Industrial various sub-systems (or elements) that played an
Posted On May 8, 2019
Industrial Revolution, a process that reshaped the global economic landscape, has been explained by many contrasting theories. Each of them can be critiqued and none of the theory forms the definitive basis for explaining this process. With explanations existing in abundance from path dependency, unique factor price structure to industrial enlightenment, it is naïve to accept that any one of these theories offers the only explanation for the industrial revolution. Hence within the scope of this essay, the Industrial Revolution is observed from an Economic System perspective, and the question, “Why was the first Industrial Revolution British? Discuss with historical examples in a comparative perspective”, is addressed. The relevant literature has been critically examined and laid out in a coherent synthesis that paints an evolving picture of various sub-systems (or elements) that played an important role in enabling Industrial Revolution in Britain.An economic system can be defined as “a set of interrelated elements functioning according to definite behavior” (Kornai, 1971). An economic system has multiple elements, which interact with one another, and changes in one element, lead to changes in other elements. Within the same paper, Kornai lays out the parts of a system, the production unit, which is the supply side, the consumption units, which are the end users and finally the institutions, which facilitate the smooth functioning of the other two elements. This essay explores these three parts of the system and discusses the changes that made the Industrial Revolution possible. The idea that is being put forth in the essay is that it was not just a major change in one of these elements that made Industrial Revolution possible, however, the fortunate changes that happened across all the elements made such a systemic change possible. Hence this essay provides a synthesis of various theories that exist to explain the Industrial Revolution within a system theory concept. The system which is considered in this essay is the British economic system, and the elements of this system have been laid out above. Firstly, the supply side arguments are explored, subsequently, the institutions arguments are discussed and finally, the demand side arguments are examined. Throughout the essay, the reinforcing effect that one element of the system had on the other elements, is highlighted, along with the challenges or critiques of the theories.Element 1 of the British Economic System: The Supply Side The Industrial Revolution majorly changed the modus-operandi in the 18th and 19th century by employing inanimate power source, which was mobile i.e. it could be carried from one place to another unlike water energy or wind energy. R.C. Allen (2011), in his landmark paper “Why the Industrial Revolution was British: commerce, induced invention and the scientific revolution” put forth one of the most important supply-side argument, he argues that the “unique wage and price structure” of Britain is the pivot around which the industrial revolution swung. In the late 18th and early 19th century, the wages of London were exorbitantly high vis-à-vis the other commercial cities such as Amsterdam, Vienna, Beijing, and Delhi. The wages in London were almost twice the wages in Amsterdam. Moreover, the welfare ratios also show that London was higher than Amsterdam and other countries, hence the higher wages were not being offset by a high expenditure on food. Finally, due to abundant availability of coal especially around the Newcastle area, the inanimate energy was available at a very low price in Britain (especially Northern Britain) as compared to Amsterdam, Beijing, and Paris. Now if all of these factor prices are considered, there is a systemic incentive for an entrepreneur to employ ways to substitute the high factor prices with lower factor prices, and hence according to Allen, Britain was the only country that could have moved on a technology-intensive path. Mokyr also uses the supply side argument when he says “Scientists often wanted credit, not profit.” This line of argumentation, however, is fundamentally opposed to Allen’s as it diminishes the economic incentive basis that was used by Allen but focusses more on the inherent want of an innovator or inventor for their invention to reach as much of mankind as possible.Allen’s implicit assumptions in his argumentation need to be highlighted here. Allen’s theory of the induced invention is based on his economic incentive argument: “An inventor with an enforceable patent could recoup the development cost through royalties.”Firstly, this statement assumes the existence of legal institutions, institutions that award patents and that are able to enforce such patents. Hence the importance of legal institutions in Allen’s argument can not be ignored.Secondly, Allen lessens the importance of “industrial enlightenment”. He argues that if the “industrial enlightenment” was a European concept then why was Industrial Revolution limited to Britain. He gives the examples of France and Netherlands as counterexamples to Britain and argues that non-supportive factor prices would not have enabled an Industrial Revolution in France and Netherlands. Thirdly, his use of the term “recoup the development cost” also assumes the availability of affordable credit, which again necessitates the existence of developed financial institutions.Fourthly, his assumption of innovation requires the existence of efficient social institutions that enable gestation of innovation. According to Roy (2005), innovation requires people in possession of different skill sets to come together.Finally, Allen’s line of argumentation does not include any demand-side factors. Everything that is existing, i.e. high wages are considered exogenous. Hence given these unexplained factors, we move towards the role of institutions in fuelling the industrial revolution.Element 2 of The British Economic System: The InstitutionsThe institutional structures that were existing in Britain in the 18th century paved the way for such an industrial revolution to take place. The protection of property rights of individuals, the rules of which are not at the mercy of a fickle minded king, but on a system of governance that can be trusted by the people, laid the foundation of Industrial Revolution. One of the biggest supporters of this argument is Olson (1993). In his paper Dictatorship, Democracy and Development, Olson highlights the unique position of Britain post the Glorious Revolution of 1689, and how post this revolution “people in England in due course came to have a relatively high degree of confidence that private property rights were relatively secure”. The Glorious revolution changed Britain in three ways. Firstly, it established parliamentary supremacy, secondly it gave parliament the primary role in financial matters and thirdly, the king’s powers were significantly reduced (North & Weingast, 1989). The example of monopoly grants by the king is a prime example of decrees that would discourage entrepreneurs from following economic incentives.The state in Britain in the 17th century is very different from other countries that were previously mentioned. The Netherlands became a parliamentary democracy in 1848, almost 150 years after the glorious revolution. Similarly, France faced a period of uncertainty post the French Revolution, and repeated setting up of Republics did not offer the level of stability and confidence in a government that was offered in Britain. This argument is supported by the work of North and Weingast (1989) in which they use the growth of government debt as a proxy for the confidence in the government. Before the Glorious Revolution, Netherland’s debt to GNP ratio was about 4% and that of Britain was 2%-3%, however, post the Glorious revolution this reached a level of 40%. And this trend was not just limited to the public sector but was closely followed in the private sector too. An evidence for the maturity of the financial sector may be the lower cost of capital as summarized by Broadberry & Gupta (2008). For entrepreneurs to invest money, availability of credit at a reasonable rate is a pre-requisite, and Britain offered such an environment. So a stable political environment gave rise to fully trustable financial and political institutions.The third type of institutions that emerged before the Industrial Revolution is highlighted by Mokyr (2005), in his paper “The Economic Origins of Modern Economic Growth”. These institutions are the Royal Academy in 1662 in Britain and Academie Royale des Sciences in 1666 in France. Such institutions reduced the access costs by making the knowledge easily available and also provided opportunities for more innovation. However, here, the possibility of contrasting Britain with other European nations is not a possibility because the “Industrial Enlightenment” is seen by Mokyr as a European occurrence. An interesting question to ask would be, if Britain was not in such close proximity to Europe, would it still have achieved the similar levels of growth? This is a very difficult question to answer as knowledge transfer between the European nations is very difficult to assess because of highly porous borders. Fundamental to Mokyr’s arguments is the existence of informal social institutional structures, that facilitated exchanges of techniques and sharing of knowledge. He also mentions the existence of coffee houses for the exchange of such ideas. Such social structures can help in creating a culture of innovation due to sharing of ideas between people from different strata of society, or can act as ‘reverse salients’. ‘Reverse salient’ was a term coined by Thomas Hughes (1983), which is defined as a component of a system, which due to insufficient development, prevents the growth or progress of the system. An ill-functioning social institutional structure can be thought of as such a reverse salient. In India, the class and caste system created invisible silos that prevented innovation as the process of innovation required people having different skill sets to come together (Roy, 2008). The societal structure in Britain promoted openness to sharing ideas and techniques which fuelled the innovation, whereas the societal structure in India was a ‘reverse salient’.It is very important to highlight here that the existence of efficient institutions was taken as a given by Allen in his economic incentives argument. Even Mokyr did not give much importance to the financial and legal institutions. Without the glorious revolution, the private property rights would not be well protected, but due to the greater number of checks and balances, the people’s rights were protected. The existence of efficient financial institutions made affordable credit a possibility and efficient social institutional structure promoted innovation. Hence we can safely say, what Allen and to some extent Mokyr assume to be a given, form the basic building blocks or the foundation for the Industrial Revolution.Element 3 of the British Economic System: Demand sideThe arguments of Allen and Roy miss out on one of the most important factors for such a dramatic change, the demand side, i.e. the people who form the labour market and are also the end consumers of the goods. If the society or the labour market did not evolve, it would be very difficult to implement technological innovations. Hence in the last part of this essay, we look at the demand side changes that made the Industrial Revolution a possibility.The work of Vries (1994) sheds light on the demand side before and during the industrial revolution. He argues that before and during the industrial revolution, the families changed their consumption and labour contribution pattern in order to maximize their utility and hence the supply of labour and the demand for consumer goods increased. People moved from making items at home to buying more industrial goods. Moreover, people started sacrificing their leisure in order to work more. He calls this social change as the “Industrious Revolution”. However, the evidence used by Vries can be challenged very easily. Vries uses anecdotes and fictional books as the basis of his argumentation. An empirical research by Allen & Weisdorf (2011) nevertheless, confirmed there was the industrious revolution in Britain. Among the urban workers this occurred due to a consumer revolution and among the rural workers, this revolution occurred due to economic hardships. Hence the arguments of Vries (1994) can be considered valid.Mokyr’s (2005) paper also sheds light on the demand side. The society as a whole was more willing to accept technology and willing to update their skill set, which would not have been possible without an industrial enlightenment. Looking at industrial revolution from the labour’s perspective, we realize that the labour needed to update their skill set in order to operate the machines and this required an investment in knowledge. The industrial enlightenment, along with easy access to educational institutions for the acquisition of knowledge, made this skill addition possible. Even Allen in his paper agrees with the support of educational institutions when he states “population at large was better placed to buy education and training than their counterparts elsewhere in the world”. The demand side dynamics that were existing across other countries were fundamentally different from Britain. While “the intensification of work and suppression of leisure” (Vries, 1994) was happening in Britain, “peasants also preferred leisure to arduous labour in the fields” (O’Brien,1996) in France. Hence we can clearly see there was a significant difference in the social conduct between France and Britain. To realize the interplay existing between the elements of the system here we discuss the impact of institutional structures on the demand-side dynamics of the labour and consumers. Due to Napolean’s legal code of 1804 in France, partible inheritance was strengthened and the land sizes decreased. This, in turn, led to each family trying to “minimize their risk” by maintaining their own land and hence the move to seek other jobs or to migrate was seen as highly risky. However, during the same time in Britain, impartible inheritance was followed and this led to bigger farmlands, and hence there was scope for hired help in Britain and less incentive for people to be limited to their own land (O’Brien,1996). So we can see an institutional incentive or “path dependency” in France for smaller land holding whereas in Britain, there was an institutional incentive for migration and seeking other jobs, and it could be argued that such an environment promoted entrepreneurship in Britain which led to Industrial revolution whereas the institutional incentives increased farm owning and farming in France. In other words, the legal code can be thought of as a ‘reverse salient’ in the case of France.ConclusionWe see in this essay, that each argument put forth by various authors crumbles without assuming the existence of others, hence Industrial Revolution must be seen from a systems perspective in which each part of the system is essential and changes in each part were reinforcing so as to make a process like Industrial Revolution possible in Britain. There is an alternative way to observe Industrial revolution. We can see the industrial revolution process as a pyramid in which the bottom layers are an enabler for the top layers, i.e. the top layer would not be possible without the existence of bottom layers. And hence at the bottom-most level, we would have the social constructs that made Industrial Revolution possible, and at this level, we could put industrious and scientific revolution that changed the mindset of people so that they were more willing to accept technological change. At the second level, we can put the institutional structures such as legal code in Britain, social institutions (as pointed out by Mokyr) and financial institutions, that instilled the entrepreneur’s confidence in innovation. And the final or the top layer may be considered the trigger for Industrial Revolution, i.e. the factor prices that were possible because of the first and second layers. Allen (2011) sees scientific revolution as having a “reinforcing effect” on the Industrial Revolution, however, it can also be argued, as it has been done throughout this essay, it was an enabling effect rather than just a reinforcing effect. However, a potential problem in visualizing the Industrial Revolution as a pyramid is that multiple linkages exist across the layers and the reinforcing effect they have cannot be imagined and hence the systems view that has been laid beforehand paints a more dynamic picture.Britain was fortunate enough to have and to develop the supply, demand and institutional elements that were not collectively seen in such a form in any other geography. Other regions did have parts of the system that was probably robust, for instance, Amsterdam also had high wages, France and Germany were at the heart of scientific revolution, however, Britain was the only country that had all the parts of the system reinforcing each other, whereas other countries were laden with ‘reverse salients’. As Britain led the charge of Industrial Revolution, the system in other countries become streamlined and the ‘reverse salients’ were reduced, and hence the convergence started happening in other regions across Europe a little later. Given the above-stated arguments, synthesized in the systems perspective or the pyramid analogy, we can safely conclude that Industrial Revolution was entirely a British phenomenon and could not have occurred in any other geography in the 17th-18th century. It spread to other geographies only when the ‘reverse salients’ were removed or fairly reduced and the technological innovation reached a level that allowed for acceptance in other geographies.ReferencesAllen, R. (2011). Why the industrial revolution was British: Commerce, induced invention, and the scientific revolution. The Economic History Review, 64(2), 357-384Allen, R., & WEISDORF, J. (2011). Was there an ‘industrious revolution’ before the industrial revolution? 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