Foreign Trade Was Not an Engine of Growth

Trade reshuffles. No wonder, then, that it doesn’t work as an engine of growth—not for explaining the scale of growth that overcame the West and then the Rest 1800 to the present. Yet many historians, such as Walt Rostow or Robert Allen or Joseph Inikori, have put foreign trade at the center of their accounts. Yet the Rest had been vigorously trading in the Indian Ocean long before the Europeans got there—indeed, that’s why the West wanted to get there. Trade certainly set the prices that British industrialists faced, such as the price of wheat or the interest rate. But new trade does not put people to work, unless they start unemployed. If they are, then any source of demand, such as the demand for domestic service, would be as important as the India trade. Foreign trade is not a net gain, but a way of producing importables at the sacrifice of exportables. The Harberger point implies that static gains from trade are small beside the 1500% of growth to be explained, or even the 100% in the first century in Britain. Trade is anyway too old and too widespread to explain a uniquely European—even British—event. One can appeal to “dynamic” effects, but these too can be shown to be small, even in the case of the gigantic British cotton textile industry. And if small causes lead to large consequences, the model is instable, and any old thing can cause it to tip. Ronald Findlay and Kevin O’Rourke favor foreign trade on the argument that power led to plenty. But domination is not the same thing as innovation. In short, the production possibility curve did not move out just a little, as could be explained by trade or investment or reshuffling. It exploded, and requires an economics of discovery, not an economics of routine exchanges of cotton textiles for tea.