Rise and Fall of Empires in the Industrial Era: A Story of Shifting Comparative Advantages

Rise and Fall of Empires in the Industrial Era: A Story of Shifting Comparative Advantages. Roberto Bonfatti & Kerem Coşar. NBER Working Papers 30295. July 2022. DOI 10.3386/w30295

Abstract: The last two centuries witnessed the rise and fall of empires. We construct a model which rationalises this in terms of the changing trade gains from empires. In the model, empires are arrangements that reduce trade cost between an industrial metropole and the agricultural periphery. During early industrialisation, the value of such bilateral trade increases, and so does the value of empires. As industrialisation diffuses, and as manufactures become more differentiated, trade becomes more multilateral and intra-industry, reducing the value of empires. Our results are consistent with long-term changes in income distribution and trade patterns, and with previous historical arguments.

IV Conclusions

“The Foreign and Colonial Offices are chiefly engaged in finding new markets and in defending old ones... Therefore, it is not too much to say that commerce is the greatest of all political interests, and that Government deserves most the popular approval which does the most to increase our trade and to settle it on a firm foundation.” (Joseph Chamberlain talking to the Birmingham Chamber of Commerce in 1896; cited by Ferguson 2004, p. 210)

“[in the mid 1950s] There were signs, particularly through the growth of intraindustry trade and the redirection of overseas investment, that the expansion of the international economy would take place increasingly between advanced economies. [...] Colonial trade, like colonial investment, was becoming less attractive. The pattern of specialisation that had promoted economic integration in the world economy since the nineteenth century was beginning to weaken, and the empires that were its political expression were losing their rationale.” (Hopkins 1997, p. 256).

In this paper, we have added to an otherwise standard trade model “empires” –institutional arrangements that reduce the cost of trading between an industrial center andbthe agricultural periphery. Using this model, we have shown that the emergence and later diffusion of industrialisation, as it occurred in the 19th and 20th century, can explain both the rise and fall of empires in the industrial era. In addition, increasing product differentiation may have further contributed to the demise of empires by incentivising intra-industry trade between developed countries. The above quotes, by prominent British historians, suggest that our model formalises arguments that have been in the historical literature for some time. A similar argument is made for France by Marseille (2015), who posits that French big business evolved from supporting the empire before World War I, to seeing it as a waste of money by the 1950s, largely due to its falling importance in world trade.

We finish with a discussion of how to interpret the model in light of historically relevant factors that we abstracted from. We haven’t allowed for the redistribution of the gains and costs from empire, neither between nor within locations. This suits our current purposes well, since a growing pie will make empires more sustainable, and a shrinking pie less so, however the pie is divided. A richer model, however, would accommodate factors such as coercion through military force, state capacity building and nationalism in the agricultural periphery, and cultural distances across locations. These were important factors in the history of empires. Military force also clearly evolved with industrialisation, since 19th century industrial products such as the Maxim gun gave the industrial centers a military lead which was perhaps comparable to that enjoyed by the first conquistadores in the 16th century.

Finally, the combined assumptions of imperfect specialisation, a spacious world, and lack of discriminatory trade policies against non-empire countries, shut off all strategic interactions amongst the industrial centers. If any of these assumptions is dropped, then to enlarge one’s empire will improve an industrial center’s terms of trade, to the detriment of all the others. This is the context in which competition amongst the industrial centers—such as the Scramble for Africa—could be studied.