Cheap Grain and Tariffs. A note on O Rourke and the late 19 th century Grain Invasion in Europe.

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1 Cheap Grain and Tariffs. A note on O Rourke and the late 19 th century Grain Invasion in Europe. This note replaces K. O Rourke s article The European Grain Invasion, , JEH, 57:4, 1997, pp But, please, do not hesitate to consult the paper. It is available over the web since Journal of Economic History (JEH) is an online journal. The Hecksher-Ohlin trade theory argues that an economy that opens up for trade specializes in exporting goods which are intensive in its use of factors of production that the economy is relatively well endowed with. As a consequence of trade nations will be better off compared to the no-trade alternative. Stolper-Samuelson agreed but pointed out that there were losers and winners within each nation when opening up from trade. Owners of scarce resources lost, while owners of abundant resources were the winners. The intuition is straightforward: if an economy starts exporting a commodity is does so because the world market price is higher than the domestic price in autarky so income for the exporting sector will increase. That economy will import goods which are cheaper abroad so price of the domestically produced substitutes of imports will fall. Eli Hecksher probably had the uneven resource endowment between New World and Old World economies in mind when he started to think about trade patterns. Here is the logic: New World economies such as US, Argentina and Canada were richly endowed with fertile land and products like grain were intensive in its use of land. So they had a comparative advantage in grain compared to labour abundant but land scarce Old World European nations, which had a comparative advantage in labour intensive goods, say, some manufactured goods. When Europe began to import grain prices fell for domestic consumers and producers. Kevin O Rourke investigates who the winners and losers were from that fall in prices in the period between 1870 and The fall in real prices was considerable, about 30 per cent. The analytical framework for his analysis is a so-called computable general equilibrium model, CEG. A CEG model not only looks at the direct impact on the grain producing sector of a fall in prices but at all other sectors, that is grain and non-grain agriculture, manufacturing and services for which standard production functions are specified, Labour can move between sectors and land is convertible to other agrarian uses than grain, such as pasture, i.e. livestock or cattle-breeding. When prices of grain fall then output, employment, wages and land-rents in the grain producing sectors in Europe will fall. The unemployed in the grain producing agriculture will seek employment in other sectors and will push down the general wage level, but less than the fall in prices. Land will be converted to other uses than grain, such as livestock. As a consequence of

2 falling wages profits in non-grain producing sectors will increase. A pattern of winners and losers emerge: Capitalists, that is non-farm property owners will gain because wages fall. Land-owners in grain production will lose because prices fall more than wages. If land can be easily put to other uses, such as pasture and other non-grain uses the fall in land rents might not be so strong. Wage earners, however, is a more ambiguous case because on the one hand nominal wages fall and on the other hand prices of food also fall so the what happens to real wages cannot be determined a priori. O Rourke asks two major questions in an analysis of three countries: Britain, France and Sweden. 1. Which were the effects of the fall in grain prices on sectoral output, sectoral employment, wages, profits and rents? 2. Given the fall in prices what are the effects of the protectionist measures introduced in France and Sweden? Both questions are important for the political economy of trade restrictions: Who is in favour of free trade and who is advocating trade restrictions? Table 7 from O Rourke s article, reproduced below, and is related to the first question. Fixed and Mobile indicates whether the CGE analysis permits for land in tillage, for example grain production, to be convertible to pasture, i.e. animal husbandry. If so, land is Mobile (flexible would be a better word, of course). If tillage land can only be used for grain and non-grain tillage land is Fixed. Not surprisingly, please consult Table 7, a fall in grain prices increases both output in pasture and non-grain tillage, P and NG while grain output and land rents fall, G, R and RT. The story is straightforward. A fall in prices for grain forces farmers to switch to other agrarian commodities. Since grain is an input in animal husbandry it will be stimulated by the fall in grain prices. (This is the Danish way out of the grain invasion which we will talk about next time on the basis of Ingrid Henriksen s paper). However, land rents cannot be stopped from falling even if the fall is smaller in case of mobile resources. What about wages? It turns out that the three nations investigated in O Rourke s paper referred to above, Britain, France and Sweden, react differently: In the UK real wages, WA and WNA, increased, in France real wages declined. The explanation that O Rourke offers does not stick. He argues that a sharp decline in an already small British agrarian sector does not depress wages much. However the proportion of the total labour force that is forced to move from agriculture to other sectors is as large in Britain as in Sweden but it is smaller in France! Despite that wages in Sweden did not change significantly because of the fall in grain prices.

3 France and Sweden (as well as Germany) reacted to the Cheap Grain Invasion by increasing tariffs from the 1880s. In Tables 8 and 9 reproduced below O Rourke looks at the impact of the tariffs by contrasting two historical experiments. First he asks what a free trade regime implies with a 33.7.percent decline in grain prices in France and a 26.8 percent decline in Sweden. The logic of the argument is similar to the one just discussed regarding Table 7. Given the free trade impact which is a counter-factual, since France and Sweden introduced tariffs, O Rourke then measures how the actual tariffs 26.5 and 22.4 percent respectively, muted the effect of the fall in prices. For example, Table 8 shows that in free trade grain output would have declined with 60 percent but tariffs made the decline much smaller, just 20 percent. The tariff impact indicates that due to tariffs grain output is 100 per cent higher than it had been without tariffs. Not surprisingly O Rourke finds that French and Swedish landowners gained from the tariffs and they anticipated the effect when they campaigned for protectionism. Capitalists lost, while French workers also gained. Swedish workers neither gained nor lost. In fact workers and the urban liberals opposed the tariffs. The political economy theory of protectionist policies suggests that owners of scarce resources, i e land in Europe favoured tariffs. They did! In Europe capitalists and urban labour generally opposed tariffs, except in Germany where industrialists and landowners joined forces, the so-called rye and iron alliance. It seems obvious why capitalists should oppose tariffs on food tariffs increased the cost of living of workers which might demand compensating wage increases. But in light of O Rourke s results it is not clear why urban labour in most countries were free traders. Did French and Swedish workers act against their best interest? Or does O Rourke exaggerate the gains to workers from tariffs? I think O Rourke is wrong on the real wage effect for the following reason. Nominal wages are usually rigid when it comes to downward adjustments. The negative effect on urban nominal wages of the exodus of rural labour is therefore probably exaggerated in O Rourke s analysis. However, falling grain prices undoubtedly contributed to a fall in costs of living. With unchanged nominal wages the real wage can be expected to increase. In other words, workers and trade unions were right in opposing tariffs.

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