How important was colonial trade for the rise of Europe?

I recently gave an interview to Garret M. Petersen of the Economics Detective Radio where we discuss some of my work. You can listen to it in this link: Money, Trade and Economic Growth in the Early Modern Period (interview).

In the interview, we discuss at one point the matter of how important was colonial (and otherwise intercontinental) trade for macroeconomic outcomes such as growth and urbanization in Europe. As I notice in the interview, my position on this (see my Cliometrica article here for details) stands between two extremes:

1. that of Eric Hobsbawm or Immanuel Wallerstein, who argue Europeans profited a huge deal from the colonies. This view is very prevalent in some political circles today, if not the person on the street, who often believes that “imperialism” or “colonialism” is what what made the West Rich, through exploitation of the rest of the world. It is related to “dependency theory”.
2. by contrast, that of many if not most economic historians, who believe that such trade (and the violence that came with it) didn’t matter very much for outcomes back in Europe.

The latter view became the orthodoxy among economists and economic historians after Patrick O’Brien’s 1982 paper, which in one of many of Patrick’s celebrated phrases, claims that “”the periphery was peripheral” for Europe. He concludes the paper by writing:

“[G]rowth, stagnation, and decay everywhere in Western Europe can be explained mainly by reference to endogenous forces. … for the economic growth of the core, the periphery was peripheral.”

This is the view that remarkable scholars such as N. Crafts, Deirdre McCloskey, or Joel Mokyr repeat today (though Crafts would argue cotton imports would have mattered in a late stage, and my reading of Mokyr is that he has softened his earlier view from the 1980s a little, specifically in the book The Enlightened Economy.) Even recently, Brad deLong has classified O’Brien’s 1982 position as “air tight”.

Among economists and economic historians more on the economics side, I would say that O’Brien’s paper was only one of two strong hits against the “Worlds-System” and related schools of thoughts of the 1970s, the other hit being Solow’s earlier conclusion that TFP growth (usually interpreted as technology, though there’s more to it than that) has accounted for economic growth a great deal more than capital accumulation, which is what Hobsbawm and Wallerstein, in their neo-Marxist framework, emphasize.

Let me be clear from the outset that the idea that it was European exploitation of foreign peoples that made it rich is, by itself, highly simplistic, and, in short, nonsense. The view held by many historians and members of the public, that colonialism essentially equals why the west is rich is evidently false. This view is seductive in part because of the nasty violent means and institutions (such as slavery), clearly immoral from the normative standpoint of our times, which was often associated with it. Even if partially true it fails to ask why was Europe the part of the world capable of doing this, which in turn raises the obvious suspicion that the deep causal factor lies elsewhere.

To a degree in the interview I react more against the opposite version, the point (2) above, the idea that it did not matter at all. But this is because I hold the fact that (1) is false as more evident.

One irony with all of this is that for more than a decade now, Patrick O’Brien has changed his mind. He has, indeed refereed to this in writing (as far back as 2006), and several people have witnessed seminars where the speaker mentions “as Patrick O’Brien has concluded, colonies didn’t matter for European development…” only to have Patrick raise and kindly but firmly inform the speaker of his change of heart.

Last year at the American Economic Association meeting in S. Francisco, my good friend Deirdre McCloskey even told me in disappointment how me she feels Patrick should go back to his old view! But I feel there’s good reason for his change of mind. Patrick certainly hasn’t adopted a Hobsbawm-Wallerstein type of position. He is now simply of the view that, at the margin, trade with other parts of the world did matter for European development. It’s does not explain everything, but it mattered a bit. This is what I find empirical support for in my own work.

My discussion has focused on the impact of trade for the European economy.  As Brad deLong notices, a different matter is that of whether such trade had an impact on other parts of the world (positive or negative). Patrick O’Brien sometimes refers to himself as a “mercantilist”. So I conclude by noting that some ideas related to the benefits of protectionism (once an idea almost banished from the realms of “serious” economics), especially as it applies to countries that are not at the frontier, has been taking hold among some young and very competent economic historians, such as Réka Juhász or Luigi Pascali. Perhaps I’ll write more about this in a future post.