The First Industrial Revolution: a Puzzle for Growth Economists

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The First Industrial Revolution: a Puzzle for Growth Economists

  1. 1. The First Industrial Revolution: a Puzzle for Growth Economists Nick Crafts and Larry Neal
  2. 2. The Holy Grail <ul><li>To explain the sustained acceleration in economic growth in Britain during the Industrial Revolution </li></ul><ul><li>The Good News : the explicandum is better described </li></ul><ul><li>The Bad News : endogenous growth theory does not yet have a persuasive model that fits the facts </li></ul>
  3. 3. British Industrial Revolution <ul><li>Modest growth </li></ul><ul><li>Escape from ‘Malthusian Trap’ </li></ul><ul><li>Large structural change </li></ul><ul><li>No take-off but TFP growth increases significantly </li></ul>
  4. 4. Growth in Britain (% per year)
  5. 5. Malthusian Model Crafts & Mills (2007) <ul><li>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 </li></ul><ul><li>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 </li></ul>
  6. 6. Employment Composition (%)
  7. 7. Agricultural/Total Employment at British 1840 Income Level (%)
  8. 8. Family to Capitalist Farming <ul><li>Disappearance of small farms </li></ul><ul><li>Release of surplus labour </li></ul><ul><li>Promotes industrialization </li></ul><ul><li>‘ Explains’ British divergence from ‘European Norm’ </li></ul>
  9. 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. 10. Institutions, Theory <ul><li>“ Rules of the game” set incentives and constraints for “play” by economic agents. </li></ul><ul><li>“ Winners” become incumbents, resist institutional change </li></ul><ul><li>“ Losers” adapt, exit, or revolt </li></ul>
  11. 11. Institutions are persistent <ul><li>New rules emerge in response to external shocks; they do not evolve gradually </li></ul><ul><li>New institutions are conditioned by adaptations of past losers </li></ul><ul><li>New institutions are fragile; reversals are typical. Legitimacy is hard to establish </li></ul>
  12. 12. Institutions Matter <ul><li>Modern economic growth associated with modern institutions: nation state secularism constitutional government extension of the franchise </li></ul>
  13. 13. Institutions Matter <ul><li>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 </li></ul>
  14. 14. Slow TFP Growth <ul><li>Uneven technological progress </li></ul><ul><li>Slow incremental improvements and diffusion of well-known inventions, e.g. steam power </li></ul><ul><li>Disincentives to innovative activity </li></ul><ul><li>Confirmed by growth of wages (Clark, 2005) </li></ul>
  15. 15. TFP Growth <ul><li>Much slower and less pervasive than ‘old-hat view’ believed </li></ul><ul><li>Sustained acceleration from 2nd quarter of 19th century indicates new era of growth </li></ul><ul><li>Note the (delayed) impact of steam </li></ul>
  16. 16. Total Steam Contribution to Growth of Labour Productivity (% per year)
  17. 17. 1780-1860: Ingenuity or Abstention ? Crafts (2004b ) <ul><li>TFP growth accounted for less than 30% of GDP growth </li></ul><ul><li>TFP growth accounted for 70% of labour productivity growth </li></ul><ul><li>TFP growth and new varieties of capital goods accounted for 87% of labour productivity growth </li></ul>
  18. 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. 19. Why Was Britain First ? <ul><li>Timing of acceleration in TFP growth much harder to explain than structural change </li></ul><ul><li>Search but success not guaranteed </li></ul><ul><li>Inventions and market demand </li></ul><ul><li>The Peso Problem </li></ul><ul><li>Macro-inventions </li></ul><ul><li>NEG and agglomerations </li></ul>
  20. 20. Endogenous Innovation Models <ul><li>Expected technological progress is faster if appropriability of returns improves productivity of R & D inputs goes up markets get bigger </li></ul>
  21. 21. Endogenous Growth Schumpeter relationship (high λ ) Schumpeter (low λ ) Solow (high s ) Solow steady-state relationship (low s ) x k ^
  22. 22. Growth Potential <ul><li>In later 18 th century quite probable that growth potential higher in Britain than in France or 16 th_ century Britain (cf. Crafts, 1995) </li></ul><ul><li>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 ? </li></ul>
  23. 23. Implications for Unified Growth Theory <ul><li>Industrial revolution is more than a scale effect of bigger population (cf. Kremer, 1993) </li></ul><ul><li>Period of sustained demographic pressure is prolonged and escape from Malthusian Trap involves substantial increase in TFP growth (cf. Galor & Weil, 2000) </li></ul><ul><li>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 </li></ul>
  24. 24. Role of Markets: Land, Labor, Capital, Entrepreneurs <ul><li>Markets allocate resources more efficiently than alternative methods: Command economies Custom in traditional economies </li></ul><ul><li>Hicks’ dilemma: Command is usual response to shocks Custom emerges in absence of shocks </li></ul>
  25. 25. Role of Finance: Mobilize Resources <ul><li>Hicks’ resolution of dilemma: European invention of city-states governed by merchant elites committed to maintenance of markets </li></ul><ul><li>Neal’s resolution of dilemma: Governments that use debt markets to respond to shocks committed to use labor and capital markets as well </li></ul>
  26. 26. Tales of Two Institutions
  27. 27. Tales of Two Institutions
  28. 30. Tales of Two Revolutions <ul><li>Bordo-White compare UK & France during Napoleonic Wars </li></ul><ul><li>UK wins, despite flexible exchange rates, fiat currency, and tax shocks. Why? Credible commitment for debt </li></ul><ul><li>France loses, despite fixed exchange rates, and balanced budget. Why? Napoleon’s defeat in Russia. </li></ul>
  29. 31. Neal’s Tale of Two Revolutions <ul><li>Capital flight initiated by French revolution elimination of feudal rights </li></ul><ul><li>Capital fled to merchant centers throughout Europe, using private trade credit circuits </li></ul><ul><li>British war finance resumes on 18 th c. model, fails with fall of Amsterdam, leads to paper pound </li></ul>
  30. 32. Neal’s Tale of French Revolution <ul><li>Flexible exchange rate of pound “locks in” foreign capital in London’s capital market </li></ul><ul><li>Continental Blockade destroys UK system of war finance, as intended </li></ul><ul><li>Napoleon’s capital levies throughout conquered Europe increase flight capital to London </li></ul>
  31. 37. Tale of Two Revolutions <ul><li>France: establishes property rights, rule of law, constitutional monarchy, and funded government debt by end of 1815. </li></ul><ul><li>New institutions constantly under threat and revised periodically through 1871. </li></ul><ul><li>Lesson: Institutions matter, but hard to legitimate and incorporate in new setting </li></ul>
  32. 38. Tale of Two Revolutions <ul><li>Great Britain: switches capital formation to capital goods industry, reducing relative cost of capital permanently (cf. Hicks) </li></ul><ul><li>Key to success is arms-length financial markets maintained by government throughout conflicts with France </li></ul><ul><li>Postwar settlement difficult: Corn Laws, repatriation of capital, de-mobilization, </li></ul><ul><li>TFP resumes rise by 1830, accelerates after 1850 </li></ul>

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