Your SlideShare is downloading. ×
The First Industrial Revolution: a Puzzle for Growth Economists
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.


Introducing the official SlideShare app

Stunning, full-screen experience for iPhone and Android

Text the download link to your phone

Standard text messaging rates apply

The First Industrial Revolution: a Puzzle for Growth Economists


Published on

Published in: Technology

  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 1. The First Industrial Revolution: a Puzzle for Growth Economists Nick Crafts and Larry Neal
  • 2. The Holy Grail
    • To explain the sustained acceleration in economic growth in Britain during the Industrial Revolution
    • The Good News : the explicandum is better described
    • The Bad News : endogenous growth theory does not yet have a persuasive model that fits the facts
  • 3. British Industrial Revolution
    • Modest growth
    • Escape from ‘Malthusian Trap’
    • Large structural change
    • No take-off but TFP growth increases significantly
  • 4. Growth in Britain (% per year)
  • 5. Malthusian Model Crafts & Mills (2007)
    • LogW = α - β LogPop + ρ t Trend growth of W is zero till 1800 while ‘Iron Law’ of wages allows population growth at ρ / β =0.5% pre-1800, = 2% post-1800 based on higher ρ English population in 1800 was 3 x 1550 population but no sign of positive feedback from population to technological progress
    • The key feature of the industrial revolution is the dog that didn’t bark – rapid population growth was sustained without a collapse in real wages
  • 6. Employment Composition (%)
  • 7. Agricultural/Total Employment at British 1840 Income Level (%)
  • 8. Family to Capitalist Farming
    • Disappearance of small farms
    • Release of surplus labour
    • Promotes industrialization
    • ‘ Explains’ British divergence from ‘European Norm’
  • 9. Simulated 1841 Economy Crafts & Harley (2004) 28 41 Industrial Employment (%) 47 22 Agricultural Employment (%) 69 100 Industrial Output 105 100 Agricultural Output Peasant 2/3 Actual
  • 10. Institutions, Theory
    • “ Rules of the game” set incentives and constraints for “play” by economic agents.
    • “ Winners” become incumbents, resist institutional change
    • “ Losers” adapt, exit, or revolt
  • 11. Institutions are persistent
    • New rules emerge in response to external shocks; they do not evolve gradually
    • New institutions are conditioned by adaptations of past losers
    • New institutions are fragile; reversals are typical. Legitimacy is hard to establish
  • 12. Institutions Matter
    • Modern economic growth associated with modern institutions: nation state secularism constitutional government extension of the franchise
  • 13. Institutions Matter
    • Issue of causality confounded by advantages of backwardness for followers, who can: substitute capital skip learning stages adopt most advanced technology import capital, skills, institutions
  • 14. Slow TFP Growth
    • Uneven technological progress
    • Slow incremental improvements and diffusion of well-known inventions, e.g. steam power
    • Disincentives to innovative activity
    • Confirmed by growth of wages (Clark, 2005)
  • 15. TFP Growth
    • Much slower and less pervasive than ‘old-hat view’ believed
    • Sustained acceleration from 2nd quarter of 19th century indicates new era of growth
    • Note the (delayed) impact of steam
  • 16. Total Steam Contribution to Growth of Labour Productivity (% per year)
  • 17. 1780-1860: Ingenuity or Abstention ? Crafts (2004b )
    • TFP growth accounted for less than 30% of GDP growth
    • TFP growth accounted for 70% of labour productivity growth
    • TFP growth and new varieties of capital goods accounted for 87% of labour productivity growth
  • 18. Sources of Labour Productivity Growth, 1780-1860 (Crafts, 2005) (% per year) 0.78 Labour Productivity Growth 0.03 Other 0.19 Agriculture 0.34 Modernized Sectors 0.56 TFP 0.13 Other -0.03 Agriculture 0.12 Modernized Sectors 0.22 Capital Deepening
  • 19. Why Was Britain First ?
    • Timing of acceleration in TFP growth much harder to explain than structural change
    • Search but success not guaranteed
    • Inventions and market demand
    • The Peso Problem
    • Macro-inventions
    • NEG and agglomerations
  • 20. Endogenous Innovation Models
    • Expected technological progress is faster if appropriability of returns improves productivity of R & D inputs goes up markets get bigger
  • 21. Endogenous Growth Schumpeter relationship (high λ ) Schumpeter (low λ ) Solow (high s ) Solow steady-state relationship (low s ) x k ^
  • 22. Growth Potential
    • In later 18 th century quite probable that growth potential higher in Britain than in France or 16 th_ century Britain (cf. Crafts, 1995)
    • Britain better at micro-inventions but what does that tell us about the ex-ante probability of making the decisive inventions in cotton and getting ahead in the key sector ?
  • 23. Implications for Unified Growth Theory
    • Industrial revolution is more than a scale effect of bigger population (cf. Kremer, 1993)
    • Period of sustained demographic pressure is prolonged and escape from Malthusian Trap involves substantial increase in TFP growth (cf. Galor & Weil, 2000)
    • Understanding the acceleration of technological progress is central; the ‘national innovation system’ (cf Mokyr, 2002) not the size of the population is the heart of the matter
  • 24. Role of Markets: Land, Labor, Capital, Entrepreneurs
    • Markets allocate resources more efficiently than alternative methods: Command economies Custom in traditional economies
    • Hicks’ dilemma: Command is usual response to shocks Custom emerges in absence of shocks
  • 25. Role of Finance: Mobilize Resources
    • Hicks’ resolution of dilemma: European invention of city-states governed by merchant elites committed to maintenance of markets
    • Neal’s resolution of dilemma: Governments that use debt markets to respond to shocks committed to use labor and capital markets as well
  • 26. Tales of Two Institutions
  • 27. Tales of Two Institutions
  • 28.  
  • 29.  
  • 30. Tales of Two Revolutions
    • Bordo-White compare UK & France during Napoleonic Wars
    • UK wins, despite flexible exchange rates, fiat currency, and tax shocks. Why? Credible commitment for debt
    • France loses, despite fixed exchange rates, and balanced budget. Why? Napoleon’s defeat in Russia.
  • 31. Neal’s Tale of Two Revolutions
    • Capital flight initiated by French revolution elimination of feudal rights
    • Capital fled to merchant centers throughout Europe, using private trade credit circuits
    • British war finance resumes on 18 th c. model, fails with fall of Amsterdam, leads to paper pound
  • 32. Neal’s Tale of French Revolution
    • Flexible exchange rate of pound “locks in” foreign capital in London’s capital market
    • Continental Blockade destroys UK system of war finance, as intended
    • Napoleon’s capital levies throughout conquered Europe increase flight capital to London
  • 33.  
  • 34.  
  • 35.  
  • 36.  
  • 37. Tale of Two Revolutions
    • France: establishes property rights, rule of law, constitutional monarchy, and funded government debt by end of 1815.
    • New institutions constantly under threat and revised periodically through 1871.
    • Lesson: Institutions matter, but hard to legitimate and incorporate in new setting
  • 38. Tale of Two Revolutions
    • Great Britain: switches capital formation to capital goods industry, reducing relative cost of capital permanently (cf. Hicks)
    • Key to success is arms-length financial markets maintained by government throughout conflicts with France
    • Postwar settlement difficult: Corn Laws, repatriation of capital, de-mobilization,
    • TFP resumes rise by 1830, accelerates after 1850