British Economic Growth in the Steam Age: Some Lessons for Today

1. British Economic Growth in the Steam Age: Some Lessons for Today Nick Crafts University of Warwick

2. General Purpose Technologies(Lipsey et al, 1998) • Over time are found to have many uses and complementarities … are pervasive • Initially have much scope for improvement • Eventually come to be widely used and lead to (large) rise in aggregate productivity growth BUT • Initially may have no positive impact on growth or even imply a slowdown phase

3. The Solow Productivity Paradox You can see the computer age everywhere except in the productivity statistics Robert Solow, 1987

4. Steam as a General Purpose Technology • Steam Engines, Railways, Steamships • James Watt’s Invention : 1769 • Liverpool & Manchester Railway : 1830 • Steamship crosses the Atlantic : 1838

5. Sources of Power, 1760-1907 (Thousand Horsepower) Source: Kanefsky (1979a, p338); not including internal combustion engines

6. Steam Engine Technology • Took a long time to become cost effective in most sectors • Coal consumption per hp per hour fell from 30 lb pre-Watt to 12.5 lb for Watt engine to 2 lb by 1900 when psi reached 200 compared with 6 in 1770 • The big breakthrough was not James Watt but the move to the high pressure steam engine after 1850

7. Capital Cost and Annual Cost per Steam Horsepower per year (£ current) Note: the estimates are for a benchmark textile mill in a low coal cost region like Manchester

8. Total Steam Contribution to Growth of Labour Productivity (% per year) Source: Crafts (2003): includes railway, steamships, steam engines

9. Implications • Small contribution of steam pre-1830 helps explain Crafts-Harley view of industrial revolution • Strong contribution of steam power in second half of 19th century says climacteric not explained by hiatus between GPTs • Puts Solow Paradox into perspective

10. ICT Contribution to US Labour Productivity Growth (% points per year) Source: Oliner and Sichel (2003)

11. The Progress of ComputingReal Cost MIPS-E ($1998) Source: Nordbaus (2001)

12. Impact of GPTs on Growth • ICT much bigger impact on American growth in recent past than steam ever had on UK growth • Costs of computing have fallen much faster than did costs of steam power • Society seems to be getting better at exploiting GPTs more rapidly

13. Railway Capital Authorised (£mn) Source: Gayer, Rostow & Schwartz (1953)

14. Railway Share Prices (June 1840=100)

15. RAILWAY BENEFITS

16. RATES OF RETURN • Average private rate of return = 5%, 1830-70 • Average social rate of return = 15%, 1830-70

17. Lessons from Railways • Railway mania ended in tears • Profits from railways less than optimists had hoped • Users gained much more than investors

18. Does Innovation Generate Supernormal Profits? (Nordhaus, 2004) • Innovators capture about 2% of the total socialgain from technological progress • Appropriability is low(7%) and depreciation is high (20% per year) • The US stock market valuation of ‘new economy’ firms grew between 1995 and 2000 at a rate that implied owners could capture 90% of the social gain

19. NASDAQ Composite Index

20. The New Economy and Stock Prices • It was a bubble but fundamentals (trend growth) had improved • Dot.coms experience would not have surprised someone who lived through the 1840s • Economic gains from ICT not a mirage but few of them will be reaped by investors

21. Globalization • Enhanced integration of international markets • Promoted by reductions in transport and communications costs ….. both steam and ICT do this • But is the effect to centralize or disperse economic activity?...to promote divergence or convergence?

22. Transport/Communication Costs • VERY HIGH: activity is dispersed • VERY LOW: activity is dispersed • INTERMEDIATE: agglomeration with feedback effects based on large markets and linkages

23. Agglomeration Benefits • External economies of scale • Productivity rises with city size • Proximity to customers and suppliers • Thick labour market • Still very important and cannot easily be replicated

24. Steam Power and Industrial Location • Reduced transport costs for goods rather than services both on land and at sea • Industry moved closer to natural resources • Manufacturing cities proliferated in Europe and North America • Centralizing not dispersing

25. Real Cost of Ocean Shipping(1910 = 100) Source: Harley (1988)

26. Steam-Powered Globalization • Helped manufacturing and finance • Hurt arable agriculture, especially land rents • Lancashire cotton textiles enjoyed an Indian summer

27. Wheat Prices Sources: Harley (1980); Mitchell (1988)

28. Lancashire Textiles and Globalization(Leunig, 2005) • Lancashire a high wage industry (6 xIndia and Japan in 1910) • But continued to dominate world trade (60% world market share in 1910) • Unit costs no higher than in India or Japan even before adjusting for quality • Lancashire flourished because of agglomeration benefits (productivity33%higher than rest of Britain)

29. Regional GDP/Head(GB= 100)(Crafts, 2005)

30. Coefficient of Variation of Regional GDP/Person Source: Crafts (2005)

31. Globalization and the Regions • Both then and now regional income inequality rises with globalization • London then and “Greater London” now prosper while imports hurt the provinces • East Anglia suffered in 19th century and West Midlands in 20th century

32. London as a Financial Centre • Agglomeration where size matters • Benefits from thick labour markets and importance of proximity for deal-making • Clerical jobs will increasingly be offshored • This will strengthen the core business

33. UK Asset Management: Core BusinessOXERA (2005)

34. UK Asset Management: Back-OfficeOXERA (2005)

35. Death of Distance • “Greatly exaggerated” • ICT enables some things to go to the periphery but enhances the strengths of the core at the same time (e.g. strengthens London as a financial centre) • Like steam, ICT rearranges geography but doesn’t abolish it • Globalization requires sectoral and spatial adjustment

36. Did Victorian Britain Fail ? • Choices of technique basically correct • Foreign investment profitable • Emulation of USA not feasible • Natural resources, economies of scale, non-universal technology: not a neoclassical world • New growth economics and new economic geography complicate the argument

37. Pre-1914 Globalization • Driven by falling transport and communication costs • Protectionism increasing in product markets and USA a high tariff country • Massive international factor flows • BOTH capital and labor go from Old World to New World

38. Anglo-American Wage Gap: % Contributions to Change, 1870-1913(O’Rourke, 1996)

39. Why No Wage Convergence ? • TFP gaps increase because of British incompetence • USA develops its own non-transferable technology • USA benefits from increasing returns to scale and agglomeration economies sustained by migration

40. Heckscher-Ohlin US comparative advantage from land abundance remains in agriculture Tariffs imply less trade and more migration New Geography Migration and increasing returns: virtuous circle of industrialization plus manufactured exports Tariffs imply more migration and promote switch in comparative advantage North Atlantic Economy

41. American Overtaking of Britain • Best understood in the context of globalization • Reveals some limitations of neoclassical economics • May have no important policy implications