Lecture 3 - The Transition to Modern Economic Growth PDF

Economic History The transition to modern economic growth Felix Ward Erasmus University Rotterdam 1/42 1 The British Industrial Revolution From Malthus to Solow Induced innovation in Britain 2 International spread of the Industrial Revolution 3 The Deep Roots of modern economic growth 2/42...

Economic History The transition to modern economic growth Felix Ward Erasmus University Rotterdam 1/42 1 The British Industrial Revolution From Malthus to Solow Induced innovation in Britain 2 International spread of the Industrial Revolution 3 The Deep Roots of modern economic growth 2/42 The Industrial Revolution The transition to modern economic growth occurred in Northwest Europe between the mid C18th and mid C19th Decisive breakthrough occurred in Britain around 1750 with the adoption of new technologies and their continuous improvement ⇒ Britain is the first to embark on technological progress-driven economic growth and thus escapes the Malthusian trap 3/42 The central role of coal Prior to the Industrial Revolution coal was already used for a variety of purposes in Britain (e.g. heating, brickmaking, ceramics,...) New technologies critically expanded the use of coal in two ways Smelting iron with coke (Abraham Darby, 1709) Newcomen steam engine (Newcomen, 1712) Use of coal unshackles economy from Malthusian land constraint No more woodland required for smelting iron with charcoal More horsepower without new farmland for producing fodder ⇒ Energy and iron production become independent from land area 4/42 The central role of coal Energy accessible to British Industry 1800: 170,000 horsepower 1907: almost 10,000,000 horsepower Iron produced by British Industry 1700: 12,000 tons 1850: >2,000,000 tons The map of the British Industrial Revolution, it is well known, is simply the map of the coalfields. Pollard, Sidney. 1981. Peaceful conquest: the industrialization of Europe, 1760-1970. Oxford University Press. 5/42 The geography of coal shapes the Industrial Revolution English Industry in 1700 English Industry in 1800 Neal, Larry and Rondo Cameron. 2015. A concise economic history of the world: from Paleolithic times to the present. Oxford University Press. 6/42 The escape from Malthus Coalbrookdale by Night, 1801 painting by Philip James de Loutherbourg. 7/42 The new iron abundance The world’s first iron bridge opened in 1781 (Shropshire, England) Neal, Larry and Rondo Cameron. 2015. A concise economic history of the world: from Paleolithic times to the present. Oxford University Press. 8/42 1 The British Industrial Revolution From Malthus to Solow Induced innovation in Britain 2 International spread of the Industrial Revolution 3 The Deep Roots of modern economic growth 9/42 From Malthus to Solow Pre-modern production function: α 1−α Y = AΛ L ⇔ −α y = AL Y: Output (Food) A: Total factor productivity Λ = 1: Fixed land input L: Labor input 0 < α < 1: constant scale returns; decreasing marginal returns y ≡ Y/L ⇒ Negative relation between population level and p.c. incomes Modern production function: Y = AKβ L1−β ⇔ y = Akβ K: Capital input ⇒ New machines make substitution of land area (current sunlight) for mineral energy (stored sunlight) possible k ≡ K/L 0 < β < 1: constant scale returns; decreasing marginal returns ⇒ Population increase no longer implies lower p.c. income if accompanied by capital stock increase 10/42 Escaping Malthus: English real wage and population level ⇒ Rising incomes despite a growing population 11/42 Modern economic growth according to Solow Per capita income growth in the Solow model can come from 1 Capital accumulation → transitory growth 2 Technological progress → steady state growth Sustained per capita income growth requires sustained technological progress (i.e. Kuznetsian or Schumpeterian growth) Solow model: exogenous TFP growth Endogenous growth models: e.g. R&D models 12/42 The onset of modern economic growth Real GDP per capita in the U.K. (in 2011 international USD) Maddison Project Database 2020 (Bolt and van Zanden, 2020) 13/42 Growth Accounting 1 Cobb-Douglas production function: Y = AKα L1−α ⇔ y = Akα α= b capital share of income (∼ 1/3) k ≡ K/L 2 Take logs and differentiate with respect to time (∆): ∆log(y) = ∆log(A) + α∆log(k) ⇒ Decompose p.c. output growth into TFP growth and capital deepening 3 Calculate TFP growth ∆log(A) = ∆log(y) − α∆log(k) 14/42 TFP growth during the British Industrial Revolution Initially, new technologies only applied in a few small sectors But later TFP growth becomes more visible in aggregate data Persson, Karl Gunnar and Paul Sharp. 2015. An Economic History of Europe: Knowledge, Institutions and Growth, 600 to the Present. Cambridge University Press. 15/42 1 The British Industrial Revolution From Malthus to Solow Induced innovation in Britain 2 International spread of the Industrial Revolution 3 The Deep Roots of modern economic growth 16/42 What drives TFP growth? The role of factor prices Recap: Induced innovation thesis A historical first: expensive labor meets cheap energy Cost minimization dictates that English firms produce with as little labor and as much coal as technologically possible High firm demand for new technologies that substitute cheap coal for expensive labor Lucrative opportunity for innovators to develop coal-powered steam engines for commercial use 17/42 Induced innovation ⇒ Technology T only worth using and inventing when wages are high Notes: CH : high-wage firm’s cost of production; CL : low-wage firm’s cost of production; r: rental price of capital; T: new technology (capital-intensive & labor-saving) Allen, Robert C. 2011. Why the industrial revolution was British: commerce, induced invention, and the scientific revolution. The Economic History Review, 64(2). 18/42 The birth of modern economic growth A pit head, c. 1775–1825, National Museum Liverpool, Walker Art Gallery. 19/42 1 The British Industrial Revolution From Malthus to Solow Induced innovation in Britain 2 International spread of the Industrial Revolution 3 The Deep Roots of modern economic growth 20/42 Improvements make the steam engine more energy efficient Allen, Robert C. 2010. The British Industrial Revolution in global perspective. Proceedings of the British Academy. 167. 21/42 Induced innovation: micro innovations ⇒ Micro-innovations make new technology cost effective in low-wage firm 22/42 Spread of the Industrial Revolution As steam engines become more efficient they become part of the cost-minimizing input mix in other coal-abundant regions with relatively high wages (i.e. Northwest Europe) ⇒ Steam engines spread to all coalfields of Northern France, Belgium and Western Germany Pre-railway logistics restricted the development of heavy industry to regions where coal was plentiful, or which had access to coal through waterways (e.g. along the Rhine) ⇒ The industrial development of countries that lacked domestic coal supplies lagged behind (e.g. Italy) Coal geography matters less once railway transport spreads in C19th ⇒ Industrial Revolution spreads even further (Southern Europe, Scandinavia) 23/42 Coal in Europe Fernihough, Alan and Kevin Hjortshøj O’Rourke. 2021. Coal and the European Industrial Revolution. The Economic Journal, 131. 24/42 Coal geography shapes initial spread of Industrial Revolution 25/42 Modern economic growth spreads across Europe Real GDP per capita (in 2011 international USD) ⇒ Sustained p.c. GDP growth spreads Maddison Project Database 2020 (Bolt and van Zanden, 2020) 26/42 1 The British Industrial Revolution From Malthus to Solow Induced innovation in Britain 2 International spread of the Industrial Revolution 3 The Deep Roots of modern economic growth 27/42 Deep roots of modern economic growth beyond factor prices TFP growth is key to modern economic growth Economic theory: TFP growth is key to sustained p.c. income growth Growth accounting: TFP growth becomes important during Britain’s Industrial Revolution TFP growth is commonly interpreted as technological progress, but TFP is a summary term that can reflect many things Human capital (e.g. numeracy, literacy) Institutions and politics (e.g. executive constraints, policing, corruption) Culture and ideology (e.g. trust, work ethics, entrepreneurial spirit) Geography (e.g. waterway access, coal deposits, disease environment) ⇒ Modern economic growth has several potential deep roots 28/42 Institutions and the British Industrial Revolution North and Weingast (1989) argue that the British Industrial Revolution was a consequence of the Glorious Revolution (1688)1 Strengthens power of parliament and courts / constrains monarch ⇒ Tax policy of government becomes more predictable ⇒ Secure property rights, lower risk premiums / cheaper capital Caveats: England only catching up with others: interest rates not especially low Why the 60 year lag between Glorious and Industrial Revolution? Epstein critique2 : powerful states better at curbing private rent-seeking Too secure property rights can also prevent progress (e.g. enclosures) 1 North, Douglass and Barry Weingast. 1989. Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century Britain. The Journal of Economic History, 49(4). 2 Epstein. S. R. 2000. Freedom and Growth: Markets and States in Europe, 1300–1750. Routledge. 29/42 British interest rates catch up with Dutch rates Sussman, Nathan and Yishay Yafeh. 2006. Institutional reforms, financial development and sovereign debt: Britain 1690–1790. The Journal of Economic History, 66(5). 30/42 Intellectual property rights and the Industrial Revolution Theory: Knowledge is an undersupplied public good (non-rival, non-exclusive). Patenting solves an underinvestment problem In practice: British patenting system expensive and cumbersome Many important inventions were never patented (e.g. coke-smelting) Initially, fame and reputation may have been enough As late as the mid C19th, minority of inventions were patented (< 16%) Important industry differences: e.g. machine building filed more patents and concentrated in countries with stronger patent protection ⇒ Despite its imperfections the patent system probably resulted in higher TFP growth than reputation and fame could have achieved on their own Mokyr, Joel. 2009. Intellectual property rights, the Industrial Revolution, and the beginnings of modern economic growth. The American Economic Review: Papers & Proceedings, 99(2). 31/42 Intellectual property rights and the Industrial Revolution ⇒ Clear trend break around start date of traditional Industrial Revolution Sullivan, Richard J. 1989. England’s “Age of Invention”: the acceleration of patents and patentable invention during the Industrial Revolution. Explorations in Economic History, 26. 32/42 The Scientific Revolution Joel Mokyr argues that science was key to the Industrial Revolution New scientific and philosophical societies facilitate interaction between scientists and engineers Baconian program: focus on generating useful knowledge ⇒ Scientific culture generated permanent TFP growth Caveats: Many C18th theories have been rejected (e.g Phlogiston theory) Not U.K. specific: Pan-european exchange (Republic of letters) Research better developed in Continental Europe than in Britain Many inventors were tinkerers, not scientists ⇒ Professional science probably more relevant for 2nd wave of industrialization (electrification and chemical industry) Mokyr, Joel. 2012. The enlightened economy: an economic history of Britain 1700–1850. Yale University Press. 33/42 Human capital Unified growth theory: human capital is key to modern economic growth Malthusian regime: Constant probability of having a good idea / head Slow technological progress ⇔ slow population growth Modern regime: More technology increases returns to expensive education ⇒ Fewer but better educated children (quantity-quality trade-off ) Human capital increase ⇔ faster technological progress ⇒ Rising per capita incomes Rising per capita incomes ⇔ rising opportunity cost of having children ⇒ Demographic transition Galor, Oded. 2005. From stagnation to growth: unified growth theory. in: Handbook of Economic Growth, 1 Part A, Ch. 4. 34/42 A simple model of TFP growth More brains ⇔ more TFP growth Kremer, Micheal. 1993. Population growth and technological change: one million B.C. to 1990. The Quarterly Journal of Economics, 108(3). 35/42 Human capital and the British Industrial Revolution British educational attainment was low by European standards. Fully literate Scandinavia became Europe’s Impoverished Sophisticate Initial Industrial Revolution was de-skilling Replaced skilled artisans with machines and unskilled labor Widespread child labor increased opportunity cost of schooling Upper tail of the human capital distribution probably mattered1 Few individuals with high technical skill enough to get TFP growth going Mass education probably more important for technology adoption in late developers 1 Squicciarini, Mara P. and Nico Voigtländer. 2015. Human capital and industrialization: evidence from the Age of Enlightenment. The Quarterly Journal of Economics. 36/42 Culture Burgeois virtues: McCloskey argues that a culture that valued economic enterprise and innovativeness drove the Industrial Revolution1 Norms on working hours and intensity shifted (Industrious Revolution)2 Engineering superstars get statues (e.g. Brunel, Watt) Creative destruction became an accepted part of economic life As entrepreneurs and inventors became appreciated identities, ambitious individuals could achieve social recognition outside of a political, ecclesiastical, or military career 1 McCloskey, D. 2010. The bourgeois virtues: ethics for an age of commerce. University of Chicago Press. 2 de Vries, Jan. 2008. The Industrious Revolution: consumer behavior and household economy, 1650 to the present. Cambridge University Press. 37/42 Empire, trade, and market size In the late C18th British colonial trade is booming. British Empire becomes a significant outlet for Britain’s industrial produce By 1800, ≈ 50% of cotton goods were exported to America and Australia1 British textile production outpaced domestic demand By 1815, > 60% of cotton textile sector’s output was exported In late C18th, 50–70% of additional industrial production was exported ⇒ Export-led growth? Crafts (1985): export increase explains 21% of GDP increase from 1780 to 18012 1 Findlay, Ronald and Kevin H. O’Rourke. 2007. Power and plenty: trade, war, and the world economy in the second millennium. Princeton University Press. p.326. 2 Crafts, Nicholas F. R. 1985. British economic growth during the Industrial Revolution. Oxford University Press. 38/42 Empire, trade, and market size ⇒ British colonial exports boom in late C18th Davis, Ralph. 1962. English foreign trade, 1700–1774. The Economic History Review, 15(2). 39/42 Was the Industrial Revolution a case of export-led growth? Price D S S’ D’ $" $# !" !# Quantity S – supply before industrial revolution S’ – supply after the industrial revolution D – domestic demand D’ – domestic demand + exports ⇒ with trade: UK output increases from Q0 to Q1 ⇒ without trade: limited market size halts industrialization cf. Findlay, Ronald and Kevin H. O’Rourke. 2007. Power and plenty: trade, war, and the world economy in the second millennium. Princeton University Press. p.332. 40/42 Chance and the British Industrial Revolution Crafts (1977) views technological progress as a stochastic process: Some innovation attempts are successful, others are not ⇒ Important role for randomness Only very few breakthrough technologies played an outsized role (e.g. coke smelting, Spinning Jenny) ⇒ England may simply have had good luck Voigtländer & Voth (2006) use stochastic model simulations to conclude: England had some good luck, but was also accident-prone Probability for France to move out of agriculture into manufacturing faster than England <25% Crafts, Nick 1977. Industrial Revolution in England and France: some thoughts on the question “Why was England first?”. The Economic History Review, 30(3). Voigtländer, Nico and Hans-Joachim Voth. 2006. Why England? Demographic factors, structural change and physical capital accumulation during the Industrial Revolution. Journal of Economic Growth, 11. 41/42 Summary New technologies allowed the British economy to move from Malthus to Solow around 1750: steam engines and coke smelting use mineral energy instead of the traditional land-intensive energy sources (animal fodder and wood) Driven by cheap energy and expensive labor entrepreneurs and engineers continuously improve their machines and thus embark upon sustained TFP growth The Industrial Revolution spread to other Northwest European regions with access to cheap coal once steam engines had become sufficiently energy-efficient The constellation of various other deep roots of economic growth (institutions, culture, human capital, market size, innovation luck) was at least sufficiently benign for British manufacturers to not prevent this transition from happening 42/42