EXPLAINING THE INDUSTRIAL REVOLUTION

Ideas Untrapped

Welcome to another season of your favourite podcast! We are starting off the season by exploring the many explanations of The Industrial Revolution with economic historian and writer Davis Kedrosky. You can learn more about Davis' work from his excellent newsletter here. You can also listen to this podcast through all the other options here. The transcript of the conversation is below.

TRANSCRIPT

Tobi;

So briefly, what is the Industrial Revolution? And what is its significance? I mean, we've all seen the charts, you see these different trend lines charting world living standards from the Middle Ages, and then somewhere in the middle 18th century, there's this huge jump, you know, that is generally termed as around the time the Industrial Revolution started. So what's the Industrial Revolution, basically? And why is it significant?

Davis;

Right. So I guess what you've asked here is two impossibly three questions. So what is the Industrial Revolution? The Industrial Revolution is actually multiple events, which is the bad historian answer. But essentially, you first have the British Industrial Revolution. This is a period that starts around 1760 and continues for about a century until 1860. That's sort of the standard periodization and basically consists of the structural transformation of one economy, the British economy, from a largely agrarian country to one based on manufacturing, especially in a couple of key sectors, those being textiles, iron, and various types of steam goods.

So this event is transformative in a number of ways. It's not transformative, in that it brings about a titanic increase in living standards. Because really, for most of the period, living standards in Britain do not rise. It's significant because it is really the first true stirring of economic dynamism anywhere in the world, with the possible exception of the Netherlands in the 17th century. But in this case, in Britain, the industrial revolution is truly sustained.

And that brings us to the second part of the question, what is the Industrial Revolution? Because there's first the British Industrial Revolution, and then a European and then a Global Industrial Revolution. By the middle of the 19th century, the technologies that sustain the British Industrial Revolution are spreading to the European continent, and Britain's rivals - France, Germany, parts of Eastern Europe, and Northern Europe and southern Europe - are all starting to take part.

And this becomes a continental phenomenon. And this is occurring toward the middle and the latter half of the 19th century, eventually spreading to North America, and is based on new technologies. Primarily based on the application of science to the growth process. And this growth, unlike, perhaps the British industrial revolution, and certainly unlike any growth episode in world history was sustained. Because we are where we are today.

It was the beginning of modern economic growth. And so that actually gets into why this episode is significant because it is the spontaneous transformation of a largely stagnant, slow-growing economy, perhaps less so in Britain, but certainly the case in Europe and the rest of the world until something that increasingly approach the relatively rapid pace that we're seeing today, and learn to apply technological advances in a consistent fashion to the improvement of human welfare.

Tobi;

I'm curious, yeah, like you said, the data is usually put somewhere around 1760, to about 1860, for the first Industrial Revolution. Why did it happen when it did? Because usually, you get two sides of this story, where some scholars will argue it was a really long, slow buildup; while you get the impression from some other scholars that was a sudden discontinuity from a previous, longer trend. So why that period in time, what was different?

Davis;

If I said that I believe that the Industrial Revolution was a discontinuity from a long trend, I would have historians barking at my door for the next year, and I, you know, might not ever have a career in this discipline. But what I will say is that there are a number of theories about why the industrial revolution happened and how it happens. And this paints me as a historian, but I think it's sort of irresponsible to settle on one. So I borrow from all of them. But I'll just, you know, for the benefit of the listener, I will lay out as many as I can, that I think are relevant.

So I guess in the classic phase of the debate, starting in the 19th century when people realize starting with people like Karl Marx... realized that the changes that had been occurring over the previous century in the economy of Britain had been of truly historic magnitude.

Two competing theories for why the industrial revolution happens: and I'm borrowing from Deirdre McCloskey here - the conservative approach, which is to say, basically capitalists saved, they were frugal, they built up a larger capital stock, and eventually learned to make whatever gains and growth that they were achieving self-perpetuating. And of course, more capital per person means more productivity, more productivity means greater income per head. So that's the conservative interpretation.

The Socialist interpretation is that of Marx, which is that the industrial revolution is based on expropriation, that a process of force was involved in first, the primitive accumulation of capital by capitalists and by capitalist farmers; in dispossessing the peasantry from the countryside and driving them into the factories where they could serve as low wage labour. This increase the profits of the capitalists, and in turn created the self-perpetuating growth process that we are observing continuing today.

Both of those continue to be influential, and certainly, their strains have been incorporated into the modern economic history discourse. But so far as we're concerned in talking about economic history, I think that there are really three main theories. And so one of them is definitely the slow growth over time take. And that's the unified growth theory of people like Oded Galor and David Weil, and they essentially argue that an evolutionary process occurs over time whereby a combination of selection and population growth leads to the accumulation of technologies, increase in the rate of innovation.

And then this innovation in turn leads to economic growth. And that is also abetted by fertility transition, such that population growth is no longer correlated with economic growth. And that leads to a growth in income per head. Then we have... I think it's about the same year - the end of the first decade of this millennium, we had two theories that have really transformed economic history come out that really set the terms for the causes of the Industrial Revolution debate.

The one that's been, I think, most influential among economists is that of Bob Allen. And in his book, The British Industrial Revolution and Global Perspective, he argues that Britain had a unique combination of factor prices - that wages were extremely high in Britain, and capital and energy were extremely cheap.

And so what this led producers to do was to substitute labour for capital and also make innovations that would have this labour-saving effect by using lots of capital and energy. The prime example is the steam engine, which used cheap British coal to perform the work that would otherwise have been performed by muscle power. And so the continual creation of these labour-saving inventions is sort of the basis for the Industrial Revolution and increases worker productivity.

This is the Allen theory. The Allen theory has received some very strong critiques. People like Jane Humphries and Judy Stevenson have really attacked the empirical basis of Allen's work. They've suggested that wages in Britain were not nearly as high as Allen had computed and that his series made some improper assumptions that led it to be inflated and this really changed the sorts of profits to technological innovation that Allen had to suppose would be driving this process.

And so that's where the Allen theory stands today. It's sort of the cleanest mechanism for describing the industrial revolution in an economic sense, but it faces some factual challenges. The other one that occurred about the same time is that of Joel Mokyr. He wrote a book called The Enlightened Economy, I believe in 2009, in which he argued that it was rather ideas rather than economic incentives that led to the transformation of Britain.

That it was industrial enlightenment that occurred, and a culture of improvement that swept Britain and led many people of the intellectual class of the country to start taking an interest in practical matters, devising innovations that would improve society, that would make doing practical tasks easier, and then crucially, sharing them with the people around them in a sort of Republic of Letters - in which intellectuals across England and across the continent all communicated to iterate upon each other's technical ideas.

And this, in turn, provided the creative spark for modern economic growth and crucially incorporates the sort of scientific aspects that is the foundation of the second or European Industrial Revolution. These are the two main competing theories and people like Nicholas Crafts have attempted to synthesize them into a single argument suggesting that, you know, one explains the demand and one explains the supply of inventions. But others hold that they're incompatible. But you can kind of pick and choose your favourite aspects as Crafts did.

Tobi;

Yeah, I mean, I get that. But from a global perspective, you're looking at other parts of the world like India, Africa. There are other - I'd say, maybe within the economic history profession - not so popular, but quite popular with the lay public. For example, the institutionalist view of Acemoglu and Robinson who claim in their book and also in some of their papers that the Glorious Revolution laid the foundation for the Industrial Revolution. That's one, I'll like you to address some critiques of that. And secondly, what's the difference between Galor's Unified Growth Theory and sort of the Neo Malthusian story that people like Gregory Clark are constructing?

Davis;

Okay, I'll start with the Acemoglu and Robinson theory about the Glorious Revolution. So [what] they essentially argue is that the Glorious Revolution is a watershed event that turns England into a participatory democracy, in which people are free to possess, transfer and use private property without fear of expropriation from the supposedly tyrannical monarchy that existed beforehand.

And in the institutionalist view, the security of property rights and participatory democracy are both crucial for economic growth because they allow people to transfer assets to their most productive uses. And these sort of efficiency gains also lead to investment and modern economic growth is supposed to follow from that.

Yeah, so Acemoglu and Robinson are sorts of making a distinction between inclusive and extractive institutions. Extractive institutions are supposed to be the sort of, European and broadly global pattern whereby elites have no incentive to promote economic growth and do not allow participation by the common citizen in the political discourse. Whereas inclusive institutions are very much the exception but are established in Britain in the sense that I've previously described, in both the economic and political spheres.

They allege that, and I quote, "the industrial revolution started and made its biggest strides in England because of her uniquely inclusive economic institutions. These, in turn, were built on the foundations laid by the inclusive political institutions brought about by the Glorious Revolution, and that they gave man of talent and vision such as James Watt, the opportunity and incentive to develop their skills and ideas and influence the system in ways that benefited them and the nation".

So yeah, that's the Acemoglu and Robinson view. Um... I'm not so fond of this one.

Tobi;

Why?

Davis;

I have to be careful because there are many people who see a sort of, attack on Acemoglu and Robinson, or even a critique of Acemoglu and Robinson as a critique of institutionalism itself, and I am by no means an anti institutionalist. Because I mean, it's painfully obvious that institutions are extremely important in explaining differential development.

But some empirical flaws with the Acemoglu and Robinson contention, especially in its "Why Nations Fail" iteration is that the Glorious Revolution really didn't actually bring about the sort of sweeping political changes that they suppose occurred. British Parliament was still corrupt, the electorate was tiny and dominated by landed elites rather than merchants. Certainly, industrialists come [in the] early part of the 18th century. So those sorts of sweeping changes couldn't really have had a very big influence on the beginning of Britain's economic transformation.

Second of all, Parliaments just do not guarantee economic growth anyway, there are plenty of examples of Parliaments filled with wealth holders and merchants who use their political powers in order to just extract rents from the economy at large. So this happens in places like Poland, for example, where parliament is so strong that the ruler cannot issue any legislation without its consent. But that power is then used by the Polish parliament to support the feudal rights of landowners over their serfs and that leads to agricultural stagnation rather than economic growth.

So parliament is not necessarily the keystone of economic transformation. Finally, private property in England was already quite secure by the time of the Glorious Revolution. And that event did not bring about any kind of radical transformation in the way that property was treated in England. The Bill of Rights that was passed in 1689 did not impose any limits on Parliament's ability to confiscate property.

So you basically see the replacement of the monarch's despotic power over property such as it existed, which was in curtailed form by Parliament. So it's not clear to me that you can attach an economic discontinuity to a political discontinuity in this way. I mean, indeed, in the century following the Glorious Revolution, there really isn't an economic discontinuity.

There is perhaps an acceleration in the rate at which the British population is moving out of agriculture, but that had been occurring for over a century in Britain. Those are some of the main difficulties with the Acemoglu and Robinson theory. Then I believe you asked about...um...

Tobi;

Yeah, Greg Clark and...

Davis;

Right. So this is not an area that I've really worked with very much. And by the way, there are a number of iterations on the Unified Growth Theory. But as best as I understand it, unified growth theory is concerned with the sort of, the transition between a Malthusian regime and a post-Malthusian regime through the lens of the demographic transition and the returns to innovation.

And in their model, population growth tends to increase the rate of technological progress, and technological progress, in turn, increases the returns to investing in human capital. And there's sort of a positive feedback loop between investment in human capital and the rate of technological growth, which has the additional effect of decreasing fertility and a sort of quality versus quantity trade-off.

Clark's hypothesis is a little bit different. So Clarke, as I recall, argues most famously in the Farewell to Arms, sorry, A Farewell to Alms. (That is quite a slip there). His argument there is that, basically, the differential reproductive rates of the wealthy lead people of their habits and mindset to become the dominant subset of the population in certain advanced regions, and their behaviour - the behaviour that made them wealthy - is sort of the basis for growth-inducing economic interaction. Those are the main differences.

I guess they don't interact with one another that directly, in my point of view.

Tobi;

So I mean, as long as we are interrogating several theories of the causes of the Industrial Revolution, I read McCloskey's trilogy, right? And I mean, she spent a lot of time criticizing all these other theories about the causes of the Great Enrichment, as she called it. And at the end of the day, she basically, well, I'm not an expert, but in my opinion, she resorted to a bit of a sleight of hand as well, which is to say that well, the cause of this Great Enrichment is liberalism. The spread of freedom, and basically attributed that to luck. Do you buy that? And how does that differ from say, Acemoglu and Robinson, you know... Feels a bit arbitrary.

Davis;

As I understand it, liberalism is only a part of the McCloskey hypothesis. There's also an aspect to which it has to do with the spread of the bourgeois virtues among the people of Britain and an economic mentality that had not previously existed, and that these sorts of behaviours are the key to an efficiently transacting and innovating culture.

Yeah, so there's not just liberalism uber alles. But as far as liberalism is concerned, it's clearly not a sufficient condition for economic growth, it has to be combined to be even beneficial with certain kinds of state capacity such as the provision of some kinds of basic essential services, especially infrastructure, and the provision of social overhead capital in order for the benefits of industrialization not to be winnowed away.

I mean, a good example is Britain, in fact, where certain kinds of laissez-faire behaviour by the state are actually detrimental to the British economy. British cities grow much too fast for their infrastructure, and in many ways, they really are the sort of hives of scum, filth, and overcrowding they're drawn up as in your standard Charles Dickens novel.

And part of the reason for that is because much of the investment in public infrastructure was shunted away from the state and toward private individuals and this process did not occur as seamlessly as it might have. And so, you know, there's poor sanitation, improper access to good drinking water, inadequate housing stocks, and all these social bads, actually, probably, reduced the rate of economic growth.

So if liberalism is to be helpful, it has to be an appendage of a larger growth process. And I really do not think it's either sufficient or necessary for industrialization. You can look straight to one of the foremost industrializing countries of the last four decades in China, where industrialization has occurred apace in, really, the absence of political liberalism.

And you can make arguments about whether that growth will be sustained. But there is certainly dynamism and there is certainly an improvement in per capita living standards and convergence with the West. You can even make the argument for Soviet Russia and its early years as Bob Allen has - that from about the late 1920s until 1970, Soviet Russia under a planning regime grew quickly enough to have some measure of convergence with the West, and certainly an increase in living standards.

Tobi;

Two final questions before I let you go. One of which would be, as you mentioned in the introduction, after the 1760 or thereabout event, a lot of economies in Europe, France, and of course, Germany, caught up with the British economy and, of course, by the end of the Second World War, America had become the preeminent global economic power. Why did the British economy decline?

Davis;

That's a question that some economic historians don't accept at all, and that I'm hoping to explore in the relatively near future. But the old Edwardian argument that Britain has just matured, and that it's had its spell as the leading industrial nation, but there are inevitable limits to growth, and that they've reached the limit of their possibilities and handed over the torch to the United States and to Britain's European rivals.

You know, the answer here is obviously a little bit more complicated. But one of the standard responses is to say, well, the kind of growth that Britain experienced from 1760 to 1860, was of a fundamentally different character than that that made the United States and Western Central Europe successful during the 19th century.

And that's basically down to this distinction between tinkering and engineering-based innovation that is responsible for the creation of many of the main inventions of the British Industrial Revolution and the application of science to technology, drives innovation during the Second Industrial Revolution. So in the first industrial revolution, you see, particularly in the textile sector, a range of innovations arising from learning by doing, from people within the industry solving problems that occur to them in the production process and making incremental improvements, really, without the aid of any kind of formal knowledge.

Not all of these improvements are incremental, like inventions like the flying shuttle, the water frame, the spinning jenny, all these things bring about colossal improvements in productivity, and they make Britain by 1850 the world's leading textile exporter, but none of them required deep formal knowledge of how to construct machinery of the physics of the engineering process.

Whereas by the end of the 19th century, some of the leading sectors like steel, electricity, the construction of automobiles, chemicals, all of these industries require significant scientific knowledge in order to advance to an appreciable degree. So there's the argument that Britain's success in tinkering-based innovation-led it to undervalue the importance of investment in human capital, specifically through an education system.

And consequently, there was sort of an inadequate generation of young scientists and professional engineers coming through the ranks just at the time when they were most needed in transitioning the British economy toward the modern industries that we're taking hold in Germany and the United States.

That's probably true to an extent. But there's also a degree to which Britain is simply following its comparative advantage in other kinds of industries in the face of the industrialization of the United States and the Central European powers.

Britain is always going to have an advantage in the provision of financial services and shipping, and that is really one of the directions that the British economy takes in the years before World War One. And so the economic historian Simon Carly has argued that this isn't senescence, this is not the ageing and stagnation of the British economy, but really a movement in a new direction to conform with her resource possibilities and comparative advantages.

Obviously, the United States is always going to have a much larger advantage in heavy resource-based industrialization, because of the massive reserves of ores, minerals, timber at its disposal.

Tobi;

Final question before I let you go, if we look at contemporary economic growth and policies, especially in countries that are still behind income-wise, what can we learn from the Industrial Revolution? Because a lot of people project different things depending on the causal story that they buy, or that they want to believe.

Advocates of industrialization and the East Asian style of industrial policy take different lessons, people who favour the Institutionalists also use that to give their own sort of policy advice. People who favour liberalism will say, well, it's about political freedom. So what are we supposed to learn from the Industrial Revolution, so to speak, does that particular period of history have anything to teach us at all?

Davis;

You and every sort of public, economic intellectual in every country that has tried to develop ever since the Industrial Revolution wonders the same thing. And the thing that's really interesting and unique about the British Industrial Revolution is not just that it's the first of its kind, but that it's the only Industrial Revolution that occurs without a model.

Because every other industrialization process in history looked back on the British experience, and said, you know, we should imitate this aspect and that aspect. And that where Britain has been successful, we should expect to be successful too. They've taken Britain's successes and applied them to their own, to some extent. The British Industrial Revolution is unique because there is no precedent, there is no model for what occurred.

It really did happen spontaneously, because even though there may have been some elements in the British government that wanted to promote economic growth, that's the famous mercantilism of the 17th and 18th centuries and really, one of the reasons why Adam Smith writes his great book, The Wealth of Nations in 1776, is because these are all people interested in making the country wealthier. But they had no idea that industrialization was sort of what could or would follow.

And so, in terms of the lessons that we can draw from this, they are to some extent limited. We know that because of the degree to which all of these countries that have attempted to follow the British model have either successfully or unsuccessfully failed to do so.

The United States, for example, was moderately successful at industrializing, say, in New England, along British lines, but immensely successful in going its own way in a variety of Heavy Industries toward the end of the 19th century. Partly because of the simple scale, but also because of the human capital and skill advantages that we've been talking about.

You know, it's quite reasonable to argue that many of the East Asian countries would have struggled to industrialize in the spontaneous fashion that Britain did because they were situated in a position in the global economy in which they did not have a comparative advantage in the industries that would end up transforming them until they employed industrial policy in order to break free and to get out of low level local agrarian traps.

And I know that people will shout at me and say that Meiji Japan was already growing prior to the world wars. But I don't think it was necessarily true that Meiji Japan was set to grow in the spectacular fashion that Japan did after 1945. But all this is debatable. But what is certainly true from the British example, is that it demonstrates, in some respects, the extent to which a different combination of political liberalism and state capacity can make a difference in producing some economic separation.

So if you have the right political economy, by comparison with your neighbours, you can have a bit of a growth advantage. This is not to say that if you have had Britain's political economy from the 18th century, you would somehow grow faster today. Rather, if you had Britain's advantage in political economy, you might have.

But in my opinion, and this is not to sound too down, the genesis of the Industrial Revolution is primarily in the long process of the transformation of productive forces from the 16th century onward. And no hand was taken really by any institution in shaping them. And that spontaneity, and that mystery really, is what makes the Industrial Revolution so interesting. And so also just why it has been so difficult to copy. And why nations that have intentionally industrialized have needed to find their own recipes for doing so.

Tobi;

Finally, what are you working on right now? And why are you excited about it?

Davis;

Yeah, so I'm planning on obviously continuing with my Substack and blog, I never really know what to call it. I don't know if it's a newsletter or a blog, or what? I guess it just depends on...

Tobi;

I think it's both.

Davis;

Yeah, I guess it depends on how you access it. But yeah, I've got a couple of projects in various stages of production. I have an economic history paper that is presumably being refereed at the moment, so we'll see how that's received and whether major transformations will be needed to bring that toward publication.

And then I also am in some of the very early stages of what could be an exciting project in Canadian economic history. But I don't want to reveal too much about that at the present. I'm not exactly like throwing spaghetti at the wall and hoping that it sticks because I have way too much time in order to, sort of, incentivise desperation like that.

But I do think it's, at this point, beneficial to engage in a diverse array of possibilities for work that I can consider doing.

Tobi;

It's been great talking to you, Davis, and I wish you all the best.

Davis;

Yeah, thanks. Fun conversation.

This is a public episode. If you’d like to discuss this with other subscribers or get access to bonus episodes, visit www.ideasuntrapped.com/subscribe