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Instructor: Dr. H. Misigo Amatsimbi Course Description: Economic history is more than an examination of the development of the economy. The study of economic history is also an exploration into the economic motivations behind historical action and change. In this exploration we will be utilizing the tools of a variety of economic fields including microeconomics, macroeconomics, monetary economics, international trade and finance, economic development, and labour economics. The perspective offered by these various fields will offer insights into world history frequently not presented in the typical history book. Additionally, this course will demonstrate how economics can learn from history. Specifically, the dynamic nature of historical progress allows us to move beyond the static perspective so often employed in the typical economics text.

Course content 1. Food Production and the First Economic Revolution. 2. The Origins of the World Economy. 3. The Second Economic Revolution. 4. The Economic Development of Europe. 5. Colonialism and Economic Imperialism. 6. The Growth of the United States. 7. Issues in Japanese and South-East Asia Economic Development. 8. Latin America and the Industrial Economy. 9. The Economic Development of India. 10. Africa and the World Economy. 11. Economy, Society and Politics. 12. Globalization and the International Economy. Formative coursework Students will be expected to discuss assigned texts and produce several pieces of written work. Indicative reading A reading list of will be given at the beginning of the course. For an introduction, students may read John Mills(ed),A Critical History of Economics: Missed Opportunities, R L Heilbroners, The Worldly Philosophers; for general background, consult Roger E Backhouses, The Penguin History of Economics, or David Colander & Harry Landreths, History of Economic Thought.

Lecture One Introduction

Economics is a social science that is concerned with the production, distribution and consumption of goods and services. The term economics comes from Greek word oikonomia which literally means management of the household, administration. The roots words of this term are oikos which refers to house and nomos to customs or law, hence rules of the house (hold). Current economic models developed out of the broader field of political economy in the 19th century, owing to a desire to use an empirical approach more akin to the physical sciences. About 1870, economics moved away from being a subject which was largely in the hands of non-professionals businessmen, administrators and civil servants, as well as politicians, revolutionaries and even soldiers and became largely, though not exclusively, the province of academic economists. The subject changed from being called Political Economy, and became Economics . It was, however, more than an alteration in name that took place. The impact of economics becoming a subject in the hands mostly of academics rather than people with other jobs to do had a marked effect on where the main emphasis and focus of interest of the major participants henceforward was to be found. The character of the subject changed subtly away from its practical roots trying to explain the world so that it could be changed to a more abstract approach, where explanation was all, or nearly all, and prescription counted for much less. Whereas political economy was primarily concerned with influencing policy, economics, with relatively few, although important, exceptions, was from now onwards intended mainly to be more like a scientific subject, concerned with providing convincing theories about relationships, but with less and less of a normative and prescriptive, policy-orientated content. During the last hundred years, some conspicuous trends in economics have become apparent. The number of economists has certainly increased vastly, and many more of them are to be found in journalism, business, finance, government and the professions, as well as in the academic world, than was ever the case in the nineteenth century. Many of the techniques used by the economics profession have become much more refined than they were, and also a great deal more sophisticated mathematically. There has been an enormous expansion in the scope and coverage of statistics. The development of computers has made it much easier than it was to handle and process large amounts of data. Economics in general terms therefore aims to explain how economics work and how economic agents interact. Economic analysis is applied throughout society. Common distinctions are drawn between

various dimensions of economics. The primary textbook distinction is between microeconomics, which examines the behaviour of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy. We must note that the kinds of interactions between human beings which are the stuff of economics go back to the dawn of civilization, but the systematic study of these relationships is heavily skewed towards recent times. From the time when language developed some 100,000 years ago, there must have been buyers and sellers, borrowers and lenders. The need for credit must have been critical from the beginning of settled agriculture about 11,000 years ago. Indeed, the reason why some 5,000 years elapsed between the time of the first permanent settlements in Egypt and Mesopotamia and the rise of the first city states of significance in the same area may well have had to do with the lack of any way of recording more debts than could be remembered by the village headman. It was finding ways of keeping track of increasingly complex webs of obligations which, as much as anything else, made the growth of larger-scale polities possible. There is ample evidence, however, in the form of clay tablets, that sophisticated methods of recording obligations were in operation when the earliest cities were established about 3,700 BC. The invention of money came much later. Barter tokens were minted by the Chinese in the second millennium BC. True coinage, however, was first used in the kingdom of Lydia in about 700 BC. Originally made of electrum, a local natural amalgam of gold and silver, the first coins were produced by the fabled king Croesus (died 546 BC). The development of coinage led directly to the vast increase in trade and colonization which took place in the Mediterranean basin over the subsequent centuries, as the Greeks and others spread their culture and customs throughout the ancient world, creating the civilization which the Romans subsequently made their own. While the Greeks developed a trading system and the Romans a structure of administration, which between them managed to support a huge empire for hundreds of years, the economic achievements of the Ancient World were otherwise surprisingly modest. Manufacturing never proceeded significantly beyond the output of small groups of individual artisans. There was little technical advance. Almost none of the scientific speculations of the Greeks were orientated to practical purposes. The economy of the Roman Empire stagnated under the weight of increasing taxation, disruption occasioned by plagues, and the uncertainties caused by periodic severe inflations. Probably the most important contribution made

by the Romans to the subsequent development of the world economy was their system of law, particularly their law of contract. This, on its own, however, was insufficient to generate anything remotely equivalent to the start of the Industrial Revolution, which took another millennium and a half to materialize. An additional underlying reason why nothing approaching sustained economic advance took place in the Ancient World was the lack of as effective a method of performing and recording complicated calculations as was provided by the spread of Arabic numerals, particularly the concept of zero. The ability of previous systems of calculation, based on the abacus, can easily be underestimated by those not familiar with their capacity to deal with multiplication and division, but they provided no satisfactory basis for modern mathematics. Although the latest view among some scholars is that it may have originated in Babylonia, the idea of zero is generally credited to Indian thinkers in the fourth century AD. This notation, however, took eight hundred years to reach Europe, via the Islamic Arab states. Its use was first successfully publicised in the West by Leonardo Fibonnacci (1170 to 1250) in his Book of the Calculator, published in 1202, although a book on Arab arithmetic had been translated into French in about 990 AD. The inadequacy of ancient mathematical systems may have contributed not only to the lack of scientific and technical advance which might otherwise have been possible, but also inhibited the development of the sophisticated banking systems, depending, as they did, on records as well as calculations, which were an important precursor to the Industrial Revolution. It is no coincidence that double entry book keeping and the much wider availability of credit which better systems of recording and managing liabilities made possible provided important underpinning to the creation of the new wealth which led to the Renaissance. Inspirational as much Renaissance art and literature remains, it is unwise to be too idealistic about the circumstances of its production. The concept of magnificentia was central to Renaissance thinking; conspicuous expenditure on magnanimous gestures, including the patronage of art and scholarship, was evidence of virtue, of a greatness of soul. Those who held or aspired to authority could justify their claims by just such an expenditure, and competitive consumption came to be the order of the day, as each sought to demonstrate that his (or very occasionally her) cultural credentials were of the highest order. It is a brutal way of looking at the period, but a realistic one. Cities and towns were centres of wealth production and of creativity. Urban society in the Renaissance period was thoroughly commercialized; everything had a price. There were two particularly dense areas of urbanization, North Italy and the Low Countries, which acted as the main hubs for

international trade in commodities such as wool and woolen cloth, silk, tapestries, spices, silver and fine armour. With the invention of printing Venice came also to be the centre of the European book trade, ideas travelling rapidly via the well-established commercial network. The Renaissance prince, the aspirant courtier or socially climbing merchant provided a ready market for all these commodities, for expensive fabrics and intricately decorated armour were as much manifestations of magnificentia as paintings or sculpture. And it was only in the town, with its concentration of skilled artisans, that the manufacture of luxury goods and the complex technology of book production were possible. Commerce alone was not enough to amass the largest fortunes however; the richest merchants acted as bankers. Italian banking houses had well established networks in the later middle ages playing for huge stakes as creditors to princes. By the 16th century such loans were also being advanced by the more spectacularly wealthy merchants of the Low Countries and of German towns where profits had been amassed on the strength of the trade in silver. Expenditure was not just a personal matter; it was a matter of corporate status as well. European cities expressed their sense of corporate pride and identity in public buildings, secular and ecclesiastical. Cities experienced various degrees of autonomy. Claiming the most independence were the few remaining city republics of north Italy, though they were not republics in the sense that we understand the term today. Venice had the most clearly articulated hierarchy: a closed caste of nobility; a broader body of citizens; the plebians at the bottom of the pile. Power was restricted to members of the nobility who made sure that public building and public spectacle constantly broadcast the virtues of the Venetian state, the unparalleled blessings it brought, the sanctity of the city. Equally conscious of its virtue was the Florentine republic. This too was effectively run by a wealthy elite increasingly dominated by the Medici. The Medici, however, were very canny operators in the 15th century and expressed their magnificentia in public works which ostensibly demonstrated their loyalty to the Republic; only within their palaces, in rooms to which just the privileged had access, was the scale of their ambition fully represented in the art they purchased. The autonomy of cities and towns varied from state to state. Within the Holy Roman Empire towns might have a considerable degree of independence, for the Empire was a loose confederation of some hundreds of different political units, some of them independent cities. The lack of a centralizing bureaucracy in the Empire contrasts with the highly centralised monarchy in England, where, London excepted, towns had little autonomy. But all cities and towns possessed certain shared characteristics: collective authority exercised by a group which was selected or elected, and not hereditary. Usually this meant control by a

wealthy elite of magistrates, who influenced by humanist values, liked to think of themselves as patricians. The public buildings they had erected in their cities both reflected and served to create this image of themselves. Economic organisation within towns was usually through guilds. Although guilds were intended to protect the employment of members it would be a mistake to equate them with trade unions. Guilds had a strongly religious dimension within Catholic Europe, giving spiritual solidarity through their brotherhood, or confraternity. And guilds were very hierarchical in organisation, both internally and in the relationship between guilds. Within the guild masters protected their position against apprentices and journeymen, the very small scale of most industry facilitating this kind of control. Indeed printing was one of the few industries where more than a handful of people were employed in each production unit. Relationships between guilds were also far from equal. Merchants belonged to elite guilds whose economic power was protected by the urban government (which of course they constituted) or the state; artisans belonged to less prestigious guilds which had far less stake in urban government and whose activities were closely overseen by the urban magistrates. This led to the period of mercantilism (accumulation of bullionism - gold and silver). Mercantilism, or Merchant Capitalism, provided the dominant framework for thinking about economic issues for roughly the 300 years from towards the end of the fifteenth century to the closing years of the eighteenth century. It had no acknowledged spokesperson. It was a system rather than a theory, developed mostly by people in business and the professions, although some, particularly on the continent, were government officials. The appeal of its tenets waxed as Europe prospered in the shadow of the Renaissance and the development of the nation state. It waned as the intellectual climate moved in a different and more sophisticated direction, prompted by the advent of the Industrial Revolution, and exemplified by the publication of Adam Smith's Wealth of Nations and the American Declaration of Independence, both of which occurred in 1776. Mercantilism was strongly associated with the rise of commercially dominant cities. Venice, Florence and Bruges were in an earlier wave, giving way later to Antwerp, Amsterdam, London and the Hansa cities. Its development as a system was heavily influenced by the changes in perception of what it was possible to achieve, occasioned particularly both by the discovery of America and the route to India, and the impact on government revenues of vast quantities of silver from the New World. The new sea routes opened up

much greater trade possibilities than had existed previously, generating in turn the need for colonies to protect the territorial interests of the big trading monopolies which became established. Mercantilism thus led to imperialism, colonialism and globalization.

Lecture Two The First Economic Revolution For more than a million years after men and women had become distinguishable from other animals, they roamed the earth hunting and gathering plants. The evidence available, while scanty, makes clear that Paleolithic man had a lifestyle that distinguished him from lower animals, although like theirs, his ability to survive was affected by the vagaries of nature. Man lived in small groups or bands; caves, or sometimes simply the open, were his dwelling places. The groups had to be ready to move whenever they had exhausted the animal or plant supply in an area. During this long era of hunting and gathering there developed many variations of man's lifestyle and culture. Examples of Paleolithic man's artistry are to be found in the Dordogne Valley in France, where depictions of animals and hunting scenes still survive on the walls of caves. While this Magdalenian culture has been viewed by archeologists as the most brilliant achievement of the Pleistocene period, there is evidence of a developed culture in other parts of Europe as well. Archeologists have found tools and weapons engraved or carved with animal or floral designs; small figurines ( Venuses) have been found that accentuate the pregnant features of women; and burial sites suggest that prehistoric humans were concerned with life after death. Despite these artistic and aesthetic achievements, however, man lived very much as other animals, taking from nature what he could kill or gather. The limits of livelihood were fixed by a resource base which he could not yet improve; he could exist only within the earth's biological constraints. Approximately ten thousand years ago, humans began to develop a settled agriculture: to herd and breed animals and to cultivate plants for food. The results of a developed ability to increase the resource base amounted to a fundamental economic revolution. The transition from hunting and gathering to settled agriculture, which the archeologist V. Gordon Childe termed the Neolithic Revolution, fundamentally altered the rate of progress of human beings. It led to an enormous acceleration in the process of learning, which accounts for the extraordinary developments in, say, the past ten minutes of man's chronological history in contrast to the previous twenty-three hours and fifty minutes. Making sense of this change is extremely difficult and to some degree must be conjectural. There is, of course, no written word to provide evidence and only a few artifacts survive. Nevertheless, the brilliant

detective work of archeologists has helped us a great deal, and the combined efforts of botanists, biologists, geologists, physicists, and geographers have given us a number of clues to help us reconstruct, however tentatively, what must have taken place. Before examining this first economic revolution it is well to outline that generally accepted significant evidence about man's prehistoric past with which a theory of the revolution should be consistent. 1. The development of settled agriculture occurred approximately ten thousand years ago, but man is distinguishable from other animals more than one million years ago. The rate of material progress of man has accelerated dramatically since the development of agriculture. 2. This development appears to have occurred independently in such areas as the "Fertile Crescent," Meso-America, and probably Peru, North China, and others, and at different times. 3. The spread of agriculture took thousands of years. The rate of spread across Europe appears to have averaged only about one kilometer per year. 4. The extinction of a variety of large animal species occurs in the later Pleistocene period. Some two hundred species have been listed as disappearing. 5. Before the development of agriculture man had begun to exploit a wider source of food. Larger animals played a lesser role in man's diet, and small animals, fowl, shellfish, snails, nuts, and seeds played a larger role. This exploitation is called the Broad Spectrum Revolution. 6. Human population increased and man migrated into new regions; the most dramatic was his movement into the New World and into Australia. In sum, there are three changes that could account for the transition from hunting to agriculture. Individually or acting in concert, a decline in the productivity of labour in hunting, a rise in the productivity of labour in agriculture, or a sustained expansion of the size of the labour force could have resulted in the transition of man from being exclusively a hunter to increasingly a farmer.

Let us put this very general description into our economic framework. Initially, this was a world in which the supply of animals and plants upon which man could feed appeared endless. As human population expanded and threatened the supply of foodstuffs in a given area, bands would subdivide and move to new areas, thus gradually spinning off new groups. This process is described by anthropologists as an open-donor system. In terms of the model this was a world of constant returns to an increasing labour force, so that growth in population resulted in a proportionate increase in output. This world of constant returns persisted as long as there was empty land of equal productivity for a growing population to exploit. So long as this condition existed, there was no incentive to attempt to delineate exclusive ownership over plants or animals. We should expect, however, that groups that found themselves inside the population frontier would initially try to develop stable relationships between the population of the band and the resource base since they were bounded by other bands and as yet had no way to expand the resource base. Such population groups would attempt to reach precisely the kind of homeostatic relationships that the anthropologists have described as existing among contemporary primitive societies. These bands would limit fertility by taboos, infanticide, and various other means in an attempt to keep the relationship between the population and the resource base constant. Moreover, we should expect that these bands attempted to develop a set of customs and rules to regulate hunting, and in a way that would maintain stability. This attempt is due to fail for the reasons discussed above: a homeostatic population can exist only among isolated bands. Once population had expanded to the point where the resource base was fully utilized, then any further increase in population led to a decline in the marginal produce of labour in hunting/ gathering. Nevertheless, given the characteristics of competing tribes and a common property resource, population would continue to grow. I can illustrate the consequences in figure 1 above. Population expansion to q d could occur without a diminution in the stock of the resource base, but further increases produced diminishing returns. Big animals increasingly became scarcer and gradually man was forced to search for new sources of food among the lower orders of animals. We do know that beginning about 20,000 B.C. man began to adapt himself to different kinds of animals and plants to eat (Flannery 1969). This era can itself only have been a transitional phase because as population pressure continued to grow and compete for these common property resources even they would become increasingly scarce and relatively more "costly" in labour time to gather.

The solution to the common-property dilemma in which prehistoric man found himself was the development of exclusive communal property rights. While animals and plants remained abundant relative to the demands of the human population, there was no incentive to incur the costs of establishing property rights over them. It is only during this transitional phase of increasing scarcity that it became worthwhile to incur the costs necessary to develop and enforce property rights that could limit the rate at which the resources were exploited. The difference between cultivation and domestication is a subtle one. The latter (i.e domestication) implies a genetic alteration in the plant or animal to improve its value to humans. 18 Two famous examples from prehistory were the evolution of emmer and einkorn wheat from the shattering to non-shattering form and the modification of wild sheep to a quieter, more tractable animal. Both instances of domestication may have come about as accidental results of the selection process. But under exclusive property rights the rewards from domestication would encourage the trial and-error process of seed and animal selection. There is no implication that the transformation from hunting to agriculture occurred rapidly. The evidence accumulated by archaeologists suggests that it required a substantial period of time. The transition occurred as a result of persistent population pressure which produced changes in the relative scarcities of the resources exploited by prehistoric man. In response to these developments, individual bands began to attempt to exclude outsiders from access to the resource base. In the process such bands became sedentary. The establishment of exclusive communal property raised the bands' return to attempts to increase the productivity of the resource base. Many groups probably
failed to make this transition, but some by luck or chance managed to make the transformation; it is from these beginnings that we see the development of civilization and economic growth that has occurred in the ten thousand years since.

The First Economic Revolution was not a revolution because it shifted man's major economic activity from hunting and gathering to settled agriculture. It was a revolution because the transition created for mankind an incentive change of fundamental proportions. The incentive change stems from the different property rights under the two systems. When common property rights over resources exist, there is little incentive for the acquisition of superior technology and learning. In contrast, exclusive property rights which reward the owners provide a direct incentive to improve efficiency and productivity, or, in more fundamental terms, to acquire more knowledge and new techniques. It is this change in incentive that explains the rapid progress


made by mankind in the last 10,000 years in contrast to his slow development during the long era of primitive hunting/ gathering.

The Organizational Consequences of the First Economic Revolution Between the beginning of settled agriculture and the peak of the Roman Empire was a span of approximately eight thousand years. As the length of time is not matched by quantity of evidence, we may tend to think of these years in terms of an endless parade of kingdoms, empires, and whole civilizations appearing and then disappearing in warfare, treachery, intrigue, and murder. Yet there were, as well, more mundane developments underlying these societies; and despite scanty evidence, it is possible to reconstruct certain of these developments. We would like especially to know the structure of the economies that supported the civilizations and permitted the existence of great empiressome of which endured for centuries. We would like also to know more about their demise than the story of a great battle or the sack of a capital city and the death, or enslavement, of its inhabitants. Certain broad trends can be identified as occurring during the eight thousand years that span the ancient era. 1. It is clear that population grew and at a then unprecedented rate. The area of human settlement also increased. The land surrounding the Mediterranean, for instance, became fairly densely populated during this era. 2. There was a gradual transition from hunting/ gathering to farming, and over time the dominant form of economic activity became settled agriculture. 3. The political organization of the state emerged for the first time. The particular forms that the state took
during this era were many and varied, ranging from the despotic to the democratic. But despite the variety of forms, each undertook the duties of government. The rise of the state was accompanied by war and political instability. The size of the state tended to grow until the entire Western world was united in the Roman Empire.

4. Significant progress was made in the development of technology, and over those eight thousand years the Bronze was succeeded by the Iron Age.

5. Trade developed and expanded. Especially interregional trade grew in importance during this era. Eventually impersonal markets were created and then increasingly used to allocate resources. 6. Urban places developed for the first time. Cities grew in size and complexity of function and spread across the Mediterranean World. 7. A variety of economic organizations emerged. The redistributive economies of Sumer, Egypt, and Mycenaean Greece represent one extreme; the extension of price-making markets in Hellenic Greece and Rome, the other. 8. A variety of property rights underlay the various types of economic organizations. Initially, exclusive communal rights were established by the first agricultural communities; in some places these gave way to exclusive state-owned property rights and in others to individual private property rights. Where individual private property rights were established, these rights were developed over goods, land, and labour in the form of slavery. 9. Significant economic growth occurred. Part of this gain was used to support a growing population, part to raise the general standard of living. 10. The distribution of income became decidedly more unequal, with wide disparities appearing very early. The Rise and Decline of Feudalism The economy of tenth-century western Europe had the following initial conditions. Law and order generally existed only within the boundaries of settled areas, a condition that severely limited trade and commerce; goods were generally much less mobile than labour because they were subject to higher transaction costs. Land was abundant but valuable only when combined with labour and protection. Labour exhibited constant costs when combined with land to produce goods because of the relative abundance of land. Because of the indivisibility of a castle there were, up to a point, economies of scale in protection. As the number of inhabitants protected by a lord grew, however, the distance of farmed lands from the castle increased and eventually led to rising costs of protection. In short, protection exhibited the U-shaped cost curve so familiar to economists. The "efficient" size of the manor was determined at the point where the marginal cost of providing protection equaled the value of the lord's share of the marginal product of labour (that is, the tax).


A local castle and knights were the keys to protection. The local lord was linked to overlords all the way up to the greatest lordthe king in a hierarchy of feudal obligations. Between the local lord and the king there might be several intermediate levels; but at each level the lower lord provided knight service for his immediate superior. Property rights under feudalism were in effect a conditional grant of tenure in return for military service. In the course of feudalism's emergence out of the centuries of chaos following the demise of Rome, the lord and his knights had become both a warrior class and a highly specialized ruling class whose survival and raison d'tre depended on military prowess. The ideological gloss overlying this class was chivalry, a term that brings to mind King Arthur, the Round Table, knight service, and courtly love, but in practice was more a rationale for a class that lived by violence. The underpinnings of this structure, which provided the productive output of goods and services in return for whatever measure of protection and justice existed, were slaves, serfs, and free labourers. While some slavery persisted into the Middle Ages, the characteristic organization of the manor was built upon villeins and freemen; its structure is admirably summarized in the Shorter Cambridge Medieval History.: Feudalism provided a measure of order and security in this chaotic world and led to a concomitant expansion of both population and economic activity. Northwest Europe was still largely forested and had abundant room for population growth. As an expanding population led eventually to crowding and to diminishing returns in local areas, the logical outcome was colonization: the creation of new manors carved out of the wilderness. A frontier movement developed. New manors spread across northwest Europe and increased the potential gains from trade by reducing the unsettled areas between manors that had harbored brigands, by encouraging the growth of towns where specialized skills could develop to produce manufactured goods, and by settling areas with significantly different factor endowments. The wine of Burgundy, Bordeaux, and the Moselle, the wool of England, the metal products of Germany, the wool cloth from Flanders, the fish and timber from the Baltic all betoken different factor endowments in both resources and human capital investment. In short, the frontier settlement movement resulted in reduced transaction costs of trade, and gains from trade increased. Towns established their own body of law and gradually their own commercial courts. While early enforcement of town law may have been by ostracism, there subsequently developed the police power of a local political unit. As merchant codes became established, they were recognized over a wider areathe


Chart D'Oleron (near La Rochelle, France), for example, during the twelfth century was widely recognized in Flanders, Holland, and England. Within the towns, guilds developed to serve the needs of local manufacturers as well as merchants. The property rights surrounding the production of non-agricultural goods were inextricably tied to the guilds, which in their early form were voluntary associations but which soon became a legally recognized part of the state. Guilds provided an early set of rules with private policing for the protection of the property of their members, but by the end of the twelfth century they had become a part of the political administration in the Italian cities. General diminishing returns to a growing population in Western Europe appear to have set in in the twelfth century. In turn, relative factor scarcities changed: labour became less valuable ; land, more. The rising value of land led to efforts to provide for exclusive ownership and transferability. Within the manor the common fields would tend to be overexploited if every resident had equal access. The response to this exploitation was to embody in the customs of the manor regulations which restricted access. Stinting arrangements that limited the number of animals a family could pasture on the common became customary. Thirteenth-century England witnessed the development of an extensive body of land law, the beginnings of enclosure, and, finally, formalization of the ability to alienate land. Similar developments took place in Burgundy, Champagne, and France. The rising value of land increased the incentives to alter property rights so the now increasingly scarce resource could be used more efficiently. The twelfth and thirteenth centuries were a period of a flowering of international commerce. There is not sufficient space in this chapter to trace the institutional arrangements that were innovated in the development of organized product and factor markets to replace local self-sufficiency and barter. The Champagne Fairs, the burgeoning Mediterranean trade of Venice, Genoa, and other Italian cities, the urbanization of metal and cloth trades of Flanders were only a few of the major manifestations of commercial expansion of the era. From the viewpoint of this chapter the most interesting aspect was the shift in the protection of property rights from private policing by voluntary groups to the state. Everywhere kings and princes were guaranteeing (for a fee) safe conduct to traveling merchants, protecting alien merchants and providing them with exclusive trading privileges, enforcing the judgments of commercial courts, and granting or delegating property rights to the burgeoning towns.There can be little doubt that


there was substantial productivity increase in the non-agricultural sector as a result of reducing transaction costs; nevertheless, this sector still accounted for only a tiny fraction of total economic activity. Population growth was causing the prices of agricultural goods to rise relative to other goods, and real wages were falling. A growing population coupled with diminishing returns was reducing the standard of living of most people. Agricultural production was affected: relatively fewer animals and relatively more cereal grains were raised. This change was reflected in the diets of the peasant as carbohydrates replaced protein. The population of western Europe was approaching a subsistence level, and the margin of existence became precarious. The famines that enveloped much of western Europe in the early 14th century demonstrate this, and they were a harbinger of worse things to come. The plague in 1347 became endemic, returning again and again so that probably population fell for a century. Trade and commerce, as a consequence, declined in volume. Western Europe was experiencing a Malthusian crisis. In the non-agricultural sector the most striking result of this crisis was the emerging strength of guilds organized to protect local artisans in response to rapidly declining markets. The strength of the guilds in preserving local monopolies against encroachments from outside competition was frequently reinforced by the coercive power of kings and great lords. On a large scale the Hanseatic League represented such a defensive alliance of cities to protect their shrinking markets from the competition of rival cities. In the agricultural sector there was a return to an era of abundant land and scarce labour. Everywhere poorer land went out of production; there was a shift from crops to livestock production ; and real wages rose, and rents fell. The relative bargaining strength shifted from the lords to the peasants. The opportunity cost of peasants improved as escape to towns (which resulted in freedom after a year and a day) offered an alternative to the oppression of a local lord. Despite repeated efforts to regulate maximum wages, competition among landlords led to increasingly liberal terms for tenants as well as to rising wages; as a consequence, the master-servant aspect of serfdom gave way to recognition of copyhold rights and an end to servile obligations (although it was not until 1666 in England that they were legally swept away). Freemen had already escaped the jurisdiction of the manorial court in England in the thirteenth century and come under the aegis of the king's court. Gradually villeins also came under the king's justice, and the manorial court slowly lost jurisdiction. The great contraction that took place during the fourteenth and fifteenth centuries did cause some reversion back to the Dark Ages in terms of chaotic conditions and ubiquitous warfare, which made property rights increasingly insecure. But trade, while diminished, did not disappear; markets survived and with them a money economy.

The changes described in the previous pages of this section took place throughout western Europe. There were regional variations in population pressure and in the incidence of famine and of the plague, but to one degree or another all of western Europe felt the changing relative factor scarcities. However, the response in terms of evolving institutional arrangements and property rights differed throughout western Europe. In order to understand the diverging pattern of adjustment to these changes we must turn to the other factor contributing to change in the medieval world, the technology and organization of warfare. The previous lectures ended on the theme that the economies of scale associated with military organization, which permitted large states and order over a substantial territory, had either disappeared or been substantially weakened in the late Roman Empire. During the ensuing millennium a warrior class that lived by pillage, raids, and ransom dominated the scene. This class was only briefly constrained by the Carolingian Empire, and even the relative increase in protection and order that emerged with feudalism did not fundamentally change this way of life. Warfare was typically small scale but ubiquitous. By the end of the era, however, the character of warfare was basically altered and this warrior class had become obsolete. The chaos of western Europe was briefly interrupted when Charles Martel turned back the Arabs at Poitiers in 753. By 800 Charlemagne had annexed or conquered a vast area, from the borders of Islamic Spain to Saxony, Bavaria, and Lombard Italy; on Christmas Day of that year he was crowned emperor by the pope in St. Peter's Cathedral. The subsequent Carolingian Renaissance was a striking contrast to the earlier "dark ages," but its partition and breakdown in the ninth century were convincing evidence that the viable size of the political-economic unit was small. No centralized administration and fiscal structure emerged, and it was in effect Charlemagne's genius that briefly held his empire together. Internal warfare was abetted by partible inheritance ; dissolution hastened by the assaults from three directions of Vikings, Moslems, and Magyars. Vikings appeared off the coast of England in 786, Ireland in 795, and Gaul in 799. London was sacked in 841, and Vikings moved up the rivers in their long boats to attack such widely separated cities as Rouen in the north and Toulouse in the south. Moslem corsairs attacked Christian ships in the Mediterranean and raided from southern Italy to Provence. Hungarian horsemen following the ancient Roman roads raided Bremen in 915 and reached as far west as Orleans in 937. A distant king was of little protection against these marauding bands. The viable response was the fixed fortification and the heavily armored knight. The latter's comparative advantage over infantry was

immensely increased by the diffusion of the stirrup which provided the leverage for the armored knight on horseback to use the combination of human and animal muscle to destroy opposition (White 1962). The hierarchical decentralized structure of feudalism outlined above was the result. There was the revival of local order and economic expansion described earlier in the chapter, with the addition of the Vikings who had settled into northern Europe and became a part of the structure. The military result was a stalemate which reinforced the persistence of small political-economic units. The castle was impregnable to all but the most persistent and well-financed military excursions that could afford the prolonged siege to starve out the inhabitants; the character of warfare was typically small scale between heavily armored knights. But if the technology of warfare solidified the feudal structure, the resultant revival of economic activity gradually undermined it. The growth of a money economy led to scutagea money payment in lieu of knight service. Kings could now hire mercenaries in lieu of relying on forty days a year of knight service. The size of a king's army now depended on his purse. In the long run the de facto power of vassals, who had always posed the threat of becoming militarily more powerful than the king, was decreased. But in the short runthrough the fifteenth centurygreater warfare and chaos attended the growing market for mercenaries, who once organized into existing bands became the scourge of western Europe as they discovered the profitability of extortion, ransom, and plunder. Between periods when they were hired by one or another side in a war they lived off such profitable opportunities. Between the thirteenth and the end of the fifteenth centuries there occurred a major series of technological changes in military warfare. The pike, the longbow, the cannon, and eventually the musket in warfare on land and improvements in naval architecture combined with the cannon at sea. At Courtrai in 1302 Flemish pikemen demonstrated that heavily armored cavalry were vulnerable to the pike-phalanx; at Crecy the combination of English longbowmen with dismounted knights routed the French as it did again at Poitiers and again at Agincourt. In the fifteenth century (at Formigny in 1450 and Castillion in 1453) the French turned the tables with field artillery that devastated the English ranks before their archers could get in range. Moreover the development of the siege cannon destroyed the centuries-old impregnability of the castle; the French in 1449 1450 recaptured most of the fortified sites of the English in Normandy.


We have seen that mercenary specialists ranging from Swiss pikemen to English archers were effective and profitable in the late Middle Ages. They were dangerous not only to the enemy but to their employer when during those periods they were unemployed and unpaid they ravaged the countryside. It was in direct response to such ravaging by hired mercenaries that Charles VII of France created the first standing army in western Europe in 1445. The Compagnies d'Ordonnance were eventually made up of twelve thousand troops paid at the rate of ten livre tournois per month for a man at arms and four or five livre tournois for each of his "retinue." Whether the development of an exchange economy was a sufficient condition for expanding the optimum scale of warfare or technological innovations augmented the scale may still be argued. What cannot be argued is that it expanded. As a consequence, the conditions for political survival were drastically altered. Survival now required not only a larger army, but a trained, disciplined fighting force supported by costly equipment in the form of cannons and muskets. The age of the armored knight with lance passed; the age of chivalry was ended. Warfare on land and at sea (where the size and armaments of naval ships increased dramatically) had dramatically altered the size of the financial resources necessary for survival. At this point we can usefully pause in our historical narrative to offer an analogy from economic theory. Let us examine the case of a competitive industry with a large number of small firms. Introduce a change which leads to significant economies of scale relative to the size of the market so that the efficient-size firm must become larger. The path from the old competitive equilibrium to a new (and perhaps unstable) oligopoly solution will be as follows. The original small firms must increase in size or combine, or they will be forced into bankruptcy. The competition for survival will be fierce. The inevitable result is a smaller number of large firms of optimum size. Even then the equilibrium is likely to be unstable. In an oligopoly there will be endless efforts toward collusion and price fixing, but there are always advantages for an individual firm to cheat on the arrangement. The result is periods of collusion interrupted by eras of cutthroat competition. If we compare the above description with the political world of the late Middle Ages, we find remarkable similarities. Between 1200 and 1500 the many political units of western Europe went through numerous conflicts, alliances, and combinations as the local manor gave way to the emerging nation-state. These centuries witnessed intrigue and warfare on an ever-expanding scale. While the size of states sometimes increased, the critical factor was the ability to increase tax revenues rather than simply to increase the size of the political unit. The contending nation states faced enormously growing expenses. A year of warfare

represented at least a fourfold increase in the costs of governmentand most years were characterized by war, not peace. Kings who in the past had lived on their own could no longer do so. Monarchs were continuously beset by fiscal crises and growing indebtedness and often were forced to desperate expedients. The spectre of state bankruptcy was a recurring threat, and bankruptcy was often a reality. As late as 1157 the Count of Flanders received a significant share of his revenues in kind. Income in kind shows up in French crown receipts well into the thirteenth century. During the feudal period it had been customary for the king's court to move from one part of the country to another to consume the goods and services in kind. With the growth of a money economy, the revenues became increasingly monetized. They were, however, declining during the fourteenth and fifteenth centuries as a result of the fall in land rents due to a declining populationat precisely the time when more revenue was required for survival. In the face of declining revenues and growing financial needs, the princes of Europe faced an everworsening dilemma. Custom and tradition set limits to the exactions they could obtain from lesser lords. As the Magna Carta amply attests, a king who stepped over the boundary of accepted custom faced the possibility of revolt. Many of the king's vassals were almost as powerful as he (in fact, the Dukes of Burgundy were at this time much more powerful than the kings of France), and certainly in concert they were more powerful. There was frequently more than one contender for the throne. Even in the absence of an active contender, powerful vassals posed an imminent threat either to overthrow the king or to collabourate with an outside invasion, as the Burgundians did with England against the French crown. Increased taxation could place a European Crown in jeopardy. There was the possibility of borrowing moneyand indeed this was a major source of meeting short-term fiscal crises brought on by war. Since a prince could not be sued for debt, the lender exacted a high interest rate, usually disguised to avoid usury laws. As compensation for the high risk, the loan often was backed by collateral (frequently it was crown lands, the crown jewels, farming of the customs, or certain monopoly concessions). Default was common. Edward III ruined the Peruzzi and Bardi, and at a later date Charles V and Phillip II ruined the Genoese and the Fuggers. A king could rely on loans to tide the government through a war; but, facing the awesome task of repayment, he required fiscal revenues. The necessity to establish a regular source of revenue to repay war loans influenced and then determined the relationship between the state and the private sector.


The degrees of freedom of the ruler varied widely. He could confiscate wealth. He might be able to exact a forced loan when he could convince his subjects that they were threatened by attack or invasion. He could grant privilegesproperty rights and the protection of property rightsin return for revenue. Clearly there were economies to be gained by the state taking over from manorial lords the protection of property rights. As trade and commerce grew beyond the boundaries of the manor and the town, the farmers, merchants, and shippers found that the private costs of protection could be reduced by a larger coercive authority. The basis for a mutually advantageous exchange existed between the private sector and the state. Since individuals in the private sector always had the free rider incentive to evade a tax, the state had of necessity to discover a source of income that was measurable and easy to collect. In contrast to presentday tax structures, there was no institutional structure available to undertake such activities. The emerging nation-state thus sought revenues from economic activities that were relatively easy to tax. A number of possibilities were open to a ruler. Where foreign trade was a significant part of the economy, the costs of measuring the extent of trade and of collection of the tax were typically lowparticularly so in the case of waterborne trade, since the number of ports was limited. But where trade was primarily local within a town or small geographical area or primarily internal to the economy, the costs of measurement and collection were typically much higher. Foreign trade was thus a more attractive source of potential revenue than domestic trade. Another alternative, frequently employed at this time, was to grant certain property rights to groups who could pay for them, or to pass laws prohibiting practices that threatened government revenues. Here we can no more than list some of the multitudinous (and ingenuous) ways by which princes traded property rights for revenue. The right to alienate land was granted to free peasants in England in 1290 (by the Statute of Quia Emptores) and to nobles in 1327, because the king would otherwise lose revenue by the practice of subinfeudation. Later, the Statute of Wills (1540) was enacted to permit inheritance because the crown was losing revenue through the extensive device of "uses." Similar laws were enacted in France, Champagne, and Anjou. Such laws not only prevented loss of revenue but allowed the state to tax land transfers. Towns were granted trading and monopoly privileges in return for annual payments, and alien merchants were granted legal rights and exemption from guild restrictions, again in return for revenue. Guilds were granted exclusive monopoly privileges in return for payments to the crown, and customs duties were established on exports and imports in return for monopoly privileges.


In most cases the crown was initially forced to grant to "representative" bodies (Parliament, Estates General) control over tax rates in return for the revenue they voted. In some instances these representative bodies retained this privilege; in others, they lost it. This last point requires special emphasis and further elabouration since it is the key to future differential patterns of development which we observe within Europe. What did the ruler have to give up in order to get the essential tax revenues for survival? That is, what determined his bargaining strength vis--vishis constituents? The argument advanced above suggests that three basic considerations influenced the bargaining process: (1) the extent of the potential gains to constituents created by the state taking over protection of property rights from local lords or voluntary associations; (2) the ability of rivals of the state to provide the same service; and (3) the structure of the economy which determined the benefits and costs to the government of various types of taxation. In the next section we shall examine how these three factors effected the type of government that emerged in France, Spain, the Netherlands, and England and how the type of government influenced the economic growth of these nations. Structure and Change in Early Modern Europe The two centuries from 1450 to 1650 were marked in Europe first by extended exploration, exploitation, trade, and settlement to the New World and the Indies, and second by a structural transformation, of crisis proportions, of political-economic units. The consequence of the expansion was ultimately to integrate the rest of the world with the western European nations; but its shorter-run consequences were a widening of the market and increased opportunities for profit and, in turn, political pressure for structural changes to realize those opportunities. The resultant structural transformation produced the essential conditions that underlie the economic growth of the past three centuries. The motives that led Prince Henry of Portugal to undertake the exploration of the African coast were to "serve God and grow rich." It would be a mistake to underestimate the zealous ideological cast to this materialistic endeavor, since the service of God throughout this era constrained the range of choices of the participants (at least in the short run). But the search for gold, spices, silver, slaves, and more prosaic trade goods was the fundamental driving force that led the Portuguese, Spanish, Dutch, English, and French to round the Cape of Good Hope (called the Cape of Storms for good reason); to rediscover America ; to capture and pillage the Mayan and Incan civilizations; to search for the Northwest Passage; to fight interminable wars with each other, as well as with Moslems and native populations. By the middle of the

seventeenth century the general contours of the world had been discovered (or rediscovered) and patterns of colonial settlement having lasting consequences for subsequent development had been established. A papal bull put forth an imaginary dividing line which gave Brazil to Portugal and the rest of Central and South America to Spain. The Dutch, while pre-eminent in trade, had only temporary success in ousting the Portuguese from the Brazilian sugar coast and in maintaining a foothold (New Amsterdam) in North America. However, their efficiency in shipping and trade played a major role in shaping the external policies of France and, particularly, England. The English, relatively latecomers in the search for profitable trade ventures, gradually developed a system of colonial settlement and preference trade between its West Indian and North American colonies. This system was designed defensively to exclude the Dutch (and others) and positively to integrate the colonies and the mother country. The division of costs and benefits of the Navigation Acts, as between the colonies and the mother country, is the subject of a substantial literature. 2 In the Far East the superiority of Western sailing ships and cannons established Portuguese, Dutch, and English trade. As Cipolla makes clear, their trade was not confined simply to east-west trade, but in addition they were "middlemen in a vast network of commercial activity among Asian nations ..." (1965:136). In terms of the framework,, there were two fundamental consequences of this European expansion and integration of the rest of the world into the Atlantic nations: the institutions and property rights carried over from the mother country shaped the subsequent development of the colonial areas, and the pattern of trade and flow of productive factors (labour and capital) helped shape the pattern of development of the Atlantic nations themselves. The contrast between the economic organization of the Spanish, Portuguese, and French settlements on the one hand and the English on the other stemmed from a combination of the property rights carried over from the mother country and the factor endowments of the colonial area. The Spanish encomienda system in Mexico substituted the overlordship of Spanish encomenderos for Aztec rulers. In return for "protection and justice" the new rulers received tribute and forced labour. The Portuguese sugar colonies were built by slaves imported from Africa. The French attempted to settle French Canada in a pattern mirroring feudal land organization of the mother countrywith the predictable result that it provided little attraction to settlers.


English settlement, coming a century after Spanish and Portuguese settlement, mirrored the changing structure of property rights emerging in that country. While the Virginia Company and some of the other colonial ventures started out by working land in common, the disastrous consequences quickly led to modification and the de facto development of private property rights in land. The scarcity of labour produced diverse results in the different colonies, depending on the resource endowments. The indenture system initially provided an attractive opportunity for the poor to pay for their passage in return for a fixed period of obligatory labour. In the South, where relatively large-scale tobacco, rice, and indigo plantations developed, indentured servants were replaced by slaves. In contrast, the New England and middle colonies were characterized by individual land holdings and the early development of an economy based on agriculture, fishing, and shipping. The development of America is the subject of a subsequent chapter. The focus of this chapter is upon the emerging national economies of western Europe; the above-described expansion influenced each of them. For the Portuguese and the Spanish it initially meant riches and economic opportunity, but ultimately these gains were to prove illusory as the Spanish sank into stagnation. For the Dutch it meant an economy built on their comparative advantage in shipping and trade; for the English the colonies became a part of an empire. We must examine the structural crisis of the seventeenth century to see the differential pattern of European development. There is widespread agreement that there was a crisis in the seventeenth century but no agreement on its sources or character. It was an era marked by devastating wars, such as the Thirty Years' War in Germany; falling wages; widespread social upheaval; and religious strife. By the time it was over the structure of some of the political-economic units had been radically transformed. For the Marxist the seventeenth century is part of a larger puzzle in the dialectical process of development, since feudalism appears to have died by 1500, but capitalism, traditionally associated with the Industrial Revolution, does not emerge for almost three centuries. Because the exogenous variable in the Marxian system is technological change, which leads to the emergence of new classes, the Marxists have a three century void. Their explanation is that it took the emerging bourgeois class almost three centuries to come to political power and create the Revolution. The English and French revolutions were the critical breakthroughs that opened the gates of modern capitalism.


For Hugh Trevor-Roper the crisis was one of an overburdening parasitic bureaucracy with a consequent tax burden that produced strain, casualty, and bankruptcy when Europe ceased expanding in the seventeenth century. There can be no doubt there was a fiscal crisis, but as J. H. Elliot points out in his comments on Trevor-Roper, it was engendered by war rather than the extravagance of Renaissance courts. 5 Thus the Marxian argument appears to fit the evidence better, as it was a structural crisis over control of the state which ultimately led to the emergence of a set of property rights encouraging modern economic growth. The Marxian emphasis on technology has led Marxians astray, however, since the technology of the Industrial Revolution followed rather than preceded the structural changes. While gunpowder, the compass, better ship design, printing, and paper all played a part in the expansion of western Europe, the results were widely divergent. The technological change associated with the Industrial Revolution required the prior development of a set of property rights, which raised the private rate of return on invention and innovation. The explanation advanced below begins with population change and is built on the interplay between changing economic opportunities and the fiscal requirements of the state. The late medieval world was characterized by cycles. The population growth of the preceding two centuries was followed, between 1300 or 1350 and 1475, by famine, pestilence, and economic contraction; a second cycle of expansion, 1475-1600, was followed by a contraction during the seventeenth century. The crisis of the seventeenth century spread with differential results throughout Europe. England and the Netherlands were barely, if at all, affected, while France and especially Spain suffered extensively. England and the Netherlands had escaped the Malthusian crisis as output grew faster than population; France, while essential property rights which led to the Industrial not stagnating, was clearly falling relatively behind England; and Spain, previously the most powerful nation in Europe, fell into a state of absolute decline. The reason for the differential growth rates among the merging nation-states of Europe during the seventeenth century is to be found in the nature of the property rights that had developed in each. The type of property rights established was the outgrowth of the particular way each nation-state developed. The interplay between the government and its subjects with respect to the expansion of the state's right to tax was particularly important. We have seen that each emerging nation-state was desperate to obtain more revenue. It is the manner in which this was accomplished that was crucial to the state's economy, for in each case a modification of property rights was involved.


In the case of the two successful countries, the property rights established provided incentives to use factors of production more efficiently and directed resources into inventive and innovating activity. In the case of the less successful countries, the absolute level of taxation and the specific forms by which fiscal revenues were obtained resulted in personal incentives to do just the opposite. This section briefly surveys how such a divergence came about. Let us begin with France. The emergence of a nation-state in France began as a response to the devastation caused by the Hundred Years' War. English armies occupied parts of France, marauding bands of unpaid soldiers preyed upon the countryside, and the great nobles engaged in seemingly endless squabbles. France was a country in name only when Charles VII took the throne in 1422. He faced the awesome task of reestablishing law and order and of recovering more than half his claimed kingdom from the English and Burgundians. Such a task required a large and growing crown revenue. A representative body called the Estates General had been established to vote the crown special levies to meet emergencies. Charles VII repeatedly had to ask the Estates General for new revenues during the early years of his reign. The amounts that he could ask for and expect to receive were limited by the levels of taxation in competing English-occupied France and Burgundy. Charles VII used his fiscal revenues effectively, making an advantageous peace with the Burgunidans, pushing the English back, and clearing the countryside of outlaws. As a consequence of his increased power, he began to treat as his prerogative the regular leveling of taxes which had first been voted as special ones by the Estates General. The fervent desire of the Estates General to bring an end to chaos within France allowed the crown to seize the right to tax without the consent of the governed, a right that would outlast the emergency that created it. The ability to enforce property rights effectively, the removal or neutralizing of local rivals, and the acquisition of the unconstrained power to tax gave the French crown the exclusive right to grant or alter property rights. The rivalry between the emerging nation-states caused a continuing need for ever-more fiscal revenues. The crown sought revenue wherever it could be found. The trading of property rights for tax revenue was a fruitful short-run solution that had deleterious long-run consequences.


The kingdom of France as it emerged after the Hundred Years' War was not a national economy even if it was becoming a nation-state. The economy was composed of many regional and local economies. The crown was forced to tax each region specificallya task which required a large bureaucracy and the assistance of existing voluntary organizations. With the decline of economic activity in the fourteenth and fifteenth centuries, guilds had become a growing power in the towns of France. They attempted to protect the shrinking local markets from outside competition by employing monopoly restrictions. The crown found in these guilds an already developed infrastructure for raising fiscal revenue. The crown strengthened the guilds by guaranteeing a local monopoly in return for a fee. The crown in effect traded monopoly rights in local areas for an assured source of revenue. This fiscal system was expanded and elabourated under Colbert in the seventeenth century. Potential rivals within France (the nobility and the clergy) were neutralized by being excluded from taxation. A large administrative bureaucracy was created to control the fiscal system. Once such a bureaucracy was in place, it was relatively easy to use it to regulate the economy, as the system implemented by Colbert demonstrates. 7 The logic and consequences of this fiscal system can be readily interpreted in terms of the analytical framework of this study. With a reduction in the power of external and internal rivals the crown increased its ability to exact income from its constituents but was constrained by the costs of measuring wealth and income which were predominantly derived from local and regional production and trade. The system of trading property rights for revenue provided a solution but required an elabourate agency structure to monitor the system. The resultant bureaucracy not only siphoned off part of the resultant income but became an entrenched force in the French political structure. While revenue to the crown and bureaucracy increased, the consequence for productivity was to discourage economic growth. The French economy remained regional in nature and as a result the gains from a growing market were sacrificed. The benefits of competition were lost to numerous local monopolies that not only exploited their legal position but also discouraged innovation. The benefits of improving the efficiency of markets were in France sacrificed to the fiscal needs of the state. As a consequence, France did not escape the Malthusian crisis of the seventeenth century. Neither did Spain. Earlier in Spanish history when land was still abundant, the wool industry had developed. Sheepherders moved their flocks between the highlands in summer and the lowlands in winter. In 1273 the


local sheepherders guilds, called mestas, were consolidated by Alfonso X into a single guild called the Honorable Assembly of the Mesta of the Shepherds of Castile. The motive was merely one of the king's financial embarrassments ; he realized that it was much easier to assess taxes on livestock than on men and formed the mestas into an organization that would provide considerable sums to the monarchy. In exchange for these taxes the herders wrested a series of privileges from Alfonso X, the most important of which was the extension of supervision over all migratory flocks, including stray animals, in the whole kingdom of Castile. This supervisory function was gradually extended, in time, even to "permanent" sheep pastured in local mestas and to the "riberiegas," animals which were pastured along the river banks within the district of a particular town. (Vives (1969:25) In return for being the principal source of revenue of the crown to finance the war with the Moors, the mesta was given expanded privileges to move sheep back and forth across Spain; in consequence, the development of efficient property rights in land was thwarted for centuries. The Council of the Mesta by the sixteenth century had become a privileged institution, with protected routes across the kingdom, with its own itinerant legal staff and armed guards accompanying the annual flocks, with authority to override conflicting interests, to prevent the enclosure of fields in their path, empowered to engage in collective bargaining with the most powerful landowners, exempt from the payment of the alcabala and from municipal sales taxes. It had judicial powers and economic prerogatives which placed it outside the reach of other institutions. (Schwartzman 1951:237) It was under Ferdinand and Isabella that a nation-state emerged, after centuries of strife with the Moors and an almost ceaseless internal warfare among feudal lords. Weary of internal chaos, the representative body of Spain, the Castile Cortes, surrendered control over taxation to the crown. Between 1470 and 1540 tax revenues grew twenty-twofold and, as in France, the granting of monopoly rights by the state was a major source of income with similarif more damagingconsequences. With Charles V's ascension to the throne in 1516, the great era of Spanish hegemony over Europe began. It was initially a period of great prosperity with enormous increases in fiscal revenues from Aragon, Naples, and Milan, but particularly from the prosperous Low Countries, which in some years exceeded by tenfold revenues from all other sources, including treasure from the Indies. However, increased revenues were matched by increased expenditures as Charles V maintained the largest (and best-trained) army in Europe,

as well as a large navy. Charles V and his successor Philip II were required to spend more each year to maintain this empire. When revenues from the Netherlands stopped with the revolt of the Low Countries and the treasure from the New World declined, the need became especially critical. Guilds in the towns were granted exclusive local monopolies for new revenues. Property was confiscated, and noble status, which was exempt from taxation, was sold. Even such desperate expedients could not keep the crown from bankruptcy. Bankruptcies occurred in 1557, 1575, 1596, 1607, 1627, and 1647. As a consequence of monopoly, high rates of taxation, and confiscation, trade and commerce declined. The only areas safe from the crown were in the church, government services, or the nobility. The widely reported observation that the hidalgos had an aversion for trade and commerce and a preference for careers in the church, army, or government suggests that they were rational men. The structure of property rights that evolved in response to the fiscal policies of the government simply discouraged individuals from undertaking many productive activities and instead encouraged socially less-productive activities that were sheltered from the reach of the state. The experiences of France and Spain were similar in many ways. In both cases the initial desire on the part of the people for protection and the enforcement of basic property rights was so great that the state was able to acquire control over the power to tax. The need for ever-larger fiscal revenues caused both states essentially to trade property rights for fees. The property rights that were granted did not foster efficiency rather the opposite. Spain even more than France suffered the consequences during the seventeenth century. While France and Spain were suffering setbacks throughout the seventeenth century, the population and income per capita of the United Provinces experienced a sustained increase. As a consequence, the Dutch achieved a political importance all out of proportion to their small size. The success of the Dutch is all the more interesting because it was a country with relatively few resources. The Dutch overcame their lack of resources by developing an efficient economic organization relative to their larger rivals and by taking advantage of the expanding world trade associated with the discoveries and trade in the Indies and Americas.


The United Provinces had been the possession of the Duke of Burgundy until by inheritance they passed to the king of Spain. Their rulers, whether Burgundian or Hapsburg, actively discouraged the existence of monopoly privileges in the established cloth towns, such as Bruges and Ghent. While opposed by these towns, the rulers were supported by new centers of industry and commerce that were springing up, the result of a reviving international trade. The efficiency of these new areas was due in large part to the absence of guild and trade restrictions. As a consequence, the Low Countries in general and Antwerp in particular rose to unparalleled importance in industry and commerce. The fact that the rulers of this area discouraged restrictive practices and actively encouraged competition and the growth of trade and commerce may appear peculiar in the light of opposite developments in France and Spain. The answer to this puzzle lies in the nature of the major economic activities of the area. The Low Countries were the natural center of European trade. Their initial comparative advantage in the manufacture of cloth had led to the development of an international market place where a wide range of goods was traded. In 1463 Philip the Good had created a representative body, called the States General, which enacted laws and held the authority to vote taxes for the ruler. The make-up of this assembly favored legislation that fostered the growth of trade and commerce and the granting and protection of private property rights that made such growth possible. Furthermore, the Dutch were willing to pay for those rights by a series of small taxes on trade in general. The level of tax on any one item was always relatively low. The Hapsburgs went along with the desires of the assembly so long as sufficient revenues were approved. The prosperity of the Low Countries made this possible. The Low Countries became the jewel of the Hapsburg Empire, delivering to the Spanish king the majority of his revenues. Eventually, however, the ever-more exacting demands of Philip II led to the successful revolt of the seven northern provinces. During the rebellion Antwerp was sacked by the Spanish, and commercial leadership shifted to Amsterdam. The republic that emerged retained the structure of law and property rights that had led to the commercial eminence of the Dutch in the first place. The expansion of trade and commerce was the prime mover of the Dutch economy. The expansion of trade led to improvements in the efficiency with which Dutch markets operated. Markets, which develop to reduce transaction costs, are subject to economies of scale. As the volume of trade grows, the cost of making an

individual trade falls. First in Antwerp and then in Amsterdam, trades began to be made in continuous auction markets. Price lists reporting the current market transactions were circulated for all to read. Standard contracts and law courts dealing exclusively with trade were established. A thriving capital market developed alongside commerce and produced innovations of its own. Gradually the existing letter obligatory was transformed into a bill of exchange allowing merchants an expanded means of payment. The property rights that favored the growth of commerce also favored increased efficiency in agriculture. Dutch agriculture became more capital intensive, waste lands were drained and cleared, and fertilizer was used extensively. The rise of international markets led to regional specialization within the Low Countries. Vineyards disappeared and dairying expanded. New crops were introduced to service the urban commercial sector. The Dutch during the early modem era became the economic leaders of Europe. Their centrally located geographical position was combined with a government that encouraged an efficient economic organization by granting and protecting private property rights and discouraging restrictive practices. The development of the pre-eminent European market at Antwerp and then at Amsterdam made commerce the easiest sector for the state to tax. The numerous goods traded on the commercial exchanges came from all parts of Europe, and they came to the Low Countries because the markets there were competitive and efficient. The merchants of the Low Countries in recognition of this situation paid their rulers through the States General to establish and enforce private property rights and end restrictive practices. The Netherlands as a result became the first country to achieve sustained economic growth. Moreover, the United Provinces continued to prosper even after the center of the European economic stage shifted to England when this larger country, consciously or unconsciously, imitated the success of the Dutch. The success of the English economy in escaping the crisis of the seventeenth century is directly traceable to the system of private property rights that had evolved. The English government faced the same fiscal demands as did the other emerging nation-states of Europe (although the threat of invasion was less pressing). The size of France, the fiscal endowments of Spain, and the efficiency of economic organization of the Netherlands made these countries European powers. England was forced to contend with these emerging nation-states. She sought a middle ground, constructing a New World empire in defiance of

Spain and attempting to quarantine the Dutch on the one hand while instituting similar property rights and institutional arrangements on the other. By the year 1700 England had succeeded in replacing the Dutch as the most rapidly growing nation in the world. Yet two centuries earlier there was little indication that England would take the path that led to economic growth. As in France the emergence of a nation-state in England was a long and costly process. During the fourteenth and fifteenth centuries England suffered through the Hundred Years War and the War of the Roses with the attendant disorders, rebellions, and maladministration of justice that went along with the reduction of the powers of the barons. The Tudors, as a consequence, raised the English monarchy to its height. Henry VII, while still expected to live on his own, did manage to expand his revenues in ways now very familiar to usby selling grants and privileges. His successor, Henry VIII, managed the same way and added the confiscation of monastic lands. The process of consolidating the power of the king and at the same time increasing crown revenues left the Tudors decidedly unpopular with many, perhaps most, of the nobility and clergy. The Tudors relied for their support on the rising merchant class and on the House of Commons where, along with the landed gentry, this class was well-represented. The Tudors were as opportunistic in their dealings with property rights as any continental king. They sought revenues wherever they could be found without regard to economic efficiency. They cultivated, rather than suppressed, Parliament because it was expedient to do so. The Stuarts inherited what the Tudors had sown. The Stuarts viewed the government as their exclusive prerogative, while Parliament saw the crown as circumscribed by the common law. Caught up in the evermore expensive rivalry between nations, the Stuarts sought new sources of funds; Parliament proved intractable, and the scene was set for a conflict that the crown would lose. The right of Parliament to grant taxes was by this time of long standing, having emerged late in the fifteenth century out of the struggle for control of the wool trade. Wool, long the staple export in English international trade, was an obvious source of crown revenue. A tripartite struggle over the extent of the tax developed between the crown, the merchants exporting the wool, and Parliament, where the wool growers were wellrepresented. The outcome of this struggle was a compromise with something for everyone. The crown received the revenues from the tax, but Parliament won the right to set the level of the tax, and the

merchants achieved a monopoly of the trade. The wool monopoly eventually disappeared, and the wool tax became a minor source of government revenues; but Parliament's exclusive right to tax endured. Hence in England, the representative assembly retained its crucial powers to tax even though the issue was not finally settled until 1689. When challenged by the Stuarts, Parliament's authority survived. Thus, the crown's initial control over property rights for two centuries passed to a representative assembly composed of merchants and landed gentrya group whose interests were to halt restrictive practices and ensure private property rights and competition by constraining the powers of the king. Let us examine some of the reasons why a representative assembly thrived in England while it declined and disappeared in France and Spain. England's geographical position as an island insulated the country from its rivals. Foreign invasion was never as serious a threat as it was on the Continent, and so the central provision of protection was not as significant to the English as it was to the French. Internally there were often several contenders for the throne, the presence of whom limited the powers of the English king or queen. The nature of the economy led to a dependence upon an export staple, wool, which provided an easily measured and collected source of fiscal revenues. The collection of this tax did not require a large bureaucracy dependent upon the crown but could be farmed out to a voluntary organization of merchants. In short, little reason existed to concentrate authority in the crown over property rights and taxation, and still less reason existed to support a large central government. The rise of Parliament caused the nature of English property rights to diverge from the Continental pattern. The power to grant property rights increasingly fell to a group whose own interests were best served by private property and elimination of crown monopolies. Had such a shift not occurred, the economic history of England would have been much different. As we have seen, the economic policies of the Tudors were the same as those of the continental kings. Had they been able freely to trade monopolies and other restrictive rights for revenue, the outcome for economic efficiency also would have been similar. But in England the crown ran into effective opposition. The regulations enacted by the Tudors in an attempt to develop a comprehensive system of industrial regulation proved ineffective. These regulations, similar to the ones successfully enacted in France, were simply evaded. Finally, the crown's prerogative to create monopolies was itself ended by an act of Parliament.


It was in the context of the development of an efficient set of property rights that the growth in population during the sixteenth century occurred. In France and Spain a growing population encountered a restrictive set of property rights that made an efficient adjustment to the changing factor proportions impossible ; in England, as in the Netherlands, the opposite occurred. In England a growing population meant the revival of trade and commerce. Institutional arrangements evolved to further the gains from trade. The reduced cost of using the market to organize economic activity was the main source of productivity gains during this era. As the market expanded, commercial, industrial, and agricultural innovations familiar to the Dutch were adopted by the English. It was the reduction in transaction costs due to the establishment of private property rights and competition in trade and commerce that allowed England to escape the Malthusian check that both France and Spain suffered during the seventeenth century. It was in the context of the development of an efficient set of property rights that the growth in population during the sixteenth century occurred. In France and Spain a growing population encountered a restrictive set of property rights that made an efficient adjustment to the changing factor proportions impossible; in England, as in the Netherlands, the opposite occurred. In England a growing population meant the revival of trade and commerce. Institutional arrangements evolved to further the gains from trade. The reduced cost of using the market to organize economic activity was the main source of productivity gains during this era. As the market expanded, commercial, industrial, and agricultural innovations familiar to the Dutch were adopted by the English. It was the reduction in transaction costs due to the establishment of private property rights and competition in trade and commerce that allowed England to escape the Malthusian check that both France and Spain suffered during the seventeenth century.


Lecture Three The Second Economic Revolution

The Industrial Revolution Reconsidered The Industrial Revolution has been widely considered by modern economic historians as a watershed dividing human history. The eras that preceded it are regarded as a prelude to the rapid social and economic change unleashed in Great Britain beginning with the last half of the eighteenth century. It is easy to understand this preoccupation with the Industrial Revolution. The process of sustained economic growth that historians believe began between 1750 and 1830 radically altered the manner and standard of living of Western men and women. If an ancient Greek had been miraculously transported through time to the England of 1750, he or she would have found much that was familiar. The Greek alighting two centuries later, however, would discover what would appear to be an "unreal" world in which little would be recognizable or even understandable, so much had the state of mankind been altered in that relatively brief historical time span. What were the changes? They can be stated as follows: 1. Population growth occurred at an unprecedented rate. Demographers estimate that world population was approximately eight hundred million in 1750. It was in excess of four billion by 1980. (Coale 1974:43)


2. The Western world achieved a standard of living which had no counterpart in the past. The average citizen enjoyed luxuries which were not available to even the richest man of earlier societies. Moreover, the average length of life almost doubled in the developed countries. 3. In the Western world agriculture ceased to be the dominant economic activity; industry and service sectors of the economy replaced it in significance. This change was made possible by the tremendous increase in agricultural productivity. In the United States the 5 percent of the population engaged in agriculture could feed the other 95 percent and still have enough left over to make the United States a world leader in the export of agricultural goods. In colonial times these percentages were reversed. 4. In consequence, the Western world became an urban society with all that term implies concerning increasing specialization, division of labour, interdependence, and inevitable externalities. 5. Continuous technological change became the norm. New sources of energy were harnassed to do men's work, and new materials and substances constantly created to satisfy human wants. While these developments are not in question, how these changes occurred, when they began, and what we mean by the term Industrial Revolution have been the subject of a substantial debate. It is the argument of this chapter that the Industrial Revolution was acceleration in the rate of innovation, the origins of which go back well before the traditional chronology (1750-1830). It was better specified property rights (not the same thing as laissez faire) which improved factor and product markets as described in the previous chapter. The resultant increasing market size induced greater specialization and division of labour, which increased transaction costs. Organizational changes were devised to reduce these transaction costs and had the consequence of radically lowering the cost of innovating at the same time that the increasing market size and better specified property rights over inventions were raising the rate of return on innovating. It was this set of developments which paved the way for the real revolution in technologythe Second Economic Revolutionwhich was the wedding of science and technology. It was this later development, in the second half of the nineteenth century, which produced the elastic supply curve of new knowledge and the unprecedented developments briefly summarized above. In order to set this story in perspective we must first review the traditional story of the Industrial Revolution and explore the nature of technological change; then we shall be in a position to examine the interrelated


process of organizational change and technological development which made up the Industrial Revolution as it is defined in this chapter. Historians agree that these changes in organization and technology began in Britain during the middle decades of the eighteenth century. Over the next hundred years, the population of Britain tripled; some towns grew into big cities; the average income of an Englishman more than doubled; agriculture fell from roughly one-half of the nation's output to under one-fifth; and manufacturing and services expanded to assume the farmer's former role. In the process the manufacture of textiles and iron was undertaken in steam-powered factories of greatly improved efficiency. This combination of events has appeared more startling to the historian than it did to contemporaries. Adam Smith, writing the most important book on economics in the middle of these occurrences, did not mention them. Further, he predicted that his nation of merchants, farmers, and handcraftsmen would continue to increase its wealth at a moderate pace by further specialization and trade; in fact, national income rose at an unprecedented rate in the next eight decades. Smith was in good company. David Ricardo suggested that rising rents would absorb any increase in productivity. In the decades immediately after Ricardo wrote, rents as a share of a rising national income fell by half. Thomas Malthus predicted that the enormous increase in population would keep wages from rising for long times above subsistence; and Karl Marx, writing at the end of the era, predicted that the lot of the worker would not improve. Instead, the share of labour income in national income rose markedly, and real wages increased dramatically. The classical economists simply failed to understand the events that were occurring around them.
It is not that all contemporaries were unaware of change occurring. Some were aware, as evidenced in Frederick Engel's Conditions of the Working Class in England, published in 1844. But the term "Industrial Revolution" was not popularized until Arnold Toynbee employed it in a series of lectures delivered in 1880-1881, five decades after the date customarily accepted as the end of the transformation to which it refers.

Why did most classical economists miss the Industrial Revolution while living through it? Perhaps because the significance of this century of change lies more in the analyses of historians than in actuality. Population, for instance, was growing prior to the century of Industrial Revolution; large cities existed before the industrial towns grew up; and the income of Englishmen increased prior to the birth of Adam Smith as

well as during his life and the lives of other classical economists. During this period, there were more and more agricultural workers in total; agriculture would not have appeared a declining industry to a contemporary observer. Large factories had existed prior to the Industrial Revolution, and steam engines had been employed in coal mines for decades before James Watt's steam engine. The fabled Watt engine was simply an improvement over the previously existed Newcomen engines. So perhaps it is not surprising that the classical economists missed the Industrial Revolution: for what was new was the magnitude of the changes, not their revolutionary character. While the average Briton marveled at the wonders of the Crystal Palace Exhibition of 1851, he would have found the transformation of the next 125 years to be simply unbelievable. And while the classic era of the Industrial Revolution was certainly an acceleration in economic change, the revolutionary transformation I described at the beginning of this chapter is predominantly a happening of the past 150 years. It was after the middle of the nineteenth century that everyday life was transformed in such a fashion that our mythical time travelling Greek would no longer recognize earth as a familiar place. The enormous growth in population, for instance, which began prior to the Industrial Revolution, had been transformed into a world population explosion by the middle of the twentieth century. The cause of this modern explosion has been declining mortality from infectious disease as a result of improvement in nutrition and in the environment. Similarly, an urban world is a development that has occurred during the last hundred years and is associated not so much with the industrial city as with a dramatic decline in the costs of transportation, the increase in agricultural productivity, and the agglomerative benefits of central places for economic activity. Nor does the industrial sector dominate the employment of the developed nation's labour force; services, not manufacturing, employ the vast majority of modern workers. Further, the rate of economic growth during the Industrial Revolution was not particularly impressive when compared with later eras, especially the rates achieved by more recently developing nations. In short, our stereotyped views of the past two centuries are in need of revision. The period that we have come to call the Industrial Revolution was not the radical break with the past that we sometimes believe it to have been. Instead, as I shall show below, it was the evolutionary culmination of a series of prior events. The real revolution occurred much later, in the last half of the nineteenth century. The technological events of the Industrial Revolution period were largely independent of developments in basic science. 1 The technological events of the recent past, on the other hand, all have required major breakthroughs in science. Learning by doing can explain the technology developed during the Industrial Revolution, but only

scientific experimentation can account for the development of nuclear power or the petrochemical industry. The great technological strides of the last hundred years depended upon the scientific revolution; and the combination of science and technology produced the Second Economic Revolution. To understand what occurred during the Industrial Revolution it is necessary to explore the process of technological change. Most of the existing literature, concentrating on the great inventions such as Watt's steam engine, Arkwright's water frame, or Crompton's mule, ignores the day-to-day progress in technological change which produces the sustained productivity increase in economic activity; nor is it integrated into a transaction cost framework that would permit us to understand the complex reciprocal relationship between economic organization and technical change. From initial conceptualization to establishment of technical feasibilitythat is, from invention to commercial feasibility, innovation to subsequent diffusionis often a long and intricate process. 2 Consider, for example, the development of the steamship. Watt's steam engine was an eighteenth-century invention. Its application to water transportation occurs at the beginning of the nineteenth century. Yet we do not observe that the steamship replaced the sailing ship until the end of the nineteenth century. As late as 1880 most of the world's bulk cargo was still being carried by sailing ships. Thus, one of the most dramatic inventions took almost a hundred years to replace its predecessor. The transformation took place only gradually because successive modifications and improvements in the reciprocating engines were required to reduce fuel consumption (and thereby increase carrying capacity) and, equally, continued improvements in the sailing ship which increased speed and reduced the size of crews allowed the sailing ship to keep pace with the steamship for most of the nineteenth century. The process of technology improvement depends upon not only the day-to-day improvements in a new technique but also the developing human skills using the new technique. The process of learning by doing must also accompany technical change. In addition, technical changes in one area may outrun technical knowledge in other fields. We are familiar with the fact that Watt's steam engine could not be efficiently produced until Wilkinson's boring machine enabled Watts to bore precision cylinders. Even more famous is the fate of the celebrated notebooks of Leonardo da Vinci: a vast array of original ideas could not be


implemented with the companion technologies of the time. Indeed, the relationship between the development of new techniques and the development of new knowledge is a major issue. Innovations draw upon the stock of existing fundamental knowledge which men possess. That knowledge is today embodied in such formal scientific disciplines as physics, chemistry, and biology. These disciplines are of recent origin, beginning in the late Renaissance and early modem eras. It is not that man's fundamental knowledge of his environment had not expanded since neolithic times: I have discussed a number of these advances in earlier chapters. But these developments did not depend upon structured formal disciplines. We must make this distinction, because the incentives to expand pure knowledge are not necessarily the same as those that lead to practical innovation. Historically, there has always been a gap between pure scientific knowledge and the techniques that man has utilized; indeed, until very modern times the systematic development of new knowledge was not necessary for man to make enormous progress. It is only in the last one hundred years that advances in basic knowledge are necessary to continued technological change. What determines the rate of development of new technology and of pure scientific knowledge? In the case of technological change, the social rate of return from developing new techniques had probably always been high; but we would expect that until the means to raise the private rate of return on developing new techniques was devised, there would be slow progress in producing new techniques. And, in fact, we have observed in the previous historical chapters of this book that throughout man's past he has continually developed new techniques, but the pace has been slow and intermittent. The primary reason has been that the incentives for developing new techniques have occurred only sporadically. Typically, innovations could be copied at no cost by others and without any reward to the inventor or innovator. The failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change. It is only with the Statute of Monopolies in 1624 that Britain developed a patent law. It is true that prior to that time prizes had sometimes been awarded for the development of new techniques and at times governments had subsidized men searching for new techniques. Prince Henry the Navigator, for example, called together a group of mathematicians to search for a new method of determining latitude. Governments also have often subsidized the development of military technology and provided a ready

market for new weapons. But a systematic set of incentives to encourage technological change and raise the private rate of return on innovation closer to the social rate of return wasestablished only with the patent system. It would of course be misleading to put too much stress on a single law. Eli Whitney spent a good part of his life attempting to protect his patent for the cotton gin. More important than patent law per se is the development and enforcement of a body of impersonal law protecting and enforcing contracts in which property rights are specified. Let me restate the argument in a more rigorous fashion. Rules designed to constrain behavior with respect to an economic return to ideas face basic difficulties associated with the measurement of the idea itself. Trade mark, copyright, trade secret, and patent laws are all designed to provide some degree of exclusive rights to the inventor and innovator and have generated a controversy, spanning more than a century, over the value of patents. 3 But much of the controversy misses the point. The inability precisely to define and delineate an idea means that surrogate rules will be required; and such rules, embodying imperfect measurement and some degree of monopoly restriction, will result in real revenue losses. But as compared to no protection at all, the value of some property rights over invention is not an issue. Idle curiosity or learning by doing will produce some technological change of the type we have observed throughout human history. But the sustained devotion of effort to improve technologyas we observe in the modern world is stimulated only by raising the private rate of return. In the absence of property rights over innovation, the pace of technological change was most fundamentally influenced by the size of markets. Other things equal, the private return upon innovation rose with larger markets. An increase in the rate of technological change in the past was associated with eras of economic expansion. In summary, economic historians of the Industrial Revolution have concentrated upon technological change as the main dynamic factor of the period. Generally, however, they have failed to ask what caused the rate of technological change to increase during this period: often it would appear that in arguing the causes of technological progress they assume that technological progress was costless or was spontaneously generated. But in sum, an increase in the rate of technological progress will result from either an increase in the size of the market or an increase in the inventor's ability to capture a larger share of the benefits created by his invention.


The most convincing explanation for the Industrial Revolution as an acceleration in the rate of innovation is one drawn from straightforward neoclassical theory in which a combination of better specified and enforced property rights and increasingly efficient and expanding markets directed resources into new channels. Its origins go back in time well before the traditional chronology. Let us return to the shipping illustration used at the beginning of this chapter. The competition of steam and sail in the nineteenth century really is the middle of the story. Productivity increase as a result of declining transaction costs had been going on since at least 1600, when the Dutch flute (a specialized merchant cargo ship) was used in the Baltic trade and subsequently adopted on other routes. The declining transaction costs a result of reduced piracy, increases in size of ships, growing trade, and reduced turnaround timeled to substantial productivity growth beginning 150 years (at least) before the Industrial Revolution; and they, more than technological change, were responsible for productivity increases. What happened in ocean shipping was paralleled by equal transformation in other product and factor markets. There certainly is nothing new in this argument. It was a central part of Toynbee's celebrated lectures published in 1884. He wrote, "The essence of the industrial revolution is the substitution of competition for the medieval regulations which had previously controlled the production and distribution of wealth. The same theme is picked up by Phyllis Deane and R. M. Hartwell. 6 What has been missing in the argument, however, is that while laissez faire is identified as the key to the development, the term "laissez faire" not only has misleading ideological overtones but at least in part misses the point. It is true that the decline in mercantilist restrictions including repeal or reform of the Statute of Artificers, poor laws, acts of settlement, usury laws, navigation acts, and so forth is part of the story. Particularly significant to the developing of more efficient markets, however, is the better specification and enforcement of property rights over goods and services; and in many cases much more was involved than simply removing restrictions on the mobility of capital and labourimportant as those changes were. Private and parliamentary enclosures in agriculture, the Statute of Monopolies establishing a patent law, and the immense development of a body of common law to better specify and enforce contracts also are part of the story. Laissez faire implies an absence of restraints; efficient markets imply well-specified and enforced property rights, which means the creation of a set of restraints encouraging productivity growth. The removal of restrictions widening the gap between private and social returns frequently required positive action by governmenta government which we have seen was, as a result of the English revolution, oriented toward such developments. Indeed, a part of the process was the wholesale evasion of restrictions which remained on the booksand became a

dead letter through lack of enforcement; such a development could only occur with the tacit approval of Parliament. The Industrial Revolution, as I perceive it, was initiated by increasing size of markets, which resulted in pressures to replace medieval and crown restrictions circumscribing entrepreneurs with better specified common laws. The growing size of the market also induced changes in organization, away from vertical integration as exemplified in home and handicraft production to specialization. With specialization came the increasing transaction costs of measuring the inputs and outputs, as described in chapter 4. The resultant increased supervision and central monitoring of inputs to improve quality radically lowered the cost of devising new techniques. It is in the evolution of economic organization of manufacturing that we can best observe the interplay between transaction costs and technical change which characterized the Industrial Revolution. From handicraft to putting-out system to the factory system spans more than three centuries; the key to explaining the transformation is growth in the size of the market and problems of quality control (that is, measurement of the characteristics of the good). In the course of the transformation in economic organization wage labour developed, the metering of inputs and outputs sharply changed, and the incentives for technical change increased. The putting-out system which developed in Tudor and Stuart England was a response to the expanding market demand of those centuries. It was characterized by raw materials being put out to geographically spread locations and wages (predominantly piece-rate) being paid for each step in the manufacturing process from raw material to finished good. In contrast to handicraft manufacturing, putting out was marked by growing separation of tasksa classic example of Smithian growth in the size of the market inducing specialization. While its initial main focus was in textiles, it gradually spread to newer branches of textiles, leather goods, small metal wares. Clapham maintained that this system still predominated manufacturing in Britain as late as the 1820s. While escape from the urban guilds and a cheap labour supply as a byproduct of part-time agriculture explain the dispersion of manufacturing, they do not explain the form that it took. Why not simply a series of market transactions rather than a central merchant-manufacturer employing wage labour? The most convincing answer is that the costs to the merchant of ensuring quality control were less by the latter form of organization than by the former. A major argument of chapter 4 is that where quality was costly to measure, hierarchical organization would replace market transactions; the putting-out

system was in effect a "primitive firm" in which the merchant-manufacturer attempted to enforce constant quality standards at each step in the manufacturing process. By retaining ownership of the materials throughout the manufacturing process, the merchant-manufacturer was able to exercise this quality control at a cost lower than the cost of simply selling and buying at successive stages of the production process. The gradual move toward central workshops was a further step in efforts at greater quality control and presaged the development of the factory system that was in effect the direct supervision of quality throughout the production process. The gradual move to central work places cannot be explained by a central power source. Space in factories could be and was rented out to individual entrepreneurs before as well as after the development of central power sources. Rather, the impetus for the factory system was monitoring of the production process by a supervisor. With the development of direct supervision and monitoring, the costs of devising technical improvements are reduced because the role of the monitor is to "rationalize" each step in the production and this process consists of devising means to measure the output of each input unit and of creating more productive combinations. Team production played no significant role in the putting-out system; but once the workers were gathered in a central place, the productivity gains from team production were evident. With the better measurement of individual contributions came reductions in the cost of devising machines to replace men's and women's hands. The Industrial Revolution came about as a result of organizational changes to improve the monitoring of workers. This factory discipline was itself a step in quality control but had the additional consequence of suggesting to entrepreneurs new productive combinations and specifically machines to replace human hands in the production process. The emphasis in much of the literature on the Industrial Revolution goes the wrong waythat is, from technological change to the factory system; rather than from central workplace, to supervision, to greater specialization, to better measurement of input contributions, to technical change. Transaction costs and technology are of course inextricably intertwined: it was increased specialization which induced organizational innovations, which induced the technical change, which in turn required further organizational innovation to realize the potential of the new technology.


In terms of the theoretical framework of this study, one additional point must be raised. In chapter 4 I argued that the measurement costs of constraining behavior in the absence of effective ideological constraints would be so high as to make the new organizational forms non-viable. Both the political and the economic changes described above created impersonal factor and product markets and broke down old ideological loyalties. Factory discipline (that is, rules and penalties to enforce behavior) had to be supplemented by investment in legitimating the new organizational forms. The Industrial Revolution was characterized by sustained efforts to develop new social and ethical norms. Peter Mathias described this effort as follows: "A set of social norms, embodied in emergent social institutions, did develop in response to these new needs, however imperfectly they were practised. The virtues of hard workthe gospel of work preached by Samuel Smilessaving, thrift, sobriety became the new social imperatives dinned into the heads of the working classes by their social betters by every known means of communication. They were enshrined in nonconformist and evangelical doctrine. In Sunday schools, pulpits, the mechanics' institutes after 1824 and all forms of literature in the hands of middle-class publicists were preached the golden rules as they attempted to diffuse the bourgeois virtues down the social scale" (1969:208). I shall have more to say about this issue in examining the implications of the Second Economic Revolution.

The Second Economic Revolution and Its Consequences The term "economic revolution" is intended to convey two distinct changes in an economic system: a fundamental change in the productive potential of the society as a consequence of a basic change in the stock of knowledge, and a consequent, equally basic, change in organization to realize that productive potential. Both economic revolutions deserve that title because they altered the slope of the long-run supply curve of output so as to permit continuing population growth without the dismal consequences of the classical economic model. The First Economic Revolution created agriculture and "civilization"; the Second created an elastic supply curve of new knowledge which built economic growth into the system. Both entailed substantial institutional reorganization. The organizational crisis of the modern world can only be understood as a part of the Second Economic Revolution. The Second Economic Revolution made the underlying assumption of neoclassical economics realizable. That optimistic assumption was that new knowledge could be produced at constant cost and that substitution at all margins made possible persistent and sustained growth. The realization was possible only with the wedding of science and technology. The Industrial Revolution was a part of the evolutionary

process that led to the marriage, and indeed we may get bogged down in semantics and technical trivialities if we wish to date precisely the exchange of the marriage vows. The important point is that the Secondas indeed the FirstEconomic Revolution was the inflection change in the supply curve of new knowledge, rather than the clustering of a set of innovations or any of the other characteristics used to describe the Industrial Revolution. There is also nothing automatic about a society's ability to realize this productive potential since its realization involves a basic restructuring of property rights. The internal and international turmoil of the past century provides us with abundant evidence of the chaos that has resulted from the tension between the technology of the Second Economic Revolution and political-economic organization. In this section we examine how the Second Economic Revolution came about and what its implications have been for economic organization and then to explore the social, political, and ideological reactions which characterize our modem world. The steps in the development of the Second Economic Revolution were, first, the development of the scientific disciplines. Currently there is no convincing explanation for the early development of scientific knowledge. It surely was related to a decline in the monopoly the church had possessed over ideas about the relationship of man to his environment. The Protestant Reformation was a symptom of such a change in perspective. Galileo, Copernicus, Kepler, and, particularly, Newton were leading a revolution in man's view of the world around him. Who sponsored such people? What kinds of incentives existed for the development of new knowledge? During the Renaissance it was fashionable to support scientists; but the systematic demand for scientific knowledge is a modern phenomenon and is surely related to a growing perception of its usefulness in solving practical problems. A distinctive feature of its institutionalization in universities and research organizations is the recognition of social demands on a broad front. Advances in scientific knowledge must proceed along a wide variety of lines so that our ability to employ developments in one area is not impeded by bottlenecks in another. A second step, emphasized by A. E. Musson, E. Robinson, and others, concerns the intellectual interchange
between scientists and inventors during the Industrial Revolution. 1 This interchange contributed to the growing consciousness of the high social (and potential private) rate of return from increase in basic knowledge; a consequence was growing public and private expenditure on basic research. An awareness of the growing relevance of science to invention led to increasing investment in human capital. Germany's pre-eminent latenineteenth century role in the chemical industry was in good part due to the early training of large numbers of chemists. 46

Schmoockler (1957) shows a dramatic rise between 1900 and 1950 in the ratio between patents taken out by state residents and scientists and engineers in the state. The most crucial feature of this evolution was that public and private organizations came to appreciate that the underlying key to success was basic and exploratory research. The result of this development is what has come to be called the invention industry. 2

Still a third important step is the evolution of property rights which raised the private rate of return closer to the social rate. In earlier chapters I have emphasized the importance not only of the development in patent laws but also of the growth of complementary law (such as that over trade secrets) aimed at raising this private rate of return. The development of intellectual property rights posed complex issues in the measurement of the dimensions of ideas as well as complex problems over the trade-off between raising the private rate of return on innovation and monopoly-restraining of trade as a result of the grant of exclusive rights over time. While the private rate of return has been raised by better specified property rights over invention and innovation, a good part of the basic research has been financed by government and takes place in universitiesreflecting the growing public awareness of the high social rate of return to scientific advances. The technological breakthroughs that have characterized the Second Economic Revolution are the development of automated machinery to replace man's hands and mind in production; the creation of new sources of energy; and the fundamental transformation of matter. The first of these developments is a continuation from the Industrial Revolution and is in part a simple result of increasing specialization and division of labour, which make the objective of devising a machine to replace a simple task easier for the inventors. Eli Whitney's celebrated demonstration of interchangeable parts in the manufacture of muskets and Henry Ford's equally celebrated assembly line for the manufacture of the Model T were classic examples. The high-speed computer is the most revolutionary modem example. Its most striking characteristic is continuous high-speed throughput, to use Alfred Chandler's (1977) favorite term. It is a response to large-scale markets that induce high-volume output. The second also has its beginnings in the Industrial Revolution, with Watt's improved steam engine; but in the ensuing two centuries this improvement has been overshadowed by the development of the internal combustion engine, sources of electricity, and nuclear power. The result has been a per capita use of energy far exceeding that of the past, when animal and human muscle were the chief source of energy. The third, the transformation of matter, is also not new. The Bronze Age and the Iron Age were chronological periods named by historians and anthropologists after the technological breakthroughs that

transformed copper and tin and iron ore into useable materials. The development of bleaching was an important chemical breakthrough of the Industrial Revolution. But the modern developments in the sciences of chemistry, physics, and genetics are a quantum jump in man's ability to transform matter into useable materials and energy. For example, coal and petroleum have been transformed into thousands of goods far removed in appearance and composition from the original material. The important underlying basis is the growing scientific knowledge about the fundamental sources of matter which permits their recombination into other materials, energy, and new genetic combinations. Pasteur, Einstein, Von Newmann, and Crick and Watson have become familiar names in the extraordinary scientific revolution of the past century. It is this development that has changed the shape of the supply curve of basic knowledge and made possible sustained economic growth in the face of the unprecedented explosion of population in the past century. The technology of the Second Economic Revolution was characterized by significant indivisibilities in the production process with large fixed-capital investment. The realization of the potential scale economies required large-volume continuous production and distribution. Ever since J. M. Clark's The Economics of Overhead Costs (1923) and Allyn Young's classic article "Increasing Returns and Economic Progress" (1928) economists have discussed the economic implications of scale economies. Economic historians have provided detailed descriptions of mechanization in individual industries, and recently Chandler provided the following summary: The rise of modem mass production required fundamental changes in the technology and organization of the processes of production. The basic organizational innovations were responses to the need to coordinate and control the high-volume throughput. Increases in productivity and decreases in unit costs (often identified with economies of scale) resulted far more from the increases in the volume and velocity of throughput than from a growth in the size of the factory or plant. Such economies came more from the ability to integrate and coordinate the flow of materials through the plant than from greater specialization and subdivision of the work within the plant. (1977:281) Chandler goes on to discuss the integration of mass production with mass distribution as follows: As the new mass production industries became capital-intensive and management-intensive, the resulting increase in fixed costs and the desire to keep their machinery or workers and managerial staff fully employed increased pressures on the owners and managers to control their supplies of raw and

semifinished materials and to take over their own marketing and distribution. The changing ratio of capital to labour and of managers to labour thus helped to create pressures to integrate within a single industrial enterprise the process of mass distribution with those of mass production. By 1900 in many mass production industries the factory, works, or plant had become part of a much larger enterprise. In labourintensive, low-level technology industries most enterprises still operated little more than a factory or two. But in those industries using more complex, high-volume, capital intensive technology, enterprises had become multifunctional as well as multiunit. They had moved into marketing of the finished goods and the purchasing and often the production of raw and semi finished materials. These enterprises did more than coordinate the flow of goods through the processes of production. They administered the flow from the suppliers of raw materials through all the processes of production and distribution to the retailer or ultimate consumer. (1977:282-83) The managerial revolution in American business, to use the subtitle of Chandler's book, was an effort to realize the productive potential of the new technology. Chandler has persuasively described one part of that effort, but part of the story is missing; a major part of that managerial revolution was the attempt to devise a set of rules and compliance procedures to reduce the transaction costs attendant on the new technology. This potential required both occupational and territorial specialization and division of labour on an unprecedented scale. The greater the specialization and division of labour, the greater the number of exchanges in the production process. Individual home production is complete vertical integration, and, as noted in chapter 4, there are no measurement costs; but the price is the productivity gains from specialization. The Second Economic Revolution resulted in just the obverse. Specialization and division of labour resulted in an exponential multiplication of exchange, with immense gains in productivity; the price, however, which is the transaction costs arising from these exchanges, is also great. Obviously the productivity gains from specialization have exceeded the increasing transaction costs in the process; hence the quantum leap in living standards that makes the modern Western world unique in history. But the transaction costs associated with this development use up immense amounts of resources. While historical statistics are not organized to specifically mirror specialization and division of labour, the changing proportion of blue collar (production) workers to white collar workers gives some indication. Between 1900 and 1970 the United States labour force grew from 29 million to 80 million. Manual workers

increased from 10 million to 29 million, while white collar workers increased from 5 million to 38 million (Historical Statistics Series D 182, 183, 189). But that is not all. If the coordination and integration of the production process involves an ever-growing proportion of the labour force within manufacturing firms, the Second Economic Revolution equally fostered a growing number of firms specializing in transactions from producer to consumer. Between 1860 and 1960 employment in trade grew twice as fast as the labour force. A specialized monitoring profession, accounting and auditing, grew from 2300 in 1900 to 712,000 in 1970 (Historical Statistics Series D235). During the same period employment in government grew from 1 million to 12.5 million (Historical Statistics Series D131). Chandler glosses over the transaction cost problems associated with the new technology. How does one devise and measure exchange relationships in "high-speed throughput"? While Chandler implies that vertical integration was the answer, it should be clear both that measurement is still necessary at each step in the production process, and that one has the additional dilemma of monitoring the inputs. The problems of quality control at each step in the lengthening production chain and the growing problems of labour discipline and bureaucracy were the accompaniment to this radical change in production. Much of the technology was designed to reduce the attendant transaction costs by substituting capital for labour, by reducing the degrees of freedom of the worker in the production process, or by automatically measuring the quality of the intermediate goods. 4 The underlying problems were, first, the problem of measuring inputs and outputs so that one could ascertain the contribution of individual factors and measure the output both at successive stages of production and finally. For inputs there was no agreed-upon measure of the contribution of an individual input ; equally there was room for conflict over the consequent payment to factors. For output not only were there residual unpriced outputs (waste, pollutants) but also there were complicated costs of specifying the desired properties of the goods or services produced at each state in the production process. The second problem was that the large fixed-capital investment, which had long life and low alternative value (scrap value), required exchange relationships and contractual agreements extending over long periods of time. During these periods there were uncertainty about prices and costs and abundant possibilities for opportunistic behavior on the part of one or the other party to the exchange.


In consequence there were, first, increasing resource costs of measuring the quality of output. While the production potential resulted in a quantum leap in the per capita consumption of goods and services it produced a comparable growth in measuring the quality of the goods and services produced. Sorting, grading, labeling, trade marks, warranties, and licensing are all costly devices to measure the characteristics of goods and services. Yet despite the resources devoted to measuring the "quality" of goods and services the dissipation of income is evident all around us in the difficulties in measuring automobile repairs, in evaluating the safety characteristics of products or the quality of medical services, or in measuring educational output. We have consumer testing services such as Consumer Reports and trade associations and Better Business Bureaus to police quality. A major political consequence has been the demand for government intervention to provide quality standards. Second, while team production permitted economies of scale it did so at the cost of increased shirking. The "discipline" of the factory system is nothing more than a response to the control problem of shirking in team production. From the perspective of the employer the discipline consisted of rules, regulations, incentives, and punishments. Innovations such as Taylorism were methods of measuring individual performance. From the point of view of the worker they were inhuman devices to foster speed-ups and exploitation. Since there was no agreed-upon measure of output that constituted contract performance, both were right. Additionally, the potential gains from opportunistic behavior were equally enhanced and led to strategic behavior both within the firm (in labour-employer relations, for example) and in contractual behavior between firms. Everywhere in product and factor markets the gains from withholding services or altering the terms of agreement at strategic points offered large potential gains. Vertical integration, horizontal integration, bonding of the participants were efforts to limit such activity; and an increasing appeal to government to act as a third party to contracts underlay a great deal of the growth of regulation. 6 Further, the development of large-scale organization produced the familiar problems of bureaucracy. If the multiplication of rules and regulations inside large organizations is a device to reduce shirking and opportunism, the deadweight losses associated with bureaucracy are so familiar that they require no further elabouration here. Finally there were the external effects: the unpriced benefits and costs that were a consequence of employing this technology are an equally familiar story. The growth of the business firm was a method of

internalizing unpriced benefits. 7 The unpriced costs are reflected in the modern environmental crisis in which the problems of measuring and reducing them have both altered voluntary organization and induced the growth of government intervention in the twentieth century. William Baumol's Welfare Economics and a Theory of the State (1952) was an early attempt to relate the growth of government intervention to external costs. The burgeoning modem literature on industrial organization offers ample evidence of organizational innovation to reduce transaction costs. But the growth of specialization and division of labour was both occupational and territorial. As the new technology lowered transportation and information costs, it led to regional, national, and world-wide specialization which produced markets sensitive to world-wide supply and demand conditions, transmitted changes in economic conditions throughout the world, and encouraged opportunism on an international scale. The result was to raise the rate of return on using government to protect groups from market instability and international opportunism. Political instability as well as economic interdependence was the price of specialization. The Second Economic Revolution ushered in an era of unequaled prosperity in the Western world. It also induced a massive reaction against market economies and market forms of resources allocation. The labour movements that came into existence were predominantly socialist and communist in England and Europe and played a major role in the emergence of socialist and communist political systems and political parties in these countries; peasant and farm movements if not actively hostile to market economies have at the least spearheaded successful movements to protect themselves from market competition; Third-World countries have shown little enthusiasm for market forms of resource allocation; and even in countries that have remained predominantly market economies the growth of government has reflected a radical alteration in the control of those political systems and consequent change in the structure of economic organization. What has made the market system tend to self destruct ? It is clear that control of the state was, for a brief period of time, in the hands of groups whose self-interest promoted the growth of market forms of resource allocation. That is the story of the two preceding chapters. It is equally clear that control of the state passed into the hands of groups that favored the elimination, or at the very least modification, of market forms of resource allocation. Two hypotheses are advanced below to

account for this transformation; both have their origins in the specialization and division of labour which as we have seen was an integral consequence of the Second Economic Revolution. One is that market competition induced massive alienation because the particular characteristics of the exchange relationship that emerged energized groups to overcome the free rider problem and gain control (or at least participate in control) of the state; the other, that market competition induced interest groups to shield themselves from its consequences by using the state to alter property rights and hence reduce competitive pressures. The first hypothesis stems primarily from the occupational, the second from the geographic, division of labour both part of the Second Economic Revolution. Let us examine each in turn. It was Karl Polanyi who, in The Great Transformation (1957), first made a forceful case that a market society would tend to self-destruct. Polanyi argued that the market-based society which dominated the Western world in the nineteenth century was inherently unstable because the commoditization of land, labour, and money (via the International Gold Standard) destroyed the social fabric of society. It is worth quoting his colorful language to get the flavor of his criticism of the market economy. To allow the market mechanism to be sole director of the fate of human beings and their natural environment, indeed, even of the amount and use of purchasing power, would result in the demolition of society. For the alleged commodity "labour power" cannot be shoved about, used indiscriminately, or even left unused, without affecting also the human individual who happened to be the bearer of this peculiar commodity. In disposing of a man's labour power the system would, incidentally, dispose of the physical, psychological, and moral entity "man" attached to that tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime and starvation. Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed. Finally, the market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts in primitive society. Undoubtedly, labour, land, and money markets are essential to a market economy. But no society could stand the effects of such a system of crude fictions even for the shortest stretch of time unless its human and natural substance as well as its business organization was protected against the ravages of this satanic mill. (1957:73)


Polanyi's criticism was in the tradition of Durkheim and Weber; but it was Polanyi who most vividly described the disintegrating effects of the "unregulated market" in terms of the social instability it created. His analysis, in contrast to his colorful description, is vague, imprecise, and at times simply non existent. He emphasizes that it was the state that created the impersonal markets; but nowhere does he provide a theory of the state which accounts either for its creation of the body of property rights or for the way that groups influenced the state to bring about the demise of the "self-regulating market"; he graphically describes the destruction of the social fabric of society without providing a theory of ideology; and he continually identifies non-market forms of resource allocation with social, that is, non-economic, objectives when in fact they frequently stemmed from efforts to reduce transaction costs as described in the previous section of this chapter. But Polanyi's basic intuition was correct and he provides the clues with which to develop a theoretical reconstruction. We can begin by agreeing with Polanyi that it was change in control of the state that led to the breakdown of the restrictions on factor and product markets as described in the previous chapter. The creation of large-scale impersonal factor and product markets was an essential prerequisite to realizing the productive potential of the Second Economic Revolution. But the price paid was massive ideological alienation The stability of any society requires an ideological superstructure to legitimize the rules of the game. The personalized exchange with reference to transaction costs minimized the gains from shirking and opportunism because of both repeated dealings and personal contact. Moreover the exchange process was overlaid with a social ethic of the justice of the rules and property rights. Reciprocity certainly reinforced these codes of behavior, but it would be a mistake to conceive of the "consensus" ideology that overlaid personalized exchange as pure reciprocity. It was in effect a way of life and under those conditions formal rules of exchange and monitoring would be minimal. In contrast the exchange process of impersonal markets first of all fostered diverse perceptions of reality which in turn led to differing and conflicting ideologies. The experiences of the labourer were those in common with other labourers increasingly cut off from the personal ties that had produced a common set of values. Informal agreements had to be replaced with formal contracts; the consequent structure of impersonal market organization encouraged the very behavioral characteristic that posed the Hobbesian dilemma. That is, a formal set of rules evolved to constrain behavior in market exchange but also created conditions in which there was a large pay-off to disobeying those rules. Those whose behavior was

constrained by the consensus ideology of personalized exchange soon came to perceive that they were being taken advantage of in this new environment where there was a large pay-off to maximizing behavior by the parties to exchange. Impersonal market competition introduced a basically antagonistic relationship to exchange. Traditional status relationships, a "fair rate of return," honesty, and integrity were replaced by ubiquitous conflict over the terms of exchange. In particular the inability to measure the output of labour in team production induced conflict over what constituted shirking versus the speedup. It is not surprising that in such an environment Marx could construct a theory of history around class conflict, with technology as the exogenous variable; or that Joseph Schumpeter could maintain that the very success of capitalism produced ideological alienation that would lead to its downfall. But what is missing in Schumpeter's and in Polanyi's analyses, and only in completely and inadequately dealt with by Marx and his followers, is a theory of the way the free rider problem would be overcome to lead to a capture of the state (or at the very least partial control of the state) by groups intending to use the political process to safeguard their terms of exchange. The growth of class consciousness in nineteenth-century Britain and Europe has been a favorite topic of social historians, and the ideological perspectives of many of the writers who have been Marxists has provided for real insight into the process of worker alienation. Marx's emphasis on consciousness being basically conditioned by one's relationship to the mode of production remains an important contribution. The creation of an impersonal labour market cut the old ideological ties of the worker and led him to identify with other workers in a common antagonistic interest against employers. To quote Charles Tilly, Marx's account "Class Struggles in France has stood the passage of time rather well" (1969:13). The succession of movement from Luddism to Chartism to the Labour Party reflected the evolution of the British worker's ideological perspective. On the continent the later development of class consciousness mirrored the lag in growth of impersonal labour markets; but despite disparate origins similar patterns of protest evolved. However, on the continent Marx had a far greater influence on the ideological perspective of the worker than he did in England. The consequences of occupational specialization and division of labour were to break down the communication and personal ties that had formed the fabric of a consensus ideology, and to produce diverse ideologies built upon the new and conflicting perceptions of reality that emerged from the


environment of occupational specialization. Alienation activated groups to participate in control of the state to alter their terms of exchange. In contrast, the second hypothesis suggests that the self-destruct tendency of the market system comes from the inherent instability of the competition that emerged from the reduction in transportation costs leading to regional, national, and international specialization and division of labour. This competition in turn led to sharp fluctuations in the terms of exchange (and in the case of labour markets, to unemployment) and induced interest groups to devote resources to attempting to influence or control the policies of the state in the interest of reducing competitive pressures. In the case of farm groups, large group action was induced by the deep conviction that the farmer was a victim of the adverse terms of trade of an industrial system. In the case of manufacturers the new competition broke down the local monopolies that had existed and induced participation in influencing the state. In the Marxian literature this is frequently viewed as the class struggle of a rising bourgeoisie to overthrow the political dominance of the landlord class, as in the repeal of the Corn Laws; this emphasis obscures, however, the ubiquitous struggle of propertied groups to curtail market competition. The triumph of free trade in Europe was spectacular but brief. It was quickly replaced not only by the revival of barriers against external competition, but equally by efforts to reduce market competition internally. The structural transformation of Western economies in the past century as a consequence of the Second Economic Revolution has been the subject of a vast literature by social scientists. There have been important contributions to our understanding, but no description has been complete; and because of ideological differences and the compartmentalization of academic disciplines, an integrated overview of the structural transformation is still lacking. Neoclassical economics has recognized and elabourated the productivity implications of this revolution in a context of zero transaction costs and more recently explored the implications of positive transaction costs for economic organization. But it has failed to come to grips with the ideological consequences and therefore to provide more than a superficial theory of the political process. The new economic historians, basing their analysis on neoclassical theory, have had very little to say about structural change in history; even the literature on positive transaction costs is just now filtering into economic history research.


The strength of the Marxian analysis has been precisely that it focused on structural change and the tension between the production potential of a society and the structure of property rights; but the emphasis on class divisions has obscured the intra-class conflict inherent in economic organization. The most serious shortcoming of the Marxian analysis, however, has been that it has conceived of the problems of alienation as stemming from capitalism, rather than perceiving that the problems are inherent organization consequences of the Second Economic Revolution. Shirking, opportunism, and externalities are as prevalent in the Soviet Union and other socialist countries as they are in capitalist countries. Indeed the widespread view of Marxists in the Western world that the Soviet Union is not socialist is at base a misreading of the nature of the modern organization crisis. The sociological tradition from Durkheim to Talcott Parsons has recognized the disintegrating effects of modern social organization. Parsons's The Structure of Social Action (1937) was a pioneering effort to come to grips with many of the issues, but Parsons failed to solve the free rider dilemma and to produce a coherent body of theory. Nor have political scientists evolved a theory of the state, although they have examined the rise of pluralism, that is, the multiple interest-group control of the political process. And finally we come back to Karl Polanyi. The sources of the self-regulating market that was the basis of modern distress were the impersonal labour market, the impersonal land market, and the gold standard. All three have either disappeared or been so altered structurally that they bear no resemblance to Polanyi's description of their nineteenth-century character. But the consequences bear little resemblance to Polanyi's cautiously optimistic view of such change. The pluralist control of the state which emerged from the struggle of workers, farmers, and business groups has produced the disintegration of the earlier structure of property rights and replaced it with a struggle in the political arena to redistribute income and wealth at the expense of the efficiency potential of the)Second Economic Revolution. Moreover, this resultant struggle has not led to a new ideological social fabric that resolves the organizational tensions. The erosion of the gold standard since 1914 and especially since the 1930s has eliminated the nominal anchor of the money supply and therefore the forces that limited changes in the price level. In consequence manipulation of the money supply by contending interest groups is a major destabilizing force in the modern world.


Polanyi concludes, "Socialism is, essentially, the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society" (1957:234). Despite his perceptive examination of the issues, Polanyi, too, failed to understand the Second Economic Revolution.

The Origins of Technological Change in Industry and Agriculture Before the 18thcentury the most advanced economies in the world featured a combination of craft manufacturing (its most skilled components based in cities) and a large labour force committed to agriculture. Most production, both manufacturing and agricultural, was based on manual household labour, with larger village groups combining for certain operations like harvesting and road building. The use of slave crews for commercial production of key agricultural goods like sugar and tobacco had spread, particularly in the Americas, though there were no major changes in technology. Several societies had developed sophisticated craft skills for the production of luxury cloth, metal goods, and other items. China, Japan, India, the Middle East (including North Africa), and western Europe stood at the forefront in terms of artisanal technology and the vital capacity to produce iron and iron products. Africa had a well-established ironworking tradition, and metallurgy and armaments manufacturing were advancing in Russia by 1700. West European technology had gained decisive ground from the 15th century onward. Western production of guns, based on earlier skills in ironworking developed initially for the production of great church bells, provided a crucial military edge, particularly in naval conflicts. Western metallurgy generally led the world by the 16th century. During the 17th century growing dominance in world trade spurred the growth of textile production in many parts of western Europe, and here too technological refinements occurred that made the West effectively an international leader. Western biases concerning the rest of the world began to take on a technological cast, with scorn for the many peoples slow to imitate Western developments. A Western missionary in the 17th century described

how, in his opinion, the Chinese could not be persuaded "to make use of new instruments and leave their old ones without an especial order from the Emperor to that effect. They are more fond of the most defective piece of antiquity than of the most perfect of the modern, differing much in that from us who are in love with nothing but what is new." With all these developments, however, Western technology and production methods remained firmly anchored in the basic traditions of agricultural societies, particularly in terms of reliance on human and animal power. Agriculture itself had scarcely changed in method since the fourteenth century. Manufacturing, despite some important new techniques, continued to entail combining skill with hand tools and was usually carried out in very small shops. The most important Western response to new manufacturing opportunities involved a great expansion of rural (domestic) production, particularly in textiles but also in small' metal goods. Domestic manufacturing workers used simple equipment, which they usually bought themselves, and relied on labour from the household. Many combined their efforts with farming, and in general their skill levels were modest. The system worked well because it required little capital; rural householders invested a bit in a spinning wheel or a hand loom, while an urban-based capitalist purchased the necessary raw materials and, usually, arranged for sale of the product. Output expanded because of the sheer growth of worker numbers, not because of technical advancement; indeed, the low wages paid generated little incentive for technical change. Western Europe in 1700 was an advanced agricultural society, with an unusually large commercial sector and a great deal of manually operated manufacturing. The region was developing a certain fascination with machines but most decidedly was not industrialized. Three changes began to combine during the eighteenth century to accelerate manufacturing and ultimately generate the world's first industrial revolution. They affected much of western Europe but particularly Britain, where the revolution first took shape.

1. New agricultural methods came into use in the late 1700s. Peasants in many parts of Europe, including Ireland, France, and Prussia, began to grow potatoes, a New World crop long regarded with suspicion. Potatoes offered several advantages over the grains Europeans had traditionally relied upon as staple food: Higher caloric value could be produced from smaller and sometimes less fertile plots of land, and for many decades potatoes were less subject to periodic diseases than were grains. Increasing adoption of the potato supported the beginnings of rapid population growth in Europe by the 1730s. Britain's population, for example, doubled between 1750 and 1800, while that of France rose by 50 percent. The potato also freed up a percentage of rural labour for work in other areas, again because of its caloric yield on small plots. At roughly the same time, farmers in Holland began to develop new drainage systems by which swampland could be converted to agricultural use, and they introduced nitrogen-fixing crops that enabled them to keep fields in use every year rather than being rested every third year to regain chemical fertility. With less fallow land and more land in use overall, food production expanded, which also contributed to population growth and to release of new workers for other potential work activities. While agricultural improvements took shape in various places, they received enthusiastic support in Britain, where aristocratic landlords were particularly interested in new and more rewarding production for market sales. Draining of marshes added cultivable land in eastern England. Innovators like "Turnip" Townshend spread the word about using nitrogen-fixing crops to increase production by eliminating fallow land. Increased food supplies spurred British population growth and reduced the percentage of the labour force required in agriculture. This was the context in which what some historians have called "proto -industrialization" began to intensify in several areas. Domestic manufacturing systems spread as more workers became


available, while population growth and new consumer interests created new markets, particularly for textiles. Many rural workers began to farm only part-time, taking orders for thread and cloth from urban merchants at other points. This capitalist system generated growing production. Though the workers involved used traditional methods based on manual labour and cooperation of the family in a household operation, they began to see themselves as different from peasants-more interested in urban fashions, for example, which created additional markets. 2. Another set of changes provided a context for new technologies. Massive strides in European science, in an already active commercial economy, encouraged attention to new devices in the manufacturing field. A host of scientific societies took shape that combined researchers with merchants and manufacturers, which led to excited discussions about down-to-earth technological possibilities. Advances in chemistry helped trigger the discovery of new techniques for manufacturing and glazing pottery in 18th century England. New scientific knowledge about the behavior of gases set a context for considering the possibility of harnessing steam to provide a moving force to replace unreliable water and wind as power sources. The first steam engine was invented by a French refugee in Holland in the late 1600s; several Dutch scientists discussed the prospect of propelling a boat by steam. Around 1700 the engine was improved in England by Thomas Newcomen, who applied it to drainage pumps for coal mines. A steam truck was invented in France in the 1760s, though it was never put to use. The engine was perfected in the 1760s by James Watt, a Glasgow craftsman who produced scientific instruments, and could be applied for industrial use. 3. Along with changes in agricultural production and a stream of new inventions and attendant intellectual enthusiasm came additional shifts in England's domestic manufacturing system, initially beneath the surface.


The nation was already a leader in world trade. It had a growing population by the 1730s, and the public was expressing interest in more fashionable clothing--an early manifestation of new consumer tastes. This setting prompted a handful of domestic producers to think about expanding their operations, in a gradual shift that proved to be the forerunner of a new organization of manufacturing labour. For example, the Halifax area in Yorkshire in the late 17th century was a significant center for the production of wool cloth by local artisans in the countryside who often combined their manufacturing with farming. Output from each worker was low, though the profits could provide some useful supplementary income. Even substantial farmers put their hand to the loom from time to time or used family members as workers. In the 1690s a few workers began buying more wool than they could handle themselves; they hired other workers to work the wool at home for them and, without abandoning their own labour at first, were on the route to becoming manufacturers. By the next generation, these same manufacturing families, a minority of the wool workers in the region overall, were beginning to separate themselves socially from their employed labour. They were no longer willing to share a beer; they were thinking of their workers as a class apart. Workers clearly, had become disposable subordinates in the process of production, and a traditional manufacturing system was beginning to yield to a more structured hierarchy. By the 1730s several of these strands of change were beginning to combine in England. Protoindustrialization meant that, although the total number of agricultural workers grew, even as aristocratic landlords consolidated their holdings and sponsored more efficient methods, the percentage of a rapidly growing population employed in agriculture declined. Market opportunities for manufacturing production rose, however, despite frequent slumps, through population growth, expanding international trade, and the growing appetite for consumer goods like fashionable clothing.

As more and more workers and small businesses began expanding their operations by hiring wage workers, the profile of a new manufacturing middle class began gradually to emerge. Finally, new technology began to be developed for the sector that most obviously invited it--the domestic production system. In 1733 an English artisan, James Kay, invented the flying shuttle, a new kind of loom for weaving cloth that automatically moved thread horizontally through a frame when activated by a foot pedal. This machine was nothing fancy, and no new power was involved, but one worker with a child as assistant could now do the work of two adults. Inventions for automatically winding fiber to make thread followed in the 1760s. New opportunity and evolving attitudes on the part of the growing manufacturing class, plus the excitement surrounding technological change and the resultant encouragement to invention, were pushing the traditional production system well beyond its former bounds. By the 1760s, then, the ingredients of the industrial revolution had been assembled in England, after several decades of proto-industrial changes within the domestic manufacturing system. New entrepreneurs were ready to manipulate workers in novel ways. Inventions increased the number of industrial processes handled automatically. The manufacturing sector and its labour force were growing steadily. Then came a usable steam engine, which by the 1770s could be hooked up to some of the semi-automatic inventions already devised for manual textile workers. Because steam power was concentrated and could not be transmitted over long distances, workers had to be assembled near the engines to do their work; small factories had to replace household production sites. This final change, too, was developing rapidly in certain key sectors by the 1770s. Britain's industrial revolution was under way. Britain Becomes the Workshop of the World The initial explicit stages of the world's first industrial revolution--as opposed to the previous preparatory decades--involved a number of elements. Rapid innovation transformed several sectors of industry, with new technology and organization at the core of change. Without this, the industrial revolution could not have been identified.


At the same time, many branches of the economy were affected only slightly, and thus some overall measurements of industrialization remained modest. (This is why some scholars, failing to look at the longer-term picture, dislike the term "industrial revolution.") Within the innovative sectors, intense misery pervaded the experience of many of the human beings involved; the industrial revolution was built on the backs of exploited labour.

Finally, as the revolution caught on, it inevitably brought in its wake further change in both technology and business practices. Most of these developments occurred during decades when Britain nearly monopolized the new processes, winning a growing world role on the strength of its industrial lead.

The cotton industry commanded the central role in Britain's early industrialization. Cotton, as a fiber, had characteristics relatively easy to mechanize; it broke less often than wool and, particularly, linen. Further, cotton was a new product line in Europe, more open to innovation. It had been widely used in India, and an Asian market for cotton cloth already existed. In England, however, its novelty facilitated the introduction of new machines, though the raw fiber had to be imported. Workers were displaced indirectly by the rise of cotton because traditional linen production declined. The lack of a large established labour force in cotton obviated the need to prompt many traditional workers to change their ways directly, and this fact limited resistance. At the same time, cotton had great appeal as a product: It could be brightly colored for a population increasingly eager to make a statement through clothing, and it was easily washed, which appealed to people who were developing more stringent notions of personal cleanliness. Cotton was in demand, and this invited new techniques to produce the cloth in quantity. By the 1730s a series of inventions began to shift cotton manufacturing increasingly toward a factory system. The flying shuttle, designed originally to improve hand weaving, was refined over another thirty years sufficiently in accuracy to make possible the application of nonhuman power. Edmund Cartwright patented a power loom in 1785; his description of his procedures revealed the new kind of thinking being applied to technical issues: "It struck me that as plain weaving can only be three movements which were to follow one another in succession, there would be little difficulty

in producing them and repeating them." Indeed, mechanization involved isolating parts of the production process that could be accomplished through highly standardized, accurate motion and then applying to such motion equipment that could be linked to power sources. Weaving turned out to be among the more complicated stages to mechanize, and Cartwright's loom had to undergo substantial improvements before, by around 1800, it could be widely used. More impressive developments occurred in the preparatory phases in cotton. James Hargreaves invented a spinning jenny device about 1764, which mechanically drew out and twisted the fibers into threads--though this advance too initially was applied to handwork, not a new power source. Carding and combing machines, to ready the fiber prior to spinning, were developed at about the same time. Then in 1769 Richard Arkwright developed the first water-powered spinning machine; it twisted and wound threads by means of flyers and bobbins operating continuously. These first machines were relevant only for the cheapest kind of thread, but other inventions by 1780 began to make possible the spinning of finer cotton yarns. These new devices also could be powered by steam engines as well as waterwheels. The basic principles of mechanized thread production have not changed to this day, though machines were to grow progressively larger, and a given worker could tend a greater number of spindles. Other inventions pertinent to the industrialization of cotton production included new bleaching and dying procedures (in the 1770s and 1780s) and roller printers for cloth designs that replaced labourious block printing by hand--another new method that increased production a hundredfold while reducing workers' skill requirements. Cotton production by the 1790s was advancing with extraordinary rapidity. New machines required a factory organization, for the power could not be transmitted widely. Workers had to be removed from their homes and clustered around the new machines. Cotton spinning was entirely concentrated in factories by the 1790s. Because mechanical weaving lagged, this initial industrialization spurred a massive expansion of domestic looms; the thread produced was distributed from huge warehouses in the new factory centers such as Manchester. Power weaving came into general use in the Manchester area only after 1806, then began the full conquest in cotton after 1815--to the immense distress of the hundreds of thousands of workers who had been drawn into the surrounding countryside to do the weaving.

There were massive fortunes to be made in the industry. Robert Owen, a store assistant, began his Manchester factory in 1789 by borrowing 100, and by 1809 he was in a position to buy out his partners in his New Lanark Mills for 84,000 in cash--this in a country where only about four percent of the population earned more than 200 per year. Sales of manufactured cotton goods soared, for with the new machines not only did output increase, but prices plummeted. Exports were essential, and by 1800 approximately four pieces of cotton cloth were sold abroad for every three disposed of at home. As late as 1840 cotton continued to provide about half of the entire value of British exports. Continental Europe was a major market, but it consumed only about a third of Britain's export production in this field. Latin America was seized by British cotton exports after Spanish rule was cast off early in the nineteenth century. By 1820 the impoverished continent was buying a quarter as much cotton cloth from Britain as was Europe, and by 1840 the figure had risen to a full half. India and Southeast Asia were de-industrialized by a combination of British factory competition and colonial policy as machine products beat out hand labour; cotton imports from Britain rose by 1,500 percent between 1820 and 1840. Africa was another major market. Of the major nations, only China held out until its economy was forced open in the early 1840s. Britain's industrial revolution consisted until about 1840 primarily of changes in the cotton industry, with its massive results in terms of expanding production and world outreach, but other developments were vital as well. Mechanization of wool spinning and weaving was well under way by 1800, impeded only by the higher cost and greater fragility of wool fiber. New machines and procedures were introduced into beer brewing; the big factories established included the great Guinness brewery in Dublin. Pottery manufacturing concentrated important developments in industrial chemistry during the late eighteenth century, while new methods reduced the work required in processes such as glazing and cutting. Several of these innovations created major health hazards for the workers involved-new grinding methods, for example, "hath proved very destructive to mankind, occasioned by the dust suckled into the body which fixes so closely upon the lungs that nothing can remove it"--but productivity per worker expanded immensely, to the benefit of new pottery magnates such as Josiah

Wedgwood. In the 1830s new printing presses were developed that could be powered by steam engines, which greatly expanded production in such fields as daily newspapers. A few commercial bakeries also introduced important new methods. The most striking mechanical strides outside the growing textile sectors occurred in metallurgy and mining. During the eighteenth century British manufacturers learned to produce coke from coal (by heating and concentrating it in special ovens) and to use coke instead of wood-derived charcoal for smelting iron ore. Coke production in turn depended on advances in furnace design and steam blasting (introduced by John Wilkinson in 1776). As coke supplies grew, furnace design for smelting and refining iron was also reconsidered; the result was larger furnaces and higher output per worker. Henry Cort's reverberatory furnace for refining iron (developed in 1784) saved fuel but above all increased productivity by 1,500 percent. Steam-powered machines to roll metal, replacing manual hammering, soon followed. The iron industry began to expand rapidly. Britain had produced 25,000 tons of pig iron in 1720; by 1796 the figure was 125,000 and by 1804 was 250,000 tons. The growth of the iron industry had two further consequences. Coal mining surged to provide the fuel for iron smelting and for steam engines generally. Major advances in work methods at the coal face did not develop, though there were important improvements in timbering mine pits to allow deeper shafts. Transportation from the coal face did demand attention. Wooden and metal rails were laid down to facilitate carts of coal being pulled by horses or people; soon after 1800 experiments with steam-driven engines to pull the carts began. At the same time, the number of miners increased rapidly because this vital industry remained extremely labour-intensive. At the other end of iron production, machine building expanded steadily. Inventions of new equipment, from spinning machines to the steam engine, did not always translate readily into production methods beyond the prototypes. Twelve years passed, for example, between Watt's construction of a working model engine (1765) and usable cylinders that could be widely manufactured. Before 1800 machine building was scattered in small shops and was performed with hand methods, and even after this date the industry long demanded highly skilled workers labouring with relatively little sophisticated equipment of their own. But attention in France and the new United States to the manufacturing of guns led to the development of

precise patterns for designing machine parts, such that these parts could be interchangeably used on a given machine. Several machines were designed to bore and turn the machine pieces, and their industrial use gradually spread in Britain (and the United States and western Europe) during the early decades of the nineteenth century. Headed by advancements in the cotton industry, Britain's early industrial revolution featured dramatic new methods that subsequently generated improved productivity and more standardized products in a host of industries. Heavy industry--mining and metallurgy--gained ground rapidly, though the importance of the labour force and the total product long lagged behind textiles. Vast numbers of new workers were drawn into factories and mines. Some of these people were relatively unskilled, for many of the new processes required only modest training compared with older methods, but some, as in machine building, applied extensive skills to new products. Developments were not uniform: Many production branches, as in the manufacturing of brass and other small metal goods, were scarcely touched, though they often expanded given growing demand. Nor was progress steady: Great lags often intervened, as in mechanical weaving, between initial devices and widespread applicability. Britain's industrialization was a revolution, but it neither occurred overnight nor was tidily packaged. The revolutionary quality, however, showed through in a host of ways. Urban growth was one of these. Cities of various sorts exploded in Britain in the late 1700s and early 1800s, the result of burgeoning banking operations, growing port activities, and so on. The biggest expansion, however, occurred in the factory centers as factories located near energy sources and a large labour force accumulated to facilitate factory operations. Manchester, Britain's cotton capital, grew from a modest town of 25,000 in 1772 to a metropolis of 367,232 by 1851. Leeds, Birmingham, and Sheffield, centers of textiles or metalwork grew by 40 percent between 1821 and 1831 alone. Britain's industrialization revolutionized where many people lived by drawing work increasingly into the big-city context (and of course by making agriculture more efficient, thus less labour-intensive). During this period the majority of British families changed their residence and much of their framework of daily life as they shifted from reliance on agriculture to involvement with industry. Industrialization Exacts a Price. The industrial revolution, even in its early phases, prompted major changes in business scale. Many operations started small; because initial textile machinery,

in particular, was not costly, many small-scale innovations could draw on a wide array of available business talent. But there was obvious challenge. Traditional textile equipment for a home manufacturing operation cost a fraction of what was required to set up an early factory: By the 1780s British textile mills were valued at 3,000-4,000, many times the 25 cost of a good hand loom. The first multistoried factory powered by steam, established in 1788, was valued at 13,000; its steam engine alone, large for the time at thirty horsepower, cost 1,500. Plants for metallurgy and mining operations were more expensive still. Businesses did not immediately have to adopt radically new methods of capital formation and management systems, but the pressure to innovate was quite real. Many firms were established as partnerships because necessary capital was unavailable otherwise. Many factories, launched under the eye of an ever-present owner, had to generate a small bureaucracy when it became clear that directing the labour force, providing necessary technical expertise, arranging for purchase of raw materials, and selling the goods simply escaped the capacity of any one individual. Borrowing arrangements became steadily more elabourate, although abundant capital kept interest rates fairly low in early British industry. Family firms had to branch out to hire outsiders to participate in more specialized management structures. And while massive profits were possible--Robert Owen's achievement was replicated in a host of cases as a new class of wealthy factory owners began to emerge in the 1820s-the possibility of failure was very real as well. Sales recessions were frequent, particularly in industries like cotton that depended on exports. Poor harvests reduced income at home and cut deeply into industrial sales. Significant economic crises occurred at least once a decade; a particularly severe recession followed the end of the Napoleonic Wars in 1815. Workers suffered most in these catastrophes as unemployment soared, but many manufacturers collapsed financially as well. The early industrial revolution in Britain was built on the backs of cheap labour driven mercilessly hard. The standard of living fell for many workers in rural regions, who were pressed both by population growth and by competition from machine-made goods that cut into branches of domestic manufacturing. Many rural women, for example, lost their manufacturing income when spinning was mechanized. With less land available for small farmers, less supplementary employment, and competitive pressure on agricultural wages, stark misery spread in many agricultural districts. While hand weavers enjoyed some real prosperity


before 1800, when thread production soared but mechanized weaving had yet to take hold, their pay began to plummet thereafter. By 1811 wages were down one third from their 1800 levels, and by 1832, when hand weaving in cotton was dying out in Britain, they had fallen by a full 60 percent. Industrialization was not fully to blame for this collapse--population pressure and displacement of small farmers by aristocratic landlords played a role--but there can be no doubt of the massive hardships involved. Further, although the worst misery was centered in areas remote from the factories, the widespread deterioration also cut into the standard of living of industrial workers, who faced a growing amount of potential competition for jobs. In the factories proper, however, wages in some sectors held up somewhat better, for new workers had to be drawn in. Mining wages, for example, seemingly improved in Britain's early industrial revolution. Skilled workers, needed to set up and maintain the new machines, also did well, often winning long-term contracts and other benefits. On the other hand, many employers, desperate for workers but desperate also to keep costs down to protect their expensive investments and allay their fears of business failure, looked for labour shortcuts. This was the inspiration for hiring groups of orphans from London and other large towns, who were shipped in droves to the factory centers in return for employer provision of food and barracks housing. Extensive use of child and female labour was not in itself novel--families had always depended on work from all its members to survive--but use of children and young women specifically because of the low wages they could command reflected the pressures of early industrial life and unquestionably constrained the nascent working class in the factories. To be sure, factory-produced goods such as clothing and utensils fell in price; but there were drawbacks too: Urban housing often was costlier than the pre industrial rural counterpart, and food costs fluctuated. Historians of Britain's industrial revolution have debated the standard-of-living question for many decades without definitively agreeing about whether conditions grew worse or better. Certainly there was variety, and factory workers were not the worst-paid group in the British population.


Certainly also, however, particularly before about 1819, there was widespread suffering in the factory cities, where few workers were able to afford much above a bare subsistence even as more of their employers grew fat from the fruits of the new industry.

Other pressures added to the burdens on the new factory workers. No regular provision for illness or old age cushioned industrial life, and factory workers, unlike many small farmers, had no plot of land to fall back on for at least a modest food supply if their strength began to fail. The frequent economic slumps often caused unemployment rates, even for skilled workers, to soar as high as 60 percent for several months or even a year, and food prices often went up in these periods. Not surprisingly, many workers, even those capable of improving their earnings, found industrial life extremely unpredictable, even nerve-wracking, and in the worst slumps, death rates rose in the factory centers. Furthermore, and again even for workers whose pay might have increased modestly, the industrial revolution cut into leisure time. The labour force was prodded to work harder than its preindustrial counterpart, and work hours inched up as employers sought to maximize use of the expensive machinery. Some textile factories drove their workers sixteen hours a day, Saturdays included. Traditional festival days, when rural workers had taken time off, came under attack as the new factories fined workers for unauthorized absences. Finally, factory jobs exposed many workers to new physical dangers: dust from textile fibers, accidents in the coal mines, and maimings from the fast-moving--usually unprotected--machinery. The early industrial revolution depended on the need that growing numbers of workers had for jobs in order simply to survive. Necessity, not attraction, lay at the root of the formation of Britain's new factory labour force. Relatively low pay-declining pay in some circumstances--helped subsidize the investment in new machinery and supported the gains that motivated successful entrepreneurs, and increased work time contributed to growing output along with the machines themselves. And while the misery was worst in the early decades of industrialization--real wages and urban health conditions began to improve in the 1820s or at least in the 1830s--and while debate continues about exactly how bad things were, there is no doubt that desperately hard work and scant reward constituted key ingredients in the early industrialization process in Britain.


Not surprisingly, conditions of early manufacturing generated serious protest among many British workers, though labour organization was illegal and poverty limited the resources available for protracted struggle. Many workers struck or rioted against cuts in pay or high food costs. Beyond these specific efforts, a number of factory hands articulated a larger sense of the exploitation to which they were in their judgment subject and about the gap that had opened between them and the factory masters. A Manchester cotton spinner in 1818 condemned his employers for their "ostentatious display of elegant mansions, equipages, liveries, parks, hunters and hounds . . . they are literally petty monarchs, absolute and despotic, in their own particular districts; and to support all this, their whole time is occupied in contriving how to get the greatest quantity of work turned off with the least expense." The spinner also excoriated the "terrible machines" that had so worsened the quality of work as compared with preindustrial life. Some workers did far more than talk. In a series of riots between 1810 and 1820 hand workers attacked and destroyed the textile equipment that threatened their jobs or at least their accustomed wages. These Luddite workers claimed inspiration from a mythical leader, Ned Ludd, whose office was supposedly in Sherwood Forest, and they pointed to a world of work in which skills would be valued, workers treated as equal producers rather than factory "hands," and machines outlawed. Their efforts failed, as did more ambitious unionization attempts in textiles and mining during the 1820s and early 1830s. But the resentment of the new working class that the factories had assembled could scarcely be denied. The industrial revolution created a new division between the directors of manufacturing, the owners, and the workers they sought to control. To many observers, this was one of the essential and deeply troubling features of the wider industrial revolution.

Change Generates Change

By the 1820s, then, Britain's industrial revolution had introduced new technologies in cotton and other textiles, in pottery and metallurgy, and in aspects of coal mining. It had generated an unparalleled export surge that brought Britain's achievement home to peoples almost around the world. It had destroyed several traditional manufacturing sectors at home and abroad.


It had introduced factory organization to many branches of production and had prompted a massive growth in British cities. It had created a dynamic new business class and an even more novel as well as more numerous working class. Even in a society already heavily commercial, with an important manufacturing sector, it had fundamentally altered the framework of social and economic life. And the revolution would not stop. Innovations were not constant, but they recurred. Existing machines became more refined; the number of spindles on a cotton-spinning machine, for example, increased periodically, which greatly heightened production per worker. The number of workers in major industries grew inexorably. So did the average size of factories and firms, which permitted greater specialization of labour and more bureaucratic management. These developments brought innovation in business practices and labour conditions beyond what the initial industrial revolution had required. A measure of the persistent change was output: In 1830 Britain produced about 24 million tons of coal, four-fifths of the world's total; by 1870 the figure was 110 million, still half of all the coal mined around the world. British pig iron production was 700,000 tons in 1830; thirty years later it had more than quintupled, to almost 4 million tons. Raw cotton imports rose sixfold in the twenty years after 1830; in this period also, average productivity per worker doubled. All this meant steadily rising exports. By 1870 British exports exceeded those of France, Germany, and Italy combined, and they were three times the level of exports from the United States. Rising output boosted industrial profits, which provided additional capital for still further changes, and began to permit some definite if modest improvements in the standard of living of most workers even as income inequality continued to increase. The ongoing industrial revolution in Britain involved more than expansion from an earlier base. It also meant radical new directions. A new breakthrough in metallurgy in 1856 brought changes greater in many ways than those previously created by use of coke and coal. Henry Bessemer (along with inventors in other countries) worked on the problem of removing chemical impurities, in particular carbon, from raw iron (called pig iron). The conventional procedure demanded extremely labour-intensive operations, as highly skilled workers called puddlers stirred molten ore to remove the carbon. After repeated experimentation, Bessemer found that altered furnace design could accomplish the same results automatically; a blast of compressed air passed through the molten iron would extract the carbon. Not only were labour costs reduced, but the Bessemer converter made possible the construction of much larger blast furnaces,

another huge productivity gain. Finally, the same procedures enabled industry to use the controlled reintroduction of carbon to make steel, a much tougher metal than iron but previously extremely expensive to manufacture. An industry already transformed was transformed anew, in a pattern that would be repeated often as the industrial revolution proceeded. The most dramatic extension of industrialization in Britain after the initial decades occurred in the field of transportation. As output grew, pressure on transportation facilities inevitably increased: Goods had to be carried to market, raw materials to the places of manufacture. Improved roads and, especially, the spate of canal building helped, but inventors--aware from prior industrial experience that concerted experiments could produce dramatic results--looked for more genuine innovation. Initiatives with rail transport had already begun in the coal mines; the first steam engine for hauling coal out on tracks was introduced in 1804. In 1821 a group of inventors and entrepreneurs chartered a railway line between Darlington, a mining center, and the port of Stockton. Some of the wagons were pulled on rails by horses, but locomotives were also developed, under the guidance of George Stephenson. The first full-scale locomotive was unveiled in 1825, but its frequent breakdowns almost resulted in cancellation of any further experiments. An improved model featuring a larger boiler that could produce greater heat was tested in 1827 and put to regular use just a few months later. With this success established, a more ambitious rail line was opened in 1829 between the cotton port of Liverpool and the great factory center in Manchester. A contest was set up for locomotive design, and one model attained a speed of twenty-eight miles per hour--an achievement marred, however, by a breakdown before the test was completed. More reliable models operated at about sixteen miles per hour, and this was sufficient to launch a spate of railway building in Britain and, soon, elsewhere. Developed at about the same time were steam-driven ships (the first transatlantic steamship lines opened in 1838), and these and railroads plus faster communication via the newly invented telegraph truly revolutionized the conveyance of goods, people, and information. More bulk could be transported over longer distances at greater speed than ever before. This result of industrialization also generated additional change. Labour recruitment could reach out more widely. Coal and iron (soon steel) production had to expand simply to meet the demand generated by

railroad construction and operation. The industrial revolution was beginning to feed itself, sprouting new branches to deal with opportunities presented by prior developments. This same acceleration inevitably attracted attention elsewhere to the wonders of Britain's achievement. A growing number of countries judged the power of Britain's transformation not only in economic but also in military terms, and this dual interest was yet another spur to the ongoing momentum of the revolution.

New Causes: Why Did the Industrial Revolution Happen, and Why Did It Happen in 18th Century Britain? Explaining the industrial revolution is a challenge to analysts of history. Identifying the factors that caused the industrial revolution is a complex task because no one development stands out. The task is vital not simply as a historical exercise but as the basis for understanding the complexity of the challenges awaiting societies that tried to establish an industrial revolution even after Britain showed the way. The variety of developments that combined to create the first industrial revolution had somehow to be replicated, though not necessarily in identical fashion. This same daunting variety helps explain why a number of regions have not managed to launch full-scale industrialization to this day. Complex causes persist as a factor in world affairs. Not surprisingly, historians have offered different emphases. Occasionally, industrialization is presented as flowing from a few dramatic inventions and from some new thinking about the economy, notably Adam Smith's market-oriented theories issued in 1776 that stressed the importance of vigorous economic competition free from government controls as a means of generating innovation and growing prosperity. Inventions of course were involved--but why did they occur? And why did Britain produce more inventions than other countries (followed, in the formative decades of industrialization, by France and the United States)? New economic theories helped produce some policies favorable to industrialization, but these did not cause it; they came too late, and they affected too few people. Any explanation of the industrial revolution must account for new behaviorus on the part of literally thousands of people: entrepreneurs who gradually moved toward a factory system, workers who staffed the factories, investors who provided capital, consumers who eagerly accepted the machine-made products. A number of powerful factors had to combine to generate a change as substantial as even the early phases of industrialization.

For the industrial revolution to occur, considerable investment funds were required--the new machines were expensive, far costlier than any manufacturing equipment previously devised, even in the very small factories that characterized much early industry. Also needed was access to raw materials, including textile fibers but particularly coal and iron, the sinews of the industrial revolution. Government interest in supporting economic innovation was a factor, though various kinds of specific government policies could do the job. Of major importance was an available labour force that did not have more agreeable employment options, for while some workers might be attracted to the industrial life because of high pay for their particular skills, the excitement of innovation, and greater independence from traditional family and community controls, most workers entered factories because they had little choice. Finally, industrialization, particularly in its first manifestation in Britain, required an aggressive, risk-taking entrepreneurial spirit that would drive businesses to venture into innovation. All these ingredients must be considered in dealing with the causes of the industrial revolution. To be sure, recent reminders of how gradual the process was--how factory firms developed often as part of a very slow, multigenerational evolution from domestic manufacturing operations to a new willingness to organize and subordinate manufacturing labour--affect analysis. The industrial revolution need not be explained as a dramatic single eruption or a rapid, coordinated set of changes; early steps in industrialization help account for later ones, as the revolution rippled out from the minority of the population initially involved. Still, the challenge of explaining the process remains considerable. Several basic factors were generally widespread in northwestern Europe by the eighteenth century; others were more particular to Britain. A large seam of coal ran from Britain through Belgium and northern France to the Ruhr valley in Germany, and the most intense early industrialization developed along this coal seam.


Iron ore deposits also existed in western Europe, in some cases close to the coal sources. Without these raw materials--and especially coal as the energy source for smelting metal and powering the steam engine-early industrialization would have been impossible. Western Europe also had abundant wool and, through already established colonial trade, initial access to cotton (grown in the southern colonies of British North America and in parts of Asia). The key resources that had of course been sitting in the ground for many millennia facilitated the industrial revolution by their presence, but they did not cause it. Far more important was the impact of the scientific revolution in western Europe during the 17th century. Few scientific discoveries directly affected early industrial technology, though the work on gases and chemicals was relevant; the fuller marriage of science and industry occurred only after the 1830s, when the industrial revolution was already well advanced. Science did, however, help persuade people that nature could be rationally understood and controlled. It promoted an outlook attuned to change and generated widespread new interest in technical experiments. Definitions of science, from the pens of such experimenters as Francis Bacon in England, had urged its potential application to material conditions. It was no accident, then, that a vast refocusing of Europe's intellectual orientation preceded the industrial revolution itself. Europe's commercialization also helped set the context for the industrial revolution. Many Europeans were familiar with production for the market or were accustomed to buying some of the goods they needed rather than manufacturing every subsistence item locally. Habits of this sort were obviously essential to the industrial revolution, during which they were greatly extended. As with the scientific revolution, the expansion of commercial activities in the seventeenth century formed a vital precondition for industrialization. Through the domestic manufacturing system, direct links followed from commercial endeavors more generally. Further, during the 18th century Europe's increasing commercial system generated important changes in banking. National banking systems were established in England and several other countries, which facilitated nationwide marketing and thus expanded the opportunities for manufacturing and sales. Commercial experience as a factor should not be overly stressed, however. Even in business-minded Great Britain, the new banks rarely lent money to industrial firms; they focused on merchant and real estate operations. Nor did many established merchants become involved in the early factories.

Factories were regarded as risky and dirty, and respectable people, even in the business community, kept some distance. Early industrialists most commonly came from artisanal or manufacturing backgrounds, though the collabouration of individual merchants and landlords, particularly in the expensive operations of metallurgy, was vital. Commercial experience and commercial institutions prepared the industrial revolution, but some gaps remained to be filled before striving industrialists linked up with existing commercial operations. Another vital ingredient of Europe's industrial context--this one also taking shape before the industrial revolution but gaining ground steadily immediately before its advent--involved Europe's growing role in world trade. From the late 15th century onward, west European countries, ultimately headed by France, the Netherlands, and Britain, had won increasing control over international commerce. European ships and merchant companies dominated international trade, even in some cases in which exchange did not directly involve Europe at all. Increasingly, a hierarchy emerged in the international economy in which Europeans acquired minerals and agricultural goods from other areas (including their colonies in the Americas, India, and elsewhere) and in return sold manufactured products, including fine furniture, cloth, and metal goods such as guns. Because Europeans could price their goods to include the cost of processing, they were in general able to profit from the exchange. Not all parts of the world actively engaged in trade with western Europe at this point, but parts of eastern Europe (which sent grain, furs, and timber supplies), the Americas (precious metals, sugar, and tobacco), and India and Southeast Asia (spices, tea, and gold) added steadily to western Europe's wealth. The active slave trade that Europeans ran between Africa and the Americas was another source of profit. Europe's role in pre - industrial world trade set up the industrial revolution in several ways. Growing amounts of commercial experience developed through the trading companies, and new technologies relating to shipbuilding and warfare received impetus. Governments were encouraged to pay attention to the importance of fostering trade, though this at times also led to heavy-handed efforts at control. Trade leadership helped stimulate a taste for new products. Growing interest in cotton cloth originated first from trade with India, particularly in Britain. The British government then sought (from the 1730s onward) to

encourage cotton manufacturing at home and to prevent undesirable dependence on foreign manufacturing by banning cotton imports, which had the additional effect of reducing India's economic vitality and opening this area to British goods. At the same time, Britain used its holdings in India and particularly the southern colonies in North America to provide raw cotton for its new textile branch. Above all, foreign trade, including colonial trade, expanded the markets for European manufacturing and thus contributed directly to one of the obvious reasons to seek more productive technologies. Trade also provided capital through the growing wealth of many business and landowning groups. Thus, Europe's industrial revolution, which was to have such dramatic effects on the wider world, stemmed in great part from Europe's ability to draw disproportionately on world resources. International trade encouraged the second strand of causes: dynamic internal changes in Europe. Wage labour spread. So did beliefs in science and other cultural shifts that created assumptions favourable to economic change. So, also, did growing consumerism--the expanding interests in acquiring and enjoying new goods. Popular consumer interests in the West first focused on exotic imports like sugar and tea--whole agricultural systems were organized to feed these appetites. But expanding prosperity and proto-industrial manufacturing spurred consumerism in clothing and household goods as well, expanding local and national markets. Finally, governments became more efficient, with better-trained bureaucrats and more interest in economic growth. All of these internal developments were in place by 1700. By the 18th century, the first two strands of causation were already intertwined and their initial results were accelerating, which explains why additional thousands of workers were recruited into the domestic manufacturing system. With time, the industrial revolution might have emerged from this context alone. But a third set of factors added in during the 18th century, with the particular impact on Britain. These final causes, headed by massive population growth, assured industrialization and also explained its timing. Population and Capital as Triggers for Industrialization It was the population explosion in western Europe that added the final general factor. Food was crucial. The lack of major agricultural changes in Europe between the late Middle Ages and the 1690s was ironic, given the commercial advance. By the 1690s, this anomaly had begun to yield, providing an agricultural basis for

further economic change, via population growth. After long hesitations because the goods were not mentioned in the Bible, west Europeans began to grow calorie-rich New World crops, headed of course by the potato. Again, larger world history fed industrialization. Further, led by the Dutch, new methods of draining and fertilizer expanded available land and fertility. With more food came more people. Rapid population growth resulted from new food supplies and other developments such as a temporary lull in major plagues. There was also a pause in the most devastating kinds of warfare between 1715 and 1792. Increased population pushed workers to seek new, even unpleasant, kinds of jobs, provided growing markets for inexpensive manufactured goods, and prodded even some prosperous families to seek economic innovation. An eastern French family, the Schlumbergers, was a case in point. In the 1760s the head of the family ran an artisan shop, producing cloth but displaying no particular business dynamism. He had twelve children; that all of them lived to adulthood was somewhat unusual but illustrative of the impact of population growth in a single-family context. Simply in order to provide for his brood in the accustomed respectable middle-class fashion, Schlumberger had to expand his textile operations, hiring domestic manufacturing workers and then tentatively introducing some powered equipment. His children, building on their father's example, became dynamic industrialists in the early nineteenth century, creating large textile and machine-building factories and sponsoring the first local rail line. Population upheaval promoted economic dynamism in a number of ways and at various levels of the initial industrialization process in western Europe. Industrial revolutions require capital. This was not easy to find in western Europe--many sectors of established wealth shied away from the risk and grubbiness of the factory system--but capital resources had expanded steadily on the strength of growing internal and especially international trade. New technology rested on the more gradual prior improvements in European manufacturing techniques before 1700 and on the spread of scientific ideas and the new confidence in mastering the forces of nature. Necessary labour derived from the growing manufacturing force in crafts and domestic manufacturing, which provided relevant basic skills as well as sheer numbers, and then from the population surge. Once factory industry began, furthermore, it increased the number of workers seeking urban jobs by rendering many sectors of domestic manufacturing obsolete. An entrepreneurial spirit, evidenced as an interest in innovation and organizational expansion, resulted from prior growth in the business class, from the challenge of population increase in certain favorably positioned families, and from the increasing

cultural emphasis on science, material progress, and control over the environment. None of this assured easy industrialization, but the combination overall was powerful--as it had to be to launch the first industrial revolution the world had ever experienced. Britain as a Special Case Why was Britain, among the several areas of western Europe in which relevant changes had been taking shape, in the vanguard? Within the larger west European context, there were several special features in Britain. Population growth was extremely rapid in the eighteenth century. Its effects, in terms of freeing up available labour, were magnified by major changes in agriculture. British landlords successfully pried land away from smallholding farmers through the government's Enclosure Acts. These required farmers to enclose their fields, usually by planting hedges, but the expense was beyond many small farmers, who had to sell out to the landlords. British agriculture became dominated by large estates, and while these employed many workers, they did not absorb a growing population as readily as peasant-dominated agriculture proved able to do elsewhere. Thus there were hungry workers eager for new options. The enclosed estates, in turn, increased market production, providing food for growing cities. British artisans were also unusual. Most urban artisans in western Europe belonged to guilds, which tried to protect members' working conditions by limiting new technology and preventing any employer from creating undue inequality or threatening wage rates by hiring too many workers. Guilds were ideal for a relatively stable economy, but they definitely inhibited both rapid labour mobility and changing techniques. Britain had once boasted a guild system, but it had virtually disappeared by the 18th century. The result was twofold: Employers had unusual freedom to bring new workers into established branches of production, and were at liberty to tinker with new methods--perhaps the most important single source of Britain's lead in inventions. Britain's extensive international trade provided capital and markets and also supplies of vital materials such as cotton. The British aristocracy was more favourable to commerce than its counterparts on the European continents; some British landlords directly participated in setting up new mines and manufacturing, and tolerance for commercial development was high.


The British government favoured economic change. Tariff regulations in the 18th century, such as the barriers to the importation of cotton cloth from India, spurred new industries. Other laws that discouraged the export of new machinery or designs impeded rapid imitation elsewhere of British gains. Laws made the formation of new companies relatively easy and officially banned combinations of workers--what we would call unions--which in turn constrained protest.

During the eighteenth century a number of local governments began to build better roads, and then a wave of canal building developed at the end of the century. The new infrastructure facilitated the movement of both raw materials and finished goods.

At the same time, the British government did not attempt to regulate manufacturing extensively. Other European governments, though often eager to promote economic growth, tended to control manufacturing with regulations about product quality, techniques, and some working conditions. The British state was less interventionist. This was not always an advantage, as we shall see in other industrialization cases, but it may have served well in setting a favorable framework for the first industrial revolution.

Simple luck in terms of natural resources also aided Britain. It had excellent holdings in coal and iron, which were often located quite close together. The island nation had not only coastal waterways but good navigable rivers, which further facilitated the transport of the two materials so vital to early industrialization but extremely heavy and costly to move over land. Britain was also running low on timber supplies by the early eighteenth century, which encouraged the search for alternative fuels, notably coal. This in turn spurred industrial development, from the adaptation of the initial steam engine for mine pumping to the use of coal for smelting iron.

Finally, Britain apparently provided an optimal setting for producing individuals inclined to taking risks in business. Good market opportunities and an extensive preindustrial manufacturing system formed part of this framework. New ideas about science and material progress spread more rapidly in Britain than in most other European countries. A relatively small government meant limited chances for success by seeking bureaucratic jobs. Furthermore, Britain tolerated a number of Protestant religious minorities such as the Quakers, though this indulgence was incomplete: Protestants who were not members of the established Anglican church could not attend universities or gain government employment. This ambivalent situation encouraged members of these minorities, eager to demonstrate God's favour, to seek opportunities in business. Certainly

the Protestant minorities produced a disproportionate number of early manufacturers, who were stimulated by a belief that disciplined work, frugality, and economic drive were pleasing in the sight of God and who were eager to get ahead where the chances lay--through entrepreneurial initiative. In sum, Britain concentrated many of the changes developing generally in western Europe and added an array of special factors ranging from flukes of nature to new forms of callous manipulation of agricultural labour. Quite possibly the more general shifts taking place throughout Europe would have generated an industrial revolution elsewhere by the early nineteenth century; the uniqueness of the British combination should not be exaggerated. Nevertheless, the fact was that Britain came first and that its leadership can be explained. For at least a half century the nation's effective monopoly over the industrial revolution was scarcely challenged. British industry enabled the country to hold up against the much larger population of France during the wars of the French Revolution and the Napoleonic era. By the 1830s Britain's industrial lead was so obvious, and its related need and ability to export cheap machine-made manufactured goods were so great, that the government changed its basic tariff policy. Britain became a pioneer in free trade, allowing imports of food and raw materials that helped keep prices (and wages) down while relying on manufacturing exports to balance the trade exchange and even to show a tidy national profit. Britain was indeed pouring manufactured goods into the markets of the world. Machine-made textiles cut into customary production not only in Latin America but also in Germany. British iron products undersold traditional charcoal-smelted metal in France. Here, obviously, was a rude challenge. But here also was an opportunity. Britain's success in industrialization added another ingredient to the changes taking place in western Europe. Continental businesses and governments began to wake up to the possibility of copying British machine design and factory organization, realizing they must stir themselves lest they be engulfed in a British industrial tide. The industrial revolution began to spread. The Industrial Revolution in Western Society In 1851, when Britain celebrated its industrial might in the Great Exhibition at Crystal Palace, it had no peer in any of the principal phases of mechanical production. Several European countries were superior in textile design and the United States led in a few minor categories such as machine stitching. But the British lead in textiles, metallurgy, mining, and machine building seemed insurmountable.


Britain's industrial superiority inevitably affected the next phase of industrialization: A list of causes of all the industrial revolutions launched between 1820 and 1870 has to include both the example of Britain and the international activities of British businesses. The countries that first imitated Britain did so not only because they shared many of the same features that had produced the British surge but also because they were geographically close (or in the case of the United States, historically and culturally close) to the industrial island. French textile factories surged in the north, which abutted the English Channel, and in Alsace, where the leading industrialists were Protestant and therefore shared contacts with England. The industrial rise of Britain spurred west European and American businesses. There were profits to be made and industries to defend lest British exports overwhelm the entire manufacturing base. Foreign governments had to take an interest as well. British economic might during the Napoleonic Wars demonstrated the relevance of industrialization to power politics. Gains in metallurgy and machine building had direct links to armaments. The obvious potential of the railroad moved government officials interested in better political and military contacts who otherwise would have preferred to keep society immune from the upheavals of economic change. Britain's success, in sum, was an active cause of the subsequent round of industrialization in societies having many of the same commercial, scientific, and social features that had spurred the British. Foreigners began to flock to Britain to learn, and British entrepreneurs and workers began to set up operations abroad. There were three principal stages in the wider Western effort to copy Britain's mechanical advances. Before 1789 European governments sent over a few observers to learn about British technology. The French in 1764 dispatched a scientist to study British metallurgy, and on his return he used the new methods to develop one of France's great iron manufacturing firms, the de Wendel Company. The French government also paid a British metallurgist to set up a cannon foundry. Various German and Swiss states sent students also, and some of them brought back new textile equipment. Such transfers of technology were unusual, however, partly because British law forbade the export of new technology or the emigration of skilled workers. Then the French Revolution exploded in 1789, and its turmoil and the ensuing European war interrupted major developments for over two decades. Yet the revolution also introduced important

new legislation that (though the drafters largely did not so intend) helped pave the way for industrialization in Western Europe. In France and also neighboring territory like Belgium and western Germany, guilds were abolished, which removed restrictions on the movement of labour and technical innovation. Western Europe in this way became more like Britain. Internal trade barriers were removed in countries like France, and commercial law was regularized. Other laws prohibited combinations of workers-these too emulated the British lead and inhibited labour protest against change. Although those who launched the French Revolution did not intend to promote industrialization (and the ensuing disorder actually delayed it), the new laws and a general enhancement of the power of the middle classes, along with Britain's display of industrial success during the battles with Napoleon, completed the causation for western Europe's economic transformation. When war ended in 1815, Europeans intensified their study of British ways, seeking to circumvent British laws prohibiting technology transfer. In 1819 the Prussian government sent a locksmith to study British machine building, and he returned to form a major plant in Berlin. The French and Dutch governments bribed British entrepreneurs to set up modern metallurgical factories directly; the French steel industry took shape under James Jackson as a result, and it was a Jackson grandson who in 1861 set up the first Bessemer converter in France. Belgian businessmen smuggled British machinery out of the country in rowboats and in a few cases literally kidnapped skilled British workers. Francis Cabot Lowell, an American, visited Britain in 1810-1812 and two years later established the first power looms in the United States and the first major textile plant that combined mechanical spinning and weaving. French and Swiss metallurgists visited frequently. Alfred Krupp, a German, made his study trip in 1838, by which time Germans and others were also studying British railroads and mining engineering. The Belgian government directly hired George Stephenson to set up railroads there, and all the European states, plus the United States, imported British locomotives. European and American businesses also hired British workers. By 1830 there were at least 15,000 British workers in France, serving mainly as skilled technical personnel in textile and metallurgical plants. Employers offered huge bonuses and wages sometimes double the local rate to induce the vital British workers to emigrate. The results were not always happy, for some of the British workers involved were inferior types.


Needless to say, most European industrialists trained a local labour force as quickly as possible. Nevertheless, the British ingredient was often central to the process. French metallurgists, for example, found that it took at least a decade to teach French workers some of the necessary skills, mainly because their rural background did not generate the requisite motivation. British workers, accustomed to industry, were also attuned to the idea of innovating in return for making more money, an outlook that did not immediately arise elsewhere. Also important was the direct emigration of British industrialists. Samuel Slater, an apprentice in one of the Arkwright textile plants, emigrated to the United States in 1789 under the sponsorship of a Rhode Island merchant; he soon established the first textile factory in the country. The first Swiss cotton factory was set up by two Britons, and another Englishman, along with a few imported British skilled workers who taught mechanical weaving, revolutionized Dutch cotton production after 1830. No English family did more for European industrialization than the Cockerill clan in Belgium. William Cockerill brought modern textile machinery to France in the 1790s--Napoleon made him a citizen in 1810, which allowed him to continue operations. A Cockerill machine-building plant in Liege employed 2,000 workers by 1812. By the 1830s the Cockerill operation included the largest integrated metallurgical and machine factory in the world, its owner boasting that "I have all the new inventions over at Liege ten days after they come out of England." Mining, shipbuilding, and railroad development fanned the Cockerill empire, which also expanded into Germany. A Belgian observer noted that the Cockerills saw "a mission to extend manufactures everywhere and to fill the whole world with machinery"--profit possibilities and a genuine missionary zeal made a heady combination. The British role in stimulating wider industrialization was particularly crucial into the 1840s. Individual Britons continued to contribute thereafter, but by this point the industrial revolution was firmly anchored in Belgium, France, the United States, and Germany and was developing deep native roots. British industrial adventurers began to work farther afield, in Russia and Austria for example, where full industrial revolutions were yet to emerge. Even before the 1840s the British role should not be exaggerated, for it obviously combined with the emergence of new business interests in western Europe and the United States and with shifts in government policy. Furthermore, imitation was never precise. Each subsequent industrial revolution had its own flavor, sharing many features with the British process because of the intrinsic nature of industrialization as well as emulation but also responding to local constraints and opportunities. The sheer difference in

timing was a factor as well. The British industrial lead forced some later industrial revolutions to develop different emphases. Textiles, for example, played a less prominent role in German industrialization partly because British imports had made major inroads before the German process gathered momentum. This was one reason Germany's industrial revolution stressed heavy industry from the first. In addition, the possibility of imitating Britain meant that many west Europeans and Americans required less time for experimentation; they could begin with more sophisticated and productive machinery from the start. Thus, the next round of industrial revolutions did not impose quite so much new misery on the labour force as had been forthcoming in early British industrialization. French or German industrial workers were not well paid, and wages had been traditionally lower in these countries in any event, but the intense deprivation of the British industrial slums and the reliance on virtual slave gangs of children were largely avoided. In addition to coal-rich Belgium's rapid transformation, three follow-up industrial revolutions in Western society were particularly important. France, Germany, and the United States joined the industrial parade between 1820 and 1840, and each displayed distinctive features in the process. In combination, their industrial revolutions essentially completed the industrialization of the Western world by the 1870s, increasing the worldwide impact of the industrial revolution while cutting into Britain's preeminence. By then all three countries, though in particular Germany and the United States, were also spearheading further transformations of the industrial economy that extended the process of technological and especially organizational change well beyond Britain's first stages. France: An Eclectic Course France, western Europe's richest and most populous country in the eighteenth century, faced several drawbacks in attempting to imitate the British achievement. Recurrent revolutions into the 1870s were not helpful to the business climate and perhaps even encouraged several French governments to be somewhat more protective of traditional economic groups than were their counterparts elsewhere.


Certainly the French were fiercely protectionist in their tariffs against foreign (notably British) goods, a move favouring inefficient, old-fashioned textile and metallurgy firms that would otherwise have perished. But most countries seeking to emulate the British had a long protectionist phase to help safeguard their manufacturing, so the French tactic probably was not decisive.

Far more important were deficiencies in natural resources. The French simply did not have the large coal reserves of Britain, Germany, or the United States. By 1848 they were in fact exploiting a higher percentage of their reserves than any other country, but they could not keep up. To do so they needed to import coal, which resulted in higher costs, particularly in metallurgy. France's ability to compete in heavy industry was further weakened after its war loss to Germany in 1871, when it surrendered most of its iron-rich province of Lorraine.

Finally, French population growth, though substantial, was lower than that of most other Western nations, which meant less spur for workers to flock into factory centers. French factory cities grew but far less than their counterparts elsewhere, and difficulties in recruiting labour--workers were able to indulge a preference to remain in the countryside--played a substantial role.

Because of these limitations, French industrialization was less impressive than that of several other countries, and the nation's relative economic strength declined as a result. There was a real industrial revolution nevertheless. About 20 percent of all manufacturing workers were employed in factory industry or coal mines by 1850. Cotton and wool production was substantially mechanized, and several new metallurgical centers featuring large factories and advanced techniques had developed. The French introduced a number of important inventions, including a mechanical loom for fine cloth, the Jacquard, that helped spread mechanization in textiles and ultimately helped inspire twentieth-century advances in circuit-board technology. French output began to expand rapidly. Coal production rose thirteenfold between 1820 and 1870, while iron production sextupled. The pace of French industrialization increased after 1842 when the national government agreed on a railroad system and sponsored its rapid development. Unlike in Britain, where most railway initiative lay in private hands and the government provided only its right of eminent domain to aid in property acquisition, the French government built the rail systems, then turned over most of the lines to private companies on ninety-nine year leases; the companies provided the rolling stock. France's national system was completed in the 1860s, and an active program of local development went forward thereafter, boosting French heavy

industry in particular and making a major contribution to the transportation needed for industrialization more generally. The French industrialization process featured some relative lags and a greater degree of government involvement than the British model. It also emphasized concurrent transformation of craft production. France had a well-established craft tradition, with export markets in such goods as fine furniture and silk cloth. Because of some limits on industrialization in other areas and as a means of circumventing British competition, many French manufacturers worked to expand craft output without totally revolutionizing the technology. Furniture makers, for example, began to standardize design and production, which allowed workers to be trained more quickly and increased their output. They still worked in small shops with largely manual techniques, but they were almost mass-producing tables, cabinets, and other items that could be sold to middle-class households not only in France but abroad. The workers involved keenly sensed and resented the changes, lamenting a faster pace of work and a decline of creative artistry. Through the rise of factory industry and the emphasis on substantial transformations within the craft system, France increased its annual per capita economic growth almost as rapidly as Britain in its industrial revolution period. Indeed, France pioneered in one of the obvious outcomes of the industrial revolution: a major innovation in distribution systems. More goods to sell and a growing urban market meant traditional small shops no longer sufficed. The first department store, aimed at high-volume sales, opened in Paris in the 1830s. Germany: Trend to Big Business German industrialization got under way later than the French version. Absence of tariff protection for textiles perhaps hampered early development and certainly fostered a tremendous sense of industrial inferiority. Germany was also divided into separate states and industrialized only after a customs union created a larger national market in the 1830s. Full abolition of the guilds and serfdom also came late in Germany; these institutional features reduced labour mobility into the 1840s. Finally, unlike France and the United States, Germany contributed almost no new inventions to the early industrialization process and remained highly dependent on foreign technologies into the 1870s. Simply locating adequately trained skilled workers was a problem; one manufacturer complained in the 1830s that it was impossible to find a single German worker capable of making a machine screw.

Nevertheless, coal-mining output began to expand rapidly by the 1830s, almost doubling in that decade alone. Between the 1840s and 1870 German coal production expanded sevenfold as deep mines were sunk, particularly in the rich Ruhr valley coal basin. A few coke furnaces in metallurgy were installed early, but before 1850 only 10 percent of all iron was coke-smelted. In the 1850s, however, iron production expanded at a rate of 14 percent per year. By then the German states were also actively expanding their railroad network; most of the lines were built and operated by the governments involved. In the 1870s Germany benefited from the acquisition of Alsace and Lorraine, which had strong concentrations of industrialized textiles and of metallurgy respectively. Development of new smelting processes facilitated fuller use of phosphorus-rich Lorraine ore, another boost for Germany's ascendant heavy industry. By 1913 Lorraine alone was producing 47 percent of all iron ore mined in Europe, and most of this fell to Germany's benefit. From the 1850s onward, German industrialization displayed several distinctive features. Sheer speed was one important point. So too was the unusual concentration of heavy industry, which followed from Germany's excellent resources in coal and iron and from the fact that Germany's industrialization was the first to take shape almost exclusively after railroads, with their huge demand for coal and metal, were introduced. In addition, the German government was extensively involved in supporting industrialization; an example of this was its state-based railroad policy. Because Germany had a smaller preindustrial middle class and less capital than Britain or France, government operations helped make up the difference. State backing for investment banks, for example, promoted the accumulation of investment funds. Germany also quickly became a center for business combination. Many small firms continued to operate in crafts and retailing, so the picture should not be overdrawn. But Germany's stress on capital-intensive heavy industry, plus state backing, provided favorable conditions for experimenting with new kinds of big companies and cartels. By the 1870s gigantic firms like Krupp dominated much of German metallurgy and mining, with branches extending from the mines through smelting and refining of metal to the production of armaments and ships. Huge capital demands in these industries encouraged German investment banks to facilitate large business combinations to help assure profits. Newer industrial sectors like chemicals and electrical equipment were quickly dominated by two or three large firms, in part because of the backing of

the investment banks. Two companies, the Allgemeine Elektrizitaets Gesellschaft and Siemens, controlled over 90 percent of the German electrical industry and developed extensive branches abroad. Firms of this size not only accumulated massive capital; they were also in a position to set prices somewhat independently of market forces. Combinations of big business units also occurred in Germany. Several steel cartels formed that allocated market quotas for certain products to ensure the price held up; a coal cartel set production limits for each member for the same purpose. By the late nineteenth century there were 300 cartels in Germany, many with extensive market control and political influence. Germany was not alone in the rise of big business, but it emphasized such arrangements more than Britain or France did.

The United States: Dynamism of a New Nation Along with the German version, American industrialization formed the great economic success story in world history between 1850 and 1900. U.S. industrial growth began in the 1820s with importation of technological systems from Britain. Although American inventors contributed significantly to the industrialization process through such achievements as the mechanical gin for removing seeds from cotton fiber and the major strides in devising the system of interchangeable parts, the United States remained dependent on European technological advances throughout the nineteenth century--British and French at first, then German and Swedish in industries like chemicals. American businesses were quick to imitate: Construction of locomotives began just a year after the first British model reached the United States. Only local lines were laid before 1830, but 3,000 miles of track were set out in the following decade, mainly in the Northeast, and major interregional lines were launched by the 1840s. As usual, the new infrastructure generated increased demand in heavy industry and facilitated other industrial operations. Extensive canal building also contributed to the burgeoning process. Textile factories, which used water as well as steam power, formed the core of initial American factory industry, and factory towns spread across New England. But there were advances in machine building, printing, and other manufacturing sectors. The invention of the sewing machine in the 1840s initiated a

transformation in clothing manufacture from handwork to faster-paced mechanized output, not only in New England but in midwestern factory centers like Cincinnati (by 1840 the nation's third largest industrial city). In its first stage U.S. industrialization increased the amount of manufactured goods in circulation and encouraged the further development of market specialization in other areas such as agriculture, even as the bulk of the nation's economy remained nonindustrial. The process was also marked by relatively favorable labour conditions. Workers were in short supply, and recruitment required paying relatively high wages. Many women were drawn from farms into the factories in expectation of working a few years and then returning with a nest egg. Skilled male workers were also relatively well treated. Unlike their counterparts in
Europe, they also had the vote, which fostered their sense of connection to the larger society. Worsening conditions in the 1830s provoked a number of labour strikes; then in the 1840s growing numbers of immigrants, Irish in particular, fed the urban labour force, and standards of living deteriorated in many factory centers.

The second stage of U.S. industrialization took off with the expansion of war industries during the Civil War. American arms manufacturers extended their operations, beginning a tradition of arms sales abroad when the domestic market shrank after 1865. Development of intercontinental rail links spurred industrial growth on another front. Railroad companies were in private hands and pioneered in a number of aspects of American big business: huge capital investments, a large labour force, and attempts to assure regional monopolies over service. As early as the 1850s American railroads began to devise appropriate forms of organization for a large company, commissioning engineers to plot out management structures and information flows. The railroad age in the United States also involved massive government support, including federal land grants that helped provide capital to the growing network. It was in this context in the 1870s that Andrew Carnegie introduced the Bessemer process into steel manufacturing on a large scale, lowering prices substantially in the bargain. Expansion of mining fed the growing use of steam engines in manufacturing and transport. The manufacturing labour force expanded rapidly as well through the growing recruitment of immigrant workers from southern and eastern Europe and, for a time on the West Coast, from Asia. Average factory size increased: By 1900 over 1,000 American factories employed between 500 and 1,000 workers, and 450 more had over 1,000. Not only heavy industry but also textiles experienced this growth in factory size. U.S. industrialization obviously displayed much the same surge toward big business that characterized Germany in these decades. Investment banks helped coordinate the growth of multifaceted companies. As

in Germany also, the sheer speed of the American industrial explosion altered the world's economic context with dizzying rapidity. Indeed, it was through industrial expansion that the United States began to make an independent mark in world history by the 1870s. Several American companies began establishing branches abroad. Two American firms, in sewing machines and agricultural equipment respectively, were the largest industrial enterprises in Russia by 1900. More than in Germany, much American public opinion remained committed to a rhetoric of free enterprise even as big business grew and the government actively contributed to industrial expansion not only through grants of land but also through high protective tariffs. The industrial revolution in the United States had three other distinctive features. First, what amounted to an industrialization of agriculture occurred along with the transformation of manufacturing. The vast lands of the westward-expanding nation encouraged the development of new equipment, from horse-drawn harvesting machinery to tractors that were in growing use by the end of the nineteenth century. Agricultural output expanded rapidly, providing the nation with vital export commodities by the 1870s. American farmers often warred with big business (over railroad rates, for example), but there was less disjuncture between the rural and urban economies than in France and Germany. The United States also avoided the outright shrinkage of the agricultural sector that came to characterize Britain, which traded industrial exports for dependence on food imports. The United States also relied unusually heavily on foreign capital. The nation was rich in resources but lacked the funds to develop them as rapidly as industrialization required. Huge investments from Europe, in particular Great Britain, fueled American industry throughout the nineteenth century, and the nation remained in international debt until World War I. American industrialization contributed important organizational innovations in addition to the growth of big business. Because of an initial potential labour shortage and then the importation of immigrant workers regarded by many American industrialists as racially inferior to Anglo-Saxon stock, American factory managers devoted great thought to the conscious control of their labour force. They developed factory police forces to quell strikes and by the late nineteenth century were experimenting with engineering research, called time-and-motion studies, designed to calculate the movements of workers so that they could be systematized and sped up. Time-and-motion engineers set pay rates on the basis of optimal worker efficiency and subdivided tasks so that more and more workers performed in a routine, almost machinelike fashion. European factories quickly introduced some of the same thinking, but the initiative in

new organizational techniques came disproportionately from the United States. The world's first large political democracy ironically pioneered in rigid workplace hierarchies, building on the implications of the factory system to create greater management control. 3.10 The Industrial West by the 1880s The spread of rapid industrial revolutions to Belgium, France, Germany, and the United States effectively converted the bulk of Western society to an industrial economy by the 1870s. Industrial revolutions were also under way in Scandinavia, northern Italy, and the Netherlands. A few regions, of course, were largely unaffected: southern Italy and much of Spain, for example, as well as regional pockets within industrial nations. Ireland, under British rule, industrialized little; it served as a cheap source of agricultural goods and labour. The American south was largely nonindustrial even after slavery was finally abolished; it too served as a dependent economy providing cotton and other raw materials while buying manufactured goods from the north. Nevertheless, the expansion of industrialization altered the economic balance both among Western nations and between the West and the world. Britain's huge industrial lead progressively dwindled as the German and American share of the industrial pie expanded. The British found it difficult to accommodate to some of the forms the industrial economy began to take by the 1870s. Britain provided less technical training for workers and managers than Germany did, relying instead on more traditional kinds of skill and initiative, and moved into the big-business age less comfortably than its new rivals did, partly because of its established pattern of family-owned factories. Industrialization in Britain continued--history reveals no instance of a retreat from industrialization save in wartime, at least until the collapse of the Soviet economy in the 1980s--but its relative share declined. Overall industrial output elsewhere in the West continued to increase. The expansion of railroads and the focus on heavy industry in Germany and the United States prompted strong growth in metallurgy and related branches such as armaments. New electrical and chemicals industries took off, the latter on the basis of new manufacturing needs and techniques in dyes, chemical fertilizers, and explosives. The organizational thrust of the industrial revolution took on new contours with the rise of big business and the development of new methods of disciplining and arranging the factory labour force. In sum, the rapid change in the cast of industrial actors made clear what British industrialization had already taught: The industrial revolution involved ongoing change, not simply an initial conversion to new techniques.

The expansion of Western industrial society also brought growing international rivalry. The British worried increasingly about competition, particularly from Germany. A major depression in the 1870s, not fully resolved until the 1890s, resulted in part from international pressures and also worsened those pressures. The "great depression" of the 1870s, as it was then called, was a new kind of slump. Traditionally, depression had begun with agricultural failures caused by bad weather or crop disease; food prices then rose, which cut demand for manufactured goods. By the 1850s the expansion of agricultural production plus transportation improvements that made widespread food shipment possible reduced the prospect of this kind of collapse in the industrial areas. Recessions in the new context began with a failure of demand for other reasons, which led banks to cut their industrial loans and produce yet another reduction of industrial demand. The resulting spiral of declining production and growing unemployment caused less dire want than had the old agricultural failures, but the cycle also tended to be more prolonged. The crisis of the 1870s, triggered by several bank failures in the United States, stemmed from a growth in industrial output that often exceeded demand. Workers' wages were low. The incomes of European peasants were declining because of competition from cheap food imports from the Americas. In this context came a major industrial pause: Sales plummeted and manufacturers tried desperately to find new outlets for their goods while cutting wages and jobs in the process. The 1870s depression did not permanently interrupt Western industrialization. It did, however, generate new demand for an increase in protective tariffs against foreign goods, a movement that swept over all industrial nations except Britain in the next two decades. The crisis also gave rise to urgent efforts, avidly supported by many industrialists, to seek new market security internationally. Interest in expanding imperialism increased, in part because of a desire to monopolize potential markets in Africa and Asia and to insulate these markets against growing international competition. Thus, the advent of new rivalries within the industrial world helped escalate the impact of industrialization in the world at large. This in turn helped move the Western-dominated first phase of the industrial revolution into a more fully international setting. 3.11 The Industrial Revolution: An Economic Perspective What, then, was it that changed in the years that we refer to as the Industrial Revolution? We shall have to leave out of the discussion many of the aspects that made it a "more than industrial Revolution"attitudes,

class consciousness, family life, demographic behavior, political power, though all of these were transformed during the same periodand concentrate on economic variables. Four different schools of thought about "what really mattered" during the Industrial Revolution can be distinguished. The four schools differ in matters of emphasis and weight, yet they overlap to such an extent that many writers cannot be readily classified. A. The Social Change School. The Industrial Revolution is regarded by the Social Change School to have been first and foremost a change in the way economic transactions between people took place. The emergence of formal, competitive, and impersonal markets in goods and factors of production is the basis of this view. B. The Industrial Organization School. Here the emphasis is on the structure and scale of the firm -- in other words, on the rise of capitalist employment and eventually the factory system. The focal point is the emergence of large firms, such as industrial mills, mines, railroads, and even large retail stores, in which production was managed and supervised and where workers were usually concentrated under one roof, subject to discipline and quality control. C. The Macroeconomic School. The Macroeconomic School is heavily influenced by the writings of Walther Hoffmann and Simon Kuznets. Here the emphasis is on aggregate variables, such as the growth of national income, the rate of capital formation or the aggregate investment ratio, or the growth and composition of the labour force. Early practitioners of the New Economic History have tended to belong to this school, because by its very nature it tends to ask questions about large collections of individuals rather than about single persons and because of its natural interest in quantitative analysis. D. The Technological School. The Technological School considers changes in technology to be primary to all other changes and thus focuses on invention and the diffusion of new technical knowledge. Technology is more than just "gadgets," of course: It encompasses techniques used for the organization of labour, consumer manipulation, marketing and distribution techniques, and so forth.


Lecture Three Colonialism and Economic Imperialism

1. Mercantilism Mercantilism, or Merchant Capitalism, provided the dominant framework for thinking about economic issues for roughly the 300 years from towards the end of the fifteenth century to the closing years of the eighteenth century. It had no acknowledged spokesperson. It was a system rather than a theory, developed mostly by people in business and the professions, although some, particularly on the continent, were government officials. The appeal of its tenets waxed as Europe prospered in the shadow of the Renaissance and the development of the nation state. It waned as the intellectual climate moved in a different and more sophisticated direction, prompted by the advent of the Industrial Revolution, and exemplified by the publication of Adam Smith's Wealth of Nations and the American Declaration of Independence, both of which occurred in 1776. Mercantilism was strongly associated with the rise of commercially dominant cities. Venice, Florence and Bruges were in an earlier wave, giving way later to Antwerp, Amsterdam, London and the Hansa cities. Its development as a system was heavily influenced by the changes in perception of what it was possible to achieve, occasioned particularly both by the discovery of America and the route to India, and the impact on government revenues of vast quantities of silver from the New World. The new sea routes opened up much greater trade possibilities than had existed previously, generating in turn the need for colonies to protect the territorial interests of the big trading monopolies which became established, such as the British and Dutch East India Companies, founded respectively in 1600 and 1602.

Medieval support for monopolies made this form of organisation seem the natural way to support trading activities, while the need to protect extended commercial ventures strongly increased the bonds between the state and merchant interests all over Europe. The abundance of money plus the inflation which came with it were a major incentive to economic expansion, while the increased revenues received by state treasuries provided the finance for larger-scale warfare. Max Weber (18641920) estimated that military expenditures accounted for about 70% of all Spanish revenues during this period, and about two-thirds of those of other European countries. Prices increased particularly fast in those regions most affected by the advent of New World treasure. They rose fivefold in Andalusia in Southern Spain between 1500 and 1600, and increased everywhere else too, even if generally not so sharply. It was not clear, however, that this inflation was entirely caused by bullion from the New World. The rise in prices throughout Europe had started in the 1510s, well before major shipments of gold and silver began. Potosi, the main silver mine, was not discovered until 1545, and gold shipments did not average 1,000kg a year until the 1530s. The thinkers and writers who shaped the Mercantilist consensus came from many countries: Antoine de Montchrtian (15761621) in France; Antonio Serra (precise dates unknown) in Italy; Philipp W. von Hornick (18381712) in Austria; Johann Joachim Becher (16351682) in Germany; and Thomas Mun (15711641), an employee of the British East India Company and perhaps the best known of all, in England. 87 All of them shared the leading features in the Mercantilist outlook. Gold bullion and treasure of every kind was the essence of wealth. Foreign trade should be regulated to produce an inflow of gold and silver, by ensuring that more goods and services were exported than imported. Industry should be encouraged to buy cheap raw-material from abroad, matched by protective duties on imported manufactured goods. Exporting, particularly the sale overseas of finished goods should be fostered wherever possible. Population growth was favoured, both to strengthen the state and to keep wages down. The core of the Mercantilist doctrine was that a favourable balance of trade was desirable because it was seen as the key to national prosperity. Powerfully underpinning these ideas, across Europe strong unitary states were emerging and consolidating themselves. To what extent were these new states created for, rather than used by, the new merchant interests? The answer is that it is difficult to explain the evolution of state policies during the long period during which Mercantilism held centre stage without acknowledging the extent to which the state was the creature of commercial interests, one of whose main objectives was to make sure that they could manipulate it to their best advantage. 89 Mercantilism had firm roots in national defence and aggression,

and was pre-eminently an ideology suited to the powerful merchant classes which had emerged. Serra took it for granted that everyone understood how important it is, both for peoples and for princes that a kingdom should abound in gold and silver. Becher had no doubt that it is always better to sell goods to others than to buy goods from others, for the former brings a certain advantage and the latter inevitable damage. How effective was Mercantilism as a doctrine? Adam Smith began his well-known critique of it with an accurately targeted attack on the popular notion that wealth consists in money, in gold and silver rather than in the value of goods and services. There were soon few people who doubted that he was right. Smith not only produced a highly convincing theoretical case against some of the central tenets of Mercantilism, but was also in tune with the changing climate of opinion among key parts of the now increasingly rapidly evolving economy. By the eighteenth century, the Mercantilist support for monopolies was starting to fall foul of the rising number of industrialists who saw them as obstacles to the advancement of their interests, and wanted to get rid of them. As industry began to develop, there was also increasing opposition to Mercantilist-inspired protectionism. This including prohibitions on the exports of tools and skilled craftsmen, and the Navigation Acts with their equivalents in other countries which confined the carrying of British goods to British ships. It does not follow, however, that all the elements of the Mercantilist approach were wrong or worthless, or that some of the concepts which it spawned did not have lasting value. Mercantilism was defended at least in part by Keynes in The General Theory: As a contribution to statecraft, which is concerned with economic systems as a whole and securing the optimum employment of the system's entire resources, the methods of the early pioneers of economic thinking in the sixteenth and seventeenth centuries may have attained to fragments of practical wisdom which the unrealistic abstractions of Ricardo first forgot and then obliterated.The Mercantilist view that trade depended on sufficient quantities of money being available to finance it was surely correct, and at a time when banking was relatively undeveloped and paper money barely existed, this meant adequate coinage. Where money was scarce, trade was sluggish; where it was abundant trade boomed. The notion that bullionism the accumulation of gold and silver as a prime policy objective was necessarily wrong was therefore wide of the mark. European prosperity had been held back by a severe shortage of coinage during the early Middle Ages until, towards the end of the twelfth century, silver finds in Germany and elsewhere greatly increased the money supply. Everyone could see how the fresh bullion

supplies from the New World were stimulating trading conditions. At a time when adequate coinage was the only way of ensuring a sufficient money supply, running a balance of payments surplus to make sure that coins were accumulated, and did not drain out of the country, made sense. Furthermore, careful thought about the conditions required to achieve this objective led to other advances. Thomas Mun was one of the earlier writers to realise that it was the overall balance of trade which mattered, not bilateral trade balances. To Mun, money was primarily valuable, not for itself, but as a medium of international exchange to drive trade. Such sophistication was not, however, always evident. Confusion between bullion accumulation for its own sake and the more sophisticated concept of a trade surplus remained. Regulations to stop the export of bullion failed to work, but were not formally abolished in Britain until 1663. The Mercantilists were also right to regard high interest rates as being a deterrent to good trading conditions. The fact that, during the seventeenth century, interest rates in Holland, averaging about 6%, were well below the 10% or so prevailing in Britain, undoubtedly was a factor in keeping the effectiveness of the merchant capitalism of the Dutch well ahead of the British. Concern on this score was eloquently expressed by Sir Josiah Child, at the time the richest merchant in Britain, in his book A New Discourse on Trade which went through many printings. Child was the first person to propose the idea of general economic progress, setting an English trend towards an empirical and undogmatic attitude to economic statecraft. His arguments echoed those of Sir Thomas Culpeper (15681662) who in 1621 published his Tract Against the High Rate of Usury, a publication which was reprinted in an expanded version in 1668 by his son of the same name. The Culpepers argued, quite rightly, that interest was a cost and that those countries with the lowest interest rates would be more competitive. The idea that high interest rates lowered prices first surfaced in 1832, and had as little evidential support then as it has now. No account of Mercantilist views should conclude without describing a new approach to the creation of wealth, which did not depend on gold and silver, but on paper money. This was pioneered by John Law (16711729), a Scotsman who found his opportunity in Paris in 1716, the year after the death of Louis XIV whose many wars and other extravagances had left the French Treasury empty. State receipts were only half the expenditure which needed to be financed, and Law's proposal to establish a bank, whose primary function was to lend money to the state, received a ready hearing, although Law's previous efforts to establish such ventures in Paris, Edinburgh and Savoy had all been turned down. Law was a man of considerable intellect and experience, whose Money and Trade Considered: With a Proposal for Supplying the Nation with Money, published in 1705, shared the view, current among other writers of the time, that

increasing the money supply would not cause inflation provided that the volume of business transactions expanded pari passu with the extra money that was made available. Initially the notes issued by the bank were eminently acceptable not only for the payment of taxes, but for all other purposes. This was because Law's bank promised to redeem the notes with the same weight of metal as at the time of their issue, in contrast to the coinage generally, which had long continually been debased by clipping and by reducing its bullion content. For several months the increased liquidity significantly improved not only the condition of the state's finances, but also business conditions generally, leading the Regent to propose a second issue. Law not only acquiesced in this request, but also found a way of augmenting what was now called the Bank Royale's reserves by promoting a new venture, the Mississippi Company, to bring to France the large quantities of gold believed to lie ready to be mined in Louisiana. Three years after its foundation, a speculative boom was under way, as the public flocked to buy shares in the Banque Royale and its associated ventures, with the finance for the share purchases largely being provided, directly or indirectly, by the bank itself. As always, however, the solvency of the bank depended on its ability to redeem for hard cash any notes which were presented to it. As confidence began to ebb, so did the number of people increase who wanted to cash in their notes. By 1720 the Banque Royale was bankrupt, leaving lost fortunes, depressed business conditions, an abiding French distrust of banks, and the condition of the French Treasury no better than it had been four years previously. Only land kept its value, a matter which was not lost on the Physiocrats, whose views on economic were shortly to enjoy considerable influence in France and elsewhere. John Law left France for Venice, where he spent the remainder of his life supporting himself by gambling. Where does this leave Mercantilism in the long journey towards modern economic? There are perhaps three key points to be made. First, the sheer volume of writings on the economic policy issues which Mercantilist concepts generated did much to establish economics as a separate branch of study, and to provide a sophisticated structure of ideas on which others could later build. Second, the writings of the Mercantilist period, partly because of the occupations of those who produced most of them, were heavily coloured by the interests of the rising merchant classes. Mercantilism was mostly concerned with establishing how to run unitary states as successfully as possible in the interests of those engaged in trade, rather than how to achieve wider objectives. In serving primarily the interests of the rich and powerful, however, the economic thinking of the Mercantilists merely reinforced a trend which was to be much in

evidence in the future. Third, the thrust of Mercantilist thinking was largely orientated to dealing as well as possible with practical problems. It had a down to earth quality which much which was to follow lacked. It is easy to criticise, in the light of subsequent developments, what Mercantilism got wrong. It is not always so easy to recognise the extent to which many of its tenets were basically valid, at least in the circumstances of the time.

Classical Economics Classical economics, developed largely, although not exclusively, in Britain, which led the way in the Industrial Revolution, had three main underpinnings. One was the philosophic liberalism, developed from its canonical origins, with the emphasis in the writings of Thomas Hobbes (15881679) and John Locke (16321704) on the individual and the state as the protector of property rights. The second was the foundation laid by the later writers on Mercantilism, and in particular its critics. The third was the French Physiocratic system and, in this case, not so much its particular recommendations, but more the overall approach taken by its leading writers to the way economic issues should be tackled. The background was the unfolding growth in output per head which was becoming increasingly apparent to acute observers in Britain during the eighteenth century, as both agriculture and manufacturing began to transform themselves. At the beginning of the eighteenth century, the Dutch had a better-developed economy, and a higher standard of living on average than the British, but over the next hundred years Britain moved well ahead. Whereas the Dutch depended on trade, reflecting the preoccupations of Mercantilist thought, the newly developing economy in Britain had different roots. In addition to the advantages shared with the Dutch of a stable political background, a developed system of contract law, and a reasonably well-developed banking system, Britain also had an entrepreneurial class which was attracted to agriculture and industry, as well as to trading. Coupled with the benefit of early developments in science, and a long tradition of able artisanship, British industry began to move ahead in textiles, pottery and metal work, as well as mining, canals and agriculture. The first practical steam engine was developed as early as 1712 by Thomas Newcomen, and greatly improved by James Watt from 1769 onwards. John Kay's flying shuttle was invented in 1733, and Richard Arkwright's water frame in 1769. The first major British canal, for which James Brindley (17161772) was the consulting engineer, was completed in 1761, for the Third Duke of Bridgewater (17361803), to carry

coal from his collieries to Manchester. The resulting establishment of large commercial operations, often in areas such as much of the Midlands, where previously few large towns had existed, led to the continuing decline of wage regulation, the traditional apprentice system and the guilds. The outwork system, where entrepreneurs delivered work to the homes of those who carried it out before it was collected again, became more common. Monopolies gradually disappeared or became undermined, although the East India Company lasted until the second half of the nineteenth century. The major change which took place as the Industrial Revolution started was away from the merchant, whose orientation was to the purchase and sale of goods, to the industrialist who concentrated on their production. The ideas making up Classical economic were not, therefore, just occasioned by the coming together of English liberalism, late Mercantilism and the legacy of the French Physiocrats. The changes in perception which were taking place were also very much a consequence of the new conditions and prospects opened up by the Industrial Revolution. The key issue is the extent to which the scope for exponential increases in output and productivity which industrialisation presented for the advancement of humanity was adequately grasped and exploited by the economic theories which came to the fore at the end of the eighteenth and the beginning of the nineteenth centuries. A major part of the thesis in this book is that, after an excellent start with Adam Smith's Wealth of Nations, a great opportunity was wasted by the next generation of writers who took centre stage, as they failed to take adequate advantage of the foundation which Smith had laid. On the contrary, they tended to home in on and develop those parts of Smith's legacy where he was in error, while failing to carry forward his vision of the state's role in promoting economic advance by providing appropriate structures and incentives to enable the full potential of the Industrial Revolution to be realised. The reaction against Mercantilism Much of the reducing influence of Mercantilist thought on both policymakers and among thinkers and writers during the eighteenth century came not so much from the deficiencies of Mercantilist policies although these became increasingly attacked but from a widening out in perspective generally about the scope and range of intellectual thought. The development of the scientific method, pioneered by Francis Bacon (15611626) at the beginning of the seventeenth century in a series of highly influential works, had provided the world with a much more effective way than had been available previously to sift out the most viable working hypotheses. Thomas Hobbes, who had for some time been Bacon's secretary as well as tutor to Charles II, and John Locke, some 40 years his junior, had provided a coherent defence of individual rights, particularly to the private ownership of property, though there was some difference in their

formulations. Locke viewed property as being a natural right, and its protection to be the principal purpose of government, whereas Hobbes had regarded it as being a creation of the sovereign state. 6 Either way, their emphasis on individual rights helped to shift the style of policymaking away from the collectivist approach, which broadly characterised both canonical and Mercantilist thinking, towards looking for solutions which might better harness private initiative, not least towards thelaissez faire attitude advocated by the Physiocrats. Rapid advances in mathematics, medicine and the physical sciences opened up new horizons, indicating how much further it might be possible to push human knowledge and control over events, given sufficient determination and application to do so. Some of those involved in making new discoveries also played a major role in public life, such as Sir Isaac Newton (16421727), who not only had an important part in the early eighteenth century controversy over the respective valuations of gold and silver coins, and the recoinage of the latter, but who also became Warden of the Mint. 7 It was in this capacity that he was responsible for fixing in 1711 the value of the pound in terms of an ounce of gold at 3 17s 9d, which was still its value at the beginning of 1931. John Locke, who, incidentally was on the other side of the recoinage controversy to Newton, himself made a significant contribution to economic as well as to philosophy. He wrote extensively on monetary matters and the implications of the quantity of money on changes in the price level, though he drew the wrong conclusions about the impact of liquidity on economic performance, denying that low domestic prices, caused by a shortage of money, would increase exports and thus restore the trade balance. 8 This was an issue which was not to be satisfactorily resolved until, as we shall see shortly, David Hume provided a clear explanation of the process at work. Locke's writings also provided a basis for the Labour Theory of Value. This cornerstone of the highly influential writings of David Ricardo was to be one of the banes of economic theory until the 1870s. Other significant critics of Mercantilist thought included Sir William Petty (16231687), who had a varied and distinguished career in several different academic and practical fields. Although he followed Locke on the Labour Theory of Value, he made major contributions in other respects. He was very much an empiricist, and one of the first to emphasise the need for reliable data and statistics. He also conceived the idea of the national income the aggregate of all output in the economy over a given period and he made the first calculations as to what it might be, which was an outstanding achievement in taking

economic thinking forward. He was also the first to grapple with the concept of the velocity of circulation of money i.e. the ratio between the amount of money in circulation and the total value of all transactions in a given period a matter of critical importance to the control of the economy by monetary methods, and an outstanding example of how Petty hammered out concepts from, and in connection with, his statistical investigations. Another important work his Discourses was written by Sir Dudley North (16411691), published at almost the same time as he died. While the general tenor of Mercantilist thinking was opposed to free trade, North was strongly in favour of it, especially with France. He was also the first to see the whole world as an economic unit, rather than just the individual nation state. He had little patience with the accumulation of wealth for its own sake, although he understood its importance for financing trade. North also opposed proposals current at the time for restricting the maximum rate of interest on the grounds that it was better to let the market find its own level another step towards the liberalisation of finance and commerce from detailed state control. Even more significant was the work of David Hume (17111776). As well as contributing significantly to philosophy, Hume also has an important place as an exponent of the new political economy. He viewed landowners as prone to extravagance and disinclined to save, and took a much more favourable view of the contribution to the prosperity of the economy of those engaged in commerce and industry. He recognised self-interest and the desire for accumulation as driving forces in economic activity, helping to reinforce the attitudes among business people which were then coming to the fore. His most substantial contribution, however, was to explain clearly, and for the first time, how the flow of specie gold and silver was the controlling factor in promoting equilibrium between different economies trading with each other the factor which had eluded Locke. A balance of payments surplus produced an inflow of gold and silver, which led to a rise in economic activity and upward pressure on the price level. This would work its way through to reducing export competitiveness, thus eventually diminishing the export surplus, and restoring equilibrium. Hume also thought that there was a tendency for economic opportunity to migrate to areas with the lowest cost base on account of the low price of labour in every nation which has not an extensive commerce, and does not much abound in gold and silver, a concept to which this book argues that modern economic has paid far too little attention. He also viewed commerce as being a civilising influence, a point commented on by Smith.


Finally, in this brief survey of the major figures prior to Adam Smith, mention needs to be made of Richard Cantillon (16971734), who was probably the clearest exponent of all the current economic issues prior to Smith. Cantillon is a strange figure, who amassed a large fortune at a young age, much of it by speculating successfully in Law's banking activities in Paris, before he died in a mysterious fire when he was only 37. His major work, Essay on the Nature of Trade in General was not published until 1755, nearly 20 years after his death, and then in a French translation. This, however, meant that his work became well known to the Physiocrats, as well as to English readers. Cantillon's main role was to synthesise and explain the concepts with which economic was becoming increasingly familiar. It was in this capacity that he played an important role in laying the foundations for the work which was to be carried forward by subsequent writers. He also realised the key role of the entrepreneur, and the fact that his work was published in France may have been an important reason why French economists never lost sight of this function and its central importance. By three-quarters of the way through the eighteenth century, therefore, economics had come a considerable distance. It has been argued that, although only a few writers prior to Adam Smith were free traders, all the basic elements of the classical approach to economic activity are embedded in Mercantilist literature, or its critics. It now needed Smith to pull all the threads together into the clear and elegant exposition which he so effectively produced. Adam Smith Adam Smith, the first truly academic economist, was born in 1723 in Kirkcaldy, a small port on the other side of the Firth of Forth from Edinburgh, where his father was the customs collector. After school, Smith went to university, first in Glasgow and then at Oxford. He then returned to Glasgow where he became Professor first of Logic and then of Moral Philosophy. He published his first book, The Theory of Modern Sentiments, in 1759. Four years later he resigned from the university to become tutor to the young Duke of Buccleuch. This appointment provided Smith with the opportunity to tour Europe with his aristocratic charge. They visited Voltaire in Geneva and Quesnay and Turgot in Paris. There is little doubt that the cosmopolitan tone of Smith's writing reflected the breadth of experience he had while travelling outside Britain. He began to write the Wealth of Nations while in France, and he continued to work on it for a further ten years after returning to Britain. It was published in 1776, the same year as the American Declaration of Independence. A consequence of the fame Smith thus acquired was that he was offered a sinecure in the best Mercantilist tradition as a commissioner of customs in Edinburgh, where he died in 1790.

An Inquiry into the Nature and Causes of the Wealth of Nations, to give it its full title, was an immediate success, and the first two-volume edition sold out almost at once. The reception it received was extremely favourable from the beginning, and of course the fact that it was so widely read was a major reason why its influence was as great as it was. Part of the reason why his book was so popular was that Smith's writing style, in contrast with far too many books on economic, is full of anecdote and side comments, and is highly readable. When Adam Smith's friend Edward Gibbon wrote to a mutual colleague saying What an excellent work is that with which our common friend Mr. Adam Smith has enriched the public [offering] the most profound ideas expressed in the most perspicuous language he echoed an opinion of the Wealth of Nations which is widely held and richly deserved. Smith's book had three major themes: what, broadly, motivates economic activity? What determines prices and the distribution of income and wealth? What are the policies by which the state supports and encourages economic progress and prosperity? In providing answers to these questions, Smith no doubt drew on all the previous literature dealing with economic issues, but by power of his expression and clarity of exposition, combined with his own common sense and intelligence, he succeeded in threading together an altogether different way of looking at most of the key economic issues of his day. On economic motivation, Smith firmly gave self-interest pride of place. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self love. The individual is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. Selfinterest is the great unifying principle of the Wealth of Nations, harking back to Smith's earlier writing in The Theory of Moral Sentiments. Though foreshadowed by writers such as Hume, this was a major change in perception from nearly all that had preceded it. Previously, the notion of self-enrichment as a motive had been regarded with mistrust and suspicion, a sentiment that could be easily traced back to the teachings of the Church. Now, the invisible hand was made the centrepiece of economic motivation a position from which it has never since been moved. On the issues of value, distribution and prices, Smith was much influenced by the new conditions thrown up by the Industrial Revolution. As paid employment became much more prevalent compared to the

selfemployment of subsistence farming and small-scale commercial activity, so the issue of who should get what share of the value of whatever was beingproduced became more critical. Similarly, when the ownership of land became separated from the person who farmed it, the rent payable by the tenant farmer to the landlord became an increasingly important matter. How was each determined and justified? Whereas on the issue of economic motivation, Smith carried all before him, his analysis of value and prices, and why they were distributed the way they were, is less satisfying and convincing. There had long been a baffling problem, going back to Aristotle, as to why the prices attributed to some commodities which were so important, such as water, were so low, while the prices of others, such as diamonds described by Smith as the greatest of all superfluities, should be very much higher. The solution to this problem was not to be found until the Marginal Revolution a hundred years later. In the meantime, Smith fell back on his own version of the Labour Theory of Value, which also had a long history.. This is the concept that the worth of any goods or services is to be measured by the amount of labour required to produce them. As Smith said, The value of any commodity to the person who possesses it is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. In another passage he says that The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. 35 In yet another section of the Wealth of Nations, where he compares the time taken to catch a beaver and a deer, there is much heavier emphasis on measuring solely the quantity of labour involved rather than allowing also for its quality, as is implied in his main exposition. Smith was aware, however, that all these formulations were less than fully satisfactory. Clearly, costs other than labour were involved in producing goods and services, not least rent. Furthermore, as capitalist production got under way, it was evident that costs were also bound up with the provision of capital equipment and a return to those who had invested in it. Additional difficulties were caused by introducing the concept of toil and trouble, implying that there were other reasons for costs being incurred than simply the application of a uniform unit of labour, whether or not it was graded for quality. There were also problems about the subjective perceptions of value, which sometimes cut across the work put into their production. On the whole, however, Smith inclined to the view that it was labour production costs which were most significant. The value of a unit of labour was essentially the cost of bringing a worker into being, and then sustaining him references to female workers are virtually non-existent in nineteenth-century writings on economic in a job. This was the subsistence theory of wages, which was later transformed by

Ricardo and Malthus into the Iron Law of Wages, implying that the wages paid to the labouring classes would never be more than what was necessary for their survival. Smith also struggled with the return on capital and to the entrepreneur, whether in the form of interest or profits, to which the Labour Theory of Value, in any of its varying forms, provided no satisfactory explanation. If it was only the labour content of production which determined rightful costs, it appeared that the capitalist's profit was an unjustifiable exaction a view which underpinned much of Marx's work in the middle of the nineteenth century. In the end, however, Smith himself recognised that this part of his work was less than satisfactory. In a characteristically honest comment, he explained that it was a subject extremely abstracted and it may perhaps, after the fullest explication which I am capable of giving it, appear still in some degree obscure, a comment which has been described, perhaps justifiably, as the greatest understatement in the history of economic thought! Partly because of this confusion, the legacy left by Smith's Labour Theory of Value helped to establish two very different traditions. One, broadly adopted by the Classical Economists, was of harmony between the factors of production, while those who became radical critics inclined to accept that exploitation was the key characteristic upon which to seize. Rent was another topic on which Smith did not produce particularly satisfactory formulations. Sometimes it appears that he thought that rent was a separate cost from other components making up total prices. At others, however, he took it to be a residual, after other costs had been deducted. Rent enters into the composition of the price of commodities in different ways from wages and profit. High or low wages and profit are the causes of high or low price; high or low rent is the effect of it. He then explained that this was to do with the quality of the land. The rent increases in proportion to the goodness of the pasture. On public policy, however, Smith was on much firmer ground. He drew on the work of his predecessors such as Sir William Petty and David Hume, but took his analysis well beyond theirs. His greatest emphasis was on the benefit of free internal and international trade, which would allow what he believed to be the key benefit of the Industrial Revolution specialisation and the division of labour to be exploited to a much greater extent than would be feasible without the largest possible market. Smith was fascinated by the pin factory with which he was well acquainted, and he describes in accurate detail all the different processes used to produce pins, and the far higher total output made possible by each worker concentrating on a particular part of the process. Interestingly, Smith did not really appreciate the extent to which the application of machinery and power was the engine of increased output rather than the division of

labour. In this respect, his pin factory, which was evidently not very highly mechanised, may have been a misleading example of where the Industrial Revolution was leading, weakening his argument for unrestricted free trade. Had Smith seen the much bigger factories which were to be commissioned shortly after the publication of his book, he might have taken a different view. Smith's attack on the accumulation of bullion as the talisman of the wealth of the nation, rather than the totality of output it was capable of producing has never been seriously challenged since he made it. The opening words of the Wealth of Nations proclaim that it is not its gold or silver which measures a nation's wealth but that the annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life. The nation's wealth is produced by the skill, dexterity, and judgement with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and those who are not so employed, although Smith had some difficulties with those who were not usefully employed. Among those he listed as being in this category were princes, churchmen, armies and opera singers, a distinction eventually successfully attacked as being untenable. As to monetary policy, Smith thought that exports would attract sufficient money in circulation to keep the economy prosperous, with prices held down and an abundance of products available as a result of the increased competition made possible by free trade. He did not envisage the likelihood of shortage of demand. He did not, therefore, challenge the critical assumption, carried through to Classical economics, and not toppled, at least among mainstream economists, until Keynes, that savings would automatically create the same volume of spending on investment. Instead, following previous writers such as Turgot, he held that the portion of income which was saved is immediately employed as capital, a mistake for which humanity was to pay a high price for the next 150 years. As regards foreign trade, Smith was not dogmatic about the benefit of unfettered markets. He was willing to accept that there could be cases where they were inappropriate, such as for essential defence industries, and in retaliation for foreign tariffs. He thought there might be occasions when even if tariffs needed to be removed, they should be reduced gradually to allow for adjustment. Just as Smith was generally against all forms of internal and external tariffs, he also opposed other forms of restrictions on trading. He denounced restrictive preferences, privileges and state grants of monopoly. He was also against combinations of both employers and workers in restraint of trade, though he

characteristically noted that there were more laws against trades unions than there were against employers' organisations. He was not, however, convinced that, even if they were outlawed, they would not re-emerge informally. In another often quoted passage Smith observes that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. From Smith comes the now almost universally held view that competition is to be preferred to monopoly, although Smith had in mind much more theowner-managed businesses characteristic of his time than the large corporations typical of the modern world. Some recent corporate boardroom behaviour nevertheless lends credence to Smith's view that Being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. 52 Not that Smith had a rosy-eyed view of owner-managers. He constantly berated both merchants and manufacturers for wanting to widen the market and to narrow the competition. As to the role of the state, Smith was strongly in favour of both a minimalist function, and parsimony in its execution. On countless occasions in the Wealth of Nations, he used the lessons of history and his contemporary experience to depict government as generally inefficient, corrupt, frivolous, wasteful and subject to the pressure of vested interests. He therefore believed that the state ought to confine its activities to no more than the provision of defence, public works, and the administration of justice. Taxation should be certain, as convenient as possible, economical to assess and to raise, kept to a minimum, and levied proportionately to income. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The legacy thus left by Smith was a massive one. He did much to map out the field of economic inquiry in such a way that subsequent thinkers were guided by the landmarks which he established: production, value, distribution and the role of the state. The laissez faire principle, competition and Smith's version of the Labour Theory of Value all became outstanding features of the Classical economic The thought of most economists, including Ricardo, started from Smith, and it is widely recognised that most them never got much beyond him. At least until J.S. Mill's Principles, published in 1848, Smith supplied the bulk of the ideas for the average economist. More than this, the Wealth of Nations set a standard for clarity of exposition and forward thinking which has perhaps never been equalled. There was much that Smith had to


say about the new world which was opening up all round him. Perhaps even more important, however, was all that he did to undermine and demolish the legacy of previous thinking which was no longer apposite. Smith was not right about everything, and both his ideas about the Labour Theory of Value and saving automatically creating its own demand involved errors which were carried forward into the economic mainstream, with serious consequences. His achievements, however, surely outweigh these deficiencies. The clarity and precision with which he introduced new ideas such as self-interest, the importance of competition, and the significance of the division of labour, and the fervour with which he advocated older ones such as the benefits from freer trade and the removal of restrictions and monopolies, were huge achievements. It is true that it took time for his writing to have practical effects. With the exception of some import duty reductions introduced by Pitt the Younger in the 1780s, Britain's tariff wall was not lowered to any serious extent until the 1820s. The Law of Settlement, which restricted the mobility of labour, was only repealed in 1834, and the East India Company survived until the 1850s, only finally to be wound up after the Indian Mutiny. It is also true, nevertheless, that the Wealth of Nations became close, in the end, to being the bible of the Industrial Revolution, and that its intellectual influence was massive, shaping the views of all economists who followed him. Most important of all was Smith's breadth of vision. He was interested in the power of economics to address the whole spectrum of the human condition. It was a long time before anyone else was to tackle the canvas on this scale again. Say, Malthus and Ricardo The three most important economists to follow Adam Smith were all close contemporaries. One, Jean Baptiste Say (17671832), was French, and two, Thomas Malthus (17661834) and David Ricardo (17721823) were British. Jean Baptiste Say spent the early part of his career as a businessman helping to pioneer life insurance. He then joined the academic world, ending his working life at the Collge de France where he was appointed France's first Professor of Political Economy in 1815. He corresponded regularly with the other major economists of his day, including Malthus and Ricardo, as well as Sismondi, of whom more will be heard later. Say was a policy-orientated economist rather than a theoretical model builder like Ricardo, whom he described as one who pushes his reasonings to their remotest consequences, without

comparing their results with those of actual experience. Say much preferred systematic analysis and empirical research to the abstract deductive method favoured by Ricardo and his followers. Say's first claim to fame was as a translator of Adam Smith's work into French. This was not a literal translation, but a much more orderly work in the French tradition covering all Smith's major contributions. Although a great admirer of Smith, Say's book, Trait d'economie politique included a number of important concepts of his own. It was very successful both in France, where it did much to publicise Smith's ideas, and also in other languages, including English, into which it was in turn translated. One was the idea, subsequently validated by later more precise formulations, that the Labour Theory of Value was flawed, and that the reason for any good having a certain value or price depended not on the amount of labour which had gone into producing it, but to its utility. This was an important departure from the traditional view, and one which Say failed to persuade Ricardo to adopt despite correspondence between them culminating in a key letter written in 1822, shortly before Ricardo died. Say urged him to accept that it was the last quantity of useful things which was crucial, this being the critically important element of the utility theory as it became accepted 50 years later. As we shall see, Ricardo never departed from his adherence to the fully fledged Labour Theory of Value, with baleful consequences for the development of economics in nineteenth-century Britain Say also carried on the tradition, established by Cantillon, and reemphasised much later by Schumpeter, of ascribing a pivotal position in economic affairs to the role of the entrepreneur, this being another concept which was largely ignored by British Classical economics. Say's interest in this aspect of economic development may well have stemmed from his own experience in commerce, and his background in a mercantile family with its own direct knowledge of entrepreneurial activity. Interestingly, no major British economist from the eighteenth century onwards was a businessman, though Ricardo made a fortune as a stockbroker. By far the most important contribution to economic thinking made by Say, however, concerned the vexed question of whether the reduction in current demand for goods and services caused by saving was automatically compensated for by increased spending on investment. On this issue, Say was in no doubt that it was, though there was some tension which remained an outstanding issue as to whether this happened as a matter of logic or as a matter of fact. Say's Law held that the proceeds from the sale of all the goods and services produced in the economy generated incomes which must exactly equal the value of all this output, although it has to be said that this is not exactly the way Say himself framed the proposition

which is so closely connected with his name. As so often happened with powerful ideas, Say's formulation was a good deal more subtle than the simplified version which became the common currency. As shaped by the tenets of Classical economics, however, the concept gelled that there could, as a result of Say's Law, be no such thing as general overproduction and a shortage of demand for everything which was on the market. It was acknowledged that some part of all incomes was saved, but this was held to generate an exactly similar volume of investment, so that the balance between supply and demand was still there. In a rather more sophisticated version of Say's Law, it was recognised that not all the savings might be spent at the same time as they took place but, in these circumstances, prices were expected to adjust themselves downwards to cater for the temporary lower flow of income. There could still be no general excess of production in relation to the available purchasing power. This was an exceedingly simple and powerful idea and, although it was challenged from time to time, it remained the conventional wisdom until the 1930s. Malthus had early reservations about whether its tenets held good, as did Marx. Furthermore, the recurrent booms, followed by recessions and rising unemployment, which afflicted the developing economies of the nineteenth century, provided increasingly clear evidence that supply and demand were not always in balance. Such disturbances were not allowed, however, to undermine the sanctity of Say's Law. They were put down to temporary periods of adjustment and frictional problems in the labour market rather than to any general flaw in Say's argument. It was not until Keynes and the Great Depression that the fundamental error in Say's Law was admitted. This was a major defect in Classical economics, and it had very substantial practical ramifications. For Say's Law imposed enormous limitations on the capacity of the state to remedy economic conditions which showed signs of under-demand. If no such state of affairs could exist, there was no reason for trying to counteract it. This then became a compelling argument for government non-intervention, ruling out the possibility of an activist approach to economic policy in a critical area where other perceptions might well have made it possible. The results were both to increase the attractiveness of radical alternatives to capitalism, and to reinforce the quietist approach to government favoured by the increasingly conservative financial and commercial interests in Britain and, to a lesser, but growing, extent elsewhere. Thomas Malthus began his career as a clergyman and, from 1804 onwards, was Professor of History and Political Economy at Haileybury College, the academic establishment at which young men were


trained for service in the British East India Company. This organisation, which had employed several significant contributors to economic in the past, not least Thomas Mun, was also to have two other important British nineteenth-century economists on its strength, James and John Stuart Mill, although neither of the Mills, nor Malthus, nor, apparently, Mun ever visited India. Malthus wrote two books, An Essay on the Principle of Population, first published in 1798, and Principles of Political Economy, first published in 1820, although both books went through subsequent additions. In the second book he attacked Say's Law, and much of his current reputation stems from the fact that he was one of the few people, and a very early one at that, to have been on the right side of this particular controversy, although his reasoning does not have a modern ring to it. His case did not depend on there being a Keynesian imbalance between saving and investment intentions but on the general proposition that the numerous but necessarily indigent labouring classes would never be able to afford to buy all that capitalist production could produce. Nor was the shortage of demand likely to be filled by the capitalists themselves, who were, in Malthus's view, likely to be too fully occupied by business affairs. The gap might be filled by what Malthus described as a non-productive class of consumers, consisting of servants, statesmen, soldiers, judges, lawyers, physicians, surgeons and clergymen, but this could not be guaranteed. Interestingly, this list of supposedly unproductive occupations has parallels with the one produced by Smith, who took a much less favourable view of their contribution to the general welfare. Another issue on which Malthus and Smith differed was on the overall merits of free trade, where Malthus expressed considerable scepticism. The arguments which Malthus produced on these topics were not strong enough to carry the day, but the same could certainly not be said of the propositions in his earlier book, which were enormously influential. These concerned the relationship between the size of the population and its level of income. Malthus began with two postulates, the first being that food is necessary to man's existence, and the second that the passion between the sexes is necessary and will remain in its present state. He then concluded that the power of population is indefinitely greater than the power in the earth to produce subsistence for man. This is so, he claimed, because population, when unchecked, tends to increase in a geometrical ratio, whereas subsistence, at best, increases only in an arithmetical ratio. Nature makes the two forces equal by checking the growth of population whenever it presses against the food supply. The two checks are vice and misery, these two bitter ingredients in the cup of human life, although subsequent editions of the Essay included moral restraint as a third possibility. If the population increases before the food

supplies have expanded, food prices will rise and real wages will fall. In the ensuing distress, population growth will come at least temporarily to a halt. This was a compellingly simple idea, with many practical implications. One was that there could be no long-term hope of increasing the living standards of the labouring poor, since the rising population would always erode away any temporary gains in income per head. This was a concept onto which Ricardo latched, with his Iron Law of Wages. Another was that public relief to the poor can only defeat its own purpose in anything but the short term. Both these ideas rang down the nineteenth century. On the one hand, they fuelled dissatisfaction with the status quo among radical thinkers. On the other, they reinforced the existing tendencies towards a minimalist role for the state among the more established classes, who were only too willing to shift the blame for poverty to the poor and away from the upper echelons of society and the government. Malthusian views about population and poverty became another part of the almost unchallenged conventional wisdom, accepted as a fact of life both by Classical economic and by most of the public at large. Yet the evidence that Malthus's views were incorrect was there from the beginning, both from practical experience and in the internal consistency of his writings. Although Malthus produced a substantial amount of anecdotal evidence to support his views even including references to the wretched inhabitants of Tierra del Fuego and while the squalor of the early stages of industrialisation reinforced them, in fact standards of living for working people were already rising when the Essay was first produced. They certainly went up substantially over the next 30 years, when Malthus was still writing. By the 1830s, knowledge of increasing agricultural productivity, population and living standards was widespread, and readily available from censuses and elsewhere. There seems to be nothing to suggest, however, that Malthus was interested in this kind of empirical evidence. Even where he did attempt to quantify the issues at stake in the Essay, it is far from clear that he did this fairly. In particular, it is not selfevident that food production will only increase in an arithmetic ratio compared to the geometric ratio posited for population growth, and indeed this is not what happened. Whatever his merits in other respects, Malthus's views on population, colouring as they did both the opinions of the nineteenth-century economic establishment and the public, provided the world with another direly wrong-headed legacy. David Ricardo was the third child of a stockbroker of Dutch descent, who had at least 17 children. Ricardo left the Sephardic Jewish faith and became a Christian when he married his Quaker wife but, in doing so,

cut himself off from his own relations. He nevertheless continued the family tradition and became a stockbroker himself, amassing a large fortune in about five years. He then bought a country estate at Gatcombe Park, the same property as was to be purchased in the 1970s by Queen Elizabeth II for Princess Anne and her family. Shortly afterwards, when he was 27 years old, he was by chance lent a copy of the Wealth of Nations. This sparked Ricardo's interest in economics, although he did not start publishing until 1809, ten years later. He was a close friend of Malthus', and was well known to all the other economists active at the time. He was widely involved in all the major economic controversies of his age, especially those to do with monetary policy, where he sided with Say against Malthus on the issue of possible deficiencies in demand. In 1819 he became MP for the Irish rotten borough of Portarlington, which had 12 voters, and which he never visited. He died four years later, in 1823. Ricardo's influence as a theoretical economist derives as much as anything else from the forcefulness and vigour with which he expressed his views. His cast of mind was analytical and abstract, and his conclusions correspondingly firm and rigid, although in his later writings he tended to modify and soften his position on many of the key issues with which he was concerned. As so often happened, however, it was not so much the nuances which carried the greatest influence either with his fellow economists or with the public, but the raw conclusions. These covered much the same ground as had been dealt with by Smith on prices, rent, wages, and profits but Ricardo tackled these issues in a different way. Whereas Smith was inclined to draw common-sense conclusions from wide empirical observations, Ricardo tended to use induction, the danger being that the validity of the conclusions then depended heavily on his premises being, and remaining, realistic and relevant. This is an approach which, it has to be said, is still just as hazardous now when used by modern economists as it was in Ricardo's day. A revealing insight into Ricardo's lack of interest in empirical information is that, despite all that he had to say about the evolving economy of his time, it appears that he never visited a factory throughout his career. On prices, Ricardo moved some distance from Smith's views by introducing the concept of utility as an important influence on cost, in addition to the labour content. If a commodity were in no way useful in other words, if it could in no way contribute to our gratification it would be destitute of exchangeable value. This was a move, shared by Say, towards the modern view in which prices are determined by the interplay of supply and demand, incidentally opening up the way to leaving a much more positive role for the entrepreneur. This did not stop Ricardo from falling back on the Labour Theory of Value as the main determinant of prices, however, although he excluded products with special scarcity value, which could not

be reproduced, such as rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil. Apart from these exceptions, in Ricardo's view It is natural that what is usually the produce of two days or two hours' labour, should be worth double of what is usually the produce of one day's or one hour's labour.' This was largely the hard line formulation to which Ricardo adhered. Rent, for Ricardo as with Smith, was largely concerned with agriculture, for Britain was still at the turn of the nineteenth century a predominantly agricultural country, and landlords, as Ricardo observed, despite the fact that by this time he was one of them, love to reap where they have never sowed. Ricardo defined rent as that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil. At the margin, with land only just capable of supporting those working it, the rent would be zero. Better land would produce a surplus, however, which would accrue to the landlord, and the greater the population, and the intensity with which it was therefore tended, the larger the surplus would be. The rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. Turning to wages, Ricardo defined them as that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution. This was the Iron Law of Wages another of the simplifications which for a long time carried almost all before it implying that the standard of living of working people would never rise above subsistence level, whatever was done by beneficent governments, charity or trades union action. In fact Ricardo substantially qualified his views on the Iron Law, allowing for the equilibrium price of labour to include conveniences [which had] become essential to him from habit. He also allowed for the subsistence level to rise as a result of improved technology and rising investment for no sooner may the impulse, which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect. He also believed, however, that the opinion prevailing in the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is confirmable to the correct principles of political economy. Perhaps partly for this reason, Ricardo's conclusion was still a pessimistic one: When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages again fall to their natural price, and indeed from a re-action sometimes fall below it. This was the message which the public received, amplified by Ricardo's


comment that Like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by interference of the legislature. As with others who had based their views on prices on the Labour Theory of Value, Ricardo had considerable difficulty in explaining how profits arose, and thus how they could be justified. If prices were determined wholly by the amount of labour expended on production, and if any surplus that might occur as a result of favourable conditions was entitled to go to the landlord as rent, where did the money to pay for profits come from? Ricardo's explanation that it arose from the contribution to production made by the entrepreneur in providing capital equipment was not difficult to attack, for this must reflect no more than the past labour costs entailed in its production. Furthermore, profits were much larger than could be accounted for in this way, 100 Ricardo's own fortune being a highly specific case in point. The conclusion, which was all too easy to draw, and which Ricardo never successfully fended off, was that capitalists made no contribution to the production of goods and services warranting the profits they earned, but merely appropriated to themselves a surplus to which they were not entitled. The contribution towards the development of nineteenth-century economics of the main figures who followed Smith was therefore a depressingly misguided legacy, well justifying the description by Thomas Carlyle (17951881) of them as the Respectable Professors of the Dismal Science. The combination of Say's Law, Malthus's views on population and Ricardo's interpretation of the Labour Theory of Value, was to make it impossible for the central doctrines in Classical economics, other than the ideas already formulated by Smith, to contribute anything of much use to practical policies for decades to come. It made it look impractical for the bourgeois state to ameliorate conditions among those benefiting least from the evolving economy, or for other reasons falling on hard times, leaving only a minimal economic role for the public action. At the same time, the same crucial concepts which underpinned Classical economics also provided large amounts of ammunition to its critics. In doing so, however, the conceptual errors they took over also proved to be faulty enough heavily to undermine the theoretical case they put up against nineteenth-century capitalism. Economic and social progress were certainly made in Britain during the nineteenth century, and elsewhere, but hardly despite their fame and influence as a result of Say, Malthus or Ricardo. The impact of the major errors of judgement which their work contributed to Classical economics at least as these were interpreted by the world at large outweighed the value of everything else they had to say.


Classical Economics in Transition The Classical System, established by the time of Ricardo's Principles, saw a period of consolidation during the following 50 years as it slowly changed to what has come to be called Neo-Classicism. Much of it has remained intact, as micro- economics, ever since. Its major policy-orientated strength continued to be, however, the case for laissez faire and free trade. The doctrine of maximum competition, partly going back to Quesnay, stayed as the pre-eminent practical economic prescription, at least outside socialist circles, throughout the nineteenth century. Much of the rest of mainstream economic theory had little or no practical application a problem which was to continue to dog economics for many decades to come. This did not, however, stop important contributions being made to the less mainstream parts of economic and social thought during the nineteenth century. Jeremy Bentham (17481832), though primarily a lawyer rather than an economist, was thought by Marshall to be on the whole the most influential of the immediate successors to Adam Smith. His major aim was to develop a complete and rational code of law, and in this capacity he was the original advocate of the utilitarian proposition that the aim of public policy should be to seek the greatest happiness of the greatest number. This concept set out to provide an important new guide to public policy, but proved to be something of a two-edged sword in practice. It could be used both to warrant state action to ameliorate social conditions, but also as a justification for exploitation on the grounds that this was for the overall benefit of society, and was criticised accordingly. The utilitarian banner was nevertheless forcefully carried forward by James Mill (17731836), who also may have contributed the theory of comparative cost to economics, although this is usually attributed to Ricardo. This elegant theory explained how any two countries could benefit by trading with each other even if one was less efficient at producing everything than the other. It was still worth trading if one country was relatively good, compared to the others, at producing one product rather than another. James Mill, a strong supporter of Ricardo and the Labour Theory of Value, published the first economic text book in 1821, entitled the Elements of Political Economy. James Mill shared Malthus's concerns about population growth, which he described as the grand practical problem, although this did not stop him having nine children of his own, one of whom was John Stuart Mill.


Much of the practical economic controversy during the early part of the nineteenth century related to monetary policy, and in particular what to do about the gold value of the currency. Britain had suspended payments in gold in 1797 because the provincial banks of the time could not meet the demand for cash caused by the threat of a Napoleonic invasion. Since then, prices had risen steeply, triggering the establishment of a Select Committee on the High Price of Gold Bullion, to whose report, published in 1810, most of the main economists of the day made contributions, including Ricardo who had been co-opted as a member. The main controversy then, and subsequently, was over what had caused the inflation, and therefore what policy to pursue to ensure that, as far as possible, price stability was maintained. The Currency School, led by Lord Overstone, George Warde Norman and Robert Torrens (17801864), believed that the inflation had been caused by the lack of discipline triggered by the abandonment of the Gold Standard. The Banking School, led by Thomas Tooke (17741858), on the contrary, denied that a purely gold-based currency would operate in the manner claimed for it by the Currency School. They believed that banks would be sufficiently cautious and prudent in their lending for the risk of inflation to be no greater than it would be with a metallic standard, and that price changes were primarily to do with supply and demand rather than monetary factors. The Currency School won the day, however, leading to sterling returning in 1821, after a severe deflation, to the pre-Napoleonic War gold valuation, originally set by Isaac Newton in 1711. Their final victory came with the 1844 Bank Charter Act, which locked the banking system still further to the same gold price, while effectively emasculating whatever scope there might have been for a more active monetary and exchange rate policy for Britain during the nineteenth century. There were protests from some industrialists, particularly Matthias Attwood (17791851) and his brother Thomas (17831856). By this time, however, Britain was too dominated by powerful financial interests for complaints about the impact of a relatively high sterling gold value on industry to carry much weight, a situation which has changed little during the last 150 years. The justification for capitalists receiving the return they did, nevertheless, remained unresolved, providing a continuing weakness to Classical economics which Marx and others exploited with eventually highly significant consequences. An attempt was made to deal with this problem by Nassau William Senior (17901864) with his Abstinence Theory of Interest. This attributed the return to capitalists as being compensation for their austerity in deferring the use of resources to a later date, for which they needed to be rewarded. To abstain from the enjoyment which is in our power, or to seek distant rather than immediate results, are among the most painful exertions of the human will. Neither the scale of the

rewards which capitalists managed to award themselves, nor the scale on which many of them spent them lent much credibility to this theory, though it lasted for some half a century before being overtaken by the Marginal Revolution, of which more in Chapter 6. While the Abstinence Theory never commended itself to the critics of the British economic system, Senior further alienated them by opposing the 1837 Factory Act with the notorious argument bitterly attacked by Marx that the last two hours of the day's labour alone constituted the capitalist's profit. During the nineteenth century, Britain, largely as a result of its economic pre-eminence at the time, established a substantial empire. Opinion about it was divided. Adam Smith had derided the empire as a project extremely fit for a nation whose government is influence by shopkeepers, and favoured its disbandment. This was a view substantially shared by his early followers such as Ricardo and James Mill, but opinion gradually became more supportive, led by Edward Gibbon Wakefield (17961862), who argued that the empire might serve a variety of purposes: The objects of an old society in promoting colonisation seem to be three: first, the extension of the market for disposing of their own surplus produce; secondly, relief from excessive numbers; thirdly, an enlargement of the field for employing capital. 116 As the nineteenth century wore on, however, the relatively poor performance of countries such as Britain, with the largest empire, gave little credence to the overall benefits to be secured from the control of overseas territories. A more significant domestic issue related to free trade, not least in food products. The agricultural interest in Britain had always been strong enough to keep the price of corn relatively high, and legislation to prohibit or discourage the importation of cereals went back to the fifteenth century. A new Corn Law was passed in 1815, which prohibited imports unless prices reached high trigger levels 80 shillings a bushel in the case of wheat. This was strongly opposed especially by the rising manufacturing interest, which wanted to see the cost of living kept down. The result was a major campaign, led by Richard Cobden (18041865) and John Bright (18111889), to have the Corn Laws repealed, an objective which was achieved in 1846, following the outcry over the potato famine in Ireland, which had started the previous year. The success of this campaign led to the almost total dismantling of British tariffs. By 1860, the total number of dutiable items coming into Britain had been reduced to 48. By 1882, only 12 imported articles were taxed, and these purely for revenue purposes.


The next major synthesis of the economic thought of the time was undertaken by John Stuart Mill (1805 1873), whose Principles of Political Economy was published in 1848. Mill took a reasonably optimistic view of industrialisation, believing rightly that conditions would improve as the economy grew, although he still took a Malthusian view, particularly of agriculture: It is the law of production from the land that in any given state of agricultural skill and knowledge, by increasing the labour, the produce is not increased in the same degree. He was also sceptical about how far economic growth could go, opining that It is only in the backward countries of the world that increased production is still an important object: in those most advanced, what is economically needed is a better distribution. In general, however, Mill followed the same line as Ricardo, although somewhat softened, not least because of the mounting attacks on Classical economics at the time from the socialist left. Although he never lost faith in Utilitarianism or a general belief in the superiority of competitive capitalism over other economic systems, he was considerably more willing than his predecessors to advocate reform of existing institutions, even if these involved government interference with private interests. Nevertheless, Mill still largely accepted Ricardo's view on the Labour Theory of Value, and he forcefully re-formulated, but did not essentially alter, Say's Law. As the role of the City of London as Britain's and the world's financial centre became more pronounced, so the way in which the banking system operated became more sophisticated, and, in particular, the function of the central bank, the Bank of England, in reacting to crises. An additional reason for the stability of the British economy militating against radical change was the mechanism developed by the Bank of England for acting as the lender of resort, providing the banking system with sufficient liquidity to ward off disaster, even though this involved risks with convertibility. Walter Bagehot (18261877), for many years Editor of The Economist, did much to develop and clarify the issues which were involved, further securing the leading role of sterling, although the Gold Standard, on which it depended, did not become the basis for Western Europe's international trade and finance until the 1870s, and the rest of the world's until the end of the nineteenth century. The Gold Standard may have benefited the City, but it did little to advance the performance of the British economy, which did significantly worse than most of its continental competitors, especially from about 1870 onwards.


New Imperialism Up to the middle of the nineteenth century the new industrialism had taken root only in Western Europe and to a less extent in the United States. The Far East had been for centuries of importance to Europe as a source of supply for fine textile fabrics, luxury foodstuffs, and a few easily transportable materials; and with the rise of the cotton industry towards the end of the eighteenth century the Far East became important as a market also. Africa had been of account in the eighteenth century chiefly as a hunting-ground for slaves who could be caught or bought for sale in the American plantations, and its commercial importance dwindled after the suppression of the slave trade early in the nineteenth century. Canada was a sparsely populated agricultural country, supplying furs and timber, and becoming after 1840 of some account as a producer of grain for export. The only important Canadian industry was shipbuilding, and that died out after the introduction of steamships made of metal. Australia and New Zealand had between them a population of less than 200,000 and were of little economic account in world trade until after the gold discoveries of 1851, though the production of fine wool had begun. In South America, Brazil had been from early in the nineteenth century an important market, and there was a growing trade with the Argentine, Chile and Peru, but these countries were still in a rudimentary stage of economic growth until the latter end of the century. The half century before 1914 witnessed, besides the vast growth of the United States and the rapid industrial development of Great Britain and Germany, a swift extension of modern commercial and industrial methods to new countries. Japan, long almost isolated from world trade, not only opened its ports to foreign commerce but proceeded with extraordinary thoroughness and speed to equip itself with the productive techniques of the Western world. British capital covered India with a network of railways and began to develop Indian productive resources for the supply of Western needs -- especially tea. The European occupation of Africa, previously confined to a few areas within easy reach of the coast, broadened out until practically the whole continent had been annexed by one or other of the European Powers. Russia, the granary of Europe, borrowed capital extensively from richer countries to build railways to link up its vast territories in Europe and Asia, and attempted, behind a very high tariff, to create modern

industries of its own, largely under imported foreign management. New commodities, such as rubber and oil, immensely increased the economic importance of Malaya, the Dutch East Indies, Persia, Burma and Mexico. Commerce ceased to be confined to the old trade routes, and ocean-going ships carried everywhere the mingled blessings and curses of modern civilization. A fever of railway-building seized on the world and provided vast openings for the investment of capital in the less developed countries. Trade, which in the earlier part of the nineteenth century had been mainly an exchange of goods for goods, often on most unequal terms, came to depend to a growing extent on the investment of capital abroad by citizens of the older countries. With this investment of capital came a startling revival of empire building and a renewed tendency towards political interference by the more advanced nations in the affairs of the less developed. When a trader sells a man a shirt, that is an end of the transaction; but when a great industrial concern or a group of financiers builds, or finances the building of, a railway in a backward country, payment can be made only by instalments spread over a long period. In such circumstances the providers of the physical capital, or of the money spent on buying it, continue to take a lively interest in what is done with it. The capitalists of the investing countries come to have a stake in the debtor countries and to regard the existence of orderly and debt-honouring governments in these countries as one of the rights of property; and they are apt to call upon their own Governments for help if these rights are challenged, or if disturbed political conditions in the backward country upset their hopes of gain. Moreover, the Governments of the advanced countries themselves set to work to extend their colonial empires in search both of markets for their products and of assured sources for the supply of foodstuffs and raw materials for their use or even mainly for the sake of preventing their rivals from occupying territories which they may want to control and develop at some future date. The recrudescence of imperialism in the latter part of the nineteenth century was no merely causeless change of political attitude. It was based on a profound alteration in the economic relationships between the countries of the world. Richard Cobden and John Bright and most of their contemporaries in Great Britain had believed that it was only a matter of time for the white colonies to proclaim their independence and become sovereign States, as the United States had done in the previous century. Nor did they object to this; for they were convinced that trade would develop all the faster and more advantageously if no attempt were made to influence it by political pressure. In the native areas included within the British Empire, with the exception of India, the early Victorians took little interest; and on India many of them looked askance, as involving expensive responsibilities that were not worth while. Those who did value the Indian empire regarded it chiefly as a field for the expansion of the market for Lancashire cotton goods. The early

Victorian capitalists looked at the world with the eyes of traders in finished consumable commodities, and their creed of laissez-faire followed logically from their economic ambitions. But other countries, as they adopted the new industrialism, found themselves less fortunately placed than Great Britain. Their captains of industry found it hard to compete with the British in the open markets of the world, and they had no comparable colonial empires of their own. Just as they protected their own industries against British imports, so they set out to make such colonies as they had as far as possible closed markets for their own goods -- and to get more colonies, in order to secure more protected markets and preferential fields for capital investment. British capitalism, confident in its industrial superiority and in its ability to lend capital more readily and on a larger scale than its rivals, felt for a long time no need to close its colonial territories to foreign products, even where it was in a position to impose its own terms; but the newer colonial empires of France and Germany grew up to a far greater extent as closed markets for the goods and capital of the metropolitan countries. This does not mean that Great Britain was unaffected by the growth of imperialism. On the contrary, the British also set out to annex fresh territory and to build in every part of the Empire railways and other public undertakings which supplied profitable outlets both for British capital and for the products of the British industries making capital goods; nor did British economic activity stop short at the boundaries of the Empire. The Argentine was opened up mainly with British capital and British machinery, and there was active British investment in China, as well as in India, and even in colonies belonging to other Powers, such as the Dutch East Indies. This expansion of industrialism over almost the whole world is connected intimately with the growth of the metal trades, as closely as the earlier phases of the Industrial Revolution had been with the rise of the Lancashire cotton industry. In the second quarter of the nineteenth century coal, iron and engineering had laid the foundations of the new system of transport. Great Britain owed a great deal of its advantage at this stage to the abundance of its coal and to its possession of good supplies of iron-ore in close proximity to the coalfields. This second phase of the Industrial Revolution consolidated British economic supremacy. British engineering skill had built the main-line railways mainly between 1826 and the later 'forties, and thereafter the British engineers and contractors set out to use their acquired skill and experience in the profitable task of railway building for the rest of the world. Great railway contractors such as Thomas Brassey, finding orders no longer plentiful at home, began to look further afield; but undeveloped countries

could not afford to supply the capital for expensive railway projects, however great the prospects of economic expansion by their means might be. British capitalists, enriched by the profits of earlier ventures, could afford to lend the money as well as supply the skill. British capital, British technicians and British skilled labour undertook the task of equipping a large part of Western Europe, and later India and the Argentine, China and Africa, and many other parts of the world, with the new means of transport. Railway construction occupies indeed a position of extraordinary significance in the evolution of modern capitalism. On the one hand it has been the means by which the hinterland of vast continents has been opened up to trade and settlement, and, jointly with the steamship, the instrument whereby the raw materials and the producing capacity of the New World, of Africa, and of the East have been made available for European use; and on the other hand it has largely influenced and determined both the structure of capitalist business and the growth of overseas investment as a means of hastening the spread of power production over a larger and larger part of the world. The railway played an even more important part than the steamship in the promotion of international trade, for the steamship for the most part only enabled goods to be carried faster and in greater quantities along the familiar routes of commerce, whereas the railway multiplied many times over the area of the world open to commercial exploitation and settlement. Industrialism, before the coming of the railroads, could be hardly more than a fringe of smoke round the seaboards of even the most advanced countries. The railways industrialised, or at any rate commercialized, the interior as well. Above all else, they were the making of the United States as an advanced industrial nation. But railway development was also of very great importance in its effects on the structure of the business system. The railway company, as it grew up in Great Britain in the second quarter of the nineteenth century, was modelled in its business structure on the earlier turnpike trusts and canal companies, which, like it, had been compelled to get special powers by private Acts of Parliament, because they needed the authority to invade private rights in order to construct their enterprises. But the railway company very soon developed on quite new and different lines. So large a mass of capital was needed to finance the host of projects for new railway construction that the money could be got only by making mass appeals and by drawing in large sections of the public who had been previously unused to industrial investment. The railway promoters appealed for capital to the rising middle classes of Great Britain, who needed new openings for the use of their money when the State had ceased to pile up war debts and there were few

other fields open to savers who did not wish to take an active part in the use of their capital. In drawing in these classes, the railway promoters created the typical modern joint-stock concern with its widely diffused body of shareholders and stockholders, too numerous and too scattered to exercise any effective control over its conduct and interested in it solely from the financial point of view. The experience of railway flotations and railway stockholding prepared the way for a general acceptance of the joint-stock system and for the final concession of limited liability in all industries under the British Companies Act of 1855. There were of course other pioneers of joint-stock besides the railways -- gas and water companies, for example but in the evolution of the joint-stock system and in the widening of the investing public the railways played throughout the dominant part. No less significant was the effect of railway development in internationalizing the supply of capital. British overseas investment had indeed begun before the coming of the railways; there had been large private investments in the West Indian plantations and in North America during the eighteenth century. Moreover, after the Napoleonic wars there had been a boom in overseas issues, especially loans and investments in the South American States which had just thrown off the Spanish dominion and were looked to as expanding markets for British goods. But before the epoch of overseas railway construction there was not a great deal of investment of capital abroad except in Government loans or in purely private ventures such as the plantations of the West Indies. It was mainly through the building of railways overseas that British investors first learned to trust their money in foreign industrial ventures; and, in this respect too, what began with railways soon spread to other industries. The export of capital took a great and increasing place in the economic development of the modern world, and in this sphere, as in home investment, railway enterprise was the principal pioneer. In this great movement of overseas investment Great Britain, as the only country with any large mass of surplus capital to invest, led the way. The rapid growth of British capacity to export goods provided the necessary resources, but exports could not develop to the full in a world much poorer than Britain unless British capitalists were prepared to lend to other countries the means of buying what they had to sell and were content to receive a deferred return as interest on their lendings. As we have seen, this overseas lending was largely confined in its early stages to public loans or to plantations; but after the coming of the railways it expanded into private industrial projects on a steadily increasing scale. In 1850 British capitalists had already perhaps 230 millions invested abroad, mainly in Government stocks, with a sprinkling of commercial and mining investment. By 1876, according to the most reliable estimates, the total had

increased to about 1200 millions. Between 1860 and 1876 nearly 950 millions of new capital issues for overseas use can be traced in the London market. Rather more than half this total consisted of Government loans, including railway guarantees, and rather less than half of all other investments put together. The railways in the United States alone absorbed over 470 millions, and railway securities easily occupied the next place after public loans. It has been estimated that in 1914 British investors had at least 4000 millions invested abroad, and of this sum more than 1500 millions was in railway securities and 1000 millions in Government loans. No other country had in 1914 even half so large a total overseas investment as Great Britain. France is estimated to have had about 1800 millions; Germany about 1200 millions; and the United States about 540 millions. The foreign investments of the United States were mainly in South and Central America ; the French and German mainly in Europe and in their own colonies; but in all cases the total included a large mass of investments in railway securities, besides the proceeds of Government loans which had been devoted to the building of State-owned railway systems. France, outside its own colonies, had specialised chiefly in public loans and in the financing of the economic development of Russia; while Germany had distributed its investments about equally between Europe and the rest of the world, with a preponderance of fixed-interest-bearing securities. Only British investment was very widely spread over all countries and every type of bond and share, both public and private. Undoubtedly this heavy investment of capital overseas greatly speeded up the economic growth of the more backward countries and stimulated in the more developed countries the expansion of the industries producing capital goods. It was indeed largely a result of the concentration of income in the hands of the richer sections of the community, for this both increased savings and limited the home market for consumers' goods, and thus provided an incentive to the active capitalists and financiers to be always on the look-out for fresh markets and fields for investment abroad in order to absorb the growing productivity of capitalist industry and the larger and larger masses of capital looking for profitable outlets. If wages had risen faster in the older countries, the aggregate increase of wealth in the world as a whole might possibly have been slower and the industrialization of the less advanced areas would probably have been delayed, but there would have been a better diffusion of wealth in the developed countries. There would also have been less international rivalry, less imperialism and subjection of the weaker peoples, and less sowing of the seeds of war.


Yet, obviously, it is in itself a good thing for the richer and better-equipped countries to help on the development of the less advanced. Obviously, it would have been in every way better if this could have been done without either subjecting the borrowers to the political control of the lenders or involving the lending countries in quarrelling with one another about their rights to help in the expansion of the new industrialism. But, as the world was, the less advanced countries became, not so much willing borrowers from the more advanced, as recipients of loans and investments which were thrust upon them even against their wills and were applied to such purposes as suited the needs of the lending rather than of the debtor countries. Investment developed as a means of finding markets and raw materials and foodstuffs needed by the advanced countries, and was uninfluenced by considerations of the well-being of the peoples among whom it was made. Of course, it often raised the national incomes of the borrowing countries; but that was incidental only, and against this has to be set its effect in breaking up the old ways of living without providing any substitute pattern of culture adjusted to local needs. Moreover, the advanced countries were continually squabbling for the rights of their national capitalists to exploit the backward countries' resources. The enterprises set up in the less developed countries were often not only financed by alien capital and managed by alien technicians and supervisors but also conducted under alien control by companies registered and administered in the lending country. The white workers received salaries out of all relation to native incomes; and usually no attempt was made to train native workers for the more skilled tasks. The profits of the enterprises were remitted home to the alien owners; and the countries in which the enterprises were carried on, unless they were recognized as fully civilized nations, had to submit to alien policing and often even to annexation, either open or disguised under the form of a protectorate or a mandate. The native inhabitants became in effect sources of man-power for the less skilled tasks under alien capitalists; and in many areas steps were taken to force reluctant tribesmen to supply labour to man the white man's mines and plantations. In other areas, such as Malaya, mass importation of workers from other backward countries changed the make-up of the local populations and created vast insoluble political problems of mixed societies. In some cases, a large part of the tax revenue of the backward countries came to be earmarked as security for the payment of interest on the alien capital. The capitalist world, in the latter part of the nineteenth century, became far less tolerant of uncivilized peoples and even of peoples backward in relation to Western standards of economic progress. While Europe was asserting within its own borders the rights of nationality and self-determination, it was also denying the right of non-European peoples to abstain from using to the full, according to Western notions, the potential wealth of their lands

and their labour power, and was claiming the right to enforce the development of any territory inhabited by less civilized peoples, as part of the civilizing mission of the white races.

Of course, from the standpoint of the capitalists in the advanced countries, with their faith in the virtues of large-scale production, there were reasonable arguments in support of this attitude. Modern capitalist industrialism could develop only if it could find both expanding markets for its products and larger and larger supplies of foodstuffs and raw materials which it could receive in exchange for them. It needed not only the produce of the prairie lands of America and the ranches of Australia, where there were relatively few natives to be dispossessed, but also that of tropical Africa, rubber and tin from Malaya and the Dutch East Indies, and a host of other commodities from countries already thickly populated by native inhabitants who would not and could not produce enough to meet the needs of the advanced countries except under the stimulus of white intervention. Why, asked the European capitalist, should these native populations be allowed to ignore the vast economic opportunities of the regions in which they dwelt? Their own standards of wealth and civilization could rise only if they were taught how to use the resources lying ready to their hands; and only the white man could teach them. That was the white man's mission -- a mission, as he saw it, of civilisation for the world as well as of enrichment for himself, a mission necessary in the interests of the progress of industrialism -- which was assumed to be good. National self-determination, according to this view, could hold good only for peoples who had their eyes sufficiently open to the economic main chance. A sentimental regard for the cultural traditions and ways of living of the more primitive peoples must not be allowed to stay the civilizing march of the capitalist industrial system. But, unhappily, the white men did not march on their civilizing mission either as a united army or with any notion of human equality or brotherhood in their minds. Even those who "got on well with the natives" commonly had a contempt for them and regarded their institutions without respect. Moreover, the white men disputed and even fought one another for the right to exploit the less developed regions of the earth. The partition of Africa was accomplished without actual war between the great Powers, which divided up practically the whole continent, but not without recurrent threats of war. In 1918 the colonial empire of Germany was parcelled out among the victors, and though the form of annexation was hidden under the

cloak of the mandatory system and each annexing Power pledged itself to administer its mandated territories in the interests of their inhabitants, in effect most of the mandated areas were virtually added to the empires of the victorious Allies. One thing, indeed, was secured -- the open door in these areas for the commerce of all nations -- but with that exception the mandatory system differed little from positive annexation. Only after the rise of the Soviet Union and the development of native nationalism, which was greatly stimulated by the Second World War, did the older notions of imperialism go out of fashion; and even then they died hard, especially in the French colonies, but also in Malaya and in East and Central Africa. The root of the problem lay in the need of the developed countries for ever-expanding markets and sources of supply to keep their industries at work and their peoples fed. It is not in the nature of modern industrialism to stand still. It must either grow or decay, and under the conditions of the nineteenth century it had, in order to grow, to find markets for its products largely outside its own borders -- except where, as in the United States, its home population was being reinforced by a stream of immigrants. Especially in Great Britain and Germany, industrialism grew up, not as a balanced system of production and consumption, but as a development of specialised production of certain classes of machine-made goods made largely out of imported raw materials and under conditions which necessitated the importation of large quantities of foodstuffs as well. Any system of this sort must sell abroad in order to buy, and can raise the standard of living at home only by selling more and more of its products abroad. It must, moreover, if it is to have more to sell, assure itself of a constantly growing supply of necessary materials. This was much less true of France than of either Great Britain or Germany, and it has been still less true of the United States, with its vaster territory and its more balanced economic development of industry and agriculture. But it was broadly true of all the great empire-building countries. The inevitable result appeared in the growth of economic Imperialism and in the rivalries of the great Powers for the effective possession of sources of supply as well as of expanding markets. The struggle for oil furnishes an outstanding example. In sum, the latter half of the nineteenth century was marked by the development of a new kind of economic
Imperialism. Between 1884 and 1900 the territory of the British Empire was increased by more than 3.7

million square miles, containing more than 57 million people. France annexed 3 1/2 million square miles, with more than 36 million inhabitants; and Germany, much less favourably placed, built up, chiefly in Africa, a colonial empire of over a million square miles, with nearly 17 million inhabitants. The United States took over Cuba, the Philippines, Hawaii and Alaska. Italy followed France and Great Britain into Northern Africa.

Russia and Great Britain squabbled over Persia and intrigued in Afghanistan and the States of Central Asia. France, Spain and Germany fell out in Morocco. Belgium, under Leopold, attempted to develop the Congo on lines which shocked the conscience even of an imperialist world. In 1914 it was very nearly true that there was no territory left on the face of the earth which had not been appropriated or at least dominated by one or another of the "civilized Powers". The great exception was China, which had proved too tough a nut for even modern capitalism to crack: and China, because it could not be partitioned, had found itself at the mercy of the intrigues and rivalries of the great Powers. All the world over, economic Imperialism had become a dominant force in world politics, and behind it loomed the ever-growing threat of war. All the same, it is an error to interpret the imperialist tendencies of the nineteenth and twentieth centuries entirely in economic terms. Important as the economic factors of course were, they did not stand alone: side by side with them the old militaristic drives towards imperialist expansion persisted, and in certain countries the economic forces were fully as much instruments of State policy as influences impelling their States towards new conquests of potential economic value. For example, as we shall see in a later chapter, the great expansion of Czarist Russia in Asia certainly cannot be accounted for by the pressure of Russian capitalists for markets or sources of raw material or fields for the investment of surplus capital. Capitalism in Russia was not nearly a strong enough force to exert a preponderant influence, and Russia's drive in the East is to be explained much more in terms of militaristic power motives than of economic inducements. Nor can Germany's imperialism really be explained in exclusively economic terms. In Germany, the interconnection between the forces of militarism and capitalism was very much more complicated than it was in Czarist Russia, but it can hardly be disputed that the German drive for supremacy in Central and Eastern Europe, though it largely used economic means, was inspired fully as much by nationalist and militarist sentiment as by the search for markets. Even in the case of Africa the partition, though accounted for partly by economic inducements, was speeded up and universalized by the competitive prestige-seeking of the European Powers. One act of annexation led to another, not so much because there were real economic gains in prospect as because each participant in the scramble felt that it would lose "face" if it were behindhand with its rivals in acquiring additional territories. There were strong reasons why the capitalist system of the later nineteenth century turned away from the pacific courses of Cobdenism to policies resting on domestic Protection and

the attempt to monopolize colonial markets, materials and fields of investment; but these economic forces did not operate in isolation from the political forces, which cannot be correctly represented as simply derivative or secondary. Imperialism is a very much older thing than capitalism, and although in the nineteenth century it took on new forms, deeply affected by changes in what Marx called "the powers of production", the old lusts for power, the old militaristic impulses affecting whole nations and particularly their ruling classes, did not cease to operate: they were merely reinforced when monopolist capitalism became the ally or the auxiliary of militant expansionism, as it did in Japan as well as in Germany. Even in Great Britain it was certainly not from economic motives only that Disraeli caused Queen Victoria to be proclaimed Empress of India. Nor was the new imperialism at all welcome to important sections of the British capitalist classes. The new imperialism was not identical with the old, but it is fully as important to recognise its continuity as to draw attention to the way in which it was affected by the growth in the scale of economic enterprise and by the drive to find markets and materials and scope for the investment of surplus capital outside the older countries.

Activities 1. To what extent is imperialism older than colonialism? 2. Why was the Railway Age considered so important in the evolution of modern imperialism?

Beyond Imperialism: The New Internationalism Much has been said about the United States having become, or having to become, an empire. To provide the chaotic world, especially in the wake of the Cold War, with some semblance of law and order, it has been asserted, the international community needs a new world order, a global empire, a superpower that can speak on behalf of all countries and all peoples, a power willing to use its military and economic resources to protect all against the forces of violence and anarchy. There is only one nation that can fulfill the task: the United States. In the twenty-first century, therefore, humankind may be forced to choose between continued disorder and imperial governance instituted by the United States. So one side of the argument goes. But others dispute this contention, insisting that for practical or moral reasons the United States should never take on an imperial role.


A historian can only contribute to this debate by historicizing it--that is, by noting what empires and imperialism have meant in the past, and by examining what these might mean in today's world. This essay seeks to put empires and imperialism in the context of modern world affairs and to discuss how they contributed, or failed to contribute, to stabilizing international order. It cannot be denied that there was a time when empires provided some sort of world order. In the first half of the nineteenth century, the globe was dotted by huge territorial empires, including the Ottoman, Persian, Mughal (Mogul). Russian, and Chinese (Qing). They presided over large, multiethnic populations and kept (with varying degrees of success) local tensions under control. These were traditional imperial states under the rule of dynasties whose origins went back several centuries. They governed essentially contiguous territories, thereby establishing some semblance of regional order. One might include the United States in this list as well: it, too, grew as a territorial empire during the nineteenth century, expanding northward, westward, and southward, with the central government establishing its authority over all parts of its territory, at least after the Civil War. These landed empires were joined by the maritime empires of Britain, France, Spain, and other European nations that superimposed a commercial regime over the vast, traditional empires of the Middle East, South Asia, and East Asia. The relationship between the landed and maritime empires was sometimes violent--for example, in India during the 1850s when Britain displaced the Mughal Empire with its own colonial regime. On the whole, however, the traditional empires continued to function, even as merchants, sailors, and missionaries from the maritime powers infiltrated their lands. Until the last decades of the nineteenth century, these territorial and maritime empires constituted an international order. The system of international law that had originated in Europe in the seventeenth century steadily spread to other parts of the world, and all these empires, as well as other independent states, entered into treaty relations with one another. This was an age of multiple empires. When we talk of empires today, or of the United States having become an empire, we obviously do not have in mind such a situation. Rather, many observers draw the analogy between empire today and the British and other maritime empires that emerged at the end of the nineteenth century when a handful of colonial regimes established near-total control over most of the world's land and people. This distinction is important, since much depends on what historical antecedent one is referring to when one talks about an empire.

Likewise significant, in contemporary discussions the ' imperialism' that is most relevant is the 'new imperialism' that emerged in the last decades of the nineteenth century and persisted only through the first decades of the twentieth. A handful of nations whose empires were both territorial and maritime exercised the new imperialism; great military powers such as Britain, France, Germany, Russia, the United States, and Japan incorporated overseas territory into their respective domains, thereby emerging as world powers. Most of Africa, the Middle East, Asia, and the Pacific were carved into their colonies and spheres of influence. Once acquired, these lands were governed by cadres of administrators recruited both at home and in the colonies; and these colonial regimes were in turn protected by officers and men sent from the metropoles and by troops and police recruited locally. The new imperialists vied with one another for control over land, resources, and people, and in the process they fought many colonial wars. Instead of producing global chaos and anarchy as a consequence, however, these empires at times managed to establish some sort of world order. They did so both by seeking to stabilize their relationships with one another and by making sure the people they controlled would not threaten the system. The Russo-Japanese War (1904-1905) and its aftermath serve as a good illustration. Ignited by Russia and Japan's clashing ambitions in northeast China (Manchuria) and the Korean peninsula, this first major war of the twentieth century was a typically imperialistic war. When negotiations to define their respective spheres of domination failed, the two countries fought on land and at sea, but not on Russian or Japanese soil; the Chinese and Koreans themselves had no say in this war that would determine their nations' futures. Victorious, Japan won control over Korea and southern Manchuria, turning the former into its colony and the latter into its base of operation on the Chinese mainland. The other Great Powers, assuming their own imperial domains would not be directly threatened by the conflict or its eventual outcome, did not intervene, but in the end the United States offered mediation with a view to preventing further bloodshed and regional disorder. Within two years of the war's end, moreover, Russia and Japan reconciled and agreed to divide Manchuria (and later, Inner Mongolia) between them. The two empires had fought an imperialistic war and, just as quickly, had decided to preserve their imperial spheres through cooperation. Such behavior was typical in the age of the new imperialism. The other imperialists essentially stood by, accepting the new status quo in Asia, although the United States, with its empire in the Pacific, began to view Japan's growing power with alarm. Still, the United States and Japan

reached agreement that they would not challenge their respective empires: the United States would not dispute Japanese control over Korea or southern Manchuria, and Japan would not infringe on U.S. sovereignty in the Philippines, Guam, or Hawaii. The Japanese also accepted French control over Indochina and Dutch control over the East Indies, despite the movements against colonialism that were developing in those colonies. Some of these movements' leaders looked to Japan, the only non-Western Great Power, for support, but Japan chose to identify itself with the other imperialists. At least for the time being, the imperial powers colluded with one another to keep their respective colonial populations under tight control. The world order they established entailed a division of humankind between the ruler and the ruled, the powerful and the weak, the 'civilized' and the 'uncivilized.' The world of the new empires had its heyday at the beginning of the twentieth century, but it disintegrated rapidly following the Great War. The German, Austrian, and Ottoman Empires collapsed after the four years of fighting, while the Russian Empire, on the opposite side of the conflict, was undone by the revolutionaries who came to power during the war. The empires of Britain, France, Japan, and the United States did not disappear, but they were no longer capable of providing the globe with system and order. They might have tried to cooperate with one another to preserve the new imperialism, but they had neither the will nor the resources to do so. Imperialistic collusion broke down, and Japan began challenging the existing empires in Asia and the Pacific in the 1930s. Under Nazi leadership a new German empire emerged, and Japan and Germany in combination collided head-on with the remaining empires of Europe and the United States. In that sense, World War II was an imperialistic war, but it was also the beginning of the end of all empires, new and old. By seeking to destroy each other, the empires had committed collective suicide--but that was only one reason behind the demise of imperialism. More fundamental was the emergence of antiimperialism as a major force in twentieth-century world affairs. Anti-imperialistic nationalism had many sources--ideological, political, social, and racial--but above all, it was fostered by the development of the transnational forces that are usually identified as globalization. The age of the new imperialism coincided with the quickening tempo of technological change and of international economic interchanges; more and more quantities of goods and capital crossed borders, and

distances between people of different countries narrowed dramatically, thanks to the development of the telegraph, the telephone, the steamship, the automobile, and many other devices. These advances in science and technology at one level facilitated imperialistic control over distant lands-and for this reason most historians tend to claim that imperialism and globalization went hand in hand. Without the international order sustained by the imperial powers (in particular, by the British Empire), it is often argued, economic globalization would have been much more difficult, if not impossible, to develop. The empire provided a political and legal framework, backed up by military force, for the economic transactions and technological developments of the day. The imperial administrators built roads, established schools, and helped eradicate diseases in their colonies and spheres of influence, thereby modernizing these areas and incorporating them into an increasingly integrated globe. Thus, if one accepts such a perspective, it is possible to say that imperialism and globalization reinforced one another, even that they were two sides of the same phenomenon--something like the development of a stable and interdependent world order. But it is also clear that globalization facilitated the growth of colonial resistance to imperialist domination. To the extent that globalization was an integrative force, bringing people of all countries closer together, it undermined one essential condition of imperialism: the rigid separation of colonizer and colonized. The blurring of the distinction took many forms: mixed marriages between these two groups of people, compradors acting as middlemen between colonial administrators and the native populations, and the education of colonial elite in the schools and universities of the European metropoles. Imperialism would have ceased to function if such blurring continued--and that was why, even while colonizer and colonized were intermingling at one level, at another a system of rigid social and cultural distinction was maintained. Such distinction in turn aroused resistance and opposition from the indigenous populations, reinforcing anticolonialist sentiments. If globalization, in short, facilitated the new imperialism, it also provided favorable conditions for the emergence of anti- imperialism. And in the end, anti- imperialism proved to be a far stronger imperative than imperialism. Before the Great War, anti-imperialists in Tunisia, Egypt, India, China, Korea, and elsewhere were already aware that modern transportation and communications technology could serve their interests as well as they had served those of their colonial masters. Anti-imperialists could use

railways and steamships to travel long distances and organize resistance movements; they could use the mass media and circulate handbills and newspapers among an increasingly literate populace; and they could even establish transnational connections and convene international congresses against imperialism. Although some in the metropoles supported the anti-imperialist movement, before the Great War it had not significantly weakened or altered the structure of imperial governance. Yet even as large numbers of colonial troops were recruited to fight for their respective masters, the war experience did nothing but encourage the growth of anti- imperialism. Both the Bolshevik revolutionaries' anti-imperialist ideology and Woodrow Wilson's conception of self-determination indicated that even among the victorious Allies the ranks of the imperialist powers were breaking down. The processes of globalization that had facilitated imperialism were now encouraging the spread of anti-colonial nationalism. If empires had defined the nineteenth century, then nationalism would define the twentieth. This became quite evident after the Great War, when economic globalization resumed, buttressed by such technological inventions as the airplane, the radio, and the cinema. Imperialism, however, was not reinforced by this process but, on the contrary, was eclipsed by an ever-more vociferous clamor for national liberation all over the world. When the remaining imperial powers failed to respond in unison to such voices, or to prevent another calamitous war from breaking out between themselves, anti-imperialist movements grew so strong that by the end of World War II, nationalism had come to be seen as a plausible alternative to imperialism as the basis for reconstructing world order. Instead of a handful of large and powerful empires providing law and order in the world, now, after World War II, sovereign states were expected to act as both the constituents and guardians of the international system. The former empires that were now shorn of colonies, the newly decolonized countries, and the countries that had been independent but non-colonial states--all would be equal players in the postwar world order. They would ensure domestic stability while at the same time cooperating with one another through the United Nations, an organization whose basic principle is national independence and sovereignty. The so-called Westphalian system of sovereign states that had provided the normative framework for European international affairs since the seventeenth century would now be applied to the entire globe, as country after country achieved independence in Africa, the Middle East, Asia, and elsewhere. Global governance would no longer be based on a vertical division of the world into the ruling

powers and all the rest, but instead established through a horizontal system of cooperation among nations of presumably equal status. The history of the world in the second half of the twentieth century was to show, however, that sovereign states were no more capable of producing stable international order than the empires had been: nearly as many lives were lost in interstate and civil wars after 1945 as in World War II. With rare exceptions, the United Nations proved incapable of preventing such conflict when national interests collided, and few countries were willing to give precedence to the principle of international cooperation. It is often argued that the postwar international system was defined by the cold war in which the United States and the Soviet Union effectively divided the globe into two counterbalancing spheres of influence. The two countries, which controlled the domestic affairs of their allies and client states to maintain local order, managed to prevent a third world war from erupting. If we accept this view, we are in effect saying the United States and the Soviet Union behaved like erstwhile empires, as providers and sustainers of local and international order. But it must be recognized that unlike the nineteenth-century empires, they did not discourage nationalism. The United States, after all, continued to espouse the principle of national self-determination, and the Soviet Union, for its part, preached ideological anti- imperialism. Both superpowers supported colonial liberation movements, although in practice they did not always find them compatible with their global strategies. Meanwhile, the independent states of Asia, the Middle East, Africa, and Latin America often refused to heed the dictates of the Cold War antagonists. Nationalism, once unleashed, could not be contained even by the Cold War's new empires. Globalization proceeded apace after World War II, but this was not because of the Cold War or postcolonial nationalism, but rather in spite of them. Economic, social, and cultural bonds of interdependence were strengthened across nations by supranational entities (especially regional communities) and by non-state actors (such as multinational enterprises and international nongovernmental organizations). Regional communities, most notably the European Economic Community, sought to subordinate separate national interests to considerations of collective wellbeing. The idea had always been there--after all, it was well recognized that globalization implied some sort of trans-nationally shared interest--but it was not put into

practice until a group of European countries agreed to put an end to their history of internecine wars and to give up part of their respective sovereign rights for the sake of regional peace and solidarity. The number of non-state actors grew rapidly after World War II. Whereas in the quarter century after 1945 the number of independent states nearly doubled, international nongovernmental organizations and multinational enterprises increased even more spectacularly. While the superpowers worked to advance their own geopolitical agendas, and independent states continued to look after their own parochial interests, these non-state actors together promoted globalization and a sense of transnational interdependence. The question, then, was whether the non-state actors would be able to provide global order if this task could not be entrusted to the superpowers or the sovereign states. This was the key question that had to be addressed in the last three decades of the twentieth century--and it remains the key question today. Indeed, it is the question at the heart of the contemporary debate on empire. During the 1970s and 1980s, as Cold War tensions abated, fresh national rivalries were unleashed, fracturing Africa, the Middle East, Central Asia, and Southeast Asia. At the same time, forces for transnational interconnectedness were strengthened. The European Economic Community, now joined by Britain, steadily effected regional integration, and its success encouraged similar, if smaller-scale, arrangements elsewhere, such as the Association of Southeast Asian Nations and the North American Free Trade Area. Whether such regional entities would, by themselves, succeed in establishing a new international order remained to be seen. If such communities developed as exclusionary groupings, pursuing only their internally shared interests, they might end up dividing the world. But other developments in the last decades of the century tended to encourage international and interregional cooperation and to generate conditions for the emergence of a new, stable order. During the 1970s, for instance, issues such as environmental degradation and human rights abuses were becoming so serious that they would have to be solved through trans-nationally coordinated action. The United Nations sponsored conferences to deal with them, and it was joined by newly formed nongovernmental organizations that were transnational in character, such as Friends of the Earth and Amnesty International. Acts of international terrorism also aroused global awareness, evoking calls for collective response.


These issues were no longer confined to specific countries or regions. It was no accident, then, that international organizations of all sorts, but especially of the nongovernmental variety, grew spectacularly in the last decades of the century. At a time when sovereign states were proving incapable of constructing a viable international order, and when the Cold War was ebbing, regional communities, international organizations, and non-state actors were actively seeking an alternative--a global community that did not rely for its viability on the existing governments and armed forces, but on the transnational activities of individuals and organizations. These were all aspects of the globalizing trend of international affairs. Can such transnational forces and activities somehow manage to combine to establish a global structure of governance? That is the major challenge today. A hundred years ago, globalization had coincided with the new imperialism. By the late twentieth century, nineteenth-century-style imperialism had long since disappeared from the scene, but the postcolonial states had proved no more capable of establishing a stable world order than the older nations that had been in existence for a long time. Would the regional communities provide the answer? If not, would transnational non-state entities such as non-governmental organizations and multinational enterprises be able to construct a global civil society? How could non-state bodies establish any sort of governing structure to provide law and order? How would they define their relationship to the existing states? These were serious questions to which no satisfactory answer was readily available. It may have been for this reason that some began to look back fondly on empires as providers of international order. Two developments at the end of the twentieth century and the beginning of the twenty-first made the question of effective world governance extremely urgent. One was the frequency and geographical spread of international terrorism, and the other, the proliferation of nuclear, biological, and chemical weapons across national boundaries. Both were serious challenges to the whole world, requiring an effective response from all--states, international organizations, regional communities, and non-state actors. Such cooperation, however, would take a long time to develop, so in the meantime the United States took it upon itself to punish terrorist groups and the 'rogue states' suspected of harboring weapons of mass destruction. For those who believed that international order must be buttressed by a great military power willing to use its resources for this


purpose, the United States provided the ready, and possibly only, answer. The nation would carry out the functions that the earlier empires had performed. It would be the empire for the twenty-first century. But today there is little tolerance for any sort of imperialism anywhere in the world. Although old-fashioned imperialism is far from dead, it has no legitimacy in the international community, which is, at least in theory, constructed on the principles of national self-determination and human rights. Moreover, the Atlantic world, which dominated modern international relations and of which the United States was an integral part, can no longer claim the same degree of hegemony in world affairs. On one hand, European countries have tended to move within the framework of their regional community, quite independently of the transatlantic ties. On the other hand, China, India, and some Latin American and Middle Eastern countries are likely to develop as centers of economic and even military power. To the extent that the new imperialism of a hundred years ago was largely a product of Western civilization, today we must reckon with the fact that non-Western civilizations have grown in strength and self-confidence. If a new empire were to emerge, therefore, it would not be able to function if it were identified solely with the West. Such an empire would have to accommodate different civilizations from all regions of the Earth, and it would need to be mindful of the transnational networks of goods, capital, ideas, and individuals that constitute global civil society. In other words, a new empire for the new millennium would not be an empire in any traditional sense. What may have worked briefly a hundred years ago cannot be expected to reappear and function in the same way today. There is, however, another nineteenth-century legacy that might, in its twenty-first-century incarnation, provide a more relevant solution to today's problems: the legacy of internationalism. It is sometimes forgotten that the age of the new imperialism was also a time when modern internationalism was vigorously promoted, by governments, private organizations, and individuals. The Olympic Games were one example, the Permanent Court of Arbitration in the Hague, another. The internationalists established transnational organizations and convened world congresses. They sought an alternative to a world order that was dominated by the imperialists. Yet the contest for influence between imperialism and internationalism appeared to be decided in the former's favor when, despite the internationalists' ardent pleas for peace and understanding among nations, the world powers chose war.

But the Great War proved to be the swan song of empires, and their certain demise was implicit in the establishment of the League of Nations, an internationalist project par excellence. Although the League did little about the existing empires besides placing Germany's former colonies and those of its wartime allies under a system of mandates, and while it proved powerless to check the aggressive imperialism of Germany and Japan in the 1930s, its internationalist vision never died. The international body, assisted by a host of nongovernmental organizations, kept up the efforts--even during the dark days of World War II--to define norms of behavior for nations and individuals, efforts that laid the ground for conceptions of human rights, crimes against humanity, and universal equality and justice under the law. The United States and Great Britain, even as they fought against the Axis Powers, without hesitation embraced this internationalist legacy that became the basis of the United Nations. Even if somehow a new empire were to emerge, that empire would have to embody principles of human rights and justice for all. It would have to be an empire of freedom in support of the emergent transnational institutions of global civil society. Since such a development is highly unlikely, we would do better to explore the alternative. After all, there actually are other ways of securing international order. And there is no reason why the internationalist legacy, rather than the legacy of the briefly dominant new imperialism, should not serve humankind today.


Lecture Five The Growth of the United States Across the Atlantic, a country potentially far wealthier than any other, with the most fertile territory and the vastest natural resources in the world at its disposal, had been developing its economic life along lines radically different from those of Europe. During the earlier part of the nineteenth century the United States, despite a considerable growth of manufactures and an early resort to mechanical power for both production and transport, remained predominantly agricultural and imported manufactured goods from Great Britain and continental Europe in return for exports of foodstuffs and of raw materials such as tobacco -- the leading commercial crop in the eighteenth century -- indigo, rice and timber. The export of cotton became important at the very end of the eighteenth century, and from that time grew with astonishing speed. The export of wheat came much later and did not reach large dimensions until well after the middle of the nineteenth century. The chief exporters at this stage were still the planters of the Southern States, who used slave labour for the growing of crops suitable for large-scale production. The Northern States were peopled chiefly by farmers producing for their own subsistence or for the home market. Industries were, for the most part, on a small scale and were hampered in applying the new techniques of power production by the limitations of the domestic market. The future of the United States seemed, then, to lie less in production for export than in the growth of a balanced system of agricultural and industrial production, with the home market mainly in view. Despite the vast growth in the scale of enterprise, the economic development of the United States has largely fulfilled this idea of internal self-sufficiency. The growth of the slave population of the Southern States was indeed bound up with the development of production for export, and at a later stage the huge interior was opened up largely as a source of supply of foodstuffs which could be profitably exported to Europe in exchange for manufactures -- especially capital goods -- and for such raw materials as are not found in sufficient abundance in the United States. But only in the cotton and tobacco districts did production for export ever play a dominant part in setting the course of economic policy. Save in these

areas, the home market always remained the most important consideration. The battle between the North and South, finally fought out in the Civil War, was in effect a struggle not only between slave-owners and employers of free labour but also between Free Traders interested mainly in exports and Protectionists concerned chiefly with the home market. Its outcome made certain the dominance of Protectionism over the United States as a whole. We have seen already that opinion in America had turned at an early stage towards Protectionism and that from 1816 to 1833 tariff duties on imported manufactures had been steadily increased. But during the next two decades, in view of the rapid opening-up of the country and of a growth of home demand which outran the capacity of the native manufacturers, this tendency was temporarily reversed, and tariffs were revised on the whole in a downward direction. From 1861, however, a new epoch of Protectionism began. The emergency duties levied largely for revenue during the Civil War were not removed, and in 1864 the average level of duties was three times as high as it had been under the Act of 1857. From this time onwards high and increasing Protection was the established basis of American fiscal policy. Of course the development of industrialism in the United States is no more to be attributed to tariffs than its development in Great Britain is to Free Trade. Both countries, by reason of their natural resources, were obviously suited to industrial development, and both would have become great manufacturing powers whatever fiscal policy they had chosen to adopt. Great Britain, if it had clung to a Protectionist system, would probably have specialised much less in the great exporting industries, such as cotton, and would have maintained a larger rural population and a larger volume, in the long run, of agricultural production. The country as a whole would, in consequence, almost certainly, under the conditions which existed during the nineteenth century, have been less wealthy and its citizens would have acquired a much smaller quantity of overseas investments. One undoubted effect of Free Trade was to give a very great stimulus to the export of British capital. British influence in speeding up the industrialization of other countries would thus have been lessened, and British capitalism would have been less international both in its dealings and in its economic outlook. But it is far harder to say what would have happened to the United States if Free Trade had been adopted as the basis of American economic policy. The growth of industries would probably have been slower, and that of agricultural production even faster, than they actually were; but industrial development would not have been stopped, although it might have taken somewhat different forms and the relative proportions of

different industries might have been radically altered. The cost of living would certainly have been lower, but probably wages would have been lower too. Some purists in economic theory will doubtless claim that industry as a whole would have been more productive if some forms of production had not been fostered by Protection at the expense of others, and that America would have become a greater exporter of manufactures if Protection had not artificially raised the costs of production. This latter statement is certainly true, but the first is doubtful. For the United States, behind its high tariff wall, is the largest Free Trade area in the world, and with the growth of population the American market became big enough to afford full scope in almost every industry for the full economies of large-scale production. There are strong economic arguments against the maintenance of the high American tariff, now that the United States has become a great creditor country; but the familiar view that, in relatively small countries, tariffs lead to the fostering of industries for the products of which the home market is not large enough to afford adequate scope for efficient production, cannot be applied to the United States. The American tariff has been a great nuisance to Europe, but it does not follow that it has held back the growth of wealth and prosperity in the United States. Even if it could be shown that universal Free Trade is the system calculated to secure the greatest possible production of wealth over the world as a whole -which is doubtful -- this would not prove that Free Trade must necessarily have the same effect within each separate country. The stages by which the United States came to be the world's greatest producing area, though not the most important in foreign trade, are clearly marked by the growth of American population and output. The population of the United States doubled between 1860 and 1810, and trebled between 1860 and 1914. In successive decades from 1860 to 1920 it rose by 8 millions, 10 millions, 12 millions, 13 millions, 16 millions and 14 millions. In the same decades immigration accounted in round figures for 2 millions, 3 millions, 5 millions, 4 millions, 9 millions and 6 millions. The negro population rose from 4 millions in 1860 to 10 millions in 1920, but constituted by 194 less than 10 per cent of the total. Immigrants, who were drawn in the earlier decades chiefly from Western Europe, came in the later decades much more largely from Southern and Eastern Europe, creating a problem of national assimilation which has not yet been wholly solved, though it became much less intractable when the door was closed to free migration after the First World War. Thereafter immigrants were admitted only under a quota system which discriminated according to the country of origin; and the total inflow was greatly reduced. Even with a population of more than 150 millions in 1950, the United States remains a sparsely populated country. It has under 50 inhabitants to the square mile, compared with 194 in France, 466 in Western

Germany, and about 750 in England and Wales. A considerable part of the population is still rural. Despite the rapid growth of industries, even in 1940 nearly 20 per cent of the total working population was still engaged in agriculture, forestry and fishing, as against less than 28 per cent in manufacture and mining, 5 per cent in construction, 6 per cent in transport and public utilities, 9 per cent in public employment and more than 32 per cent in trade, finance and other private services. In Great Britain, on the other hand, the proportion of the total working population engaged on the land in 1951 was well under 5 per cent, as against more than 37 per cent in manufacturing industry, 3 per cent in mining, over 6 per cent in construction, 7 per cent in transport and communications, 6 per cent in public services, 3 per cent in the armed forces and 28 per cent in trade, finance and personal and professional services. In 1920 nearly half the total number of inhabitants in the United States were still classified as living in rural areas; but since then the growth of towns and industries has been astonishingly rapid. The urban population of the United States more than doubled between 1880 and 1900, and had nearly doubled again by the 1920s; whereas the rural population is still less than double what it was half a century ago. Perhaps the clearest sign of the rapid industrialization of the United States is the growth of coal production. In 1860 the total output of coal was under 15 million tons. This was doubled in the next decade, doubled again in the next and again in the next, reaching nearly 160 million tons in 1890. It was over 500 million tons in 1910, and over 600 million tons in 1920. Meanwhile, the output of pig-iron was trebled between 1850 and 1870, and multiplied five times between 1870 and 1900. It surpassed the British output in the early 'nineties, and was nearly three times as large as the British and twice as large as the German output in 1913. In steel, the United States was just behind Great Britain in the 1880s, but had four times as large an output in 1913. The value of American manufactures, according to the census returns, rose tenfold between 1860 and 1910. For the same period the total value of exports rose fivefold and that of imports more than fourfold. Up to the 1870s imports exceeded exports in value; but thereafter there was always a balance on the other side available for use in payment of shipping and financial services and in interest on capital borrowed from abroad. Right up to 1914 the Americans continued to import capital. The United States became a creditor nation only during the First World War. Side by side with the advance in manufacturing industry went a rapid growth of agricultural production. The value of farm products, according to the census returns, more than doubled between 1870 and 1900, and rose more than fourfold between 1870 and 1910. Wheat output was nearly three times as great in 1880 as in 1860, and rose again rapidly in the 1890s, till it was nearly four times as large in 1910 as it had been half

a century before. The number of cattle in the country more than doubled between 1860 and 1890, but thereafter ceased to grow as the free grazing area was reduced by the advance of arable cultivation. The number of pigs nearly doubled between 1860 and 1900, but showed thereafter a small decline. The production of wool, for which, rather than for their mutton, sheep are chiefly raised in the United States, grew more than fourfold between 1860 and 1910; while the cotton crop was between three and four times as large in 1910 as it had been fifty years before. These great increases in agricultural output were achieved mainly under a system of small-scale farming, and the average agriculture holding was actually smaller in the 1930s than it had been in 1860. Nearly 60 per cent of the farms in the United States were of less than 100 acres, and only 18 per cent of more than 175 acres, but there had been a great advance in the use of farm machinery and also in the large-scale marketing of farm produce. The great rise of American agricultural exports occurred in the latter part of the nineteenth century, as the new lands of the West were gradually opened up. The export of grain rose from 20 million bushels in 1860 to 293 million bushels in 1880; and it then nearly doubled again by the middle 'nineties. But thereafter, with increasing consumption at home, the surplus available for export fell off sharply. For the five principal cereals, it was 530 million bushels in 1897-8 and only 168 million bushels in 1913-14. Similarly, the export of meat rose from 46,000 tons in 1870 to 550,000 in 1880, only to fall off still more sharply as home consumption grew. After 1918 the United States fell to a position of declining importance as an exporter of foodstuffs, but greatly increased its importance as an exporter of a wide variety of manufactured goods; but raw cotton still retained its position as the most important single article of export. Above all, the economic growth of the United States throughout the nineteenth century was that of a balanced productive system dependent relatively little on the outside world. In the twentieth century the U.S.A. came to be by far the largest exporting and importing country in the world, and even before the First World War it was second in exports and third in imports; but even of commodities of an exportable kind the Americans exported in the period between the wars less than 10 per cent of their total output, and in comparison with their total volume of production the proportion of exports was much smaller still. In comparison with Great Britain or Germany the United States was still -- and still is to-day -- a largely selfcentred economic unit, despite its vast demands on world supplies of materials in which it is deficient in domestic resources -- such as rubber and tin.

Nevertheless, the American scale of production and consumption is so vast that the United States became after 1914 a factor of enormous importance in world trade. The American impact on world conditions was therefore very great, and any fluctuation in the domestic demand, especially for raw materials, was liable to dislocate conditions in the world market; but the home trade is of so much greater importance to the Americans than their foreign commerce that right up to the Second World War American economic policy continued to be guided almost exclusively by domestic considerations. The consequences for other countries were sometimes most unfortunate, for although the Americans were in a position largely to ignore the rest of the world, other countries could not afford to ignore the United States. For a great creditor nation to maintain a large surplus of exports over imports is a very anomalous state of affairs, which can be sustained only if such a nation continually makes large overseas investments -- or outright gifts -to restore the balance. But the Americans between the wars, after investing largely in Europe -- especially in Germany -- during the 1920s, ceased to follow this policy in the 1930s, and thus contributed greatly both to the coming of the world crisis and to its prolongation. The world's gold piled up in the United States -- which did not need it -- in payment for necessary imports; and other countries had to reduce their intake of American goods because of sheer inability to pay for them This situation reappeared in an exaggerated form after 1945, and disaster was averted only by the granting of huge free gifts to European countries under "Marshall Aid" and subsequently in the form of subsidies for the defence of the "free world" against Communism. Meanwhile, though some reductions were made in the American tariff, a policy of Protectionism remained in force; and even if it had not, the balance could hardly have been restored without a very great diversion of European purchases from America to non-dollar sources of supply. The outstanding consequence of the enormous domestic wealth of the United States has been the establishment there of a higher standard of living for the main body of the people than exists in any other country. There remain great areas of comparative poverty, especially in the South, and the American standard of living is far from being uniform over the whole country. But a very large section of the American people, including most of the industrial workers, has undoubtedly a higher living standard than has ever been achieved elsewhere. In 1929, on the eve of the world depression, the American wage-level was in terms of purchasing power nearly twice as high as the British, and in terms of gold two and a half times as high, and the difference has since become substantially greater. There is nothing new in this American superiority in wage-levels, so far as the more skilled workers are concerned. It was relatively almost as marked half a century ago as it is now. But it has spread in recent

times to the less skilled, who used to be largely immigrants paid at much lower rates, but have now been absorbed and have learnt the arts of combination which used to be the prerogative of the skilled crafts. The disparity, moreover, is not confined to the working classes. It runs right up the social scale, creating in the United States a far vaster public with surplus income to spend on luxuries or to invest in future production than exists in any other country. The immensely rapid advance in the exploitation of American economic resources has meant throughout the history of the United States, despite recurrent crises, a prospect of very high profits for the successful business adventurer, and this prospect has bred in the American people a speculative temper of a kind that exists nowhere else in anything like the same degree. This temper has contributed greatly to the instability of the American business system and has exaggerated its repercussions on the rest of the world. It has also prevented the development of any large body of Socialist opinion and has given even Trade Unionism in the United States a peculiarly individualistic turn. The American Socialist movement has been able to exert practically no influence on national policy, and the Trade Unions have shown no disposition to become the nucleus, as in Europe, of a Socialist political party, though they have become, since the world depression of the 1930s, increasingly active in pressing their political claims on the established parties. The absence of a class-conscious Socialist movement, comparable with those of Europe, has been characteristic of America right up to the present time. This has not prevented a growing assimilation of attitude between the American Trade Union movement and the non-Communist Trade Unions and Labour or Socialist Parties of Western Europe. But the policies common to these movements are those of the "Welfare State" as a promoter of social security and full employment rather than of any sort of Socialism. The United States has emerged into world politics as the great upholder of "free enterprise" in its capitalist forms, and has influenced other Western countries much more than it has been influenced by them.

Activities 1. Discuss the effect of scarcity of labour on the American economy as regard (i ) level of wages and (ii) capital- intensity in production in agriculture and industry 2. Explain technological convergence in the context of the rapid pace of technological change in the USA economy during past centuries.


Lecture Six The growth of Japan and South East Asia IN the course of the eighteenth century the British had driven the French out of India, and the British East India Company had grown from a corporation of traders into the government of a great empire. Great Britain had thus secured for its merchants by far the largest share in the available trade with the Far East. The East India Company controlled the trade with China as well as with India, and British merchants were able to build up a great position as middlemen with continental Europe in Far Eastern products. With the introduction of tea-drinking as a habit among larger and larger sections of the people, the China trade acquired a new importance, and after the rise of the cotton industry in England, India and China both became vitally important markets for British manufactures. Trade with India became less like open rapine and more a real exchange of goods; but the native cotton industry of India, based on domestic spinning and on the handloom, suffered disastrously from the competition of the machine-made cloths of Lancashire. As the nineteenth century advanced, the Far Eastern market grew steadily in importance, and India became a field for the large-scale investment of British capital as well as for the export of Lancashire's piece goods. Indian railways, irrigation works and other public enterprises were constructed mainly with capital borrowed from Great Britain and with capital goods made by British engineers. The China trade also grew in size and value, especially after the Opium War of 1840-42 had forced the Chinese to open the interior to foreign trade. Hong Kong, annexed in 1842, became the great depot for the British trade with Southern China, and the Chinese were compelled to open Shanghai and three other ports to British commerce, in addition to Canton, through which alone trade with Europe had previously been allowed. Great Britain forced China to admit Indian opium, and soon, in conjunction with the other Western Powers, imposed on the Chinese Government both acceptance of the rights of extra-territoriality for European and American nationals and limitation of the Customs tariff to a maximum rate of 5 per cent ad valorem. In 1853

the Americans, under Perry, forced open to Western products the closed markets of Japan; and this triumph of civilisation was followed by the American-Japanese commercial treaty of 1858 and by similar treaties between Japan and the other Western Powers. Japan, as well as China, had to accept a limitation of its Customs tariff to 5 per cent and to grant foreigners special privileges in its markets. But whereas China, even after the opening and extension of trade with the West, remained in its own life almost unaffected by Western influences, the impact of Western ideas on Japan had very different results. Japan had long been the home of a culture largely not its own but borrowed from China; but from the Revolution of 1867 the Japanese set themselves, under new bureaucratic rulers, to imitate the West both in military and naval equipment and in methods of economic enterprise. With extraordinary thoroughness and imitative competence, they set to work to learn the techniques of machine production and to apply in their own country the methods of Western commerce and finance, but without changing the theocratic and authoritarian basis of their State or accepting the laissez-faire gospel of Western capitalism. Japanese capitalism grew up under State tutelage and as the auxiliary of the aims of the governing military caste. By stages the Japanese drove the foreign merchants out of the points of vantage for the conduct of overseas trade. They introduced Western banking institutions, at first mainly in imitation of the United States but later more extensively on European models. The Bank of Japan was founded in 1882 as a Central Bank with a monopoly of note issue. The currency, previously much inflated, was reformed and made convertible into silver, and after a phase of bimetallism Japan finally came over to the gold standard in 1897, using the proceeds of the indemnity exacted at the end of the Sino-Japanese War as the means of building up the necessary reserve of gold. In the meantime, the war with China had afforded the Japanese the chance of displaying their military prowess, which was to be shown still more formidably in the Russo-Japanese War of 1904-5. Military success secured the recognition of Japan as a World Power by the great Western countries, and its new status was consolidated by the alliance with Great Britain concluded in 1902. At the same time, Japan's rulers modernized the industrial system, developing the production of iron and steel and engineering goods as well as of textiles, and seeking to build up an export market in China and the other countries of the Far East, with the aid of the cheap labour which Japanese industry was able to command. With a narrow and infertile territory and a rapidly growing population, Japan felt even more strongly than the Western countries the impulsion towards a policy of militant imperialist expansion. The Japanese occupied and subsequently


annexed Korea, forced their way into sparsely populated Manchuria, and became masters of its rich economic resources. After 1905 Japan replaced Russia as the leading Power in North-East Asia. While Japan was thus striding forward in the mastery of the arts of the West, an undignified scramble was in progress among the European Powers for the extension of their spheres of influence in China. It was widely believed that the old, unwieldy Chinese Empire was breaking up and that the problem of openings for trade and investment would in the end be settled by the piecemeal annexation of Chinese territory by the leading Powers. Indeed this process had already begun on a small scale. The British had instituted it when they annexed Hong Kong, and it had been continued when the French extended their Empire in IndoChina, when the British seized Upper Burma, and when the Russians descended on Manchuria in their quest for an ice-free port in the East. The United States, having taken the Philippines from Spain at the close of the Spanish - American War, had also become more closely concerned in the Chinese question; but American policy, unlike that of the European Powers, favoured the "Open Door" for the commerce of all nations, and on the whole American influence in the dealings of the West with the unfortunate Chinese was at this stage a moderating factor. It was largely owing to the Americans that the idea of partitioning China between the European Powers and Japan had to be given up. It had never been really workable. China was too vast and too densely populated a country for the annexation of the main part of its territory to be a possible policy for the Western Powers. Even the Japanese discovered this, despite the ability of their armies to live on the country. It was possible to occupy large areas, but only to hold the main centres; the Japanese writ, even at the height of the penetration, never ran in the interior beyond the garrison centres and the communication lines. Outlying areas, such as Manchuria, could be effectively subdued and held, at least for a time; but China was tough and remained finally unassimilated. Where Japan was to fail, the European Powers, whose forces could not live on the country, could not hope to succeed, even if they had been able to agree among themselves on a concerted plan of spheres of influence -- which they were quite unable to do. Indeed, the history of China during the decades before 1914 is mainly the record of an endless scramble for railway and other concessions by the Western Powers, and of the mortgaging of more and more of Chinese internal revenues for the service of external loans. As the idea of partitioning the country was abandoned, there was a growing tendency for the Powers to act in concert, and this finally led up to the Six-Power Consortium of 1912, which set out to put Chinese

finances in order for the benefit of foreign creditors and investors. Great Britain, the United States, France, Germany, Japan and Russia were all parties at this stage to the Consortium; but in 1913 President Wilson, objecting to the proposed drastic interference with Chinese internal affairs, caused the United States to withdraw. Germany was practically eliminated as a result of the war, Russia was for the moment eclipsed; and the Consortium fell to pieces. China, meanwhile, had been passing through a series of revolutions, and, hampered by foreign debt and intervention and by foreign control of Customs policy, was unable to establish an enduring government over the whole country. Japan used the opportunity presented by the first European War to extend its influence and to exact arbitrary terms from the Chinese, and later profited by the Russian Revolution further to extend its control in Manchuria and Northern China. Great Britain, concerned mainly with the South and the Yangtse Valley, cared little what happened in the North, and as French interests were also mainly in the South, Japan got more and more of a free hand in Manchuria and in the Shantung Peninsula, where the Japanese had inherited the concessions seized from Germany during the First World War. China had thus been for many years before 1914 the meeting-place and chief quarrelling ground of all the great imperialist Powers. After the effective partitioning of Africa had been completed, China was the one great territory in the world easily open to new imperialist aggression. European capitalism helped to provide China with railways and thus in some measure to prepare the way for consolidation under a single government after the Revolution of 1912. But subsequent history has shown that it is a good deal easier to establish a central government in China than to maintain its authority. It has still to be seen whether Chinese Communism will succeed where previous revolutions have failed. Amid the unhealthy manifestations of economic imperialism, the industrialization of the Far East was effectively begun; and, especially during and after the First World War, Far Eastern industries began seriously to threaten the supremacy of Western products in the Eastern markets. Japan, as we saw, was the pioneer in this process of industrialization; but after 1914 it spread in both India and parts of China, and during the Second World War there were further big developments in India, in the heavy industries as well as in the manufacture of cotton goods. Moreover India, out of the proceeds of war exports, was able to repay the capital belonging to British investors, and to accumulate large sterling balances.


The competitive power of Japanese industry in foreign markets was based from the first on a plentiful supply of cheap labour; but even with its aid Japan had not become, until after 1914, a really important competitor, outside its own home market, of the European exporter. By Western standards Japanese labour and techniques of production were still up to that time at a low standard of efficiency, and Japanese industry had no advantage in total costs over the Western countries, despite their much higher wage-levels. Lancashire, for example, was fully capable, up to 1914, of meeting the competition of the Japanese exporters of cotton goods. The First World War, however, by interrupting the supply of European goods to Eastern markets, gave the Japanese their opportunity. Japan's exports rose sharply, and at the same time the efficiency of Japanese production was considerably improved. Meanwhile, the same causes as were speeding-up the growth of industry in Japan were leading to a parallel rise of the factory system in both India and China, where labour could be got at an even cheaper rate. As Japanese industrialism developed, wages in Japan rose fairly fast, though they still remained exceedingly low by European standards. Before long, Japanese employers began to complain of the competition of the cheaper labour of India and China, and Japanese capitalists started factories in China or Korea or imported Korean workers in order to get the benefit of labour at a lower wage. On the whole, however, the advance in Japanese industrial efficiency more than kept pace with the rise in wages, and as costs had risen in Great Britain and the other European countries Japanese competition with their exports became much more effective, especially in the Eastern markets. Although industrialism was thus making a beginning after 1914 in India and China as well as in Japan, it has even now advanced in both these countries only a very little way. The overwhelming majority of the people in India and China are still employed on or about the land, and even manufacturing production, outside a few centres, still largely takes the form of handicraft. In China, for example, the quantity of cotton goods produced in the factories is still small in relation to the amount produced on handlooms. In India, too, even apart from the effects of Gandhi's propaganda, the handloom still supplies the needs of a large part of the rural population. It is still in spinning rather than in weaving that the greatest advances in factory production have been made. This continued activity of handloom production has not, however, prevented the competition of Indian and Chinese as well as of Japanese factories from having been a very serious matter for the exporters of the Western countries, and, above all, of Great Britain. The greater part of Lancashire's former markets in the

Far East has certainly been lost for ever to the cotton industries of Japan, China and India. Undoubtedly recent changes in industrial techniques have reduced the comparative advantages of the more advanced countries. The new automatic machines diminish the need for skilled labour and make it easier for the less strenuous and less skilled labour of the Eastern peoples to be used. The real reason why the factory system in the Far East did not advance even faster than it did between the wars was that the Far Eastern countries could not find the capital for more rapid development. Moreover, the economic difficulties of the Far East were greatly accentuated between the wars by the fall in the value of silver. This decreased enormously the external purchasing power of countries such as China, which remained upon a silver standard. Japan, being on the gold standard, had to sell its goods abroad at prices measured in gold, and this meant asking the Chinese buyer a very high price in terms of silver. The Japanese merchants, with Government aid, tried to meet the situation by cutting their prices, and this of course reacted still further on the position of exporters in the Western countries, and, above all, in those which remained on the gold standard. Clearly, the growth of industry based on modern power production in the less developed parts of the world was still only in its very early stages and is destined to exert a steadily increasing influence on the world economic situation. There is no inherent reason why, in the long run, both China and India should not do what Russia has achieved under its successive Five-Year Plans -- that is, carry through a thorough-going reconstruction of their entire economic systems, including agriculture as well as industry, on lines of hugescale collective organization based on the use of mechanical power in its most developed forms. There are, however, in the short run, insuperable obstacles in the way. It was difficult enough for Soviet Russia to abstract, at the expense of the low standard of life of the great mass of the people, enough capital to finance the ambitious schemes of industrial reorganization on which the Communist Party embarked. But Russia had, from this standpoint, the great advantage of being thinly populated in comparison with the countries of the Far East. For India and for China, the density of population, the very small size of the crowded peasant holdings, and the extreme poverty of the people put even greater difficulties in the way of any comprehensive plan of economic development out of their own resources. At the end of the Second World War, Burma, Malaya, the Dutch Indies and Indo-China, all overrun during the war by the Japanese, were handed back to their European rulers when Japan surrendered; but in none of them, except Malaya, was there any real possibility of a return to the old system of colonial exploitation.

Burma was given its independence along with India, and became a prey to civil war. War was also waged in Indonesia before the Dutch were compelled to accept an independent Indonesian Republic in union with the Dutch Crown. In Indo-China the French became involved in a colonial war. These struggles restricted economic development, both directly and because they have made South-East Asia an obviously unsafe field for the investment of foreign capital. In India, too, development slowed down, largely because the rapid increase in population absorbed the resources of the country in the fight against sheer famine, but also because the uneasy relations between India and Pakistan have diverted to military uses funds that were sorely needed for measures designed to increase productivity and to bring more land into use. Activity 1. What is meant by the Chinese Question in the Context of the superpowers rivalry of the past century?

The Development of Modern Business in Japan

Although it has not been recognized very clearly, Alfred Chandler offers a dual definition of modern business. One definition focuses on the formation of "managerial hierarchies;" this refers to the rise of professional managers, a development that eventually leads to the separation of management and ownership. The advent of the managerial firm, or managerial capitalism, symbolizes modern business.1 Chandler's other definition focuses on management structure and emphasizes the U-form (Unitary-form) or M-form (Multi-divisionalform), both of which are organizational types closely associated with the development of modern, large-scale firms. The modern firm usually has the characteristics of a managerial organization and employs either the U-form or M-form (typically the latter) structure. Chandler's model, based on this dual definition, can be regarded as a convergence theory. If we conduct our analysis at a very abstract level and consider the fundamental trend in business organizations, there is indeed considerable evidence pointing toward convergence. Yet this convergence process takes place along different paths, especially at the outset, and there are significant time-lags where different nations were involved. Each country has had different development characteristics. We can characterize the systems as: competitive capitalism in the United States; personal capitalism in the United Kingdom; cooperative capitalism in Germany; and group-enterprise capitalism in Japan.


In contrast to Chandler's model, Alexander Gerschenkron's model of development emphasized the different nature and paths of latecomer economic growth. Latecomers were frequently able to gain advantages: larger scale; state-of-the-art technology; special financing systems; and political intervention in the form of industrial policy. By adopting advanced technology from developed countries, latecomers could rapidly catch up with the early starters. Gerschenkron's model, which stressed the various paths followed in the development of capitalism, indicated that the business enterprises of latecomers would necessarily have different characters. Gerschenkron's model thus provides a non-convergence theory that can be used to examine of the development of capitalism in Japan. The Formative Years from the Late Nineteenth Century to World War II One of the most remarkable characteristics of Japans modern economic development was the appearance of zaibatsu, i.e., conglomerates with the following features: product diversification; family ownership; and nation-wide eminence. These zaibatsu tended to have close connections with government. For that reason, they were called "political merchants," although they were engaged not only in commerce but also in manufacturing and mining. We can look in more detail at three examples, using the best known zaibatsu: Mitsui, Mitsubishi, and Sumitomo. In Mitsui and Sumitomo, powerful professional managers had control. While the Mitsui family and the Sumitomo family were almost the only stakeholders, it was the professional managers who directed these zaibatsu. The owners' say was limited to final authorization, and the professional staff had the actual managerial capabilities. In contrast, the Iwasaki family, the owners of Mitsubishi, had direct control because it was a newly-developing firm. It remained an "entrepreneurial firm" in the sense that its founders still owned and managed the enterprise, whereas Mitsui and Sumitomo, which already had long histories lasting several hundred years, had evolved past that stage. Mitsubishi's case is quite similar to that of the Korean chaebol which developed after World War II. Mitsubishi, however, employed a large number of university graduates and ultimately it too created a managerial hierarchy. Organizational capabilities thus played a critical role in Mitsubishi, just as they did in the similar cases of Du Pont and the German family firms. Furthermore, there was in the case of Mitsubishi a partial separation of ownership and management even before World War II. In Japan, managerial capitalism was thus evolving, even though in a different form than it was in the US. In Japan, ownership remained in family hands.

The zaibatsu were characteristically diversified, but they used the holding company form or H-form, not the U-form or the M-form which Chandler depicted as "modern." Despite this difference, the zaibatsu succeeded in developing modern, effective structures, using organizational forms that we can call "group enterprise capitalism." This form was different than American capitalism, but both were increasingly coordinated through the visible hand of a managerial style of organization. In the beginning, Mitsui and Mitsubishi especially maintained close relationships with the government. The government tried to foster industrialization by establishing and running state-owned factories and mines. But these efforts did not, for the most part, succeed, and the government sold the public organizations to the zaibatsu, which rapidly expanded as a result of the acquisition of these assets. Initially, the zaibatsu and the government were thus closely connected. But political relationships of this sort carry the risk that political circumstances will change. The leaders of the zaibatsu gradually realized that too close a connection with the government might be dangerous and began to distance themselves from politics. It is nevertheless true that Japans industrial policy fits the Gerschenkron model very well, even though government policy was not particularly successful in promoting the evolution of modern firms. Rather, private economic powers such as the zaibatsu were instrumental in developing Japan, while the government's policy was most effective in developing infrastructure. The government tried for a time to do more than that, but it then backed away from direct investment, and eventually, the zaibatsu became less involved in politics. Japan in the Post-World War II Period After the defeat of World War II, Japan experienced a drastic change in its economic system. The occupation army forced the dissolution of the zaibatsu, which were thought to be one of the driving forces behind the war. The General Headquarters of the Allied Powers ordered the "voluntary" dissolution of the zaibatsu and prohibited the use of zaibatsu names, such as Mitsui, Mitsubishi, and Sumitomo. For some years, each of the companies of the former zaibatsu was isolated, with no special organizational ties or network with the other companies. With the end of the occupation, however, the old constituent firms began to meet and exchange information. The main reason they drew together and reestablished their special relationships was to ensure protection against unfriendly takeovers by outside interests. They began to hold regular meetings of

presidents and secretaries. This trend toward consolidation accelerated in the 1960s in a further effort to bolster protection against takeovers by foreign companies. In this way, inter-market keiretsu, like the Mitsui group, the Mitsubishi group and the Sumitomo group (the direct descendants of prewar zaibatsu) were formed. In these inter-market keiretsu, family ownership no longer existed and mutual shareholding among member companies became deeply entrenched. These inter-market keiretsu do not have an hierarchical structure, and each member firm has an equal relationship in shareholding and transactions. With this transformation, a thorough form of managerial capitalism, with complete separation of ownership and management, was established in Japan. This fullyachieved managerial capitalism (an extreme form, even compared to the United States) was partly due to the U.S. occupation forces and partly to the continuation of the prewar trend toward control by professional managerial hierarchies separated from ownership. This secular trend fits very well in the Chandlerian model, as does the ubiquity of managerial firms in Japan. But it is worth noting that the change took place in a different form, through mutual-shareholding among firms, and not in the classical form of dispersed shareholdings in a centralized corporation. Each member of the keiretsu is a large firm in itself, with numbers of subsidiaries and affiliated firms, each of which make a member firm a parent company. This hierarchical keiretsu is created by various spinoffs and acquisitions. This particular form, which differs from the ideal type posited in the Chandler model, can be called "hierarchical" because it is structured along the lines of parent/subsidiaries "affiliated" companies (at times, identified by the euphemistic expression of "subcontracting" companies). Although these large firms with many subsidiaries and affiliated firms have the multi-divisional structure which Chandler underlined as that of the modern firm, in Japan they also have an industry-wide H-form (Holding-company form). Some scholars hold that the hierarchical keiretsu (such as the Toyota group, the Matsushita group, the Toshiba group, the Hitachi group, the Canon group, the Honda group, the Sony group, and others"4) is much more important than the inter-market keiretsu (namely, the Big Six kigyo shudan, including the Fuyo group, the DKB group, and the Sanwa group, in addition to the aforementioned Mitsui, Mitsubishi and Sumitomo). The strength of the inter-market keiretsu is debatable"5 because its functions are limited to particular activities like protection from outside interests, establishment of prestige, and the promotion of

large-scale inter-firm projects. In contrast, the strength of the hierarchical keiretsu is beyond doubt since it is the basis of the Japanese management system"6 and gives to the nation an international competitive advantage, as I will explain later. Japan's capitalist development thus follows a distinctive path, as Gerschenkron suggested, to the sort of managerial capitalism that Chandler emphasized. Basically, the two Chandlerian themes, the rise of managerial capitalism and the shift to coordination through the visible hand, apply to Japan. But recent developments in the United States and Japan raise doubts about this interpretation of modern business evolution. The Japanese Management System (JMS) The JMS was established in the 1950s and 1960s: it included a new form of labour management, involving, for instance, life-time employment; the seniority system; enterprise unions; flexibility through job rotation; quality control circles; and respect on the part of industrial engineers for on-site experience (thus, a close relationship between industrial engineers and shop floor workers). The JMS was in particular based on hierarchical keiretsu. The establishment of hierarchical keiretsu (which could be described as multilayered production and distribution networks involving vertical inter-firm integration) paved the way for the just-in-time system. Hierarchical keiretsu made a parent company slim and made it desirable to purchase from suppliers. Accordingly, it was a JMS form of "outsourcing" and "downsizing," two of the vogue concepts in management circles in recent years. These hierarchical keiretsu evolved by spinning off successful parts as quasi-independent companies, while also using acquisitions to extend and reconstruct their networks. Chandler's model teaches us that bigness is beautiful, an idea that has aroused strong opposition, especially in recent years. Put differently, Chandler contends that large-scale operations and integration within firms are imperatives for the development of modern firms through a three-pronged investment in manufacturing, marketing, and management. But recently, outsourcing and downsizing have come to be regarded as crucial elements of business strategy. Instead of scaling up and diversifying, we see more and more US. (and Japanese) firms spinning off subsidiaries"9 and tightening their strategic focus, changes that are seen as indispensable for achieving competitive advantage. During the years since 1970, when the weaknesses of the American style of big business were becoming apparent, the JMS was becoming more competitive on a global basis. This was particularly true in such assembly-type manufacturing as automobiles and electrical products. The lean production system of Japan

is dominant in these two industries. By way of contrast, we must consider the venture capital business in the United States, which attracts our interest because of its agility. In biotechnology, software, and other industries, recent developments make us ask: Is big really beautiful? Chandler has provided his answer to this question in his recent articles and in Scale and Scope. He discussed the difficulties of large, U.S.-style enterprises in the section titled "When Large Is Not Logical" in his article and distinguished "investmentoriented mergers and acquisitions" from "transaction-oriented mergers and acquisitions." He classified industries into three categories: high-tech industries; low-tech industries; and stable-tech industries. He concluded that investment along traditional lines was still important and American firms still did it well in high-tech industries (e.g., chemicals, including pharmaceuticals, and computers), but it no longer sufficed in stable-industries (e.g., automobiles and iron and steel). In high-tech industries, the performances of U.S. firms have generally been strong because they continued to invest; but the U.S. firms in stable-industries performed poorly because they did not invest enough to keep their competitive advantage. While Chandler's interpretation is persuasive, it does not sufficiently account for the many cases of venture businesses such as Microsoft and other successful enterprises of that sort. To be sure, in the last two hundred years, firms have become bigger and bigger, more and more integrated, and more diversified by utilizing economies of scale and scope. Firms have, as Chandler indicated, adopted the Uform and then the M-form. But they have also adopted different forms like the H-form of the hierarchical keiretsu. This new form, which is especially suitable to lean production systems like the Toyota Kanban System,' is now the mainstream of development in assembly-type manufacturing. From a long-term historical perspective, it seems that some of the most important trends that Chandler identified are now being reversed. This is especially true if we compare developments during the Third (electronic related) Industrial Revolution with the Second. If we consider the development of networks (and the keiretsu is a sort of network) or the increasing importance of venture business, the goal of organizational flexibility seems to be central to the basic flow of business development. Organizational flexibility dictates that structural forms should and can change according to the shifting demands of the environment (especially the market and technological environments). As Chandler acknowledged, competition has intensified, and research and development have become more and more crucial to business success. In such situations, small businesses can utilize state of-the-art-technology thanks to the changes associated with the Third Industrial Revolution and can have relatively easy access to venture


capital. In some cases, "large" has become "not logical," continuing the trend that began when the more flexible M-form replaced the U-form of organization.

Conclusion The development of modern business in Japan, broadly speaking, arrived at the same Second-IndustrialRevolution endpoint as the United States, but it did so by following a different path. Managerial capitalism, that endpoint, is characterized by the separation of management from ownership. Japan's capitalism achieved this end in the period between the late nineteenth century and the occupation after World War II. In this regard, Japans brand of capitalism was more organization-oriented than that of the Chinese firms or Korean chaebol. Although all three are in East Asia, the Chinese and Korean businesses were different. Blood-relationships and family ownership were paramount, which was not the case in Japan. In this regard, Japans managerial capitalism was unique and was even more complete than that of the United States. In Japan group-enterprise capitalism prevailed, in the form of zaibatsu in the pre-war time and keiretsu in the post-war years. The latter form of management structure, in particular hierarchical keiretsu, was the pre-requisite for lean production, a central characteristic of the Japanese management system. This structure was different from the typical U-form and M-form which developed in the United States. Like businesses in the United States and Germany, Japanese firms achieved coordination through managerial organizations, not through the market. In this sense, the Chandlerian model is applicable to Japan. But the Gerschenkron model is particularly persuasive in the Japanese case when we look at the converging forces reshaping the system at a deeper level; Gerschenkron is especially useful when we examine the process by which Japan arrived at managerial capitalism and coordination through organization. Present trends, however, seem to be moving in a direction different from managerial capitalism, away from bigness and economies of scale and scope. Institutional investor capitalism, downsizing, and outsourcing are gaining ground. Even in Japan's keiretsu, some businessmen are now stressing the importance of nonkeiretsu transactions. If these trends continue, the Chandlerian model will have to be revised in significant ways insofar as Japan and the other industrial powers are concerned.


Japan, put temporarily out of the world market and retarded in economic development by defeat in war, emerged, under American tutelage, as a large-scale exporter, especially of textile goods. But even Japan, though far more highly developed than any other Asiatic country, was by no means fully industrialised by Western standards. Agriculture, including the cultivation of the silkworm, provided the basis of living for most of the Japanese people. During the world depression of the 1930s the Japanese made great efforts to capture markets from the Western countries with a wide range of cheap manufactured goods -- from textiles to bicycles and electrical gadgets. A large part of this trade was lost as a result of the war; but great efforts are now being made to regain it. Indeed, the Japanese are too crowded together to live tolerably without a great export trade. Their agricultural holdings are mostly very small -- 70 per cent of the farms being of less than 2 acres -- and the country was poor in raw materials as well as in cultivable land. Japanese industrialism was at all stages a remarkable tour de force; and behind it has been the sheer need to eke out scanty resources for the supply of a rapidly increasing population.

LECTURE TEN: AFRICA AND THE WORLD ECONOMY An Analytical Perspective on its Origins and Nature The majority of African countries are experiencing a serious economic crisis. That crisis, though showing signs of moderation in some countries, has resulted in development eluding most of the others, with farreaching negative consequences on their populaces. When there is no development, there is


hopelessness; and where there is hopelessness, there is no effort to work toward development. The circle becomes complete and reinforcing. Unfortunately, in most of Africa, the economic crisis has made life an endless series of vicious circles that are now spreading economic suffering in a concentrated fashion. The economic crisis in Africa represents a historical tragedy, and the historical evidence now suggests that such a crisis need not have occurred. Despite some views to the contrary, the overwhelming opinion is that this economic crisis is primarily the inevitable outcome of the failure of post independence development policy formulation and implementation in the majority of the African countries. In most of Africa, post independence development policy was formulated through a statist ideological framework, which was then implemented by experimentation. Moreover, some, if not all, of the countries had to contend with an adverse international economic environment. That combination produced disastrous results. Among other things, poverty and socioeconomic inequalities increased, the external debt burden became heavier, the brain drain intensified, capital flight deepened, the balance of payments weakened, the physical infrastructure deteriorated, unemployment and crime escalated, famine and malnutrition became more pronounced, budget deficits soared, agricultural productivity declined, urbanization burgeoned, environmental degradation expanded, political and civil strife worsened, and corruption became more rampant. These disastrous development results were, in turn, the catalyst behind the deepening economic crisis in Africa, and consequently provided the imperative for policy reform in those countries. Policy reform can be defined as changes in government policy, institutional structure, or administrative procedures that are designed to alter economic activity and improve performance ( Roemer and Radelet 1991 ). Put more succinctly, it is policy change, across the board, to effect sustained economic progress that will lead to a more desirable economic outcome than current practice permits. The policy reform that emerged in the 1980s as a response to the ensuing economic crisis in Africa was dominated by donor-sponsored structural adjustment programmes (SAPs), primarily the World Bank and the International Monetary Fund. The SAPs have triggered a fierce debate over their effectiveness as an antidote to the economic crisis in Africa, and a significant body of literature that is very critical of SAPs has emerged. However, most of the critics of SAPs, although making a convincing case in some of their

criticisms, on the other hand have failed to provide convincing and implementable alternatives for economic recovery in the African countries. This chapter, which is structured as a comparative analytical review, examines the origins and nature of the economic crisis in Africa and the policy framework giving rise to it, drawing on Southern Africa country examples to illuminate and illustrate the analytical perspective.

The Origins and Nature of the Economic Crisis in Africa The economic crisis in Africa emerged in the 1970s following the achievement of independence in most of the countries in the 1960s. During the 1980s the crisis worsened. Basically, after an initial period of growth immediately after independence, most of the Africa economies began to decline. In the 1980s, the decline became more rapid and had reached crisis proportions before donor-supported policy reforms were implemented. There is little doubt that the magnitude of the economic crisis in Africa has brought considerable agony to the citizens of those countries the rural population being poor compared to 31 percent of the urban population (
World Bank 1995a).

However, despite the fact that most of the poor in Africa live in the rural areas, urban poverty has been increasing as urbanization has become much more rapid. With the exception of South Africa, all of the Southern African countries had urban population growth rates that exceeded 3.5 percent during the period 1980-93, with Mozambique having the highest rate at 8.4 percent ( World Bank 1995b). This rapid urbanization in Africa can be attributed primarily to rural-to-urban migration. Migration to urban areas is a rational economic decision for those in search of economic betterment. It is therefore a survival strategy for the rural poor. In Tanzania, for example, the percentage share of net migration in urban growth was 85 percent for the period 197590 ( Findley 1993 ). However, when coupled with the other elements of the economic crisis in Africa, rapid urbanization has some very serious consequences. Most of those consequences are related to insufficient capacity for labor absorption in the urban areas, resulting in increasing rates ,,of urban unemployment, and the lack of government capacity to provide the requisite social services ( Hope 1995a).

With respect to capacity to absorb labor, with the exception of Lesotho (1.96 percent) and Mozambique (1.79 percent), all of the Southern African countries had average annual labor-force growth rates that exceeded 2 percent during 1965-95, and it is projected that during 1995-2005 the majority of the countries will have labor-force growth rates exceeding 2.5 percent, with some countries surpassing the 3 percent mark ( World Bank 1995b). However, this growth in the labor supply has not been matched by a similar growth in formal-sector employment. As a matter of fact, in most of the countries, formal-sector employment has been declining since the 1980s ( World Bank 1995c). In Zambia, for example, formal-sector employment as a proportion of the labor force has been declining so rapidly that it is now the primary contributor to urban poverty and income inequality in the country ( Seshamani 1992 ). In addition, real wages in the formal sector have also been declining ( Vandemoortele 1991 ). Much of the decline in formal-sector employment can be attributed to the decline in manufacturing employment. In South Africa, for example, the growth rate of manufacturing employment declined from 2.9 percent in 1970-80 to 0.9 percent in 1980-90, while in Zimbabwe the decline was less dramatic for the same two periods, moving from 3.48 percent to 3.14 percent ( Khan 1994 ). In terms of formal-sector wage rates, not only has the ratio of nonagricultural to agricultural wage rates been declining but so also has been the ratio of nonagricultural wages to per capita income. Since 1980, real wages have declined more rapidly than per capita income. This suggests that the wage earners have borne a heavy burden of the economic crisis ( Vandemoortele 1991 ). In Tanzania, for example, employees in the nonagricultural sector earned about seven times the country's per capita income in 1975 compared to only two and one-half times in 1986, while in Zambia similar employees earned approximately five times the country's per capita income in 1975 compared to a little more than one and one-half times in 1984 ( Vandemoortele 1991 ). With the decline in formal-sector employment, there has been an increase in subterranean- (informal) sector employment and activities. The expansion of subterranean-sector employment in Africa is, ironically, one of the few positive things to have emerged from the ensuing economic crisis in the region. The phenomenal expansion of the subterranean sector has been documented in numerous studies and reports in recent years. The great majority of that documentation suggests that the evolution of the subterranean

sector has taken place because of the failure of the developing countries to formally make the kind of economic progress that would have allowed for, among other benefits, low urban unemployment rates, a reduction in national poverty rates, wages and salaries that kept pace with inflation, the ready availability of basic goods and services, a functioning infrastructure, and a relatively honest and efficient bureaucracy ( Hope 1993a; Hope 1993b). The subterranean sector now absorbs the majority of labor-force entrants in Africa, and government attitudes in the region have changed in favor of its role as a labor sponge and center of self-reliance and private initiative. In Botswana, for example, the government has given prominence to the subterranean sector for its increasingly important role in providing income-earning opportunities and meeting demands for goods and services, particularly for the low-income population ( Republic of Botswana 1991a). In Zambia, the subterranean sector now absorbs nearly 80 percent of urban workers ( Kashambuzi 1995 ). Based on the available evidence, women seem to be overrepresented in the subterranean sector in Africa. In Zambia, women now account for two-thirds of subterranean-sector production of services, and in the urban areas of Botswana in 1984-85, nearly half of employed women -- but only 10 percent of employed men -- were working in the subterranean sector ( UNDP 1995). In Tanzania, in 1988, 95 percent of women workers and 84 percent of male workers were concentrated in the subterranean sector ( World Bank 1995b). The involvement of women in the subterranean sector has grown as the economic crisis has reduced job opportunities in the formal sector and increased the need for an additional source of family income. In Zambia, for example, women's earnings from the subterranean sector increased considerably as a share of total household earnings in the 1980s ( UNDP 1995). Turning to social services, although access to these services has been increasing over the years, the budgetary constraints of the governments have resulted in a situation where there are still too many people without access to health care, safe water, sanitation facilities, and adequate housing, particularly in the rural areas. In some countries, such as Zambia, only 28 percent of the rural population, compared to 70 percent of the urban population, had access to safe water during 1988-93 ( UNDP 1995). In other countries, such as Lesotho, only 23 percent of the rural population and 14 percent of the urban population had access to sanitation facilities during the same period ( UNDP 1995).


One major area of concern, in terms of access to services, is housing. While some countries, such as Botswana, seem to have an oversupply of urban housing, there are several others where the housing situation has become environmentally hazardous as a result of overcrowding and the increasing concentration of squatter settlements. In Johannesburg, South Africa, for example, squatter housing was estimated to have reached 22 percent of the total housing stock by 1990, while in Dar es Salaam, Tanzania, by 1990 squatter housing was 51, percent of the total housing stock ( The Economist 1995). This demonstrates a serious situation regarding lack of access to adequate shelter and a potential source of societal conflict. Of all of the indicators reflecting the seriousness of the economic crisis in Africa, two of the most significant are the persistent budget deficits and the aggregate net resource flows. As seen in Table 1.2, with the exception of Botswana since 1983 and Swaziland (for some years), all of the countries recorded budget deficits throughout the 1980s. The budget deficit/surplus (excluding grants) is a measure of the ability of a government to finance its activities from its own resources. For most of the countries, the deficit as a share of GDP had reached unsustainable levels by the beginning of the 1980s. In both Malawi and Zambia, for example, the deficit was equivalent to approximately one-fifth of GDP by 1980. Such budget deficits suggest that the governments were consistently spending much more than they were capable of raising as revenues from domestic activities despite their high levels of taxation ( Tanzi 1992 ). In Zambia and Zimbabwe, for example, total expenditure as a percentage of GDP exceeded 35 percent during the period 1981-86, while total revenue as a percentage of GDP during the same period was 30 percent in Zimbabwe and 23 percent in Zambia ( World Bank 1994b). Contributing significantly to these budget deficits has been the very poor performance of the public enterprises, which in turn resulted in the need for governments to inject substantial sums of money into those enterprises to keep them afloat. Basically, African public enterprises have failed to generate a sufficient amount of working capital internally. Consequently, "they have demonstrated a limited ability to finance new or replacement investments" ( Nellis 1994 ). African public enterprises have now gone from being a burden on the national treasury to being a major burden on the domestic banking system and capital markets. The budget deficit situation, in turn, led to a heavy reliance on foreign financing primarily in the form of external borrowing and official grants. During the 1970s and 1980s, the external debt of all the countries

increased and some countries also relied heavily on official grants. In Tanzania, for example, during 197480, the nominal value of foreign aid per capita increased nearly fourfold and more than doubled in real terms ( Hyden and Karlstrom 1993 ), while in Mozambique, foreign aid as a percentage of GNP reached 59.2 percent in 1989 ( Kyle 1994). Also, with the exception of Malawi, by 1993 the total external debt burden per capita in all of the countries exceeded U.S.$250. In Zambia, the total external debt burden per capita was U.S.$849 by 1986, the highest in the developing world, while its GNP per capita was only U.S.$260 ( World Bank 1995a; Fardi 1991 ). Clearly such a state of affairs would be unsustainable. Further evidence of the harsh realities of the debt problem as a major contributor to the economic crisis in Africa can be gleaned from an examination of the debt service ratios. From the available data for Southern Africa, with the exception of Botswana, Swaziland, and Lesotho, all of the countries had double-digit (exceeding 15 percent) debt service ratios (debt service as a percentage of exports) by 1993, with both Zambia and Zimbabwe exceeding 30 percent. Furthermore, and again with the exception of Botswana, Lesotho, and Swaziland, all of the countries had external debt that exceeded 40 percent of GNP by 1993. In some countries, such as Mozambique, Zambia, and Tanzania, the net present value of external debt as a proportion of GNP had exceeded 100 percent by 1988, with Mozambique at the top with 376 percent ( World Bank 1995b; World Bank 1990). The economic crisis in Africa is also reflected in the inflation rates and the foreign reserves situation. The fiscal deficits and the resultant heavy borrowing have fueled inflation. During the period 1980-93, the average annual rate of inflation exceeded 10 percent in most of the countries. In some countries, such as Tanzania and Zambia, the inflation rate exceeded 25 percent during 1981-86 ( World Bank 1994b). For Zimbabwe, it was also determined that the deficit was very responsive to changes in the rate of inflation, with a one percentage point change in domestic inflation increasing the deficit by 0.31 percentage points of GDP in the 1980s ( Morand and Schmidt-Hebbel 1994 ). Due to poor balance-of-payments performance, as a result of deteriorating terms of trade, among other things, the import-coverage ratio of reserves declined in all of the countries during the 1980s except for Botswana. In Botswana, the balance of payments has been in surplus since 1982, primarily as a result of the outstanding export performance of the diamond industry ( Hope 1996a ). By the end of the 1980s, Botswana's import-coverage ratio of eighteen months was eighteen times that of Lesotho, South Africa, and Zambia; nine times that of Malawi, Mozambique, and Zimbabwe; and six times that of Swaziland. In

contrast, by the end of the 1980s, Tanzania, for example, did not have enough foreign reserves to cover a full month of its imports and, in this regard, the country was worse off than it was in the 1960s ( Sarris and Van den Brink 1994 ). The final aspect of the economic crisis to be considered relates to savings and investment. It has been shown elsewhere that the presence of high and variable inflation lowers both investment and domestic savings, while large debt ratios tend to crowd out savings and investment ( Hadjimichael et al. 1995 ). In the Southern African region, with the exception of Botswana, gross domestic savings as a proportion of GDP declined during most of the 1980s. The worst performer was Lesotho, whose dependence on the South African economy cast it in the role of an exporter of labor and dependent on remittances and on receipts from the Southern African Customs Union ( Petersson 1993 ). Lesotho had negative gross domestic savings during the 1980s, reaching a high of -- 93.7 percent of GDP in 1984 and declining to -46.4 percent of GDP by 1989 ( World Bank 1995a). Savings determine the rate at which productive capacity, and therefore income, can grow. On average, the more rapidly growing countries, such as Botswana, have had higher rates of savings than the slowergrowing countries such as Tanzania. In addition, savings indicate the flow of real resources that are not consumed and therefore: available for possible investment. Investment in Africa was uneven in the 1980s and was too low to support both a sustainable expansion in output and greater economic diversification. During the 1980s, Angola had the lowest rate of gross domestic investment, measured as a proportion of GDP, in Southern Africa. By 1989, Angola's gross domestic investment was only 12 percent of GDP. On the other hand, Lesotho's gross domestic investment in the latter half of the 1980s was the highest in Southern Africa, averaging more than 50 percent of GDP during 1985-89 compared to 28 percent during 1975-79 and 24 percent during 1980-85 ( World Bank 1995a). The average annual growth of gross domestic investment in Lesotho was 15.9 percent in 1985-95 compared to -- 1.7 percent in 1980-85 ( World Bank 1994c). This performance was achieved primarily through improved rates of private investment. Conclusions The economic crisis in the majority of the African countries is rooted in the postindependence policy framework, which put considerable faith in the role of government to plan and allocate resources for economic development. Although such external factors as fluctuations in the terms of trade did also have

some influence on the resultant economic crisis, it is the internal policy framework that played the much more crucial role in the birth and growth of the economic crisis in Africa. In Africa, most of the countries embarked on development policies in the 1960s and 1970s that, among other things, distorted their price structures and removed their comparative advantage. Development
planning and other forms of state interventions in the economic process resulted in the diversion of resources from their socially most productive uses ( Rimmer 1995 ). As a result, economic growth and development became elusive and the majority of the African countries accelerated into a deep economic crisis.

The impact of that economic crisis has been so devastating that the 1980s are now correctly referred to in the literature as "Africa's Lost Decade" ( Ndegwa and Green 1994 ). Some authors, such as Landell-Mills ( 1992) , have gone even further by arguing that "the first three decades of African independence have been an economic, political and social disaster." This economic deterioration at the national level, and the ensuing economic deprivation at the human level, provided the imperative for policy reform which emerged most dominantly in the form of structural adjustment programmes. However, although this chapter is not concerned with the policy response to the economic crisis in Africa, suffice to say here that the SAPs have met with varying degrees of success. Nonetheless, to date, there have been no real alternative policy frameworks that have been adopted and implemented by the African governments. Consequently, the SAPs retain their dominance as the preferred policy response to the economic crisis in Africa. This chapter has provided one analytical perspective on the economic crisis in Africa. It does not claim to be exhaustive. Nevertheless, it provides considerable detail on the economic decline and human setbacks that have gripped most of the African countries and which now present a considerable development challenge for those countries as they approach the twenty-first century and more particularly so for the poorer countries such as Malawi, Sierra Leone, Ethiopia, Mozambique, Tanzania, and Zambia, all of which have GNP per capita below U.S.$300 and a large percentage of their population below the poverty line. On the other hand, two countries -- Botswana and South Africa -- are well poised to maintain and/or improve their economic performance. Botswana has been a model of economic success with its sound development management and good governance ( Hope 1995b). However, the country needs to diversify its economy beyond dependence on diamond exports to come to grips with its problems of unemployment

and income inequality ( Hope 1996a ). With respect to South Africa, the transition to majority rule in 1994 created an internal environment for increased domestic and foreign private investment and a receptive external environment for increased exports. Given its already substantial industrial base, South Africa has the potential to become a major economic power in the world economy. Such a potential must be prudently tapped, particularly, among other things, to mitigate the estimated 30 to 40 percent unemployment rate among the Black population ( Lundahl and Moritz 1993 ), and to accumulate resources for reconstruction and development projects