Donald Winch
Free Trade, Cosmopolitanism and the Political Economy of National
Identity
An open lecture given at Kyoto University, Thursday, May 7, 1992.
I am pleased to have been invited to spend the next six weeks with the Faculty of Economics at
Kyoto University under British Council auspices. I am also grateful to Professors Sechiyama
and Yagi for their efforts in organising this visit. This is my third trip to Kyoto during the last
five years, and I hope it will help to establish closer relations with my own university. As some
of you will realise, however, I am not perhaps the best person to forge closer relations between
economists here and in Sussex. Although I was originally trained as an economist at the
London School of Economics and later at Princeton University, and although I have served
as an editor of the Economic Journal and continue to serve as the Publications Secretary
of the Royal Economic Society, my research and teaching is now concentrated entirely on
intellectual history, with a strong tendency to move sidewards from the history of economics
into the history of social and political ideas. It is certainly a long time since I have done any
research that relates to current economic issues.
Moreover, my interpretation of how intellectual history should be written prevents me
from claiming that it is highly relevant to modern economics. There have been periods
when theoretical debate in economics has been conducted on the territory cultivated by
historians of economics, the best examples being: Adam Smith's quarrel with his mercantile
and physiocratic predecessors; Marx's work on theories of surplus value; the arguments by
the early marginalist as to whether they were engaged in a revolutionary or evolutionary
process of intellectual change; Keynes's attempt to express his own position in terms of
a rejection of 'classical economics'; and the debates over capital and growth theory in the
nineteen-sixties which turned on the relative merits of classical and Marxian approaches
to value and distribution compared with neo-classical models. But these examples, in my
opinion, also demonstrate how, while you can often derive challenging historical hypotheses
1
from such disputes, good history rarely comes from its use as a weapon in methodological
and ideological controversies.
Good history of economics, like any other form of intellectual history, comes from
consistent efforts over a long period to pose intelligent historical questions about past writers
and their texts. It also entails detailed detective work of a biographical or bibliographical
kind that, like all empirical work, can only be of interest to those who already want
to know the answers. In formulating interpretations of historical texts it is often more
important to examine the contemporary context than it is to focus on supposed similarities
or dissimilarities between the past and the present. Since I hold these rather old-fashioned
views of history you will appreciate why I cannot proselytize for the history of economics
as an essential element in the education of economists. If economists are interested in past
economists and their texts, so much the better; but I do not feel able or willing to argue that
they ought to be interested. Nor, incidentally, have I ever thought of what I do as a purely
antiquarian pursuit, as though I was engaged in rearranging and dusting the specimens in
some kind of museum of quaint and outmoded economic models. The authors I have studied,
and the kinds of questions that have moved them to write as they did, seem alive to me, and it
is my duty as an historian to make them come alive to readers. But that presumes the readers
have an interest in the first place, which is something one cannot assume among economists
today. To use another metaphor, if I were a military historian I would not assume that today's
soldiers are necessarily going to be interested in learning how past battles were won or lost.
Soldiers who are fighting today's battles may wish to spend more time on improving their
weapons and tactics in other ways.
To judge solely from the number of historians of economics I have met in Japan, the field
is in a much healthier condition than it is in Britain. I understand some of the reasons for
this state of affairs, and I hope to learn more during my visit. By inviting me to spend this
period at Kyodai you have done me the honour of expressing an interest in my research, but I
shall not abuse your hospitality and tolerance too much by speaking about it on this occasion.
2
Instead, I have chosen a speculative topic which may be of more interest to economists, even
though it largely consists of historical reflections and raises more questions than it answers.
***
I have used 'political economy' in the title of this lecture because I wish to combine politics
and economics in order to speak about something I have called, rather vaguely, "national
identity". But there is an immediate tension or paradox involved in trying to do this which
I can best express by raising two questions. The first flows from a well-known distinction.
Whereas science, by definition, is a cosmopolitan enterprise, many other fields of study are
characteristically local or national in their sympathies and interests. The distinction is best
expressed in the language of the nation where the underlying issues were first formulated
clearly, namely German, where a dividing line was drawn betweenNaturwissenchaftenand
Geisteswissenchaften. Thus if we speak about Japanese or British biology or physics, it is
only to describe a non-essential feature of these natural sciences -- the nationality of those
doing it and the national institutions within which they are organised to do so. There may also
be divergent cultural patterns of interest for which an historical explanation may be required,
but on any matter of common concern there ought not to be any essential differences in
what counts as knowledge. My first question then becomes: does economics conform with
this scientific model, and if so, has it always done so? Alternatively, is economics more
like other cultural branches of study -- literature, for example -- where we expect there to
be greater national, religious and ethnic differences, and where nationality and historical
tradition matters as much, if not more than the cosmopolitanism I have associated with the
natural sciences. My second question is more directly about economics: while a politics
of national identity makes perfectly good sense, an economics of national identity is more
difficult to conceive -- far more so than,say, an economics of national survival or even an
economics of national sovereignty. Is this a comment on economists and the kind of discipline
that economics has become, or does it say something about the nature of the world in which
we live?
3
Both of these questions are too large one for anyone to answer in a single talk, and I am
fully aware of my own lack of qualifications as a mere historian of economics for providing
answers. Many years ago, when I was a pupil first of James Meade and secondly of Jacob
Viner, I was better qualified to tackle the question -- or so I thought. At that time, in the
nineteen-fifties and sixties, international economics was coming to grips with the economics
of customs unions, free trade areas, and full economic unions involving the harmonization of
monetary and fiscal policies. Before the European Economic Community made these matters
a practical reality, international economics was trying to work out how to analyse the various
categories of gain or loss resulting from regional or partial movements towards the goal of
multilateral free trade, and how to measure those gains and losses.1 Multilateral free trade
represented the bench-mark against which we felt that it was relevant to judge the effects
of regional economic union on the welfare of individual members or on the world at large.
We were aware of the various arguments that had been advanced for protection -- the valid
and invalid ones, judged from an economic point of view -- but we remained confident that
multilateral free trade was the essential bench-mark, despite the fact that it existed only as
an ideal state.
What this reflects, of course, is the overwhelmingly liberal character of the tradition
of economics in which I was educated -- a tradition which was particularly strong in the
Anglo-American world, though not as firmly rooted in some other European countries, where
it had been challenged by alternatives deriving from the German historical tradition and
by Marxism. Regional movements towards free trade were merely second-best, which is
why the name given to this branch of applied welfare economics was the theory of the
second best, and why we thought it was the duty of an economist to speak up for a truly
cosmopolitan perspective. My teachers, Meade and Viner, though not agreed on all matters
connected with the economics of customs unions, were prime representatives of this liberal
cosmopolitanism in economics. The economic nationalism of the interwar period in which
1
As an illustration of work that was then central see J. Viner, The Customs Union Issue, New York, 1950; J. E. Meade,
The Theory of Customs Union, Amsterdam, 1955, an expansion of his Problems of Economic Union, Chicago, 1952 and
part of his larger work on The Theory of Economic Policy, Oxford, 1951-5; and T. Scitovsky, Economic Theory and Western
European Integration, London, 1958.
4
they reached manhood provided their original battleground; and they were both active during
and after the Second World War in trying to create a world order that would minimize the
scope for economic nationalism. The monuments to this world order were, of course, the
International Monetary Fund, the World Bank, and the General Agreement on Trade and
Tariffs. I can now see that I was educated as an international economist at a peak period
in liberal economic optimism. The only dark clouds on the horizon were those associated
with the economics of underdevelopment in the Third World, and even here we felt that
wisdom would eventually prevail if the post-war institutions of the IMF, IBRD, and GATT
were allowed to function as intended.
I do not know how Japanese economists of my generation were being educated in the
nineteen-fifties. That is something else I hope to learn about during my stay in Kyoto. I
suspect that many of them were being educated in a different way, with a stronger emphasis
on the power disparities at work in international economic relations, possibly deriving from
Marxist sources. The view of the world from Britain's position on the edge of the Atlantic
rim was also probably different from the view of the world from Japan's position on the edge
of the Pacific rim -- at a time when Japan was about to launch itself on its meteoric career
as a world economic power. Perhaps you will tell me during the question period what these
differences were and are. I mention my own educational formation as an economist only
because it could help you to understand what I now want to say as an historian.
***
What I have called the liberal cosmopolitanism of the economics I learned was built into the
fabric of the discipline in Britain at its outset. That is something I have come to appreciate
more as a result of becoming a historian. International trade theory was very much the
creation of such figures as Adam Smith, David Ricardo and John Stuart Mill; it was an
extension to world trade of what Smith called the 'system of natural liberty'. Free competition,
free movements of goods, and free movement of labour and capital, both within and between
nations, were the central clues to economic growth and prosperity. The fact that Smith chose
a plural title for his work,An Inquiry into the Nature and Causes of the Wealth of Nations,
5
was a sign of his acceptance of the Enlightenment belief that criteria could be formulated to
establish comparative national performance on a universal or cosmopolitan scale.
It was never quite as simple as this sounds because in the course of articulating the case
for free trade, the economists I have mentioned encountered many of the difficulties that
have become familiar ever since. There were arguments within the political economy camp
about exceptions to free trade on grounds of national security, with Malthus, for example,
tentatively going further by trying to formulate the case for protection of Britain's capacity
to maintain a higher degree of self-sufficiency in subsistence goods than free trade would
allow. The British classical economists also had to deal with the problems of trade between
large and small nations, rich and poor nations, and the complex issues connected with the
British empire and colonisation. 2 There was even a debate provoked by Robert Torrens on
the wisdom of establishing an imperial zollverein or customs union. They were also alert to
the welfare problems of gauging the impact of free trade on different groups of producers
within Britain. There would be gainers and losers, though the fact that Smith had identified
economics with the study of long-term economic growth and had made consumers' interests
rather than producers'interests the test of wise and just policy helped his classical followers
to give confident answers on the distributional questions.
Free trade became the normative goal according to which policies should be judged,
and the fact that other nations in Europe and North America, even Britain's ex-colonies in
Australia and Canada, did not accept free trade in the same thorough-going way as Britain
was taken as a sign of their misfortune, probably due to defects in the kinds of political
systems they had. Thus when Australia was colonized in the 1830s it was seriously suggested
that alongside immigrants from all the other trades and professions there should be "at least
one good Political Economist at each settlement to prevent us from devising an Australasian
tariff."3 If Britain was isolated in being the only major economic power to accept the scientific
logic of free trade after she had removed the last vestiges of protection by repealing the Corn
2
The last of these topics was the subject of my doctoral dissertation, written, as I then thought, as a kind of holiday from
international economics; see Classical Political Economy and Colonies, London, 1965 and translated into Japanese in 1975
3
Edward Gibbon Wakefield, A Letter from Sydney(1829), Everyman edition, London, 1929, p.85.
6
Laws in 1846, so much the worse for the rest of the world. I can illustrate the dominant mood
by citing two highly confident, even arrogant, statements made by John Eliot Cairnes and
Walter Bagehot respectively in the 1870s.
"Great Britain, if not the birthplace of Political Economy, has at least been its early home,
as well as the scene of the most signal triumphs of its manhood. Every great step in the
progress of economic science... has been won by English thinkers; and while we have led
the van in economic speculation, we have also been the first to apply with boldness our
theories to practice. Our foreign trade, our colonial policy, our fiscal system, each has in turn
been reconstructed from the foundation upwards under the inspiration of economic ideas;
and the population and the commerce of the country, responding to the impulse given by the
new principles operating through these changes, have within a century multiplied themselves
manifold.4
Bagehot was no less enthusiastic a few years later when celebrating British achievements
in the hundred years since the Wealth of Nations appeared.
"In that time [political economy] has had a wonderful effect. The life of almost every one
in England -- perhaps of every one -- is different and better in consequence of it. The whole
commercial policy of the country is not so much founded upon it as instinct with it. Ideas
which are paradoxes everywhere else in the world are accepted axioms here as results of it.
No other form of political philosophy has every had one thousandth part of the influence on
us; its teachings have settled down in to the common sense of the nation, and have become
irreversible.5
As I have already hinted, the victory being celebrated here was not achieved without
some challenge from other positions. In addition to the spokesmen for various agricultural
and industrial interests who stood to lose from free trade, there were others who from the very
beginning of the history of economics as a discipline mistrusted its conclusions precisely
because they were internationalist or cosmopolitan. The best English illustration of this can
4
"Political Economy and Laissez-Faire", reprinted in Essays on Political Economy: Theoretical and Applied, London,
1873, p.232.
5
Economic Studies, London, 1908, p.1.
7
be found in a statement by the romantic poet and conservative political theorist, Samuel
Taylor Coleridge, who frequently complained in the early decades of the nineteenth century
about what he called the "denationalising" tendencies of political economy, explaining what
he meant by going on to say that it had made "love of our country a foolish superstition".
Coleridge's romantic friends believed that "nationality" was bound up with self-sufficiency:
"The nation that cannot exist without the commodity of another nation, is in effect the slave
of that other nation."6 (I feel sure that you could supply me with Japanese statements of a
similar kind.) Coleridge's protest against political economy will indicate why I said just now
that it was easier to conceive of a politics of national identity than an economics of national
identity: he was correctly diagnosing what was to become a dominant feature of British
economic thinking among those who were dedicated to the development of the science.
British economists were behaving as though they were leading members of an international
scientific community, where the rules of scientific inquiry guaranteed that the truths of
political economy were truly cosmopolitan. They were also acting and speaking as though
nationality was of little account and as though economists, unlike politicians, had a duty to
speak for common humanity, with no presumption that the welfare of individuals of other
nationalities was any less weighty than those of one's own nation.
It was Friederich List, building on the ideas of the American founding father, Alexander
Hamilton, who articulated the largest challenge to the conclusions of the English science. He
also provided a useful word to describe its individualistic tendencies and failure, as he saw
it, to recognise the importance of national entities, namely "cosmopolitical economy". The
object of List's book on The National System of Political Economy (1841) was to unmask
what he saw as the bogus origins and influence of this English way of thinking. List was
arguing, in effect, that Britain had achieved her national identity by means that denied it
to others -- the latecomers in the race to acquire the power that went with manufacturing
capacity. As one might expect, neither List nor any of the other spokesmen for protectionism,
such as Henry Carey, had much influence on British thinking, though John Stuart Mill gave
6
Table Talk, edited by H. N. Coleridge, London, 1838, pp.288-9.
8
cautious recognition to the "infant-industry" argument for tariffs. Apart from this, Carey's
and List's arguments were simply regarded as a reversion to mercantile and pre-scientific
fallacies.
The climax of the British mood of confidence in free trade came in the writings of
those who founded what became known as the Manchester School in the eighteen-fifties
and sixties. Thus Richard Cobden and John Bright held that Britain had an almost Christian
mission to use its unilateral acceptance of free trade as an example that would convert the
rest of the world in the interests of international peace and harmony. By then, however,
the free trade movement had ceased to be closely associated with original work in the
science of political economy; it had become a political or quasi-religious movement engaged
in propaganda. The challenge to the free trade position in the late nineteenth century
Britain came from an ex-Liberal politician, Joseph Chamberlain, who led the Tariff Reform
campaign -- a campaign that took sustenance from fears that Britain was rapidly losing its
industrial hegemony to Germany and America. Economists were recruited on both sides
of a dispute that culminated in the defeat of Chamberlain's proposals in the 1903 election,
but it is doubtful if any new economic arguments for or against tariffs came from them.
They rehearsed the old arguments against a different background. When economists declared
in favour of upholding the policy of free trade, or of departing from it, they were either
disagreeing about the empirical evidence or giving largely political reasons for their final
choice.
The single most durable contribution by an economist to the tariff reform debate was
Alfred Marshall's Memorandum on Fiscal Policy of International Trade(1903). It was
an undogmatic attempt to show that as far as Britain was concerned the change in her
competitive position did not warrant a change in her policy on free trade. Her older industries
needed the stimulus that came from cheaper and better imports, and the relevant elasticities
of demand for her products made it unlikely that she would be able to use tariffs to shift
the burden of taxation to foreigners. The older British economists may have been overdogmatic, but the only error of which they were guilty, in Marshall's view, was in not
9
recognising the force of the "infant-industry" case for tariffs in other countries who were
industrializing after Britain. The earlier free trade case, Marshall said, "ignored the fact that
protection to immature industries is a very great national good; and that, though that good
may be bought at too great a cost, it would have been foolish for nations with immature
industries to adopt England's system pureand simple."7 But it was also Marshall's conclusion,
based on a special empirical study which he made of the effects of American and German
protectionism, that any net benefit these countries had derived from this policy had been
greatly outweighed by the corruption introduced into their political systems in the course of
making tariff policy. Similarly with regard to imperial unity and the other political benefits
held out by Chamberlain's case for tariffs and preference to imperial suppliers, Marshall was
unconvinced that the benefits should be purchased at the likely cost to British consumers,
especially those in lower-income groups.
I mention this because I would not like to convey the impression that British economists
were guilty of the kind of political naivety one finds in the writings of Cobden and Bright.
From the very beginning, in the work of Smith, one finds him taking a non-utopian view
of his task of advising policy-makers. Given the power of established producers' interest
groups, he was not hopeful that free trade would ever be accepted in Britain. He endorsed the
idea that "opulence" would have to be sacrificed for national security; and he also addressed
himself to the important second-best questions raised by free trade. Thus he did not think it
would be prudent for a small nation to make a unilateral move in this direction: "The very
bad policy of one country may thus render it in some measure dangerous and imprudent to
establish what would otherwise be the best policy in another." He considered the short-term
disturbances of removing trade restrictions as well as such realistic issues as the use of tariffs
as a retaliatory device to force reductions by other countries; he also dealt with the case of
countervailing duties on imported goods to offset the effects of domestic taxes on importcompeting products.8 Smith was not legislating for some idealised world.
7
8
Official Papers by Alfred Marshall, London, 1926, p. 392
On this see my "Science and the Legislator: Adam Smith and After', Economic Journal, 93, 1983, especially pp.505-11.
10
***
Nevertheless, it is still possible to argue that British economists did not fully confront the
political economy of national identity and sovereignty again until they were faced with
conflicts between national and international economic policy objectives in the interwar
period. Keynes was the first economist to pose these issues in dramatic form during the
nineteen-twenties: why should Britain, suffering from high unemployment concentrated in
the export industries, subject its currency and interest rates to the international discipline
being set up for them by bankers under the gold standard, regardless of the political and shortterm economic costs of this policy? Notice that this was not a question directly raised by
free trade, but by the international constraints imposed on national governments by the world
monetary system -- a system in which Britain was once the dominant banker, but where her
capacity to act in this fashion was under threat as a result of the rise of the United States
as a financial power and the weakening of the British economy before and after the First
World War. The problems to which Marshall had given a relatively optimistic answer had
reappeared in more pessimistic monetary guise. Britain's difficulties in the interwar period
were to lead, first, to the forced abandonment of the gold standard in 1931, and subsequently
to the abandonment of free trade in 1933. Keynes did not agree with the tariff response,
but it was undoubtedly a significant sign that economic recovery was to be sought by more
nationalistic methods in the country that had previously shown the greatest commitment to
internationalism. At this time Keynes came under fire from more orthodox members of the
economics profession for appearing to support economic nationalism, though later in his life,
of course, Keynes returned to the full liberal internationalism of his upbringing when he
played a major part in designing the post-1945 international institutional order.
In recent decades Keynes and Keynesians have been heavily criticised by monetarists,
public choice theorists, and those who march under J.M.Buchanan's banner of
"constitutional economics". The criticism has centred on the charge that Keynes politicized
economics,thereby undoing the greatest achievement of classical economics in the late
11
eighteenth and nineteenth centuries.9 It is certainly true that Keynes, in arguing for selfconscious management in monetary affairs, was undermining a position that was strongly
entrenched among central bankers, Treasury officials, and many orthodox economists. This
position was summarized by one of them as follows: the great virtue of the gold standard
was its "knave-proof" qualities, meaning that inflation, deflation, interest rates and exchange
rates were best treated as technical issues involving "automatic" mechanisms and rules of
the game that were non-discretionary. (It is similar to one of Marshall's arguments against
tariffs, namely that the political case for free trade was simply that "it is not a device, but
the absence of a device."10) The position also entailed a sceptical view of the capacity of
democratic governments to act responsibly on these vital economic matters: how could you
allow the international value of a currency to be determined as part of the promises and
counter-promises of a contest for support between political parties? A public choice version
of this would ask why you should expect any bureaucratic organisation to be interested in
achieving any goal defined as the public interest?
It is true that Keynes did not have a high opinion of central bankers and the rules of the
gold standard game; he welcomed the relaxation that came with the downfall of the gold
standard; and he also supported active fiscal policies by governments during the depression.
But it would be a mistake to think that this led him to believe that complex issues of economic
management were best left to the political processes at work in democratic governments.
The following statement is fairly typical of his attitude: "I believe that the right solution will
involve intellectual and scientific elements which must be above the heads of the mass of
more or less illiterate voters."11 He was advancing the claims of another form of technocracy,
one that wasassociated with the new economics he was working out at the time, and through
which he hoped to convert, first his fellow-economists, and secondly politicians and the civil
service. But there is some truth in the charge that Keynes politicised economics, even if
9
For a brief statement of the position see Buchanan's article on "constitutional economics" in The New Palgrave Dictionary
of Economics
10
Official Papers, p. 394.
11
The Collected Writings of John Maynard Keynes, VIII, p. 295. For more evidence on this see my "Economic Knowledge
and Government in Britain" in M. Furner and B. Supple (eds), The State and Economic Knowledge; The American and
British Experience, Cambridge, 1990, pp. 40-70.
12
he did not wish to politicise economic policy-making. Keynes spent a good deal of time
showing that supposedly "knave-proof" mechanisms were not automatic; that they involved
discretion, and that discretion opened up possibilities of choosing between alternative policy
goals, between inflation and deflation, between unemployment and exchange rate stability,
and so on.
I mention this historical episode because it has returned to haunt members of the
European Economic Community as they move towards ever closer economic union, with the
prospect of a single currency in sight and the removal this year of all remaining restrictions
on the movement of goods, services, and factors of production across EC internal frontiers.
In principle at least, the economics of these developments is fairly straightforward; they turn
on the case for regional movements towards free trade, and they only become difficult if one
thinks that the trade-diverting effects are more serious to the world at large than the tradecreating and trade-expansion effects of regional economic union. If these problems are not
thought to be serious, an economic union represents the ultimate goal of the cosmopolitan
political economy I have been describing, which has always found it more congenial to treat
nations as though they were aberrant regions. After all, the origin of that branch of the subject
called international economics, can be found in the following questions: why does a theory
of value that works in the case of interregional trade not apply to trade between nations? Why
do the competitive forces that work within nations to determine where production should best
be located from the consumers' point of view not work between nations? The answer lies,
of course, in the half-realistic assumption of early nineteenth-century Europe that whereas
both goods and factors are mobile within nations only goods are mobile between nations. If
we apply this to Europe after 1992, and after whatever form of monetary union emerges, we
arrive at a Europe of economic regions rather than nations. Interregional economics takes
over from international economics.
The politics of the situation, however, are a good deal more complex. For various reasons
connected as much with history and culture as economics, Britain has had more difficulty
than other members of the EC in accepting the pace and scale of the movement towards
13
closer economic and political union. It may be significant, however, that Mrs Thatcher's antiEuropean stance played a major part in her downfall within the Conservative party, and that
the issue has hardly featured in the recent British election campaign. Outright opposition to
what is described as the loss of national sovereignty in economic affairs is confined to the
far right and far left of the British political spectrum. Indeed, if Keynes were alive today he
would be struck by the irony of a situation in which it is the anti-Keynesian monetarists who
are closest to the "nationalist" position he adopted for a time during the interwar period. The
monetarists are bitterly opposed to Britain's entry into the European monetary system because
it curbs her freedom of action over interest rates and monetary policy. On the far left the
fears are mostly focussed on the loss of autonomy by a socialist government to engage in the
kind of national planning and protection to vulnerable groups that their kind of anti-market
socialism makes preeminent. They are, if you like, in a comparable position to East German
communists who can now point to the disastrous effects of union with an economically more
powerful economic neighbour at an exchange rate that took no account of the enormous
disparities between the two parts of Germany. It has brought massive unemployment at a
time when the old political apparatus of East Germany has been dismantled.
Leaving these extreme conditions and positions to one side, however, there are still large
political problems for those in the centre. For different reasons perhaps, the Conservative,
Liberal Democratic and Labour parties in Britain have all accepted membership of the
European exchange system, with the two largest parties reserving their position on a single
currency and other features of closer union. They accept the loss of freedom to devalue
or pursue a divergent monetary policy in the belief that the system involves closer control
over inflation. Although Labour supporters have traditionally been most suspicious of central
bankers -- whom they do not regard as being famous for their responsiveness to the needs
of the unemployed, the under-educated, and the sick and the poor -- they have now placed
their trust in what is called the Social Fund and the Social Chapter of the EC, where the fund
is to compensate regions harmed by free trade and the chapter regulates working conditions
throughout Europe. They see this as a European way of obtaining the kinds of welfare
14
commitments that Conservative governments have attempted to dismantle in Britain. For
this very reason, the Conservative party is largely opposed to the Social Chapter. But there
are still major unresolved political issues here. Does membership of the Exchange Rate
Mechanism entail being tied to the policies of the German Bundesbank? Or will it open the
door to a genuinely European-wide monetary authority? Has there ever been an international
economic order that has not required, if only implicitly, a dominant single country capable
and willing of exercising leadership, whether it has been London, New York, Bonn or Tokyo?
If so, can one really imagine a collaborative and consensual method of managing currencies?
Can monetary management by a central European bank be divorced from control over other
aspects of public finance such as government deficits and borrowing requirements? To whom
would the members of this authority be accountable? How far would their powers extend?
As these questions indicate, the largest problems are still those centring on bureaucracy
and political accountability in a Europe that has still not developed strong parliamentary
institutions that command any respect or legitimacy. It is one thing to accept the disciplines
implied in membership of an exchange rate system, and even British national pride in the
pound sterling is unlikely to remain a barrier to acceptance of a single currency if there is
a danger of Londonlosing its present position as a banking centre. But the loss of political
control by a British Parliament is far more sensitive, especially when Britain has no tradition
of written constitutions and bills of rights interpreted by judicial authorities. What authority
will emerge that is capable of dealing with the social and economic disparities that exist today
and could -- in what may be a long adjustment period -- be widened by the effect of closer
union? The difficulties of achieving German reunion gives us some idea of how difficult these
disparities are to deal with, even when there is a clear national governing body, a common
language, and the memories of previous nationhood.
Since I do not have answers to any of these questions, I will conclude this lecture in
historical vein. In the light of some British fears about joining any monetary union dominated
by Germany, I cannot resist the temptation to cite List's prediction in 1837 of the likely effects
of a British-dominated free trade world.
15
"All England would ...be developed into one immense manufacturing city. Asia, Africa,
and Australia would be civilised by England, and covered with new states modelled after the
English fashion. In time a world of English states would be formed, under the presidency of
the mother state, in which the European Continental nations would be lost as unimportant,
unproductive races. By this arrangement it would fall to the lot of France, together with Spain
and Portugal, to supply this English world with the choicest wines, and to drink the bad ones
herself; at most France might retain the manufacture of a little millinery. Germany would
scarcely have more to supply this English world with than childrens' toys, wooden clocks,
and philological writings...It would not require many centuries before people in this English
world would think and speak of the Germans and the French in the same tone as we speak
at present of the Asiatic nations."
I leave you to consider whether you would give this high or low marks for its predictive
qualities. In my opinion it was roughly true for only the first third of the period that has
elapsed since 1837. What has happened since is common knowledge: the English-speaking
world, first in Britain and more recently in North America, has lost much of its earlier
dominance, and Germany, despite its present difficulties with reunion, has become the major
economic power in Europe. One of the Asiatic nations referred to so dismissively by List,
Japan, now leads the way, bringing other Asiatic nations in its train. Does economics have
the power as a science to analyse, let alone predict, what will happen in the next century?
What will be the balance between national identity and cosmopolitanism in the next wave
of developments? It would be fitting if it was a Japanese economist who showed us how to
deal with these questions.
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