Trade and Empire, 1700-1870

literature very often (if understandably, given the realities of mercantilism) conflates two
conceptually distinct issues, namely the impact of trade in general, and the effects of
countries’ colonial policies. In what follows, we therefore look at the mechanisms
through which, it has been suggested, trade might have influenced growth. We then
consider the link between imperialism per se and economic welfare, using the Iberian
loss of its Latin American colonies as a "natural experiment". Finally, we take a more
detailed look at the various links between trade and the central economic event of this
period, the British Industrial Revolution.

3.2. Mechanisms

How might trade have affected growth during this period? One crucial issue is
whether or not all resources in the economy were fully employed. With full employment,
allocating resources to exports had an opportunity cost, as they could alternatively have
been used in production for the domestic market. While a "comparative advantage"
perspective leads to the conclusion that trade was beneficial for economies, it also tends
to imply that the gains involved were small (since the Harberger triangles measuring the
gains of moving to free trade from some protectionist equilibrium are small relative to the
size of the overall economy). Thus Thomas and McCloskey (1981) among others
conclude that if the British economy had been shut off from trade at the time of the
Industrial Revolution, it would have produced a lot less cotton, but a lot more of other
commodities, and sustained only a small welfare loss.

An alternative Smithian "vent for surplus" perspective assumes that resources in
many 18th century economies were unemployed, or at least, underemployed, and that
trade could bring these resources into productive (or more productive) employment at
little or no opportunity cost. In this case, trade would have a bigger effect on economic
growth, as O'Brien and Engerman (1991) argue for the British case. Faced with these two
alternatives, some researchers have adopted the eclectic solution of providing upper
(unemployment) and lower (full employment) bounds for the impact of trade or empire
on particular economies. Nevertheless, both approaches tend to produce small numbers,
with the estimated contribution of empire or trade to growth remaining modest compared
with the expansion of the domestic market. This is not surprising, since both approaches

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