[Market Economy Guide] The Bitter Lesson of the Corn Laws

Grain Import Restrictions → Higher Prices → Pressure for Wage Increases → Economic Deterioration

…Ricardo: “If you engage in free trade, prices will fall too” … Advocated the repeal of the Corn Laws

In economics, comparative advantage refers to the ability to produce a good or service at a lower opportunity cost than other producers. In other words, it means having a relative competitive edge compared to others. The first person to formulate the concept of comparative advantage was the British economist David Ricardo. Ricardo opposed Britain’s Corn Laws at the time and advocated free trade, citing the theory of comparative advantage as his basis.

Why Ricardo Opposed the Corn Laws

The Corn Laws were laws implemented in Britain in 1815. Their core provisions prohibited the import of foreign agricultural products and imposed tariffs on wheat, effectively forcing it to be traded above a certain price level. Under the Corn Laws, if wheat was priced at 80 shillings or less per quarter (about 12.7 kg), imports of foreign wheat were banned, and it could not be imported at a price lower than the legally designated amount. Naturally, the British people could buy grain only by paying at least the price fixed by law. In other words, the Corn Laws were a form of protectionism: laws enacted by the British government to maintain domestic grain prices against cheap foreign grain and protect British agriculture.

The Corn Laws Were Protectionism

However, after their enactment, the Corn Laws triggered much controversy even within Britain. At the time, Britain was undergoing the Industrial Revolution, and its population was growing explosively. Moreover, grain demand had become extremely high because of the Napoleonic Wars (1803–1815). In those circumstances, with foreign grain not being properly imported, grain prices in Britain skyrocketed. Before the Napoleonic Wars, wheat had cost around 46 shillings per quarter, but during the wars it rose to as high as 177 shillings. After the wars ended, the price fell to 60 shillings, but with the Corn Laws in force, it still remained higher than before the outbreak of war. As a result, the British people had to pay high prices for bread for the sake of landlords and agricultural capitalists, and the Corn Laws functioned as a political tool that most reliably secured the interests of those landlords and agricultural capitalists.

Ricardo was deeply outraged by the Corn Laws, which exploited the vast majority of the British people while concentrating benefits on only a small minority. He believed that by depriving people of the right to buy grain cheaply through free trade, the Corn Laws harmed both wage laborers and the industrial capitalists who employed them. When wheat prices rose, wage laborers found even a piece of bread burdensome to buy, and this in turn created pressure on industrial capitalists to raise wages. Ultimately, industrial capitalists had little choice but to reduce employment and investment as their profits fell, and the artificial price restrictions imposed by the Corn Laws produced the side effect of hindering Britain’s industrial development and economic growth.

Protecting Domestic Agriculture?

What else can one call a law designed to protect domestic industry that in reality causes social division and obstructs economic development, if not a case of burning down the whole house just to catch a flea? Accordingly, many people within Britain, including Ricardo, opposed the Corn Laws and called for their repeal. Of course, in Parliament, lawmakers repeatedly rejected repeal and fought desperately to preserve the Corn Laws for the benefit of vested interests. But after 1845, when the Great Famine in Ireland caused countless people to starve to death, the Corn Laws were finally repealed. It was 1846—more than 30 years during which the many had been forced to sacrifice for the few.

After the repeal of the Corn Laws, Britain liberalized trade in most sectors. This was because it came to regard free trade based on comparative advantage, just as Ricardo’s theory held, as the most efficient way to run an economy.

Make Watches and Exchange Them for Wheat

The liberal economist Ludwig von Mises left behind an interesting remark about comparative advantage. He said that the cheapest way for Switzerland to produce wheat was to manufacture “watches.” That is because it is most economical for Switzerland, which has a comparative advantage in watches, to make watches and export them to Canada, a major wheat-producing country. Free trade through fields in which each side holds a relative advantage—that is, a comparative advantage—can benefit everyone.

In this way, free exchange based on comparative advantage can produce results that benefit all. In a market economy, even those who may be weak in every respect can naturally enter into exchange and gain benefits through comparative advantage. Through comparative advantage, a market economy does not allow the strong to monopolize everything; rather, it enables people to live together in mutual coexistence.

■ Please remember

The Corn Laws were laws implemented in Britain in 1815. Their core provisions prohibited the import of foreign agricultural products and imposed tariffs on wheat, effectively forcing it to be traded above a certain price level. They were enacted to maintain domestic grain prices against cheap foreign grain and protect British agriculture, making them a form of protectionism.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 곡물법의 뼈아픈 교훈

Author: Sung-no Choi

Date: 2020-03-30

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=9&idx=22517