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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

The First Industrial Revolution: a Puzzle for Growth Economists

Nick Crafts and Larry Neal

the holy grail
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
British Industrial Revolution
  • Modest growth
  • Escape from ‘Malthusian Trap’
  • Large structural change
  • No take-off but TFP growth increases significantly
malthusian model crafts mills 2007
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

family to capitalist farming
Family to Capitalist Farming
  • Disappearance of small farms
  • Release of surplus labour
  • Promotes industrialization
  • ‘Explains’ British divergence from ‘European Norm’
institutions theory
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
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
Institutions Matter
  • Modern economic growth associated with modern institutions: nation state secularism constitutional government extension of the franchise
institutions matter1
Institutions Matter
  • Issue of causality confounded by advantages of backwardness for followers, who can: substitute capital skip learning stages adopt most advanced technology import capital, skills, institutions
slow tfp growth
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
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
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
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
why was britain first
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
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


Endogenous Growth

Schumpeter relationship (high λ)


Schumpeter (low λ)

Solow (high s)

Solow steady-state relationship (low s)

growth potential
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
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
Role of Markets: Land, Labor, Capital, Entrepreneurs
  • Markets allocate resources more efficiently than alternative methods: Command economies Custom in traditional economies
  • Hicks’ dilemma:Command is usual response to shocksCustom emerges in absence of shocks
role of finance mobilize resources
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 revolutions
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
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
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
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 revolutions1
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