The industrial revolution # 10 18 October 2016
A (peculiar) turning point The industrial revolution represents a turning point as it inaugurated the era of sustained economic growth thus, income compounded to today s levels Even though it was not an abrupt discontinuity it marked a discontinuity at the end of the process of transformation The very point is that it was the first of a string of industrial revolutions
The Britain s GDP growth rate, 1700-1870 The pace of the annual GDP growth rate was relatively modest in the 18 th century (circa 1,2% per year) [Broadberry et alii, 2011] compared to recent fast growth experiences (South Korea s or China s has grown as much as 8-10% per year)
Discontinuity from a gradual process: an oxymoron? At the very end of the process Britain s economy appeared radically transformed But the industrial revolution in its making was a gradual process as the industrial sector was initially smaller than the others (agriculture + services) as Britain s was extending the world s technology frontier (and that s slower than importing a technology)
Why England? Why did the industrial revolution occur in England rather than in the Netherlands or in France? Or in China or India? England had the right context England had the right political institutions promoted the empire and the commerce as the basis of the high-wage economy favoured enclosures, canals and turnpikes by overriding property owners supported the emerging scientific culture
Britain s unique structure of wages and prices The structure of prices may explain the macroeconomic dynamics in Europe and Asia The structure of prices and wages was unique and provided a peculiar set of incentives high-wages (+ education) cheap energy (coal-mining) relative low price of capital services
Less labour, more technology British wages were high relative to the price of capital from the mid-17 th century and even more subsequently (60% by the mid- 18 th century) So British firms had a strong incentive to mechanise production less (expensive) labour, more (cheap) capital and energy Technology (K + E) made labour more productive compatible with high wages
Wages relative to price of capital services Since 1630 circa the ratio measuring the relative affordability of capital compared to labour split in Europe In the early 1820s the differential between Europe (UK) and India restrained the adoption of capital intensive technology in India with a negative impact on the Asian growth potential The same was true for energy
The industrial revolution at work: the cotton industry Cotton was the first industry to be transformed by technology and organisational innovation (factory production) Britain s expansion came at the expense of India, China and the Middle East (Calico Acts, 1710) Internationalisation was the spur that led to the mechanisation of cotton spinning as machines where profitable only in England technology adjusted to relative prices through experimental engineering
The economics of machines The economics of machines was quite simple incremental successive innovations made spinning machines successful (Hargreaves, Arkwright, Crompton) but they were actually cost saving only where the labour cost was high enough Arkwright mill s rate of return was 40% in England, 9% in France, 1% in India So by the 1820s improved cotton machinery made profitable machines also on the Continent (saving capital as well)
The steam engine The steam engine was the key technology of the industrial revolution allowing mechanical power to be used in a wide range of industries (factories, railways, ships) the first general-purpose technology (GPT) As a spin-off of the scientific revolution (from Galileo to Boyle and Papin) was a pan- European product But it was economically profitable only in Britain (because of the cheap coal & expensive labour)
Continuing invention The greatest feature of the industrial revolution is that its innovations were not one-offs, but kicked off a stream of innovations [Mokyr, 2005] A GPT has a long-run pay-off effect thus explaining why economic growth (and structural change) was so slow and gradual (up to the mid-19 th century) cumulative and incremental micro-innovations
The ascent of the rich # 11 19 October 2016
Industrialising Europe (and the West) From 1815 to 1870 industrialisation spread from Britain to Europe (at least partly) and to the Western offshoots (USA) Catching up processes coincided with the formation of the innovation club, a group of countries, all of them able to push forward the world s technology frontier Catching up with the leader (Britain) entailed overcoming a consistency problem as the technologies of the industrial revolution were forged according to a specific endowment (UK)
Technology gap and infant industries Industrialisation outside Britain required appropriate technology and protection from British competition The followers needed a strategy to emulate the British industrialisation The idea was that followers had uncompetitive industries as they were at the infancy stage and so they were to be protected (infant industries) Hamilton (USA, 1790) and List (Germany, 1841)
Development strategies The standard development strategy had four points: to unify the national market by abolishing internal tariffs and promoting transports to protect national manufacturers by means of external tariffs (protectionism) to modernise the financial system to promote mass education: human capital and technology
A national market The German case is a good case in point After Vienna (1815) Prussia led the creation of a less segmented market through a customs union (the Zollverein) common external tariffs were introduced to keep out British manufacturers In the 1850s mainline railways were laid out and branch lines in the 1860s In 1913 Germany had a railway network of about 63,000 km
The protectionism Improved technologies made profitable to transfer mature technologies to the Continent (Belgium, Germany, France) the cotton industry (a light sector), 1830s- 1860s Whereas technologies incoherent with the followers endowment needed protection to catch up with cutting edge technology the iron industry (a heavy sector), 1860s- 1890s
The second industrial revolution In the 1880s the technological discontinuity in capital-intensive sectors was an opportunity for the second comers Germany in steel and chemical industries France in steel industry and mechanical engineering (+ the car industry) USA in steel and chemical industries, mechanical engineering and car-making From 1870 to 1913 the followers caught up with the UK in manufacturing production
The British (relative) decline From 1870 onwards Britain lose her relative positions in international trade and manufacturing By 1913 the followers outpaced Britain in industrial output Britain s share of the world s manufactures dropped from 23% in 1880 to 14% The continental industrialisation extended and pushed forward the technology frontier (a collective and shared effort)
How to finance investments? But the new technologies were capitalintensive and required more capital and in a shorter time The universal banking (commercial + investment banking) allowed to reduce the gap by bridging savings and investments Société Générale de Belgique (1822/1832) Crédit Mobilier in France (1852) Kredit Banken in Germany (Dresdner B., Darmstadter B., Commerz B., Berliner HG, Deutsche B.)
R&D and human capital The key point in the industrialisation of the second comers (USA, Germany, France) is represented by technology innovation and transfer through adaptive strategies The second industrial revolution sectors needed investment in human capital (mass education) and R&D as technological innovation was more and more science-based the German primacy in the chemical sector
The macroeconomic character of innovation The global aggregate production function suggests that technological progress has a macroeconomic character the rich countries have developed technologies suitable to their specific circumstances addressing their own needs e.g., in Britain high wages favoured technologies which economised labour by increasing the use of capital The spiral underlies the rising income of rich countries (and inequalities as well)
The world aggregate production function: USA, Germany and Italy (1820-1990) over time Today s development has been created yesterday and it depends on technologies invented by rich countries that became such yesterday The ascending spiral of progress further increases the advantage of rich countries
The great empires # 12 20 October 2016
Europe and the Empires In the long run the European political segmentation [Rosenberg & Birdzell 1987] was in contrast with the great Empires Russian, Ottoman, Persian, Mogul, Chinese and Japanese Were the Empires richer than Europe? Or less dynamic exactly because empires? not open to the international trade [Smith] with an inefficient demographic model [Malthus] or an inefficient socio-political structure [Marx]
The California School These views have been challenged by the California School [Pomeranz; Li; Feng] in particular, China had a legal system (property rights) comparable to Europe s the demographic structure, although different, had similar dynamics productivity and living standards were similar at both ends of Eurasia (and Yangzi Delta quite close to England s) The big difference was that empires had no coal reserves and did not profit from globalisation
Asia s deindustrialisation Asia started the 19 th century with the largest manufacturing share and ended the long century de-industrialised (neither modern factories nor state-of-the-art technologies) Three factors determined Asia s (but, partly, J and RUS) deindustrialisation technology globalisation economic policies
A lack of competitiveness The industrial revolution technology were cost-effective in Europe but not in India or China, where the cost of labour was lower than the cost of capital Thus, Asian producers had to wait for the improvement of European technologies so that became costeffective for Asia too to adapt them to their specific factor endowment (as Japan did first)
in a global world The growing productivity differential between Europe and Asia became a direct competitiveness differential as a result of globalisation The cutting of costs (cheaper transports) boosted the integration of international markets and the international competition outcompeted the inefficient Asian makers So, the Resteners de-industrialised and regressed to commodity producers backward economies
How comparative advantages worked How to explain Asia s regression to a backward continent: the theory of comparative advantages [Ricardo, 1819] The international trade implies the specialisation of each economy according to its own comparative advantage economies make what they make more efficiently comparatively with long-term effects vs short term effect when a world market emerged in the early 19 th cent. Asia specialised in commodities
The importance of being a colony In a global world only independent states or polities had the power to pursue development strategies (USA, Western Europe) to adjust to international competition (Britain, initially) But colonies are not independent, they were subordinated to colonial powers Institutions were not efficient as they were efficient for colonial powers not for colonies preventing them to adopt such strategies
The cotton industry in Britain and India During the industrial revolution mechanisation fostered the productivity of the British textile producers The international competition made directly comparable the differences in the relative efficiency of manufacturing in Britain (increasing) and India (stagnant) Britain s industrialisation provoked an imbalance in the global productivity growth pushing India towards primary productions for which now she had a relative advantage
The direct competition The price of British and Indian cotton in London was similar, although British cotton prices plunged more quickly In 1812 the request by British manufacturers to repeal the East India Co. monopoly was consistent with the relative competitiveness for yarns (and then clothes) As a consequence India specialised in cotton raw production, lesser value added
The real price of cotton in England and India, 1781-1913
The real price of raw cotton in England and India, 1781-1913
De-industrialising India India s deindustrialisation was a consequence of specialisation in primary products (raw cotton) with cumulative effects over time (path dependence) confirming the Indian specialisation (in the primary sector) Neither the railroadisation (from the 1860s onwards) of India positively stimulated local manufacturers because of the British imperial policies