What can we learn from Britain’s laissez-faire experiment?

What can we learn from Britain’s laissez-faire experiment?

Guest post by W. Walker Hanlon, NYU Stern.

In the nineteenth century, Britain undertook the boldest experiment in small government ever attempted by an industrialized and technologically advanced country. This experience has had an enormous intellectual influence. It shaped the views of, among others, Karl Marx, Friedrich Engels, John Stuart Mill, Alfred Marshall, and Walter Baghot, who experienced it first-hand, and it features prominently in the work of later scholars, ranging from John Maynard Keynes to F. A. Hayek to Karl Polanyi.

Understanding how this small-government system worked, and most importantly, why it was abandoned in favor of a modern welfare state, has attracted debate for over a century. This debate has largely been defined by two seminal contributions. In 1914, A.V. Dicey argued that a shift in public opinion away from liberalism and toward collectivism played a central role. Oliver MacDonagh, writing in the 1960s and 70s, instead believed that laissez-faire was abandoned in the face of “intolerable conditions’’ which led, in stages, to reform.

Today, with more data and a better understanding of how markets work, and when they might fail, it is possible to re-examine this experience in order to understand why the country that pioneered laissez-faire government ultimately chose to abandon it. This post provides a brief review of the main themes of this re-examination, based on a book currently being prepared for the Princeton University Press.

The Adoption of Laissez Faire

Britain did not simply stumble upon a laissez-faire system. Instead, the small government system that existed in Britain by the middle of the nineteenth century was the product of decades of concerted effort, guided and motivated by Enlightenment ideas about personal liberty, to move away from the more corrupt, arbitrary, and invasive system that existed in the eighteenth century.

What were the key features of this new small-government system? One central aspect was the stripping away of regulation: the repeal of the Statue of of Apprentices and Artificers in 1814 freed up labor markets, the repeal of the Bubble Act in 1825 expanded incorporation, the East India Company’s monopoly ended in 1813, restrictions on the emigration of skilled workers were eliminated in 1824, the repeal of the Corn Laws in 1846 signaled the era of free trade, etc. Another dimension of this new system was a reduction in government support for the needy, most notably through the New Poor Law of 1834. As George Boyer (2019) describes, this “marked the end of an era of generous public assistance,’’ and gave rise to a harsher system of workhouses and labor tests. The fiscal size of government was also kept carefully in check. Government expenditure relative to GDP remained extremely low throughout the middle of the nineteenth century, even as the country was growing and modernizing. Thus, by the middle of the nineteenth century, Britain had come as close to a laissez-faire system as we have seen in an industrialized, politically stable, technologically advanced nation.

Challenges to Laissez Faire

As the nineteenth century progressed, Britain’s small-government system faced a manifold set of challenges. In order to better understand these, it is useful to group them into a few broad streams based on the underlying economic forces at work.

One set of challenges was created by growing industrialization arising from the Industrial Revolution. While industrialization brought enormous wealth to the country, it also created or exacerbated a number of market failures. For example, new factories spewed smoke and effluent, creating negative externalities that eventually motivated government action, including the first modern pollution regulation, the Alkali Act of 1863. Factories also required workers, upsetting existing labor markets in ways that shocked moral sensibilities. In some factories, eight-year-old children worked twelve-hour days in harsh conditions. When such conditions came to light, even many opponents of government interference accepted the need for some regulation, and so the first factory inspectorate was born. These provide just two examples of the challenges created by industrialization, and how they undermined the commitment to small government, even in the heyday of laissez-faire.

Another set of challenges was created by the rapid urbanization that accompanied industrial growth. As British cities grew, new systems were needed for providing clean water, removing sewage, providing adequate housing, and combatting infectious disease. Initially, private actors were relied upon to fulfill many of these vital urban functions. However, the challenges of supplying the enormous urban demands, together with the pervasive externalities, particularly those associated with the spread of infectious diseases, proved beyond the capabilities of private enterprise. As it became increasingly apparent that private actors alone were inadequate for addressing pressing urban problems, a progressive expansion of government intervention followed. These interventions took varying forms, including the regulation of housing codes, the municipalization of many water systems, and the direct public provision of sewer systems. Each represented a departure, to a greater or lesser extent, from laissez-faire.

Globalization and the expansion of trade posed a third challenge to Britain’s small-government system. Global trade and migration offered enormous benefits, but taking advantage of these opportunities, and managing the downsides of trade, ultimately required government action. Infrastructure played a key role in the expansion of trade and economic growth, but it was recognized early on that the coordination problems inherent in infrastructure development, from railroads and turnpikes to ports and canals, required government intervention. Long-distance trade and migration also came with substantial information asymmetries and hold-up problems, such as those that plagued poor emigrants and led to the passage of the Passenger Acts regulating passenger-carrying ships. The expansion of the Passenger Acts, documented by MacDonagh (1961), provides the canonical example of expanded government intervention in the nineteenth century. Trade also enabled the concentration of particular industries in locations, such as the cotton textile in Northwest England. This was efficient, but it created huge vulnerabilities, as demonstrated by the Lancashire Cotton Famine generated by the reduction in cotton imports during the U.S. Civil War. Thus, growing trade and migration created a range of challenges that ultimately called forth a range of government responses, laying the foundation for government intervention in areas as varied as infrastructure management, food safety, and unemployment insurance.

In the second half of the nineteenth century, the growing importance of education became yet another issue challenging Britain’s small government. In education, by the middle of the century, England and Wales lagged behind other advanced nations, particularly the U.S. and Germany. This was due in part to a stubborn reliance on non-governmental actors for the provision of basic education. While bills for the public provision of public education had been introduced in Parliament as early as 1807, by the middle of the century education in England and Wales was still being provided by private and parochial schools, with only some modest grant support from the central government. Local authorities were even barred from using revenue from the local rates (local taxes) to operate schools. As technological progress increased the importance of mass education, and with Britain falling even further behind peer nations, reliance on private actors was eventually, and very reluctantly, abandoned when the 1870 Education Act opened the door for local governments to provide a `public option’ in education. By 1902, the government’s role as a provider of basic education had been solidified. Thus, faced with the demands for more and better education required by a modern economy, rapid technological change, and an expanding franchise, laissez-faire was reluctantly abandoned in favor of government intervention.

The fifth dimension along which Britain’s laissez-faire system was challenged, and one that is often overlooked, was related to the changing way in which wars were fought. As has been argued by Charles Tilly (1992) and others, war played an important role in the development of European states. It should come as no surprise, then, that the enormous changes in how wars were fought during the period stretching from the French Revolution to the onset of WWI, influenced the relationship between states and their populations. At the core of these changes was a shift from the small, professional, long-service armies of the eighteenth century, to the mass conscript armies of the early twentieth century. Britain was more isolated from these forces than other European powers, which may help explain how it was able to put off some reforms longer than France and Germany. However, Britain’s struggles in the Second Boer War (1899-1902) awoke British leaders to the fact that the country’s survival was increasingly dependent on the health and support of the great mass of the working class population. This led to much hand-wringing over “national efficiency’’, and eventually to a new set of policies aimed at improving the health of the urban working classes, and binding their loyalty more closely to the state. The first step in this direction, endorsed by Balfour’s Conservative government in 1904 and passed as the Education (Provision of Meals) Bill by Campbell-Bannerman’s Liberals in 1906, aimed to provide free school meals to poor children. This bill was the first of what would eventually become known as the Liberal Welfare reforms, culminating in the People’s Budget of 1909, the country’s first attempt at directly addressing inequality.

Summary

By 1910, Britain’s laissez-faire system had been so deeply undermined that it was essentially dead. This was not, as Dicey argued, due to a change in public opinion. While public opinion did change, this change lagged rather than led the expansion of government. Instead, in case after case, expansions in government interference were implemented by leaders who, while espousing laissez-faire, faced urgent problems and felt that something must be done. Thus, we see Gladstone, while speaking in favor of what would become the 1870 Education Act, still declaring that,

“I am one of those who hold that in the production of material objects it is desirable never to multiply the Establishments of Government beyond what is necessary, but where it is possible to avail ourselves of private energy and zeal. So, in this matter of education, it is a great mistake and an error, in our view, to think that secular education given by a State machinery is per se better and more valuable than the same education given by machinery voluntary in its character.”

Despite this affinity for reliance on private actors, the 1870 Education Act, passed under Gladstone’s premiership, represented the first major step toward government provision of primary education. This is just one of many examples of government expansions being passed by those who, in nearly the same breath, professed their commitment to small government.

So, what can we learn from this experience? First, laissez-faire was abandoned because the system had failed in addressing critical challenges faced by a modernizing economy. In the face of these challenges, the small-government system was progressively abandoned, one small and pragmatic step at a time, even by those who claimed to support it. As a consequence, even before the enormous changes that followed the First World War, the era of the modern welfare state had quietly begun.

Second, if the forces I have highlighted played an important role in the expansion of government, then we should also expect the changing nature of these forces to influence the role of government in the future. Today, urbanization and globalization have continued, and education remains critically important. Yet, in most of the developed world, industrialization has gone in reverse, and in warfighting, there appears to be a clear shift back toward smaller professional militaries. If my analysis is correct, then these trends may have implications for the evolving size and scope of government.

References

Boyer, George (2019). The Winding Road to the Welfare State. Princeton: Princeton University Press.

Dicey, A.V. (1917). Lectures on the Relation between Law and Public Opinion. London: Macmillan and Co. Ltd.

MacDonagh, Oliver (1961). A Pattern of Government Growth. London: MacGibbon and Kee.

MacDonagh, Oliver (1977). Early Victorian Government. London: Weidenfeld and Nicolson.

Tilly, Charles (1991). Coercion, Capital, and European States. Malden, MA: Blackwell.