth. India had an experienced merchant class which had begun to develop modern industry.

By 1914, India had the world’s largest jute manufacturing industry, the fourth-largest cotton textile industry, the largest canal network, the third-largest railway network, and 2.5 percent of world trade. Fifty years earlier, Karl Marx had predicted that the introduction of railways and modern factories into India would transform the subcontinent. Why didn’t it happen?


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Towards a theory of infrastructure – what is infrastructure and who should pay for it

This has been a vexed issue that’s beset by close to utter confusion in the economics literature.

I wrote about this issue here last year but I’m unable to locate any consistent first-principles approach to this question.

The issue of infrastructure is closely inter-related to town planning and zoning. Unpacking the matter is now becoming important since town planning has failed in the West and there has been a chronic under-supply of infrastructure.

My FB comment:

The reason government was given the task of supplying public goods such as infrastructure is that private sector ownership may lead to an undersupply.

But because the government doesn’t charge like a perfectly discriminating monopolist, the problem of undersuppy has not been resolved.

In addition, we now have the various inefficiencies associated with government supply. It is therefore unclear whether society has become better off in this process.

I’ve also been exploring this issue here: Optimal taxation, levies, fees and charges.


It argues:

The costs of infrastructure are met in different amounts by the public, the indirect beneficiaries of new infrastructure and other users. Establishing what infrastructure costs fall into the domains of each funder group should be the first step in negotiating a fair mix:
• State Government: for enabling ‘State’ infrastructure for a public good (via consolidated revenue)
• Local Government: for enabling ‘local’ infrastructure delivering a public good (via rates)
• Land owners / developers whose proposed development gives rise to – or benefits from:
− uplift in land value – and increased future development prospects as a result of the provision of new infrastructure capacity
− related State and local infrastructure needs (via state development contributions and local infrastructure contributions)
− an impact that requires mitigation (via conditions of consent, offsets and development contributions)
• Other users via user charging (via eg tolls, parking fees, access fees)

As part of this exercise I’ll make some notes here and hope that I can find some existing literature to assist the analysis. I’ve downloaded a lot of papers on this topic and will try to highlight the good ones if time permits.

This is a placeholder post and I’ll update as time permits.


Fixing American Infrastructure

Who Should Pay for Infrastructure?

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Was Jane Jacobs a force for the good or for evil?

I showed here how John Ruskin exercised a baneful influence on liberty in the 19th century – particularly on urban landscapes.

Jane Jacobs was a similarly influential figure in the 20th century.

“For contemporary architects, civic planners and city dwellers, Jacobs’ book is a foundational text of humane urban planning. Her ideas, considered radical when the book was published in 1961, are now settled thought.”

I was keenly interested in this article: How Should We Interpret Jane Jacobs? published yesterday, which argues that Jane was a good influence, after all.

“We should interpret Jane Jacobs as a spontaneous order theorist in the tradition of Adam Smith, Michael Polanyi, and F.A. Hayek. Built into her work is a profound appreciation of the importance of local knowledge, decentralized planning, and the spontaneous orders that structure urban life.”

“Jacobs found the wellspring of economic health in cities as a constant bubbling forth of ideas.”

I’m not quite sure, yet – and will need to study this issue more carefully and personally. I’m informed that we find “an appreciation of spontaneous orders (set out explicitly in the opening and closing chapters of The Death and Life of Great American Cities)” – full PDF here.

This is a placeholder post and I’ll add my views after I’ve reviewed the first and last chapters of her book.

Slideshow on Jane Jacob’s views.

On Mises Institute: Jane Jacobs, The Anti-Planner

“Despite her occasional advocacy of government intervention, there is a very strong libertarian tendency in Jacobs’ writings, even if she steadfastly refuses to be labeled. “


See my posts here and here.

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