Forging Ahead, Falling Behind and Fighting Back Read online

  Sources: Crafts (1985), (2005) revised with land growth from Allen (2009b) and real GDP growth based on Broadberry et al. (2015).

  Table 2.5 reports that the rate of TFP growth nearly doubled from 0.4 per cent per year in 1760–1800 to 0.7 per cent per year in 1830–1860. This certainly can be interpreted as reflecting acceleration in the rate of technological progress but TFP growth captures more than this. No explicit allowance has been made for human capital in the growth accounting equation. Prior to 1830, it is generally agreed that any contribution from extra schooling or improved literacy was negligible, but in the period 1830–60 education may have accounted for around 0.3 percentage points per year of the measured TFP growth in Table 2.5 (Mitch, 1999). From 1760 to 1800, there is good reason to think that average hours worked per worker per year were increasing which is not taken into account in Table 2.5; the increase was probably enough to imply a correction to labour inputs growth sufficient to push TFP growth from technological progress down quite close to zero (Voth, 2001). More generally, it seems very likely that much of the increase in real GDP per person from the mid-fifteenth to the late eighteenth centuries came from people working longer rather than from technological advance (Broadberry et al., 2015, pp. 260–265). Overall then, a best guess might be that the contribution of technological progress, as reflected in TFP growth, went from about zero to a sustained rate of about 0.4 per cent per year by the time the classic Industrial Revolution period was completed.

  At first sight, this may seem to undermine McCloskey’s claim that ‘ingenuity rather than abstention governed the industrial revolution’ (1981, p. 108) which was made at a time when Deane and Cole’s estimates of economic growth during the Industrial Revolution were the conventional wisdom and, based on these numbers, Feinstein (1981) estimated TFP growth of 1.3 per cent per year during 1801–1830. Replacing Deane and Cole’s growth estimates with my 1985 figures and even more so with the revisions by Broadberry et al. (2015) leads to much lower TFP growth estimates, as we have seen, and an estimate that TFP growth contributes only about 30 per cent of output growth even in 1830–1860. However, if, as is more appropriate, the focus is on the sources of labour productivity growth, then it is immediately apparent that McCloskey was right and that TFP growth rather than physical-capital deepening accounted for the lion’s share of labour productivity growth (Table 2.5).

  Neoclassical growth accounting of this kind is a standard technique and valuable for benchmarking purposes, if nothing else. However, it does potentially underestimate the contribution of new technology to economic growth if technological progress is embodied in new types of capital goods, as was set out in detail by Barro (1999). This was surely the case during the Industrial Revolution; as Feinstein put it, ‘many forms of technological advance … can only take place when “embodied” in new capital goods. The spinning jennies, steam engines and blast furnaces were the “embodiment” of the industrial revolution’ (1981, p. 142).

  To allow for embodiment effects and to capture the idea of ‘revolutionized’ activities, it is possible to modify a growth accounting equation to distinguish between different types of capital and different sectors, along the following lines

  Δln(Y/L) = αOΔln(KO/L) + αNΔln(KN/L) + γΔlnAO + ΦΔlnAN

  where the subscripts O and N denote capital in the old and new sectors, respectively, γ and Φ are the gross output shares of these sectors, and αO and αN are the factor shares of the capital used in these sectors.1 Disaggregation can be taken as far as the data permit.

  Table 2.6 shows the results of an exercise of this kind. The ‘modernized sectors’ (cottons, woollens, iron, canals, ships and railways) are found to have contributed 0.45 out of 0.71 per cent per year growth in labour productivity over the period 1780–1860 with the majority of this, 0.34 compared with 0.11 per cent, coming from TFP growth as opposed to capital deepening. If the contribution of technological change to the growth of labour productivity is taken to be capital deepening in the modernized sectors plus total TFP growth, then this equates to 0.62 out of 0.71 per cent per year. It remains perfectly reasonable, therefore, to regard technological innovation as responsible for the acceleration in labour productivity growth that marked the importance of the Industrial Revolution as an historical discontinuity as Kuznets would have supposed even though the change was less dramatic than used to be thought.

  Table 2.6 Contributions to labour productivity growth, 1780–1860 (% per year)

  Capital deepening 0.20

  Modernized sectors 0.11

  Other sectors 0.09

  TFP growth 0.51

  Modernized sectors 0.34

  Other sectors 0.17

  Labour productivity growth 0.71

  Memorandum items

  Labour force growth 1.22

  Capital income share (%) 35

  Modernized sectors 5.2

  Note: Derived using standard neoclassical growth accounting formula modified to allow for two types of capital. Modernized sectors are textiles, iron and transport.

  Source: Crafts (2004a) updated to incorporate new output growth estimates from Broadberry et al. (2015) and revised to a three-factor growth accounting framework.

  It may seem surprising that the Industrial Revolution delivered such a modest rate of technological progress given the inventions for which it is famous including most obviously those related to the arrival of steam as a general purpose technology. It should be noted, however, that the well-known stagnation of real wage rates during this period is strong corroborative evidence that TFP growth, which is equal to the weighted average of growth in factor rewards (Barro, 1999), was modest.

  Two points can be made straightaway. First, the impact of technological progress was very uneven as is implied by the estimates in Table 2.6. Most of the service sector other than transport was largely unaffected. Textiles, metals and machine-making accounted for less than a third of industrial employment – or 13.4 per cent of total employment – even in 1851 (Shaw-Taylor, 2009) and much industrial employment was still in ‘traditional’ sectors. Second, the process of technological advance was characterized by many incremental improvements and learning to realize the potential of the original inventions. This took time in an era where scientific and technological capabilities were still very weak by later standards.

  Steam power offers an excellent example. The estimates in Table 2.7 show that its impact on productivity growth before 1830 was trivial – as was made clear by the detailed quantitative research of von Tunzelmann (1978) and Kanefsky (1979). In 1830, only about 165,000 horsepower were in use, the steam engine capital share was 0.4 per cent and the Domar weight for steam engines was 1.7 per cent (Crafts, 2004a). The cost effectiveness and diffusion of steam power was held back by the high coal consumption of the original low-pressure engines and the move to high pressure – which benefited not only factories but railways and steam ships – was not generally accomplished until the second half of the nineteenth century. The science of the steam engine was not well understood and the price of steam power fell very slowly compared with that of computers in modern times, especially before about 1850. The maximum impact of steam power on British productivity growth was delayed until the third quarter of the nineteenth century – nearly 100 years after James Watt’s patent.

  Table 2.7 Steam’s contribution to British labour productivity growth, 1760–1910 (% per year)

  1760–1800 1800–1830 1830–1850 1850–1870 1870–1910

  Capital deepening 0.004 0.02 0.16 0.20 0.15

  Steam engines 0.004 0.02 0.02 0.06 0.09

  Railways 0.14 0.12 0.01

  Steamships 0.02 0.05

  TFP growth 0.005 0.001 0.04 0.21 0.16

  Steam engines 0.005 0.001 0.02 0.06 0.05

  Railways 0.02 0.14 0.06

  Steamships 0.01 0.05

  Total 0.01 0.02 0.20 0.41 0.31

  Note: Based on standard neoclassical growth accounting formula disaggregated to include three types of steam capital.
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  Source: Crafts (2004b).

  2.3 Explaining ‘Slow Growth’ in the First Industrial Nation

  At a deeper level, it is important to understand why Britain was, in the terms of Figure 1.1, a low λ and low saving economy such that the intersection of the Solow- and Schumpeter-relationship lines was at a fairly low level of technological progress but nevertheless Britain was able to become the Industrial Revolution pioneer. In part, the answer is that British institutions and policies were good by the standards of the time rather than by those of the twentieth or twenty-first centuries. Moreover, it seems that Britain enjoyed transitory advantages conducive to its initial success.

  Thus, comparisons of Britain and France from an endogenous-innovation perspective strongly suggest that Britain was much better placed in the late eighteenth century. Despite France’s larger population, Britain had access to the largest free trade area in the world and a much better integrated domestic market (Berrill, 1960). Britain was twice as urbanized as France, which reduced the costs of acquiring and developing knowledge (Bairoch, 1991). Britain had a superior expertise in using and assimilating the vital coal-based technologies (Harris, 1976) and there is little doubt that unproductive rent-seeking absorbed far more talent in eighteenth-century France than in Britain (Root, 1991).

  Mokyr (2009) develops a similar argument for British primacy. He suggests that what was needed to generate an industrial revolution was the right combination of useful knowledge produced by scientists, engineers and inventors to be exploited by a supply of skilled craftsmen and an institutional environment that provided good incentives for entrepreneurs. Britain was better placed in this regard than any of its Northern European rivals. Central to all this was Britain’s embrace of the Enlightenment which promoted both better institutions and an appropriate research agenda whose results were effectively disseminated – in terms of Figure 1.1, a higher λ economy than other late eighteenth-century economies.2

  Nevertheless, from an endogenous-growth perspective the British economy still had many weaknesses. Accordingly, TFP growth was modest although by the 1830s it was still well ahead of the rate achieved in the United States which averaged 0.2 per cent per year during 1800–1855 (Abramovitz and David, 2001). The size of markets was still very small in 1820 when globalization proper was yet to begin (O’Rourke and Williamson, 2002) and real GDP in Britain was only about 6 per cent of its size in the United States a century later (Maddison, 2010). The costs of invention were high since the contributions that scientific knowledge and formal education could make were modest (Mokyr, 1990). Intellectual property rights were weak since the legal protection offered by patents was doubtful until the 1830s and the cost of taking out a patent was extremely high until 1852 (Dutton, 1984) and the value of patent rights relative to the size of the economy was much smaller than in the twentieth century (Sullivan, 1994). Even if Britain had less rent-seeking than France, rent-seeking in the law, the bureaucracy, the church and the military remained a very attractive alternative to entrepreneurship as the evidence on fortunes bequeathed attests (Rubinstein, 1992).

  Obtaining the potential gains from innovation could be problematic, as is reflected by the problems of the textile and engineering sectors. In particular, eliciting sufficient effort from the workforce was a significant problem of industrial relations to which solutions had to be devised. In cotton textiles, the answers were found through embracing craft unionism and committing to fixed piecework rates through collective bargaining. This amounted to conceding job control to senior workers and using payment by results rather than managerial authority to underpin the effort bargain. In the short term this delivered higher productivity; for example, the introduction of the 1829 piece-rate list raised labour productivity at M’Connel and Kennedy by 15 per cent (Huberman, 1991). In the longer term, craft control entailed problems of adjusting to changes in circumstances such as new technological opportunities and conflicts related to trials of bargaining strength ensued, notably in engineering highlighted by the famous lockout of the Amalgamated Society of Engineers in 1852 (Burgess, 1975).

  Table 2.8 reports levels of investment in physical and human capital in the early nineteenth century which are very low by later standards. This was clearly not a time of high college enrolment and the highly educated were to be found in the old professions not science and engineering. Investment, especially in equipment, was a small proportion of GDP. This may partly reflect the modest capital requirements of the early industrial technologies but is also a symptom of the deficiencies of the capital market at a time of very restrictive company and banking legislation (Harris, 2000). In particular, at times of major government borrowing for military purposes such as during the Napoleonic wars, the Usury Laws meant that the private sector faced severe credit rationing and crowding out (Temin and Voth, 2013).

  Table 2.8 Aspects of broad capital accumulation, 1801–1831 (%)

  Investment/GDP 6.7

  Non-residential investment/GDP 5.0

  Equipment investment/GDP 1.3

  Adult literacy 54

  Primary school enrolment 36

  Years of schooling (number) 2.0

  University students/population 0.04

  Civil engineers/employed 0.01

  Traditional professions/employed 0.88

  Sources: Crafts (1995), (1998) updated for new GDP estimates in Broadberry et al. (2015).

  The limitations of British growth potential at the time of the Industrial Revolution compared with the leading economy 200 years or even 100 years later are reflected in the contributions to productivity growth made by steam in Britain in contrast to electricity and Information and Communication Technology (ICT) in the United States, as reported in Table 2.9. Steam’s contribution in Britain was smaller and took much longer to materialize. Indeed, these estimates indicate that already by 2006 the cumulative productivity gain from ICT had matched that of steam over the whole period to 1910. The price of steam power fell much less rapidly than for the more recent technologies implying that rate of improvement of the technology was much slower. It seems reasonable to conclude that over time leading economies have become much better at exploiting general purpose technologies. The reasons are likely to be found in a superior level of education and scientific knowledge, improvements in capital markets, government policies that support research and development, and thus a greater volume of and higher expected returns to innovative effort.

  Table 2.9 GPTs: contributions to labour productivity growth (% per year)

  Steam (UK)

  1760–1830 0.01

  1830–1870 0.30

  1870–1910 0.31

  Electricity (USA)

  1899–1919 0.40

  1919–1929 0.98

  ICT (USA)

  1974–1995 0.77

  1995–2004 1.50

  2004–2012 0.64

  Memorandum item: real price falls (%)

  Steam horsepower

  1760–1830 39.1

  1830–1870 60.8

  Electric motors (Sweden)

  1901–1925 38.5

  ICT equipment

  1970–1989 80.6

  1989–2007 77.5

  Notes: Growth accounting contributions include both capital deepening from use and TFP from production.

  Price fall for ICT equipment includes computer, software and telecoms; the price of computers alone fell much faster (22.2% per year in the first period and 18.3% per year in the second period).

  Sources: Growth accounting: Crafts (2002), (2004a) and Byrne et al. (2013).

  Price falls: Crafts (2004a), Edquist (2010) and Oulton (2012).

  2.4 Getting Ahead and Staying Ahead

  Britain was well enough served by its institutions and economic policies, was quite capable of developing and investing in new technologies, and achieved leadership in the Industrial Revolution. However, getting ahead was one thing, staying ahead quite another. Over time, growth potential in other countries would improve and the feasible rate of
productivity advance would rise markedly as national innovation systems grew stronger. Thus, the advantages identified by Mokyr were temporary, as he stresses (2009, pp. 478–479), and Britain would need to re-invent itself. In time, a different kind of human capital and the educational system to deliver it would be needed to remain a technological leader as formal science came to the fore. Similarly, a more sophisticated capital market, improved intellectual property rights and policies that effectively addressed market failures would have to be introduced. All this is implicit in Table 2.8 which reflects an economy which in terms of Figure 1.1 was, by later standards, both low s and low λ.

  The nature of the advantages that underpinned British leadership may actually have been more fragile and transitory than the traditional account recognizes. This would be a corollary of the interpretation of the Industrial Revolution put forward by Allen (2009a) together with related work in the field of ‘directed’ technological progress. His approach is in the endogenous-innovation tradition and emphasizes the importance of expected profitability to justify the fixed costs of the investment required to perfect good ideas and make them commercially viable. Britain’s unique advantages at the time were to be found in the structure of relative prices, characterized by high wages and cheap energy and a sizeable market for the new technologies which initially were profitable to adopt only in these cost conditions. 3

  International comparisons reveal that Britain was an economy that had high wages relative to other countries, a point that has only become firmly established recently, as a result of a long period of successful commercial expansion. Cheap energy was based on the early development of the coal industry, favourable geology and the possibility of transporting coal by water. The rate of return on adopting inventions, and famous inventions in textiles, steam power and coke smelting, was much higher in Britain than elsewhere and so the potential market for these innovations was much greater. As Allen sees it, ‘The Industrial Revolution, in short, was invented in Britain in the eighteenth century because it paid to invent it there’ (2009a, p. 2). British institutions and policies were adequate for the time but were not markedly superior. Britain did, of course, require an adequate supply of inventors and this may explain why the apparently favourable configurations of relative factor prices which had prevailed in earlier periods did not deliver a pre-Enlightenment Industrial Revolution.