The Great Irish Famine
The crisis suffered by Ireland in the mid-nineteenth century is one of the most tragic in recent history and a clear example of such current phenomena as supply shocks, public stimulus policies, protectionism and inflation.
The Irish crisis of 1845, also known as the Great Irish Famine or the Potato Famine, was probably one of the harshest recessions suffered by a Western country in contemporary history. Developed between 1845 and 1851, it consisted of a drastic fall in the production of potatoes (the main source of food in Ireland) due to a fungus that destroyed almost all of the plantations.
These events have constituted a turning point in the history of the island, but in the 21st century they can also help us understand what the economic supply crises caused by shocks externalities, especially that derived from COVID-19.
An economy tied hand and foot
To understand the causes that deepened the impact of the crisis, it is necessary to go back a few years. Suffering a long English occupation dating back to the 11th century, the Irish economy in the early 19th century was mostly rural, with land suitable for grazing sheep and cattle and for growing cereals, especially barley and wheat. This comparative advantage in agricultural production, together with the strong ties with England and access to colonial markets, had configured a production model with a clear export character, while manufactured products were imported from Great Britain.
In this way, Ireland experienced one of the most prosperous periods in its history, with unprecedented economic growth that allowed the island's population to multiply from 2 million inhabitants in 1741 to 8.75 in 1847.
However, this apparent prosperity hid serious shortcomings that would prove fatal in the long run. In the first place, the Penal Laws in force until 1829 granted privileges to the Protestant minority of the island and prohibited Catholics, who made up the vast majority of the population, actions as basic as going to school, holding public office or owning land.Livestock farms were therefore in the hands of English landowners who rented small plots to local producers at increasingly higher prices as the rural population grew.
Naturally, the impossibility for these tenants to buy their land and the legal uncertainty of rental contracts that could easily be broken by the owners were a strong disincentive to long-term investment in productive improvements.
Finally, the Cereal Laws that protected British wheat and barley kept prices artificially high and created incentives for the export supply of these crops to be boosted, regardless of local demand.
The multitude of regulations that weighed on the Irish economy consolidated its rigidity and left it defenseless against any external shock
The result was a combination of factors that would later become explosive: a workforce with almost zero qualifications and no possibilities of training to improve human capital, land laws that prevented free trading and, therefore, the mobility of resources and a protectionism that made products as basic as bread more expensive.
This profound distortion of the markets had a double effect on the Irish population, as barriers to staff qualification and investment in productive improvements kept productivity levels substantially low, which resulted in very low real wages. At the same time, the combination of low wages and expensive cereals led to a substitution effect in local markets in favor of potatoes, a much cheaper crop to produce on which most of the Irish tenants soon became dependent.
Ireland therefore arrived in 1845 with a deeply unbalanced economy due to multiple legal restrictions that for years had distorted the markets, preventing their normal functioning.
Although demand was not very flexible, the biggest problem rested on supply, since it was virtually divided in two: a wheat and barley export sector stimulated by decree and a completely rigid potato production for the local market, with increasingly rigid levels. lower productivity and no real possibilities to expand due to the law of diminishing marginal returns. The arrival that same year of Phytophthora infestans, a fungus that attacked potato bulbs destroyed approximately half of the summer and autumn crops, thus triggering the onset of the crisis.
The failure of the revival
The recession deepened in the following years, with practically all crops destroyed in 1846 and heavy losses until 1848, after which a slow recovery began. Naturally, a crisis of such dimensions caused a marked shortage in the markets, which resulted in the greatest famine in the West in recent centuries with terrible consequences such as hundreds of thousands of deaths from starvation, massive migratory movements and popular revolts.
Normal production levels could not be reached until the following decade, but by then the effects of the crisis were already devastating: it is estimated that of the 8.75 million inhabitants of the island, approximately one million had died of hunger while another 1.5 million had emigrated, adding a population loss of almost 30% in the most affected areas.
As is natural to suppose, a humanitarian crisis of such dimensions did not go unnoticed in the rest of Europe and even less so in London, where the British government prepared an ambitious stimulus plan to fight the incipient recession as early as 1846. As a distant precursor of According to Keynesian theses, the plan consisted of the massive hiring of the unemployed for the construction of public works, which was thought to reduce unemployment while increasing the competitiveness of the most affected areas. Ultimately, it was a matter of recovering aggregate demand, relying on the multiplier effect of public spending, as many of our governments do today.
The money from the stimulus plans only managed to fuel inflation, since it was not aimed at boosting aggregate supply
The initiative ended in a resounding failure, not only because of the unsustainability of these spending levels over time, but also because it ultimately intended to relaunch demand without allowing the necessary supply adjustment, which was actually the basis of the problem. From the point of view of the London bureaucrats, the general crisis in Ireland was due to the fact that problems with growing potatoes had deprived workers of their main source of income, which had led to a drop in consumption that in turn dragged other sectors.
The solution therefore consisted in recovering aggregate demand by replacing the lost income with other income provided directly by the government in exchange for work in public works. Ultimately, these stimulus plans only contributed to aggravating the problem, since they multiplied the monetary base in a context of decreasing supply and ended up fueling inflation, which further deepened the shortage.
The reason for this failure is simple: if the Irish economy was capable of producing a certain number of potatoes, that volume was the maximum quantity that consumers could find on the market. The fact that buyers had more bills in their pockets did not mean that they could access more potatoes, but only that they could offer more money to bid on them. This process of depreciation of the monetary unit with respect to real goods has converted the Great Irish Famine in a clear example of an inflationary process.
The existence of previous rigidities prevented the adaptation of the economy to the shock and condemned farmers to bet again and again on the same failed crop
The end of the recession came mainly thanks to the recovery of crops around 1852, although the rural exodus continued in the following decades and by the end of the century the population had already fallen to 4.5 million, that is, a reduction of almost one million. 50% with respect to pre-crisis levels (which have not yet been reached in the 21st century).
In this sense, one of the few positive contributions from the British authorities was the repeal of the Cereal Laws, which allowed the prices of basic necessities to be reduced while improving the conditions of competition, with the consequent incentives to increase investment and productivity.
The Irish crisis of 1845 constitutes, therefore, a clear example of a supply crisis generated by an external shock, although it was deepened by the existence of previous rigidities in the production model. Far from maintaining economic stability, the truth is that the regulations that weighed on the local economy prevented the supply from being flexible enough to adapt to the shock, by preventing the transfer of production factors from one sector to another. Precisely for this reason the only solution for the Irish peasants was to bet again and again on the cultivation of potatoes in the hope that one day the plague would end, instead of looking for other alternative activities.
This tragic experience shows that the flexibility of the economies constitutes an essential advantage when facing a crisis, beyond the fact that part of the public opinion may reject the adjustment processes. The history of the Great Irish Famine Perhaps it is one of the saddest in recent centuries, but at least it can teach us that the solution to drops in supply is to facilitate the mobility of productive factors.
However, this does not mean that it is the only (and best) possible solution, but that for that particular case many avoidable mistakes were made. And if we must learn something from history, it is that those peoples who forget it are condemned to repeat it.