Saturday, October 13, 2007

Incentives Matter

Reason Online has an interview with the economic historian John Nye about his new book, War, Wine, and Taxes: The Political Economy of Anglo-French Trade, 1689-1900. The book generally argues that Britain in the latter nineteenth century was no paragon of free trade. But what really interests me is the argument that high levels of British protectionism against French wine helped make Britain the nation of beer drinkers it is, while the French favored wine:

reason: Speaking of specific tariffs, explain the significance of the one part of your title everyone can get behind: Wine. You ask the question, "Why do the British drink beer and not wine?" Give the short version of your answer (hiccup) with regard to tariffs.

Nye: The core of British tariffs was directed against the French and specifically against French wine. This policy dated back to the late 1600s, when the two countries were at war for a quarter century. Tariffs designed to exclude all but the best French wine—and to a large extent depress imports from most other wine-exporting nations—were matched with policies targeted to assist brewers and domestic producers of spirits. Over time, the exclusion of cheaper French wine—especially during the Industrial Revolution—meant that lower- and middle-class drinkers had to settle almost exclusively for beer, gin, whiskey, and rum.

reason: My god! The horror!

Nye: We probably have no idea how bad some of that stuff actually was!

reason: That's speaking as someone who has obviously never drank anti-freeze. Your book is in many ways a primer on public choice economics and how officials respond to the demands of the very people they are supposed to be regulating in the name of the public good. Talk about the brewers in England as a special interest group and their relationship to the state.

Nye: During the quarter century (from 1689 to 1715) when French wine was excluded from the British market, the beer industry experienced what historian Peter Mathias refers to as the Brewing Industrial Revolution. Technology made it possible to produce beer (initially porter) in quantity. At the same time, protection meant these guys were earning money hand over fist.

When war ended, domestic beverage interests successfully lobbied to have very high tariffs placed on wine, and extra high tariffs on French wine. But a cynical public choice scholar would argue that the government would not be content with handing out goodies to the brewers. Now the state had the brewers over a barrel (so to speak). They were able to impose excise taxes on the industry and expect to collect them. The latter point is very important. In previous times, high excise taxes were not always accompanied by high revenues because of evasion.

Sociologists, economists and political scientists since Weber have debated whether culture determines economic success – whether attitudes toward science, or the theology of Christianity led to the rise of the West, whether there is something about Chinese culture that causes Chinese entrepreneurs to succeed all over the world, even when (as in countries like Indonesia) they are often despised.

So culture can clearly determine economic outcomes. But can economic policies determine a culture? Does a country become a land of beer drinkers, or come to favor idleness or hard work, because of something as mundane as prices? That is the Nye argument, and it is not at all implausible. All it would take would be for a particular price structure to affect behavior in one period, and for there to be a lot of inheritability in cultural behavior – that children, in other words, have a high propensity to behave like their parents. If beer became desirable because wine was expensive, and kids drink beer because their parents did, an eighteenth-century trade-policy decision can affect the drinking behavior of Britons decades later, and can even influence their view of themselves. If Britain founds settler nations like Australia, the effect can reverberate even there.

But of course if culture can be done by incentives, it can also be undone by incentives. The improved technology of wine growing and delivery, which has made America a fine-wine superpower and has turned wineries in Chile, Spain, South Africa and elsewhere into global players, has lowered the relative price of wine to beer. Thus even Britain may be becoming a land of wine drinkers.

Thomas Sowell (in books such as Race and Culture: A World View), is one of the most perceptive writers on the relation between cultural tendencies and economic outcomes. But his argument generally takes cultural tendencies as given, and then deduces economic results. If Professor Nye is right, perhaps economic incentives come first. It has earthshaking implications for economic policy: the economic policy choices you make now can profoundly affect outcomes generations down the road.



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