free market

Those who say we tried the free market and it failed should research the history of the Boston Tea Party a little.  We didn’t even have a free market in the 18th century, a period referred to in British history as The Whig Supremacy.  Here’s the background; and to prove that there is nothing new under the sun, it involves company rent-seeking, market distortion, bailouts and stealth taxes.

As early as 1698, the English Parliament awarded the East India Company the monopoly on tea importation into England.  In return the Company paid Parliament a 25% ad valorem tax on the tea imported.  Now, at this stage the Company was not allowed to import tea to the American colonies, so it sold the tea it had imported into England on to other merchants, who sold it in the colonies.  So even at this stage, government was distorting the tea market, by granting a monopoly to a rent-seeking company in return for revenue.

The result should be obvious.  Dutch merchants, paying no tax, were able to undercut the East India Company by exporting tea directly from Holland.  This meant smugglers made a fortune importing the cheaper tea into the colonies and England as well.  The result was that the rentseeker actually suffered.  Now, did government take the simple route and abolish the monopoly and tax, allowing the free market to operate? Of course not.  They complicated matters further.

The Indemnity Act 1767 lowered the tax on tea consumed in Britain, and refunded the tax paid on tea imported to the colonies.  Government, however, needed to replace its lost revenues, and so was passed the infamous Townshend Revenue Act 1767, which levied taxes on all sorts of imports into the colonies.  And so began the dispute about whether or not the British Parliament had the right to tax Americans.  And the smuggling problem remained.

This time, as well as buying black market tea, the colonists organized boycotts and non-importation agreements.  The popular pressure forced Parliament to repeal the Townshend taxes in 1770 – except for the tea tax, which by this time had taken on a symbolic importance of Parliamentary supremacy.

This is where things get really complicated.  In 1772, the Indemnity Act 1767 expired (ah, for the days when British Acts had sunset clauses), thereby eliminating the full refund of the 25% tax on tea exported to the colonies.  A new Act reduced the refund to three fifths, restored some other taxes repealed in 1767 and kept the Townshend tax in place.  Result: a government-imposed increase in the price of tea and a consequent collapse in tea sales.  The East India Company faced ruin – it needed a bailout!

Then as now, the correct bailout solution would have been to remove the government-imposed barriers to business, and let the East India Company sells its teas competitively (and this was what the Company asked for).  To an extent, this was what happened.  The Tea Act 1773 dropped the ban on the Company selling tea to America directly, so removing the middlemen and lowering prices, and restored the full refund of the 25% British tax.  This enabled the Company at long last to sell tea cheaper than the smugglers.

But the Townshend duty remained, an affront to Americans and a symbol to the British government.  Realizing the problem, the East India Company arranged for it to be paid in London or otherwise hidden.  It was, in effect, an early Stealth Tax.

What happened next is well known – the Boston Tea Party was a protest against British usurpation of American liberties, not high taxes (as they had been reduced by the Tea Act 1773).  Yet it was all the result of unnecessary government intervention in the market because some bright spark thought that it would be good for a company to have an income stream guaranteed by government.

In short, if we’d had a genuinely free market in tea in the 1700s, the tensions that led to the American Revolution would have been significantly reduced.