Other blog posts in Free exchange's economic history series have included the economic consequences of the Black Death, the importance of institutions and what Adam Smith really meant. In the festive spirit, we ask our readers to suggest the economic-history topic that we should write about next. Please add your suggestions in the comments and we will choose the most popular.

MANY people think that governments play only a negative role in relation to the economy: enforcing irritating regulations, taxing individuals, spending inefficiently. Economies do better when the government gets out the way.

But economic history complicates that assumption. Some argue that without active government intervention, markets as we know them today would never have emerged.

Governments can pursue “industrial policy” to boost economic growth, as we showed in our first blog post of the economic history series. The government of Otto von Bismarck, German chancellor in the late 19th century, implemented protective duties on foodstuffs and manufactured goods (but kept free the importation of raw materials for use in industry). Research by Kevin O’Rourke, then of Trinity College Dublin, suggests that protectionist economic policies like Bismarck's were generally successful. Tariffs were positively associated with growth in ten countries—from Germany to America—from 1875 to 1914.

So far, so uncontroversial. Industrial policy can spur economic development. But others provocatively argue that governments have played a more fundamental role. Some (particularly those historians that slide towards Marxism) assert that economic development—indeed, the creation of capitalism itself—was only possible because governments were willing to upend traditional societies and forcibly create markets.

How did this work? Karl Polanyi, an Austrian historian, argued in “The great transformation” that the English state was instrumental in creating markets. Take the example of labour. Before the reform of the Poor Laws, enacted in 1834, poor relief to the working classes was generous: organised on a local scale, handouts were unconditional and intended to preserve social stability. People could get away without working and slacking off was not frowned up. The idea of economic efficiency was alien. In this system, Polanyi reasoned, a labour market as such did not exist.

That all changed in 1834. Rules on accessing poor relief got tougher: for example, the government decreed that the unemployed could not receive cash hand-outs, but would have to go to a workhouse instead. (For more on the history of poverty thinking, see our Free exchange column from the summer.) Spending on poor relief plummetted. The prospect of unemployment became much less attractive. Consequently, people had to rely more on earning money through working for a wage. Hence, according to Polanyi, the state helped to create a market in labour.

Governments also helped to create a market in land. Under acts of “enclosure”, which probably started in the middle ages, the government transferred common land to private ownership. The Highland clearances in Scotland were one such example; others have interpreted the actions of the English state during the Great Irish Famine of the 1840s in a similar way. This “colossal theft” (as Karl Marx described it in “Capital”) of land by private landowners from communal tenants forced people to become wage-earners, rather than just living off the land. Marxist historians tend to refer to this idea as "primitive accumulation": the massive land-grabs during colonialism are interpreted in a similar way.

Other, more radical, historians see the state as playing an instrumental role in getting markets going. In some accounts, it seems like the state only exists for the benefit of greedy capitalists. Michel Foucault, possibly the most radical of the lot, writes in an early work that state institutions like hospitals, asylums and prisons emerged in the early part of the industrial revolution in order to play an explicit economic function. During periods of economic prosperity, the working classes could be let free to contribute to economic growth: that helped to keep wages down. But during downturns, the working classes were locked up (madness or criminality, argues Foucault, were effectively invented to justify so doing). Locking up the poorest people minimised the risk of violent rebellion:

Cheap manpower in the periods of full employment and high salaries; and in periods of unemployment, reabsorption of the idle, and social protection against agitation and uprisings.

Foucault’s later works—such as his most famous book, "Discipline and Punish"—are not quite so reductionist; although a whiff of what some leftists call “structural Marxism” persists. But Foucault’s general conclusion is similar to Polanyi’s and Marx's: governments were crucial for creating capitalism.

Most people think that governments simply exist to soothe the worst ravages of free markets (or to slow them down). Economic history shows that in different ways states have instead helped to get markets going. The invisible hand was far from inevitable.



Reading list:

Block, F. (2003). ‘Karl Polanyi and the writing of the Great Transformation’. Theory and society, 32(3), 275-306. [A useful critique of Polanyi’s theory and methodology].

Brundage, A. (2002). 'The English Poor Laws, 1700-1930'. Palgrave. [Excellent discussion of the Poor Laws but very detailed. Mark Blaug's discussion on the 'Mythology of the Old Poor Law' is probably a better introduction for someone interested in this topic].

Foucault, M. (1965). 'Madness and civilization: A history of insanity in the age of reason'. Pantheon. [Seems rather dated now (Foucault's Marxism is much less subtle in this work compared to his later research) but an important early contribution to Foucault’s work on state institutions].

Lotz, W. (1907). 'The commercial policy of Germany'. The Journal of Political Economy, 15(5), 257-283. [Good outline of Bismarck’s policies].

O'Rourke, K. H. (2000). 'Tariffs and growth in the late 19th century'. The Economic Journal, 110(463), 456-483. [Quantitative study of the impact of tariffs—with some surprising results].

Polanyi, K. (1944). 'The great transformation: The political and economic origins of our time'. Victor Gollancz. [Readable and hugely influential study on how capitalism came to be. Often very short on evidence, but a gripping read].

Thompson, E.P. (1963) 'The making of the English working class' Victor Gollanz [A mammoth book which all historians claim to have read (but few probably have). Fights against the top-down approach to history which ignores the voices and interests of the working classes (a methodological problem which this blog post is certainly guilty of making), rescuing ordinary people from "from the enormous condescension of posterity"]