Custom Search
Industrial revolution (IndRev) can be best explained by a gradual increase in the growth rate of GDP per head in 1750-s. In 100 years this extra growth transformed Britain to the first and richest industrial country in the world. So we are talking about the second derivative of production level here - the change in the growth level! The accuracy of predictions for the data before first world war based on so limited empirical evidence is very doubtful. It is no surprise then that there are conflicting views about the causation of this growth, simply because we cannot measure when it actually happened and how big it was. Gilboy was the first one to suggest that the factors causing IndRev were mainly demand side ones. The contemporary view emerging from Dean and Coleman, supported by Mokyr, has been that supply side improvements were much more important.
In a very elementary level, demand and supply act in markets to produce an equilibrium. It is clear that quantity produced is income in aggregate case:
This suggests a first possible clue for economic growth - supply growth should decrease prices and demand growth should make them increase. There are two types of demand that can influence the industrialisation - the growth of aggregate demand as a whole, and the growth of industrial demand. We are trying to estimate the causes of the former, so it is false to take it as a reason for growth. However, there is likely to be a trickle down effect (McKennrik) arising from a small initial increase in income. Keynes called it the multiplier effect. However, this can explain only the magnitude of growth, not why it started. Demand is likely to lead to more inflation, when resources are fully utilised - so a necessary assumption for demand led IndRev is the existence of idle resources. Furthermore, every change in investments will have multiplier demand effects on the economy. So we are likely going to find much demand supported growth. We must be careful to determine wheter these effects are exogeneous or are infact endogeneous supply side initiated.
Things are not that simple in reality. Market structures are not always perfectly competitive and they can also change over time. So when we observe a price increase, it can be only because of monopoly charging higher price. In aggriculture supply actually decreased in bad years, leading to price increase and giving a false impression of increasing demand.
Simple demand and supply diagram is thus not very adequate way to depict a growing economy with some inflation and changing productivity. Dasgupta has suggested an enchancement to simple Keynes aggregate demand diagramm, which tries to explain the economic growth by depicting aggregate demand as a third order function, not as a straight line:
This unit square is going to be the main tool I am going to use to explain the various changes in 18th century Britain. The f(AD) depicts the amount of people that demand the "good" at given level endowment (on the x axees). We can apply that diagram to any good. For example with national income - when the economy is at x1 level of income, then people demand y1 of income instead. So extra investment occurs until income rises to y*. This is the equilibrium outcome as people want as much income as they presently have. It is also clear that the further appart the 45 degree line and the f(Y) are (ie the bigger the distance y1z1) the faster the investment occurs.
The shape of f(Y) is easily explainable in terms of a typical good - like transport. In the diagram below there are 2 equilibriums, (E1; E2; E3), however only E1 and E3 are stable - between x1 and x2 system shifts towards E1 and after x2 system shifts to E3. Thus x2 is the critical treshold, after which the people realise that there are actually more benefits realised from transport that previously realised. When equilibrium is originally at x1 then people used roads only for short distance travel. However, when suddendly the amount of roads is increased above x2, then people realise it has become benefitial to use roads for long-term travel as well! Thus it suddenly becomes profitable to invest to roads until a new equilibrium x3 is reached, where all profitable roads are built (of course inertia might carry the process a bit beyond, in case some scraping will occur later).
f(Y) needs not to be stable over time. It tends to grow steadily in line with productivity. Changes in demand will shift f(Y) as well. For example, when cotton suddenly came to fashion f(Y) shifted upwards. Now it is clear that after a certain increase in f(Y) a critical point occurs:
Any small further increase will initiate a self-sustained growth to E3. Furthermore, this growth will increase half way through as the distance between 45degree line and f(Y) increases (more people start realising the benefits of this new level of good and want it). They are the Keynes multiplier effects, and are essentially demand side driven. However, the initial increase up to critical level could have been caused by either D or S. So we should have a prior second reason in order to determmine which one it is. That is why I am going to explore each of the likely factors changing in the British economy at that time. However, to jump a bit ahead, it is very unlikely that there was only S or D effects present. They were both there, my task is to determine which ones were stronger on average. Industrial revolution (IndRev) can be best explained by a gradual increase in the growth rate of GDP per head in 1750-s. In 100 years this extra growth transformed Britain to the first and richest industrial country in the world. So we are talking about the second derivative of production level here - the change in the growth level! The accuracy of predictions for the data before first world war based on so limited empirical evidence is very doubtful. It is no surprise then that there are conflicting views about the causation of this growth, simply because we cannot measure when it actually happened and how big it was. Gilboy was the first one to suggest that the factors causing IndRev were mainly demand side ones. The contemporary view emerging from Dean and Coleman, supported by Mokyr, has been that supply side improvements were much more important.
Industrial revolution (IndRev) can be best explained by a gradual increase in the growth rate of GDP per head in 1750-s. In 100 years this extra growth transformed Britain to the first and richest industrial country in the world. So we are talking about the second derivative of production level here - the change in the growth level! The accuracy of predictions for the data before first world war based on so limited empirical evidence is very doubtful. It is no surprise then that there are conflicting views about the causation of this growth, simply because we cannot measure when it actually happened and how big it was. Gilboy was the first one to suggest that the factors causing IndRev were mainly demand side ones. The contemporary view emerging from Dean and Coleman, supported by Mokyr, has been that supply side improvements were much more important.
Industrial revolution (IndRev) can be best explained by a gradual increase in the growth rate of GDP per head in 1750-s. In 100 years this extra growth transformed Britain to the first and richest industrial country in the world. So we are talking about the second derivative of production level here - the change in the growth level! The accuracy of predictions for the data before first world war based on so limited empirical evidence is very doubtful. It is no surprise then that there are conflicting views about the causation of this growth, simply because we cannot measure when it actually happened and how big it was. Gilboy was the first one to suggest that the factors causing IndRev were mainly demand side ones. The contemporary view emerging from Dean and Coleman, supported by Mokyr, has been that supply side improvements were much more important.
Let me first look at the Aggriculture. Its traditional role has been as a "labour releaser" for industry. It experienced a considerable growth in productivity and thus could use few resourced, but still feed the urbanising population. Thus a cupply side factor. However, recently it has been argued that farmers were actually demanding most of the extra industrial output. Their incomes went up in famines where food prices were very high. However, Grasp has arguaed that productivity growth was lower at the beginning of IndRev and Mokyr has estimated the maximum effect on the manufacture to be 8%. Furthermore, violent cycles decreased the actual economic growth. When food prices were high, factory workers had lower real income. Thus industrial demand would have only risen when the propensity to spend on manufacturing was higher among farmers. This is not certain at all with the present available data.
Increased urbanisation probably did lead to a consumer revolution and changes in fashion (McKennrik). People were increasingly getting out of self-provisioning and getting used to buying goods. Public also started to imitate the upperclasses, thus demanding more cotton clothes. There is obvoiusly very little scope for self-provisioning of manufactured goods. There was some in clothing, though. It was often used as a consumer durable - people were not buying more, they just rermade the old ones. Not much evidence supports consumer revolution. Goods that dead people left behind in towns were not more industrial. Real wages were not rising despite the fact that women were getting more employment, because they were just compensating for falling men's wages(Ogilvie). The different consumption pattern of women was originally thought of as being an initiator of consumer revolution.
Aggriculture did help to keep imports down. Exports however were rising due to new industries like coton. This lead to increase injections to the system and higher national income. However, for the exports to increase the UK must have had a comparative advantage already. Thus the multiplier effects were just repercussions, once supply side has lifted f(Y) curve above E1.
Population is anothervariable originally thought to increase the demand. Population did increase, however, it is not so certain whether the increase was exogeneous. Increases in population do not bring about automatic increases in per capita income - people must actually work more to feed the increasing population. There must be actually shortage of labour for the increase in population to automatically increase income. However, that is a supply side reason once again.
Last demand side thing I want to talk about is the increase in income inequality. It is thought that the rising incomes of middle class allowed them to demand more industrial goods (Williams). There is also some limited empirical evidece supporting that, but the significance of this effect is questionable.
State on the other hand as always been regarded as a favouring supply side effect. England had an effective state system with strong patent laws, fair tax collection and effective protection. Strong property rights were especially important in creating favourable supply side conditions (Wriggley). Government did not intervene with the economy explicity by managing aggregate demand. Keynesians view is that government intervention to create artificial could have increased the gorwth rate, but Neew Growth Theorists argue that private sector was fullfilling the government role here. Private sector was providing enough investment to social capital investment (Wallis). Transport and educations are examples of this type of investment, whereby the more you invest, the more returns you get out, so the unit box would look something like this:
Initial investment is often unprofitable, so it is often regarded that state should undertake this. However there are numerous criticisms for this theory, that I will not go much into. Basically, income elasticity for the investment must be >1 for it to continue. Also some growth must be initially present, otherwise big scale investment will not find any use. As it did occur, there were some demand pressures.
Private sector at the time had large productivity gains indeed. Britain's initial endowment of natural resources, like coal and iron, was good (Crafts) and there was enough capital acumulation to "lift" the economy to a new equilibrium. Improvements in organisation (financial sector) and people's attitudes (nomore aristrocratic capitalism) changed too. Crafts has estimated this supply side productivity increase to count for approximately 40% of Britain's growth. However, the original growth rate estimates by Dean and Coleman have been revised downwards substantially, which makes the whole idea of "revolution" questionable. Furthermore, coton and iron that grew most, were very small to start with, so at least irons extraordinary growth rate did not affect the economy much. However New Growth theorist argue here again that growth in productivity without complementing demand (especially foreign demand for coton) and necessary institutions would have not been sufficient for the "revolution". But demand for transport was definitely a derived demand - it was only demanded because productivity and industry were already growing fast.
Productivity grew essentially because of inventions. It was the micro-inventions (making big inventions suitable for particular processes) that were all-important here. Some argue that there was also demand for inventions as some processes were faster than the other. So there was great demand for speeding up slower ones. However, in practice the resources (capital and labour) were moved instead, when the invention was not made. Inventions were however supported by two other favourable supply side conditions: strong patent lawas, that prevented the market from failing due to piracy; and already high national income so people could afford to use trial and error methods.
With the available limited evidence it is quite clear that both demand and supply effects were present. It is hard to draw precise conclusions, but it seems to me that the supply conditions were indeed the ones that pushed the aggregate supply curve upwards slowly until the growth could became self sustainable. However, we cannot neglect the changes in population that forced people to demand more housing, food and manufacturing and the improvement in agriculture that allowed people to have spare resources for manufacturing demand. And the reinforcing multiplier effects arising from initial supply shocks were pprobably larger than the shocks themselves. Thus I can agree with McCloskey only to a limited degree. There is relatively strong evidence suggesting that the relative increase in industrial demand, not aggregate, occurred before industrialisation started.
I am trying to be a lot more concise now. Please cross out anything that I should not waste time on in an exam. Thanks.
1. Demand and supply diagram. S pushes D pulls.
2. When S up, so must Q, but P down, similarly for D both up
Demand - 2 things -
growth in real income - not because that what we are trying to estimate. It has only multiplier effects that we are not interested in.
Growth in industrial demand
McKennrik did thing - trickle down effect. This however not cause but explains the amplitude.
Demand is likely going to affect when under-utilised resources
Supply - likely going to cause little GDP increase until prod. capacity is enlarged enough and then with a supporting multiplier. effect does the lot.
3. However, we have inflation and supply of aggric. actually decreased, while D increased in slump years. So should use something more accurate
4. Unit box thing (Dasgupta).
Explanation:
1. MPC
2. technology gets a while to become used
3. explains cycles
4. Increase can however be initiated by either demand or supply, so we should have a reason to believe before hand which one to go for. So look at each individually
5. Every increase has multiplier effects on demand. Thus we might find lots of demand effects. However, we like to know what initiated it. So we should look what caused these demand side effects
Institutional factors (enclosure started productivity, but enclosed productivity. was not much higher).
Helped to keep imports down (1850 22%) and feed urban pop.
Cycles produced rise in incomes and thus rise in industrial D
Prices did rise actually and prod. growth lower at the beginning of indrev (Grasp), but max effect on increase in manufacturing. demand 8% (Mokyr) to 20% (Ogilvie). Real income did not increase actually.
Longer working hours and improved diet to earn the extra ind. production. However this is only very short-term and small factor (Mokyr)
However cycles likely to have negative effects
Why should we think that farmers have higher income elasticity and MPC to ind. prod? So no demand
Releasing labour effect is a supply side thing - occurred because prod. increase. Led to industrialisation of workforce and urbanisation - supply. urbanisation probably affects the creation of market orientated view - declining self subsistence.
Export increase did lead to AD increase. But in order for E to increase comp. adv must have happened in S. side.
Did increase. However, per capita GDP does not automatically increase, more people to fed etc.
Thompson - death rate fell, IndRev sheer luck? Some argue against this being exogenous. Flinn - regional evidence shows pop incr. is actually caused by economic growth. So little here.
1. Combination of rising incomes and desires
2. People emulating classes above them
3. new advertising
4. women wages, family consumption pattern changes
BUT
1. Family incomes are not rising
2. women work to make up falling men wages.
3. Goods dead people leave behind are not industrial below a certain income level.
4. Brewing and baking demand did increased, but coal went more expensive and expensive to bake their own bread.
5. Servants did not have much money to spend and the clothes were bought for them.
6. Small goodies were bought. Clothing was a consumer durable. Remake of clothes occurred.
1. Patent laws
2. No selling out tax collection
3. Property rights (Wriggley)
4. Successful wars, secure producing conditions
Demand effects are normally state intervention, running budget deficit
This did not happen
5.5 Although New Growth Theorists (Romer & Lucas) argue that private sector fulfilled the government role in this case and provided the social capital investment (Wallis). Empirical evidence is the growth of residual income. Returns on investment increased with the amount of investment providing further funds. This happened in transport and education. Although some writers argue that the income elasticity for investment must be >1 for this theory to work and disregard it on the basis of inadequate empirical evidence (Ye was <1), Wallis has shown that Ye differs between industries and thus was likely >1 for transport. This theory also predicts for the occurrence of booms (like my AS AD thing) and booms were evident.
1. technological change
2. capital accumulation. Although initial endowment also good (coal, Crafts)
3. improvements in organisation and attitudes
It has bee estimated that 60% of growth during industrial revolution was because of growth in inputs and 40% because of growth in productivity (Crafts)
Cotton and Iron examples. Iron small, but cotton for export etc. Cotton grew cause few restriction, fashion change, capital concentration. But quality down.
Most likely cause - this took the thing across to higher growth. Much empirical evidence. Occurred slowly before. Although Crafts has re-estimated the growth figures for productivity. They remain positive and show an increase, but much smaller than Dean and Coleman. That is why the traditional supply causing IndRev reasoning is challenged now.
Market for innovation (Induced tech change). Need micro inventions for accompanying macro ones. UK was successful micro. This market should normally failed, but as I have said, the UK had strong patent laws and that is why demand caused improvements in various steps of production. However people can allocate resources instead (Cotton example)
Society already rich enough to trial and error
Main supply side thing. Large economic of scale and developed a lot. But as I argued before in New Growth Accounting there were also large demand for improved transport. However, this was derived demand, other markets had expanded a while before.
True that went for cotton
But why happened just then 1750
Aristocracy was producing - not market orientated
Surely substituted only between different industrial products, Overall small effects on demand.