The first industrial revolution a puzzle for growth economists
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The First Industrial Revolution: a Puzzle for Growth Economists. Nick Crafts and Larry Neal. 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

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The First Industrial Revolution: a Puzzle for Growth Economists

Nick Crafts and Larry Neal

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

British Industrial Revolution

  • Modest growth

  • Escape from ‘Malthusian Trap’

  • Large structural change

  • No take-off but TFP growth increases significantly

Growth in Britain (% per year)

Malthusian ModelCrafts & Mills (2007)

LogW = α- βLogPop + ρtTrend 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 ρEnglish 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

Employment Composition (%)

Agricultural/Total Employment at British 1840 Income Level (%)

Family to Capitalist Farming

  • Disappearance of small farms

  • Release of surplus labour

  • Promotes industrialization

  • ‘Explains’ British divergence from ‘European Norm’

Simulated 1841 EconomyCrafts & Harley (2004)

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

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

Institutions Matter

  • Modern economic growth associated with modern institutions:nation statesecularismconstitutional governmentextension of the franchise

Institutions Matter

  • Issue of causality confounded by advantages of backwardness for followers, who can: substitute capital skip learning stagesadopt most advanced technologyimport capital, skills, institutions

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)

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

Total Steam Contribution to Growth of Labour Productivity (% per year)

Source: Crafts (2003): includes railway, steamships, steam engines

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

Sources of Labour Productivity Growth, 1780-1860(Crafts, 2005) (% peryear)

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

Endogenous Innovation Models

  • Expected technological progress is faster if appropriability of returns improves productivity of R & D inputs goes up markets get bigger



Endogenous Growth

Schumpeter relationship (high λ)


Schumpeter (low λ)

Solow (high s)

Solow steady-state relationship (low s)

Growth Potential

  • In later 18th century quite probable that growth potential higher in Britain than in France or 16th_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 ?

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

Role of Markets: Land, Labor, Capital, Entrepreneurs

  • Markets allocate resources more efficiently than alternative methods: Command economiesCustom in traditional economies

  • Hicks’ dilemma:Command is usual response to shocksCustom emerges in absence of shocks

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

Tales of Two Institutions

Tales of Two Institutions

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.

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 18th c. model, fails with fall of Amsterdam, leads to paper pound

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

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

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

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