The Industrial Revolution and Modern Development

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I’m not an economic historian, but like most growth economists I am an avid consumer of economic history. Maybe it’s our version of “physics envy”. Regardless, it isn’t always obvious why growth economists look backwards so much for motivation, examples, and inspiration. Let me try to give an example of the usefulness of economic history by looking at recent “big theories” of the British Industrial Revolution (IR).

If you have any interest in learning about the IR, then you could do a lot worse than reading the following two books:

Mokyr’s theory is that there was a unique intellectual environment created in Britain during the Enlightenment, and that this generated cultural conditions that valued innovation as a valuable activity in and of itself, as well as a supply of trained engineers that took advantage of these conditions. What made the IR British was its adoption of science and reason as tools of economic progress.

Allen’s theory has to do with relative factor prices. The IR was British because Britain had a unique combination of high wages (persisting after the Black Death) and low fuel costs (due to cheap coal) that made labor-saving and fuel-using innovations (e.g. the steam engine) profitable. Other countries failed to adopt, or lagged in adopting, because they had different relative prices for labor and fuel.

There is some sense that these two have set up competing explanations of the Industrial Revolution, diametrically opposed. Mokyr does tend to downplay the “coal made the IR” idea. Allen does tend to downplay the notion that Britain was unique in its potential for innovation. But there is more subtlety to their arguments than that. The theories do not contradict each other, because they are fundamentally concerned with explaining different phenomenon.

There are two different questions about the IR in Britain that we want to answer. First, why did several particularly important innovations take place in Britain, and not in other places? Second, of all the innovations available, why were they adopted first (or with greater speed) in Britain than in other areas of Europe?

Mokyr’s theory is very much an answer to the first question, and provides a sound answer to the second. Newcomen and Watt and Arkwright and Darby and Hargreaves were all British. Perhaps more important than these noted innovators, according to Mokyr, is the small army of highly skilled engineers that patiently but steadily made improvements to the steam engine, spinning jenny, coke smelting, and other technologies. What set Britain apart from China (where most of the big innovations had occurred earlier) or France (which quickly had knowledge of the big innovations) were those engineers. Without them, you have curiosities. With them, you have industrialization. Britain led the IR because the Enlightenment took hold and produced both the original innovators and that army of engineers.

Allen’s theory is very much an answer to the second question, but is relatively weak on the first. That is, we can use factor prices to understand why Britain adopted the steam engine or spinning jenny first, but they don’t explain why those things were invented in Britain. Allen suggests that those same factor prices played a role in inducing innovation, but that is shakier ground. Anton Howes just posted a reaction to Allen’s work that focuses precisely on that failure.

So Mokyr’s theory is more comprehensive, but it lacks a compelling explanation for the failure of other countries to follow Britain quickly into industrialization. Allen’s work is really a theory of growth and development, articulated with examples from the British IR. We can easily adopt his concepts for other time periods and places, whereas Mokyr’s work is far more context-specific. Thus Allen’s theory is more relevant than Mokyr’s to thinking about the general process of development. The second question above – why do some places fail to adopt or lag in adopting new innovations? – is in some sense the central question of development.

Research on development has been focusing a lot lately on the distribution of productivity across firms (see my reading list on misallocation). In China, India, or Mexico, for example, the ratio of labor productivity of the top firms to bottom firms is on the order of 10-1 or more. Even in the U.S. there are productivity gaps of something like 2-1 between the best and worst firms. Not all firms use the best techniques. Poor countries have particularly bad distributions, with the vast majority of their firms using low productivity technologies.

If we could understand that distribution, we could understand a lot about the gap in income per capita between poor and rich countries. So far, most of the explanations hinge on firms facing some implicit distortion to factor costs, which makes them choose a sub-optimal level of inputs. Firms that may be very productive perhaps face high distortions, making factors expensive, and leading them to be too small. Firms that are unproductive face low distortions, making factors cheap, leading them to be too big.

What this literature could learn from Allen is that the choice of technology itself is in play when factor prices are distorted. In particular, distortions that change the costs of materials relative to capital or labor could be instrumental in keeping firms from adopting leading technologies in poor countries. Cheap labor may make a firm inefficiently large in a poor country, yes. But it also removes the incentive to adopt a capital-using, labor-saving high technology production technology, even if the firm has full knowledge of the technology.

This isn’t a brand new idea by Allen. Hicks talked about it in 1932. Hayami and Ruttan talked about induced innovation and the choice of technology with respect to agriculture in developing countries long ago. Banerjee and Duflo’s chapter on distortions considers the role of borrowing constraints (i.e. expensive capital) in generating a fat tail of small labor-intense firms in India. Daron Acemoglu‘s theory of directed technical change is basically induced innovation based on differentials in factor prices.

Allen, though, provides a clear and compelling story about the power of factor prices in technology adoption. Think of his work as a “proof of concept” that induced innovation has a lot of explanatory power for differences between rich and poor countries. It is an excellent example of how studying economic history can produce insights into modern questions about development and growth. Factor price differences created decades-long lags in technology adoption across Europe, perhaps we shouldn’t be surprised at decades-long delays in adoption in developing countries. Relative factor prices may be a worthwhile avenue to explore, possibly as the lever on which institutions (hypocrite!?) or geography push to generate differences in living standards.

[I appear to have slighted Mokyr’s work here in favor of Allen, but right now someone else is reading his book and gleaning from it some idea about culture and development that I missed completely. From the growth economist’s perspective, the purpose is not to decide who’s right in these economic history debates, it is to mercilessly steal all the good ideas.]

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15 thoughts on “The Industrial Revolution and Modern Development

  1. Yes – one of my favorite subjects! There’s also been interesting work connecting the nutritional impact of agricultural improvements with the productivity of artisans and the development that followed. Some notes from articles I’m too lazy to cite appropriately (at lot from Mokyr’s “Precocious Albion”):

    English artisans were notable not only for their skill, but for their fundamentally sounder physical condition and nutrition. The poorer diet of the continentals led to significant height differences (as well as much worse child survival rates, and, implicitly, cognitive development.) Of note, there was greater variation within France for wages and productivity than between England and France. Rural French workers needed twice as many work days to produce a unit of wheat, and this variation is likewise associated with height variation. These nutritional gaps are rooted in food supply.

    In England, agricultural improvements sometime between 17th and 18th C provided for a more energy-intensive use of the land. The landed gentry did not know of the role of nitrogen or fertilizer, but their land use had exhausted the land of necessary nitrogen over the centuries. With land of too poor quality to support their fiefdoms, the feudal system fell apart. The landless left for the city; the lords leased their land for pasturage. Farmers would increasingly turn to turnips, legumes, and the grasses and clovers of Holland. Less land was cultivated each year, but, due to pasturage and the new crops in rotation, the land grew richer in quality. The energy intensity increased, resulting in greater production of both animals and grains. England had Europe’s most productive craftsmen, and this nutritional increase preceded and likely spurred that productivity.

    There is an intuitive logic to the idea that the combination of cheap energy (coal) and increasingly dear labor could have led to investment in technology as a means to reduce the business cost of labor. If labor were more scarce in England than continental Europe, it would explain the rise of labor-saving technologies in the former, and gradual diffusion to the latter. Yet while this is true for the cotton industry, most other technologies were not labor-saving. The high-skilled artisans and machines were, however, complementary goods. While an artisan may have been paid twice as much in England as in France, their higher productivity with the jenny made their skills worth the price. Further, technology innovation happened outside the realm of coal, often replacing horses or watermills, and began before coal took over as a principal energy source. Still access to coal was necessary if not sufficient for sustaining the industrial improvements that increasingly drew on its power. Some have argued that the industrial revolution was significant not because there were productivity improvements, but because they were sustained, and, in this sense, the presence of coal can be seen as necessary if insufficient for the industrial transformation that followed.

    I also have much sympathy for the perspective that the Glorious Revolution did not produce a liberal environment for innovation but rather produced an aristocratic alliance that would starve innovative industry of the opportunity to expand by pushing all capital toward its war efforts, leading to the high rates of return, small wage improvements, and slow growth until peace and the availability of greater capital. Of course, you can debate on either side the alliance’s presumption that land war should take priority.

    Regarding culture, enlightenment, etc., I am certainly very skeptical. I don’t doubt that England may have had more “enlightened people” or “republican virtues,” but this would seem to confuse cause and effect. More broadly, it smacks of turning history to morality tales where success is the result of modern virtues. Acemoglu and Robinson’s work particularly bothers me in this respect.

    • One question that remains in your analysis (which jives with my reading of the lit) is that we don’t know for sure the direction of the wage/nutrition link. Did better nutrition lead to better workers, and hence high wages? Or did high wages lead to demand for better nutrition. Either way you get the good cycle you talk about, but what’s the underlying push?

      My general feeling is with you on the cultural/institutional explanations. I’m wary of attributing this too much to some unique cultural traits of the English, if only because our explanation for the IR is then inexplicable. What is the functional difference in Britain that made their culture adopt the Enlightenment more fervently than other areas of Europe?

  2. It really seems that the big single factor ideas are all at best insufficient — institutions, values, coal, competing states, ghost acres/new world, guns, science, printing/literacy, individualism, geographic and social mobility, improved transportation/communication etc.

    I think the more successful approaches look at it as a phase transition from one attractor to another. We transitioned to a larger, more efficient, more complex networks of reciprocity and cooperation. We became better at solving problems for each other in ways without creating them even faster. We became better and more efficient at specializing, exchanging and cooperating. We became better at transporting, copying and sharing.

    I believe there are myriads of factors which contribute to our ability to learn to learn and learn to cooperate better. Some were steps forward, and others were overcoming barriers or headwinds against prosperity. Included in the latter category are predation/exploitation, Malthusian forces, and basic resistance to change.

    Widespread progress is about creating, spreading and building upon solutions. In the Netherlands in the 17th and 18th century they started to learn how to solve problems faster than nature and man could create them. In the 19th century Britain and then others began to take it up to an even faster level. Lots of factors were necessary for the phase transition. The odd thing is that so many breakthroughs occurred and limitations fell all at once.

    • I buy your general concept. I think at times when people say “institutions” or “culture” they mean “ease of information flows”. And potentially small changes in that could have big, snowball effects. Seems like something that would benefit from some formal model so that we could frame discussion clearly.

  3. Nice post. I should note that both Mokyr and Allen provide supply-side stories for the IR. It used to be the case that a demand perspective was considered more relevant by economic historians, like Phyllis Deane and the old stuff from David Landes. In The Unbound Prometheus he said: “it was in large measure the pressure of demand on the mode of production that called forth new techniques in Britain, and the abundant, responsive supply of factors that made possible their rapid exploitation and diffusion. The point will bear stressing, the more so as economists, particularly theorists, are inclined to concentrate almost exclusively on the supply side.”

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