Do frontiers give or do frontiers take? The case of intercontinental trade in France at the end of the Ancien Régime

"In the eighteenth century, the trading activities of Nantes, Bordeaux, Marseilles and Rouen expanded much faster than the rest of the French economy. The usual trade analysis tools suggest that their trade had no effect on the French economy, as the most dynamic activity of these harbours merely used France as a warehouse between the West Indies and the rest of Europe. This paper examines the role of this maritime frontier in the domestic capital accumulation. Many authors asserted that the relations between European nations and the rest of the world played a great role in the “primitive accumulation” of capital before the Industrial Revolution. Their statements are controversial. Most economic historians would agree with Patrick O’Brien’s view as it is expressed in his 1982 paper : profits from the “periphery” were simply too small to have played a major role in European growth. This paper first transposes O’Brien’s computation to the case of France at the end of the Ancien Régime. Three estimations are needed: one of the annual rate of profit; one of the amount of trade; and one of the amount of capital invested for each unit of trade. My estimation for the annual rate of profits is 6.25% on a three-year rotation of capital, i.e. a rate of profit of 20% on the whole rotation of capital . For reasons developed elsewhere, I believe Arnould offers us the best measure of trade : he indicates the size of intercontinental French trade to be 610 million livres tournois (approximately £25 million) in 1787 . 125 ship investment accounts allow me to estimate the ratio between the amount of capital invested and the value of exported cargo to be 225%. Based on these numbers, annual French profits from international trade can be estimated at 142 million livres tournois. Computing profits is not enough, however. One needs to compute the extra profits provided by investment in intercontinental trade compared to investment in the domestic economy. Following the recommendations of Barbara Solow – and under the hypotheses that the remuneration of domestic capital was 4.5% and that 25% of French income went to capital, 15% to land and the rest to labour – this paper assesses that the existence of the intercontinental sector represented an additional income of between 1.5% and 2% for the French economy at the end of the Ancien Régime. The intercontinental sector effect was small compared to total French income. Yet, its existence had a redistributive role, mainly in the favour of capital. Through this redistributive role, it played a role in determining the saving rate and the capital accumulation rate. Under reasonable hypothesis, extra savings accruing from the existence of intercontinental trade represented 5-6.3% of total French savings. That increased the growth rate of the economy by 6-7.6% (i.e. 0.036-0.046 percentage points). Even if the intercontinental sector was a dynamic sector that “pulled” the rest of the economy, its direct role was small. This paper suggests that another, indirect, role may have been more important. The intercontinental sector encouraged capital accumulation in the domestic economy rather than irrigated it. Over-investment was a much more remote possibility in world trade than in one country’s domestic economy. By offering a way out of decreasing returns to capital, the intercontinental trade sector encouraged capital accumulation in the whole economy, in the same way as “heart of growth” sectors in AK-type growth models do. Actually, the usual notion of a high-profit sector “irrigating” the rest of the economy with its profits is difficult to justify: one expects capital to move to high-profit sectors, not from them. Accordingly, there are indications that the profits from the intercontinental trade sector were kept there, even if this did not exclude some asset diversification directed toward geographically close industrial firms in which the utilisation of knowledge and social networks already accumulated in intercontinental trade was possible. In addition to keeping its capital, the intercontinental sector attracted entrepreneurs – and their financial, human and social capital stocks – from the interior economy. That – negative – attraction effect was counterbalanced by the encouragement to capital accumulation. However, it is possible to show that theoretically the net effect would have been very small if the intercontinental sector had become an enclave. Ironically, as French entrepreneurs have often been exposed for their lack of capitalist thriftiness, the fact that they used an important part of their income to consume French domestic goods prevented that and was as such a good thing."