The importance of a free lunch in capital formation
Did the British empire generate super-profits? And if 'Yes', were they sufficient to prime or power the industrial revolution?
Thirtankar Roy’s recent declaration that the Great Divergence debate is ‘almost dead’ prompted me to turn to Kenneth Pomeranz, the author of the book of the same name.1 The American academic (his nationality has relevance) is also referenced in Prabir Bhattacharya’s excellent paper on the subject, ‘India and the rise of Britain and Europe’, which Alan Lester made use of in his considered response last week to the Institute of Economic Affairs’ propagandist tract, Imperial Measurement.23 This is a serendipitous moment.
The IEA ‘book’ (let’s call it what it is: a pamphlet) promotes the idea that the profits of enslavement in the British Empire made no significant contribution to Britain’s industrialisation. The pamphlet ignored other contributions derived from imperial conquest or coercion: cotton, tobacco, opium, indigo, land tax, rubber, etc., except as footnotes; it was promoted enthusiastically in the Daily Telegraph, Daily Express and by History Reclaimed and critiqued in the Guardian by Will Hutton4. The goal was to promote neo-liberal development policy but the oddity here is that such a position can still be taken against all the evidence, and only in part by ignoring that evidence. Perhaps this is because in Britain the conquest of empire and the industrial revolution are taught in two separate classes and rarely if ever connected together, one as a far-away merchant and military adventure, the other a technology-driven revolution inspired by individual genius and seated firmly at home, in New Lanark, Coalbrookdale and Stockton. This is exactly the point that Kemi Badenoch makes, armed with the IEA pamphlet, to the leaders of developing nations: “it was British ingenuity and industry, unleashed by free markets and liberal institutions, that powered the Industrial Revolution and our modern economy”. Focus on that, not colonialism.
Pomeranz asked the essential question that the IEA pamphlet fails to pose correctly or answer truthfully, viz. “Overseas coercion must have made some contribution to Western European capital accumulation — but was it large enough to matter?” He considers the possible answers, but cannot come to a firm conclusion, and here we might have to acknowledge a failure of British historiography, past and present, that has given the IEA its liberties to deceive. Pomeranz continues:
“Patrick O'Brien has calculated in an often-cited article that the fruits of overseas coercion could not have been responsible for over 7 percent of gross investment by late eighteenth-century Britons (though a later article leaves open the possibility of a higher figure); and for Europe as a whole the figure would have been far less.
But in a preindustrial world, this could have been quite significant. Typical rates of growth in output were much slower than in most industrial economies today, and it has been suggested (though not proved) that preindustrial capital goods were on average far less physically durable than they are now (being made of different materials and more often exposed to the elements). This would suggest that a much smaller proportion of the year's production that was not consumed became net capital accumulation than is the case today: most went to offset the high rate of depreciation in the capital stock… [he quotes Kuznets’ models of premodern economies, and continues…]
… In such a context, even a relatively small "free lunch" — an increment to gross savings that was not purchased at the expense of consumption — could lead to a very significant increase in net capital accumulation. For instance, if we imagine an economy that conformed exactly to Kuznets' second model of a preindustrial economy (gross investment of 26 percent of production, net of 1.32 percent), raising gross investment by the 7 percent O' Brien concedes was possibly due to "super-profits" would more than double the year's net increase to the capital stock. Conversely, one would not have to lower the amount of gross capital formation by very much to wipe out most or even all net capital accumulation; either way this hypothetical 7 percent addition could have been very important.”
Now, here’s the rub:
Granted, one must say "could have been," not "was." For the purposes of this argument, O'Brien has stipulated that commerce with the periphery was twice as profitable as "normal" commerce, while he rightly points out that nobody has yet shown any such thing.”5
And so: nobody has yet shown any such thing. Why not? This really should not be so difficult, and it is essential to the argument. The IEA pamphlet dodges the issue, saying: ‘the transatlantic slave trade was no more important for the British economy than brewing or sheep farming, but we do not usually hear the claim that ‘brewing financed the Industrial Revolution’. This is a gross over-simplification of course, probably deliberate. For the author, supposedly, importance relates to GDP, not surplus; sheep and beer are attempts to obscure the role played by super-exploitation and the super-profits obtained through chattel slavery, debt bondage and indenture; it is the surpluses they generate and their impact on capital accumulation, not gross product, that matters. Nick Robins makes the point in relation to India and China: ‘Drawing on recent analysis carried out by Utsa Patnaik, the Asian drain grew as a proportion of Britain’s gross domestic product from 1.7 per cent in 1770 to 3.5 per cent in 1800. Crucially, from 1800 onwards the Asian drain began to match the enormous extraction of wealth that Britain had historically achieved from the slave-based sugar plantations of the West Indies. Together, the combined surplus in 1801 was equivalent to over 86 per cent of Britain’s entire capital formation from domestic savings.”6 This is the free lunch.
The credence given to IEA’s counterfactual argument is hardly O’Brien’s fault, more a longstanding failure of British historiography in general. Have we tip-toed around the amounts of wealth extracted, the mechanism by which it has been transferred, the uses to which it has been put and the consequences for those exploited - the last of which are often the hardest to dispute. The contribution of overseas coercion — using Pomeranz’s phrase — to Western European and especially British capital accumulation is a work pitted by lacunae, distorted by mirrors and wreathed in the smoke often created by the original participants with gains to conceal or political objectives to pursue. The pioneering thinking has been done by Indian and West Indian historians and economists: Naoroji, Dutt, Patnaik, Williams, together with important work on the data by Chaudhuri. But the data remain a difficult issue. Where are the sources that show with reasonable accuracy, confidence and consensus that profits at the periphery were twice as profitable as ‘normal’ commerce? Or how that wealth was repatriated? Or the obscure mechanisms by which Britain captured almost the entire value of India’s trade for its own current account?
The opium trade demonstrates these problems; it is a minefield of inconsistent data, but also a most worthy subject for Pomeranz’s thought experiment; it is a free lunch of awesome proportions. As Bhattacharya suggests: ‘the opium trade would appear to have been at the very centre of the evolution of the world economy in the nineteenth century’; and indeed this is also Amitav Ghosh’s thesis in Smoke and Ashes, in which he examines the influence of the trade on North American capital formation and financial structures in some detail.
Data is available. J.F. Richards’ tables derived from East India Company accounts include both costs and revenues of opium production from 1782 to 1859 and indicate a net profit margin averaging 70%.7 These are super profits, wildly in excess of those available from sheep farming in Chipping Camden or brewing in Burton-on-Trent. They are derived from monopolistic control of a captive (addicted) market and the debt bondage of Bihari tenant farmers who were paid for their labour one third of the price paid by traders to opium growers on the Malwa plateau, east of Gujarat8.
According to Richards (perhaps significantly, also an American academic) the gross revenue achieved by the Company was £126 million over 77 years, with an average annual revenue of £1.6m (rising year by year from £0.17m in 1782 to £6.86m in 1858). How much money is that? As a commodity, in terms of economic cost and relative share of GDP, the aggregate revenue achieved in 1851-59 was, apparently, equivalent to £156bn at 2022 constant prices, so enough for all phases of HS2!9 I don’t trust that number particularly, or my ability to parse it (and this is the Calcutta Exchange price: it doesn’t include the estimated 20% gross revenue uplift that should be added to account for the price charged at Lintin Island by Dent or Jardine to cover the cost and profit of their smuggling operations).10 What I do trust is that, if we take the 1845 Bengal opium net profit of £2.23m, and add to it an estimated £1.75m EIC gain from transit duties on Malwa opium, we arrive at a net gain of £4m, and so from the profits of just one colonial crop we have more than half of the entire sum of capital invested in railways in Britain — £7m — in that very same year.11 This is the free lunch. And, if we want to add desert, and make this up to the full 100%, we simply pop in the average £3m per annum derived from private trade in Asia and remitted by individuals back to Britain12.
So, there is reason to believe — this may not be ‘proof’ — that commerce with the periphery was (at least) twice as profitable as "normal" commerce; the evidence needs testing and there is a project here for somebody — if it has not been done already. The question is, how might the surplus created have been used: for consumption, or capital investment? I am not an economist, my subject is cultural history. Lately, this has been with a particular interest in the role that East India Company networks — both family and professional — have played in influencing technology, art and design in Britain in the 19th Century. This has been useful in understanding likely responses to the free lunch, and it has become apparent that for those returning from Calcutta and Madras in the 1820s, 30s and ‘40s, often with substantial savings, there was an intense interest in the new technologies of reproduction, manufacture, communication and transportation. Company administrators often became enthusiastic participants in the advancement of the arts, science and engineering. The strength of their networks at home and abroad gave them powerful influence over their peers, too. My suggestion would be that — unlike their forbears the nabobs — in the 1840s they were more likely to invest in railways than in buying titles, tulips or Titians (the enviable choices presented by Pomeranz).
Here are some examples. David Ogilvy, born in Calcutta, the son of the head of the Indian Medical Service, was during the great railway boom in the early 1840s and afterwards invested in and director of a dozen railway, rail financing and related hotel companies, ending with the world’s first underground railway, the Metropolitan Line, and starting with the London, Woolwich and Gravesend Railway in 1844, over a route that ran via Blackwall which is of course the site of the East India docks. Fellow investors on the provisional committee included Francis MacNaghten (brother of William Hay MacNaghten, better known for his inflammatory role in the first Afghan war) and George Probyn, owner and captain of East Indiamen. MacNaghten and Ogilvy made a number of subsequent investments together, later joined by Francis’ other brother, Elliot, Chairman of the EIC, and William Prinsep. For many years Ogilvy was a director of the Great Western Railway and Prinsep, another member of the extended family and partner in Carr Tagore & Company of Calcutta, was on the board of the GWR as Company Secretary, using the expertise he had developed on the Hooghly River (running a Keiretsu-style conglomerate of docks, river steamers, mines and coal transport) to develop the GWR’s freight activities in the South Wales coalfield. William Carr, his former partner, had in the meantime taken over Prinsep’s position as Secretary of the South Devon Railway. In 1852 Stephen Lushington, formerly Governor of Madras, was Chairman of the proposed London, Chatham and North Kent Railway, alongside his son Charles Manners Lushington, both parties in a Bill before Parliament to amalgamate with the Canterbury and Dover Railway. Their cause was aided by Charles’ position as MP for Canterbury and by supportive and invested landowners in Kent, including Sir George Francis Robert Harris of Belmont, a cousin of Ogilvy’s wife Eliza, then Governor of Trinidad and a future Governor of Madras. In the same year Charles Lushington became a founding director of the company that purchased the Crystal Palace after the Great Exhibition, taking it from Hyde Park to Sydenham. Ogilvy joined him as co-director alongside Arthur Anderson, founder of the P&O shipping line. Ogilvy and Anderson, along with the architect Matthew Digby Wyatt, the orientalist water colourist David Roberts and whaler and art aficionado Elhanan Bicknell, were Vice Presidents of The Crystal Palace Art-Union, established “for the promotion of public taste in Fine and Ornamental Art”.
I hope the point is made. This is still just scratching the surface. A thorough review of Herapath’s Railway Journal and other railway and financial publications is likely to reveal that the activity of former EIC officials in the second phase of the industrial revolution in Britain was intense. Digby Wyatt was of course the architect of Paddington Station, Brunel the engineer. I have written elsewhere: “This convergence [of art, engineering and East India money] is now a largely forgotten moment in British history when an interdisciplinary movement in art and design emerged and achieved total immersion into popular culture, with an aesthetic that became so pervasive it is now all but invisible unless, one day in Paddington Station, you choose to look up and around and recognise the profound synthesis of orientalism, lightness, repetition and machine power that it represents.” Try it out on a steam excursion day.
In relation to India and China, there is valuable work to be done, to catch up with where we should have been already. Data is available, but often incomplete and inconsistent; it takes considerable work to discover, verify and normalise; currencies, bullion, values, volumes, weights, time sequences, points of exchange, duties, costs of labour or costs of transportation are expressed in every which way. How should this work be gathered together if it already exists, how completed if not, how aggregated in one place and kept up to date as new discoveries arise, ready for use when historical negationists exploit incomplete histories to serve the dark forces that pay their bills. Should we thank them for keeping us on our toes? Forcing us to do better work? And should this in some way be a collective response, rather than the work of individuals?
I think the answer is yes, but informally, not in an institutional way, not forced into grant dependency. Collective work adds to the speed, accuracy and reach of any effective response13. The sources that I have suggested are lacking may well exist. Collectively created and managed bibliographies would be a hugely valuable way of cooperating, were they to use open software14, and to be focused on key questions (rather than bloated and compendious, as they so often are) such as those questions Bhattacharya identifies in relation to the role of India and China in European economy and the great divergence - a debate that hasn’t gone away. These are: the transfer of wealth from India to Britain; the role of the Indian army in furthering British economic, military and political interests; the role of India as a ‘captive’ market for British goods; the role of India’s China trade in furthering British economic development and global influence; the role of India as a source of labour for other British tropical colonies.15
Another problem is methodology, and adjusting the balance: so less top down, more bottom up, looking as closely at the effects of empire ‘at home’ as on ‘the periphery’, to discover what has been exchanged — financially, politically and culturally: these are interdisciplinary questions, requiring a combination of knowledge and skills and therefore, once again, collaboration. Such a shift in the balance has been happening in studies of the Caribbean and enslavement, with the scrutiny of the inflow of sugar, tobacco and cotton money into the United Kingdom and of the application of funds arising toward finance or consumption; also the influence on economy and society of cultural exchange involving technology and the arts. There have been important inputs from initiatives such as the Centre for the Study of the Legacies of British Slavery, National Trust investigations, the Black Metallurgists study at UCL and the East India Company at Home research project. It should be no surprise that these have become the battlegrounds of the culture wars: they hold truths.
To that end, the last word should go to Pomeranz.
“… with or without a contribution from overseas coercion, late eighteenth-century Europe still did not have an edge in the way it amassed, protected, or deployed commercial capital (from whatever source) that can explain very much about its long-term path.
This places as much onus on the naysayers of the Institute for Economic Affairs to prove that Empire did not stimulate the industrial revolution, as on reasonable people searching for truth to prove that it did.
Roy’s statement was made in a thread on Twitter/X: https://x.com/RoyHistory1/status/1793549463128309865
Prabir Bhattacharya, India in the Rise of Britain and Europe: A Contribution to the Convergence and Great Divergence Debates, Journal of Interdisciplinary Economics 2021 https://journals.sagepub.com/doi/epub/10.1177/0260107920907196
Alan Lester, Imperial Mismeasurement https://blogs.sussex.ac.uk/snapshotsofempire/2024/05/23/imperial-mismeasurement/
Kristian Niemietz, Imperial Measurement: a cost-benefit analysis of western colonialism, 2024 https://iea.org.uk/publications/imperial-measurement-a-cost-benefit-analysis-of-western-colonialism/
Kenneth Pomeranz, The Great Divergence, 2001, Princeton 2021 edition, p187-8 (my emphasis)
Nick Robins, The Corporation that Changed the World, 2012, London p206
Richards, The Finances of the East India Company in India 1766-1859, LSE. A series of tables compiled in preparation for a major work on the fiscal history of India during the transition from Mughal to British rule in the region, shortly before Richards’ death. Richards’ paper ‘The Opium Industry in British India’ also includes data on opium exports in the Raj period: In the 1870s and 1880s an average of over ninety thousand chest left Indian ports every year, double the amount in the 1840s. In 1880-81, the Indian government calculated the net cost for the raw opium require to produce one export chest at Rs370. The average price that year in the auction sales at Calcutta was Rs 1,362, so a net profit margin of >72%. Profits would have been c.£9m per annum.
Markovits, The Political Economy of Opium Smuggling in Early 19th Century India
measuringworth.com This is using the economic cost comparator, “measured as the cost of a project as a percent of the output of the economy. This measure indicates the opportunity cost in terms of the total output of the economy. It can be interpreted as the importance of the item to society as a whole. This measure uses the share of GDP.”
John Crawford, A sketch of the commercial resources and monetary and mercantile system of British India, in Chaudhuri, The Economic Development of India under the East India Company 1814-58
Markovits op cit
George Prinsep, in Chaudhuri, op cit, p53
Alan Lester’s response was supported by Patrick O’Brien and Pat Hudson. I contributed suggestions for source material including Bhattacharya and Prinsep.
eg. by using Google docs and sheets
Bhattacharya op cit