By Sebastian Galliani and Gustavo Torrens

National Bureau of Economic Research

Working Paper 22724

October 2016 

http://www.nber.org/papers/w22724

A Review

Combining academic disciplines often lead to innovative and interesting new perspectives. Sebastian Galliani and Gustavo Torrens, two economists accomplish this this in an October 2016 paper written for the MBER entitled “Why not taxation and representation? A note on the American Revolution.” The authors define an economic behavioral model to assert that internal British politics prevented any real compromise with Colonial America. As a result the only choice left to both the British and Americans was either independence or the status quo. A negotiated compromise was not in the perceived best interest of either party.

The authors lay out a ten point overview of the considerations which drove the American and British decision making prior to the outbreak of the American Revolution. They opine that understanding these ten considerations will solve the puzzle as to why a compromise short of a total war of independence was not concluded. Interestingly novel, these considerations include the fact that Americans were very prosperous and may have been, on average wealthier than Britons. Another consideration is that Americans paid far less taxes (26 to 1 shillings).

Given these considerations, the authors attempt to answer the question, “why did the North American colonies rebel?” There are three major factors which contributed to the conflicting points of view: religious, economic and political rights. In the 18^th Century, religious beliefs were powerful motivators and connected or divided people. The British High Anglican Church was principally rejected by the colonists who practiced beliefs in the Low Anglican Church. In terms of trade, the tax policies advocated by the British threatened the position of the colonial elites and realigned economic power. In addition, the new tax regime displaced the informal colonial agents who had successfully lobbied for years the Crown and Parliament on behalf of the colonial interests. Finally, the colonists concluded that they did not enjoy the same rights as British and wanted have equal say in government and policies.

Interestingly, Galliani and Torrens describe contemporaneous proposals by Thomas Powell and Adam Smith for resolving the disputes. Powell, a noted British political theorist argued for American representation in Parliament. He advocated a compromise which would allow the American Colonies to remain in the Empire without shifting too much power across the Atlantic. In his famous book, The Wealth of Nations, Adam Smith wrote that it was in the best interests of all parties to either find a compromise which allowed for independence in exchange for a trade/military treaty or to allow colonial assemblies to tax their constituents and transfer a portion of these proceeds to the British government.

In the end, neither of these proposals gained sufficient traction with the Crown or Parliament. Internal British politics did not favor granting any concessions as the landed elites supporting Lord North feared that if they did, then British subjects would demand the same rights. The opposition supporters of John Wilkes (Wilkesites) and Rockingham Whigs did support a compromise with the colonists but they were never able come together to garner sufficient votes.

For both parties, taxation in exchange for representation was a reasonable solution. However, the political calculus was not in place and the British government was afraid to grant American representation as it might disrupt the balance of political power.

Providing a simple Model of independence, the authors attempt to prove the veracity of their conclusions. The model depicts the decision calculus of colony and a metropolitan power. The model, even simplified demonstrates that not compromising, the British leaders maximized their position but not granting independence. The use of a behavior model is an interesting combination of historical research and behavioral economics.

The paper concludes that American representation in British Parliament would have allied  with the Rockingham Whigs and Wilkesites which threatened the Lord North government. This is another example of self-preservation being dominant in human decision making. It is also a good illustration, that to properly understand the American Revolution, one has to understand both sides of the Atlantic.