Economic historians have a growth preoccupation. The Industrial Revolution and its causes play the leading role in most prominent books in the field. And there are many other works that seek to explain the absence of an industrial revolution elsewhere in the world.
It is refreshing therefore to read a book that is not about the causes of industrialization but its consequences. If we reach back to the past, say, 200 or more years ago, two dramatic transformations are visible: one is the abundance of material goods and transformative technologies due to industrialization; the second transformation is the rise of large, modern, welfare states.
Walker Hanlon’s book The Laissez-Faire Experiment addresses this second transformation. He asks two fundamental questions: ‘First, how well did limited government in mid-19th century Britain work? Second, why was limited government abandoned in favor of the more interventionist government found in the U.K., and essentially all other developed countries, today?’
Hanlon’s argument is elegant and simple and it is grounded in standard economic theory.
The main problem facing the British economy in the early 19th century was dismantling the inefficient policies of the pre-Napoleonic war era, i.e., the fiscal-military state of the 18th century which protected large land-owners and relied on local and ad hoc institutions. Hanlon suggests that laissez-faire was an appropriate economic philosophy in this context: ‘across the first half of the nineteenth century, Britain’s laissez-faire system was successful. Economic growth was booming, and the benefits were accruing not only for the rich but also for average workers. Technological progress continued at a rapid pace. As a global power, Britain was unmatched.’
But, as the Industrial Revolution unfolded, the costs associated with this policy of non-interference mounted. For example, rapid urbanization brought new problems of overcrowding, sanitation, disease control, and pollution. There was a large health penalty to urban living in the 19th century.
Hanlon provides a compelling empirical assessment of the economic problems that led British policymakers to adopt a more interventionist series of policies. Increasingly severe market failures in the form of externalities from pollution, or asymmetric information in a range of markets, made government intervention potentially welfare enhancing.
The book is admirably clearly written. First, Hanlon presents the relevant economic analysis, which will be familiar to those who have taken Intermediate Micro or Public Economics, outlining the main explanations for market failure: information problems, monopolies, credit constraints, public goods, and coordination problems. Each chapter then considers different applications of the general principles, and provides a survey of relevant literatures in economic history, for example the literature on child labor regulations or urban public health.
The chapter on unemployment insurance, for example, condenses a tremendous amount of information and evidence into just a few pages. One charge that classical liberals have made against the modern state is that unemployment benefits and insurance crowded out the many forms of charity and private insurance that were commonplace prior to the welfare state.
Indeed, Hanlon discusses the wide array of traditional and occupation-based non-government forms of insurance available prior to 1850. He then, however, explains how the rise of large, geographically concentrated industrial agglomerations based on a single industry, such as cotton textiles in Lancashire, changed the problem of insuring workers. Neither family, locality-based, nor occupation-based forms of unemployment insurance, could deal with a general downturn in cotton textiles.
Overall, the book offers an exemplar of how to write a modern work of economic history. I wouldn’t hesitate in recommending this book. Beyond an economic history audience, it is an important book for anyone interested in understanding the rise of the modern state in the 19th and 20th centuries.
Nonetheless, as I discuss below, I want to push the implications of the book’s arguments a little further and explore some aspects of the debate which Hanlon perhaps neglects.
Having lavishly praised The Laissez-Faire Experiment as a work of economic history, my more critical comments will focus on the implicit political economy of the book and its treatment of economic ideas.
First, and I think intentionally, Hanlon’s treatment of what he calls ‘a laissez-faire philosophy’ is remarkably flat. I say intentionally as Hanlon clearly wants to focus on the economic history. From this perspective, too much engagement with the literature on the history of ideas would be distracting. So, he uses laissez-faire as a short-hand to refer to what is often called classical liberalism, essentially the idea of limited government and a general presumption of liberty.
This is entirely understandable and indeed defensible. Nonetheless, there is a price to taking this approach, which I will attempt to cash out below.
First, there is the use of the term laissez-faire as a shorthand. Classical liberalism has never been identical to laissez-faire because classical liberal thinkers have always recognized areas where government intervention is required.
Hanlon doesn’t really defend his use of laissez-faire as shorthand. But this approach overstates the degree of elite consensus and underestimates the extent to which there were competing intellectual traditions in 19th century Britain.
It is true that many of these positions came together in favoring a limited state in the mid-19th century, but it is precisely by recognizing that they were not a coherent ‘philosophy’ that we can appreciate why some of the leading figures also came to push for more technocratic interventions in society. A case in point would be Edward Chadwick. Chadwick was both a utilitarian follower of John Stuart Mill and a founder of modern public health and policing and he was more than willing to abrogate private property rights to achieve an improved societal outcome.
Hanlon’s narrative is of liberal, laissez-faire inclined policymakers and thinkers confronting the reality of widespread market failure and externalities and gradually adapting their policies and intellectual principles. He writes that ‘government intervention during the nineteenth century was not the work of a group of ideological collectivists. Rather, many interventions were the work of laissez-faire adherents who nevertheless believed that intolerable or inefficient conditions exist and were open to the possibility of experimenting with various forms of government intervention’. My feeling is that a deeper investigation of the ideas and writings of the classical economists and associates like Chadwick will reveal a more forthright commitment to policies of amelioration and improvement, rather than what is conventionally meant by the term laissez-faire.
Moreover, as Colin Holmes documented more than 50 years ago, something recognizable as a doctrine of laissez-faire did exist in the mid-19th century but it was never the animating principle of the British elite or government. Opposition to great government involvement in society could be animated by traditional ‘small c’ conservative principles. We don’t get a sense of this opposition (no John Ruskin or Thomas Carlyle, for example) in The Laissez-Faire Experiment.
Acknowledging this does not weaken Hanlon’s argument, but it would strengthen our understanding of the issues at hand in 19th century Britain.
My second comment concerns the treatment of political economy in the rise and fall of laissez-faire.
In general, Hanlon’s treatment is broadminded. He doesn’t assume that the existence of widespread market failures automatically translated into policies that could by assumption correct for those failures. Aware of the role played by both ideology and interests, he rather argues that the market failures that were exacerbated by industrialization ‘created opportunities for efficiency-enhancing government intervention’. Many factors would be critical in determining the extent to which these opportunities were realized.
Hanlon provides a similarly nuanced discussion of the shift towards more government activism at the end of the 19th century. He draws on recent historical scholarship to discuss the extent to which the example of the German welfare reforms and the pressures of war and imperial competition pushed policymakers away from laissez-faire.
Nonetheless, this part of the argument was less compelling than the first part of the book where Hanlon provides a systematic account how the new industrial economy generated all kinds of new externalities.
There is a reason for this. The type of evidence that Hanlon does a great job of assembling is very convincing in demonstrating the existence of market failures. He combines rigorous evidence with economic theory. But he doesn’t have an equivalently powerful framework for discussing how and why certain policy decisions were made.
In his conclusion, Hanlon tackles some of the big questions raised by his account: ‘is there evidence that the expansion of British government intervention . . . was misguided?’. Hanlon provides evidence that this was not so. He contends that policymakers followed experience and were not led by public opinion.
There is a risk here that the political economy of the 19th century does not get the full attention it deserves. Political economy is about heterogenous preferences and Hanlon’s framing in terms of an unmet nascent demand for education or for regulations abstracts from these conflicting preferences. Hanlon appreciates that government policies do not always achieve their aims. But political economy considerations are only occasionally mentioned, for example in explaining the failure to tackle coal pollution.
In contrast, conflicting political interest groups were prominent in earlier accounts of the rise of the state in late 19th century England. Holmes noted that what was traditionally seen as the high-point of laissez-faire ideology, the mid-19th century, was in fact a period of centralization and increased regulation, a point that Hanlon’s narrative and data in fact substantiate. But the role of conflict between different interest groups is not a major theme in The Laissez-Faire Experiment. And this also limits the ability of Hanlon to speak to developments in the 20th century, when much larger and more interventionist states emerged.
None of these comments take away from the fact that The Laissez-Faire Experiment is a great work of economic history and a major achievement. All subsequent scholarship will have to engage with it and will no doubt build upon its findings.
‘The Laissez-Faire Experiment: Why Britain Embraced and Then Abandoned Small Government, 1800-1914’ by W. Walker Hanlon was published in 2024 by Princeton University Press (978-0-691-21341-5). 504 pp.
Mark Koyama is Professor of Economics at George Mason University. He writes extensively about economic growth and institutions.