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The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The Holy Grail
The Holy Grail
British Industrial Revolution
British Industrial Revolution
Growth in Britain (% per year)
Growth in Britain (% per year)
Malthusian Model Crafts & Mills (2007)
Malthusian Model Crafts & Mills (2007)
Employment Composition (%)
Employment Composition (%)
Agricultural/Total Employment at British 1840 Income Level (%)
Agricultural/Total Employment at British 1840 Income Level (%)
Family to Capitalist Farming
Family to Capitalist Farming
Simulated 1841 Economy Crafts & Harley (2004)
Simulated 1841 Economy Crafts & Harley (2004)
Institutions, Theory
Institutions, Theory
Institutions are persistent
Institutions are persistent
Institutions Matter
Institutions Matter
Institutions Matter
Institutions Matter
Slow TFP Growth
Slow TFP Growth
TFP Growth
TFP Growth
Total Steam Contribution to Growth of Labour Productivity (% per year)
Total Steam Contribution to Growth of Labour Productivity (% per year)
1780-1860: Ingenuity or Abstention
1780-1860: Ingenuity or Abstention
Sources of Labour Productivity Growth, 1780-1860 (Crafts, 2005) (% per
Sources of Labour Productivity Growth, 1780-1860 (Crafts, 2005) (% per
Why Was Britain First
Why Was Britain First
Endogenous Innovation Models
Endogenous Innovation Models
Endogenous Growth
Endogenous Growth
Growth Potential
Growth Potential
Implications for Unified Growth Theory
Implications for Unified Growth Theory
Role of Markets: Land, Labor, Capital, Entrepreneurs
Role of Markets: Land, Labor, Capital, Entrepreneurs
Role of Finance: Mobilize Resources
Role of Finance: Mobilize Resources
Tales of Two Institutions
Tales of Two Institutions
Tales of Two Institutions
Tales of Two Institutions
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
Tales of Two Revolutions
Tales of Two Revolutions
Neal’s Tale of Two Revolutions
Neal’s Tale of Two Revolutions
Neal’s Tale of French Revolution
Neal’s Tale of French Revolution
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
The First Industrial Revolution: a Puzzle for Growth Economists
Tale of Two Revolutions
Tale of Two Revolutions
Tale of Two Revolutions
Tale of Two Revolutions

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The First Industrial Revolution: a Puzzle for Growth Economists

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1 The First Industrial Revolution: a Puzzle for Growth Economists

The First Industrial Revolution: a Puzzle for Growth Economists

Nick Crafts and Larry Neal

2 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

3 British Industrial Revolution

British Industrial Revolution

Modest growth Escape from ‘Malthusian Trap’ Large structural change No take-off but TFP growth increases significantly

4 Growth in Britain (% per year)

Growth in Britain (% per year)

5 Malthusian Model Crafts & Mills (2007)

Malthusian Model Crafts & Mills (2007)

LogW = ? - ?LogPop + ?t Trend growth of W is zero till 1800 while ‘Iron Law’ of wages allows population growth at ?/? =0.5% pre-1800, = 2% post-1800 based on higher ? English 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

6 Employment Composition (%)

Employment Composition (%)

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

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

8 Family to Capitalist Farming

Family to Capitalist Farming

Disappearance of small farms Release of surplus labour Promotes industrialization ‘Explains’ British divergence from ‘European Norm’

9 Simulated 1841 Economy Crafts & Harley (2004)

Simulated 1841 Economy Crafts & Harley (2004)

Actual

2/3

Peasant

Agricultural Output

100

105

Industrial Output

100

69

Agricultural Employment (%)

22

47

Industrial Employment (%)

41

28

10 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

11 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

12 Institutions Matter

Institutions Matter

Modern economic growth associated with modern institutions: nation state secularism constitutional government extension of the franchise

13 Institutions Matter

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

14 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)

15 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

16 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

17 1780-1860: Ingenuity or Abstention

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

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

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

year)

Capital Deepening

0.22

Modernized Sectors

0.12

Agriculture

-0.03

Other

0.13

TFP

0.56

Modernized Sectors

0.34

Agriculture

0.19

Other

0.03

Labour Productivity Growth

0.78

19 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

20 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

21 Endogenous Growth

Endogenous Growth

Schumpeter relationship (high ?)

x

Schumpeter (low ?)

Solow (high s)

Solow steady-state relationship (low s)

22 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 ?

23 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

24 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 shocks Custom emerges in absence of shocks

25 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

26 Tales of Two Institutions

Tales of Two Institutions

27 Tales of Two Institutions

Tales of Two Institutions

28 The First Industrial Revolution: a Puzzle for Growth Economists
29 The First Industrial Revolution: a Puzzle for Growth Economists
30 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.

31 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

32 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

33 The First Industrial Revolution: a Puzzle for Growth Economists
34 The First Industrial Revolution: a Puzzle for Growth Economists
35 The First Industrial Revolution: a Puzzle for Growth Economists
36 The First Industrial Revolution: a Puzzle for Growth Economists
37 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

38 Tale of Two Revolutions

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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