Essay: Industrial Revolution and Economic Growth

Essay: Industrial Revolution and Economic Growth!

Industrial Revolution is an unpredictable and unprecedented transformation of socio-economic life of Great Britain during the last few decades of 18th century. The Industrial Revolution is a process of quite substantial structural changes which eventually ushered in accelerated eco­nomic growth. These changes are not simple economic changes in the social dynamics, culture and political functions of the government.

In fact, the mutual interplay among these changes shaped the process of industrialisation and technological revolution. However these changes cannot be analysed without any reference to the class composition of the British society and the associated social tensions. Actually, historically speaking, industrial revolution produced what we call modern industrial capitalism.

When economists in the mid-1950s began to dispute the traditional thesis that capital deep­ening had been, historically, the major source of increases in productivity per head, there began the search for important factors—other than physical inputs of capital and labour—which had caused gains in per capita product.

Thus population increases and technological change, which for so long were assumed to have been determined exogenously, made their way back into the economist’s bag of variables. The historian, fortunately, had never been imprisoned within the restrictive framework of neo-classical production function and had always recognised the im­portance of both population and technology for the process of historic growth; on the other hand, they had no conceptual framework in which to relate the variables of growth they had identified.

We will now attempt to identify the broad factors causing Industrial Revolution:

(1) Capital Accumulation:

The accumulation of capital has been a major interest of econo­mists since Adam Smith (1723-1790), and of economic historians since economic history emerged in the second half of 19th century as an academic discipline. Industrial Revolution; it has been argued recently, was no more than an acceleration in the rate of capital formation.

The tendency of recent literature on Industrial Revolution has been to look for factors that raised the profitability of investment (i.e. its demand) rather than those which increases the flow of saving (its supply). Aston argued that fall in the interest rate was an important stimulant of invest­ment—a difficult hypothesis to test in the absence of statistics on investment expenditure.

The more usual notion stresses the role of increased demand for final goods, reacting back on the demand for capital (profitability of investment). In this context we may refer to the theory of profit inflation as a major determinant of capital accumulation.

According to this theory, the steady price rise between 1750 and 1790 inflated profits, increased savings and accelerated capital accumulation. E. H. Hamilton has provided historical backing for this particular hy­pothesis and has argued that the profit inflation after 1750 caused Industrial Revolution.

However, empirical evidence about capital formation—at various times and in various econo­mies over the last hundred years—has produced a series of generalisations which can be use­fully grouped, for the purpose of considering their relevance for historic growth in three broad categories:

First, concerning the size and composition of capital accumulation:

(a) The diversion of resources to capital formation in advanced economies is ‘modest’—20 to 25 percent of GNP, and is less in underdeveloped countries;

(b) The proportion of total investment in machinery, tools and equipment and hence, em­bodying technical progress, is relatively small—usually less than half of that on construction.

Second, concerning the relationship between capital formation and growth of output:

(a) The capital-output ratio has been 3 for some time, with a possible falling tendencies in the advanced economies;

(b) Differences in the rate of capital formation cannot explain differences in growth rates between economies.

Third, concerning the role of capital formation in the growth of underdeveloped economies compared with developed economies:

(a) The capital-output ratio is relatively higher;

(b) The proportion of social infrastructure capital formation to total capital formation is relatively higher;

(c) The proportion of replacement capital is smaller.

The historians now question, not so much the basic importance of capital formation in the making of the Industrial Revolution, as the size and composition of necessary diversion of resources for capital formation. Historians cling to the classical economists’ theory of growth through accumulation, but argue whether a modest or large capital accumulation was necessary to begin and to sustain the 18th century growth. This problem of determining the necessary size of accumulation cuts across other historical problems of capital formation and partly deter­mines the outcome of other arguments.

(2) Technical Change:

The character of a society is conditional and its production possi­bilities as assumed by historians are determined by its technology. Many economists now be­lieve that the rate of growth is a function of the rate of technical change and its application to industry. Historically, however, it is difficult to separate technological progress and capital accumulation.

Most new technology during the Industrial Revolution for example was embod­ied in new or improved capital goods. Thus there was a close relationship between investment, capital formation, technical progress and increase in output.

Sharp increase in productivity is one of the most important factors contributing to economic growth. Increase in productivity was primarily a function of innovations. Innovations are sim­ple technological developments that could only be responsive to socio-economic conditions. Two important economic factors were fuel shortage and demand growth.

Shortage:

The growth of output and capital stock was tending to outrun the growth of labour supply and natural resources (wood): expensive wood led to exploiting cheap coal and, then, to steam. Thus the energy crisis generated its own solution—the resultant changes in relative prices which were powerful incentives to innovation and vital to Industrial Revo­lution.

Growth in Demand:

Growth increased demand along a wide front, putting pressures on sources of supply and eliciting vigorous innovative responses; more particularly, Cole has ar­gued that faster population growth from 1740 onward ultimately stimulated growth of income per head—in sharp contrast with the Malthusian prediction—because greater demand pressure led to induced innovations—more than sufficient to offset diminishing returns.

Characteristics of Technological Progress:

In the 18th century a series of inventions transformed the manufacture of cotton in England and gave rise to a new mode of production-the factory system. During these years, other branches of industry affected comparable advances and, all these taken together, mutually reinforcing one another, made possible further gains on an ever-widening front. The abundant and variety of these innovations almost defy compilations.

But they may be subsumed under five princi­ples:

(1) The substitution of machines-rapid, regular, precise-for human skill and effort;

(2) The substitution of inanimate for animate sources of power, in particular the introduc­tion of engines for converting heat into work, thereby opening to man a new and almost unlim­ited supply of energy;

(3) The use of new and far more abundant raw materials—in particular, the substitution of minerals for vegetable or animal substances.

(4) The rapid growth associated with the technological progress was self-sustaining. Where, previously, on amelioration of the condition of existence—hence of survival—and an increas­ing economic opportunity, had always been followed by a rise in population that eventually consumes the gain achieved; now, for the first time in history, both the economy and knowl­edge were growing fast enough to generate a containing flow of investment and technological innovations; a flow that lifted beyond visible limits the ceiling of Malthus’s positive checks. The Industrial Revolution thereby opened a new age of promise.

(5) An economic historian, Malthias, speaks of a continuum of technological improvement; of the kind of technological Darwinism sustained over a long period of time. Much of this technological changes was product innovation rather than process innovation, or, when it was process innovation, it would be accommodating a standard process to a new range of uses.

As a result substantial changes in processing costs tended to occur discontinuously; e.g. when patent right expired. Nevertheless, the underlying technological Darwinism was an important reason for an accelerated British economic growth during the last few decades of the 18th century.

Social Change:

Crucial change in the 18th century was dependent not only on more productive equipment, not only on more entrepreneurs, but also on the changing values in society; in particular, it was necessary to cross a threshold level of acceptance of level methods.

The changing values were reflected in changed social action that was economically significant, for example, at the top of the income structure, more capital went into factories and less into country-houses, while, at the bottom, more into new customer goods and less in idleness, gin and customary subsistence living standard.

These switches in demand were the result partly of a rational economic reac­tion to price changes, but partly of a radical revision of those traditional attitudes which dis­couraged the fuller use of human material resources.

Men’s minds turned generally from tradi­tionalism to risk-taking and profit-making, from the acceptance of customary way of life to striving for extra income and extra consumption. It is important to note that pursuit of wealth dominated the minds of a much larger segment of English society than before and the accept­ance of change was general and quite pervasive.

Population:

Population, its growth, stability or decline, and its relationship to economic growth, has been an absorbing interest of economists and historians since Malthus (1766-1834). It was the In­dustrial Revolution which marked ‘the great divide’ between a world in which population and output per capita were increasing slowly, or not at all; and a world of much faster growth of output per capita, in which population had increased at an almost frightening rate.

If the limits to population growth and living standards seemed rigidly determined at low levels in pre- industrialised England, the limits to both since the beginning of the Industrial Revolution (1750s) have been flexible and, it would seem, almost infinitely so.

The historical data suggests a close association between population growth and economic growth. With increase in per capita income widely accepted as the objective of development or as the best available approximation of it, population is firmly relegated to the denominator of the expression which we want to maximise and any increase in numbers can only be considered a setback on the road to development. There has been clear realisation by the historians that population can conflict with growth, but little development of the theme.

S. Pollard and D.W. Crossly have suggested that the population growth of England during the Industrial Revolution put great strain on the economy, with food supplies failing to keep up with population.

Much effort and ingenuity have gone into estimating rates of growth of England’s population in the 18th century. A regional breakdown of population growth shows that the countries which were later the centres of industrial change were already growing faster than the rest of the country in the first half of the century.

What happened in the 18th century is that population probably increased 75% over the I6th and 17th centuries; but it is growth in the 18th century which is the most important in considering the relationship between population growth and the Industrial Revolution. And about this we cannot be certain. This uncertainty means that the chronology of population growth and the chronology of economic growth are difficult to associate.

There remains the final and important question as to whether or not the increase in popula­tion helped or hindered the English growth. If we believe Malthus, then, as population grew, diminishing returns set in agriculture, resulting in increasing labour costs (man-hour food costs) and decreasing profits and, eventually, in a stationary state.

But, as Ricardo pointed out, im­provements in agriculture and in machinery could offset diminishing returns. Indeed, strongly increasing returns in industry seem to have been a characteristic of the Industrial Revolution, as well as a tendency towards increasing returns in agriculture.

Therefore the conclusion, how­ever, that England avoided a Malthusian trap is no proof that the increase in population during the Industrial Revolution actually helped growth. And, over the course of history before the Industrial Revolution, population growth was obviously the major source of general expansion of output as the world had experienced.

Population growth without industrialisation was cer­tainly disastrous for Ireland in the period before the Great Polato Famine of 1842 there. And, in trying to explain Britain’s slowing rate of growth in the years between 1880 and 1930, it is significant that one of the main ways in which Britain’s situation after 1900 differed from that in the 19th century was in the fall in its rate of population growth.

Obviously the Industrial Revolution entrepreneurs existed in sufficient numbers and had the requisite skills to overcome obstacles and to effect a transformation of the economy. Obvi­ously also, both economic incentives and factor elasticities enabled the entrepreneurs to re­spond purposefully and react successfully; institutional arrangements, factor supplies, techni­cal skills, etc. were appropriate.

Effects of Industrial Revolution:

Let us stop and take a different sort of look round Britain at the highpoint of its capitalist career after the Industrial Revolution. It was first and foremost a country of workers. The net result of the galaxy of revolutions in the way men organised their economic life was that continuous economic change came to be part of the natural order of things and the scale of economy began to expand perceptibly and without limit. It was within the century 1750-1850 that the crucial transformation took place that led, eventually, to a sustained growth in incomes per head.

When workers lost their employment-which they might do at the end of the job of the week, of the day or even of the hour- they had nothing to fall back upon except their savings, their friendly society or trade union etc., which was still the only public provision for what we now call social security.

When they grew old or infirm, they were lost, unless helped by their children for effective insurance schemes covered only a few of them. Nothing is more characteristic of Victorian-working class life than this virtually total absence of social security

After a period of stagnation in output, prices, population, incomes and standards of living in the first part of the 18th century, there was a noticeable upward trend in total national output dating from somewhere about or just before 1750.

A considerably sharper upward trend appears in the 1780s and 1790s when total national output may have been growing at a rate of 1.8 percent per annum (approximately twice the rate of growth in the middle of the century) and output per head at a rate of about 0.9 percent/annum.

By the beginning of the 19th century, the growth in total national output was proceed­ing at a rate which implied its doubling in not much more than 40 years and the growth in income per head at a rate which implied its doubling in 70-80 years.

A significant feature of this end-of-century acceleration in the rate of growth of income per head is that it was accompanied by acceleration in the rate of growth of population. It seems to have been the period within which the rate of growth in national product effectively outstripped the rate of growth of popu­lation and the spectre of Malthusian stagnation was banished.

The fact is that the economic growth was not a process of steady improvement in standards of living for the mass of the population. It was a process of economic and social change which often left certain sections of the population very much poorer in every sense than they had been in pre-industrial times, and which made larger and larger sections of the population acutely vulnerable to depressions in trade or industry or to variations in the state of the harvest. Even those whose standard of living were on balance, improving, were subject to unpredictable periods of unemployment or short-time which would bring them face to face with destitution again.

The Great Depression brought important changes. Probably the most rapid general improve­ment in the conditions of life of the 19th century worker took place in the years 1880-1895 mitigated only by the somewhat higher unemployment of this period.

This is because falling- living-costs benefit the poorest as well as the rest, indeed proportionately more than the rest, and the depression was primarily a period of falling prices — but they fell largely because an entire new world of cheap imported foodstuffs opened before the British people.

By 1850 Britain was certainly industrialised in that more of its people were engaged in manufacturing industry than in agriculture. Moreover, the agricultural industry was distinguished at this stage by the fact that its landless labourers constituted a relatively large proportion of its labour force.

It had moved a long way, that is to say, from the peasant economy. But probably the most significant difference in the labour force of 1850 as compared with the mid-18th century was that it was a more specialised labour force.

What had happened, however, by 1850, as compared with, say, 1750, was that the range of goods regularly available to the average purchaser had widened and that the chain of interme­diaries between producer and consumer had lengthened. To a large extent this was a conse­quence of the improved system to communications.

Before the middle of the 19th century, however, the process of industrialisation had gone far enough to give the British economy a built-in tendency to continuous economic growth. The volume of capital at the disposal of the labour force was growing rather faster than the labour- force itself and the long term trend was definitely set towards a continuous increase in the productivity of the worker.

Finally, another distinctive and significant dimension of the growth record of the British economy over the period of the Industrial Revolution is worth noticing: the extent to which it was dependent on the international economy both for material inputs and for final demand. Between 1750 and 1800 both real GNP and the volume of domestic exports roughly doubled, while the volume of retained imports roughly trebled.

The link with the international economy largely explained why at first Industrial Revolution first occurred spontaneously in a country with a relatively small population and a relatively narrow natural resources base. The growing strength of that link may also have contributed to the characteristically low propensity to invest and to innovate which seems to have distinguished British industrial entrepreneurs in the late 19th century from their rivals in the other industrialising countries.

Ultimately, the Industrial Revolution subjected a low-income community to a fluctuating type of economic growth in which the down-savings were prolonged and painful for the prole­tarian sectors of the population. Of course it was not only the working classes who suffered from the growing instability of the economic system.

In sum then, endowed as it was with abundant labour, a limited and exhaustible heritage of land and other natural resources, a modest propensity to save and invest and a government which preferred to leave economic development to the free play of private enterprise, the Brit­ish economy came through its Industrial Revolution with a relatively low growth potential by comparison with most of the countries which industrialised later. The faster-growing rivals threatened her virtual monopoly in world markets. The ends of British industrial supremacy was definitely in sight.

Galenson and Leibenstein push their argument one step further and identify the most profitable project as the one with the highest capital-labour ratio. This result leads them to the paradoxical conclusion that the factor-intensity rule should be reversed: countries should prefer the most capital-intensive rather than the least capital-intensive techniques in order to promote savings and faster growth.