Economic Growth and the Industrial Revolution

G. Chris Rodrigo, IMF Research Department

Economic growth is essentially growth of labor productivityReal cost of some common food items

in minutes of work 1919 1997 3 pounds of chicken 157 14 3 pounds tomato 101 18 5 pounds sugar 72 10 1 pound ground beef 30 6 ½ gallon milk 39 7 1 dozen oranges 68 9

How technological change lowers real cost of consumer durables

Cost in work hours of consumer durables 1911-16 1997

Refrigerator 3162 (1916) 68 Cooker 345 (1910) 22 Dishwasher 140 (1913) 28 Clothes washer 553 (1911) 26These are clearly enormous productivity gains

Measuring - real effective -economic growth

The economy as a production system Labor productivity (output/labor input) is the

best measure of economic progress GDP/capita is the best measure of prosperity Real growth should be measured as the rate

of growth of GDP/capita (rather than GDP) Growth of labor productivity is approximately

proxied by the growth of GDP/equivalent adult which is the slope of GDP/capita against time

Economic growth in longer term perspective (500 years)

Estimates by Maddison provides growth data from 1500 – 2000

Key turning point: industrial revolution in Britain from 1750 – 1830

Preceded by two - three centuries of merchant capitalism in Europe

Followed by spread of industrial capitalism to USA from around 1850

Germany and USA leap ahead from 1870-90

Factors catalyzing the advance of science and technology in Europe

Portugese advances in navigation and the breaking of the spice trade monopoly

International trade and the “European Enlightenment” – triggering effects

The Enlightenment and the rise of science in Europe – symbiotic evolution

Breaking the stranglehold of theology to promote advance of scientific thinking

What do we know today about long-term growth ?

Growth is uneven across time and space Pre-industrial societies were practically

stagnant by contemporary standards Economic growth accelerates with the

onset of the industrial revolution Growth is the result of technological

change Benefits of technology are not automatic:

wrenching internal reforms are needed to capture benefits from existing technology

Long-term growth occurs in waves of technological revolutions(Carlota Perez, 2002)

From 1771 From 1829

From 1875

From 1908

From 1971

The industrial revolution in Britain Age of steam and railways; from

Britain to W. Europe and the USA Age of steel, electricity and heavy

engineering. USA & Germany lead Age of oil, automobile and mass

production; from USA to Europe Age of information technology;

from USA to Europe and Asia

International trade from 1750 to 1945 and the rise of imperialism

Pre-industrial trading networks and colonies were extended to generate larger markets

Trade with colonies was a crucial source of raw materials and agricultural products

From around 1870 limited industrial activity was induced in the colonies

But exploitation of colonies (imperialism) held back technological development in Britain and France compared to the United States and Germany

Decisive political action is sometimes needed for accelerated catch-up Peter the Great, Catherine the Great and

the modernization of Russia The Zollverein and the genesis of

Germany The role of banks in promoting industry

in Germany (institutional substitution) The Meiji restoration in Japan and the

role of the state in kick-starting industry

Alexander Hamilton and the rise of the USA as an industrial power

Hamilton (in 1791) put forward the following ideas.• The US needed to become a strong industrial

power to become a first-rank nation, like Britain & France

• A developing nation like the USA could not compete immediately against industrial might of UK, to match the low-price and high quality of its manufactures

• US industrial capability has to be built-up steadily over time through experience in production

• Hence, it is necessary to support domestic industry and protect domestic markets against imports until US industrial capability is built up to British levels

• Hamilton’s industrial policies were strongly opposed by Southern plantation interests and Jefferson

Hamilton’s industrial policies for the promotion of domestic manufactures

Moderate tariffs crafted to protect ‘infant industries’ against imports Exemption from tariffs for industrial inputs Prohibitions on exporting raw materials needed by American industry Promotion of science, technology and innovation through subsidies,

patents and prizes for inventions and immigration of skilled people Regulation of product standards and inspection of US manufactured

goods to protect consumers and enhance reputation abroad Building up the physical infrastructure (transportation) and financial

system to support industrial expansion, trade and exportsThese policies were opposed by Southern plantation owners, but

became accepted from around 1812, remaining in force until 1945. US industry advanced rapidly, overtaking Britain and France by around 1890.

Alexander Hamilton (1755-1804)and Friedrich List (1789-1846)

Hamilton’s policies were adopted by List and implemented in Germany as well. By 1871 Germany and the USA began university-based research to support industrial innovation. By 1890, Germany and the USA had surpassed Britain in overall labor productivity and productivity growth as well.

Other factors that drove US ascendency over Western Europe ?

Absence of feudal social institutions promoted faster evolution of technology

Large internal market led to gains from scale economies from both production and distribution

Imperialism in Britain and France held back emergence of modern economic institutions

USA borrowed technology and adopted new ideas more rapidly than other countries

USA incubated a uniquely entrepreneurial culture

Economic change is not automatic – political action is often necessary

Evolution of social & economic institutions is often forced Expansion of education and scientific research is often

initiated by the government (Germany, USA, India) Social structures that block progress need to be broken up Industrial work tempos and work ethic need to be built up Wars often accelerate the drive for technological change Political-economy actions needed for industrial catching-up Industrial policy used successfully by Japan, Korea, Taiwan

and Singapore, but many more countries that used industrial policies failed to achieve breakthrough, possibly because they failed to simultaneously implement other necessary reforms

Original industrial policies may not work today, because the rules of trade have changed with the GATT-WTO process and the much higher complexity of modern industrial technology

Technological change and economic growth: references

Landes, David S. (1998), The Wealth and Poverty of Nations, New York, NY: W.W. Norton.

Maddison, Angus (1991), Dynamic Forces in Capitalist Development: a Long-run Comparative View, Oxford, UK: Oxford University Press.

Maddison, Angus (1995), Monitoring the World Economy 1820–1992, Paris: OECD, Development Centre Studies.

Mokyr, Joel (1990), The Lever of Riches: Technological Creativity and Economic Progress, New York: Oxford University Press.

Chang, Ha-Joon (2008) Bad Samaritans: the Myth of Free Trade and the Secret History of Capitalism, New York, Bloomsbury Press.