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«by Robert C. Allen Professor of Economic History Department of Economics and Nuffield College Oxford University Email: ...»

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The British Industrial Revolution in Global Perspective:

How Commerce Created

The Industrial Revolution and Modern Economic Growth

by

Robert C. Allen

Professor of Economic History

Department of Economics and Nuffield College

Oxford University

Email: bob.allen@nuffield.oxford.ac.uk

The Industrial Revolution is one of the most celebrated watersheds in human history.

It is no longer regarded as the abrupt discontinuity that its name suggests, for it was the result of an economic expansion that started in the sixteenth century. Nevertheless, the eighteenth century does represent a decisive break in the history of technology and the economy. The famous inventions–the spinning jenny, the steam engine, coke smelting, and so forth–deserve their renown1, for they mark the start of a process that has carried the West, at least, to the mass prosperity of the twenty-first century. The purpose of this essay is to explain why they occurred in the eighteenth century, in Britain, and how the process of their invention has transformed the world.

The last sentence introduces an important theme of this essay, which is the Britishness of the industrial revolution. Until recent decades, this was axiomatic: The industrial revolution started in Britain with the inventions that created factory textile production, the shift to coal and coke in the iron industry, and the perfection of the steam engine. Economic growth on the continent occurred when these innovations were adopted there. This schema was first called into question by national income studies which indicated that the pace of economic growth in France was not very different from that in England despite the differences in economic structure–hence, the thesis of O’Brien and Keyder (1978) that there were “two paths to the twentieth century.” This critique has gathered force with the recent emphasis on the Scientific Revolution, a pan European phenomenon, as the cause of the Industrial. While these contributions broaden our understanding of the industrial revolution, it is our contention that it really was fundamentally British.

Explaining the industrial revolution is a long standing problem in social science, and all manner of prior events have been adduced as causes (Hartwell 1967, Mokyr 1999). The role of political structure–parliamentary checks on the executive, the security of property rights, the flexibility of the legal system–is at the centre of much current discussion.

According to this view, the dramatic changes of the late eighteenth century can be traced back to the Glorious Revolution of 1688 that consolidated parliamentary ascendancy, minimal government, and secure property rights. Supposedly, these legal changes created a favourable climate for investment that made the industrial revolution possible (North and Weingast 1989, De Long and Schleifer 1993, LaPorta, Lopez-de-Silanes, Schleifer, Vishny 1998, Acemoglu, Johnson, and Robinson 2005). This interpretation, however, has some weaknesses: Studies of banking and interest rates fail to detect any structural break after 1688, so the improved investment climate is not manifest in anything financial (Clark 1996, Epstein 2000, Quinn 2001). Property rights were at least as secure in France–possibly, in China for that matter–as in England (Hoffman, Postel-Vinay, Rosenthal 2000, Pomeranz 2000).

Indeed, one could argue that France suffered because property was too secure:

Profitable irrigation projects were not undertaken in Provence because France had no counterpart to the private acts of the British parliament that overrode property owners opposed to the enclosure of their land or the construction of canals or turnpikes across it There has been a debate about the breadth of technological progress during the industrial revolution with Crafts (1985), Harley (1999), Crafts and Harley (1992, 2000) arguing that productivity growth was confined to the famous, revolutionized industries in the period 1801-31, while Temin (1997) has argued that many more industries experienced productivity growth. Whatever one believes about 1801-31, it is clear that many nonrevolutionized industries experienced productivity growth between 1500 and 1850. The incentives to invent discussed in this paper applied to all industries, not just the famous ones I discuss here.

(Rosenthal 1990, Innes 1992, 1998, Hoppit, Innes, Styles 1994). The Glorious Revolution meant that “despotic power was only available intermittently before 1688, but was always available thereafter” (Hoppit 1996, p. 126). Finally, taxes were higher in Britain than across the Channel (Mathias and O’Brien 1976, 1978, Hoffman and Norberg 1994, Bonney 1999).

In any event, it was a long stretch from the excise tax on beer or the cost of foreclosing on a defaulting mortgagor (not actually a cheap process in eighteenth century England) to Watt’s invention of the separate condenser. An explanation of the technological breakthroughs has to be more focussed on technology than is usual in constitutional discussions.

The industrial revolution was fundamentally a technological revolution, and progress in understanding it can be made by focussing on the sources of invention. This subject has been opened up for economists by the researches of Joel Mokyr (1990, 2002), and I will examine his views on macroinventions, the scientific revolution, and the industrial enlightenment. While Mokyr takes us forward by emphasizing the social context in which invention occurred and the importance of information flows, we can sharpen our understanding by concentrating on the incentives faced by inventors and the context in which they worked. This approach indicates that the reason the industrial revolution happened in Britain, in the eighteenth and nineteenth centuries, was not because of luck (Crafts 1977) or British genius or culture or the rise of science. Rather it was Britain’s success in the international economy that set in train economic developments that presented Britain’s inventors with unique and highly remunerative possibilities. The industrial revolution was a response to the opportunity.





What commercial success did for Britain was to create a structure of wages and prices that differentiated Britain from the continent and, indeed, Asia: In Britain, wages were remarkably high and energy cheap. This wage and price history was a fundamental reason for the technological breakthroughs of the eighteenth century whose object was to substitute capital and energy for labour. Scientific discoveries and scientific culture do not explain why Britain differed from the rest of Europe. They may have been necessary conditions for the industrial revolution, but they were not sufficient: Without Britain’s distinctive wage and price environment, Newton would have produced as little economic progress in England as Galileo produced in Italy.

There were, however, important features of British popular culture that distinguished the country from much of the continent, and those features–greater literacy and numeracy–underpinned the technological achievements of the eighteenth century. They were not autonomous movers, however, but were themselves consequences of the economic development that preceded the industrial revolution and that produced the high wage, cheap energy economy. Underlying the technological breakthroughs of the industrial revolution was Britain’s commercial and imperial expansion of the seventeenth and eighteenth centuries, which was the cause of the peculiar wage and price pattern. The state policies that mattered most were Mercantilism and Imperialism.

The working assumption of this paper is that technology was invented by people in order to make money. This idea has important implications. First, inventions were investments where future profits had to offset current costs. The technical discoveries were either new products or reductions in the cost of making existing products. In either case, the profitability calculation governing invention depended on the prices of the products and the prices of the various inputs. As we will see, labour was particularly expensive and energy particularly cheap in Britain, so inventors in Britain were led to invent machines that substituted energy and capital for labour. Second, the balance between the profits and the costs of an invention depended on the size of its market. The scale of the mining industry in eighteenth century Britain was much greater than anywhere else, so the return to inventing improved drainage machinery (a.k.a. the steam engine) was greater in Britain than in France or China. Third, patents that allow the inventor to capture all of the gains created by his invention raise the rate of return and encourage invention. Indeed, North and Thomas (1973) have argued that it was better property rights for knowledge that explain the inventions of the industrial revolution. However, the English patent law was enacted in 1624 and attracted little interest for much of the seventeenth century, so the explanation of the inventions of the eighteenth turns on the greater incentive to invent rather than on a change in law that met an existing, latent demand for patenting.2 Fourth, in the absence of patents, the incentive to invent was limited to the gains the inventor could realize in his own firm, and these were likely to have been small. Firms could increase the return to inventing by learning from each other. In that case, they divided the costs and pooled the gains. Indeed, collective invention was important before private invention took off in the eighteenth century and has remained a complement to the present day (Allen 1983, Epstein 1998, 2004, Nuvolari 2004a, 2004b).

Britain–a high wage, cheap energy economy

Since invention was an economic activity, its pace and character depended on factors that affected business profits including, in particular, input prices. Why the industrial revolution happened in eighteenth century Britain is easier to understand if we compare wage rates and energy prices in the leading economies of the day. In these comparisons, Britain stands out as a high wage, cheap energy economy.

Our views of British wages are dominated by standard of living debate. Even optimists who believe the real wage rose in the Industrial Revolution accept that wages were low in the eighteenth century. They were certainly lower than they are today, but recent research in wage and price history shows that Britain was a high wage economy in four

senses:

1. At the exchange rate, British wages were higher than those of its competitors.

2. High silver wages translated into higher living standards than elsewhere.

3. British wages were high relative to capital prices.

4. Wages in northern and western Britain were exceptionally high relative to energy prices.

These trends are illustrated in Figures 1-4. These figures were constructed from databases of wages and prices assembled from price histories written since the middle of the nineteenth century. The typical price history is based on the archives of an institution that lasted for hundres of years–colleges and hospitals are favourites. The historian works through their accounts recording the quantity and price of everything bought or sold and draws up tables of the annual averages. Usually prices are found for a range of agricultural and food stuffs as well as cloth, fuel, candles, building materials, implements, and a miscellany of other items. Wages and salaries are often also recorded. The commodities are measured in local weights and measures, and prices are stated in local units of account, and these must be converted to international standards. Prices histories have been written for On the operation of the English patent system, recent research includes: Dutton (1984), MacLeod (1986, 1988), Nuvolari (2004a), Khan (2005), Khan and Sokoloff (2006).

many European cities, and the research is being extended to Asia. By putting all of this material in the computer, international comparisons are becoming possible for the first time, and they are redefining our understanding of economic history. In particular, they throw new light on the origins of the Industrial Revolution, as we shall show.

Figure 1 shows the history of nominal wages of building labourers in leading European and Asian cities from the middle ages to the industrial revolution. Figure 1 The various units of account in which Labourers' wages around the world the data were recorded have been converted to grams of silver since silver coins were the principal medium of London exchange. The figure shows that the

–  –  –

European building workers were paid by the day, and I assume that 250 days was a full year’s work, making allowance for Sundays, religious holidays, and erratic employment.

–  –  –

expressed as grams of silver per million BTUs. The ratio is calculated for the cheapest fuel available in each city–coal in London and Newcastle, peat in Amsterdam, charcoal or fire wood in the other cities.

Newcastle stands out as having the highest ratio of labour costs to energy costs in the world. To a degree the high ratio reflects high British wages, but the low cost of coal was the decisive factor. Indeed, a similar ratio characterized the situation on all of the British coal fields and in the industrial cities (Sheffield, Birmingham, and so forth) built on them. The only place outside of Britain with a similarly high ratio of labour to energy costs was probably the coal mining district around Liège and Mons in present day Belgium. The high cost of labour relative to fuel created a particularly intense incentive to substitute fuel for labour in Britain. The situation was the reverse in China were fuel was dear compared to labour. The Chinese invented very large kilns for firing their pottery because such kilns had a high ratio of volume to surface area and so conserved heat. The reverse was true in Britain where kilns were small and thermally inefficient.

Why were British wages and prices unique?

Britain’s unusual wages and prices were due to two factors. The first was Britain’s success in the global economy, which was in part the result of state policy. The second was geographical–Britain had vast and readily worked coal deposits.



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