Speenhamland and Free Trade

As the debate about free trade versus protectionism rages on, it may be useful to cast an eye back to another period in history when protectionism was en vogue.

Karl Polanyi wrote about it eloquently in his The Great Transformation. The essential tension that made protectionism ultimately unworkable, he wrote in 1945, was that capitalism requires three conditions to be met to function properly: labour should find its price on the market (unhindered individual or collective negotiation of wages); capital and good can be exchanged unhindered (free trade without tariff and custom barriers); and the creation of money should be subject to an automated mechanism (an exchange rate established on the currency market or, previously, a fixed rate such as the gold standard).

To implement but one, free trade, without the other (to tether one currency to another without means of adjusting, or to deny labour to find its price in free and fair negotiations) is to set capitalism up to fail. Polanyi illustrates his argument with a detailed analysis of the Speenhamland practice, something that figures little in history books but was discussed and debated vigorously in 19th century economics. Speenhamland was essentially a system of wage subsidy, where wages would be supplemented by a form of outdoor relief by local taxpayers. In essence, Polanyi writes, it achieved two counter-productive things. First, it undermined the ability of people to negotiate their wages (individually or collectively) to accomplish a fair price for their labour. But, second, it also tied their labour to a specific place, making it impossible to move. The Speenhamland system thus created capitalism without a free and unhindered labour market.

Polanyi's example is instructive for the current debate on protectionism and free movement of people. Allowing goods, capital and services to move freely but denying the same right to people will achieve only one thing, to undermine capitalism to function properly. A fair market economy can only work smoothly if all three mechanisms of exchange (labour, goods and money) can move freely. Restrict one and you will cripple the others.