Was the industrial revolution mainly about the growth of manufacturing industry?

Some readers may think this question is like asking whether the Pope is a Catholic. The question is worth considering, however, because it raises some fairly common misconceptions about the industrial revolution (some of which I held until recently).

My main reason for reading about the industrial revolution has to do with my interest in human flourishing. The industrial revolution led to a massive, unprecedented and ongoing improvement in living standards, beginning in Britain and then spreading to other parts of the world. From that perspective, the industrial revolution tends to be associated with the advent of sustained economic growth.

However, Joel Mokyr suggests that the best available estimates indicate that growth in per capita income in Britain did not accelerate until the decades after 1830 - well after the beginning of the industrial revolution (‘The Enlightened Economy’, p 256). That makes sense if we define the industrial revolution in terms of the technological innovations which brought about a transformation in the way goods and services were produced in the British economy between 1760 and 1830. One reason why these innovations were not immediately reflected in higher per capita income growth was the rapid growth of population – the English population increased from 6.1 million to 13.1 million between 1760 and 1830 (p.257). Another reason was the initial concentration of major innovations in a relatively small, though rapidly growing, part of the British economy (p. 82).

Information from a table presented by Deirdre McCloskey is graphed below in order to provide some perspective on the contribution of different industries to productivity growth in Britain over the period from 1780 to 1860 (‘Bourgeois Dignity’, p.219).

Figure 1 shows the relatively rapid growth of productivity in some manufacturing industries as well as canals and railways.

Figure 2 shows that despite the more modest productivity growth rate in agriculture, the relatively large size of this sector means that over the period considered its contribution to overall productivity growth was comparable to that of the manufacturing industries with more rapid productivity growth.

So, was the industrial revolution mainly about the growth of manufacturing industry? Perhaps, if we define the industrial revolution so narrowly that it has to refer to the growth of manufacturing industry. If we do that, however, we need another term to describe the processes leading to the advent of economic growth in Britain. Joel Mokyr’s term, the industrial enlightenment, aptly describes the broader processes through which a social climate favourable to innovation was made possible by growing recognition that material progress could be achieved through advances in science and technology.

Mokyr puts the various phases of the industrial revolution in context as follows:

‘The Industrial Revolution was above all a beginning. It cannot be judged on its own grounds without considering what it led to. What is truly significant is not the wave of great inventions made in the years between 1765 and 1800, but the fact that this process did not subsequently fizzle out. Some societies, in Europe and Asia, had witnessed previous clusters of macroinventions, leading to substantial economic changes. ... The “classical” Industrial Revolution in the eighteenth was not an altogether novel phenomenon. In contrast, the second and third waves in the nineteenth century, which made continuous technological progress the centrepiece of sustainable economic growth, were something never before witnessed and that constituted a sea change in economic history like few other phenomena ever had’ (p. 83-4).

Postsript:
I would like to draw attention to Deirdre McCloskey's comment below.

I would also like to draw attention to this video by Hans Rosling on You Tube.

Was the industrial revolution caused by bourgeois dignity or institutional change?

Deidre McCloskey’s important new book serves to establish that if we want to explain the industrial revolution we need to explain why so much innovation occurred in England from the late 18th century and through the 19th century. She suggests that we should dismiss attempts to explain the industrial revolution in terms of such factors as thrift, accumulation of capital (physical or human), transport, geography, natural resources, the slave trade, business organization, imperialism, eugenics and even foreign trade.

The style of the exposition suggests, at times, that Deidre may not suffer fools gladly (or has a wicked sense of humour): ‘If someone claims that foreign trade made possible, say, economies of scale in cotton textiles or shipping services she owes it to her readers (as I have already said twice: I wish you would pay attention) to explain why the gains on the swings are not lost on the roundabouts. Why do not the industries made smaller by the large extension of British foreign trade end up on the negative side of the account?’ (p 221).

Well, I’m not sure Deidre, perhaps there is a link between international trade, specialization and scale economies - but you may have discussed that possibility somewhere else in the book when I wasn’t paying attention. In any case, I agree with you that innovation must have been a lot more important than scale economies.

I was a little more concerned that I didn’t see any recognition of the possibility, as discussed in Eric Jones’ recent book (reviewed here), that clustering of manufacturing in the north of England – as a result of trade and specialization within England - provided an economic environment conducive to subsequent innovations. Perhaps middle class enrichment resulting from trade and specialization could also help to explain why the bourgeois revaluation occurred when and where it did. (The bourgeois revaluation is the greater approval of the middle classes - and of innovation and markets - that began to occur in thought and talk in Holland and England three centuries ago.)

My main concern, Deidre, is that in attempting to clear the field prior to sowing a new crop of ideas (or the old ideas you want to propagate anew) you may be inadvertently slashing and burning some other ideas that are worth preserving. This applies, in particular, to the relationship between institutional change and economic performance as discussed by Douglass North (‘Institutions, Institutional Change and Economic Performance’, 1990). I agree with you that North could not have been correct in attributing the industrial revolution to more secure property rights following the Glorious Revolution. There is, however, more to institutional change than more secure property rights. I reject your attempt to dismiss appeals to institutional change as ‘still another attempt to reduce one of the greatest surprises in human history to a materialist routine’ and to claim that changes in institutions did not have much to do with the industrial revolution (p. 354).

In fact, evidence that you cite in your book seems to conflict with your claim that changes in institutions – the rules of the game - had little to do with the industrial revolution. You acknowledge that ‘the norms of antibourgeois aristocrats and clerics did discourage innovation’ (p. 267). You also suggest: ‘Had the Ottoman or the Qing empires or the Japanese Shogunate admired trade and innovation sufficiently to overcome their worries about the maintenance of state power – encouraging innovation and having a go rather than crushing it – then they, not the Europeans, would have come first’ (p. 371). You note that in France and Spain in the 18th century a nobleman caught engaging in commerce could be stripped on his rank’ (p. 387) and that in France it was necessary to apply to the state for permission to open a factory (p. 395).

I think your true position may be that bourgeois dignity and institutions (economic freedom) are both important in explaining the industrial revolution. This comes through fairly clearly when you write: ‘By adopting the respect for deal-making and innovation and the liberty to carry out the deals that Amsterdam and London pioneered around 1700, the modern world was born’ (p. 397). In such passages you seem to be offering an encompassing theory incorporating both bourgeois dignity and institutional change.

So far so good. I can understand that ideology (an amalgam of perceptions and values) influences the climate of opinion toward commerce and innovation which in turn influences both informal institutions (conventions and codes of behaviour) and formal institutions (regulations, laws, constitutions) which may or may not provide a climate conducive to innovation. Is that all there is to understand?

Perhaps not. The missing element is a sense of personal identity. As you say: ‘In truth, the agent wants to act because she attributes meaning to her life ... She is a human with an identity, not a Max U calculating machine like grass or bacteria or rats’ (p. 307).

That gets me thinking again about identity economics – the idea of George Akerlof and Rachel Kranton that people gain utility when their actions conform to the norms and ideals of their identity (which I first discussed here). Even a person with great potential to be innovative might find that difficult if the norms and ideals of their identity dictated that any attempt to innovate would be futile. If we start thinking in terms of identity economics, however, we might have to question the sub-title of your book – perhaps economics can explain the modern world after all.

'Extract the digit': a vulgar expression?

This question has arisen as a result of use of the expression in a speech made at a public speaking club a couple of months ago. The speech was made by a relatively new member of the club who said something like: ‘The time had come for me to extract the digit and get on with it...’. The subsequent reaction of some members to use of this phrase has made it extremely difficult for him (and several other members including myself) to continue their membership of the club. Members have been told by one of the longest-serving and most distinguished club members that it is not appropriate to vote for people who use such expressions as ‘best speaker’ at club meetings.

If the issue had been raised for discussion in general business, I would have made the point that I cannot remember hearing the expression before Prince Philip, the Duke of Edinburgh, told British businessmen that it was time they pulled their fingers out about 50 years ago (when I was finishing secondary school). He was reported as saying:

‘Gentlemen, I think it is about time we “pulled our fingers out” … If we want to be more prosperous we're simply got to get down to it and work for it. The rest of the world does not owe us a living’: Speech in October, 1961.

I am not sure that mentioning Prince Philip would have been persuasive, however, since the role of members of the royal family in setting social standards is now less widely accepted than it was 50 years ago. Given Prince Philip’s reputation for making social gaffes, some members of our club would possibly consider him, also, to be too rough around the edges to be voted as best speaker.

How can we judge whether or not ‘extract the digit’ should now be viewed as a socially acceptable use of language? It might be relevant to consider whether use of this expression still ranks amongst Prince Philip’s biggest social gaffes. It doesn’t. It is not even included in this long list compiled by BBC news.

A Google search for the phrase ‘pull your finger out’ reveals widespread current usage in Australia. The contexts suggest that it is usually intended to be offensive, but I think most people who are told to pull their fingers out are more likely to be offended by the implication that they are wasting time or procrastinating than by the vulgarity of the expression.

The origins of the expression do not necessarily support a vulgar interpretation. One theory, noted here, is that the expression originated during the times of the Men'o'War. When a cannon was loaded, a small amount of powder was poured into the ignition hole near the base of the weapon. In order to keep the powder secure before firing, a crew member pushed one of their fingers into the hole. When the time came for ignition, the crewman was told to pull his finger out.

Perhaps the apparent vulgarity of the expression lies solely in the imagination of those who think that the metaphor must refer to removal of a finger from a bodily orifice.

Does big government result in more housework?

I found this to be the most interesting question explored in ‘Government Size and Implications for Economic Growth’, by Andreas Bergh and Magnus Henrekson. Before I explain, however, I want to provide some comments on the author’s conclusions about the effects of size of government on economic growth.

Bergh and Henrekson base their conclusions about the effects of size of government on economic growth on a review the recent econometric literature using panel data for high-income countries. They conclude: ‘In rich countries there is, indeed, a robust negative correlation between total government size and growth’ (p.30). They qualify this conclusion by noting that, as with many other econometric studies, the issue of causation has not been completely settled (p.33). They explain the ability of the Scandinavian welfare states to maintain modest economic growth despite big governments in terms of relatively strong performance of those countries with respect to other aspects of economic freedom. These conclusions are consistent with my own review of the relevant literature (background paper for the NZ 2025 Taskforce) and modest econometric efforts.

The reservation I have about the review of the literature by Bergh and Henrekson is somewhat technical – so some readers may prefer to skip this paragraph. My reservation concerns the authors’ enthusiasm for Bayesian Averaging of Classical Estimates (BACE), a technique used to deal with possible sensitivity of parameter estimates to the inclusion of different control variables in regression models. A recent paper by Antonio Ciccone and Marek Jarocinski suggests that margins of error in international income estimates are too large for such agnostic growth empirics to be reliable. In any case, in my view the economic reasoning that tells us that the economic costs of taxation rise approximately in proportion to the square of the tax rate provides a more powerful case against big government than the results of cross-country econometric studies. (The authors appear to attribute this insight to the Swedish economist, Jonas Agell (p.17), although it should more appropriately be attributed to much earlier work by Arnold Harberger, or possibly even to Alfred Marshall.)

It is well known that the economic cost of high tax rates arises in part from the substitution of leisure for income. Some would argue that this is beneficial because many people obtain more happiness from spending time with family and friends than from working. One reason why the argument is spurious is because it may be rational for individuals to sacrifice some current happiness to provide their children with a better education, fund early retirement or pursue any number of other objectives that are important to them.

Another reason why the argument is spurious is that what economists talk about as a choice between income and leisure is often actually a choice between time spent on paid work and time spent on unpaid household chores. It is doubtful whether people obtain much more pleasure from housework, weeding the garden and childcare than from working for pay. Bergh and Henrekson make the good point that high rates of labour taxation provide an incentive for consumers to produce such services themselves in the home rather than to work longer hours in order to purchase them in the market place. The authors suggest that this explains why hours of unpaid work are substantially greater in Sweden than in the US and hours of paid work are correspondingly lower in Sweden than the US.

The authors also provide a graph comparing average hours worked per person in Sweden and the US over the period 1956 to 2003. It shows that while average hours worked in Sweden were substantially higher than in the US during the 1950s, when Sweden’s tax rates were much lower, the situation has been reversed in recent decades.

Over the last couple of centuries the ancestors of the vast majority of people in high-income countries have managed to obtain the benefits of participation in a market economy – the benefits of exchange and specialization on the basis of comparative advantage, resulting in much higher living standards and providing greater opportunities for skill development and incentives for further innovation. High taxes associated with big government provide the opposite incentives - encouraging people to shun the market and to produce services for themselves. Self-sufficiency is not without its attractions, but I doubt whether many people would freely choose the poverty experienced by their ancestors, even if that was the only way they could ensure a supply of fresh, organically-grown vegetables.

Postscript:
1. An error in the second last paragraph has now been corrected. Thanks very much to BW for noticing that!

2.When I think again about the final paragraph, the ancestors of the vast majority of people in high-income countries were living in market economies even prior to the industrial revolution. A move to self-sufficency would entail a move much further back in history.