7/8. Industrial Revolution (from card 16 - spread of IR) Flashcards Preview

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 What was the main catalyst of Industrial Revolution?

  • Technology is at the heart of the industrial revolution 
  • Technology brought England into 'modern economic growth' - quantitative and qualitative changes


Qualitative changes that drive IR

– urbanization
– industrial jobs
– international trade composition

– factory system 


Effects of introduction of technology on urbanisation (UK)

  • 1851 - >50%
  • 1900 - 75%


Tech on distribution of jobs changes (UK)

From 1710 to 1871:

  • % of people working in agriculture dropped more than half
  • % of people working in industry increased by 15%
  • % of people working in services increased by 160% 
  • although no. of people working in serv < in industry


Tech on imports and exports in Britain

  • British raw cotton imports: 25k in 1800 to 500k in 1860
  • British exports ratio to national income, 1700‐1913:

    • fluctuates but general trend is increasing

    • 0.09 in 1700 to 0.20 in 1900


GDP per capita growth in 1830‐1870 (UK)

1.98% per year 


Why quantitative change was slow to come about?

  1. Technological innovation was unevenly distributed across industries
  2. Industries affected by innovation were very small at the beginning
  3. New technologies were
    • highly specific, the steam engine being the only GPT (General Purpose Technology)
    • relatively simple and concentrated in one single stage of the production process 
  4. Going from inventions to innovative products and production processes did not happen overnight
    • the relationship between technological innovation and scientific research was at best weak
    • lack of skills
  5. At the beginning of the IR, innovative activity was possibly inhibited by small market size and poor protection of intellectual property rights 
  6. Moreover, the tech innovations of late 18th century had a deep effect on the British economy because of developments that had been under way for over a century 


What do prerequisites and concomitants (developments) concern?

  • population
  • transport infrastructure
  • agriculture
  • commerce & banking
  • institutions (political framework, economic policies, and cultural climate) 
  • Prerequisites are about what made the English ‘economic soil’ fertile for industrialization 


Population role in IR

Population is a concomitant (naturally accompanying or associated) development of the IR rather than a prerequisite

Reasons for pop growth

  • slight increase in fertility
  • declining mortality due to better diet, medical improvements, etc.
  • massive internal migrations
  • urbanization
  • geographical redistribution of pop density 

2 reasons why pop mattered for economic growth

  • supply of labour
  • demand for manufactured goods 


Agriculture revolution

  • In the 17th century, the productivity of agriculture increased substantially
    • ⟶ milk per cow up 3.8 times from 1300 to 1800
    • ⟶ sheep fleece up from 1.5 lbs. to 3.5
    • ⟶ wheat per acre up from 10 to 20 bushels in 1300‐1700
  • These results were obtained by means of new techniques
    • selection of seeds and breeds
    • introduction of new crops ⟶ clover, turnips, peas, beans
    • crop rotation, etc.
  • enclosures, larger size of the avg field 


Domestic trade vs foreign trade during the period

  • Domestic trade developed fast in the 17th and 18th centuries driven by London demand and improving transport facilities
  • Foreign trade developed no less impressively
    • end 17th century: value of per capita trade was second highest inEurope
    • 1750:England=world’s largest trading country
  • • Major changes
    • shift in trading partners
    • shift in exchanged goods: ever more exports of textiles and manufactures; ever more imports of raw materials (sugar, tea, tobacco, timber and grain)
  • Foreign markets = crucial supplementary outlet for British industrial goods 


Commerce and role of trade

  • Role of trade in the 18th century went beyond accumulation of wealth (and redistribution of de facto political power): it triggered developments
    • in the banking sector
    • in contract enforcement legislation
    • development of entrepreneurship
    • learning process about the functioning of the capitalist economy
    • ⟶made it easier to take advantage of the tech opportunities of the IR
  • Finally, international trade caused urban growth, hence contributed to stimulating agricultural productivity and made for high wages 


Banking developments during IR

  • • Prompted by domestic and international trade, a banking sector started to emerge gradually from the 2nd half of the 17th century
  • In London
    • the Bank of England (1694) catered to government financial needs, administered public debt, and issued banknotes
    • former goldsmiths turned private bankers (merchant bankers) engaged in accepting deposits, discounting bills of exchange arising from international trade, making loans
  • outside of London
    • ‘country banks’ issued banknotes, financed domestic trade, moved money across the country, lent financial resources to local industrial enterprises 


The role of transport infrastructure

  • Investment in transport infrastructure made for
    • the unification of the domestic market
    • more efficient allocation of the factors of production, both at the firm level and economy‐wide (⟶ regional specialization, Smithian growth)
  • 1660s–1749: Parliament passed a lot of legislation to improve navigability of rivers and harbours’ capacity 
  • 1750‐1820s: apogee of canal constructions
    • waterway transport freight rates were 50‐75% cheaper than land transport
    • ca. 3,000 miles of navigable waterways were added to the existing 1,000 miles; some £17 million was invested in the process
    • by 1840, Britain had >7,000 miles of navigable waterways connecting all major centres of production and consumption 


Constructions and developments of roads as prereq for IR

  • trusts were responsible for short stretches
  • usually raised funds and repaid them out of tolls collected on road users
  • previously, local government authorities were in charge of road construction and maintenance; they did so via taxation (property taxes) and forced labour (⟶ low efficiency)
  • By 1840, 1/5 of total road mileage was under the control of trusts
  • Btw mid‐18th century and 1830s, freight costs were reduced by 40% and travel times by 60% 


The factory system and its role in IR

  • The factory was a requirement of the new technologies and represented a major change with respect to both previous systems of manufacturing
    • the artisanal shop
    • the putting‐out system
  • It spread gradually and posed challenges to both entrepreneurs ⟶ learning how to manage workers workers ⟶ getting accustomed to the discipline of the factory workplace 


Statistics abt improvement in living standards

  • real wages: in 1760‐1820 grew less than GDP per capita, 4.1% vs. 16.4% {even though industrial wages were higher than other wages...}
  • stature: significant improvements only from the 1860s
  • life expectancy at birth: was 34.2 years in 1760, 39.2 in 1820 (+ 14.6%) {compare with sub‐Saharan Africa, 1999: 48 years...) 


Used strategies to catch up with revolution

  1. Decisive role of the state and new system of banks (substitutes for prerequisites)
  2. Institutional changes
  3. Spread of industrialisation


Legal foundations that kickstart the revolution


Common law made for gradual adaptation of norms:

  • protection of property rigts
  • protection of public interest

Continental Europe:

  • Roman law was not as flexible as adoption of institutions suited for economic growth had to wait the French revolution
  • after french revolution, abolition of obstacles to market and private initiatives: 
    • privileges
    • monopolies,
    • exemptions
    • guilds
    • regulations


Napoleonic codes

  • established after french rev
  • Code civil, 1804: private property; equality and freedom
  • Code de commerce, 1807:
    • simple partnership -> unlimited liab
    • societe en commandite -> both ltd and unlimited liab
    • societe anonymes (joint stock) -> ltd liab - crucial to capital accumulation as technology grew costlier and more complex in 19th cent
    • ltd liab allows industrial rev to grow because it allows company to gain more capital and take bigger risks 
    • ltd liab had many virtues:
      • spread risk among many investors
      • investors earned a return
      • company lifespan separated from owners



Why was joint-stock companies banned since early 18th cent?

  • the negative repute they had earned in disastrous speculations -> South Sea bubble in England leading to Bubble Act of 1720; John Law in France (late 1710s)


Bubble Act (1720)

  • English statute passed on 9, June 1720 to prevent corporate fraud.
  • It forbade all joint-stock companies not authorized by royal charter.
  • One of the reasons for the act was to prevent other companies from competing with the South Sea Company for investors' capital
  • The Act was repealed in 1825


How did business law then led liberlisation of incorp?

  • 1825 repeal of the Bubble Act
  • 1844 near liberalisation but absent limited liab
  • 1857 full liberalisation
  • Other European countries followed in the footsteps of England in 1860s-90s; the US adopted free incorp since 1840s


Overview of spread of industrialisation

  • Comparable industrialisation in the rest of Europe only occurred with around 100 years of delay (1870-1913)
  • Annual industrialisation rate is pretty high for such a long period 
  • The countries that indsutrialised first on the continent were those with resource endowments similar to England (be,fr,de,usa)
  • In the early 19th cent, one who moved east and south from northwest europe, would encounter countries with increasing degrees of economic backwardness (southern regions were less developed in comparison to the north)



Belgium and the beginning of industrialisation

  • had plenty of coal, long standing manufacturing and commercial tradition, substantial human capital
  • first country to follow England's footsteps
  • vicinity helped -> easier to smuggle machinery and specialised workforce to host entrepreneurs from England
  • departed significantly from england in that the gov
    • 1. funded railway cons
    • 2. created new type of banks


Why were there economically backward countries and how they deal with it?

  • Could not always afford to closely imitate the English path to industrialisation
  • too time consuming
  • tech would become more expensive and complex over time
  • needed to find shortcuts => Alexander Gerschenkron named substitutes for the prerequisites of industrialisation:
    • universal banks
    • the state


The Anglo-Saxon and the continental models

Anglo Saxon (Specialisation):

  • Commercial banks
  • IB
  • Traders, dealers, money brokers, investment trusts
  • each institution focuses on a specific type of business
  • capital markets key source of corporate finance

Universal bank (de-specialisation): - substitute for prereq.

  • One bank does it all
    • lends both short and long term funds
    • issues equity and bonds
    • deals in securities
    • branches out and accept deposits
    • provides strategic advice
  • establishes long term relationship with customers
  • is a key source of corporate finance forfirms while capital markets = complementary role



Universal banks and its role as substitutes

  • In continental Europe, most particularly Germany, Austria-Hungary and Italy, universal banks
  • the financial system that these countries developed was rather of a bank‐oriented than market‐oriented type
  • Where economic backwardness was even more important, it was the state that took on major responsibilities in fostering industrialization
  • This was much the case for Russia, Italy, and Japan 


If state plays a central role, what does it do?

  • tariff protection
  • procurement policies
  • taxation and redistribution
  • direct financial support
  • direct ownership and mgmt of enterprises
  • bail-outs


Why economic backwardness can be an advantage?

for latecomers; late industrializing countries benefit from

• cost savings arising from the import of well functioning and well experimented technologies ⟶ no waste of time, money, and effort to develop and test new technologies

• swift transfer of labour force from low productivity (agriculture, services) to higher productivity sectors (manufacturing) ⟶ hence faster GDP growth

• rapid increase in the amount of fixed capital per worker ⟶ hence faster productivity and GDP per capita growth