1. Economic Growth and the
Industrial Revolution
G. Chris Rodrigo, IMF Research Department

2. Economic growth is
essentially growth of labor
productivity
Real cost of some common food items in
minutes of work 1919 1997
 3 pounds of chicken 157 14
 3 pounds tomato 101 18
 5 pounds sugar 72 10
 1 pound ground beef 30 6
 ½ gallon milk 39 7
 1 dozen oranges 68 9

3. How technological change lowers
real cost of consumer durables
Cost in work hours of consumer durables
1911-16 1997
 Refrigerator 3162 (1916) 68
 Cooker 345 (1910) 22
 Dishwasher 140 (1913) 28
 Clothes washer 553 (1911) 26
These are clearly enormous productivity gains

4. Measuring - real effective
-economic growth
The economy as a production system
 Labor productivity (output/labor input) is the
best measure of economic progress
 GDP/capita is the best measure of prosperity
 Real growth should be measured as the rate of
growth of GDP/capita (rather than GDP)
 Growth of labor productivity is approximately
proxied by the growth of GDP/equivalent adult
which is the slope of GDP/capita against time

7. Economic growth in longer
term perspective (500 years)
 Estimates by Maddison provides growth data
from 1500 – 2000
 Key turning point: industrial revolution in
Britain from 1750 – 1830
 Preceded by two - three centuries of
merchant capitalism in Europe
 Followed by spread of industrial capitalism to
USA from around 1850
 Germany and USA leap ahead from 1870-90

9. Factors catalyzing the advance of
science and technology in Europe
 Portugese advances in navigation and the
breaking of the spice trade monopoly
 International trade and the “European
Enlightenment” – triggering effects
 The Enlightenment and the rise of science
in Europe – symbiotic evolution
 Breaking the stranglehold of theology to
promote advance of scientific thinking

10. What do we know today about
long-term growth ?
 Growth is uneven across time and space
 Pre-industrial societies were practically
stagnant by contemporary standards
 Economic growth accelerates with the onset
of the industrial revolution
 Growth is the result of technological change
 Benefits of technology are not automatic:
wrenching internal reforms are needed to
capture benefits from existing technology

11. Long-term growth occurs in waves
of technological revolutions
(Carlota Perez, 2002)
 From 1771
 From 1829
 From 1875
 From 1908
 From 1971
 The industrial revolution in Britain
 Age of steam and railways; from
Britain to W. Europe and the USA
 Age of steel, electricity and heavy
engineering. USA & Germany
lead
 Age of oil, automobile and mass
production; from USA to Europe
 Age of information technology;
from USA to Europe and Asia

12. International trade from 1750 to
1945 and the rise of imperialism
 Pre-industrial trading networks and colonies were
extended to generate larger markets
 Trade with colonies was a crucial source of raw
materials and agricultural products
 From around 1870 limited industrial activity was
induced in the colonies
 But exploitation of colonies (imperialism) held back
technological development in Britain and France
compared to the United States and Germany

13. Decisive political action is sometimes
needed for accelerated catch-up
 Peter the Great, Catherine the Great and
the modernization of Russia
 The Zollverein and the genesis of Germany
 The role of banks in promoting industry in
Germany (institutional substitution)
 The Meiji restoration in Japan and the role
of the state in kick-starting industry

14. Alexander Hamilton and the rise
of the USA as an industrial power
Hamilton (in 1791) put forward the following ideas.
• The US needed to become a strong industrial power
to become a first-rank nation, like Britain & France
• A developing nation like the USA could not compete
immediately against industrial might of UK, to match
the low-price and high quality of its manufactures
• US industrial capability has to be built-up steadily
over time through experience in production
• Hence, it is necessary to support domestic industry
and protect domestic markets against imports until
US industrial capability is built up to British levels
• Hamilton’s industrial policies were strongly opposed
by Southern plantation interests and Jefferson

15. Hamilton’s industrial policies for the
promotion of domestic manufactures
 Moderate tariffs crafted to protect ‘infant industries’ against imports
 Exemption from tariffs for industrial inputs
 Prohibitions on exporting raw materials needed by American industry
 Promotion of science, technology and innovation through subsidies,
patents and prizes for inventions and immigration of skilled people
 Regulation of product standards and inspection of US manufactured
goods to protect consumers and enhance reputation abroad
 Building up the physical infrastructure (transportation) and financial
system to support industrial expansion, trade and exports
These policies were opposed by Southern plantation owners, but
became accepted from around 1812, remaining in force until 1945.
US industry advanced rapidly, overtaking Britain and France by
around 1890.

16. Alexander Hamilton (1755-1804)
and Friedrich List (1789-1846)
Hamilton’s policies were adopted by List and implemented
in Germany as well. By 1871 Germany and the USA
began university-based research to support industrial
innovation. By 1890, Germany and the USA had
surpassed Britain in overall labor productivity and
productivity growth as well.

17. Other factors that drove US ascendency
over Western Europe ?
 Absence of feudal social institutions promoted faster
evolution of technology
 Large internal market led to gains from scale
economies from both production and distribution
 Imperialism in Britain and France held back
emergence of modern economic institutions
 USA borrowed technology and adopted new ideas
more rapidly than other countries
 USA incubated a uniquely entrepreneurial culture

18. Economic change is not automatic –
political action is often necessary
 Evolution of social & economic institutions is often forced
 Expansion of education and scientific research is often
initiated by the government (Germany, USA, India)
 Social structures that block progress need to be broken up
 Industrial work tempos and work ethic need to be built up
 Wars often accelerate the drive for technological change
 Political-economy actions needed for industrial catching-up
 Industrial policy used successfully by Japan, Korea, Taiwan
and Singapore, but many more countries that used industrial
policies failed to achieve breakthrough, possibly because
they failed to simultaneously implement other necessary
reforms
 Original industrial policies may not work today, because the
rules of trade have changed with the GATT-WTO process
and the much higher complexity of modern industrial
technology

19. Technological change and
economic growth: references
 Landes, David S. (1998), The Wealth and Poverty of
Nations, New York, NY: W.W. Norton.
 Maddison, Angus (1991), Dynamic Forces in Capitalist
Development: a Long-run Comparative View, Oxford, UK:
Oxford University Press.
 Maddison, Angus (1995), Monitoring the World Economy
1820–1992, Paris: OECD, Development Centre Studies.
 Mokyr, Joel (1990), The Lever of Riches: Technological
Creativity and Economic Progress, New York: Oxford
University Press.
 Chang, Ha-Joon (2008) Bad Samaritans: the Myth of
Free Trade and the Secret History of Capitalism, New
York, Bloomsbury Press.