On Financial Parasites in International Mercantile-Imperialism.

A few days ago (recall) I noted that I am re-reading J.A. Hobson’s (1902) Imperialism: A Study. Hobson is a fierce critic of imperialism, which he always treats as a “perversion” of (true) nationalism (p. 9). As I suggested Hobson’s main argument against imperialism is rooted in opportunity costs: imperialism benefits a small financial clique as well as those classes (mostly educated) connected to the military and imperial administration (and defense industries) at the expense of ordinary citizens in the home country.

In fact, it’s important to Hobson’s main argument that neither trade nor population growth can really explain modern imperialism. The latter has effectively stopped growing, and the former is not really profitable with the imperial domains.

In fact, as an aside, Hobson basically discovers that rich imperial countries mostly trade with each other: “the greatest increase of our foreign trade was with the group of industrial nations whom we regard as our industrial enemies, and whose political enmity we were in danger of arousing by our policy of expansion — France, Germany, Russia, and the United States.” (Part I, Ch. II, p. 38) This fact was only explained by Krugman’s New Trade Theory (which focused on economies of scale and the nature of the home market). Hobson offers no explanation. (To what degree Hobson’s views on trade are consistent has become a minor scholarly industry (see here). But my own view is that he is a Smithian free-trader.)

So if trade or “business policy” really can’t explain the enormous expansion of imperialism, what can? Now, Hobson does not ignore that some particular businesses and interest groups gain greatly from empire. But these do not amount to much in a wealthy country like Great Brittain. Rather, according to Hobson it is the enormous profitability of imperial finance that is the main driver of “energetic empire.” He summarizes his argument as follows:

First, that the income derived as interest upon foreign investments enormously exceeds that derived as profits upon ordinary export and import trade. Secondly, that while our foreign and colonial trade, and presumably the income from it, are growing but slowly, the share of our import values representing income from foreign investments is growing very rapidly.

It seemed unintelligible that the enormous costs and risks of the new Imperialism should be undertaken for such small results in the shape of increase to external trade, especially when the size and character of the new markets acquired were taken into consideration. The statistics of foreign investments, however, shed clear light upon the economic forces which are dominating our policy. While the manufacturing and trading classes make little out of their new markets, paying, if they knew it, much more in taxation than they get out of them in trade, it is quite otherwise with the investor.

It is not too much to say that the modern foreign policy of Great Britain is primarily a struggle for profitable markets of investment. To a larger extent every year Great Britain is becoming a nation living upon tribute from abroad, and the classes who enjoy this tribute have an ever-increasing incentive to employ the public policy, the public purse, and the public force to extend the field of their private investments, and to safeguard and improve their existing investments. This is, perhaps, the most important fact in modern politics, and the obscurity in which it is wrapped constitutes the gravest danger to our State. (p. 60)

In a narrow segment of private interests, manages to secure public protection for their investments abroad. That is, what Hobson notices is that gain is privatized, but that it is made risk-free due to the imperial power that the public is made to extend for private gain: “Aggressive Imperialism, which costs the tax-payer so dear, which is of so little value to the manufacturer and trader, which is fraught with such grave incalculable peril to the citizen, is a source of great gain to the investor who cannot find at home the profitable use he seeks for his capital, and insists that his Government should help him to profitable and secure investments abroad.” (p. 62)

Or as he re-summarizes: “Investors who have put their money in foreign lands, upon terms which take full account of risks connected with the political conditions of the country, desire to use the resources of their Government to minimise these risks, and so to enhance the capital value and the interest of their private investments.” (p. 62) Basically the very wealthy manage to use public political power to socialize risk for private gain (p. 379)

Now, Hobson recognizes that much imperialism is driven by non-pecuniary motives. So, he treats finance as the “governor of the imperial engine, directing the energy and determining its work.” (66) It does this through control of the press and public opinion, and thereby becomes, “parasites on patriotism.” (p. 67) And this has allowed the unscrupulous and ambitious to use any pretext to propose punitive expeditions abroad. (p. 378) It gives wealthy financial classes an incentive to interfere in the political conditions abroad. (p. 379)

In the near future, I want to focus more on Hobson’s solution in light of his own diagnoses. But here I want to telescope out. As I noted a few days ago, Hobson (1858 – 1940) can never be a hero to us; he was one of the few eloquent guardians of Cobden’s, John Bright’s, and Adam Smith’s liberal ideals—he is, after all, one of the founders of social liberalism alongside Hobhouse. In fact, Hobson echoes Bright’s emphasis on democracy as a means to generate a countervailing power to sectional, imperial interest.

Hobson’s developed theory of imperialism is, in fact, highly indebted to the framework first developed by Smith and eloquently articulated by Bright. It’s worth quoting a passage from The Life of John Bright by George Macaulay Trevelyan:

[Bright] contents himself with the broad view that the internal affairs of Egypt were not our business, that the war against the Arab was therefore unjustifiable, and that it would lead to obligations and difficulties of which no man could foresee the end. He was not so foolish as to suppose that we could come out of Egypt as easily as we could go in. He disliked the ‘city influences’ at work, and he did not think that we ought to involve ourselves in a series of wars in order to collect the debts of bondholders...

Why does this matter? Since Thatcher’s (1983) Bing Bang and Clinton’s (1999) repeal of The Glass–Steagal act it has been pretty much a dogma that liberalism supports liberalization of finance. But this does no justice to the fact that from the start liberalism has diagnosed the role of (speculative) finance in facilitating Mercantilism’s dangerous foreign policy at the expense of public interest. Smith and Bright are the most passionate free traders, but both allow violations on natural liberty when it comes to finance. They recognize that financial industries and investments are a mechanism to acquire potentially dangerous, asymmetric political influence.

Faced with American First it is tempting to go all in on cosmopolitanism with free trade, open borders, and free movement of capital in the context of a global legal authority. This is, in fact, my own instinct. But as I have been tentatively suggesting through the last few months, there is an authentic liberal tradition from Adam Smith onward that embraces free trade and free movement of peoples with a slower moving functional integration, home-grown democracy, and policies that prevent concentrated power in industry (through anti-trust), in income (through estate taxes) and finance (through regulation and taxes). This liberal tradition is prudential and realist in its international orientation with a healthy suspicion of territorial expansion and land-grabbing.