In case you missed this post by Dietz Vollrath when it was in the daily links:

Great Britain and Laissez Not-so-Faire Economics: I recently finished State, Economy, and the Great Divergence by Peer Vries. It’s a comparison of the activities of the state in Great Britain and China in the period running up to and including the Industrial Revolution, roughly 1650-1850.

Vries critiques the standard view on the role of the state and the divergence between these two places, encapsulating that view in the following:

In the Smithian interpretation of British economic history, that fits in quite neatly with the Whig interpretation of Britains overall history, the primacy of Britain and its industrialization are by and large regarded as the culmination of a long process in which Britains economy increasingly became characterized by free and fair competition and in which government increasingly tended to behave according to Smithian logics.

….

For those who endorse them, the predicament of imperial China, that it did not industrialize, has always been quite easy to explain. They only need to refer to the fact that China was characterized by some kind of oriental despotism. This notion has a long pedigree whose beginnings can be traced back at least to Marco Polo.

The alternative that Vries proposes is that China is far more “Smithian” than Great Britain in this period, in the sense that it operated a very hands-off government that mainly served to provide some subsistence insurance to its population, while Great Britain had a relatively large, intrusive, and active government managing its economy and actively interfering in the process of industrialization. ...

Vries then spends a good portion of the rest of the book laying out the evidence on government expenditures, taxes, employment, and transfer payments to support the idea that Great Britain had a much more intrusive state than China in this period. ...

Drawing on the excellent War, Wine, and Taxes by John Nye, Vries also talks about the attitude of Britain towards free trade... Compared to Britain, China was much closer to a free trade nation, declining to interfere or promote imports or exports actively. ...

Mercantilism, as practiced throughout this period in Great Britain, was not simply a fascination with collecting gold. The British government actively looked to strengthen manufacturing (of imported raw materials) and used military and naval power to open markets with that purpose in mind. To do this it taxed heavily, borrowed heavily, and spent heavily.

What to make of this? There is no necessary link between strict laissez-faire policies and growth. The first industrial nation in the world was anything but laissez-faire, and it intervened far more deeply into its economy than China, which functioned in some sense as the idealized “night watchman” state of Adam Smith. There is little to no evidence that government “just getting out of the way” leads to development. The interventions Great Britain did make certainly resulted in massive monopoly rents to small groups of people at times. So let’s not go overboard in the other direction and conclude that massive state interventions are necessary or optimal. But it is valuable knowing just how un-laissez-faire Britain was during this period.

Why did Britain take off even with all this government interference? Vries doesn’t say this explicitly, but I think his answer is partly that large-scale industrialization has big fixed costs. I want two things before I undertake big fixed investments: a large market and low risk. The British government used the high taxes to fund a military that could ensure large markets around the world, and could ensure that those markets remained open so I could earn enough to pay off my fixed cost. That military (directly or by proxy) could also actively ensure that other markets did not develop competitive industries, again ensuring that I could earn enough to make the fixed costs worth it. Without the market size and low risk, maybe British capitalists are not willing to create the large-scale industries that drove the IR. In that sense, the large size of government was necessary to the industrialization of Britain.