How profitable were British colonies overall?
I have answered this before.
The answer is “we don’t know” and “there is no single answer anyway”.
Until the 1980s it was an assumption that the British and other colonial nations must have made money from colonialism, otherwise they would not have carried it out.
[This is still used as a wisearse answer to this question when it comes up in a pub debate.]
However, when economists looked at the issue in the 1980s and 1990s, the answer became far from clear.
It is odd that the work of these economists seems to have been airbrushed out of public consciousness in the last couple of decades.
And when we get stupid ideas that “Britain looted $45 trillion from India” (when a back-of-the-fag-packet calculation based on Wikipedia data shows that the GDP of India from 1760–1940 was less than $45 trillion) forgive me for rolling my eyes!
Historians have taken up debates about the costs and benefits of empires using an approach Avner Offer refers to as imperial accountancy. Neither contemporaries nor historians have come to any solid consensus about the question of net cost or benefit to the colonizer or the colonized.
Leigh Gardner and Tirthankar Roy (2020) The Economics of Colonialism p77
- It is a common view amongst general readers that Britain grew fat on its empire, but few economists now agree with this assessment.
- The drain theory of empire was popular with nationalists during the late colonial era but subsequent analysis has questioned this.
- See for example the critique at 
- The drain theory remains popular amongst some communities for psycho-social reasons that are readily apparent.
- The amount of money made by Britain may have been:
- a positive (1–3 percent of GDP),
- negative or
- approximately zero number.
- How do we add things up?
- What do we include or exclude?
- For example, if UK made £2 M from an island plantation but fought a war costing £2.5 M defending said island- did Britain make £2 M or lose £0.5 M?
- Economists wrangle about this!
They also wrangle about how the money return that Britain would have received if it had been invested in something of other than its colonies
Calculating the gain or loss from the absence of empires with any certainty depends on the counterfactual world that would exist without empires.
Does it make any sense to discuss “the British Empire” as one entity.
the British Empire consisted of an extraordinary range of constitutional, diplomatic, political, commercial and cultural relationships 
- Is there was a lot in common between the 13 American colonies and say India in 1880?
- Does Lord Clive filling his castle in Welshpool with artefacts taken as booty for the Maharaja’s he defeated mean that the British Empire was just financially based on looting wealthy despotic rulers ?
It is psychologically attractive to have one simple answer, but life is rarely simple!
Despite the oft heard argument that Britain wouldn’t have colonised anywhere unless it was likely to turn a tidy profit, the fiscal benefits of colonies have been challenged since Adam Smith. For example:
It is plain that the colonies are not to be desired for revenue, because they do not yield it. It is plain that they are not to be desired for trading monopoly, because that we have entirely abandoned. It is plain they are not to be desired for patronage . . . it is perfectly plain that mere extension of territory is not a legitimate object of ambition.
W E Gladstone 1855 
Some folk such as Tharoor  suggest that Britain made fat wads of cash by draining the wealth from its colonies, so as acting in the role of the classic exploiter.
Exploitation may be defined as a relationship in which one party gains at the expense of another. The exploited group will be better off by withdrawing from the relationship whereas the exploiter will be worse off 
However, using this definition the graph below makes Sharoor’s assertion look rather odd.
As we can see, Britain only became really rich after it had gotten rid of most of its colonies! The Indian economy grew more slowly than that of the UK after independence, in spite of having lost the UK’s “draining” their finances! Just how big was the drain then, if it doesn’t show on the graph?
Now it is true that :
- in 1600 the average Indian person was 60% as wealthy as the average Briton in real terms, whereas
- by 1860 the average Indian was only 16% as wealthy as the average Briton
But only a dunce would think that this proves that that Britain made a lot of money from India unless a lot more supporting information was available to make this case.
Similarly, we see that Germany with few colonies did very well economically, and Spain and Portugal stagnated despite having large colonial empires. An empire isn’t a guaranteed source of wealth!
2. Economic assessments that Britain made little or no net gain from the Empire
There is an academic view that the British would have been better off by investing in the second stage of industrialisation and wasted resources on maintaining an unprofitable empire. 
the majority of the English people cheerfully and even proudly shouldered a tax bill from which they derived little in the form of tangible pecuniary gains
This view was shared by such economists as J M Keynes and S Pollard.
Similarly had Britain not had an Empire to defend before WWII, its defences would have been better focussed on the homeland and the war may have been less exhausting. Defending an Empire that would be soon given up from Japanese Imperialism may be seen as a costly waste (though presumably not by those whose massacre by the Japanese was prevented by British actions).
In the post-war period, Britain was spending money on decommissioning Empire and brushfire wars when it should have been undertaking rebuilding of its war-ravaged industry.
Economic analysis of the British Empire was carried out by a number of analysts in the 1980s and after, such as American economists Davis and Huttenbach . From the book’s blurb:
Historians have so far made few attempts to assess directly the costs and benefits of Britain’s investment in empire. This book presents answers to some of the key questions about the economics of imperialism: how large was the flow of finance to the empire? How great were the profits on empire investment? What were the social costs of maintaining the empire? Who received the profits, and who bore the costs? The authors show that colonial finance did not dominate British capital markets; returns from empire investment were not high in comparison to earnings in the domestic and foreign sectors; there is no evidence of continued exploitative profits; and empire profits were earned at a substantial cost to the taxpayer. They depict British imperialism as a mechanism to effect an income transfer from the tax-paying middle class to the elites in which the ownership of imperial enterprise was heavily concentrated, with some slight net transfer to the colonies in the process.
Swiss economist Paul Bairoch cited the idea the Europeans grew rich in the 19th century at the expense of their colonies as one of the myths of economic history.
O’Brien et al continued in the same vein .
Although Britain survived as a great power down to 1945, the notion that the empire made any positive long-term contribution to the health of the domestic economy is unlikely to survive systematic economic analysis and statistical testing. Modern research in economic history now lends rather strong empirical support to Cobdenite views of Britain’s imperial commitments from 1846 to 1914. Only conquests of loot and pillage of the kind maintained by King Leopold in the Congo seem capable of providing metropolitan traders and investors with supernormal profits. In this sense the British empire can be plausibly represented, in Adam Smith’s words, as “a sort of splendid and showy equipage, not an empire but the project of an empire, not a gold mine but the project of a gold mine”
Clearly the empire was an enormous fact which imperial historians will continue to puzzle over and explain. For not inconsiderable numbers of English people (outside and inside some very powerful social groups) the empire paid. What has been argued above is that massive public expenditure upon the apparatus of imperial rule and defence was neither sufficient nor necessary for the growth of the economy from 1846 to 1914. Thereafter Hobson’s analysis of 1902 that the empire represented an increasingly costly alternative to social reform and to structural changes within the domestic economy can be accepted as entirely percipient.
Eight decades later that “splendid and showy equipage” begins to appear, in the flat prose and statistics of the economist, more and more like a redundant ship of the line drifting away from the kingdom’s shores on the ebb-tide of twentieth-century history
3.Why do some people say that Britain made huge amounts of money from the Empire then?
3.1 Cherry picking data
Some colonial activities were clearly lucrative some of the time. Taking war booty from defeated maharajas is clearly a good get rich quick scheme (assuming the armies of the maharajas are weak). But this is a tiny part of the imperial enterprise.
[It is equally as daft when folk look to ending of the slave trade and slavery to make out the British Empire was mainly a human rights organisation!]
Tharoor in his famous Oxford Union debate does a lot of cherry picking- he shows that India had a negative balance of payments with UK but omits that the overall Indian balance of payments was positive and the UK’s was overall negative!
3.2 Assuming money could only come from an empire
Some answers to this kind of question make a schoolboy error of assuming that, had Britain not invested in its empire, it would have got no return on its investments.
Let me explain.
There were two identical twin brothers: Greg Brittas and Glen Brittas.
- Each invested their money and used it to buy a bicycle factory- Brittas Cycles and Brittas Bikes respectively.
- Greg invested his money in dodgy housing and was a notorious slum landlord.
- The other invested his money in stocks and shares.
- Greg earned £10 M and Glen earned £11 M.
Did Greg’s investments earn him £10 m or lose him £1 M since Glen with the same outlay made £11 M?
Now let us apply this to the British Empire.
As we can see, investing in the Empire may not have been such a good idea.
3.3 Forgetting Upkeep Costs
Rather than asking “how much did a British person make from the Empire?”, we can ask, “how much did he make after paying for the defence and upkeep of the Empire”.
Now, of course, colonies themselves paid taxes and these are often viewed as extractive– designed to pay generous British style salaries to expatriate Britons in roles that were not available to colonised peoples. Of course we can abhor the racism, but let us look at actual amounts of taxes paid by the colonies. . It took ten days’ work to raise the taxes paid for the average Indian, it was over 19 days for the average Briton.
As we can see from the table above, many colonies are not paying a whopping tax bill compared to UK.
If we look at defence spending: we can see that the UK is spending a lot on defence compared to colonies, and colonies spend less than other comparable countries (albeit some have cynically pointed out that may have been because they wanted to stop themselves being colonized by the European powers).
3.4. Thinking that non-colonies would not trade with Britain
Britain did rather well from its trade with South America without colonising it.
Edelstein in 1982  argued that in the 1870s, the loss of empire trade would lose Britain between 1 and 3 percent of its GDP. O’Brien (1988) countered that this was rubbish because it was premised on, say Indian, traders, withdrawing their business with Britain, But why would they do that?
3.5 Overestimating the contribution of empire to trade
In every European case, for which data is available, interconnections through (i) the export and import of goods and services, (ii) migration (iii) net flows of returns on investment overseas (interest, profits and dividends) and other economic connections with the rest of the world look immeasurably more important than links with empires
Most other authors came up with a similar judgement, or at least that it was not clear that the Empire made a lot of money for Britain 
In conclusion, the late Victorian and Edwardian empire, from a private point of view, does not appear to have been a waste of money. More than two generations of well-informed investors chose to send their funds overseas. Their assets and income were safe, they felt, under British naval protection. To imagine a better return to these assets at home, we need to visualize a different society with a different distribution of wealth, or at least a different set of financial institutions; and that is further than most economic historians would wish to go. From the social point of view the balance is more difficult to judge.
There is an academic debate about the economic benefits of the British Empire to Britain that will doubtless continue, however, based on current evidence:
- Simplistic drain theories of empire which assume Britain just sucked money out of its colonies is not supported by serious analysis.
- Economists have to make assumptions and work with limited data, then quibble with how this data is interpreted.
- Hence we are unlikely to get a clear view on the economics of empire in the near future.
A good discussion of this topic can be found in Chapter 5 Debates about Costs and Benefits in Gardner L and Roy T (2020) The Economic History of Colonialism.
This book makes a refreshing change from the Quora pantomime view of British colonialism.
On no it doesn’t!
- Roy T (2019) How British Rule changed the Indian Economy Palgrave.
- Gardner L and Roy T (2020) The Economic History of Colonialism p79 Bristol University
- Darwin J (2009) The empire project: the rise and fall of the British world system . Cambridge
- Address delivered to the members of the Mechanics Institute at Chester, I2 Nov. 1855, in Knapland, Gladstone and Britain’s imperial policy, pp. 198-9.
- Tharoor S (2017) Inglorious Empire- What the British did to India
- Foreman Peck J (1989) Foreign Investment and Imperial Exploitation: Balance of Payments Reconstruction for Nineteenth-Century Britain and India Economic History Review 42, no. 3
- Broadberry S, Custodis J, Gupta B (2014) India and the great divergence: an Anglo Indian comparison of GDP per capita, 1600–1871 Explorations in Economic History.
- O’Brien P K The Costs and Benefits of British Imperialism 1846-1914 Past & Present, No. 120 (Aug., 1988), pp. 163-200
- O’Brien, P K; Escosura, L P de la (1998). The Costs and Benefits for Europeans from their Empires Overseas. Revista de Historia Económica / Journal of Iberian and Latin American Economic History, 16(1), 29–89.
- Frankema E (2010) Raising revenue in the British Empire 1870–1940:how ’extractive’ were colonial taxes? Journal of Global History 5(3) 447–77
- Edelstein M (1982) Overseas investment in the age of high imperialism in the UK 850–1914 New York
- O’Brien P K The Costs and Benefits of British Imperialism 1846-1914 Past & Present, No. 120 (Aug., 1988), pp. 163-200
- Offer A (I993), pp. 2I5-238 The British empire, 1870-I9 I4: a waste of money. Economic History Review, XLVI, 2