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Lecture 6
A New View of the Industrial
Revolution – and the Conditions for
Sustained Economic Leadership
Was there an Industrial Revolution
in Britain?
• Recent research in economic history says
No, but…
• The classical period of the I R 1780-1830
was ’…a period of incubation in which the
groundwork to future growth was laid’
(Joel Mokyr) meaning that
• Intellectual and institutional preconditions
were created
Old school view
• The Industrial Revolution marked a radical
break with the past
• Low or insignificant growth rates were
replaced by substantially higher rates in
many (all?) sectors
• A large number of sectors became part of
the modern economy
• Science became increasingly important as
a source of technological change
New view
• Growth rates were (just a little) higher than in the past
but initially only moderately higher
• The modern sector was limited to a few initially small
dynamic sectors, such as the cotton industry
• Water mills remained an important energy source in
industry
• Science played a minor role in the advancement of
technological knowledge until mid 19th century but the
knowledge-base increased
• Innovations relied on skilled workers and mechanics
Old (Deane & Cole) and new view
compared
Why do new and old estimates
differ?
• It’s the index number problem, stupid
• We need to estimate the growth in constant
prices
• To do so we need quantities of goods produced
and prices
• Choice of base year affects results
• Fast growing sectors usually experience falling
relative prices
• As a consequence early base year implies
higher growth than later base year
Cotton and beer
• Cotton grows from 10 to 100 units
between 1770 to 1800
• Beer from 25 to 50 units
• Cotton price falls from 1 to 0.5
• Beer price is constant at 1
• Increase in output in 1770 prices is 150/35
=4.3 times
• Increase in output in 1800 prices is 100/30
=3.3 times
Lock at panel b for the British case!
Modern sector grows as a fraction
of total industry
• Deane and Cole first estimated growth rates of
individual sectors
• To aggregate to national income you also need
sector weights, that is the relative value added of
different sectors of total value added
• Using end of period year weights, say 1801 or
1831, will generate higher growth rates than
using 1770 sectoral weights, because fast
growing sectors increase their share in total
value added, see panel a
A beer and cotton sector example
• Assume the cotton industry output increases by
150 percent between 1780 and 1830 and that
beer output increases by 75 percent.
• Assume furthermore that the weight of cotton in
total output is 30 per cent in 1780 and 75
percent in 1830.
• With 1830 sector weights total output grows with
0.75*150 +0.25*75 = 131 per cent, but with 1780
weights only by 97 per cent (0.3*150 + 0.7*75)
And now to the Angus Maddison
text
• Angus Maddison is a Scottish economic
historian at Groningen and former OECD
economist who has devoted his life to
establish comparative historical national
accounts.
• His work is very useful as a source in
studies of why growth rate differs among
nations and over time.
The meaning of economic
leadership
• Economic leadership is defined by GDP
per man-hour or GDP per employed
(including self-employed)
• The basis for leadership is relative
technological sophistication, that is high
productivity, high capital/labour ratios,
human capital formation, and good
government and institutions
• Leadership is hard to attain but easily lost
The First Modern Economy- The
Dutch Republic (Netherlands)
• Markets for commodities and factors of
production, no bonded, un-free labour.
• Well defined property rights including intellectual
• Financial innovations, discounting of bills,
served trade and industry
• Good government, once free from the
Habsburgs (c.1600)
• Religious tolerance attracted immigrants with
(human) capital
• Mentalities were marked by the urge of rational
use of labour, knowledge and resources
Land scarcity was solved by land
reclamation
A 18th century model economy
Contemporary observers from all over Europe,
and Britain in particular, looked at the Dutch
republic as the economy to imitate.
But it was the institutions and technologies which
stand out – because the Dutch Republic was not
richly endowed with resources.
It has been called ‘the industrious revolution’(Jan
de Vries)
Skilled Dutch workers were very mobile diffusing
the knowledge in other parts of Europe
Why did the Netherlands decline?
• Monopolistic profits in trade could not be
maintained. British navy ruled the seas by
the end of 18th century.
• The manufacturing sector had high wage
costs, and downward rigidity of nominal
wages and other production costs despite
increasing international competition.
• Innovative activity declined as witnessed
by falling patent applications.
Patent applications took the wrong
turn
Britain takes the lead
Why Britain?
UK:s income lead was eroded by
slow growth
And why did Britain not keep its
industrial leadership?
• Low domestic investments in human and
physical capital
• Low total factor productivity growth
• Relatively high interest rates were hurting
manufacturing but service sector did well
• Financial institutions might have neglected
profit opportunities in new technologies?
(compare previous lecture)
UK investments ratios do not catch
up until after WWII
The dynamic disadvantage of an
Empire
• UK had favourable access to colonies and
dominions
• Most of the empire was composed of low
income economies with weak demand for
sophisticated new products
• British industry was not compelled to enter into
new fast growing product industries
• UK Export/Import ratio low (high) in dynamic
(traditional) new sectors (= R.C.A)
Revealed comparative advantage
Growth rates of capital stock and
TFP are correlated
Is leadership always associated
with a small agrarian sector?
• This relationship holds strictly only in a closed
economy
• US had a large agricultural sector when it gained
leadership and was a net exporter
• US agriculture had high output per worker
because land resources were abundant
• Labour shortage stimulated mechanization in
agriculture
• Agriculture has experienced as high or higher
TFP growth as the industrial sector
KGP:s mantra
•It is not what you do
•but how you do it, that
matters
Agriculture vs. industry
Britain replaced Netherlands and then US stepped
in as leading economy
Why US took and kept the leading
position
• Hight investments and high productivity
growth
• High spending on education (human
capital)
• Large homogenous market made it
possible for industry to exploit economies
of scale by standardized (similar) products
• Labour shortage directed innovations to
labour saving technologies
Few secrets in economic
leadership
• In next table a sample of nations are
ranked relative to US performance
• For example, the number 80 for UK in
Educational level means that UK
educational level is 80 per cent of the US
• US lead in all indicators except trade and
modernity of capital stock, but scale and
trade are substitutes
Scale of the economy matters a lot!
But scale and trade are substitutes
• Small economies must trade more to reap the
economies of scale and exploit comparative
advantages
• As a consequence trade/GDP ratios are much
higher for small economies (and as a rule in
favour of free trade)
• US had an advantage of a huge market where
consumer preferences were homogenous
permitting gains from domestic scale economies
(and protectionist forces were/are stronger)
Modern growth relies on the three
K:s
•
•
•
•
High investment in
’Das human Kapital’
K, that is non-residential capital
Knowledge, that is Research and
Development
Conclusion: the keys to success
• The historical record suggests
• High investments in capital, human capital and Research
and Development
• Resource endowments of greater importance in the past
when transport costs were high enough to impede trade
• Trade is a substitute to large size of the domestic
economy which is why small nations are often more
inclined to free trade than large
• Good government and appropriate institutions (contracts
are honoured, markets for goods and factors of
production, low corruption)