Understanding the Industrial Revolution

Dr Charles More, Charles More

• Publisher: Routledge
• Year: 2002
• Print ISBN:
  9780415184052
• eBook ISBN:
  9781134670079
• Topic: Economics
• Subtopic: Early Modern History
• Index: Economics

Understanding the Industrial Revolution is a fresh, new exploration of this economic phenomenon of major importance. It describes theories of economic growth, shows how these can be applied to the revolution and discusses them in the light of modern research. Furthermore, it places the debate surrounding the social effects of industrialisation into the context of economic change during the period.
This book includes discussion of:
* theories on the supply of capital
* role of labour
* innovation and entrepreneurship
* the significance of transport
* the impact of industrialisation on living standards.
Each aspect of the Industrial Revolution in Britain is discussed in depth, focusing on the important debates and reviewing the most recent research.

Chapter 1 Models of the Industrial Revolution

DOI: 10.4324/9780203136973-1

Land, labour and capital

The various attempts to explain the Industrial Revolution can be described as ‘models’. An historical/economic ‘model’ is a simplified way of representing a set of economic processes – in this case, those processes which brought about the Industrial Revolution. The model provides a schematic outline which maps the broad sweep of reality – or of what the deviser of the model thinks is reality. Behind the models there are economic theories which explain why the processes outlined in the model should lead to economic growth. Theories differ, however, which is one reason for disagreement between writers on economic growth; another is the schematic nature of models, which means that it is difficult to construct a model which is simple, but is also a sufficient representation of reality. These two potential reasons for disagreement help to explain why it is so difficult to achieve consensus about the Industrial Revolution.

Underlying all the models is the concept of factors of production: land, labour and capital. Land appears self-explanatory as the essential medium for agricultural output. But the economist’s land also includes the minerals below the earth’s surface, and the latent power of wind and water; paradoxically, it also includes the fruits of the sea. In effect, ‘land’ to economists is shorthand for all the products of the natural world. Labour is more straightforward, since we all understand what work is; but there are complexities because workers can be more or less skilled. Capital has a dual meaning, as the funds which are used to finance some productive asset, and the asset itself. Capital assets include buildings to house machinery, the machinery itself, mines and other expensive items; and also such less obvious assets as the craftsman’s tools, the farmer’s seedcorn, and the factory owner’s stocks of raw cotton.

Simple economic growth, without industrialisation, can be achieved by adding inputs of one or more of these different factors. Most economists would agree that such simple addition of factors is also necessary for industrialisation, but they would add that something else is needed: more efficient use of one or more of the factors. There are various ways in which this may be achieved.

It can be achieved through the advantages of size, usually known as economies of scale or increasing returns. For instance, as ships increase in size, their cargo capacity grows at a faster rate than their weight, and so the capital cost of building a bigger ship does not rise as fast as its cargo capacity. Nor does its crew size, and therefore the labour of the crew is used more efficiently and crew costs per tonne carried will be smaller. In economists’ jargon, capital productivity and labour productivity will both be raised. In the same sort of way, as roads become more intensively used, the capital cost of building them is spread over more vehicles; and if tolls are charged on the road, the tollgate keeper opens the gate more often, rather than just hanging about waiting for the occasional cart. Again, capital and labour productivity are both increased. If the new road also enables the land nearby to be cultivated more intensively because the produce is cheaper to take to market, then land productivity will be increased too. These examples could be multiplied over almost every industry and activity.

Economies of scale do not apply only to individual capital assets such as ships and roads. In a growing economy, there will be more economic transactions between individuals and firms. As the number of transactions multiplies, all sorts of savings enable assets and labour to be used more effectively. For instance, ships will spend less time waiting in port for a cargo as traffic grows; more letters will be written and it becomes worth establishing a postal service, which cuts the cost of exchanging commercial information. The reduction in transaction costs, of which transport costs are an important part, is a significant economy arising from growth. Postal services are examples of the beneficial civic activities that a larger economy makes possible. Others are the provision of lighthouses and charts to aid navigation, and of effective military forces to discourage unfriendly foreign powers or pirates. Sometimes these activities can only be financed by taxation and have to be left to the government, in which case they are known as public goods. Reductions in transaction costs, public goods and other benefits which are external to the firm are collectively known as external economies or beneficial externalities.

Another way in which factors can be used more effectively is summed up in the phrase ‘gains from trade’. At its simplest, this expresses the principle that if two partners, each producing a different product more cheaply than the other, exchange those products, both partners will gain so long as transaction costs are lower than the saving in production costs. Such gains can occur through internal and foreign trade. Thus if Lancashire produces cotton cloth and uses resources economically to do so, and East Anglia produces wheat with similar efficiency, they will exchange these goods and each will benefit. The theory of comparative advantage develops the analysis by showing that different partners will maximise income by specialising in products in which they have the greatest relative, or comparative, advantage. Thus even if Britain produced both cotton cloth and wheat using fewer factors of production than France, it would suit Britain to concentrate on producing the one in which its efficiency advantage over France was greatest. If that was cotton cloth, then irrespective of its efficiency advantage in both commodities, Britain would specialise in cloth and exchange it for wheat.

Greater efficiency in factor use can also be achieved by innovation – the adoption of a change which yields a more effective use of resources or provides some new service or item of consumption. Resources might be used more effectively because of a newly-invented machine or through an improvement in organisation. An example of the second is the spread in the eighteenth century of institutions known as turnpike trusts. These levied tolls on roads, enabling more money to be spent on maintenance and new building: thus vehicles could be heavier and go faster, and as a result, the productivity of carriages and waggons (capital), and that of their drivers (labour), increased. Improvement is often achieved through ‘learning-by-doing’: a simple name which describes exactly what is meant. A machine or a process might have its efficiency improved not by any sort of physical change or new type of organisation, but just by incremental improvement of what is already there. For instance, as engineers in textile mills gained experience they found they could work their steam engines harder and so drive more machinery with the same engine. There was no new technology and no investment was required: it is an example of pure learning-by-doing. (It is possible to distinguish different types of learning-by-doing – for instance, learning-by-making and learning-by-using – but to avoid complexity these will be subsumed under learning-by-doing.)

All the above types of change could be described as process innovations. Product innovation is also important. A new product might appeal to consumers – as did cotton clothing when it was introduced – or it might be a product which is primarily of commercial or industrial importance. New types of insurance, for example, might reduce the risks of foreign trade and thus its cost. It is important to stress the wide nature of innovation. The headlines about the Industrial Revolution have been made by the great inventions – Watt’s steam engine, the various textile machines, and so on. The term innovation encompasses the adoption of these, but also the other less spectacular types of change mentioned above.

The factors of production, and the concept that their productivity can be increased, are the main building blocks of the growth models of economists and historians. The models put the blocks together in various ways and sometimes add other components, and it is these various combinations which are described below.

Models of factor accumulation

The simplest growth model points to the increase of capital as the main motor for growth. This encompasses the build-up of assets such as ships, roads, tools and machinery, sometimes known as fixed capital, and also the accumulation of circulating capital. The latter includes, for an individual firm, the stocks of raw material, of goods in the course of production (work-in-progress), and of finished products which have not been sold. It also includes credit the firm has extended to others to enable them to buy its products. For the time being the analysis will focus on the accumulation of fixed capital and will use the term capital assets for this, so that there can be no confusion with capital as an accumulation of funds. But in practice, if capital assets increase, circulating capital is likely to have to increase as well.

To achieve growth in capital assets, their purchase would need to exceed the rate at which they wear out. In economic shorthand, investment would need to exceed depreciation. Land is neglected in this simple growth model because it is ultimately limited in quantity. The world has only so much of it, and so increases in land are not seen as more than temporary reasons for economic growth. An increase in labour supply is neglected because merely increasing the quantity of labour will not necessarily secure a proportionate increase in output. If more people work the same amount of land, with the same amount of fertiliser and the same techniques, output may increase through more intensive cultivation but there will be biological limits to the output increase which can be achieved. If the increased population, instead of working on the land, works in industry, there are similar problems: with no more capital in the form of tools and machinery, output per person grows more slowly than the numbers employed. More and more workers are added, all using the same machines and tools as existing staff; the new recruits get in each other’s way and little extra is produced. These likely outcomes are referred to as diminishing returns. As population increases without any increase in land or capital, the additional output generated by each additional worker becomes smaller and smaller, or in other words the marginal productivity of labour is low, or zero. Marginal productivity is an economic concept meaning the additional output added by employing an extra unit – it could be of capital or land, but in this case it is labour; zero marginal productivity of labour means that an extra worker will add no output to the existing total.

With increasing capital, however, output could increase without any growth in either land or labour supplies, and so growth models based on an increase in capital have an intuitive attraction. We associate the Industrial Revolution with capital assets such as textile machines and steam engines, and it seems logical that workers equipped with such assets should produce more. On the other hand, such models do beg fundamental questions. One such is how the additional funds to purchase the assets are acquired. Individuals’ savings are one possibility, but savings in pre-industrial societies are usually assumed to be low, so the initial build-up of funds is not easy to explain.

Another problem with simple capital accumulation models is that increments to capital, like additions to labour supply, are liable to diminishing returns if the capital assets employed remain of the same type. For instance, in eighteenth-century Britain only so many stagecoaches could be profitably used; if the number had increased beyond this level, competition would have driven down the return on capital; in other words, the marginal productivity of capital would have fallen. Innovation is particularly important in this context: it counters diminishing returns by raising the return to capital through the opening up of new opportunities for its use. Thus railways opened up many opportunities for profitable capital investment; of course, there were then fewer opportunities for investment in stagecoaches, but railways offered such an advantage to goods and passenger carriage that the capital which could be profitably invested in railways was far greater than that invested in stagecoaches. The point seems obvious but is important because it suggests that growth achieved simply through the increase of capital, without innovation, cannot go on for ever.

In one of the earliest growth models, capital accumulation plays an important part. The other main component of this model is productivity increase occurring because of the development of a market economy: that is an economy in which goods are traded freely, as opposed to a subsistence economy in which producers simply satisfy their own needs. As the market economy develops, it allows the specialisation of function: farmers can grow crops particularly suited to their land and exchange them for other agricultural produce; industries can develop, with their own specialised workforce. Such changes allow people to concentrate on doing one thing, rather than attempt every type of productive activity.

This concentration allows both a reduction in transaction costs and the realisation of gains from trade. In turn, the latter come about partly because of the effective use of human capital. Practice, education and training all develop skills, which can be described as human capital – assets which produce a return from more efficient production. In theory the money spent on these can be measured in the same way as investment in capital assets. If workers concentrate on one activity rather than many, the time spent on training or practice does not necessarily increase; but it is spent more effectively as it is easier to learn one activity than many. The productivity of the investment in human capital is greatly increased. The same principle applies to firms: if they concentrate on one activity, they more quickly develop expertise.

This model is associated in particular with the eighteenthcentury Scottish economist Adam Smith – not that Smith would have called it a ‘growth model’ – and his famous book The Wealth of Nations. In Smith’s terminology, a more extensive market made possible a greater ‘division of labour’, which was the key to higher productivity. Innovation is a component of the model – Smith referred to labour-saving machines – but is not essential to it. Nor was a growth in population integral to Smith’s model, although it could be incorporated within it. So long as capital increased and land was available, a higher population would increase the volume of exchange and thus make possible a further division of labour. By the early nineteenth century, however, economists such as Thomas Malthus worried that too great an increase in population would pose problems to an economy in which land was fixed in quantity. Diminishing returns would set in and Smith’s virtuous circle would become a vicious one.

Smith’s model was not a model of the revolutionary change. It was hardly likely to be, because the phrase ‘Industrial Revolution’ was not coined until after Smith wrote. Smith described a form of growth which had limits: there would have been a point at which no more division of labour could have been profitably achieved because transaction costs would have exceeded the cost-saving benefits of specialisation. If the logic of the model developed by Smith and his pessimistic successors is accepted, how were these limits on growth overcome?

One answer has been suggested recently by Tony Wrigley. Wrigley takes Smith’s model as broadly applicable to the growth which took place before the Industrial Revolution. As the eighteenth century wore on, the limits on growth threatened. Wrigley sees them being overcome by the use of inorganic energy in the form of coal. The use of coal freed the old organic economy, reliant on wind-, water-, horse- or humanpower, of a massive constraint. Labour productivity could now grow through the application of steam power to machinery, whether or not the division of labour increased. The limits on agricultural production would be overcome in a number of ways: the use of coal enabled woodland to be turned to food production; transport costs fell due to steam technology, enabling land use to become more specialised than before and also opening up new agricultural land overseas; more efficient production of manufactures enabled Britain to trade manufactures for imported food. In an economic sense, coal was ‘land’ and thus the use of coal gave Britain a supply of new land. With hindsight we can see that coal and other inorganic energy supplies are ultimately limited, but in the context of the energy needs of the day the supply of coal was virtually unlimited.

Wrigley does not suggest that the two processes – the expansion of the market and the use of coal – were entirely distinct. The two overlapped chronologically, in that coal use in Britain was expanding from the sixteenth century onwards, while the market did not stop expanding in the eighteenth century but has gone on doing so until the present day. But he does suggest that the processes were logically separate. And while he suggests that the growth of the economy after 1750 was increasingly dependent on coal, in his model other changes were necessary to enable growth to continue. Capital assets in coal-related uses, such as the mines themselves and transport systems, had to increase. And invention was essential, for instance in the design of new types of furnace for metal manufacture and in the development of the steam engine.

Another model in which invention and innovation were important was that of Karl Marx, whose most famous book, Capital, was published in 1867. Marx is best known for what he said about the effects of the Industrial Revolution, and that will be discussed later. His model of industrialisation sees it as a combination of market expansion, capital accumulation and innovation. Marx’s emphasis on the last was exceptional when he wrote in the mid-nineteenth century but, in the light of modern thinking, his ideas about the causes of industrialisation are only distinctive in a few specific ways, notably the mechanism of capital accumulation. He believed that capital accumulation, once industrialisation was under way, occurred because workers were not paid the full value of their labour, thus leaving surplus value which provided funds for investment. Before industrialisation started and provided this mechanism for further capital accumulation, the initial funds needed were provided by the same processes at work in agriculture, and by the exploitation of lands overseas.

Marx’s emphasis on capital accumulation is echoed by two theorists with very different political views from his. One was Arthur Lewis, whose model is often known as ‘economic development with unlimited supplies of labour’, after his article with that title, written in 1954. In this model, there is a subsistence sector in the economy, in which there is surplus labour. In other words, the population has outgrown the capacity of the land to provide productive work. Individual workers are underemployed, that is lacking regular work, and thus the marginal productivity of labour is low or zero. Only additional capital assets could enable productivity to improve, but Lewis posits an absence of capital accumulation in the subsistence sector, so that sector offers no escape from the trap of low labour productivity. Lewis sees the answer in a capitalist sector in which labour productivity is higher because of the employment of capital, in the form of machinery and so on. As this draws its labour from the subsistence sector, it only has to pay a wage which enables workers to maintain the low living standards to which they are accustomed. With high labour productivity and low wages, profits are high. The capitalist sector reinvests these profits in further capital equipment and thus raises labour productivity further. The wage it pays remains the same and thus profits per unit of output increase. As total profits rise, reinvestment becomes more rapid and a virtuous circle of capital accumulation ensues. At some stage surplus labour is used up, wages begin to rise, and while profits will not then increase so fast, the payoff in terms of ordinary people’s living standards begins.

In emphasising capital accumulation, Lewis’s model has similarities to Marx’s although the economic theory underpinning it is quite different. Drawing on both Marx and Lewis is the proto-industrialisation model, developed in the 1970s. According to this view, industry between the sixteenth and eighteenth centuries, particularly the textile industry,...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Preface
• Introduction: The scope of the Industrial Revolution
• 1 Models of the Industrial Revolution
• 2 Capital accumulation
• 3 Labour supply
• 4 Demand
• 5 Inventors and entrepreneurs
• 6 Market size and integration
• 7 Industrialisation and living standards
• 8 Conclusion
• Appendix: Measuring growth
• Index