Industrial Revolution and Economic Growth

Economic History: Transition to Modern Growth

• The transition to modern economic growth occurred in Northwest Europe between the mid-18th and mid-19th centuries.
• A decisive breakthrough occurred in Britain around 1750, marked by the adoption of new technologies, and their subsequent continuous improvement.
• Britain was the first to experience technological progress-driven economic growth, thus escaping the Malthusian trap.

The Industrial Revolution: Role of Coal

• Coal was already used in Britain before the Industrial Revolution for various purposes (heating, brickmaking, ceramics).
• New technologies, like coke smelting (Abrahm Darby, 1709) and the Newcomen steam engine (Newcomen, 1712), dramatically increased coal's usage.
• Coal use freed economies from constraints imposed by land, eliminating the need for charcoal and allowing for increased horsepower without needing more farmland.
• By 1800, Britain had 170,000 horsepower accessible through its industry; by 1907, this figure increased to almost 10,000,000.
• Iron production in Britain rose from 12,000 tons in 1700 to over 2,000,000 tons by 1850.
• The distribution of coalfields significantly influenced the geographical spread of the Industrial Revolution.

From Malthus to Solow

• Pre-modern production function: Y = AL^1-α (Output = Total factor productivity * Fixed land input^{1- α} * Labor input)
• Modern production function: Y = AK^βL^1-β (Output = Capital input^β * Labor input^{1 - β})
• α and β represent capital shares of income, approximately 1/3.
• The pre-modern function shows a negative relation between population and per-capita income.
• The modern function depicts that population growth doesn't necessarily lower per capita income if the capital stock grows.

Escaping Malthus

• The graph of English real wages and population demonstrates rising incomes that continued to rise even with a growing population.

Modern Economic Growth - Solow

• Per capita income growth can stem from capital accumulation (short-term growth or transitory growth) or technological progress (long-term growth or steady state growth).
• Sustained per capita income growth necessitates sustained technological progress.
• The Solow model emphasizes external or exogenous TFP (total factor productivity) growth.
• Endogenous growth models focus on factors like research and development (R&D) to explain sustained growth.

The Onset of Modern Economic Growth (UK)

• A graph of real GDP per capita in the UK (2011 international USD) showcases the sustained growth of the British economy post-1700.

Growth Accounting

• Cobb-Douglas production function: Y = AK^αL^1-α, where α is the capital's share of income (~1/3).
• Calculating the change in output (∆y) , one decomposes this growth into TFP growth and capital deepening.

TFP Growth during the British Industrial Revolution

• Technological advancements initially impacted only a few specific sectors.
• TFP growth in aggregate became evident slightly later.
• Initial TFP improvements were modest.

Induced Innovation: Factor Prices

• A key driver of TFP growth is the "induced innovation" thesis wherein expensive labor and cheap energy drive innovation to reduce labor costs.
• The creation of new technologies is a cost-minimizing response.
• The high demand for new technologies encourages innovation, particularly those that substitute expensive labor for cheap coal-based energy, and this resulted in more efficient technologies.

Induced Innovations as Seen by Contemporaries

• Contemporary accounts noted that technological advancements became crucial in countering the increasing cost of labor.
• They recognized that nations needed to improve labor-saving machinery to maintain or improve their competitive advantage.

Technology in Induced Innovation

• Technological advancement is heavily influenced by labor costs and the price of energy.
• Cost-effective technology is more likely to be adopted in regions with higher wage costs.

Spread of the Industrial Revolution

• The spread of steam engines became integral to cost-minimization as wage levels rose.
• Access to coal and water transportation influenced the establishment of industries.
• Industrial development in areas lacking domestic coal supplies was slower.
• The industrial revolution spread further with the advent of railway transport.

Coal Geography in Europe

• Maps illustrate the correlation between coal deposits and initial development of industrial activity in Europe.

Modern Economic Growth Across Europe

• The extension and wide adoption of the Industrial Revolution led to sustained per capita growth across Europe.

Deep Roots of Modern Economic Growth Beyond Factor Prices

• TFP (Total factor productivity) growth is a vital aspect of modern economic growth.
• TFP signifies technological advancements, but encompasses other factors like human capital, institutions, culture, and geography.

Institutions and the British Industrial Revolution

• The Glorious Revolution (1688) strengthened parliament and reduced monarchical power, making British tax policies more reliable, and thereby attracted capital.
• Securing property rights and reducing risk was a central factor in the Industrial Revolution.

Intellectual Property Rights and the Industrial Revolution

• Intellectual property rights resolved the underinvestment problem in knowledge creation, encouraging innovation and its wider and faster application. However, the patent process itself was expensive and cumbersome.
• Many important inventions were not patented initially.

The Scientific Revolution

• The Scientific Revolution played a role in facilitating interactions between scientists and engineers along with the creation of useful knowledge.
• This fostered continued innovation.

Human Capital and the British Industrial Revolution

• The initial stages of the industrial revolution diminished the skills needed to perform certain jobs as machines were integrated into the labor process.
• While initial human capital development was low by European standards, high-skill workers were crucial to initial technological advances.
• Mass education was a more important driver of technological adoption.

Higher Education Trends

• Data shows declines in higher education during the British industrial revolution.

Culture and the Industrial Revolution

• A shift in cultural values, valuing enterprise and innovation played a key role.
• Engineering became a recognized way for individuals to achieve social recognition.

Factory Discipline and Coordination Theory

• Factory production demanded intensive work structures, with penalties for conduct deviations (e.g., being late, talking).

Factory Discipline and Institutions

• Institutional elements like the Statute of Artificers encouraged an employer-friendly labor environment, resulting in higher outputs per unit of labor cost.
• However, the potential for exploitation of labor was a caveat.

Factory Discipline and Wages

• Workers in factory settings typically received higher wages compared to those working outside factories, despite the strict control measures.

Empire, Trade and Market Size

• Colonial trade expanded during the late 18th century, becoming an effective market for British manufactured goods.

Was the Industrial Revolution Export-Led Growth?

• Limited markets or lack of demand were limitations on the growth of industrial production.
• Increased market size, facilitated by exports, played a large role in encouraging British industrialization.

Chance and the British Industrial Revolution

• Technological advancement is influenced by chance and luck.
• The early stages of the British industrial revolution were marked by a heightened level of volatility and chance factors.