This action might not be possible to undo. Are you sure you want to continue?
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 Heilbroner’s, The Worldly Philosophers; for general background, consult Roger E Backhouse’s, The Penguin History of Economics, or David Colander & Harry Landreth’s, 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
Its use was first successfully publicised in the West by Leonardo Fibonnacci (1170 to 1250) in his Book of the Calculator. including the patronage of art and scholarship. Those who held or aspired to authority could justify their claims by just such an expenditure. on its own. and competitive consumption came to be the order of the day. took eight hundred years to reach Europe. on records as well as calculations. however. as they did. particularly their law of contract. 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. 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. North Italy and the Low Countries. which took another millennium and a half to materialize. was insufficient to generate anything remotely equivalent to the start of the Industrial Revolution. can easily be underestimated by those not familiar with their capacity to deal with multiplication and division. particularly the concept of zero. of a greatness of soul. it is unwise to be too idealistic about the circumstances of its production. which acted as the main hubs for 4 . depending. the idea of zero is generally credited to Indian thinkers in the fourth century AD. This notation. 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. conspicuous expenditure on magnanimous gestures. everything had a price. but a realistic one.by the Romans to the subsequent development of the world economy was their system of law. 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. via the Islamic Arab states. This. Cities and towns were centres of wealth production and of creativity. but they provided no satisfactory basis for modern mathematics. Urban society in the Renaissance period was thoroughly commercialized. The ability of previous systems of calculation. Inspirational as much Renaissance art and literature remains. The concept of magnificentia was central to Renaissance thinking. There were two particularly dense areas of urbanization. but also inhibited the development of the sophisticated banking systems. was evidence of virtue. however. published in 1202. Although the latest view among some scholars is that it may have originated in Babylonia. based on the abacus. although a book on Arab arithmetic had been translated into French in about 990 AD.
the richest merchants acted as bankers. silk. the plebians at the bottom of the pile. in rooms to which just the privileged had access. towns had little autonomy. however. that the manufacture of luxury goods and the complex technology of book production were possible. the sanctity of the city. a broader body of citizens. Italian banking houses had well established networks in the later middle ages playing for huge stakes as creditors to princes. London excepted. the aspirant courtier or socially climbing merchant provided a ready market for all these commodities. some of them independent cities. The Medici. it was a matter of corporate status as well. spices. for the Empire was a loose confederation of some hundreds of different political units. ideas travelling rapidly via the well-established commercial network. Venice had the most clearly articulated hierarchy: a closed caste of nobility. The autonomy of cities and towns varied from state to state. where. for expensive fabrics and intricately decorated armour were as much manifestations of magnificentia as paintings or sculpture. secular and ecclesiastical. Usually this meant control by a 5 . 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 Renaissance prince. With the invention of printing Venice came also to be the centre of the European book trade. was the scale of their ambition fully represented in the art they purchased.international trade in commodities such as wool and woolen cloth. tapestries. though they were not republics in the sense that we understand the term today. the unparalleled blessings it brought. 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. silver and fine armour. only within their palaces. Within the Holy Roman Empire towns might have a considerable degree of independence. But all cities and towns possessed certain shared characteristics: collective authority exercised by a group which was selected or elected. Cities experienced various degrees of autonomy. Commerce alone was not enough to amass the largest fortunes however. with its concentration of skilled artisans. The lack of a centralizing bureaucracy in the Empire contrasts with the highly centralised monarchy in England. Expenditure was not just a personal matter. This too was effectively run by a wealthy elite increasingly dominated by the Medici. And it was only in the town. European cities expressed their sense of corporate pride and identity in public buildings. Claiming the most independence were the few remaining city republics of north Italy. were very canny operators in the 15th century and expressed their magnificentia in public works which ostensibly demonstrated their loyalty to the Republic. Equally conscious of its virtue was the Florentine republic. and not hereditary.
Venice. This led to the period of mercantilism (accumulation of bullionism . prompted by the advent of the Industrial Revolution. Amsterdam. particularly on the continent. Merchants belonged to elite guilds whose economic power was protected by the urban government (which of course they constituted) or the state. 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. Within the guild masters protected their position against apprentices and journeymen.wealthy elite of magistrates. Indeed printing was one of the few industries where more than a handful of people were employed in each production unit. The public buildings they had erected in their cities both reflected and served to create this image of themselves. Its development as a system was heavily influenced by the changes in perception of what it was possible to achieve. liked to think of themselves as patricians. who influenced by humanist values. or Merchant Capitalism. developed mostly by people in business and the professions. artisans belonged to less prestigious guilds which had far less stake in urban government and whose activities were closely overseen by the urban magistrates. Florence and Bruges were in an earlier wave. London and the Hansa cities. The new sea routes opened up 6 . And guilds were very hierarchical in organisation. were government officials. It waned as the intellectual climate moved in a different and more sophisticated direction. It had no acknowledged spokesperson. Economic organisation within towns was usually through guilds. or confraternity. and exemplified by the publication of Adam Smith's Wealth of Nations and the American Declaration of Independence. both internally and in the relationship between guilds. both of which occurred in 1776.gold and silver). The appeal of its tenets waxed as Europe prospered in the shadow of the Renaissance and the development of the nation state. Mercantilism was strongly associated with the rise of commercially dominant cities. the very small scale of most industry facilitating this kind of control. Guilds had a strongly religious dimension within Catholic Europe. occasioned particularly both by the discovery of America and the route to India. Relationships between guilds were also far from equal. giving spiritual solidarity through their brotherhood. Mercantilism. giving way later to Antwerp. and the impact on government revenues of vast quantities of silver from the New World. although some. Although guilds were intended to protect the employment of members it would be a mistake to equate them with trade unions. It was a system rather than a theory.
colonialism and globalization. Mercantilism thus led to imperialism.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. 7 .
small figurines ( Venuses) have been found that accentuate the pregnant features of women. fundamentally altered the rate of progress of human beings. makes clear that Paleolithic man had a lifestyle that distinguished him from lower animals. The evidence available. Approximately ten thousand years ago. or sometimes simply the open. there is evidence of a developed culture in other parts of Europe as well. The results of a developed ability to increase the resource base amounted to a fundamental economic revolution. Gordon Childe termed the Neolithic Revolution. man lived very much as other animals. taking from nature what he could kill or gather. however. The groups had to be ready to move whenever they had exhausted the animal or plant supply in an area. Man lived in small groups or bands. which accounts for the extraordinary developments in. while scanty. caves. Examples of Paleolithic man's artistry are to be found in the Dordogne Valley in France. although like theirs. The transition from hunting and gathering to settled agriculture. his ability to survive was affected by the vagaries of nature. It led to an enormous acceleration in the process of learning. the past ten minutes of man's chronological history in contrast to the previous twenty-three hours and fifty minutes. they roamed the earth hunting and gathering plants. There is. Nevertheless. and burial sites suggest that prehistoric humans were concerned with life after death. which the archeologist V. Despite these artistic and aesthetic achievements. Archeologists have found tools and weapons engraved or carved with animal or floral designs. were his dwelling places.Lecture Two The First Economic Revolution For more than a million years after men and women had become distinguishable from other animals. of course. no written word to provide evidence and only a few artifacts survive. Making sense of this change is extremely difficult and to some degree must be conjectural. say. During this long era of hunting and gathering there developed many variations of man's lifestyle and culture. where depictions of animals and hunting scenes still survive on the walls of caves. the brilliant 8 . The limits of livelihood were fixed by a resource base which he could not yet improve. While this Magdalenian culture has been viewed by archeologists as the most brilliant achievement of the Pleistocene period. he could exist only within the earth's biological constraints. humans began to develop a settled agriculture: to herd and breed animals and to cultivate plants for food.
snails. Human population increased and man migrated into new regions. geologists. Before the development of agriculture man had begun to exploit a wider source of food. however tentatively. Larger animals played a lesser role in man's diet. what must have taken place. there are three changes that could account for the transition from hunting to agriculture. biologists. Individually or acting in concert. 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. and the combined efforts of botanists. The development of settled agriculture occurred approximately ten thousand years ago. shellfish. but man is distinguishable from other animals more than one million years ago. physicists. 6. 5. The extinction of a variety of large animal species occurs in the later Pleistocene period. a rise in the productivity of labour in agriculture. and seeds played a larger role. and probably Peru. In sum. the most dramatic was his movement into the New World and into Australia. This development appears to have occurred independently in such areas as the "Fertile Crescent. a decline in the productivity of labour in hunting." Meso-America. The rate of spread across Europe appears to have averaged only about one kilometer per year. 4. and geographers have given us a number of clues to help us reconstruct. and small animals. 1. nuts. fowl.detective work of archeologists has helped us a great deal. Some two hundred species have been listed as disappearing. and at different times. 2. The spread of agriculture took thousands of years. North China. 9 . and others. 3. The rate of material progress of man has accelerated dramatically since the development of 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. This exploitation is called the Broad Spectrum Revolution.
but further increases produced diminishing returns. I can illustrate the consequences in figure 1 above. Such population groups would attempt to reach precisely the kind of homeostatic relationships that the anthropologists have described as existing among contemporary primitive societies. This process is described by anthropologists as an open-donor system. Once population had expanded to the point where the resource base was fully utilized. In terms of the model this was a world of constant returns to an increasing labour force. This world of constant returns persisted as long as there was empty land of equal productivity for a growing population to exploit. Nevertheless. So long as this condition existed.000 B.Let us put this very general description into our economic framework. Population expansion to q d could occur without a diminution in the stock of the resource base. man began to adapt himself to different kinds of animals and plants to eat (Flannery 1969). so that growth in population resulted in a proportionate increase in output. 10 . infanticide.C. there was no incentive to attempt to delineate exclusive ownership over plants or animals. we should expect that these bands attempted to develop a set of customs and rules to regulate hunting. This attempt is due to fail for the reasons discussed above: a homeostatic population can exist only among isolated bands. 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. As human population expanded and threatened the supply of foodstuffs in a given area. Big animals increasingly became scarcer and gradually man was forced to search for new sources of food among the lower orders of animals. and various other means in an attempt to keep the relationship between the population and the resource base constant. 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. population would continue to grow. however. bands would subdivide and move to new areas. then any further increase in population led to a decline in the marginal produce of labour in hunting/ gathering. this was a world in which the supply of animals and plants upon which man could feed appeared endless. We do know that beginning about 20. and in a way that would maintain stability. Moreover. We should expect. Initially. thus gradually spinning off new groups. given the characteristics of competing tribes and a common property resource. These bands would limit fertility by taboos.
In contrast. or. exclusive property rights which reward the owners provide a direct incentive to improve efficiency and productivity. It was a revolution because the transition created for mankind an incentive change of fundamental proportions. Both instances of domestication may have come about as accidental results of the selection process. there is little incentive for the acquisition of superior technology and learning. When common property rights over resources exist. it is from these beginnings that we see the development of civilization and economic growth that has occurred in the ten thousand years since. In the process such bands became sedentary. to acquire more knowledge and new techniques. The evidence accumulated by archaeologists suggests that it required a substantial period of time. Many groups probably failed to make this transition. The establishment of exclusive communal property raised the bands' return to attempts to increase the productivity of the resource base. there was no incentive to incur the costs of establishing property rights over them. The difference between cultivation and domestication is a subtle one. In response to these developments. The latter (i.The solution to the common-property dilemma in which prehistoric man found himself was the development of exclusive communal property rights. There is no implication that the transformation from hunting to agriculture occurred rapidly. individual bands began to attempt to exclude outsiders from access to the resource base. The incentive change stems from the different property rights under the two systems. While animals and plants remained abundant relative to the demands of the human population. The transition occurred as a result of persistent population pressure which produced changes in the relative scarcities of the resources exploited by prehistoric man. but some by luck or chance managed to make the transformation. But under exclusive property rights the rewards from domestication would encourage the trial‐ and-error process of seed and animal selection. more tractable animal. in more fundamental terms.e domestication) implies a genetic alteration in the plant or animal to improve its value to humans. The First Economic Revolution was not a revolution because it shifted man's major economic activity from hunting and gathering to settled agriculture. 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. 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. It is this change in incentive that explains the rapid progress 11 .
as well. and despite scanty evidence. intrigue. The area of human settlement also increased. The size of the state tended to grow until the entire Western world was united in the Roman Empire. Significant progress was made in the development of technology. empires. The political organization of the state emerged for the first time. and murder. The rise of the state was accompanied by war and political instability. There was a gradual transition from hunting/ gathering to farming. 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. we may tend to think of these years in terms of an endless parade of kingdoms. 2. 1. for instance. became fairly densely populated during this era. and whole civilizations appearing and then disappearing in warfare. each undertook the duties of government. Certain broad trends can be identified as occurring during the eight thousand years that span the ancient era. As the length of time is not matched by quantity of evidence. of its inhabitants.000 years in contrast to his slow development during the long era of primitive hunting/ gathering. 4. ranging from the despotic to the democratic. We would like especially to know the structure of the economies that supported the civilizations and permitted the existence of great empires—some of which endured for centuries. treachery. and over time the dominant form of economic activity became settled agriculture. and over those eight thousand years the Bronze was succeeded by the Iron Age. 3. It is clear that population grew and at a then unprecedented rate.made by mankind in the last 10. The particular forms that the state took during this era were many and varied. more mundane developments underlying these societies. it is possible to reconstruct certain of these developments. 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. The land surrounding the Mediterranean. But despite the variety of forms. 12 . Yet there were.
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. Eventually impersonal markets were created and then increasingly used to allocate resources. 10.5. economies of scale in protection. the tax). A variety of economic organizations emerged. part to raise the general standard of living. in some places these gave way to exclusive state-owned property rights and in others to individual private property rights. and Mycenaean Greece represent one extreme. exclusive communal rights were established by the first agricultural communities. The distribution of income became decidedly more unequal. Trade developed and expanded. 8. Labour exhibited constant costs when combined with land to produce goods because of the relative abundance of land. 7. Where individual private property rights were established. protection exhibited the U-shaped cost curve so familiar to economists. goods were generally much less mobile than labour because they were subject to higher transaction costs. these rights were developed over goods. A variety of property rights underlay the various types of economic organizations. The redistributive economies of Sumer. the extension of price-making markets in Hellenic Greece and Rome. however. As the number of inhabitants protected by a lord grew. Urban places developed for the first time. the distance of farmed lands from the castle increased and eventually led to rising costs of protection. The Rise and Decline of Feudalism The economy of tenth-century western Europe had the following initial conditions. 6. up to a point. Initially. 9. with wide disparities appearing very early. 13 . Especially interregional trade grew in importance during this era. Part of this gain was used to support a growing population. Significant economic growth occurred. Cities grew in size and complexity of function and spread across the Mediterranean World. Because of the indivisibility of a castle there were. and labour in the form of slavery. Law and order generally existed only within the boundaries of settled areas. Land was abundant but valuable only when combined with labour and protection. Egypt. a condition that severely limited trade and commerce. In short. land. the other.
knight service. serfs. In the course of feudalism's emergence out of the centuries of chaos following the demise of Rome. As an expanding population led eventually to crowding and to diminishing returns in local areas. New manors spread across northwest Europe and increased the potential gains from trade by reducing the unsettled areas between manors that had harbored brigands. were slaves. the fish and timber from the Baltic all betoken different factor endowments in both resources and human capital investment. and courtly love. the wool cloth from Flanders. Northwest Europe was still largely forested and had abundant room for population growth. there subsequently developed the police power of a local political unit. the characteristic organization of the manor was built upon villeins and freemen.: Feudalism provided a measure of order and security in this chaotic world and led to a concomitant expansion of both population and economic activity. Between the local lord and the king there might be several intermediate levels. the Round Table. the logical outcome was colonization: the creation of new manors carved out of the wilderness. The underpinnings of this structure. a term that brings to mind King Arthur. its structure is admirably summarized in the Shorter Cambridge Medieval History. the wool of England. which provided the productive output of goods and services in return for whatever measure of protection and justice existed. Bordeaux. and the Moselle. they were recognized over a wider area—the 14 . As merchant codes became established. the metal products of Germany. The ideological gloss overlying this class was chivalry. While early enforcement of town law may have been by ostracism. and by settling areas with significantly different factor endowments. The wine of Burgundy. In short. A frontier movement developed. the frontier settlement movement resulted in reduced transaction costs of trade. While some slavery persisted into the Middle Ages. The local lord was linked to overlords all the way up to the greatest lord—the king in a hierarchy of feudal obligations. Property rights under feudalism were in effect a conditional grant of tenure in return for military service. Towns established their own body of law and gradually their own commercial courts.A local castle and knights were the keys to protection. but at each level the lower lord provided knight service for his immediate superior. by encouraging the growth of towns where specialized skills could develop to produce manufactured goods. and free labourers. the lord and his knights had become both a warrior class and a highly specialized ruling class whose survival and raison d'être depended on military prowess. but in practice was more a rationale for a class that lived by violence. and gains from trade increased.
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. and granting or delegating property rights to the burgeoning towns. and. The Champagne Fairs. which in their early form were voluntary associations but which soon became a legally recognized part of the state. Everywhere kings and princes were guaranteeing (for a fee) safe conduct to traveling merchants. Thirteenth-century England witnessed the development of an extensive body of land law.There can be little doubt that 15 . Stinting arrangements that limited the number of animals a family could pasture on the common became customary. the urbanization of metal and cloth trades of Flanders were only a few of the major manifestations of commercial expansion of the era. Champagne. The rising value of land increased the incentives to alter property rights so the now increasingly scarce resource could be used more efficiently. for example. enforcing the judgments of commercial courts. General diminishing returns to a growing population in Western Europe appear to have set in in the twelfth century. France). Holland. The rising value of land led to efforts to provide for exclusive ownership and transferability. formalization of the ability to alienate land. and England. Similar developments took place in Burgundy. finally. The property rights surrounding the production of non-agricultural goods were inextricably tied to the guilds. more. the burgeoning Mediterranean trade of Venice. during the twelfth century was widely recognized in Flanders. Guilds provided an early set of rules with private policing for the protection of the property of their members. Within the manor the common fields would tend to be overexploited if every resident had equal access. The twelfth and thirteenth centuries were a period of a flowering of international commerce. Within the towns. Genoa. and other Italian cities. protecting alien merchants and providing them with exclusive trading privileges. but by the end of the twelfth century they had become a part of the political administration in the Italian cities. guilds developed to serve the needs of local manufacturers as well as merchants. and France. The response to this exploitation was to embody in the customs of the manor regulations which restricted access. relative factor scarcities changed: labour became less valuable . land. In turn. 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. the beginnings of enclosure.Chart D'Oleron (near La Rochelle.
declined in volume. Despite repeated efforts to regulate maximum wages. and the margin of existence became precarious. competition among landlords led to increasingly liberal terms for tenants as well as to rising wages. Trade and commerce. as a consequence. Agricultural production was affected: relatively fewer animals and relatively more cereal grains were raised. Gradually villeins also came under the king's justice. there was a shift from crops to livestock production .there was substantial productivity increase in the non-agricultural sector as a result of reducing transaction costs. The famines that enveloped much of western Europe in the early 14th century demonstrate this. which made property rights increasingly insecure. and rents fell. 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). nevertheless. while diminished. But trade. 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. A growing population coupled with diminishing returns was reducing the standard of living of most people. The population of western Europe was approaching a subsistence level. The plague in 1347 became endemic. In the agricultural sector there was a return to an era of abundant land and scarce labour. 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. returning again and again so that probably population fell for a century. and real wages were falling. 16 . Everywhere poorer land went out of production. This change was reflected in the diets of the peasant as carbohydrates replaced protein. Western Europe was experiencing a Malthusian crisis. and they were a harbinger of worse things to come. and the manorial court slowly lost jurisdiction. 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. Population growth was causing the prices of agricultural goods to rise relative to other goods. The relative bargaining strength shifted from the lords to the peasants. 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. markets survived and with them a money economy. 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. did not disappear. as a consequence. this sector still accounted for only a tiny fraction of total economic activity. and real wages rose. 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.
on Christmas Day of that year he was crowned emperor by the pope in St. from the borders of Islamic Spain to Saxony. which permitted large states and order over a substantial territory." but its partition and breakdown in the ninth century were convincing evidence that the viable size of the political-economic unit was small. Moslems. and it was in effect Charlemagne's genius that briefly held his empire together. The viable response was the fixed fortification and the heavily armored knight. Warfare was typically small scale but ubiquitous. had either disappeared or been substantially weakened in the late Roman Empire. the technology and organization of warfare. The previous lectures ended on the theme that the economies of scale associated with military organization. however. 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. but to one degree or another all of western Europe felt the changing relative factor scarcities. Moslem corsairs attacked Christian ships in the Mediterranean and raided from southern Italy to Provence. and Lombard Italy. Peter's Cathedral. and Gaul in 799. 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. No centralized administration and fiscal structure emerged. The latter's comparative advantage over infantry was 17 . During the ensuing millennium a warrior class that lived by pillage. and ransom dominated the scene. The chaos of western Europe was briefly interrupted when Charles Martel turned back the Arabs at Poitiers in 753. Ireland in 795. and Magyars. the response in terms of evolving institutional arrangements and property rights differed throughout western Europe. However. Internal warfare was abetted by partible inheritance . Bavaria. By 800 Charlemagne had annexed or conquered a vast area. There were regional variations in population pressure and in the incidence of famine and of the plague. The subsequent Carolingian Renaissance was a striking contrast to the earlier "dark ages. raids. Vikings appeared off the coast of England in 786. A distant king was of little protection against these marauding bands. the character of warfare was basically altered and this warrior class had become obsolete. Hungarian horsemen following the ancient Roman roads raided Bremen in 915 and reached as far west as Orleans in 937.The changes described in the previous pages of this section took place throughout western Europe. and even the relative increase in protection and order that emerged with feudalism did not fundamentally change this way of life. By the end of the era. London was sacked in 841. This class was only briefly constrained by the Carolingian Empire. dissolution hastened by the assaults from three directions of Vikings.
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.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). was decreased. who had always posed the threat of becoming militarily more powerful than the king. ransom. Moreover the development of the siege cannon destroyed the centuries-old impregnability of the castle. But in the short run—through the fifteenth century—greater warfare and chaos attended the growing market for mercenaries. 18 . the character of warfare was typically small scale between heavily armored knights. The growth of a money economy led to scutage—a money payment in lieu of knight service. The size of a king's army now depended on his purse. The military result was a stalemate which reinforced the persistence of small political-economic units. In the long run the de facto power of vassals. The pike. At Courtrai in 1302 Flemish pikemen demonstrated that heavily armored cavalry were vulnerable to the pike-phalanx. the resultant revival of economic activity gradually undermined it. the cannon. Kings could now hire mercenaries in lieu of relying on forty days a year of knight service. 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. who once organized into existing bands became the scourge of western Europe as they discovered the profitability of extortion. and eventually the musket in warfare on land and improvements in naval architecture combined with the cannon at sea. at Crecy the combination of English longbowmen with dismounted knights routed the French as it did again at Poitiers and again at Agincourt. 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. Between periods when they were hired by one or another side in a war they lived off such profitable opportunities. But if the technology of warfare solidified the feudal structure. the French in 1449‐ 1450 recaptured most of the fortified sites of the English in Normandy. the longbow. Between the thirteenth and the end of the fifteenth centuries there occurred a major series of technological changes in military warfare. and plunder. The hierarchical decentralized structure of feudalism outlined above was the result.
the age of chivalry was ended. disciplined fighting force supported by costly equipment in the form of cannons and muskets. 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. As a consequence. In an oligopoly there will be endless efforts toward collusion and price fixing. or they will be forced into bankruptcy. Between 1200 and 1500 the many political units of western Europe went through numerous conflicts. Even then the equilibrium is likely to be unstable. the conditions for political survival were drastically altered. 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. 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. The path from the old competitive equilibrium to a new (and perhaps unstable) oligopoly solution will be as follows. The result is periods of collusion interrupted by eras of cutthroat competition. The age of the armored knight with lance passed. A year of warfare 19 . 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. What cannot be argued is that it expanded. and combinations as the local manor gave way to the emerging nation-state. Let us examine the case of a competitive industry with a large number of small firms. The contending nation‐ states faced enormously growing expenses. The original small firms must increase in size or combine. While the size of states sometimes increased. but a trained. the critical factor was the ability to increase tax revenues rather than simply to increase the size of the political unit. we find remarkable similarities. Survival now required not only a larger army. alliances.We have seen that mercenary specialists ranging from Swiss pikemen to English archers were effective and profitable in the late Middle Ages. The inevitable result is a smaller number of large firms of optimum size. These centuries witnessed intrigue and warfare on an ever-expanding scale. If we compare the above description with the political world of the late Middle Ages. The competition for survival will be fierce. At this point we can usefully pause in our historical narrative to offer an analogy from economic theory. 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. but there are always advantages for an individual firm to cheat on the arrangement.
Edward III ruined the Peruzzi and Bardi. Even in the absence of an active contender. and bankruptcy was often a reality. and at a later date Charles V and Phillip II ruined the Genoese and the Fuggers. and certainly in concert they were more powerful. the lender exacted a high interest rate. There was the possibility of borrowing money—and indeed this was a major source of meeting short-term fiscal crises brought on by war. powerful vassals posed an imminent threat either to overthrow the king or to collabourate with an outside invasion. As compensation for the high risk. as the Burgundians did with England against the French crown. facing the awesome task of repayment. 20 . With the growth of a money economy. A king could rely on loans to tide the government through a war. the loan often was backed by collateral (frequently it was crown lands. Income in kind shows up in French crown receipts well into the thirteenth century.represented at least a fourfold increase in the costs of government—and most years were characterized by war. Custom and tradition set limits to the exactions they could obtain from lesser lords. the crown jewels. farming of the customs. Since a prince could not be sued for debt. 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. Increased taxation could place a European Crown in jeopardy. or certain monopoly concessions). the revenues became increasingly monetized. As late as 1157 the Count of Flanders received a significant share of his revenues in kind. The spectre of state bankruptcy was a recurring threat. Monarchs were continuously beset by fiscal crises and growing indebtedness and often were forced to desperate expedients. They were. In the face of declining revenues and growing financial needs. however. usually disguised to avoid usury laws. Many of the king's vassals were almost as powerful as he (in fact. declining during the fourteenth and fifteenth centuries as a result of the fall in land rents due to a declining population—at precisely the time when more revenue was required for survival. a king who stepped over the boundary of accepted custom faced the possibility of revolt. the Dukes of Burgundy were at this time much more powerful than the kings of France). he required fiscal revenues. As the Magna Carta amply attests. not peace. but. There was frequently more than one contender for the throne. Default was common. Kings who in the past had lived on their own could no longer do so. the princes of Europe faced an everworsening dilemma. 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.
Later. was to grant certain property rights to groups who could pay for them. again in return for revenue. merchants. there was no institutional structure available to undertake such activities. and Anjou. Another alternative. Since individuals in the private sector always had the free rider incentive to evade a tax. He could grant privileges—property rights and the protection of property rights—in return for revenue. Such laws not only prevented loss of revenue but allowed the state to tax land transfers. As trade and commerce grew beyond the boundaries of the manor and the town. The basis for a mutually advantageous exchange existed between the private sector and the state. the state had of necessity to discover a source of income that was measurable and easy to collect. Clearly there were economies to be gained by the state taking over from manorial lords the protection of property rights. Foreign trade was thus a more attractive source of potential revenue than domestic trade. The emerging nation-state thus sought revenues from economic activities that were relatively easy to tax. But where trade was primarily local within a town or small geographical area or primarily internal to the economy. Where foreign trade was a significant part of the economy. the Statute of Wills (1540) was enacted to permit inheritance because the crown was losing revenue through the extensive device of "uses. or to pass laws prohibiting practices that threatened government revenues. frequently employed at this time." Similar laws were enacted in France. A number of possibilities were open to a ruler. since the number of ports was limited. and customs duties were established on exports and imports in return for monopoly privileges. Champagne. and shippers found that the private costs of protection could be reduced by a larger coercive authority. Towns were granted trading and monopoly privileges in return for annual payments. He could confiscate wealth. In contrast to presentday tax structures.The degrees of freedom of the ruler varied widely. Here we can no more than list some of the multitudinous (and ingenuous) ways by which princes traded property rights for revenue. the costs of measurement and collection were typically much higher. the farmers. Guilds were granted exclusive monopoly privileges in return for payments to the crown. 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. the costs of measuring the extent of trade and of collection of the tax were typically low—particularly so in the case of waterborne trade. 21 . because the king would otherwise lose revenue by the practice of subinfeudation. He might be able to exact a forced loan when he could convince his subjects that they were threatened by attack or invasion. and alien merchants were granted legal rights and exemption from guild restrictions.
(2) the ability of rivals of the state to provide the same service. what determined his bargaining strength vis-à-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. and French to round the Cape of Good Hope (called the Cape of Storms for good reason). and England and how the type of government influenced the economic growth of these nations. In the next section we shall examine how these three factors effected the type of government that emerged in France. of political-economic units. and second by a structural transformation. The consequence of the expansion was ultimately to integrate the rest of the world with the western European nations. slaves. The resultant structural transformation produced the essential conditions that underlie the economic growth of the past three centuries. and (3) the structure of the economy which determined the benefits and costs to the government of various types of taxation. to rediscover America . to fight interminable wars with each other. to search for the Northwest Passage. of crisis proportions. exploitation. In some instances these representative bodies retained this privilege. The motives that led Prince Henry of Portugal to undertake the exploration of the African coast were to "serve God and grow rich. since the service of God throughout this era constrained the range of choices of the participants (at least in the short run). to capture and pillage the Mayan and Incan civilizations. 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. Dutch. Estates General) control over tax rates in return for the revenue they voted. in turn. and more prosaic trade goods was the fundamental driving force that led the Portuguese. political pressure for structural changes to realize those opportunities. spices. Spanish. Spain. the Netherlands. as well as with Moslems and native populations. in others." It would be a mistake to underestimate the zealous ideological cast to this materialistic endeavor. Structure and Change in Early Modern Europe The two centuries from 1450 to 1650 were marked in Europe first by extended exploration. English. they lost it. By the middle of the 22 . What did the ruler have to give up in order to get the essential tax revenues for survival? That is. and settlement to the New World and the Indies.In most cases the crown was initially forced to grant to "representative" bodies (Parliament. silver. trade. But the search for gold. but its shorter-run consequences were a widening of the market and increased opportunities for profit and.
England. their trade was not confined simply to east-west trade. In return for "protection and justice" the new rulers received tribute and forced labour. In terms of the framework. As Cipolla makes clear. 23 . The Dutch. The French attempted to settle French Canada in a pattern mirroring feudal land organization of the mother country—with the predictable result that it provided little attraction to settlers. However. particularly. This system was designed defensively to exclude the Dutch (and others) and positively to integrate the colonies and the mother country. but in addition they were "middlemen in a vast network of commercial activity among Asian nations . as between the colonies and the mother country. is the subject of a substantial literature. The English. relatively latecomers in the search for profitable trade ventures.. The contrast between the economic organization of the Spanish.. while pre-eminent in trade. 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. had only temporary success in ousting the Portuguese from the Brazilian sugar coast and in maintaining a foothold (New Amsterdam) in North America. Portuguese." (1965:136). 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. and English trade.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. their efficiency in shipping and trade played a major role in shaping the external policies of France and.. Dutch. The division of costs and benefits of the Navigation Acts. 2 In the Far East the superiority of Western sailing ships and cannons established Portuguese. and the pattern of trade and flow of productive factors (labour and capital) helped shape the pattern of development of the Atlantic nations themselves. 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 Portuguese sugar colonies were built by slaves imported from Africa. The Spanish encomienda system in Mexico substituted the overlordship of Spanish encomenderos for Aztec rulers. gradually developed a system of colonial settlement and preference trade between its West Indian and North American colonies.
depending on the resource endowments. the disastrous consequences quickly led to modification and the de facto development of private property rights in land. Because the exogenous variable in the Marxian system is technological change. fishing. 24 . traditionally associated with the Industrial Revolution. For the Marxist the seventeenth century is part of a larger puzzle in the dialectical process of development. While the Virginia Company and some of the other colonial ventures started out by working land in common. such as the Thirty Years' War in Germany. does not emerge for almost three centuries.English settlement. and indigo plantations developed. The development of America is the subject of a subsequent chapter. widespread social upheaval. 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. Their explanation is that it took the emerging bourgeois class almost three centuries to come to political power and create the Revolution. indentured servants were replaced by slaves. but ultimately these gains were to prove illusory as the Spanish sank into stagnation. which leads to the emergence of new classes. coming a century after Spanish and Portuguese settlement. We must examine the structural crisis of the seventeenth century to see the differential pattern of European development. In the South. and shipping. For the Dutch it meant an economy built on their comparative advantage in shipping and trade. mirrored the changing structure of property rights emerging in that country. By the time it was over the structure of some of the political-economic units had been radically transformed. It was an era marked by devastating wars. falling wages. In contrast. The focus of this chapter is upon the emerging national economies of western Europe. The scarcity of labour produced diverse results in the different colonies. where relatively large-scale tobacco. the Marxists have a three‐ century void. since feudalism appears to have died by 1500. the New England and middle colonies were characterized by individual land holdings and the early development of an economy based on agriculture. There is widespread agreement that there was a crisis in the seventeenth century but no agreement on its sources or character. for the English the colonies became a part of an empire. but capitalism. and religious strife. rice. The English and French revolutions were the critical breakthroughs that opened the gates of modern capitalism. For the Portuguese and the Spanish it initially meant riches and economic opportunity. the above-described expansion influenced each of them.
it was engendered by war rather than the extravagance of Renaissance courts. 5 Thus the Marxian argument appears to fit the evidence better. a second cycle of expansion. There can be no doubt there was a fiscal crisis. was clearly falling relatively behind England. We have seen that each emerging nation-state was desperate to obtain more revenue. England and the Netherlands had escaped the Malthusian crisis as output grew faster than population. The Marxian emphasis on technology has led Marxians astray. affected. 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. and paper all played a part in the expansion of western Europe. printing. The late medieval world was characterized by cycles. and bankruptcy when Europe ceased expanding in the seventeenth century. The crisis of the seventeenth century spread with differential results throughout Europe. the compass. and economic contraction. pestilence. H. better ship design. since the technology of the Industrial Revolution followed rather than preceded the structural changes. Elliot points out in his comments on Trevor-Roper. France. the results were widely divergent. 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. England and the Netherlands were barely. The technological change associated with the Industrial Revolution required the prior development of a set of property rights. while France and especially Spain suffered extensively. while essential property rights which led to the Industrial not stagnating. 25 . previously the most powerful nation in Europe. was followed by a contraction during the seventeenth century. between 1300 or 1350 and 1475. 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. 1475-1600. The population growth of the preceding two centuries was followed. however. fell into a state of absolute decline. It is the manner in which this was accomplished that was crucial to the state's economy. The interplay between the government and its subjects with respect to the expansion of the state's right to tax was particularly important. by famine.For Hugh Trevor-Roper the crisis was one of an overburdening parasitic bureaucracy with a consequent tax burden that produced strain. and Spain. The type of property rights established was the outgrowth of the particular way each nation-state developed. casualty. While gunpowder. for in each case a modification of property rights was involved. which raised the private rate of return on invention and innovation. but as J. if at all.
A representative body called the Estates General had been established to vote the crown special levies to meet emergencies. The trading of property rights for tax revenue was a fruitful short-run solution that had deleterious long-run consequences.In the case of the two successful countries. English armies occupied parts of France. Charles VII used his fiscal revenues effectively. The rivalry between the emerging nation-states caused a continuing need for ever-more fiscal revenues. and clearing the countryside of outlaws. The crown sought revenue wherever it could be found. As a consequence of his increased power. The ability to enforce property rights effectively. a right that would outlast the emergency that created it. and the acquisition of the unconstrained power to tax gave the French crown the exclusive right to grant or alter property rights. Such a task required a large and growing crown revenue. marauding bands of unpaid soldiers preyed upon the countryside. He faced the awesome task of reestablishing law and order and of recovering more than half his claimed kingdom from the English and Burgundians. France was a country in name only when Charles VII took the throne in 1422. 26 . pushing the English back. the property rights established provided incentives to use factors of production more efficiently and directed resources into inventive and innovating activity. This section briefly surveys how such a divergence came about. 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 absolute level of taxation and the specific forms by which fiscal revenues were obtained resulted in personal incentives to do just the opposite. Let us begin with France. In the case of the less successful countries. and the great nobles engaged in seemingly endless squabbles. The emergence of a nation-state in France began as a response to the devastation caused by the Hundred Years' War. 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. the removal or neutralizing of local rivals. 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. making an advantageous peace with the Burgunidans. Charles VII repeatedly had to ask the Estates General for new revenues during the early years of his reign.
the consequence for productivity was to discourage economic growth. As a consequence. The economy was composed of many regional and local economies. A large administrative bureaucracy was created to control the fiscal system. While revenue to the crown and bureaucracy increased. The crown in effect traded monopoly rights in local areas for an assured source of revenue. the wool industry had developed. Sheepherders moved their flocks between the highlands in summer and the lowlands in winter. as the system implemented by Colbert demonstrates. Potential rivals within France (the nobility and the clergy) were neutralized by being excluded from taxation. Earlier in Spanish history when land was still abundant. The benefits of improving the efficiency of markets were in France sacrificed to the fiscal needs of the state. The benefits of competition were lost to numerous local monopolies that not only exploited their legal position but also discouraged innovation. This fiscal system was expanded and elabourated under Colbert in the seventeenth century. The crown found in these guilds an already developed infrastructure for raising fiscal revenue. Once such a bureaucracy was in place. With the decline of economic activity in the fourteenth and fifteenth centuries. 7 The logic and consequences of this fiscal system can be readily interpreted in terms of the analytical framework of this study. The French economy remained regional in nature and as a result the gains from a growing market were sacrificed. The crown was forced to tax each region specifically—a task which required a large bureaucracy and the assistance of existing voluntary organizations. In 1273 the 27 . 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. They attempted to protect the shrinking local markets from outside competition by employing monopoly restrictions.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. Neither did Spain. guilds had become a growing power in the towns of France. The resultant bureaucracy not only siphoned off part of the resultant income but became an entrenched force in the French political structure. France did not escape the Malthusian crisis of the seventeenth century. The crown strengthened the guilds by guaranteeing a local monopoly in return for a fee. The system of trading property rights for revenue provided a solution but required an elabourate agency structure to monitor the system. it was relatively easy to use it to regulate the economy.
the most important of which was the extension of supervision over all migratory flocks. Weary of internal chaos. were consolidated by Alfonso X into a single guild called the Honorable Assembly of the Mesta of the Shepherds of Castile. including stray animals. in time. increased revenues were matched by increased expenditures as Charles V maintained the largest (and best-trained) army in Europe. the representative body of Spain. the Castile Cortes. the great era of Spanish hegemony over Europe began. 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. (Vives (1969:25) In return for being the principal source of revenue of the crown to finance the war with the Moors. (Schwartzman 1951:237) It was under Ferdinand and Isabella that a nation-state emerged." animals which were pastured along the river banks within the district of a particular town. as in France. to prevent the enclosure of fields in their path. surrendered control over taxation to the crown. and Milan.local sheepherders guilds. with its own itinerant legal staff and armed guards accompanying the annual flocks. with protected routes across the kingdom. 28 . It was initially a period of great prosperity with enormous increases in fiscal revenues from Aragon. called mestas. However. With Charles V's ascension to the throne in 1516. but particularly from the prosperous Low Countries. the granting of monopoly rights by the state was a major source of income with similar—if more damaging—consequences. empowered to engage in collective bargaining with the most powerful landowners. Naples. which in some years exceeded by tenfold revenues from all other sources. with authority to override conflicting interests. The motive was merely one of the king's financial embarrassments . in the whole kingdom of Castile. Between 1470 and 1540 tax revenues grew twenty-twofold and. including treasure from the Indies. In exchange for these taxes the herders wrested a series of privileges from Alfonso X. exempt from the payment of the alcabala and from municipal sales taxes. in consequence. The Council of the Mesta by the sixteenth century had become a privileged institution. the mesta was given expanded privileges to move sheep back and forth across Spain. This supervisory function was gradually extended. It had judicial powers and economic prerogatives which placed it outside the reach of other institutions. even to "permanent" sheep pastured in local mestas and to the "riberiegas. after centuries of strife with the Moors and an almost ceaseless internal warfare among feudal lords. the development of efficient property rights in land was thwarted for centuries.
government services. Property was confiscated. 29 . or the nobility. and noble status. As a consequence of monopoly. which was exempt from taxation. the need became especially critical. 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 Dutch achieved a political importance all out of proportion to their small size. While France and Spain were suffering setbacks throughout the seventeenth century. The property rights that were granted did not foster efficiency— rather the opposite. When revenues from the Netherlands stopped with the revolt of the Low Countries and the treasure from the New World declined. Charles V and his successor Philip II were required to spend more each year to maintain this empire. 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. high rates of taxation. Even such desperate expedients could not keep the crown from bankruptcy.as well as a large navy. army. was sold. 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 need for ever-larger fiscal revenues caused both states essentially to trade property rights for fees. or government suggests that they were rational men. 1596. The widely reported observation that the hidalgos had an aversion for trade and commerce and a preference for careers in the church. and 1647. The experiences of France and Spain were similar in many ways. The only areas safe from the crown were in the church. 1607. and confiscation. As a consequence. Guilds in the towns were granted exclusive local monopolies for new revenues. trade and commerce declined. the population and income per capita of the United Provinces experienced a sustained increase. The success of the Dutch is all the more interesting because it was a country with relatively few resources. Bankruptcies occurred in 1557. 1627. Spain even more than France suffered the consequences during the seventeenth century. 1575.
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. While opposed by these towns. The answer to this puzzle lies in the nature of the major economic activities of the area. Eventually. which develop to reduce transaction costs. the Low Countries in general and Antwerp in particular rose to unparalleled importance in industry and commerce. the ever-more exacting demands of Philip II led to the successful revolt of the seven northern provinces. such as Bruges and Ghent. The level of tax on any one item was always relatively low. and commercial leadership shifted to Amsterdam. Their rulers. 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. The Low Countries were the natural center of European trade. the result of a reviving international trade.The United Provinces had been the possession of the Duke of Burgundy until by inheritance they passed to the king of Spain. are subject to economies of scale. which enacted laws and held the authority to vote taxes for the ruler. delivering to the Spanish king the majority of his revenues. During the rebellion Antwerp was sacked by the Spanish. the rulers were supported by new centers of industry and commerce that were springing up. whether Burgundian or Hapsburg. As a consequence. the Dutch were willing to pay for those rights by a series of small taxes on trade in general. actively discouraged the existence of monopoly privileges in the established cloth towns. The prosperity of the Low Countries made this possible. called the States General. 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. the cost of making an 30 . In 1463 Philip the Good had created a representative body. As the volume of trade grows. The Low Countries became the jewel of the Hapsburg Empire. The Hapsburgs went along with the desires of the assembly so long as sufficient revenues were approved. Markets. however. 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 efficiency of these new areas was due in large part to the absence of guild and trade restrictions. Furthermore. 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.
Vineyards disappeared and dairying expanded. the fiscal endowments of Spain. The rise of international markets led to regional specialization within the Low Countries. waste lands were drained and cleared. England was forced to contend with these emerging nation-states. constructing a New World empire in defiance of 31 . The Dutch during the early modem era became the economic leaders of Europe. Moreover. The development of the pre-eminent European market at Antwerp and then at Amsterdam made commerce the easiest sector for the state to tax. Price lists reporting the current market transactions were circulated for all to read. The Netherlands as a result became the first country to achieve sustained economic growth. 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 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. Gradually the existing letter obligatory was transformed into a bill of exchange allowing merchants an expanded means of payment. trades began to be made in continuous auction markets. New crops were introduced to service the urban commercial sector. First in Antwerp and then in Amsterdam.individual trade falls. the United Provinces continued to prosper even after the center of the European economic stage shifted to England when this larger country. The property rights that favored the growth of commerce also favored increased efficiency in agriculture. A thriving capital market developed alongside commerce and produced innovations of its own. consciously or unconsciously. 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). and the efficiency of economic organization of the Netherlands made these countries European powers. 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 numerous goods traded on the commercial exchanges came from all parts of Europe. Dutch agriculture became more capital intensive. imitated the success of the Dutch. Standard contracts and law courts dealing exclusively with trade were established. and fertilizer was used extensively. The size of France. She sought a middle ground. and they came to the Low Countries because the markets there were competitive and efficient.
The Stuarts inherited what the Tudors had sown. and Parliament. Parliament because it was expedient to do so. Henry VIII. as a consequence. perhaps most. The Tudors. Wool. long the staple export in English international trade. was an obvious source of crown revenue. rather than suppressed. and the 32 . did manage to expand his revenues in ways now very familiar to us—by selling grants and privileges. The right of Parliament to grant taxes was by this time of long standing.Spain and attempting to quarantine the Dutch on the one hand while instituting similar property rights and institutional arrangements on the other. this class was well-represented. and maladministration of justice that went along with the reduction of the powers of the barons. Henry VII. of the nobility and clergy. During the fourteenth and fifteenth centuries England suffered through the Hundred Years War and the War of the Roses with the attendant disorders. but Parliament won the right to set the level of the tax. Caught up in the evermore expensive rivalry between nations. while still expected to live on his own. the merchants exporting the wool. They cultivated. while Parliament saw the crown as circumscribed by the common law. His successor. By the year 1700 England had succeeded in replacing the Dutch as the most rapidly growing nation in the world. Parliament proved intractable. and the scene was set for a conflict that the crown would lose. The Stuarts viewed the government as their exclusive prerogative. The outcome of this struggle was a compromise with something for everyone. the Stuarts sought new sources of funds. They sought revenues wherever they could be found without regard to economic efficiency. managed the same way and added the confiscation of monastic lands. having emerged late in the fifteenth century out of the struggle for control of the wool trade. The Tudors were as opportunistic in their dealings with property rights as any continental king. along with the landed gentry. rebellions. Yet two centuries earlier there was little indication that England would take the path that led to economic growth. A tripartite struggle over the extent of the tax developed between the crown. The Tudors relied for their support on the rising merchant class and on the House of Commons where. where the wool growers were wellrepresented. raised the English monarchy to its height. The process of consolidating the power of the king and at the same time increasing crown revenues left the Tudors decidedly unpopular with many. As in France the emergence of a nation-state in England was a long and costly process. The crown received the revenues from the tax.
Hence in England. Finally. Had they been able freely to trade monopolies and other restrictive rights for revenue. but Parliament's exclusive right to tax endured. Internally there were often several contenders for the throne. 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. Parliament's authority survived. the outcome for economic efficiency also would have been similar. and still less reason existed to support a large central government. the presence of whom limited the powers of the English king or queen. 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. 33 . which provided an easily measured and collected source of fiscal revenues. The rise of Parliament caused the nature of English property rights to diverge from the Continental pattern. Thus. These regulations. wool. and so the central provision of protection was not as significant to the English as it was to the French.merchants achieved a monopoly of the trade. were simply evaded. Foreign invasion was never as serious a threat as it was on the Continent. But in England the crown ran into effective opposition. the economic policies of the Tudors were the same as those of the continental kings. The nature of the economy led to a dependence upon an export staple. The regulations enacted by the Tudors in an attempt to develop a comprehensive system of industrial regulation proved ineffective. In short. little reason existed to concentrate authority in the crown over property rights and taxation. When challenged by the Stuarts. England's geographical position as an island insulated the country from its rivals. As we have seen. the economic history of England would have been much different. Let us examine some of the reasons why a representative assembly thrived in England while it declined and disappeared in France and Spain. the representative assembly retained its crucial powers to tax even though the issue was not finally settled until 1689. Had such a shift not occurred. the crown's initial control over property rights for two centuries passed to a representative assembly composed of merchants and landed gentry—a group whose interests were to halt restrictive practices and ensure private property rights and competition by constraining the powers of the king. The wool monopoly eventually disappeared. the crown's prerogative to create monopolies was itself ended by an act of Parliament. similar to the ones successfully enacted in France. and the wool tax became a minor source of government revenues.
and agricultural innovations familiar to the Dutch were adopted by the English. Institutional arrangements evolved to further the gains from trade. the opposite 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. The reduced cost of using the market to organize economic activity was the main source of productivity gains during this era. and agricultural innovations familiar to the Dutch were adopted by the English. as in the Netherlands. industrial. in England. 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 . 34 . 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. In England a growing population meant the revival of trade and commerce. commercial. 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.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 England a growing population meant the revival of trade and commerce. The reduced cost of using the market to organize economic activity was the main source of productivity gains during this era. industrial. 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. Institutional arrangements evolved to further the gains from trade. as in the Netherlands. As the market expanded. commercial. in England. As the market expanded. the opposite occurred.
The Greek alighting two centuries later. he or she would have found much that was familiar. It is easy to understand this preoccupation with the Industrial Revolution. so much had the state of mankind been altered in that relatively brief historical time span. Demographers estimate that world population was approximately eight hundred million in 1750. however. 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.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. would discover what would appear to be an "unreal" world in which little would be recognizable or even understandable. Population growth occurred at an unprecedented rate. If an ancient Greek had been miraculously transported through time to the England of 1750. It was in excess of four billion by 1980. 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. (Coale 1974:43) 35 . What were the changes? They can be stated as follows: 1.
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. 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 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. and new materials and substances constantly created to satisfy human wants. then we shall be in a position to examine the interrelated 36 . 3. division of labour. In the Western world agriculture ceased to be the dominant economic activity. and inevitable externalities. In consequence. 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. Moreover. In colonial times these percentages were reversed. It was this set of developments which paved the way for the real revolution in technology—the Second Economic Revolution—which was the wedding of science and technology. the Western world became an urban society with all that term implies concerning increasing specialization. the origins of which go back well before the traditional chronology (1750-1830). 4. It was this later development. and what we mean by the term Industrial Revolution have been the subject of a substantial debate. how these changes occurred. It is the argument of this chapter that the Industrial Revolution was acceleration in the rate of innovation. While these developments are not in question. 5. The Western world achieved a standard of living which had no counterpart in the past. the average length of life almost doubled in the developed countries. New sources of energy were harnassed to do men's work. in the second half of the nineteenth century. interdependence. when they began. which produced the elastic supply curve of new knowledge and the unprecedented developments briefly summarized above. This change was made possible by the tremendous increase in agricultural productivity.2. which increased transaction costs. The average citizen enjoyed luxuries which were not available to even the richest man of earlier societies. industry and service sectors of the economy replaced it in significance. Continuous technological change became the norm.
The classical economists simply failed to understand the events that were occurring around them.process of organizational change and technological development which made up the Industrial Revolution as it is defined in this chapter. In the decades immediately after Ricardo wrote. the average income of an Englishman more than doubled. did not mention them. five decades after the date customarily accepted as the end of the transformation to which it refers. as evidenced in Frederick Engel's Conditions of the Working Class in England. David Ricardo suggested that rising rents would absorb any increase in productivity. In the process the manufacture of textiles and iron was undertaken in steam-powered factories of greatly improved efficiency. and real wages increased dramatically. Smith was in good company. farmers. in fact. for instance. rents as a share of a rising national income fell by half. the share of labour income in national income rose markedly. large cities existed before the industrial towns grew up. But the term "Industrial Revolution" was not popularized until Arnold Toynbee employed it in a series of lectures delivered in 1880-1881. writing at the end of the era. some towns grew into big cities. Instead. Historians agree that these changes in organization and technology began in Britain during the middle decades of the eighteenth century. This combination of events has appeared more startling to the historian than it did to contemporaries. Adam Smith. and Karl Marx. Population. Thomas Malthus predicted that the enormous increase in population would keep wages from rising for long times above subsistence. Over the next hundred years. 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. writing the most important book on economics in the middle of these occurrences. and manufacturing and services expanded to assume the farmer's former role. agriculture fell from roughly one-half of the nation's output to under one-fifth. the population of Britain tripled. Further. national income rose at an unprecedented rate in the next eight decades. It is not that all contemporaries were unaware of change occurring. and handcraftsmen would continue to increase its wealth at a moderate pace by further specialization and trade. Some were aware. and the income of Englishmen increased prior to the birth of Adam Smith as 37 . was growing prior to the century of Industrial Revolution. predicted that the lot of the worker would not improve. he predicted that his nation of merchants. published in 1844.
had been transformed into a world population explosion by the middle of the twentieth century. not their revolutionary character. 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 technological events of the Industrial Revolution period were largely independent of developments in basic science. he would have found the transformation of the next 125 years to be simply unbelievable. the increase in agricultural productivity. Large factories had existed prior to the Industrial Revolution. 1 The technological events of the recent past. Nor does the industrial sector dominate the employment of the developed nation's labour force. During this period. The fabled Watt engine was simply an improvement over the previously existed Newcomen engines. In short. employ the vast majority of modern workers. the revolutionary transformation I described at the beginning of this chapter is predominantly a happening of the past 150 years. it was the evolutionary culmination of a series of prior events. and the agglomerative benefits of central places for economic activity. So perhaps it is not surprising that the classical economists missed the Industrial Revolution: for what was new was the magnitude of the changes. 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. And while the classic era of the Industrial Revolution was certainly an acceleration in economic change. The real revolution occurred much later. in the last half of the nineteenth century. not manufacturing. Learning by doing can explain the technology developed during the Industrial Revolution. especially the rates achieved by more recently developing nations. but only 38 . Further. on the other hand. which began prior to the Industrial Revolution. The cause of this modern explosion has been declining mortality from infectious disease as a result of improvement in nutrition and in the environment.well as during his life and the lives of other classical economists. as I shall show below. Instead. and steam engines had been employed in coal mines for decades before James Watt's steam engine. our stereotyped views of the past two centuries are in need of revision. agriculture would not have appeared a declining industry to a contemporary observer. 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. While the average Briton marveled at the wonders of the Crystal Palace Exhibition of 1851. The enormous growth in population. the rate of economic growth during the Industrial Revolution was not particularly impressive when compared with later eras. Similarly. there were more and more agricultural workers in total. for instance. services. all have required major breakthroughs in science.
equally. and the combination of science and technology produced the Second Economic Revolution. Yet we do not observe that the steamship replaced the sailing ship until the end of the nineteenth century.scientific experimentation can account for the development of nuclear power or the petrochemical industry. innovation to subsequent diffusion—is often a long and intricate process. the development of the steamship. 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 39 . 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. for example. Thus. 2 Consider. concentrating on the great inventions such as Watt's steam engine. Watt's steam engine was an eighteenth-century invention. 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. The great technological strides of the last hundred years depended upon the scientific revolution. The process of learning by doing must also accompany technical change. From initial conceptualization to establishment of technical feasibility—that is. Most of the existing literature. from invention to commercial feasibility. Its application to water transportation occurs at the beginning of the nineteenth century. In addition. To understand what occurred during the Industrial Revolution it is necessary to explore the process of technological change. 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. technical changes in one area may outrun technical knowledge in other fields. 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. or Crompton's mule. one of the most dramatic inventions took almost a hundred years to replace its predecessor. As late as 1880 most of the world's bulk cargo was still being carried by sailing ships. ignores the day-to-day progress in technological change which produces the sustained productivity increase in economic activity. Arkwright's water frame.
implemented with the companion technologies of the time. Indeed. What determines the rate of development of new technology and of pure scientific knowledge? In the case of technological change. These disciplines are of recent origin. We must make this distinction. the relationship between the development of new techniques and the development of new knowledge is a major issue. 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. The primary reason has been that the incentives for developing new techniques have occurred only sporadically. Prince Henry the Navigator. Innovations draw upon the stock of existing fundamental knowledge which men possess. Typically. indeed. Governments also have often subsidized the development of military technology and provided a ready 40 . in fact. the social rate of return from developing new techniques had probably always been high. It is only in the last one hundred years that advances in basic knowledge are necessary to continued technological change. we have observed in the previous historical chapters of this book that throughout man's past he has continually developed new techniques. called together a group of mathematicians to search for a new method of determining latitude. there would be slow progress in producing new techniques. for example. but the pace has been slow and intermittent. but we would expect that until the means to raise the private rate of return on developing new techniques was devised. because the incentives to expand pure knowledge are not necessarily the same as those that lead to practical innovation. and biology. That knowledge is today embodied in such formal scientific disciplines as physics. Historically. But these developments did not depend upon structured formal disciplines. 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. there has always been a gap between pure scientific knowledge and the techniques that man has utilized. beginning in the late Renaissance and early modem eras. It is only with the Statute of Monopolies in 1624 that Britain developed a patent law. chemistry. 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. until very modern times the systematic development of new knowledge was not necessary for man to make enormous progress. And.
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. embodying imperfect measurement and some degree of monopoly restriction. In the absence of property rights over innovation. Other things equal. Eli Whitney spent a good part of his life attempting to protect his patent for the cotton gin. copyright. the private return upon innovation rose with larger markets. 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. The inability precisely to define and delineate an idea means that surrogate rules will be required.market for new weapons. It would of course be misleading to put too much stress on a single law. 41 . Let me restate the argument in a more rigorous fashion. 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. Idle curiosity or learning by doing will produce some technological change of the type we have observed throughout human history. the value of some property rights over invention is not an issue. and patent laws are all designed to provide some degree of exclusive rights to the inventor and innovator and have generated a controversy. Rules designed to constrain behavior with respect to an economic return to ideas face basic difficulties associated with the measurement of the idea itself. An increase in the rate of technological change in the past was associated with eras of economic expansion. economic historians of the Industrial Revolution have concentrated upon technological change as the main dynamic factor of the period. 3 But much of the controversy misses the point. over the value of patents. Generally. In summary. spanning more than a century. 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. Trade mark. But the sustained devotion of effort to improve technology—as we observe in the modern world —is stimulated only by raising the private rate of return. will result in real revenue losses. But as compared to no protection at all. the pace of technological change was most fundamentally influenced by the size of markets. and such rules. however. trade secret.
Its origins go back in time well before the traditional chronology. and in many cases much more was involved than simply removing restrictions on the mobility of capital and labour—important as those changes were. The declining transaction costs —a result of reduced piracy. 6 What has been missing in the argument. poor laws. Productivity increase as a result of declining transaction costs had been going on since at least 1600. efficient markets imply well-specified and enforced property rights. navigation acts. and the immense development of a body of common law to better specify and enforce contracts also are part of the story. Hartwell. Indeed. growing trade. the term "laissez faire" not only has misleading ideological overtones but at least in part misses the point. What happened in ocean shipping was paralleled by equal transformation in other product and factor markets. "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. which means the creation of a set of restraints encouraging productivity growth. increases in size of ships. is that while laissez faire is identified as the key to the development. the Statute of Monopolies establishing a patent law. however. It was a central part of Toynbee's celebrated lectures published in 1884. Particularly significant to the developing of more efficient markets. The removal of restrictions widening the gap between private and social returns frequently required positive action by government—a government which we have seen was. Let us return to the shipping illustration used at the beginning of this chapter. as a result of the English revolution. M. and they. were responsible for productivity increases. however. There certainly is nothing new in this argument. He wrote. oriented toward such developments. more than technological change. is the better specification and enforcement of property rights over goods and services. a part of the process was the wholesale evasion of restrictions which remained on the books—and became a 42 . It is true that the decline in mercantilist restrictions including repeal or reform of the Statute of Artificers. and so forth is part of the story. and reduced turnaround time—led to substantial productivity growth beginning 150 years (at least) before the Industrial Revolution. acts of settlement. when the Dutch flute (a specialized merchant cargo ship) was used in the Baltic trade and subsequently adopted on other routes. usury laws. The same theme is picked up by Phyllis Deane and R. Laissez faire implies an absence of restraints. The competition of steam and sail in the nineteenth century really is the middle of the story. Private and parliamentary enclosures in agriculture.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.
and the incentives for technical change increased. such a development could only occur with the tacit approval of Parliament. 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. In contrast to handicraft manufacturing. the metering of inputs and outputs sharply changed. they do not explain the form that it took. While its initial main focus was in textiles.dead letter through lack of enforcement. as described in chapter 4. leather goods. hierarchical organization would replace market transactions. the putting-out 43 . The resultant increased supervision and central monitoring of inputs to improve quality radically lowered the cost of devising new techniques. The Industrial Revolution. measurement of the characteristics of the good). Clapham maintained that this system still predominated manufacturing in Britain as late as the 1820s. which resulted in pressures to replace medieval and crown restrictions circumscribing entrepreneurs with better specified common laws. 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. was initiated by increasing size of markets. The growing size of the market also induced changes in organization. putting out was marked by growing separation of tasks—a classic example of Smithian growth in the size of the market inducing specialization. The putting-out system which developed in Tudor and Stuart England was a response to the expanding market demand of those centuries. away from vertical integration as exemplified in home and handicraft production to specialization. From handicraft to putting-out system to the factory system spans more than three centuries. it gradually spread to newer branches of textiles. With specialization came the increasing transaction costs of measuring the inputs and outputs. 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. small metal wares. In the course of the transformation in economic organization wage labour developed. the key to explaining the transformation is growth in the size of the market and problems of quality control (that is. A major argument of chapter 4 is that where quality was costly to measure. While escape from the urban guilds and a cheap labour supply as a byproduct of part-time agriculture explain the dispersion of manufacturing. as I perceive it.
from technological change to the factory system. Rather. rather than from central workplace. Space in factories could be and was rented out to individual entrepreneurs before as well as after the development of central power sources. but once the workers were gathered in a central place. 44 . to supervision. The Industrial Revolution came about as a result of organizational changes to improve the monitoring of workers. Team production played no significant role in the putting-out system. With the development of direct supervision and monitoring. the impetus for the factory system was monitoring of the production process by a supervisor.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. The gradual move to central work places cannot be explained by a central power source. By retaining ownership of the materials throughout the manufacturing 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 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. which in turn required further organizational innovation to realize the potential of the new technology. to better measurement of input contributions. to greater specialization. With the better measurement of individual contributions came reductions in the cost of devising machines to replace men's and women's hands. to technical change. the productivity gains from team production were evident. 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. 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. which induced the technical change. Transaction costs and technology are of course inextricably intertwined: it was increased specialization which induced organizational innovations. The emphasis in much of the literature on the Industrial Revolution goes the wrong way—that is.
equally basic. Both entailed substantial institutional reorganization. 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. The First Economic Revolution created agriculture and "civilization". 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). and a consequent. embodied in emergent social institutions. The Industrial Revolution was characterized by sustained efforts to develop new social and ethical norms. 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. The organizational crisis of the modern world can only be understood as a part of the Second Economic Revolution.In terms of the theoretical framework of this study. one additional point must be raised. 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. They were enshrined in nonconformist and evangelical doctrine. 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. thrift. however imperfectly they were practised. rules and penalties to enforce behavior) had to be supplemented by investment in legitimating the new organizational forms. change in organization to realize that productive potential. pulpits. The virtues of hard work—the gospel of work preached by Samuel Smiles—saving. The Industrial Revolution was a part of the evolutionary 45 . Factory discipline (that is. Peter Mathias described this effort as follows: "A set of social norms. did develop in response to these new needs. Both the political and the economic changes described above created impersonal factor and product markets and broke down old ideological loyalties. I shall have more to say about this issue in examining the implications of the Second Economic Revolution. The realization was possible only with the wedding of science and technology. The Second Economic Revolution made the underlying assumption of neoclassical economics realizable. the Second created an elastic supply curve of new knowledge which built economic growth into the system. sobriety became the new social imperatives dinned into the heads of the working classes by their social betters by every known means of communication. In Sunday schools.
political. and ideological reactions which characterize our modem world. Kepler. An awareness of the growing relevance of science to invention led to increasing investment in human capital. 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.process that led to the marriage. rather than the clustering of a set of innovations or any of the other characteristics used to describe the Industrial Revolution. The Protestant Reformation was a symptom of such a change in perspective. Currently there is no convincing explanation for the early development of scientific knowledge. concerns the intellectual interchange between scientists and inventors during the Industrial Revolution. Germany's pre-eminent late—nineteenth— century role in the chemical industry was in good part due to the early training of large numbers of chemists. emphasized by A. and. It surely was related to a decline in the monopoly the church had possessed over ideas about the relationship of man to his environment. 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. particularly. A distinctive feature of its institutionalization in universities and research organizations is the recognition of social demands on a broad front. the development of the scientific disciplines. 46 . 1 This interchange contributed to the growing consciousness of the high social (and potential private) rate of return from increase in basic knowledge. Galileo. Robinson. Copernicus. The steps in the development of the Second Economic Revolution were. Newton were leading a revolution in man's view of the world around him. A second step. 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 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. The important point is that the Second—as indeed the First—Economic Revolution was the inflection change in the supply curve of new knowledge. E. 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. 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 consequence was growing public and private expenditure on basic research. Musson. and others. first. Who sponsored such people? What kinds of incentives existed for the development of new knowledge? During the Renaissance it was fashionable to support scientists. E.
but in the ensuing two centuries this improvement has been overshadowed by the development of the internal combustion engine. which make the objective of devising a machine to replace a simple task easier for the inventors. 2 Still a third important step is the evolution of property rights which raised the private rate of return closer to the social rate. 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. when animal and human muscle were the chief source of energy. the creation of new sources of energy. The second also has its beginnings in the Industrial Revolution. The third. 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. is also not new. Its most striking characteristic is continuous high-speed throughput.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. with Watt's improved steam engine. 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 high-speed computer is the most revolutionary modem example. The result has been a per capita use of energy far exceeding that of the past. 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. sources of electricity. The result of this development is what has come to be called the invention industry. a good part of the basic research has been financed by government and takes place in universities—reflecting the growing public awareness of the high social rate of return to scientific advances. While the private rate of return has been raised by better specified property rights over invention and innovation. The Bronze Age and the Iron Age were chronological periods named by historians and anthropologists after the technological breakthroughs that 47 . the transformation of matter. 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 technological breakthroughs that have characterized the Second Economic Revolution are the development of automated machinery to replace man's hands and mind in production. to use Alfred Chandler's (1977) favorite term. and the fundamental transformation of matter. It is a response to large-scale markets that induce high-volume output. and nuclear power.
(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 important underlying basis is the growing scientific knowledge about the fundamental sources of matter which permits their recombination into other materials. physics. and genetics are a quantum jump in man's ability to transform matter into useable materials and energy. 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. M. Economic historians have provided detailed descriptions of mechanization in individual industries. Von Newmann. 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. and new genetic combinations. Einstein. The technology of the Second Economic Revolution was characterized by significant indivisibilities in the production process with large fixed-capital investment.transformed copper and tin and iron ore into useable materials. 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. The basic organizational innovations were responses to the need to coordinate and control the high-volume throughput. energy. For example. The development of bleaching was an important chemical breakthrough of the Industrial Revolution. 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. Ever since J. Pasteur. coal and petroleum have been transformed into thousands of goods far removed in appearance and composition from the original material. 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 48 . and Crick and Watson have become familiar names in the extraordinary scientific revolution of the past century. 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. But the modern developments in the sciences of chemistry. The realization of the potential scale economies required large-volume continuous production and distribution.
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
The burgeoning modem literature on industrial organization offers ample evidence of organizational innovation to reduce transaction costs. The Second Economic Revolution ushered in an era of unequaled prosperity in the Western world. national. Political instability as well as economic interdependence was the price of specialization. The result was to raise the rate of return on using government to protect groups from market instability and international opportunism. or at the very least modification. transmitted changes in economic conditions throughout the world. What has made the market system tend to self‐ destruct ? It is clear that control of the state was. and encouraged opportunism on an international scale. for a brief period of time. 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. and world-wide specialization which produced markets sensitive to world-wide supply and demand conditions. 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. in the hands of groups whose self-interest promoted the growth of market forms of resource allocation. 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. 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. Two hypotheses are advanced below to 52 . Third-World countries have shown little enthusiasm for market forms of resource allocation. it led to regional. As the new technology lowered transportation and information costs. But the growth of specialization and division of labour was both occupational and territorial. It is equally clear that control of the state passed into the hands of groups that favored the elimination.internalizing unpriced benefits. peasant and farm movements if not actively hostile to market economies have at the least spearheaded successful movements to protect themselves from market competition. That is the story of the two preceding chapters. of market forms of resource allocation.
even of the amount and use of purchasing power. in The Great Transformation (1957). In disposing of a man's labour power the system would. For the alleged commodity "labour power" cannot be shoved about. incidentally.account for this transformation. 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. indeed. used indiscriminately. Nature would be reduced to its elements. the second from the geographic. or even left unused. military safety jeopardized. the power to produce food and raw materials destroyed. human beings would perish from the effects of social exposure. land. psychological. the market administration of purchasing power would periodically liquidate business enterprise. 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. Let us examine each in turn. Undoubtedly. Robbed of the protective covering of cultural institutions. The first hypothesis stems primarily from the occupational. It is worth quoting his colorful language to get the flavor of his criticism of the market economy. 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. and moral entity "man" attached to that tag. (1957:73) 53 . Finally. labour. first made a forceful case that a market society would tend to self-destruct. the other. neighborhoods and landscapes defiled. rivers polluted. would result in the demolition of society. labour. dispose of the physical. and money markets are essential to a market economy. crime and starvation. perversion. Polanyi argued that the market-based society which dominated the Western world in the nineteenth century was inherently unstable because the commoditization of land. 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. It was Karl Polanyi who. they would die as the victims of acute social dislocation through vice. and money (via the International Gold Standard) destroyed the social fabric of society. without affecting also the human individual who happened to be the bearer of this peculiar commodity. for shortages and surfeits of money would prove as disastrous to business as floods and droughts in primitive society. To allow the market mechanism to be sole director of the fate of human beings and their natural environment. division of labour— both part of the Second Economic Revolution.
is vague. 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. It was in effect a way of life and under those conditions formal rules of exchange and monitoring would be minimal. 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". non-economic. That is. 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. His analysis. in contrast to his colorful description. and he continually identifies non-market forms of resource allocation with social. The creation of large-scale impersonal factor and product markets was an essential prerequisite to realizing the productive potential of the Second Economic Revolution. The personalized exchange with reference to transaction costs minimized the gains from shirking and opportunism because of both repeated dealings and personal contact. But Polanyi's basic intuition was correct and he provides the clues with which to develop a theoretical reconstruction. that is. the consequent structure of impersonal market organization encouraged the very behavioral characteristic that posed the Hobbesian dilemma. Reciprocity certainly reinforced these codes of behavior. he graphically describes the destruction of the social fabric of society without providing a theory of ideology. and at times simply non‐ existent. 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. objectives when in fact they frequently stemmed from efforts to reduce transaction costs as described in the previous section of this chapter. But the price paid was massive ideological alienation The stability of any society requires an ideological superstructure to legitimize the rules of the game. Informal agreements had to be replaced with formal contracts. but it would be a mistake to conceive of the "consensus" ideology that overlaid personalized exchange as pure reciprocity. 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.Polanyi's criticism was in the tradition of Durkheim and Weber. He emphasizes that it was the state that created the impersonal markets. imprecise. but it was Polanyi who most vividly described the disintegrating effects of the "unregulated market" in terms of the social instability it created. Those whose behavior was 54 . Moreover the exchange process was overlaid with a social ethic of the justice of the rules and property rights.
Traditional status relationships. On the continent the later development of class consciousness mirrored the lag in growth of impersonal labour markets. and integrity were replaced by ubiquitous conflict over the terms of exchange. but despite disparate origins similar patterns of protest evolved. a "fair rate of return. However. 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. or that Joseph Schumpeter could maintain that the very success of capitalism produced ideological alienation that would lead to its downfall. To quote Charles Tilly. and to produce diverse ideologies built upon the new and conflicting perceptions of reality that emerged from the 55 . The growth of class consciousness in nineteenth-century Britain and Europe has been a favorite topic of social historians. In particular the inability to measure the output of labour in team production induced conflict over what constituted shirking versus the speedup. and the ideological perspectives of many of the writers who have been Marxists has provided for real insight into the process of worker alienation. 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. 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. and only in completely and inadequately dealt with by Marx and his followers. with technology as the exogenous variable. Marx's emphasis on consciousness being basically conditioned by one's relationship to the mode of production remains an important contribution." honesty. 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. But what is missing in Schumpeter's and in Polanyi's analyses. on the continent Marx had a far greater influence on the ideological perspective of the worker than he did in England. It is not surprising that in such an environment Marx could construct a theory of history around class conflict. Impersonal market competition introduced a basically antagonistic relationship to exchange.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.
as in the repeal of the Corn Laws. In contrast. Alienation activated groups to participate in control of the state to alter their terms of exchange. 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. In the case of farm groups. basing their analysis on neoclassical theory. even the literature on positive transaction costs is just now filtering into economic history research. It was quickly replaced not only by the revival of barriers against external competition. This competition in turn led to sharp fluctuations in the terms of exchange (and in the case of labour markets. 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. 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. this emphasis obscures. and because of ideological differences and the compartmentalization of academic disciplines. the ubiquitous struggle of propertied groups to curtail market competition. The new economic historians. but equally by efforts to reduce market competition internally. 56 . an integrated overview of the structural transformation is still lacking. 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. and international specialization and division of labour. have had very little to say about structural change in history. 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. however.environment of occupational specialization. In the case of manufacturers the new competition broke down the local monopolies that had existed and induced participation in influencing the state. 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. The triumph of free trade in Europe was spectacular but brief. but no description has been complete. national. 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 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. Shirking. 57 . but the emphasis on class divisions has obscured the intra-class conflict inherent in economic organization. the impersonal land market. this resultant struggle has not led to a new ideological social fabric that resolves the organizational tensions. however. The sociological tradition from Durkheim to Talcott Parsons has recognized the disintegrating effects of modern social organization. And finally we come back to Karl Polanyi. All three have either disappeared or been so altered structurally that they bear no resemblance to Polanyi's description of their nineteenth-century character. has been that it has conceived of the problems of alienation as stemming from capitalism. that is. 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. 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. farmers. The sources of the self-regulating market that was the basis of modern distress were the impersonal labour market. and the gold standard. but Parsons failed to solve the free rider dilemma and to produce a coherent body of theory. The most serious shortcoming of the Marxian analysis. Moreover. But the consequences bear little resemblance to Polanyi's cautiously optimistic view of such change. opportunism. and externalities are as prevalent in the Soviet Union and other socialist countries as they are in capitalist countries. In consequence manipulation of the money supply by contending interest groups is a major destabilizing force in the modern world. The pluralist control of the state which emerged from the struggle of workers. 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. although they have examined the rise of pluralism. rather than perceiving that the problems are inherent organization consequences of the Second Economic Revolution. Parsons's The Structure of Social Action (1937) was a pioneering effort to come to grips with many of the issues. the multiple interest-group control of the political process. Nor have political scientists evolved a theory of the state.
Polanyi concludes. and western Europe stood at the forefront in terms of artisanal technology and the vital capacity to produce iron and iron products. 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. and metallurgy and armaments manufacturing were advancing in Russia by 1700. Western production of guns. India. essentially. Japan. The use of slave crews for commercial production of key agricultural goods like sugar and tobacco had spread. provided a crucial military edge. Western biases concerning the rest of the world began to take on a technological cast. based on earlier skills in ironworking developed initially for the production of great church bells. metal goods. During the 17th century growing dominance in world trade spurred the growth of textile production in many parts of western Europe. Western metallurgy generally led the world by the 16th century. A Western missionary in the 17th century described 58 . both manufacturing and agricultural. West European technology had gained decisive ground from the 15th century onward. the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society" (1957:234). was based on manual household labour. with scorn for the many peoples slow to imitate Western developments. particularly in naval conflicts. the Middle East (including North Africa). and here too technological refinements occurred that made the West effectively an international leader. "Socialism is. China. Several societies had developed sophisticated craft skills for the production of luxury cloth. with larger village groups combining for certain operations like harvesting and road building. too. and other items. Despite his perceptive examination of the issues. Polanyi. Most production. Africa had a well-established ironworking tradition. particularly in the Americas. though there were no major changes in technology. failed to understand the Second Economic Revolution.
" With all these developments. differing much in that from us who are in love with nothing but what is new. particularly in textiles but also in small' metal goods. and relied on labour from the household. however.how. while an urban-based capitalist purchased the necessary raw materials and. Three changes began to combine during the eighteenth century to accelerate manufacturing and ultimately generate the world's first industrial revolution. not because of technical advancement. and in general their skill levels were modest. Western Europe in 1700 was an advanced agricultural society. Agriculture itself had scarcely changed in method since the fourteenth century. where the revolution first took shape. particularly in terms of reliance on human and animal power. They affected much of western Europe but particularly Britain. Domestic manufacturing workers used simple equipment. in his opinion. indeed. They are more fond of the most defective piece of antiquity than of the most perfect of the modern. Western technology and production methods remained firmly anchored in the basic traditions of agricultural societies. usually. continued to entail combining skill with hand tools and was usually carried out in very small shops. which they usually bought themselves. the low wages paid generated little incentive for technical change. The system worked well because it required little capital. The most important Western response to new manufacturing opportunities involved a great expansion of rural (domestic) production. rural householders invested a bit in a spinning wheel or a hand loom. 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. 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. Many combined their efforts with farming. despite some important new techniques. 59 . Output expanded because of the sheer growth of worker numbers. arranged for sale of the product. Manufacturing.
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. for example. With less fallow land and more land in use overall. and Prussia. While agricultural improvements took shape in various places. Increasing adoption of the potato supported the beginnings of rapid population growth in Europe by the 1730s. again because of its caloric yield on small plots. which also contributed to population growth and to release of new workers for other potential work activities. 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 60 . food production expanded. Britain's population. farmers in Holland began to develop new drainage systems by which swampland could be converted to agricultural use. Peasants in many parts of Europe. doubled between 1750 and 1800. began to grow potatoes. At roughly the same time. they received enthusiastic support in Britain. 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. where aristocratic landlords were particularly interested in new and more rewarding production for market sales. while that of France rose by 50 percent. New agricultural methods came into use in the late 1700s.1. The potato also freed up a percentage of rural labour for work in other areas. Innovators like "Turnip" Townshend spread the word about using nitrogen-fixing crops to increase production by eliminating fallow land. France. and for many decades potatoes were less subject to periodic diseases than were grains. including Ireland. Draining of marshes added cultivable land in eastern England. a New World crop long regarded with suspicion.
while population growth and new consumer interests created new markets. 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. Advances in chemistry helped trigger the discovery of new techniques for manufacturing and glazing pottery in 18th century England. A host of scientific societies took shape that combined researchers with merchants and manufacturers. which created additional markets. Though the workers involved used traditional methods based on manual labour and cooperation of the family in a household operation. in an already active commercial economy. several Dutch scientists discussed the prospect of propelling a boat by steam. 3. encouraged attention to new devices in the manufacturing field. Around 1700 the engine was improved in England by Thomas Newcomen. Massive strides in European science. The first steam engine was invented by a French refugee in Holland in the late 1600s. 2. which led to excited discussions about down-to-earth technological possibilities. a Glasgow craftsman who produced scientific instruments. A steam truck was invented in France in the 1760s. The engine was perfected in the 1760s by James Watt. who applied it to drainage pumps for coal mines. Many rural workers began to farm only part-time. Another set of changes provided a context for new technologies.available. they began to see themselves as different from peasants-more interested in urban fashions. initially beneath the surface. though it was never put to use. 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. particularly for textiles. taking orders for thread and cloth from urban merchants at other points. This capitalist system generated growing production. for example. 61 . and could be applied for industrial use.
had become disposable subordinates in the process of production. though the profits could provide some useful supplementary income. these same manufacturing families. without abandoning their own labour at first. In the 1690s a few workers began buying more wool than they could handle themselves. however. were beginning to separate themselves socially from their employed labour. through population growth. even as aristocratic landlords consolidated their holdings and sponsored more efficient methods. expanding international trade. By the next generation. and the public was expressing interest in more fashionable clothing--an early manifestation of new consumer tastes. Output from each worker was low. They were no longer willing to share a beer. Even substantial farmers put their hand to the loom from time to time or used family members as workers. although the total number of agricultural workers grew. and a traditional manufacturing system was beginning to yield to a more structured hierarchy. Market opportunities for manufacturing production rose. Protoindustrialization meant that. they hired other workers to work the wool at home for them and. For example. the percentage of a rapidly growing population employed in agriculture declined. 62 . 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. in a gradual shift that proved to be the forerunner of a new organization of manufacturing labour. they were thinking of their workers as a class apart. By the 1730s several of these strands of change were beginning to combine in England. were on the route to becoming manufacturers. a minority of the wool workers in the region overall. It had a growing population by the 1730s. despite frequent slumps. This setting prompted a handful of domestic producers to think about expanding their operations. and the growing appetite for consumer goods like fashionable clothing.The nation was already a leader in world trade. Workers clearly.
The manufacturing sector and its labour force were growing steadily. but one worker with a child as assistant could now do the work of two adults. plus the excitement surrounding technological change and the resultant encouragement to invention. New entrepreneurs were ready to manipulate workers in novel ways. Then came a usable steam engine. after several decades of proto-industrial changes within the domestic manufacturing system. which by the 1770s could be hooked up to some of the semi-automatic inventions already devised for manual textile workers. Finally. a new kind of loom for weaving cloth that automatically moved thread horizontally through a frame when activated by a foot pedal. • Rapid innovation transformed several sectors of industry. Britain's industrial revolution was under way. were pushing the traditional production system well beyond its former bounds. too. and no new power was involved. invented the flying shuttle. the industrial revolution could not have been identified. This final change. 63 . the profile of a new manufacturing middle class began gradually to emerge. new technology began to be developed for the sector that most obviously invited it--the domestic production system.As more and more workers and small businesses began expanding their operations by hiring wage workers. James Kay. with new technology and organization at the core of change. then. was developing rapidly in certain key sectors by the 1770s. the ingredients of the industrial revolution had been assembled in England. Inventions for automatically winding fiber to make thread followed in the 1760s. By the 1760s. This machine was nothing fancy. Without this. workers had to be assembled near the engines to do their work. Because steam power was concentrated and could not be transmitted over long distances. small factories had to replace household production sites. In 1733 an English artisan. New opportunity and evolving attitudes on the part of the growing manufacturing class. 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. Inventions increased the number of industrial processes handled automatically.
and this fact limited resistance. The lack of a large established labour force in cotton obviated the need to prompt many traditional workers to change their ways directly. Cotton was in demand. which appealed to people who were developing more stringent notions of personal cleanliness. as the revolution caught on. Cotton. particularly. intense misery pervaded the experience of many of the human beings involved. many branches of the economy were affected only slightly. linen. winning a growing world role on the strength of its industrial lead. By the 1730s a series of inventions began to shift cotton manufacturing increasingly toward a factory system. The flying shuttle. The cotton industry commanded the central role in Britain's early industrialization. there would be little difficulty 64 . was refined over another thirty years sufficiently in accuracy to make possible the application of nonhuman power. its novelty facilitated the introduction of new machines.• At the same time. (This is why some scholars. as a fiber. • Edmund Cartwright patented a power loom in 1785. and this invited new techniques to produce the cloth in quantity. dislike the term "industrial revolution. and it was easily washed. more open to innovation. designed originally to improve hand weaving. 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. the industrial revolution was built on the backs of exploited labour. cotton had great appeal as a product: It could be brightly colored for a population increasingly eager to make a statement through clothing. though the raw fiber had to be imported. failing to look at the longer-term picture.") Within the innovative sectors. had characteristics relatively easy to mechanize. it inevitably brought in its wake further change in both technology and business practices. It had been widely used in India. however. Most of these developments occurred during decades when Britain nearly monopolized the new processes. it broke less often than wool and. Further. Workers were displaced indirectly by the rise of cotton because traditional linen production declined. cotton was a new product line in Europe. In England. At the same time. and thus some overall measurements of industrialization remained modest. and an Asian market for cotton cloth already existed. • Finally.
The basic principles of mechanized thread production have not changed to this day. it could be widely used. • Then in 1769 Richard Arkwright developed the first water-powered spinning machine. Cotton spinning was entirely concentrated in factories by the 1790s. • These new devices also could be powered by steam engines as well as waterwheels. Workers had to be removed from their homes and clustered around the new machines. 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. to ready the fiber prior to spinning. mechanization involved isolating parts of the production process that could be accomplished through highly standardized. not a new power source. accurate motion and then applying to such motion equipment that could be linked to power sources. the thread produced was distributed from huge warehouses in the new factory centers such as Manchester. New machines required a factory organization. by around 1800. were developed at about the same time. Carding and combing machines." Indeed. this initial industrialization spurred a massive expansion of domestic looms. and a given worker could tend a greater number of spindles. These first machines were relevant only for the cheapest kind of thread. though machines were to grow progressively larger. Weaving turned out to be among the more complicated stages to mechanize. it twisted and wound threads by means of flyers and bobbins operating continuously. and Cartwright's loom had to undergo substantial improvements before. James Hargreaves invented a spinning jenny device about 1764. for the power could not be transmitted widely. Cotton production by the 1790s was advancing with extraordinary rapidity. Because mechanical weaving lagged. but other inventions by 1780 began to make possible the spinning of finer cotton yarns. 65 . • More impressive developments occurred in the preparatory phases in cotton. • 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. Power weaving came into general use in the Manchester area only after 1806.in producing them and repeating them. which mechanically drew out and twisted the fibers into threads--though this advance too initially was applied to handwork.
Exports were essential. Of the major nations. New machines and procedures were introduced into beer brewing. By 1820 the impoverished continent was buying a quarter as much cotton cloth from Britain as was Europe. Pottery manufacturing concentrated important developments in industrial chemistry during the late eighteenth century. • Mechanization of wool spinning and weaving was well under way by 1800. but it consumed only about a third of Britain's export production in this field. and by 1840 the figure had risen to a full half. with its massive results in terms of expanding production and world outreach. while new methods reduced the work required in processes such as glazing and cutting. but other developments were vital as well. and by 1800 approximately four pieces of cotton cloth were sold abroad for every three disposed of at home. Africa was another major market. the big factories established included the great Guinness brewery in Dublin. "hath proved very destructive to mankind. but prices plummeted. Latin America was seized by British cotton exports after Spanish rule was cast off early in the nineteenth century. only China held out until its economy was forced open in the early 1840s.There were massive fortunes to be made in the industry. cotton imports from Britain rose by 1. for example. • Several of these innovations created major health hazards for the workers involved-new grinding methods. for with the new machines not only did output increase. As late as 1840 cotton continued to provide about half of the entire value of British exports. to the benefit of new pottery magnates such as Josiah 66 . began his Manchester factory in 1789 by borrowing £100. Sales of manufactured cotton goods soared. Continental Europe was a major market. a store assistant.500 percent between 1820 and 1840. Robert Owen. 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.000 in cash--this in a country where only about four percent of the population earned more than £200 per year. and by 1809 he was in a position to buy out his partners in his New Lanark Mills for £84. India and Southeast Asia were de-industrialized by a combination of British factory competition and colonial policy as machine products beat out hand labour. impeded only by the higher cost and greater fragility of wool fiber. Britain's industrial revolution consisted until about 1840 primarily of changes in the cotton industry.
though there were important improvements in timbering mine pits to allow deeper shafts. by 1796 the figure was 125. from spinning machines to the steam engine. • Coal mining surged to provide the fuel for iron smelting and for steam engines generally.000 and by 1804 was 250. for example. Henry Cort's reverberatory furnace for refining iron (developed in 1784) saved fuel but above all increased productivity by 1. Before 1800 machine building was scattered in small shops and was performed with hand methods. But attention in France and the new United States to the manufacturing of guns led to the development of 67 . did not always translate readily into production methods beyond the prototypes. machine building expanded steadily. At the other end of iron production. Steam-powered machines to roll metal. soon after 1800 experiments with steam-driven engines to pull the carts began.Wedgwood. between Watt's construction of a working model engine (1765) and usable cylinders that could be widely manufactured. soon followed. furnace design for smelting and refining iron was also reconsidered. The growth of the iron industry had two further consequences. The most striking mechanical strides outside the growing textile sectors occurred in metallurgy and mining. the number of miners increased rapidly because this vital industry remained extremely labour-intensive. Major advances in work methods at the coal face did not develop. In the 1830s new printing presses were developed that could be powered by steam engines. and even after this date the industry long demanded highly skilled workers labouring with relatively little sophisticated equipment of their own. 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. The iron industry began to expand rapidly. Wooden and metal rails were laid down to facilitate carts of coal being pulled by horses or people. replacing manual hammering. Coke production in turn depended on advances in furnace design and steam blasting (introduced by John Wilkinson in 1776). Twelve years passed.000 tons of pig iron in 1720. the result was larger furnaces and higher output per worker. As coke supplies grew. which greatly expanded production in such fields as daily newspapers. Inventions of new equipment.000 tons.500 percent. Transportation from the coal face did demand attention. A few commercial bakeries also introduced important new methods. At the same time. Britain had produced 25.
• Urban growth was one of these. centers of textiles or metalwork grew by 40 percent between 1821 and 1831 alone. grew from a modest town of 25. The biggest expansion. though they often expanded given growing demand. and so on. Many operations started small. Several machines were designed to bore and turn the machine pieces. occurred in the factory centers as factories located near energy sources and a large labour force accumulated to facilitate factory operations. the result of burgeoning banking operations. however.232 by 1851. prompted major changes in business scale. such that these parts could be interchangeably used on a given machine. however. Britain's cotton capital. growing port activities. Britain's industrialization was a revolution. 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. Nor was progress steady: Great lags often intervened. Developments were not uniform: Many production branches. applied extensive skills to new products.000 in 1772 to a metropolis of 367. Leeds. 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. between initial devices and widespread applicability. Cities of various sorts exploded in Britain in the late 1700s and early 1800s. but some. as in the manufacturing of brass and other small metal goods. for many of the new processes required only modest training compared with older methods. The industrial revolution. Headed by advancements in the cotton industry. Vast numbers of new workers were drawn into factories and mines. as in mechanical weaving.precise patterns for designing machine parts. The revolutionary quality. as in machine building. Britain's early industrial revolution featured dramatic new methods that subsequently generated improved productivity and more standardized products in a host of industries. • Industrialization Exacts a Price. though the importance of the labour force and the total product long lagged behind textiles. because initial textile machinery. were scarcely touched. Heavy industry--mining and metallurgy--gained ground rapidly. and Sheffield. Birmingham. but it neither occurred overnight nor was tidily packaged. even in its early phases. Manchester. 68 . thus less labour-intensive). showed through in a host of ways. Some of these people were relatively unskilled. and their industrial use gradually spread in Britain (and the United States and western Europe) during the early decades of the nineteenth century.
less supplementary employment.000-4. Poor harvests reduced income at home and cut deeply into industrial sales. who were pressed both by population growth and by competition from machine-made goods that cut into branches of domestic manufacturing. providing necessary technical expertise.500.000. Family firms had to branch out to hire outsiders to participate in more specialized management structures. Many firms were established as partnerships because necessary capital was unavailable otherwise. The first multistoried factory powered by steam. Significant economic crises occurred at least once a decade. for example. many times the £25 cost of a good hand loom. With less land available for small farmers. but many manufacturers collapsed financially as well. Businesses did not immediately have to adopt radically new methods of capital formation and management systems. was valued at £13.in particular. established in 1788. launched under the eye of an ever-present owner. and selling the goods simply escaped the capacity of any one individual. Plants for metallurgy and mining operations were more expensive still. but the pressure to innovate was quite real. stark misery spread in many agricultural districts. its steam engine alone. Many rural women. 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. particularly in industries like cotton that depended on exports. While hand weavers enjoyed some real prosperity 69 . Sales recessions were frequent. although abundant capital kept interest rates fairly low in early British industry. was not costly. and competitive pressure on agricultural wages. 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. a particularly severe recession followed the end of the Napoleonic Wars in 1815. arranging for purchase of raw materials. 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. many small-scale innovations could draw on a wide array of available business talent. Workers suffered most in these catastrophes as unemployment soared. lost their manufacturing income when spinning was mechanized. Many factories. large for the time at thirty horsepower. Borrowing arrangements became steadily more elabourate. cost £1. had to generate a small bureaucracy when it became clear that directing the labour force. But there was obvious challenge.000.
This was the inspiration for hiring groups of orphans from London and other large towns. In the factories proper. and factory workers were not the worst-paid group in the British population. • Certainly there was variety. their pay began to plummet thereafter. who were shipped in droves to the factory centers in return for employer provision of food and barracks housing. wages in some sectors held up somewhat better. Skilled workers. desperate for workers but desperate also to keep costs down to protect their expensive investments and allay their fears of business failure. when hand weaving in cotton was dying out in Britain. they had fallen by a full 60 percent. although the worst misery was centered in areas remote from the factories. for new workers had to be drawn in. factory-produced goods such as clothing and utensils fell in price. 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. but there were drawbacks too: Urban housing often was costlier than the pre industrial rural counterpart. for example. On the other hand. and food costs fluctuated. 70 . 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. needed to set up and maintain the new machines. and by 1832.before 1800. Mining wages. 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. many employers. also did well. seemingly improved in Britain's early industrial revolution. when thread production soared but mechanized weaving had yet to take hold. Further. however. To be sure. the widespread deterioration also cut into the standard of living of industrial workers. By 1811 wages were down one third from their 1800 levels. looked for labour shortcuts. who faced a growing amount of potential competition for jobs. often winning long-term contracts and other benefits.
and in the worst slumps. found industrial life extremely unpredictable. many workers. had no plot of land to fall back on for at least a modest food supply if their strength began to fail. No regular provision for illness or old age cushioned industrial life. Saturdays included. even those capable of improving their earnings. Some textile factories drove their workers sixteen hours a day. The labour force was prodded to work harder than its preindustrial counterpart. death rates rose in the factory centers. and work hours inched up as employers sought to maximize use of the expensive machinery. and factory workers. and food prices often went up in these periods. there was widespread suffering in the factory cities. The frequent economic slumps often caused unemployment rates. Necessity. Relatively low pay-declining pay in some circumstances--helped subsidize the investment in new machinery and supported the gains that motivated successful entrepreneurs. Furthermore. lay at the root of the formation of Britain's new factory labour force. even for skilled workers. 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. Finally. and again even for workers whose pay might have increased modestly. Other pressures added to the burdens on the new factory workers. not attraction.• Certainly also. even nerve-wracking. factory jobs exposed many workers to new physical dangers: dust from textile fibers. the industrial revolution cut into leisure time. when rural workers had taken time off. The early industrial revolution depended on the need that growing numbers of workers had for jobs in order simply to survive. and increased work time contributed to growing output along with the machines themselves. and maimings from the fast-moving--usually unprotected--machinery. to soar as high as 60 percent for several months or even a year. particularly before about 1819. accidents in the coal mines. 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. 71 . Traditional festival days. however. there is no doubt that desperately hard work and scant reward constituted key ingredients in the early industrialization process in Britain. Not surprisingly. came under attack as the new factories fined workers for unauthorized absences. unlike many small farmers.
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
Identifying the factors that caused the industrial revolution is a complex task because no one development stands out. and they affected too few people. New Causes: Why Did the Industrial Revolution Happen. they came too late. investors who provided capital. 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. This same acceleration inevitably attracted attention elsewhere to the wonders of Britain's achievement. workers who staffed the factories. sprouting new branches to deal with opportunities presented by prior developments. but these did not cause it.railroad construction and operation. though not necessarily in identical fashion. 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. Occasionally. by France and the United States)? New economic theories helped produce some policies favorable to industrialization. This same daunting variety helps explain why a number of regions have not managed to launch full-scale industrialization to this day. industrialization is presented as flowing from a few dramatic inventions and from some new thinking about the economy. and Why Did It Happen in 18th Century Britain? Explaining the industrial revolution is a challenge to analysts of history. The variety of developments that combined to create the first industrial revolution had somehow to be replicated. consumers who eagerly accepted the machine-made products. Complex causes persist as a factor in world affairs. Inventions of course were involved--but why did they occur? And why did Britain produce more inventions than other countries (followed. A growing number of countries judged the power of Britain's transformation not only in economic but also in military terms. in the formative decades of industrialization. 75 . historians have offered different emphases. 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. Not surprisingly. The industrial revolution was beginning to feed itself. and this dual interest was yet another spur to the ongoing momentum of the revolution. A number of powerful factors had to combine to generate a change as substantial as even the early phases of industrialization.
as the revolution rippled out from the minority of the population initially involved. though various kinds of specific government policies could do the job. and greater independence from traditional family and community controls. recent reminders of how gradual the process was--how factory firms developed often as part of a very slow. even in the very small factories that characterized much early industry. All these ingredients must be considered in dealing with the causes of the industrial revolution. others were more particular to Britain. the sinews of the industrial revolution. and the most intense early industrialization developed along this coal seam. Also needed was access to raw materials. considerable investment funds were required--the new machines were expensive. industrialization. early steps in industrialization help account for later ones. 76 . including textile fibers but particularly coal and iron. the excitement of innovation. Several basic factors were generally widespread in northwestern Europe by the eighteenth century. risk-taking entrepreneurial spirit that would drive businesses to venture into innovation. A large seam of coal ran from Britain through Belgium and northern France to the Ruhr valley in Germany. Government interest in supporting economic innovation was a factor. far costlier than any manufacturing equipment previously devised. Finally. for while some workers might be attracted to the industrial life because of high pay for their particular skills. coordinated set of changes. most workers entered factories because they had little choice. particularly in its first manifestation in Britain. the challenge of explaining the process remains considerable.For the industrial revolution to occur. The industrial revolution need not be explained as a dramatic single eruption or a rapid. required an aggressive. multigenerational evolution from domestic manufacturing operations to a new willingness to organize and subordinate manufacturing labour--affect analysis. Of major importance was an available labour force that did not have more agreeable employment options. Still. To be sure.
which facilitated nationwide marketing and thus expanded the opportunities for manufacturing and sales.Iron ore deposits also existed in western Europe. the new banks rarely lent money to industrial firms. It promoted an outlook attuned to change and generated widespread new interest in technical experiments. had urged its potential application to material conditions. they focused on merchant and real estate operations. It was no accident. during which they were greatly extended. National banking systems were established in England and several other countries. through already established colonial trade. The key resources that had of course been sitting in the ground for many millennia facilitated the industrial revolution by their presence. in some cases close to the coal sources. Science did. 77 . though the work on gases and chemicals was relevant. 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. from the pens of such experimenters as Francis Bacon in England. Western Europe also had abundant wool and. that a vast refocusing of Europe's intellectual orientation preceded the industrial revolution itself. Even in business-minded Great Britain. Nor did many established merchants become involved in the early factories. during the 18th century Europe's increasing commercial system generated important changes in banking. As with the scientific revolution. initial access to cotton (grown in the southern colonies of British North America and in parts of Asia). direct links followed from commercial endeavors more generally. Definitions of science. Habits of this sort were obviously essential to the industrial revolution. Commercial experience as a factor should not be overly stressed. however. then. however. help persuade people that nature could be rationally understood and controlled. when the industrial revolution was already well advanced. Further. the expansion of commercial activities in the seventeenth century formed a vital precondition for industrialization. Few scientific discoveries directly affected early industrial technology. Far more important was the impact of the scientific revolution in western Europe during the 17th century. 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. but they did not cause it. the fuller marriage of science and industry occurred only after the 1830s. Through the domestic manufacturing system.
they were in general able to profit from the exchange. Governments were encouraged to pay attention to the importance of fostering trade. kept some distance. including fine furniture.industrial world trade set up the industrial revolution in several ways. had won increasing control over international commerce. and timber supplies). Because Europeans could price their goods to include the cost of processing. Trade leadership helped stimulate a taste for new products. tea. and respectable people. a hierarchy emerged in the international economy in which Europeans acquired minerals and agricultural goods from other areas (including their colonies in the Americas. Not all parts of the world actively engaged in trade with western Europe at this point. was vital. The active slave trade that Europeans ran between Africa and the Americas was another source of profit. furs. India. Early industrialists most commonly came from artisanal or manufacturing backgrounds. Europe's role in pre . and metal goods such as guns. even in the business community. ultimately headed by France. particularly in the expensive operations of metallurgy. and tobacco). Increasingly. though this at times also led to heavy-handed efforts at control. The British government then sought (from the 1730s onward) to 78 . though the collabouration of individual merchants and landlords. particularly in Britain.Factories were regarded as risky and dirty. cloth. and elsewhere) and in return sold manufactured products. even in some cases in which exchange did not directly involve Europe at all. and Britain. but parts of eastern Europe (which sent grain. Growing amounts of commercial experience developed through the trading companies. west European countries. Growing interest in cotton cloth originated first from trade with India. and gold) added steadily to western Europe's wealth. 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. European ships and merchant companies dominated international trade. and new technologies relating to shipbuilding and warfare received impetus. the Americas (precious metals. sugar. From the late 15th century onward. and India and Southeast Asia (spices. Commercial experience and commercial institutions prepared the industrial revolution. the Netherlands.
Popular consumer interests in the West first focused on exotic imports like sugar and tea--whole agricultural systems were organized to feed these appetites. Trade also provided capital through the growing wealth of many business and landowning groups. headed by massive population growth. with the particular impact on Britain. which was to have such dramatic effects on the wider world. But expanding prosperity and proto-industrial manufacturing spurred consumerism in clothing and household goods as well. With time. stemmed in great part from Europe's ability to draw disproportionately on world resources. governments became more efficient. These final causes. did growing consumerism--the expanding interests in acquiring and enjoying new goods. providing an agricultural basis for 79 . also. International trade encouraged the second strand of causes: dynamic internal changes in Europe. Thus. Food was crucial. At the same time. which explains why additional thousands of workers were recruited into the domestic manufacturing system. the industrial revolution might have emerged from this context alone. Britain used its holdings in India and particularly the southern colonies in North America to provide raw cotton for its new textile branch. Finally. Above all. The lack of major agricultural changes in Europe between the late Middle Ages and the 1690s was ironic. By the 1690s. All of these internal developments were in place by 1700. given the commercial advance. Europe's industrial revolution. So. with better-trained bureaucrats and more interest in economic 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. foreign trade. including colonial trade. Wage labour spread. this anomaly had begun to yield. the first two strands of causation were already intertwined and their initial results were accelerating. which had the additional effect of reducing India's economic vitality and opening this area to British goods. expanding local and national markets. So did beliefs in science and other cultural shifts that created assumptions favourable to economic change.encourage cotton manufacturing at home and to prevent undesirable dependence on foreign manufacturing by banning cotton imports. By the 18th century. expanded the markets for European manufacturing and thus contributed directly to one of the obvious reasons to seek more productive technologies. But a third set of factors added in during the 18th century.
even unpleasant. larger world history fed industrialization. After long hesitations because the goods were not mentioned in the Bible. that all of them lived to adulthood was somewhat unusual but illustrative of the impact of population growth in a single-family context. Increased population pushed workers to seek new. new methods of draining and fertilizer expanded available land and fertility. 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. resulted from prior growth in the business class. Further. furthermore. became dynamic industrialists in the early nineteenth century. Once factory industry began. In the 1760s the head of the family ran an artisan shop. With more food came more people. and then from the population surge. provided growing markets for inexpensive manufactured goods. hiring domestic manufacturing workers and then tentatively introducing some powered equipment. building on their father's example. Industrial revolutions require capital. was a case in point. from the challenge of population increase in certain favorably positioned families. creating large textile and machine-building factories and sponsoring the first local rail line. Necessary labour derived from the growing manufacturing force in crafts and domestic manufacturing. producing cloth but displaying no particular business dynamism.further economic change. He had twelve children. which provided relevant basic skills as well as sheer numbers. and from the increasing 80 . led by the Dutch. His children. and prodded even some prosperous families to seek economic innovation. headed of course by the potato. Again. Population upheaval promoted economic dynamism in a number of ways and at various levels of the initial industrialization process in western Europe. via population growth. kinds of jobs. An entrepreneurial spirit. An eastern French family. 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. it increased the number of workers seeking urban jobs by rendering many sectors of domestic manufacturing obsolete. west Europeans began to grow calorie-rich New World crops. There was also a pause in the most devastating kinds of warfare between 1715 and 1792. evidenced as an interest in innovation and organizational expansion. the Schlumbergers. Rapid population growth resulted from new food supplies and other developments such as a temporary lull in major plagues. Simply in order to provide for his brood in the accustomed respectable middle-class fashion. Schlumberger had to expand his textile operations.
who had to sell out to the landlords. Most urban artisans in western Europe belonged to guilds.cultural emphasis on science. but the combination overall was powerful--as it had to be to launch the first industrial revolution the world had ever experienced. Guilds were ideal for a relatively stable economy. but they definitely inhibited both rapid labour mobility and changing techniques. British landlords successfully pried land away from smallholding farmers through the government's Enclosure Acts. None of this assured easy industrialization. but it had virtually disappeared by the 18th century. These required farmers to enclose their fields. in the vanguard? Within the larger west European context. British agriculture became dominated by large estates. some British landlords directly participated in setting up new mines and manufacturing. but the expense was beyond many small farmers. providing food for growing cities. among the several areas of western Europe in which relevant changes had been taking shape. usually by planting hedges. Its effects. 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. they did not absorb a growing population as readily as peasant-dominated agriculture proved able to do elsewhere. there were several special features in Britain. The British aristocracy was more favourable to commerce than its counterparts on the European continents. British artisans were also unusual. • The result was twofold: Employers had unusual freedom to bring new workers into established branches of production. • • Population growth was extremely rapid in the eighteenth century. Britain as a Special Case Why was Britain. and control over the environment. • Britain's extensive international trade provided capital and markets and also supplies of vital materials such as cotton. in turn. 81 . in terms of freeing up available labour. and were at liberty to tinker with new methods--perhaps the most important single source of Britain's lead in inventions. Britain had once boasted a guild system. increased market production. Thus there were hungry workers eager for new options. and while these employed many workers. material progress. were magnified by major changes in agriculture. • The enclosed estates. and tolerance for commercial development was high.
Britain apparently provided an optimal setting for producing individuals inclined to taking risks in business. It had excellent holdings in coal and iron. tended to control manufacturing with regulations about product quality. Other European governments. Furthermore. Britain tolerated a number of Protestant religious minorities such as the Quakers. Other laws that discouraged the export of new machinery or designs impeded rapid imitation elsewhere of British gains. The island nation had not only coastal waterways but good navigable rivers. 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. The British state was less interventionist. but it may have served well in setting a favorable framework for the first industrial revolution. • During the eighteenth century a number of local governments began to build better roads. • At the same time. 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 were often located quite close together. the British government did not attempt to regulate manufacturing extensively. spurred new industries. This in turn spurred industrial development. and then a wave of canal building developed at the end of the century. from the adaptation of the initial steam engine for mine pumping to the use of coal for smelting iron. which encouraged the search for alternative fuels. though this indulgence was incomplete: Protestants who were not members of the established Anglican church could not attend universities or gain government employment. New ideas about science and material progress spread more rapidly in Britain than in most other European countries. Tariff regulations in the 18th century. though often eager to promote economic growth. • Finally. • Simple luck in terms of natural resources also aided Britain. notably coal. This was not always an advantage. Certainly 82 . This ambivalent situation encouraged members of these minorities. to seek opportunities in business. such as the barriers to the importation of cotton cloth from India. as we shall see in other industrialization cases. eager to demonstrate God's favour.• • The British government favoured economic change. techniques. The new infrastructure facilitated the movement of both raw materials and finished goods. Good market opportunities and an extensive preindustrial manufacturing system formed part of this framework. A relatively small government meant limited chances for success by seeking bureaucratic jobs. and some working conditions.
Britain became a pioneer in free trade. 83 . and machine building seemed insurmountable. But here also was an opportunity. it had no peer in any of the principal phases of mechanical production. metallurgy. British iron products undersold traditional charcoal-smelted metal in France. that the government changed its basic tariff policy. Machine-made textiles cut into customary production not only in Latin America but also in Germany. the uniqueness of the British combination should not be exaggerated. Here. Several European countries were superior in textile design and the United States led in a few minor categories such as machine stitching. when Britain celebrated its industrial might in the Great Exhibition at Crystal Palace. The Industrial Revolution in Western Society In 1851. who were stimulated by a belief that disciplined work. Nevertheless. For at least a half century the nation's effective monopoly over the industrial revolution was scarcely challenged. But the British lead in textiles. and economic drive were pleasing in the sight of God and who were eager to get ahead where the chances lay--through entrepreneurial initiative.the Protestant minorities produced a disproportionate number of early manufacturers. 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. Britain was indeed pouring manufactured goods into the markets of the world. • In sum. obviously. the fact was that Britain came first and that its leadership can be explained. was a rude challenge. Continental businesses and governments began to wake up to the possibility of copying British machine design and factory organization. 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. frugality. The industrial revolution began to spread. Quite possibly the more general shifts taking place throughout Europe would have generated an industrial revolution elsewhere by the early nineteenth century. By the 1830s Britain's industrial lead was so obvious. mining. Britain's success in industrialization added another ingredient to the changes taking place in western Europe. and its related need and ability to export cheap machine-made manufactured goods were so great. 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. realizing they must stir themselves lest they be engulfed in a British industrial tide.
Foreign governments had to take an interest as well. 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. where the leading industrialists were Protestant and therefore shared contacts with England. Gains in metallurgy and machine building had direct links to armaments. and some of them brought back new textile equipment. • Then the French Revolution exploded in 1789. and British entrepreneurs and workers began to set up operations abroad. The French government also paid a British metallurgist to set up a cannon foundry. 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. partly because British law forbade the export of new technology or the emigration of skilled workers.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. There were profits to be made and industries to defend lest British exports overwhelm the entire manufacturing base. in sum. Such transfers of technology were unusual. Yet the revolution also introduced important 84 . Foreigners began to flock to Britain to learn. historically and culturally close) to the industrial island. • Before 1789 European governments sent over a few observers to learn about British technology. the de Wendel Company. The French in 1764 dispatched a scientist to study British metallurgy. and its turmoil and the ensuing European war interrupted major developments for over two decades. Various German and Swiss states sent students also. and social features that had spurred the British. scientific. The industrial rise of Britain spurred west European and American businesses. French textile factories surged in the north. Britain's success. British economic might during the Napoleonic Wars demonstrated the relevance of industrialization to power politics. however. and in Alsace. was an active cause of the subsequent round of industrialization in societies having many of the same commercial. and on his return he used the new methods to develop one of France's great iron manufacturing firms. which abutted the English Channel. There were three principal stages in the wider Western effort to copy Britain's mechanical advances.
The French and Dutch governments bribed British entrepreneurs to set up modern metallurgical factories directly. 85 . and all the European states. made his study trip in 1838. Alfred Krupp. which removed restrictions on the movement of labour and technical innovation. and it was a Jackson grandson who in 1861 set up the first Bessemer converter in France. an American. In 1819 the Prussian government sent a locksmith to study British machine building. for some of the British workers involved were inferior types. seeking to circumvent British laws prohibiting technology transfer. a German. When war ended in 1815. In France and also neighboring territory like Belgium and western Germany. Western Europe in this way became more like Britain. completed the causation for western Europe's economic transformation. Employers offered huge bonuses and wages sometimes double the local rate to induce the vital British workers to emigrate. the new laws and a general enhancement of the power of the middle classes. The Belgian government directly hired George Stephenson to set up railroads there. the French steel industry took shape under James Jackson as a result. Belgian businessmen smuggled British machinery out of the country in rowboats and in a few cases literally kidnapped skilled British workers. By 1830 there were at least 15.new legislation that (though the drafters largely did not so intend) helped pave the way for industrialization in Western Europe. Although those who launched the French Revolution did not intend to promote industrialization (and the ensuing disorder actually delayed it). guilds were abolished. Other laws prohibited combinations of workers-these too emulated the British lead and inhibited labour protest against change. European and American businesses also hired British workers. Francis Cabot Lowell. and he returned to form a major plant in Berlin. and commercial law was regularized. French and Swiss metallurgists visited frequently. imported British locomotives.000 British workers in France. along with Britain's display of industrial success during the battles with Napoleon. Europeans intensified their study of British ways. serving mainly as skilled technical personnel in textile and metallurgical plants. plus the United States. • Internal trade barriers were removed in countries like France. The results were not always happy. 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. by which time Germans and others were also studying British railroads and mining engineering.
which allowed him to continue operations. Also important was the direct emigration of British industrialists. imitation was never precise. British industrial adventurers began to work farther afield. and railroad development fanned the Cockerill empire. in Russia and Austria for example. an outlook that did not immediately arise elsewhere. but by this point the industrial revolution was firmly anchored in Belgium. mainly because their rural background did not generate the requisite motivation. found that it took at least a decade to teach French workers some of the necessary skills. Individual Britons continued to contribute thereafter. which also expanded into Germany. A Cockerill machine-building plant in Liege employed 2. Nevertheless. British workers. an apprentice in one of the Arkwright textile plants.000 workers by 1812. and Germany and was developing deep native roots. the United States. The sheer difference in 86 . The first Swiss cotton factory was set up by two Britons. By the 1830s the Cockerill operation included the largest integrated metallurgical and machine factory in the world. accustomed to industry." Mining. The British role in stimulating wider industrialization was particularly crucial into the 1840s. 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. French metallurgists. and another Englishman. along with a few imported British skilled workers who taught mechanical weaving. No English family did more for European industrialization than the Cockerill clan in Belgium. the British ingredient was often central to the process. William Cockerill brought modern textile machinery to France in the 1790s--Napoleon made him a citizen in 1810. revolutionized Dutch cotton production after 1830.Needless to say. Furthermore. 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. its owner boasting that "I have all the new inventions over at Liege ten days after they come out of England. where full industrial revolutions were yet to emerge. for it obviously combined with the emergence of new business interests in western Europe and the United States and with shifts in government policy. were also attuned to the idea of innovating in return for making more money. Even before the 1840s the British role should not be exaggerated. France. he soon established the first textile factory in the country. Each subsequent industrial revolution had its own flavor. shipbuilding. Samuel Slater. emigrated to the United States in 1789 under the sponsorship of a Rhode Island merchant. most European industrialists trained a local labour force as quickly as possible. for example.
for example. 87 .timing was a factor as well. French or German industrial workers were not well paid. Textiles. and the United States joined the industrial parade between 1820 and 1840. increasing the worldwide impact of the industrial revolution while cutting into Britain's preeminence. though in particular Germany and the United States. France: An Eclectic Course France. In addition. and each displayed distinctive features in the process. they could begin with more sophisticated and productive machinery from the start. The British industrial lead forced some later industrial revolutions to develop different emphases. the possibility of imitating Britain meant that many west Europeans and Americans required less time for experimentation. • 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. This was one reason Germany's industrial revolution stressed heavy industry from the first. but the intense deprivation of the British industrial slums and the reliance on virtual slave gangs of children were largely avoided. and wages had been traditionally lower in these countries in any event. their industrial revolutions essentially completed the industrialization of the Western world by the 1870s. In addition to coal-rich Belgium's rapid transformation. three follow-up industrial revolutions in Western society were particularly important. played a less prominent role in German industrialization partly because British imports had made major inroads before the German process gathered momentum. faced several drawbacks in attempting to imitate the British achievement. In combination. France. Thus. western Europe's richest and most populous country in the eighteenth century. 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. 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. By then all three countries. Germany.
was lower than that of most other Western nations. a move favouring inefficient. when it surrendered most of its iron-rich province of Lorraine. France's ability to compete in heavy industry was further weakened after its war loss to Germany in 1871. To do so they needed to import coal. so the French tactic probably was not decisive. The French introduced a number of important inventions. and several new metallurgical centers featuring large factories and advanced techniques had developed. Germany. though substantial. the companies provided the rolling stock. boosting French heavy 88 . Unlike in Britain. and the nation's relative economic strength declined as a result. but they could not keep up. There was a real industrial revolution nevertheless. The pace of French industrialization increased after 1842 when the national government agreed on a railroad system and sponsored its rapid development. the French government built the rail systems. Coal production rose thirteenfold between 1820 and 1870. and an active program of local development went forward thereafter. which meant less spur for workers to flock into factory centers. French output began to expand rapidly. particularly in metallurgy. old-fashioned textile and metallurgy firms that would otherwise have perished. the Jacquard. About 20 percent of all manufacturing workers were employed in factory industry or coal mines by 1850. French industrialization was less impressive than that of several other countries. French factory cities grew but far less than their counterparts elsewhere. The French simply did not have the large coal reserves of Britain. French population growth. and difficulties in recruiting labour--workers were able to indulge a preference to remain in the countryside--played a substantial role. • Far more important were deficiencies in natural resources. France's national system was completed in the 1860s. • Finally. Cotton and wool production was substantially mechanized. Because of these limitations.• Certainly the French were fiercely protectionist in their tariffs against foreign (notably British) goods. where most railway initiative lay in private hands and the government provided only its right of eminent domain to aid in property acquisition. then turned over most of the lines to private companies on ninety-nine year leases. By 1848 they were in fact exploiting a higher percentage of their reserves than any other country. But most countries seeking to emulate the British had a long protectionist phase to help safeguard their manufacturing. including a mechanical loom for fine cloth. which resulted in higher costs. while iron production sextupled. or the United States. that helped spread mechanization in textiles and ultimately helped inspire twentieth-century advances in circuit-board technology.
for example. 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. Germany contributed almost no new inventions to the early industrialization process and remained highly dependent on foreign technologies into the 1870s. The first department store. aimed at high-volume sales. Germany was also divided into separate states and industrialized only after a customs union created a larger national market in the 1830s. Furniture makers. Absence of tariff protection for textiles perhaps hampered early development and certainly fostered a tremendous sense of industrial inferiority. Finally. unlike France and the United States. Because of some limits on industrialization in other areas and as a means of circumventing British competition. The workers involved keenly sensed and resented the changes. France had a well-established craft tradition. one manufacturer complained in the 1830s that it was impossible to find a single German worker capable of making a machine screw. but they were almost mass-producing tables. these institutional features reduced labour mobility into the 1840s. Full abolition of the guilds and serfdom also came late in Germany. They still worked in small shops with largely manual techniques. 89 . with export markets in such goods as fine furniture and silk cloth.industry in particular and making a major contribution to the transportation needed for industrialization more generally. many French manufacturers worked to expand craft output without totally revolutionizing the technology. It also emphasized concurrent transformation of craft production. which allowed workers to be trained more quickly and increased their output. France pioneered in one of the obvious outcomes of the industrial revolution: a major innovation in distribution systems. France increased its annual per capita economic growth almost as rapidly as Britain in its industrial revolution period. cabinets. began to standardize design and production. opened in Paris in the 1830s. The French industrialization process featured some relative lags and a greater degree of government involvement than the British model. More goods to sell and a growing urban market meant traditional small shops no longer sufficed. and other items that could be sold to middle-class households not only in France but abroad. Simply locating adequately trained skilled workers was a problem. Germany: Trend to Big Business German industrialization got under way later than the French version. Indeed.
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
First. 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. it was through industrial expansion that the United States began to make an independent mark in world history by the 1870s. The nation was rich in resources but lacked the funds to develop them as rapidly as industrialization required. The industrial revolution in the United States had three other distinctive features. American farmers often warred with big business (over railroad rates. were the largest industrial enterprises in Russia by 1900. The United States also relied unusually heavily on foreign capital.in Germany also. which traded industrial exports for dependence on food imports. 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. fueled American industry throughout the nineteenth century. The vast lands of the westward-expanding nation encouraged the development of new equipment. what amounted to an industrialization of agriculture occurred along with the transformation of manufacturing. but the initiative in 93 . for example). but there was less disjuncture between the rural and urban economies than in France and Germany. European factories quickly introduced some of the same thinking. American industrialization contributed important organizational innovations in addition to the growth of big business. Huge investments from Europe. Agricultural output expanded rapidly. in particular Great Britain. from horse-drawn harvesting machinery to tractors that were in growing use by the end of the nineteenth century. Indeed. Two American firms. and the nation remained in international debt until World War I. They developed factory police forces to quell strikes and by the late nineteenth century were experimenting with engineering research. called time-and-motion studies. the sheer speed of the American industrial explosion altered the world's economic context with dizzying rapidity. American factory managers devoted great thought to the conscious control of their labour force. Several American companies began establishing branches abroad. providing the nation with vital export commodities by the 1870s. almost machinelike fashion. designed to calculate the movements of workers so that they could be systematized and sped up. More than in Germany. 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. The United States also avoided the outright shrinkage of the agricultural sector that came to characterize Britain. in sewing machines and agricultural equipment respectively.
94 . it served as a cheap source of agricultural goods and labour. the expansion of industrialization altered the economic balance both among Western nations and between the West and the world.new organizational techniques came disproportionately from the United States. A few regions. industrialized little. 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. the rapid change in the cast of industrial actors made clear what British industrialization had already taught: The industrial revolution involved ongoing change. Britain's huge industrial lead progressively dwindled as the German and American share of the industrial pie expanded. under British rule. Industrial revolutions were also under way in Scandinavia. and the Netherlands. relying instead on more traditional kinds of skill and initiative. New electrical and chemicals industries took off. Britain provided less technical training for workers and managers than Germany did. Overall industrial output elsewhere in the West continued to increase. for example. Germany. it too served as a dependent economy providing cotton and other raw materials while buying manufactured goods from the north. and the United States effectively converted the bulk of Western society to an industrial economy by the 1870s. Industrialization in Britain continued--history reveals no instance of a retreat from industrialization save in wartime. France. were largely unaffected: southern Italy and much of Spain. The American south was largely nonindustrial even after slavery was finally abolished. 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. Nevertheless. the latter on the basis of new manufacturing needs and techniques in dyes. The British found it difficult to accommodate to some of the forms the industrial economy began to take by the 1870s. northern Italy. at least until the collapse of the Soviet economy in the 1980s--but its relative share declined. chemical fertilizers. 3. partly because of its established pattern of family-owned factories. Ireland. not simply an initial conversion to new techniques. as well as regional pockets within industrial nations. and explosives. and moved into the big-business age less comfortably than its new rivals did. building on the implications of the factory system to create greater management control.10 The Industrial West by the 1880s The spread of rapid industrial revolutions to Belgium. In sum. of course. The world's first large political democracy ironically pioneered in rigid workplace hierarchies.
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. It did. generate new demand for an increase in protective tariffs against foreign goods. but the cycle also tended to be more prolonged. The resulting spiral of declining production and growing unemployment caused less dire want than had the old agricultural failures. particularly from Germany. The crisis also gave rise to urgent efforts. the advent of new rivalries within the industrial world helped escalate the impact of industrialization in the world at large. The British worried increasingly about competition. not fully resolved until the 1890s. 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. The crisis of the 1870s.The expansion of Western industrial society also brought growing international rivalry. triggered by several bank failures in the United States.11 The Industrial Revolution: An Economic Perspective What. Recessions in the new context began with a failure of demand for other reasons. which cut demand for manufactured goods. avidly supported by many industrialists. as it was then called. 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. The "great depression" of the 1870s. The 1870s depression did not permanently interrupt Western industrialization. A major depression in the 1870s. which led banks to cut their industrial loans and produce yet another reduction of industrial demand. This in turn helped move the Western-dominated first phase of the industrial revolution into a more fully international setting. then. Traditionally. was a new kind of slump. however. to seek new market security internationally. Workers' wages were low. stemmed from a growth in industrial output that often exceeded demand. Thus. a movement that swept over all industrial nations except Britain in the next two decades. food prices then rose. 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. 95 . 3. resulted in part from international pressures and also worsened those pressures. depression had begun with agricultural failures caused by bad weather or crop disease.
in other words. 96 . 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. The Macroeconomic School. the rate of capital formation or the aggregate investment ratio. D. consumer manipulation. 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. and so forth. Technology is more than just "gadgets. 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. marketing and distribution techniques. railroads. mines. A. B. political power. competitive. The Social Change School. such as industrial mills." of course: It encompasses techniques used for the organization of labour. though all of these were transformed during the same period—and concentrate on economic variables. The emergence of formal. Here the emphasis is on aggregate variables. Four different schools of thought about "what really mattered" during the Industrial Revolution can be distinguished. The Macroeconomic School is heavily influenced by the writings of Walther Hoffmann and Simon Kuznets. or the growth and composition of the labour force. The focal point is the emergence of large firms. subject to discipline and quality control. The four schools differ in matters of emphasis and weight. on the rise of capitalist employment and eventually the factory system. Early practitioners of the New Economic History have tended to belong to this school.class consciousness. C. The Industrial Organization School. The Technological School. yet they overlap to such an extent that many writers cannot be readily classified. family life. in which production was managed and supervised and where workers were usually concentrated under one roof. and impersonal markets in goods and factors of production is the basis of this view. such as the growth of national income. and even large retail stores. demographic behavior. Here the emphasis is on the structure and scale of the firm -.
Florence and Bruges were in an earlier wave. 97 . prompted by the advent of the Industrial Revolution. Amsterdam. were government officials. developed mostly by people in business and the professions. both of which occurred in 1776. and exemplified by the publication of Adam Smith's Wealth of Nations and the American Declaration of Independence. The appeal of its tenets waxed as Europe prospered in the shadow of the Renaissance and the development of the nation state. Venice. Mercantilism Mercantilism. 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.Lecture Three Colonialism and Economic Imperialism 1. Mercantilism was strongly associated with the rise of commercially dominant cities. occasioned particularly both by the discovery of America and the route to India. It had no acknowledged spokesperson. particularly on the continent. It was a system rather than a theory. founded respectively in 1600 and 1602. and the impact on government revenues of vast quantities of silver from the New World. giving way later to Antwerp. Its development as a system was heavily influenced by the changes in perception of what it was possible to achieve. The new sea routes opened up much greater trade possibilities than had existed previously. or Merchant Capitalism. generating in turn the need for colonies to protect the territorial interests of the big trading monopolies which became established. It waned as the intellectual climate moved in a different and more sophisticated direction. although some. London and the Hansa cities. such as the British and Dutch East India Companies.
was not discovered until 1545. that this inflation was entirely caused by bullion from the New World. across Europe strong unitary states were emerging and consolidating themselves. both to strengthen the state and to keep wages down. and about two-thirds of those of other European countries.Medieval support for monopolies made this form of organisation seem the natural way to support trading activities. rather than used by. Gold bullion and treasure of every kind was the essence of wealth. They rose fivefold in Andalusia in Southern Spain between 1500 and 1600. particularly the sale overseas of finished goods should be fostered wherever possible. To what extent were these new states created for. the main silver mine. by ensuring that more goods and services were exported than imported. Powerfully underpinning these ideas.000kg a year until the 1530s. Potosi. 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. an employee of the British East India Company and perhaps the best known of all. and gold shipments did not average 1. Antonio Serra (precise dates unknown) in Italy. Philipp W. Max Weber (1864–1920) estimated that military expenditures accounted for about 70% of all Spanish revenues during this period. It was not clear. 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. matched by protective duties on imported manufactured goods. Prices increased particularly fast in those regions most affected by the advent of New World treasure. well before major shipments of gold and silver began. one of whose main objectives was to make sure that they could manipulate it to their best advantage. while the increased revenues received by state treasuries provided the finance for larger-scale warfare. and increased everywhere else too. Population growth was favoured. Industry should be encouraged to buy cheap raw-material from abroad. 89 Mercantilism had firm roots in national defence and aggression. Exporting. The abundance of money plus the inflation which came with it were a major incentive to economic expansion. while the need to protect extended commercial ventures strongly increased the bonds between the state and merchant interests all over Europe. The rise in prices throughout Europe had started in the 1510s. 98 . Foreign trade should be regulated to produce an inflow of gold and silver. even if generally not so sharply. 87 All of them shared the leading features in the Mercantilist outlook. in England. Johann Joachim Becher (1635–1682) in Germany. however. The thinkers and writers who shaped the Mercantilist consensus came from many countries: Antoine de Montchrétian (1576–1621) in France. von Hornick (1838–1712) in Austria. and Thomas Mun (1571–1641).
There were soon few people who doubted that he was right. this meant adequate coinage. silver finds in Germany and elsewhere greatly increased the money supply. It does not follow.and was pre-eminently an ideology suited to the powerful merchant classes which had emerged. Mercantilism was defended at least in part by Keynes in The General Theory: ‘As a contribution to statecraft. 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.The Mercantilist view that trade depended on sufficient quantities of money being available to finance it was surely correct. By the eighteenth century. Serra took it for granted that everyone understood ‘how important it is. As industry began to develop. European prosperity had been held back by a severe shortage of coinage during the early Middle Ages until. and at a time when banking was relatively undeveloped and paper money barely existed. The notion that bullionism — the accumulation of gold and silver as a prime policy objective — was necessarily wrong was therefore wide of the mark. both for peoples and for princes that a kingdom should abound in gold and silver’. 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. or that some of the concepts which it spawned did not have lasting value. trade was sluggish. that all the elements of the Mercantilist approach were wrong or worthless. 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. which is concerned with economic systems as a whole and securing the optimum employment of the system's entire resources. This including prohibitions on the exports of tools and skilled craftsmen. there was also increasing opposition to Mercantilist-inspired protectionism. where it was abundant trade boomed. Smith not only produced a highly convincing theoretical case against some of the central tenets of Mercantilism. Becher had no doubt that ‘it is always better to sell goods to others than to buy goods from others. however. Where money was scarce. towards the end of the twelfth century. but was also in tune with the changing climate of opinion among key parts of the now increasingly rapidly evolving economy. and wanted to get rid of them. and the Navigation Acts — with their equivalents in other countries — which confined the carrying of British goods to British ships. for the former brings a certain advantage and the latter inevitable damage’. Everyone could see how the fresh bullion 99 . in gold and silver’ rather than in the value of goods and services.
Law was a man of considerable intellect and experience. His arguments echoed those of Sir Thomas Culpeper (1568–1662) who in 1621 published his Tract Against the High Rate of Usury. Furthermore. This was pioneered by John Law (1671–1729). setting an English trend towards an empirical and undogmatic attitude to economic statecraft. careful thought about the conditions required to achieve this objective led to other advances. at the time the richest merchant in Britain. Child was the first person to propose the idea of general economic progress. current among other writers of the time. always evident.supplies from the New World were stimulating trading conditions. Edinburgh and Savoy had all been turned down. State receipts were only half the expenditure which needed to be financed. To Mun. although Law's previous efforts to establish such ventures in Paris. The idea that high interest rates lowered prices first surfaced in 1832. received a ready hearing. were well below the 10% or so prevailing in Britain. interest rates in Holland. The Culpepers argued. the year after the death of Louis XIV whose many wars and other extravagances had left the French Treasury empty. undoubtedly was a factor in keeping the effectiveness of the merchant capitalism of the Dutch well ahead of the British. during the seventeenth century. whose Money and Trade Considered: With a Proposal for Supplying the Nation with Money. a Scotsman who found his opportunity in Paris in 1716. however. which did not depend on gold and silver. Concern on this score was eloquently expressed by Sir Josiah Child. shared the view. and did not drain out of the country. Such sophistication was not. Regulations to stop the export of bullion failed to work. money was primarily valuable. in his book A New Discourse on Trade which went through many printings. averaging about 6%. but on paper money. The Mercantilists were also right to regard high interest rates as being a deterrent to good trading conditions. Thomas Mun was one of the earlier writers to realise that it was the overall balance of trade which mattered. quite rightly. that 100 . not for itself. published in 1705. No account of Mercantilist views should conclude without describing a new approach to the creation of wealth. At a time when adequate coinage was the only way of ensuring a sufficient money supply. and Law's proposal to establish a bank. and had as little evidential support then as it has now. The fact that. not bilateral trade balances. but were not formally abolished in Britain until 1663. made sense. that interest was a cost and that those countries with the lowest interest rates would be more competitive. running a balance of payments surplus to make sure that coins were accumulated. a publication which was reprinted in an expanded version in 1668 by his son of the same name. but as a medium of international exchange to ‘drive trade’. whose primary function was to lend money to the state. Confusion between bullion accumulation for its own sake and the more sophisticated concept of a trade surplus remained.
the Mississippi Company. whose views on economic were shortly to enjoy considerable influence in France and elsewhere. a speculative boom was under way. Only land kept its value. Second. were heavily coloured by the interests of the rising merchant classes.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. directly or indirectly. depressed business conditions. but also business conditions generally. John Law left France for Venice. as the public flocked to buy shares in the Banque Royale and its associated ventures. rather than how to achieve wider objectives. but for all other purposes. however. where he spent the remainder of his life supporting himself by gambling. the solvency of the bank depended on its ability to redeem for hard cash any notes which were presented to it. a matter which was not lost on the Physiocrats. 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. in contrast to the coinage generally. and the condition of the French Treasury no better than it had been four years previously. First. by the bank itself. Where does this leave Mercantilism in the long journey towards modern economic? There are perhaps three key points to be made. Initially the notes issued by the bank were eminently acceptable not only for the payment of taxes. the economic thinking of the Mercantilists merely reinforced a trend which was to be much in 101 . which had long continually been debased by clipping and by reducing its bullion content. In serving primarily the interests of the rich and powerful. however. By 1720 the Banque Royale was bankrupt. leaving lost fortunes. Law not only acquiesced in this request. partly because of the occupations of those who produced most of them. so did the number of people increase who wanted to cash in their notes. For several months the increased liquidity significantly improved not only the condition of the state's finances. This was because Law's bank promised to redeem the notes with the same weight of metal as at the time of their issue. to bring to France the large quantities of gold believed to lie ready to be mined in Louisiana. As always. the writings of the Mercantilist period. with the finance for the share purchases largely being provided. As confidence began to ebb. and to provide a sophisticated structure of ideas on which others could later build. leading the Regent to propose a second issue. Mercantilism was mostly concerned with establishing how to run unitary states as successfully as possible in the interests of those engaged in trade. Three years after its foundation. but also found a way of augmenting what was now called the Bank Royale's reserves by promoting a new venture. an abiding French distrust of banks.
in the light of subsequent developments.evidence in the future. in Britain. It had a down to earth quality which much which was to follow lacked. and a higher standard of living on average than the British. but more the overall approach taken by its leading writers to the way economic issues should be tackled. and a reasonably well-developed banking system. the newly developing economy in Britain had different roots. Classical Economics Classical economics. for which James Brindley (1716–1772) was the consulting engineer. British industry began to move ahead in textiles. as both agriculture and manufacturing began to transform themselves. canals and agriculture. Whereas the Dutch depended on trade. and greatly improved by James Watt from 1769 onwards. for the Third Duke of Bridgewater (1736–1803). what Mercantilism got wrong. Third. The third was the French Physiocratic system and. reflecting the preoccupations of Mercantilist thought. It is easy to criticise. to carry 102 . Coupled with the benefit of early developments in science. the Dutch had a better-developed economy. had three main underpinnings. The first major British canal. in this case. as well as to trading. developed from its canonical origins. and in particular its critics. at least in the circumstances of the time. but over the next hundred years Britain moved well ahead. and a long tradition of able artisanship. developed largely. It is not always so easy to recognise the extent to which many of its tenets were basically valid. with the emphasis in the writings of Thomas Hobbes (1588–1679) and John Locke (1632–1704) on the individual and the state as the protector of property rights. pottery and metal work. The second was the foundation laid by the later writers on Mercantilism. was completed in 1761. although not exclusively. not so much its particular recommendations. John Kay's flying shuttle was invented in 1733. The background was the unfolding growth in output per head which was becoming increasingly apparent to acute observers in Britain during the eighteenth century. Britain also had an entrepreneurial class which was attracted to agriculture and industry. the thrust of Mercantilist thinking was largely orientated to dealing as well as possible with practical problems. which led the way in the Industrial Revolution. In addition to the advantages shared with the Dutch of a stable political background. a developed system of contract law. as well as mining. and Richard Arkwright's water frame in 1769. At the beginning of the eighteenth century. The first practical steam engine was developed as early as 1712 by Thomas Newcomen. One was the philosophic liberalism.
often in areas such as much of the Midlands. Thomas Hobbes. although the East India Company lasted until the second half of the nineteenth century. Monopolies gradually disappeared or became undermined. The ideas making up Classical economic were not. had provided a coherent defence of individual rights. a great opportunity was wasted by the next generation of writers who took centre stage.coal from his collieries to Manchester. where entrepreneurs delivered work to the homes of those who carried it out before it was collected again. where previously few large towns had existed. pioneered by Francis Bacon (1561–1626) at the beginning of the seventeenth century in a series of highly influential works. The development of the scientific method. whose orientation was to the purchase and sale of goods. to the industrialist who concentrated on their production. who had for some time been Bacon's secretary as well as tutor to Charles II. The major change which took place as the Industrial Revolution started was away from the merchant. late Mercantilism and the legacy of the French Physiocrats. led to the continuing decline of wage regulation. though there was some difference in their 103 . A major part of the thesis in this book is that. particularly to the private ownership of property. On the contrary. 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. as they failed to take adequate advantage of the foundation which Smith had laid. some 40 years his junior. had provided the world with a much more effective way than had been available previously to sift out the most viable working hypotheses. the traditional apprentice system and the guilds. therefore. 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 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. 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. became more common. after an excellent start with Adam Smith's Wealth of Nations. The resulting establishment of large commercial operations. and John Locke. The outwork system. just occasioned by the coming together of English liberalism. they tended to home in on and develop those parts of Smith's legacy where he was in error.
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. who had a varied and distinguished career in several different academic and practical fields. denying that low domestic prices. not least towards thelaissez faire attitude advocated by the Physiocrats. as we shall see shortly. who. John Locke. indicating how much further it might be possible to push human knowledge and control over events. This cornerstone of the highly influential writings of David Ricardo was to be one of the banes of economic theory until the 1870s. towards looking for solutions which might better harness private initiative. who not only had an important part in the early eighteenth century controversy over the respective valuations of gold and silver coins. incidentally was on the other side of the recoinage controversy to Newton. 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. though he drew the wrong conclusions about the impact of liquidity on economic performance. Although he followed Locke on the Labour Theory of Value. David Hume provided a clear explanation of the process at work. He was very much an empiricist. and the recoinage of the latter. and one of the first to emphasise the need for reliable data and statistics. himself made a significant contribution to economic as well as to philosophy. given sufficient determination and application to do so. he made major contributions in other respects. but who also became Warden of the Mint. which was still its value at the beginning of 1931. such as Sir Isaac Newton (1642–1727). caused by a shortage of money. whereas Hobbes had regarded it as being a creation of the sovereign state. Other significant critics of Mercantilist thought included Sir William Petty (1623–1687). Locke viewed property as being a natural right. and its protection to be the principal purpose of government. Rapid advances in mathematics.formulations. He wrote extensively on monetary matters and the implications of the quantity of money on changes in the price level. 8 This was an issue which was not to be satisfactorily resolved until. Locke's writings also provided a basis for the Labour Theory of Value. which was an outstanding achievement in taking 104 . Some of those involved in making new discoveries also played a major role in public life. 6 Either way. medicine and the physical sciences opened up new horizons. 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. would increase exports and thus restore the trade balance.
which led to a rise in economic activity and upward pressure on the price level. a concept to which this book argues that modern economic has paid far too little attention. and restoring equilibrium. thus eventually diminishing the export surplus. Even more significant was the work of David Hume (1711–1776). was to explain clearly. and does not much abound in gold and silver’. As well as contributing significantly to philosophy. and in connection with. His most substantial contribution.e.economic thinking forward. He was also the first to see the whole world as an economic unit. This would work its way through to reducing export competitiveness. He viewed landowners as prone to extravagance and disinclined to save. 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. a point commented on by Smith. and for the first time. published at almost the same time as he died. 105 . helping to reinforce the attitudes among business people which were then coming to the fore. rather than just the individual nation state. although he understood its importance for financing trade. A balance of payments surplus produced an inflow of gold and silver. He had little patience with the accumulation of wealth for its own sake. however. North was strongly in favour of it. Another important work — his Discourses — was written by Sir Dudley North (1641–1691). and an outstanding example of how Petty hammered out concepts from. He also viewed commerce as being a civilising influence. He was also the first to grapple with the concept of the velocity of circulation of money — i. Hume also has an important place as an exponent of the new political economy. his statistical investigations. 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. While the general tenor of Mercantilist thinking was opposed to free 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. especially with France. and took a much more favourable view of the contribution to the prosperity of the economy of those engaged in commerce and industry. 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. He recognised self-interest and the desire for accumulation as driving forces in economic activity.
a small port on the other side of the Firth of Forth from Edinburgh. His major work. Essay on the Nature of Trade in General was not published until 1755. and he continued to work on it for a further ten years after returning to Britain. or its critics. however. all the basic elements of the classical approach to economic activity are embedded in Mercantilist literature. where he died in 1790. 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.Finally. Cantillon's main role was to synthesise and explain the concepts with which economic was becoming increasingly familiar. There is little doubt that the cosmopolitan tone of Smith's writing reflected the breadth of experience he had while travelling outside Britain. before he died in a mysterious fire when he was only 37. first in Glasgow and then at Oxford. Cantillon is a strange figure. mention needs to be made of Richard Cantillon (1697–1734). The Theory of Modern Sentiments. therefore. They visited Voltaire in Geneva and Quesnay and Turgot in Paris. economics had come a considerable distance. Smith went to university. This. as well as to English readers. meant that his work became well known to the Physiocrats. This appointment provided Smith with the opportunity to tour Europe with his aristocratic charge. By three-quarters of the way through the eighteenth century. who amassed a large fortune at a young age. 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. in this brief survey of the major figures prior to Adam Smith. nearly 20 years after his death. the same year as the American Declaration of Independence. 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. where his father was the customs collector. He also realised the key role of the entrepreneur. Four years later he resigned from the university to become tutor to the young Duke of Buccleuch. and then in a French translation. 106 . It has been argued that. the first truly academic economist. It was published in 1776. in 1759. much of it by speculating successfully in Law's banking activities in Paris. He began to write the Wealth of Nations while in France. It now needed Smith to pull all the threads together into the clear and elegant exposition which he so effectively produced. who was probably the clearest exponent of all the current economic issues prior to Smith. After school. He published his first book. although only a few writers prior to Adam Smith were free traders. Adam Smith Adam Smith. was born in 1723 in Kirkcaldy. He then returned to Glasgow where he became Professor first of Logic and then of Moral Philosophy.
was an immediate success. Smith's book had three major themes: what. ‘It is not from the benevolence of the butcher. and very few words need be employed in dissuading them from it. that we expect our dinner. but from their regard to their own interest. distribution and prices. On the issues of value. is full of anecdote and side comments. broadly. 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. On economic motivation. or the baker. as in many other cases. harking back to Smith's earlier writing in The Theory of Moral Sentiments.’ Selfinterest is the great unifying principle of the Wealth of Nations. not very common among merchants. As paid employment became much more prevalent compared to the 107 . Smith no doubt drew on all the previous literature dealing with economic issues. 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 firmly gave self-interest pride of place.An Inquiry into the Nature and Causes of the Wealth of Nations. and of course the fact that it was so widely read was a major reason why its influence was as great as it was. and the first two-volume edition sold out almost at once. the invisible hand was made the centrepiece of economic motivation — a position from which it has never since been moved. It is an affectation. not to their humanity. this was a major change in perception from nearly all that had preceded it. and is highly readable. The reception it received was extremely favourable from the beginning. the brewer. Now. the notion of self-enrichment as a motive had been regarded with mistrust and suspicion. 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. Part of the reason why his book was so popular was that Smith's writing style. Smith was much influenced by the new conditions thrown up by the Industrial Revolution. but by power of his expression and clarity of exposition. Though foreshadowed by writers such as Hume. a sentiment that could be easily traced back to the teachings of the Church. he succeeded in threading together an altogether different way of looking at most of the key economic issues of his day. Previously. to give it its full title. in contrast with far too many books on economic.’ The individual ‘is in this. but to their self love. 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. combined with his own common sense and intelligence. We address ourselves. indeed.
which also had a long history. and why they were distributed the way they were. This was the subsistence theory of wages. Smith inclined to the view that it was labour production costs which were most significant. when the ownership of land became separated from the person who farmed it. 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. In the meantime. while the prices of others. as is implied in his main exposition. On the whole. there is much heavier emphasis on measuring solely the quantity of labour involved rather than allowing also for its quality. which sometimes cut across the work put into their production.selfemployment of subsistence farming and small-scale commercial activity. where he compares the time taken to catch a beaver and a deer. Furthermore. what everything really costs to the man who wants to acquire it. costs other than labour were involved in producing goods and services. is the real measure of the exchangeable value of all commodities. so the issue of who should get what share of the value of whatever was beingproduced became more critical. the rent payable by the tenant farmer to the landlord became an increasingly important matter..’ In another passage he says that ‘The real price of everything. is less satisfying and convincing. as to why the prices attributed to some commodities which were so important. were so low. whether or not it was graded for quality. Clearly. therefore. How was each determined and justified? Whereas on the issue of economic motivation. is the toil and trouble of acquiring it. Similarly. Labour. as capitalist production got under way. Smith was aware. 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. should be very much higher. such as diamonds — described by Smith as ‘the greatest of all superfluities’. such as water. that all these formulations were less than fully satisfactory. The solution to this problem was not to be found until the Marginal Revolution a hundred years later. Smith carried all before him. As Smith said. however. The value of a unit of labour was essentially the cost of bringing a worker into being. There had long been a baffling problem. not least rent. however. ‘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. which was later transformed by 108 . going back to Aristotle. Smith fell back on his own version of the Labour Theory of Value. There were also problems about the subjective perceptions of value. and then sustaining him — references to female workers are virtually non-existent in nineteenth-century writings on economic — in a job. his analysis of value and prices. 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.’ 35 In yet another section of the Wealth of Nations.
High or low wages and profit are the causes of high or low price. and the far higher total output made possible by each worker concentrating on a particular part of the process. but took his analysis well beyond theirs. in any of its varying forms. perhaps justifiably. Interestingly.Ricardo and Malthus into the Iron Law of Wages. He drew on the work of his predecessors such as Sir William Petty and David Hume. 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. provided no satisfactory explanation. as ‘the greatest understatement in the history of economic thought’! Partly because of this confusion. broadly adopted by the Classical Economists. In the end. 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 109 . Smith was on much firmer ground. Rent was another topic on which Smith did not produce particularly satisfactory formulations. implying that the wages paid to the labouring classes would never be more than what was necessary for their survival. Sometimes it appears that he thought that rent was a separate cost from other components making up total prices.’ On public policy. the legacy left by Smith's Labour Theory of Value helped to establish two very different traditions. In a characteristically honest comment. Smith was fascinated by the pin factory with which he was well acquainted. Smith also struggled with the return on capital and to the entrepreneur. after other costs had been deducted. 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. after the fullest explication which I am capable of giving it. a comment which has been described. however. was of harmony between the factors of production. he explained that it was ‘a subject extremely abstracted’ and ‘it may perhaps. His greatest emphasis was on the benefit of free internal and international trade. Smith himself recognised that this part of his work was less than satisfactory. however. he took it to be a residual. whether in the form of interest or profits. ‘Rent… enters into the composition of the price of commodities in different ways from wages and profit. to which the Labour Theory of Value. At others. and he describes in accurate detail all the different processes used to produce pins. One. high or low rent is the effect of it. If it was only the labour content of production which determined rightful costs. while those who became radical critics inclined to accept that exploitation was the key characteristic upon which to seize. appear still in some degree obscure’. ‘The rent increases in proportion to the goodness of the pasture. however.’ He then explained that this was to do with the quality of the land.
weakening his argument for unrestricted free trade. As regards foreign trade. they should be reduced gradually to allow for adjustment. and judgement with which its labour is generally applied. He was also against combinations of both employers and workers in restraint of trade. he might have taken a different view. He thought there might be occasions when even if tariffs needed to be removed. a mistake for which humanity was to pay a high price for the next 150 years. churchmen. at least among mainstream economists.labour. and in retaliation for foreign tariffs. with prices held down and an abundance of products available as a result of the increased competition made possible by free trade. Smith's attack on the accumulation of bullion as the talisman of the wealth of the nation. Just as Smith was generally against all forms of internal and external tariffs. and not toppled. that savings would automatically create the same volume of spending on investment. by the proportion between the number of those who are employed in useful labour. He did not envisage the likelihood of shortage of demand. challenge the critical assumption. privileges and state grants of monopoly. his pin factory. he also opposed other forms of restrictions on trading. Smith was not dogmatic about the benefit of unfettered markets. He did not. dexterity. The nation's wealth is produced by ‘the skill. following previous writers such as Turgot. although Smith had some difficulties with those who were not ‘usefully employed’. such as for essential defence industries. he held that the portion of income which was saved ‘is immediately employed as capital’. He denounced restrictive preferences. therefore. Among those he listed as being in this category were princes. Smith thought that exports would attract sufficient money in circulation to keep the economy prosperous. He was willing to accept that there could be cases where they were inappropriate. 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’. a distinction eventually successfully attacked as being untenable. until Keynes. rather than the totality of output it was capable of producing has never been seriously challenged since he made it. and those who are not so employed’. In this respect. may have been a misleading example of where the Industrial Revolution was leading. secondly. though he 110 . and. which was evidently not very highly mechanised. carried through to Classical economics. As to monetary policy. Had Smith seen the much bigger factories which were to be commissioned shortly after the publication of his book. Instead. armies and opera singers.
frivolous. however. Smith supplied the bulk of the ideas for the average economist. kept to a minimum. including Ricardo. public works. as convenient as possible. corrupt. convinced that. and the administration of justice. they would not re-emerge informally. and parsimony in its execution. value.characteristically noted that there were more laws against trades unions than there were against employers' organisations. 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. At least until J. or in some contrivance to raise prices’. but the conversation ends in a conspiracy against the public. The laissez faire principle. Smith was strongly in favour of both a minimalist function. the Wealth of Nations set a standard for clarity of exposition and forward thinking which has perhaps never been equalled. as nearly as possible. and it is widely recognised that most them never got much beyond him. in proportion to their respective abilities. although Smith had in mind much more theowner-managed businesses characteristic of his time than the large corporations typical of the modern world. Taxation should be certain. that is. even for merriment and diversion. economical to assess and to raise. As to the role of the state. it cannot well be expected. published in 1848.S. and levied proportionately to income. There was much that Smith had to 111 .’ 52 Not that Smith had a rosy-eyed view of owner-managers. Mill's Principles. The legacy thus left by Smith was a massive one. even if they were outlawed. He was not. In another often quoted passage Smith observes that ‘people of the same trade seldom meet together. 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. in proportion to the revenue which they respectively enjoy under the protection of the state. On countless occasions in the Wealth of Nations. started from Smith. wasteful and subject to the pressure of vested interests. distribution and the role of the state. He constantly berated both merchants and manufacturers for wanting to ‘widen the market and to narrow the competition’. competition and Smith's version of the Labour Theory of Value all became outstanding features of the Classical economic The thought of most economists. that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. he used the lessons of history and his contemporary experience to depict government as generally inefficient. ‘The subjects of every state ought to contribute towards the support of the government. From Smith comes the now almost universally held view that competition is to be preferred to monopoly. More than this. He therefore believed that the state ought to confine its activities to no more than the provision of defence.
nevertheless. 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. and that its intellectual influence was massive. however. His achievements. With the exception of some import duty reductions introduced by Pitt the Younger in the 1780s. that the Wealth of Nations became close. was only repealed in 1834. the importance of competition. surely outweigh these deficiencies. and the East India Company survived until the 1850s. and the significance of the division of labour. however. Malthus and Ricardo The three most important economists to follow Adam Smith were all close contemporaries. of whom more will be heard later. The clarity and precision with which he introduced new ideas such as self-interest. Jean Baptiste Say (1767–1832). Smith was not right about everything. Say was a policy-orientated economist rather than a theoretical model builder like Ricardo. It is also true. and two. It is true that it took time for his writing to have practical effects. was French. including Malthus and Ricardo. It was a long time before anyone else was to tackle the canvas on this scale again. He then joined the academic world. only finally to be wound up after the Indian Mutiny. was all that he did to undermine and demolish the legacy of previous thinking which was no longer apposite. without 112 . One. Britain's tariff wall was not lowered to any serious extent until the 1820s. and the fervour with which he advocated older ones such as the benefits from freer trade and the removal of restrictions and monopolies. Thomas Malthus (1766–1834) and David Ricardo (1772–1823) were British. as well as Sismondi. Perhaps even more important. Say. with serious consequences.say about the new world which was opening up all round him. to being the bible of the Industrial Revolution. Jean Baptiste Say spent the early part of his career as a businessman helping to pioneer life insurance. in the end. which restricted the mobility of labour. He corresponded regularly with the other major economists of his day. 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. whom he described as one who ‘pushes his reasonings to their remotest consequences. shaping the views of all economists who followed him. were huge achievements. ending his working life at the Collège de France where he was appointed France's first Professor of Political Economy in 1815. The Law of Settlement.
This was an important departure from the traditional view. of ascribing a pivotal position in economic affairs to the role of the entrepreneur. 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. Traité d'economie politique included a number of important concepts of his own. 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. 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. Interestingly. however. with baleful consequences for the development of economics in nineteenth-century Britain Say also carried on the tradition. This was not a literal translation. and also in other languages. established by Cantillon. Say's book. By far the most important contribution to economic thinking made by Say. subsequently validated by later more precise formulations. including English. As we shall see. Ricardo never departed from his adherence to the fully fledged Labour Theory of Value. and his background in a mercantile family with its own direct knowledge of entrepreneurial activity. no major British economist from the eighteenth century onwards was a businessman. Say's first claim to fame was as a translator of Adam Smith's work into French. 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. One was the idea. this being another concept which was largely ignored by British Classical economics. where it did much to publicise Smith's ideas. Say's interest in this aspect of economic development may well have stemmed from his own experience in commerce. Say much preferred systematic analysis and empirical research to the abstract deductive method favoured by Ricardo and his followers.comparing their results with those of actual experience’. It was very successful both in France. and reemphasised much later by Schumpeter. Say was in no doubt that it was. although it has to be said that this is not exactly the way Say himself framed the proposition 113 . but to its utility. 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. On this issue. Although a great admirer of Smith. into which it was in turn translated. this being the critically important element of the utility theory as it became accepted 50 years later. though Ricardo made a fortune as a stockbroker. but a much more orderly work in the French tradition covering all Smith's major contributions. Say urged him to accept that it was ‘the last quantity of useful things’ which was crucial.
For Say's Law imposed enormous limitations on the capacity of the state to remedy economic conditions which showed signs of under-demand. prices were expected to adjust themselves downwards to cater for the temporary lower flow of income. to a lesser. and it had very substantial practical ramifications. It was acknowledged that some part of all incomes was saved. the recurrent booms.which is so closely connected with his name. ruling out the possibility of an activist approach to economic policy in a critical area where other perceptions might well have made it possible. so that the balance between supply and demand was still there. be no such thing as general overproduction and a shortage of demand for everything which was on the market. As shaped by the tenets of Classical economics. the concept gelled that there could. was Professor of History and Political Economy at Haileybury College. Say's formulation was a good deal more subtle than the simplified version which became the common currency. This was a major defect in Classical economics. If no such state of affairs could exist. as did Marx. There could still be no general excess of production in relation to the available purchasing power. there was no reason for trying to counteract it. as a result of Say's Law. in these circumstances. This then became a compelling argument for government non-intervention. although it was challenged from time to time. followed by recessions and rising unemployment. however. the academic establishment at which young men were 114 . but growing. Furthermore. 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. however. from 1804 onwards. Malthus had early reservations about whether its tenets held good. The results were both to increase the attractiveness of radical alternatives to capitalism. Such disturbances were not allowed. In a rather more sophisticated version of Say's Law. As so often happened with powerful ideas. it remained the conventional wisdom until the 1930s. Thomas Malthus began his career as a clergyman and. but this was held to generate an exactly similar volume of investment. it was recognised that not all the savings might be spent at the same time as they took place but. which afflicted the developing economies of the nineteenth century. provided increasingly clear evidence that supply and demand were not always in balance. extent elsewhere. and to reinforce the quietist approach to government favoured by the increasingly conservative financial and commercial interests in Britain and. to undermine the sanctity of Say's Law. This was an exceedingly simple and powerful idea and. It was not until Keynes and the Great Depression that the fundamental error in Say's Law was admitted.
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. Malthus wrote two books. increases only in an arithmetical ratio. but the same could certainly not be said of the propositions in his earlier book. nor. in Malthus's view. statesmen. was also to have two other important British nineteenth-century economists on its strength. The gap might be filled by what Malthus described as a non-productive class of consumers. to have been on the right side of this particular controversy. which were enormously influential. he claimed. tends to increase in a geometrical ratio. likely to be too fully occupied by business affairs. Nor was the shortage of demand likely to be filled by the capitalists themselves. lawyers. surgeons and clergymen. This organisation. This is so. nor Malthus. and much of his current reputation stems from the fact that he was one of the few people. first published in 1820. physicians. and the second that the passion between the sexes is necessary and will remain in its present state. Mun ever visited India. first published in 1798. at best. judges. and a very early one at that. where Malthus expressed considerable scepticism. because population. not least Thomas Mun. this list of supposedly unproductive occupations has parallels with the one produced by Smith. If the population increases before the food 115 . when unchecked. although his reasoning does not have a modern ring to it. The two checks are vice and misery. although neither of the Mills. but this could not be guaranteed. although both books went through subsequent additions. who were. whereas subsistence. Interestingly. soldiers. ‘these two bitter ingredients in the cup of human life’. Another issue on which Malthus and Smith differed was on the overall merits of free trade. although subsequent editions of the Essay included ‘moral restraint’ as a third possibility. He then concluded that ‘the power of population is indefinitely greater than the power in the earth to produce subsistence for man’. who took a much less favourable view of their contribution to the general welfare.trained for service in the British East India Company. the first being that food is necessary to man's existence. Nature makes the two forces equal by checking the growth of population whenever it presses against the food supply. and Principles of Political Economy. In the second book he attacked Say's Law. James and John Stuart Mill. which had employed several significant contributors to economic in the past. Malthus began with two postulates. These concerned the relationship between the size of the population and its level of income. apparently. An Essay on the Principle of Population. The arguments which Malthus produced on these topics were not strong enough to carry the day. consisting of servants.
who had at least 17 children. and readily available from censuses and elsewhere. In the ensuing distress. both from practical experience and in the internal consistency of his writings. In particular. and indeed this is not what happened. They certainly went up substantially over the next 30 years. Ricardo left the Sephardic Jewish faith and became a Christian when he married his Quaker wife but. they reinforced the existing tendencies towards a minimalist role for the state among the more established classes. 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. Even where he did attempt to quantify the issues at stake in the Essay. with many practical implications. Malthus's views on population. Yet the evidence that Malthus's views were incorrect was there from the beginning. with his Iron Law of Wages. in fact standards of living for working people were already rising when the Essay was first produced. in doing so. One was that there could be no long-term hope of increasing the living standards of the labouring poor. population growth will come at least temporarily to a halt. since the rising population would always erode away any temporary gains in income per head. they fuelled dissatisfaction with the status quo among radical thinkers. This was a concept onto which Ricardo latched. This was a compellingly simple idea. David Ricardo was the third child of a stockbroker of Dutch descent. food prices will rise and real wages will fall. when Malthus was still writing. Malthusian views about population and poverty became another part of the almost unchallenged conventional wisdom. Both these ideas rang down the nineteenth century. accepted as a fact of life both by Classical economic and by most of the public at large. On the one hand. Whatever his merits in other respects. On the other. it is not selfevident that food production will only increase in an arithmetic ratio compared to the geometric ratio posited for population growth.supplies have expanded. By the 1830s. population and living standards was widespread. knowledge of increasing agricultural productivity. There seems to be nothing to suggest. 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. colouring as they did both the opinions of the nineteenth-century economic establishment and the public. Another was that public relief to the poor can only defeat its own purpose in anything but the short term. it is far from clear that he did this fairly. provided the world with another direly wrong-headed legacy. however. that Malthus was interested in this kind of empirical evidence. 116 .
shared by Say. but the raw conclusions. A revealing insight into Ricardo's lack of interest in empirical information is that. which had 12 voters. This sparked Ricardo's interest in economics. however. He died four years later. in addition to the labour content. Ricardo tended to use induction. it was not so much the nuances which carried the greatest influence either with his fellow economists or with the public. if it could in no way contribute to our gratification — it would be destitute of exchangeable value.cut himself off from his own relations. it has to be said. and profits — but Ricardo tackled these issues in a different way. He was widely involved in all the major economic controversies of his age. and his conclusions correspondingly firm and rigid. towards the modern view in which prices are determined by the interplay of supply and demand. Whereas Smith was inclined to draw common-sense conclusions from wide empirical observations. although he excluded products with special scarcity value.’ This was a move. wages. Ricardo moved some distance from Smith's views by introducing the concept of utility as an important influence on cost. amassing a large fortune in about five years. the danger being that the validity of the conclusions then depended heavily on his premises being. ten years later. in 1823. despite all that he had to say about the evolving economy of his time. These covered much the same ground as had been dealt with by Smith — on prices. In 1819 he became MP for the Irish rotten borough of Portarlington. although in his later writings he tended to modify and soften his position on many of the key issues with which he was concerned. he was by chance lent a copy of the Wealth of Nations. rent. Ricardo's influence as a theoretical economist derives as much as anything else from the forcefulness and vigour with which he expressed his views. especially those to do with monetary policy. is still just as hazardous now when used by modern economists as it was in Ricardo's day. As so often happened. He nevertheless continued the family tradition and became a stockbroker himself. This did not stop Ricardo from falling back on the Labour Theory of Value as the main determinant of prices. and was well known to all the other economists active at the time. which could not 117 . incidentally opening up the way to leaving a much more positive role for the entrepreneur. when he was 27 years old. He was a close friend of Malthus'. His cast of mind was analytical and abstract. where he sided with Say against Malthus on the issue of possible deficiencies in demand. Shortly afterwards. although he did not start publishing until 1809. This is an approach which. it appears that he never visited a factory throughout his career. however. On prices. and remaining. ‘If a commodity were in no way useful — in other words. realistic and relevant. He then bought a country estate at Gatcombe Park. and which he never visited. the same property as was to be purchased in the 1970s by Queen Elizabeth II for Princess Anne and her family.
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. wines of a peculiar quality. Apart from these exceptions. allowing for the equilibrium price of labour to include ‘conveniences [which had] become essential to him from habit’. wages again fall to their natural price. than another increase of capital may produce the same effect’. despite the fact that by this time he was one of them. and of the difficulty of providing food for its augmented population. and the greater the population. that the opinion prevailing ‘in the labouring class. which would accrue to the landlord. with land only just capable of supporting those working it. in Ricardo's view ‘It is natural that what is usually the produce of two days’ or two hours' labour. but is confirmable to the correct principles of political economy. ‘love to reap where they have never sowed’. ‘such as rare statues and pictures. as Ricardo observed. ‘The rise of rent is always the effect of the increasing wealth of the country. which can be made only from grapes grown on a particular soil’. however. Better land would produce a surplus.' This was largely the hard line formulation to which Ricardo adhered. the larger the surplus would be. which an increased capital gives to a new demand for labour be obeyed. is not founded on prejudice and error. and indeed from a re-action sometimes fall below it. and the intensity with which it was therefore tended. one with another. At the margin. the number of labourers is increased. Ricardo's conclusion was still a pessimistic one: ‘When.’ Turning to wages. scarce books and coins.be reproduced. amplified by Ricardo's 118 . that the employment of machinery is frequently detrimental to their interests. Ricardo defined rent as ‘that portion of the produce of the earth. should be worth double of what is usually the produce of one day's or one hour's labour. without either increase or diminution’.’ Perhaps partly for this reason. was largely concerned with agriculture. Ricardo defined them as ‘that price which is necessary to enable the labourers. which is paid to the landlord for the use of the original and indestructible powers of the soil’. for Britain was still at the turn of the nineteenth century a predominantly agricultural country. for Ricardo as with Smith. by the encouragement which high wages give to the increase of population. however. and landlords. He also believed. the rent would be zero. whatever was done by beneficent governments. In fact Ricardo substantially qualified his views on the Iron Law. charity or trades union action.’ This was the message which the public received. to subsist and to perpetuate their race. He also allowed for the subsistence level to rise as a result of improved technology and rising investment ‘for no sooner may the impulse. however. Rent.
the same crucial concepts which underpinned Classical economics also provided large amounts of ammunition to its critics. well justifying the description by Thomas Carlyle (1795–1881) of them as the ‘Respectable Professors of the Dismal Science’. other than the ideas already formulated by Smith. was to make it impossible for the central doctrines in Classical economics. The conclusion. 119 . The contribution towards the development of nineteenth-century economics of the main figures who followed Smith was therefore a depressingly misguided legacy. Malthus or Ricardo. which was all too easy to draw. profits were much larger than could be accounted for in this way. and elsewhere. Economic and social progress were certainly made in Britain during the nineteenth century. If prices were determined wholly by the amount of labour expended on production. or for other reasons falling on hard times. but merely appropriated to themselves a surplus to which they were not entitled. 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 which Ricardo never successfully fended off. and should never be controlled by interference of the legislature’. 100 Ricardo's own fortune being a highly specific case in point. to contribute anything of much use to practical policies for decades to come. however. 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. It made it look impractical for the bourgeois state to ameliorate conditions among those benefiting least from the evolving economy. 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. In doing so. 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. wages should be left to the fair and free competition of the market. Malthus's views on population and Ricardo's interpretation of the Labour Theory of Value.comment that ‘Like all other contracts. The combination of Say's Law. and thus how they could be justified. but hardly — despite their fame and influence — as a result of Say. leaving only a minimal economic role for the public action. Furthermore. was that capitalists made no contribution to the production of goods and services warranting the profits they earned. At the same time.
compared to the others. ever since. stayed as the pre-eminent practical economic prescription.economics. 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. It could be used both to warrant state action to ameliorate social conditions. 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. saw a period of consolidation during the following 50 years as it slowly changed to what has come to be called Neo-Classicism. but proved to be something of a two-edged sword in practice. stop important contributions being made to the less mainstream parts of economic and social thought during the nineteenth century. 120 . partly going back to Quesnay. although this is usually attributed to Ricardo. which he described as ‘the grand practical problem’. a strong supporter of Ricardo and the Labour Theory of Value. and was criticised accordingly. the case for laissez faire and free trade. The utilitarian banner was nevertheless forcefully carried forward by James Mill (1773–1836). who also may have contributed the theory of comparative cost to economics. however. entitled the Elements of Political Economy. was thought by Marshall to be ‘on the whole the most influential of the immediate successors to Adam Smith’. although this did not stop him having nine children of his own. at least outside socialist circles. His major aim was to develop a complete and rational code of law. established by the time of Ricardo's Principles. as micro. 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’. though primarily a lawyer rather than an economist.Classical Economics in Transition The Classical System. Jeremy Bentham (1748–1832). one of whom was John Stuart Mill. throughout the nineteenth century. but also as a justification for exploitation on the grounds that this was for the overall benefit of society. James Mill shared Malthus's concerns about population growth. The doctrine of maximum competition. This did not. This concept set out to provide an important new guide to public policy. It was still worth trading if one country was relatively good. however. James Mill. at producing one product rather than another. published the first economic text book in 1821. Its major policy-orientated strength continued to be. Much of it has remained intact.
providing a continuing weakness to Classical economics which Marx and others exploited with eventually highly significant consequences. There were protests from some industrialists. The Currency School. remained unresolved. particularly Matthias Attwood (1779–1851) and his brother Thomas (1783–1856). 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. for which they needed to be rewarded. George Warde Norman and Robert Torrens (1780–1864). and in particular what to do about the gold value of the currency. The Banking School. leading to sterling returning in 1821. The main controversy then. after a severe deflation. however. believed that the inflation had been caused by the lack of discipline triggered by the abandonment of the Gold Standard. or to seek distant rather than immediate results. to whose report. including Ricardo who had been co-opted as a member. originally set by Isaac Newton in 1711. Their final victory came with the 1844 Bank Charter Act. to the pre-Napoleonic War gold valuation. as far as possible. on the contrary. published in 1810. however.Much of the practical economic controversy during the early part of the nineteenth century related to monetary policy. a situation which has changed little during the last 150 years. 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. was over what had caused the inflation. This attributed the return to capitalists as being compensation for their austerity in deferring the use of resources to a later date. The Currency School won the day. prices had risen steeply. 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. denied that a purely gold-based currency would operate in the manner claimed for it by the Currency School. and subsequently.’ Neither the scale of the 121 . The justification for capitalists receiving the return they did. led by Thomas Tooke (1774–1858). Since then. led by Lord Overstone. and therefore what policy to pursue to ensure that. By this time. which locked the banking system still further to the same gold price. and that price changes were primarily to do with supply and demand rather than monetary factors. An attempt was made to deal with this problem by Nassau William Senior (1790–1864) with his Abstinence Theory of Interest. nevertheless. triggering the establishment of a Select Committee on the High Price of Gold Bullion. most of the main economists of the day made contributions. price stability was maintained. ‘To abstain from the enjoyment which is in our power. while effectively emasculating whatever scope there might have been for a more active monetary and exchange rate policy for Britain during the nineteenth century. are among the most painful exertions of the human will.
following the outcry over the potato famine in Ireland. The agricultural interest in Britain had always been strong enough to keep the price of corn relatively high. only 12 imported articles were taxed. an enlargement of the field for employing capital. The result was a major campaign. Opinion about it was divided. an objective which was achieved in 1846. thirdly. 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. which prohibited imports unless prices reached high trigger levels — 80 shillings a bushel in the case of wheat. the extension of the market for disposing of their own surplus produce. however. Adam Smith had derided the empire as a project ‘extremely fit for a nation whose government is influence by shopkeepers’. Britain. not least in food products. This was a view substantially shared by his early followers such as Ricardo and James Mill. relief from excessive numbers. which wanted to see the cost of living kept down. 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. The success of this campaign led to the almost total dismantling of British tariffs. and legislation to prohibit or discourage the importation of cereals went back to the fifteenth century. By 1860.rewards which capitalists managed to award themselves. This was strongly opposed especially by the rising manufacturing interest. and these purely for revenue purposes. nor the scale on which many of them spent them lent much credibility to this theory. By 1882. with the largest empire. to have the Corn Laws repealed.’ 116 As the nineteenth century wore on. the total number of dutiable items coming into Britain had been reduced to 48. led by Edward Gibbon Wakefield (1796–1862). which had started the previous year. During the nineteenth century. 122 . and favoured its disbandment. 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 relatively poor performance of countries such as Britain. led by Richard Cobden (1804–1865) and John Bright (1811–1889). established a substantial empire. but opinion gradually became more supportive. A new Corn Law was passed in 1815. though it lasted for some half a century before being overtaken by the Marginal Revolution. largely as a result of its economic pre-eminence at the time. secondly.
believing — rightly — that conditions would improve as the economy grew. for many years Editor of The Economist. Mill took a reasonably optimistic view of industrialisation. and he forcefully re-formulated. even if these involved government interference with private interests. in particular. even though this involved risks with convertibility. Although he never lost faith in Utilitarianism or a general belief in the superiority of competitive capitalism over other economic systems. Mill followed the same line as Ricardo. 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. particularly of agriculture: ‘It is the law of production from the land that in any given state of agricultural skill and knowledge. he was considerably more willing than his predecessors to advocate reform of existing institutions.’ In general. but it did little to advance the performance of the British economy. Mill still largely accepted Ricardo's view on the Labour Theory of Value.The next major synthesis of the economic thought of the time was undertaken by John Stuart Mill (1805– 1873). although somewhat softened. the function of the central bank. although he still took a Malthusian view. The Gold Standard may have benefited the City.’ He was also sceptical about how far economic growth could go. but did not essentially alter. especially from about 1870 onwards. and the rest of the world's until the end of the nineteenth century. the produce is not increased in the same degree. on which it depended. in reacting to crises. and. not least because of the mounting attacks on Classical economics at the time from the socialist left. Nevertheless. did not become the basis for Western Europe's international trade and finance until the 1870s. by increasing the labour. further securing the leading role of sterling. Say's Law. which did significantly worse than most of its continental competitors. although the Gold Standard. what is economically needed is a better distribution. however. opining that ‘It is only in the backward countries of the world that increased production is still an important object: in those most advanced. whose Principles of Political Economy was published in 1848. the Bank of England. did much to develop and clarify the issues which were involved. As the role of the City of London as Britain's — and the world's — financial centre became more pronounced. providing the banking system with sufficient liquidity to ward off disaster. so the way in which the banking system operated became more sophisticated. Walter Bagehot (1826–1877). 123 .
Japan. supplying furs and timber. and that died out after the introduction of steamships made of metal. but these countries were still in a rudimentary stage of economic growth until the latter end of the century. and a few easily transportable materials. and its commercial importance dwindled after the suppression of the slave trade early in the nineteenth century. British capital covered India with a network of railways and began to develop Indian productive resources for the supply of Western needs -. and attempted.especially tea. to create modern 124 . Canada was a sparsely populated agricultural country. Chile and Peru. In South America. The only important Canadian industry was shipbuilding. luxury foodstuffs. The half century before 1914 witnessed. a swift extension of modern commercial and industrial methods to new countries. besides the vast growth of the United States and the rapid industrial development of Great Britain and Germany. 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. the granary of Europe. long almost isolated from world trade. The European occupation of Africa. behind a very high tariff. and with the rise of the cotton industry towards the end of the eighteenth century the Far East became important as a market also. borrowed capital extensively from richer countries to build railways to link up its vast territories in Europe and Asia. The Far East had been for centuries of importance to Europe as a source of supply for fine textile fabrics. Brazil had been from early in the nineteenth century an important market. Russia. though the production of fine wool had begun. broadened out until practically the whole continent had been annexed by one or other of the European Powers. Australia and New Zealand had between them a population of less than 200. and becoming after 1840 of some account as a producer of grain for export.000 and were of little economic account in world trade until after the gold discoveries of 1851. previously confined to a few areas within easy reach of the coast. and there was a growing trade with the Argentine.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. 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.
and ocean-going ships carried everywhere the mingled blessings and curses of modern civilization. which in the earlier part of the nineteenth century had been mainly an exchange of goods for goods. A fever of railway-building seized on the world and provided vast openings for the investment of capital in the less developed countries. and on India many of them looked askance. the early Victorians took little interest. 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. payment can be made only by instalments spread over a long period. Burma and Mexico. The early 125 . Commerce ceased to be confined to the old trade routes. 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. Those who did value the Indian empire regarded it chiefly as a field for the expansion of the market for Lancashire cotton goods. or if disturbed political conditions in the backward country upset their hopes of gain. 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. largely under imported foreign management. or of the money spent on buying it. as involving expensive responsibilities that were not worth while. continue to take a lively interest in what is done with it. came to depend to a growing extent on the investment of capital abroad by citizens of the older countries. Persia. When a trader sells a man a shirt. with the exception of India. In the native areas included within the British Empire. such as rubber and oil. immensely increased the economic importance of Malaya. 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. or finances the building of. Trade. Moreover. In such circumstances the providers of the physical capital. often on most unequal terms. that is an end of the transaction. New commodities. a railway in a backward country. as the United States had done in the previous century.industries of its own. The recrudescence of imperialism in the latter part of the nineteenth century was no merely causeless change of political attitude. the Dutch East Indies. 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. It was based on a profound alteration in the economic relationships between the countries of the world. but when a great industrial concern or a group of financiers builds. Nor did they object to this.
as closely as the earlier phases of the Industrial Revolution had been with the rise of the Lancashire cotton industry. so they set out to make such colonies as they had as far as possible closed markets for their own goods -. and they had no comparable colonial empires of their own. found themselves less fortunately placed than Great Britain. in order to secure more protected markets and preferential fields for capital investment. 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. confident in its industrial superiority and in its ability to lend capital more readily and on a larger scale than its rivals. and even in colonies belonging to other Powers.and to get more colonies. 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. 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. The Argentine was opened up mainly with British capital and British machinery. In the second quarter of the nineteenth century coal. iron and engineering had laid the foundations of the new system of transport. nor did British economic activity stop short at the boundaries of the Empire. Just as they protected their own industries against British imports. and their creed of laissez-faire followed logically from their economic ambitions. This expansion of industrialism over almost the whole world is connected intimately with the growth of the metal trades. Great railway contractors such as Thomas Brassey. felt for a long time no need to close its colonial territories to foreign products. and there was active British investment in China. But other countries. 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. finding orders no longer plentiful at home. British capitalism. Their captains of industry found it hard to compete with the British in the open markets of the world. as well as in India. but undeveloped countries 126 .Victorian capitalists looked at the world with the eyes of traders in finished consumable commodities. even where it was in a position to impose its own terms. 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. as they adopted the new industrialism. began to look further afield. This does not mean that Great Britain was unaffected by the growth of imperialism. On the contrary. such as the Dutch East Indies.
the instrument whereby the raw materials and the producing capacity of the New World. had been compelled to get special powers by private Acts of Parliament. however great the prospects of economic expansion by their means might be. of Africa. like it. On the one hand it has been the means by which the hinterland of vast continents has been opened up to trade and settlement. could afford to lend the money as well as supply the skill. they were the making of the United States as an advanced industrial nation. The railways industrialised. who needed new openings for the use of their money when the State had ceased to pile up war debts and there were few 127 . the interior as well. or at any rate commercialized. which. could be hardly more than a fringe of smoke round the seaboards of even the most advanced countries. British technicians and British skilled labour undertook the task of equipping a large part of Western Europe. Above all else. and. British capitalists. But the railway company very soon developed on quite new and different lines. British capital. The railway promoters appealed for capital to the rising middle classes of Great Britain. The railway company.could not afford to supply the capital for expensive railway projects. China and Africa. whereas the railway multiplied many times over the area of the world open to commercial exploitation and settlement. But railway development was also of very great importance in its effects on the structure of the business system. and later India and the Argentine. and of the East have been made available for European use. Industrialism. as it grew up in Great Britain in the second quarter of the nineteenth century. for the steamship for the most part only enabled goods to be carried faster and in greater quantities along the familiar routes of commerce. 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. Railway construction occupies indeed a position of extraordinary significance in the evolution of modern capitalism. 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. before the coming of the railroads. because they needed the authority to invade private rights in order to construct their enterprises. and many other parts of the world. The railway played an even more important part than the steamship in the promotion of international trade. jointly with the steamship. enriched by the profits of earlier ventures. was modelled in its business structure on the earlier turnpike trusts and canal companies. with the new means of transport.
and in this sphere. Moreover. The rapid growth of British capacity to export goods provided the necessary resources. British overseas investment had indeed begun before the coming of the railways. railway enterprise was the principal pioneer. By 1876. the total had 128 . There were of course other pioneers of joint-stock besides the railways -. In 1850 British capitalists had already perhaps £230 millions invested abroad.gas and water companies. what began with railways soon spread to other industries.other fields open to savers who did not wish to take an active part in the use of their capital. As we have seen. there had been large private investments in the West Indian plantations and in North America during the eighteenth century. with a sprinkling of commercial and mining investment. mainly in Government stocks. 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. this overseas lending was largely confined in its early stages to public loans or to plantations. according to the most reliable estimates. led the way. the railway promoters created the typical modern joint-stock concern with its widely diffused body of shareholders and stockholders. but after the coming of the railways it expanded into private industrial projects on a steadily increasing scale. 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. in this respect too. too numerous and too scattered to exercise any effective control over its conduct and interested in it solely from the financial point of view. as the only country with any large mass of surplus capital to invest. 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. and. 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. In this great movement of overseas investment Great Britain. No less significant was the effect of railway development in internationalizing the supply of capital. after the Napoleonic wars there had been a boom in overseas issues. The export of capital took a great and increasing place in the economic development of the modern world. as in home investment. It was mainly through the building of railways overseas that British investors first learned to trust their money in foreign industrial ventures. 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. In drawing in these classes.
It was indeed largely a result of the concentration of income in the hands of the richer sections of the community. There would also have been less international rivalry. France is estimated to have had about £1800 millions. 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. It has been estimated that in 1914 British investors had at least £4000 millions invested abroad. Rather more than half this total consisted of Government loans. had specialised chiefly in public loans and in the financing of the economic development of Russia. both public and private. Only British investment was very widely spread over all countries and every type of bond and share. Between 1860 and 1876 nearly £950 millions of new capital issues for overseas use can be traced in the London market. outside its own colonies. while Germany had distributed its investments about equally between Europe and the rest of the world. the French and German mainly in Europe and in their own colonies. 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. If wages had risen faster in the older countries. and rather less than half of all other investments put together. and less sowing of the seeds of war. 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. The railways in the United States alone absorbed over 470 millions. with a preponderance of fixed-interest-bearing securities. The foreign investments of the United States were mainly in South and Central America . including railway guarantees. but in all cases the total included a large mass of investments in railway securities. No other country had in 1914 even half so large a total overseas investment as Great Britain. and railway securities easily occupied the next place after public loans. less imperialism and subjection of the weaker peoples. and of this sum more than £1500 millions was in railway securities and £1000 millions in Government loans. and the United States about £540 millions.increased to about £1200 millions. for this both increased savings and limited the home market for consumers' goods. France. besides the proceeds of Government loans which had been devoted to the building of State-owned railway systems. 129 . but there would have been a better diffusion of wealth in the developed countries. Germany about £1200 millions.
either open or disguised under the form of a protectorate or a mandate. it is in itself a good thing for the richer and better-equipped countries to help on the development of the less advanced. as the world was. such as Malaya. The native inhabitants became in effect sources of man-power for the less skilled tasks under alien capitalists. 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. In some cases. 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. 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 potential wealth of their lands 130 . The profits of the enterprises were remitted home to the alien owners. The capitalist world. and was uninfluenced by considerations of the well-being of the peoples among whom it was made. In other areas. it often raised the national incomes of the borrowing countries. Obviously. 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. Moreover. in the latter part of the nineteenth century. not so much willing borrowers from the more advanced. and usually no attempt was made to train native workers for the more skilled tasks. Investment developed as a means of finding markets and raw materials and foodstuffs needed by the advanced countries. 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.Yet. unless they were recognized as fully civilized nations. the less advanced countries became. The white workers received salaries out of all relation to native incomes. and in many areas steps were taken to force reluctant tribesmen to supply labour to man the white man's mines and plantations. had to submit to alien policing and often even to annexation. While Europe was asserting within its own borders the rights of nationality and self-determination. became far less tolerant of uncivilized peoples and even of peoples backward in relation to Western standards of economic progress. But. 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. according to Western notions. obviously. but that was incidental only. it was also denying the right of non-European peoples to abstain from using to the full. Of course. the advanced countries were continually squabbling for the rights of their national capitalists to exploit the backward countries' resources. and the countries in which the enterprises were carried on.
the white men disputed and even fought one another for the right to exploit the less developed regions of the earth. 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. But. 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. 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. rubber and tin from Malaya and the Dutch East Indies. That was the white man's mission -. where there were relatively few natives to be dispossessed. and though the form of annexation was hidden under the 131 . which divided up practically the whole continent. from the standpoint of the capitalists in the advanced countries. but also that of tropical Africa. there were reasonable arguments in support of this attitude. asked the European capitalist. National self-determination. 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. Of course.which was assumed to be good. 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. could hold good only for peoples who had their eyes sufficiently open to the economic main chance. as part of the civilizing mission of the white races.a mission. unhappily. of civilisation for the world as well as of enrichment for himself. Even those who "got on well with the natives" commonly had a contempt for them and regarded their institutions without respect. In 1918 the colonial empire of Germany was parcelled out among the victors.and their labour power. with their faith in the virtues of large-scale production. It needed not only the produce of the prairie lands of America and the ranches of Australia. according to this view. as he saw it. and only the white man could teach them. Moreover. The partition of Africa was accomplished without actual war between the great Powers. Why. a mission necessary in the interests of the progress of industrialism -. but not without recurrent threats of war. and was claiming the right to enforce the development of any territory inhabited by less civilized peoples.
containing more than 57 million people. if it is to have more to sell. Any system of this sort must sell abroad in order to buy. Hawaii and Alaska. with its vaster territory and its more balanced economic development of industry and agriculture. indeed. chiefly in Africa. not as a balanced system of production and consumption. but also in Malaya and in East and Central Africa. built up. This was much less true of France than of either Great Britain or Germany. It must either grow or decay. 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. with nearly 17 million inhabitants. as in the United States. Between 1884 and 1900 the territory of the British Empire was increased by more than 3. Only after the rise of the Soviet Union and the development of native nationalism.the open door in these areas for the commerce of all nations -. and can raise the standard of living at home only by selling more and more of its products abroad. especially in the French colonies. It must. and under the conditions of the nineteenth century it had.but with that exception the mandatory system differed little from positive annexation. and it has been still less true of the United States. with more than 36 million inhabitants. in order to grow. did the older notions of imperialism go out of fashion. One thing. Especially in Great Britain and Germany. its home population was being reinforced by a stream of immigrants. a colonial empire of over a million square miles. assure itself of a constantly growing supply of necessary materials. was secured -. It is not in the nature of modern industrialism to stand still. to find markets for its products largely outside its own borders -. the Philippines. moreover. in effect most of the mandated areas were virtually added to the empires of the victorious Allies. much less favourably placed.7 million square miles.except where. 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. But it was broadly true of all the great empire-building countries. industrialism grew up. 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. In sum. 132 . Italy followed France and Great Britain into Northern Africa. the latter half of the nineteenth century was marked by the development of a new kind of economic Imperialism. The United States took over Cuba. The struggle for oil furnishes an outstanding example. and even then they died hard. and Germany.cloak of the mandatory system and each annexing Power pledged itself to administer its mandated territories in the interests of their inhabitants. France annexed 3 1/2 million square miles. which was greatly stimulated by the Second World War.
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. and behind it loomed the ever-growing threat of war. 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 133 . 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. All the world over. 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". Even in the case of Africa the partition. though accounted for partly by economic inducements. under Leopold. attempted to develop the Congo on lines which shocked the conscience even of an imperialist world. but it can hardly be disputed that the German drive for supremacy in Central and Eastern Europe. Belgium. the interconnection between the forces of militarism and capitalism was very much more complicated than it was in Czarist Russia. All the same. which had proved too tough a nut for even modern capitalism to crack: and China. had found itself at the mercy of the intrigues and rivalries of the great Powers. Nor can Germany's imperialism really be explained in exclusively economic terms. was inspired fully as much by nationalist and militarist sentiment as by the search for markets. economic Imperialism had become a dominant force in world politics. and Russia's drive in the East is to be explained much more in terms of militaristic power motives than of economic inducements. In Germany. was speeded up and universalized by the competitive prestige-seeking of the European Powers. Important as the economic factors of course were. though it largely used economic means.Russia and Great Britain squabbled over Persia and intrigued in Afghanistan and the States of Central Asia. as we shall see in a later chapter. they did not stand alone: side by side with them the old militaristic drives towards imperialist expansion persisted. because it could not be partitioned. France. it is an error to interpret the imperialist tendencies of the nineteenth and twentieth centuries entirely in economic terms. The great exception was China. Spain and Germany fell out in Morocco. One act of annexation led to another. 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.
The new imperialism was not identical with the old. did not cease to operate: they were merely reinforced when monopolist capitalism became the ally or the auxiliary of militant expansionism. with some semblance of law and order. deeply affected by changes in what Marx called "the powers of production". 134 . humankind may be forced to choose between continued disorder and imperial governance instituted by the United States. To what extent is imperialism older than colonialism? 2. Nor was the new imperialism at all welcome to important sections of the British capitalist classes. insisting that for practical or moral reasons the United States should never take on an imperial role. especially in the wake of the Cold War. and although in the nineteenth century it took on new forms. a global empire. But others dispute this contention. In the twenty-first century. the international community needs a new world order. materials and fields of investment.the attempt to monopolize colonial markets. 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. the old lusts for power. To provide the chaotic world. therefore. Imperialism is a very much older thing than capitalism. as it did in Japan as well as in Germany. 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. it has been asserted. a superpower that can speak on behalf of all countries and all peoples. but these economic forces did not operate in isolation from the political forces. which cannot be correctly represented as simply derivative or secondary. Even in Great Britain it was certainly not from economic motives only that Disraeli caused Queen Victoria to be proclaimed Empress of India. Activities 1. So one side of the argument goes. a power willing to use its military and economic resources to protect all against the forces of violence and anarchy. the old militaristic impulses affecting whole nations and particularly their ruling classes. or having to become. an empire. There is only one nation that can fulfill the task: the United States.
This distinction is important. and Chinese (Qing). sailors. however. thereby establishing some semblance of regional order. with the central government establishing its authority over all parts of its territory. This essay seeks to put empires and imperialism in the context of modern world affairs and to discuss how they contributed. These landed empires were joined by the maritime empires of Britain. and missionaries from the maritime powers infiltrated their lands. we obviously do not have in mind such a situation. in India during the 1850s when Britain displaced the Mughal Empire with its own colonial regime. at least after the Civil War. grew as a territorial empire during the nineteenth century. France. Spain. This was an age of multiple empires. or failed to contribute. the globe was dotted by huge territorial empires. These were traditional imperial states under the rule of dynasties whose origins went back several centuries. The system of international law that had originated in Europe in the seventeenth century steadily spread to other parts of the world. to stabilizing international order. and by examining what these might mean in today's world. or of the United States having become an empire. since much depends on what historical antecedent one is referring to when one talks about an empire. and East Asia. and southward. South Asia. even as merchants. Mughal (Mogul). and all these empires. One might include the United States in this list as well: it. traditional empires of the Middle East. and other European nations that superimposed a commercial regime over the vast. Persian. On the whole. In the first half of the nineteenth century. When we talk of empires today. It cannot be denied that there was a time when empires provided some sort of world order. Rather. They governed essentially contiguous territories. as well as other independent states. The relationship between the landed and maritime empires was sometimes violent--for example. by noting what empires and imperialism have meant in the past. too. westward.A historian can only contribute to this debate by historicizing it--that is. 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. Russian. 135 . these territorial and maritime empires constituted an international order. Until the last decades of the nineteenth century. the traditional empires continued to function. expanding northward. including the Ottoman. multiethnic populations and kept (with varying degrees of success) local tensions under control. entered into treaty relations with one another. They presided over large.
began to view Japan's growing power with alarm. resources. the two countries fought on land and at sea. The Russo-Japanese War (1904-1905) and its aftermath serve as a good illustration. A handful of nations whose empires were both territorial and maritime exercised the new imperialism. The other Great Powers. great military powers such as Britain. the United States and Japan 136 . The two empires had fought an imperialistic war and. had decided to preserve their imperial spheres through cooperation. Within two years of the war's end. The new imperialists vied with one another for control over land. Once acquired. assuming their own imperial domains would not be directly threatened by the conflict or its eventual outcome. these empires at times managed to establish some sort of world order. Victorious. although the United States. turning the former into its colony and the latter into its base of operation on the Chinese mainland. this first major war of the twentieth century was a typically imperialistic war. with its empire in the Pacific. 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. the United States. the Middle East. Japan won control over Korea and southern Manchuria. and in the process they fought many colonial wars. Such behavior was typical in the age of the new imperialism. The other imperialists essentially stood by. and these colonial regimes were in turn protected by officers and men sent from the metropoles and by troops and police recruited locally. Ignited by Russia and Japan's clashing ambitions in northeast China (Manchuria) and the Korean peninsula. but not on Russian or Japanese soil. and people. thereby emerging as world powers. Asia. the Chinese and Koreans themselves had no say in this war that would determine their nations' futures. Russia. 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. When negotiations to define their respective spheres of domination failed. Still. moreover. these lands were governed by cadres of administrators recruited both at home and in the colonies. and the Pacific were carved into their colonies and spheres of influence. just as quickly. however. Germany. France. Most of Africa.Likewise significant. Russia and Japan reconciled and agreed to divide Manchuria (and later. and Japan incorporated overseas territory into their respective domains. Instead of producing global chaos and anarchy as a consequence. Inner Mongolia) between them. accepting the new status quo in Asia. did not intervene. but in the end the United States offered mediation with a view to preventing further bloodshed and regional disorder.
The age of the new imperialism coincided with the quickening tempo of technological change and of international economic interchanges. while the Russian Empire. sovereignty in the Philippines. More fundamental was the emergence of antiimperialism as a major force in twentieth-century world affairs. the 'civilized' and the 'uncivilized. and racial--but above all. The empires of Britain. despite the movements against colonialism that were developing in those colonies. the empires had committed collective suicide--but that was only one reason behind the demise of imperialism.S. the only non-Western Great Power. Guam. and Japan and Germany in combination collided head-on with the remaining empires of Europe and the United States. Anti-imperialistic nationalism had many sources--ideological. more and more quantities of goods and capital crossed borders. France. the imperial powers colluded with one another to keep their respective colonial populations under tight control.reached agreement that they would not challenge their respective empires: the United States would not dispute Japanese control over Korea or southern Manchuria. for support. The Japanese also accepted French control over Indochina and Dutch control over the East Indies. In that sense. Under Nazi leadership a new German empire emerged. political. but they were no longer capable of providing the globe with system and order. Austrian. They might have tried to cooperate with one another to preserve the new imperialism. but Japan chose to identify itself with the other imperialists. Some of these movements' leaders looked to Japan.' The world of the new empires had its heyday at the beginning of the twentieth century. but it was also the beginning of the end of all empires. was undone by the revolutionaries who came to power during the war. and Japan would not infringe on U. World War II was an imperialistic war. new and old. it was fostered by the development of the transnational forces that are usually identified as globalization. or Hawaii. and the United States did not disappear. The world order they established entailed a division of humankind between the ruler and the ruled. and 137 . but they had neither the will nor the resources to do so. By seeking to destroy each other. and Japan began challenging the existing empires in Asia and the Pacific in the 1930s. but it disintegrated rapidly following the Great War. Imperialistic collusion broke down. The German. Japan. the powerful and the weak. At least for the time being. and Ottoman Empires collapsed after the four years of fighting. social. on the opposite side of the conflict.
facilitated the new imperialism. it is often argued. bringing people of all countries closer together. Anti-imperialists could use 138 . it also provided favorable conditions for the emergence of anti. the steamship. But it is also clear that globalization facilitated the growth of colonial resistance to imperialist domination. anti-imperialists in Tunisia. for the economic transactions and technological developments of the day. reinforcing anticolonialist sentiments.imperialism. and helped eradicate diseases in their colonies and spheres of influence. thanks to the development of the telegraph. thereby modernizing these areas and incorporating them into an increasingly integrated globe. India. The imperial administrators built roads. Imperialism would have ceased to function if such blurring continued--and that was why.imperialism proved to be a far stronger imperative than imperialism.distances between people of different countries narrowed dramatically. The blurring of the distinction took many forms: mixed marriages between these two groups of people. Before the Great War. anti. Egypt. it undermined one essential condition of imperialism: the rigid separation of colonizer and colonized. To the extent that globalization was an integrative force. China. 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. and the education of colonial elite in the schools and universities of the European metropoles. And in the end. and many other devices. at another a system of rigid social and cultural distinction was maintained. to develop. in short. compradors acting as middlemen between colonial administrators and the native populations. if not impossible. economic globalization would have been much more difficult. Korea. the automobile. The empire provided a political and legal framework. Without the international order sustained by the imperial powers (in particular. backed up by military force. even that they were two sides of the same phenomenon--something like the development of a stable and interdependent world order. Such distinction in turn aroused resistance and opposition from the indigenous populations. even while colonizer and colonized were intermingling at one level. it is possible to say that imperialism and globalization reinforced one another. by the British Empire). established schools. If globalization. Thus. the telephone. if one accepts such a perspective. 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.
Instead of a handful of large and powerful empires providing law and order in the world. was not reinforced by this process but. when economic globalization resumed. Imperialism. Global governance would no longer be based on a vertical division of the world into the ruling 139 . The processes of globalization that had facilitated imperialism were now encouraging the spread of anti-colonial nationalism. before the Great War it had not significantly weakened or altered the structure of imperial governance. anti-imperialist movements grew so strong that by the end of World War II. then nationalism would define the twentieth. Yet even as large numbers of colonial troops were recruited to fight for their respective masters. after World War II. now. The former empires that were now shorn of colonies. the radio. and they could even establish transnational connections and convene international congresses against imperialism. Although some in the metropoles supported the anti-imperialist movement. the newly decolonized countries. nationalism had come to be seen as a plausible alternative to imperialism as the basis for reconstructing world order. as country after country achieved independence in Africa. the Middle East. and elsewhere. they could use the mass media and circulate handbills and newspapers among an increasingly literate populace. sovereign states were expected to act as both the constituents and guardians of the international system. buttressed by such technological inventions as the airplane. or to prevent another calamitous war from breaking out between themselves. They would ensure domestic stability while at the same time cooperating with one another through the United Nations. This became quite evident after the Great War. however. If empires had defined the nineteenth century. and the countries that had been independent but non-colonial states--all would be equal players in the postwar world order. 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. was eclipsed by an ever-more vociferous clamor for national liberation all over the world. and the cinema. Asia. an organization whose basic principle is national independence and sovereignty. the war experience did nothing but encourage the growth of anti. When the remaining imperial powers failed to respond in unison to such voices. on the contrary. 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.railways and steamships to travel long distances and organize resistance movements.imperialism.
could not be contained even by the Cold War's new empires. social. sought to subordinate separate national interests to considerations of collective wellbeing. however. but instead established through a horizontal system of cooperation among nations of presumably equal status. Africa. The United States. With rare exceptions. as providers and sustainers of local and international order. and few countries were willing to give precedence to the principle of international cooperation. Globalization proceeded apace after World War II. although in practice they did not always find them compatible with their global strategies. it was well recognized that globalization implied some sort of trans-nationally shared interest--but it was not put into 140 . but this was not because of the Cold War or postcolonial nationalism. The two countries. which controlled the domestic affairs of their allies and client states to maintain local order. they did not discourage nationalism. the United Nations proved incapable of preventing such conflict when national interests collided.imperialism. The idea had always been there--after all. once unleashed. managed to prevent a third world war from erupting. the Middle East. Regional communities. 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. and the Soviet Union.powers and all the rest. preached ideological anti. Both superpowers supported colonial liberation movements. 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. for its part. The history of the world in the second half of the twentieth century was to show. most notably the European Economic Community. and Latin America often refused to heed the dictates of the Cold War antagonists. we are in effect saying the United States and the Soviet Union behaved like erstwhile empires. 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). Economic. Meanwhile. after all. But it must be recognized that unlike the nineteenth-century empires. Nationalism. If we accept this view. but rather in spite of them. the independent states of Asia. continued to espouse the principle of national self-determination.
and Southeast Asia. international nongovernmental organizations and multinational enterprises increased even more spectacularly. The question. forces for transnational interconnectedness were strengthened. pursuing only their internally shared interests.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 Middle East. these non-state actors together promoted globalization and a sense of transnational interdependence. fresh national rivalries were unleashed. and it was joined by newly formed nongovernmental organizations that were transnational in character. 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. by themselves. now joined by Britain. Central Asia. and independent states continued to look after their own parochial interests. 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. as Cold War tensions abated. and its success encouraged similar. 141 . Whether such regional entities would. The United Nations sponsored conferences to deal with them. if smaller-scale. then. While the superpowers worked to advance their own geopolitical agendas. evoking calls for collective response. succeed in establishing a new international order remained to be seen. fracturing Africa. During the 1970s and 1980s. it is the question at the heart of the contemporary debate on empire. stable order. such as Friends of the Earth and Amnesty International. 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. At the same time. The number of non-state actors grew rapidly after World War II. Indeed. they might end up dividing the world. During the 1970s. The European Economic Community. for instance. Acts of international terrorism also aroused global awareness. Whereas in the quarter century after 1945 the number of independent states nearly doubled. 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. steadily effected regional integration. such as the Association of Southeast Asian Nations and the North American Free Trade Area. If such communities developed as exclusionary groupings. arrangements elsewhere.
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. Both were serious challenges to the whole world. biological. then. 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. For those who believed that international order must be buttressed by a great military power willing to use its resources for this 142 . globalization had coincided with the new imperialism. regional communities. A hundred years ago. It may have been for this reason that some began to look back fondly on empires as providers of international order. grew spectacularly in the last decades of the century. but on the transnational activities of individuals and organizations. and when the Cold War was ebbing. that international organizations of all sorts. and non-state actors. requiring an effective response from all--states. but especially of the nongovernmental variety. It was no accident. Such cooperation. and chemical weapons across national boundaries. however. 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. would take a long time to develop. the proliferation of nuclear. At a time when sovereign states were proving incapable of constructing a viable international order.These issues were no longer confined to specific countries or regions. Can such transnational forces and activities somehow manage to combine to establish a global structure of governance? That is the major challenge today. international organizations. international organizations. These were all aspects of the globalizing trend of international affairs. 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. Would the regional communities provide the answer? If not. and the other. regional communities. nineteenth-century-style imperialism had long since disappeared from the scene. By the late twentieth century. One was the frequency and geographical spread of international terrorism. 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.
quite independently of the transatlantic ties. In other words. What may have worked briefly a hundred years ago cannot be expected to reappear and function in the same way today. and it would need to be mindful of the transnational networks of goods. On one hand. it has no legitimacy in the international community. the world powers chose war. Moreover. It would be the empire for the twenty-first century. Such an empire would have to accommodate different civilizations from all regions of the Earth. in its twenty-first-century incarnation. If a new empire were to emerge. and individuals. and some Latin American and Middle Eastern countries are likely to develop as centers of economic and even military power. by governments.purpose. India. On the other hand. which is. There is. private organizations. can no longer claim the same degree of hegemony in world affairs. at least in theory. it would not be able to function if it were identified solely with the West. constructed on the principles of national self-determination and human rights. and individuals that constitute global civil society. But today there is little tolerance for any sort of imperialism anywhere in the world. 143 . To the extent that the new imperialism of a hundred years ago was largely a product of Western civilization. The nation would carry out the functions that the earlier empires had performed. another nineteenth-century legacy that might. capital. the Permanent Court of Arbitration in the Hague. a new empire for the new millennium would not be an empire in any traditional sense. the Atlantic world. today we must reckon with the fact that non-Western civilizations have grown in strength and self-confidence. however. the United States provided the ready. Although old-fashioned imperialism is far from dead. despite the internationalists' ardent pleas for peace and understanding among nations. and possibly only. therefore. ideas. The Olympic Games were one example. China. answer. It is sometimes forgotten that the age of the new imperialism was also a time when modern internationalism was vigorously promoted. another. European countries have tended to move within the framework of their regional community. which dominated modern international relations and of which the United States was an integral part. Yet the contest for influence between imperialism and internationalism appeared to be decided in the former's favor when. They sought an alternative to a world order that was dominated by the imperialists. provide a more relevant solution to today's problems: the legacy of internationalism. The internationalists established transnational organizations and convened world congresses.
assisted by a host of nongovernmental organizations. and while it proved powerless to check the aggressive imperialism of Germany and Japan in the 1930s. 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. should not serve humankind today. rather than the legacy of the briefly dominant new imperialism. and their certain demise was implicit in the establishment of the League of Nations. there actually are other ways of securing international order. and universal equality and justice under the law. kept up the efforts--even during the dark days of World War II--to define norms of behavior for nations and individuals. The international body. we would do better to explore the alternative. The United States and Great Britain. After all. that empire would have to embody principles of human rights and justice for all.But the Great War proved to be the swan song of empires. an internationalist project par excellence. its internationalist vision never died. Even if somehow a new empire were to emerge. crimes against humanity. Since such a development is highly unlikely. 144 . efforts that laid the ground for conceptions of human rights. And there is no reason why the internationalist legacy. even as they fought against the Axis Powers. without hesitation embraced this internationalist legacy that became the basis of the United Nations. It would have to be an empire of freedom in support of the emergent transnational institutions of global civil society.
with the home market mainly in view. rice and timber. to lie less in production for export than in the growth of a balanced system of agricultural and industrial production. The future of the United States seemed. and from that time grew with astonishing speed. The chief exporters at this stage were still the planters of the Southern States. a country potentially far wealthier than any other. 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 export of cotton became important at the very end of the eighteenth century. During the earlier part of the nineteenth century 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. 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 -. the economic development of the United States has largely fulfilled this idea of internal self-sufficiency. The export of wheat came much later and did not reach large dimensions until well after the middle of the nineteenth century. with the most fertile territory and the vastest natural resources in the world at its disposal.and for such raw materials as are not found in sufficient abundance in the United States. despite a considerable growth of manufactures and an early resort to mechanical power for both production and transport. The Northern States were peopled chiefly by farmers producing for their own subsistence or for the home market.Lecture Five The Growth of the United States Across the Atlantic. The growth of the slave population of the Southern States was indeed bound up with the development of production for export. for the most part. Save in these 145 . who used slave labour for the growing of crops suitable for large-scale production. on a small scale and were hampered in applying the new techniques of power production by the limitations of the domestic market. then. Industries were. Despite the vast growth in the scale of enterprise.indigo.especially capital goods -. had been developing its economic life along lines radically different from those of Europe.the leading commercial crop in the eighteenth century -.
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. this tendency was temporarily reversed. and both would have become great manufacturing powers whatever fiscal policy they had chosen to adopt. but industrial development would not have been stopped. and tariffs were revised on the whole in a downward direction. Its outcome made certain the dominance of Protectionism over the United States as a whole. however. From this time onwards high and increasing Protection was the established basis of American fiscal policy. The battle between the North and South. a new epoch of Protectionism began. although it might have taken somewhat different forms and the relative proportions of 146 . and would have maintained a larger rural population and a larger volume. in consequence. finally fought out in the Civil War. if it had clung to a Protectionist system. One undoubted effect of Free Trade was to give a very great stimulus to the export of British capital. of agricultural production. would probably have specialised much less in the great exporting industries. in the long run. From 1861. British influence in speeding up the industrialization of other countries would thus have been lessened. Great Britain. under the conditions which existed during the nineteenth century. 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. were obviously suited to industrial development. by reason of their natural resources. and that of agricultural production even faster. and British capitalism would have been less international both in its dealings and in its economic outlook. and in 1864 the average level of duties was three times as high as it had been under the Act of 1857. 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. 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. have been less wealthy and its citizens would have acquired a much smaller quantity of overseas investments. such as cotton. Both countries. almost certainly. The country as a whole would. But during the next two decades. the home market always remained the most important consideration. 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 emergency duties levied largely for revenue during the Civil War were not removed. than they actually were. The growth of industries would probably have been slower.areas.
cannot be applied to the United States. Immigrants. The American tariff has been a great nuisance to Europe. 13 millions. but it does not follow that it has held back the growth of wealth and prosperity in the United States. The population of the United States doubled between 1860 and 1810. 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. but the familiar view that. and that America would have become a greater exporter of manufactures if Protection had not artificially raised the costs of production. came in the later decades much more largely from Southern and Eastern Europe. The negro population rose from 4½ millions in 1860 to 10½ millions in 1920. now that the United States has become a great creditor country. There are strong economic arguments against the maintenance of the high American tariff. In successive decades from 1860 to 1920 it rose by 8 millions. 16 millions and 14 millions. 3 millions. 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 -. 466 in Western 147 . compared with 194 in France. creating a problem of national assimilation which has not yet been wholly solved. 9 millions and 6 millions. 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. the United States remains a sparsely populated country. in relatively small countries. are clearly marked by the growth of American population and output.different industries might have been radically altered. Even with a population of more than 150 millions in 1950. For the United States. 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. 4 millions. but probably wages would have been lower too. though it became much less intractable when the door was closed to free migration after the First World War. This latter statement is certainly true. is the largest Free Trade area in the world. In the same decades immigration accounted in round figures for 2 millions. 10 millions. The stages by which the United States came to be the world's greatest producing area. who were drawn in the earlier decades chiefly from Western Europe. 12 millions. but constituted by 194 less than 10 per cent of the total. behind its high tariff wall. Thereafter immigrants were admitted only under a quota system which discriminated according to the country of origin. and trebled between 1860 and 1914. but the first is doubtful.this would not prove that Free Trade must necessarily have the same effect within each separate country. 5 millions. The cost of living would certainly have been lower. and the total inflow was greatly reduced. It has under 50 inhabitants to the square mile. though not the most important in foreign trade.
and had nearly doubled again by the 1920s. Despite the rapid growth of industries. In 1860 the total output of coal was under 15 million tons. 9 per cent in public employment and more than 32 per cent in trade. In steel. For the same period the total value of exports rose fivefold and that of imports more than fourfold. and rose more than fourfold between 1870 and 1910. The value of farm products. Up to the 1870s imports exceeded exports in value. over 6 per cent in construction. but had four times as large an output in 1913. doubled again in the next and again in the next. reaching nearly 160 million tons in 1890. more than doubled between 1870 and 1900. and about 750 in England and Wales. and multiplied five times between 1870 and 1900. as against less than 28 per cent in manufacture and mining.Germany. on the other hand. finance and personal and professional services. and over 600 million tons in 1920. Wheat output was nearly three times as great in 1880 as in 1860. finance and other private services. the United States was just behind Great Britain in the 1880s. Meanwhile. A considerable part of the population is still rural. till it was nearly four times as large in 1910 as it had been half 148 . The urban population of the United States more than doubled between 1880 and 1900. 6 per cent in transport and public utilities. even in 1940 nearly 20 per cent of the total working population was still engaged in agriculture. In Great Britain. the proportion of the total working population engaged on the land in 1951 was well under 5 per cent. It was over 500 million tons in 1910. forestry and fishing. It surpassed the British output in the early 'nineties. rose tenfold between 1860 and 1910. 3⅔ per cent in mining. 7½ per cent in transport and communications. The United States became a creditor nation only during the First World War. and was nearly three times as large as the British and twice as large as the German output in 1913. 3½ per cent in the armed forces and 28 per cent in trade. as against more than 37 per cent in manufacturing industry. and rose again rapidly in the 1890s. 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. Side by side with the advance in manufacturing industry went a rapid growth of agricultural production. the output of pig-iron was trebled between 1850 and 1870. This was doubled in the next decade. but since then the growth of towns and industries has been astonishingly rapid. according to the census returns. In 1920 nearly half the total number of inhabitants in the United States were still classified as living in rural areas. 6 per cent in public services. according to the census returns. The value of American manufactures. 5 per cent in construction. whereas the rural population is still less than double what it was half a century ago. Right up to 1914 the Americans continued to import capital. Perhaps the clearest sign of the rapid industrialization of the United States is the growth of coal production.
as the new lands of the West were gradually opened up. but thereafter ceased to grow as the free grazing area was reduced by the advance of arable cultivation. The export of grain rose from 20 million bushels in 1860 to 293 million bushels in 1880. the surplus available for export fell off sharply. For the five principal cereals. the export of meat rose from 46. 149 . rather than for their mutton.such as rubber and tin. The great rise of American agricultural exports occurred in the latter part of the nineteenth century. only to fall off still more sharply as home consumption grew. for which.and still is to-day -. but showed thereafter a small decline. it was 530 million bushels in 1897-8 and only 168 million bushels in 1913-14. while the cotton crop was between three and four times as large in 1910 as it had been fifty years before. 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. In the twentieth century the U.A. After 1918 the United States fell to a position of declining importance as an exporter of foodstuffs. The number of pigs nearly doubled between 1860 and 1900. but raw cotton still retained its position as the most important single article of export. Above all. but there had been a great advance in the use of farm machinery and also in the large-scale marketing of farm produce. sheep are chiefly raised in the United States. Similarly.a largely selfcentred economic unit. These great increases in agricultural output were achieved mainly under a system of small-scale farming. The production of wool. came to be by far the largest exporting and importing country in the world. with increasing consumption at home. and only 18 per cent of more than 175 acres. despite its vast demands on world supplies of materials in which it is deficient in domestic resources -.S. But thereafter. and in comparison with their total volume of production the proportion of exports was much smaller still. The number of cattle in the country more than doubled between 1860 and 1890. but greatly increased its importance as an exporter of a wide variety of manufactured goods.000 tons in 1870 to 550. and the average agriculture holding was actually smaller in the 1930s than it had been in 1860.a century before. In comparison with Great Britain or Germany the United States was still -. Nearly 60 per cent of the farms in the United States were of less than 100 acres. and even before the First World War it was second in exports and third in imports. 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.000 in 1880. grew more than fourfold between 1860 and 1910. and it then nearly doubled again by the middle 'nineties.
which did not need it -. the balance could hardly have been restored without a very great diversion of European purchases from America to non-dollar sources of supply. ceased to follow this policy in the 1930s. has undoubtedly a higher living standard than has ever been achieved elsewhere.in payment for necessary imports. and even if it had not. The consequences for other countries were sometimes most unfortunate. 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. was liable to dislocate conditions in the world market. 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. In 1929. and any fluctuation in the domestic demand.during the 1920s. and the difference has since become substantially greater. The world's gold piled up in the United States -. which can be sustained only if such a nation continually makes large overseas investments -.Nevertheless. But it has spread in recent 150 . But a very large section of the American people. for although the Americans were in a position largely to ignore the rest of the world.especially in Germany -. on the eve of the world depression. There is nothing new in this American superiority in wage-levels. and the American standard of living is far from being uniform over the whole country. 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. For a great creditor nation to maintain a large surplus of exports over imports is a very anomalous state of affairs. and thus contributed greatly both to the coming of the world crisis and to its prolongation. especially for raw materials. especially in the South. so far as the more skilled workers are concerned. But the Americans between the wars. a policy of Protectionism remained in force.or outright gifts -to restore the balance. including most of the industrial workers. other countries could not afford to ignore the United States. and in terms of gold two and a half times as high. Meanwhile. 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. 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. There remain great areas of comparative poverty. though some reductions were made in the American tariff. It was relatively almost as marked half a century ago as it is now. after investing largely in Europe -. the American wage-level was in terms of purchasing power nearly twice as high as the British.
increasingly active in pressing their political claims on the established parties. comparable with those of Europe. 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. 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. 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 absence of a class-conscious Socialist movement. despite recurrent crises. The disparity. as in Europe.intensity in production in agriculture and industry 2. who used to be largely immigrants paid at much lower rates. 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. though they have become. and the Trade Unions have shown no disposition to become the nucleus. a prospect of very high profits for the successful business adventurer. of a Socialist political party. 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. has been characteristic of America right up to the present time. Discuss the effect of scarcity of labour on the American economy as regard (i ) level of wages and (ii) capital. moreover. 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. is not confined to the working classes. It runs right up the social scale. The immensely rapid advance in the exploitation of American economic resources has meant throughout the history of the United States. This temper has contributed greatly to the instability of the American business system and has exaggerated its repercussions on the rest of the world. 151 . since the world depression of the 1930s. Explain ‘technological convergence’ in the context of the rapid pace of technological change in the USA economy during past centuries.times to the less skilled. but have now been absorbed and have learnt the arts of combination which used to be the prerogative of the skilled crafts. The American Socialist movement has been able to exert practically no influence on national policy.
India and China both became vitally important markets for British manufactures. The China trade also grew in size and value. and India became a field for the large-scale investment of British capital as well as for the export of Lancashire's piece goods. The East India Company controlled the trade with China as well as with India. and the Chinese were compelled to open Shanghai and three other ports to British commerce. Great Britain had thus secured for its merchants by far the largest share in the available trade with the Far East. In 1853 152 . the China trade acquired a new importance. in conjunction with the other Western Powers. As the nineteenth century advanced. became the great depot for the British trade with Southern China. 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. based on domestic spinning and on the handloom. Great Britain forced China to admit Indian opium. Hong Kong. annexed in 1842. but the native cotton industry of India. in addition to Canton. Indian railways. the Far Eastern market grew steadily in importance. irrigation works and other public enterprises were constructed mainly with capital borrowed from Great Britain and with capital goods made by British engineers. and soon. and the British East India Company had grown from a corporation of traders into the government of a great empire. especially after the Opium War of 1840-42 had forced the Chinese to open the interior to foreign trade. through which alone trade with Europe had previously been allowed. suffered disastrously from the competition of the machine-made cloths of Lancashire. With the introduction of tea-drinking as a habit among larger and larger sections of the people. and after the rise of the cotton industry in England. Trade with India became less like open rapine and more a real exchange of goods. and British merchants were able to build up a great position as middlemen with continental Europe in Far Eastern products.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.
The Japanese occupied and subsequently 153 . Japanese capitalism grew up under State tutelage and as the auxiliary of the aims of the governing military caste. With extraordinary thoroughness and imitative competence. Military success secured the recognition of Japan as a World Power by the great Western countries. with the aid of the cheap labour which Japanese industry was able to command. under new bureaucratic rulers. Japan felt even more strongly than the Western countries the impulsion towards a policy of militant imperialist expansion. the impact of Western ideas on Japan had very different results.the Americans. was reformed and made convertible into silver. to imitate the West both in military and naval equipment and in methods of economic enterprise. and after a phase of bimetallism Japan finally came over to the gold standard in 1897. and its new status was consolidated by the alliance with Great Britain concluded in 1902. 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. had to accept a limitation of its Customs tariff to 5 per cent and to grant foreigners special privileges in its markets. remained in its own life almost unaffected by Western influences. forced open to Western products the closed markets of Japan. but from the Revolution of 1867 the Japanese set themselves. at first mainly in imitation of the United States but later more extensively on European models. At the same time. The currency. But whereas China. previously much inflated. as well as China. Japan had long been the home of a culture largely not its own but borrowed from China. With a narrow and infertile territory and a rapidly growing population. 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. The Bank of Japan was founded in 1882 as a Central Bank with a monopoly of note issue. under Perry. and seeking to build up an export market in China and the other countries of the Far East. developing the production of iron and steel and engineering goods as well as of textiles. By stages the Japanese drove the foreign merchants out of the points of vantage for the conduct of overseas trade. 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's rulers modernized the industrial system. Japan. In the meantime. but without changing the theocratic and authoritarian basis of their State or accepting the laissez-faire gospel of Western capitalism. 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. They introduced Western banking institutions. even after the opening and extension of trade with the West.
but only to hold the main centres. even if they had been able to agree among themselves on a concerted plan of spheres of influence -. forced their way into sparsely populated Manchuria. It was widely believed that the old. having taken the Philippines from Spain at the close of the Spanish . and when the Russians descended on Manchuria in their quest for an ice-free port in the East. and on the whole American influence in the dealings of the West with the unfortunate Chinese was at this stage a moderating factor. While Japan was thus striding forward in the mastery of the arts of the West. even at the height of the penetration. an undignified scramble was in progress among the European Powers for the extension of their spheres of influence in China. Where Japan was to fail. but American policy. the Japanese writ. 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.which they were quite unable to do.annexed Korea. the European Powers. and of the mortgaging of more and more of Chinese internal revenues for the service of external loans. After 1905 Japan replaced Russia as the leading Power in North-East Asia. and became masters of its rich economic resources. when the British seized Upper Burma. As the idea of partitioning the country was abandoned. 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. unlike that of the European Powers. had also become more closely concerned in the Chinese question. whose forces could not live on the country. It was largely owing to the Americans that the idea of partitioning China between the European Powers and Japan had to be given up. such as Manchuria. but China was tough and remained finally unassimilated. Even the Japanese discovered this. Outlying areas. Indeed this process had already begun on a small scale. It had never been really workable. The United States. 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. there was a growing tendency for the Powers to act in concert. never ran in the interior beyond the garrison centres and the communication lines. The British had instituted it when they annexed Hong Kong. which set out to put Chinese 154 . at least for a time. could not hope to succeed. and this finally led up to the Six-Power Consortium of 1912. Indeed. could be effectively subdued and held. despite the ability of their armies to live on the country. favoured the "Open Door" for the commerce of all nations. and it had been continued when the French extended their Empire in IndoChina. It was possible to occupy large areas.American War.
and during the Second World War there were further big developments in India. China was the one great territory in the world easily open to new imperialist aggression. Great Britain. was the pioneer in this process of industrialization. Moreover India. Amid the unhealthy manifestations of economic imperialism. the industrialization of the Far East was effectively begun. objecting to the proposed drastic interference with Chinese internal affairs. and later profited by the Russian Revolution further to extend its control in Manchuria and Northern China. 155 . the United States. But subsequent history has shown that it is a good deal easier to establish a central government in China than to maintain its authority. Germany was practically eliminated as a result of the war. China. and. Japan got more and more of a free hand in Manchuria and in the Shantung Peninsula. 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. was unable to establish an enduring government over the whole country. After the effective partitioning of Africa had been completed. Great Britain. and. concerned mainly with the South and the Yangtse Valley.finances in order for the benefit of foreign creditors and investors. Japan used the opportunity presented by the first European War to extend its influence and to exact arbitrary terms from the Chinese. Far Eastern industries began seriously to threaten the supremacy of Western products in the Eastern markets. cared little what happened in the North. France. but after 1914 it spread in both India and parts of China. Japan and Russia were all parties at this stage to the Consortium. China had thus been for many years before 1914 the meeting-place and chief quarrelling ground of all the great imperialist Powers. as we saw. especially during and after the First World War. and as French interests were also mainly in the South. Russia was for the moment eclipsed. in the heavy industries as well as in the manufacture of cotton goods. Germany. Japan. had been passing through a series of revolutions. and to accumulate large sterling balances. meanwhile. caused the United States to withdraw. and the Consortium fell to pieces. It has still to be seen whether Chinese Communism will succeed where previous revolutions have failed. out of the proceeds of war exports. was able to repay the capital belonging to British investors. where the Japanese had inherited the concessions seized from Germany during the First World War. but in 1913 President Wilson. hampered by foreign debt and intervention and by foreign control of Customs policy.
Meanwhile. In India. however. too. and even manufacturing production. was fully capable. up to 1914. outside its own home market. Before long. for example. By Western standards Japanese labour and techniques of production were still up to that time at a low standard of efficiency.The competitive power of Japanese industry in foreign markets was based from the first on a plentiful supply of cheap labour. outside a few centres. for example. of meeting the competition of the Japanese exporters of cotton goods. especially in the Eastern markets. however. however. though they still remained exceedingly low by European standards. wages in Japan rose fairly fast. even apart from the effects of Gandhi's propaganda. The greater part of Lancashire's former markets in the 156 . Japanese employers began to complain of the competition of the cheaper labour of India and China. a really important competitor. but even with its aid Japan had not become. On the whole. it has even now advanced in both these countries only a very little way. and Japanese industry had no advantage in total costs over the Western countries. by interrupting the supply of European goods to Eastern markets. of Great Britain. In China. until after 1914. Lancashire. the advance in Japanese industrial efficiency more than kept pace with the rise in wages. and at the same time the efficiency of Japanese production was considerably improved. The First World War. above all. still largely takes the form of handicraft. despite their much higher wage-levels. It is still in spinning rather than in weaving that the greatest advances in factory production have been made. Although industrialism was thus making a beginning after 1914 in India and China as well as in Japan. As Japanese industrialism developed. gave the Japanese their opportunity. the quantity of cotton goods produced in the factories is still small in relation to the amount produced on handlooms. of the European exporter. Japan's exports rose sharply. The overwhelming majority of the people in India and China are still employed on or about the land. 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. This continued activity of handloom production has not. 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. where labour could be got at an even cheaper rate. and. and as costs had risen in Great Britain and the other European countries Japanese competition with their exports became much more effective. 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. the handloom still supplies the needs of a large part of the rural population.
But Russia had. There is no inherent reason why. the very small size of the crowded peasant holdings. which remained upon a silver standard. Moreover. tried to meet the situation by cutting their prices. except Malaya. all overrun during the war by the Japanese. the density of population. Burma. had to sell its goods abroad at prices measured in gold. but in none of them. China and India. The Japanese merchants. and. with Government aid. both China and India should not do what Russia has achieved under its successive Five-Year Plans -. however. enough capital to finance the ambitious schemes of industrial reorganization on which the Communist Party embarked. the great advantage of being thinly populated in comparison with the countries of the Far East. There are. This decreased enormously the external purchasing power of countries such as China. and this meant asking the Chinese buyer a very high price in terms of silver. 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. 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. were handed back to their European rulers when Japan surrendered. For India and for China. It was difficult enough for Soviet Russia to abstract. carry through a thorough-going reconstruction of their entire economic systems. in the short run. and this of course reacted still further on the position of exporters in the Western countries. Undoubtedly recent changes in industrial techniques have reduced the comparative advantages of the more advanced countries. Malaya.Far East has certainly been lost for ever to the cotton industries of Japan. above all. from this standpoint. on lines of hugescale collective organization based on the use of mechanical power in its most developed forms. the economic difficulties of the Far East were greatly accentuated between the wars by the fall in the value of silver. 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. including agriculture as well as industry. 157 . insuperable obstacles in the way. At the end of the Second World War. in the long run. at the expense of the low standard of life of the great mass of the people.that is. 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. was there any real possibility of a return to the old system of colonial exploitation. in those which remained on the gold standard. being on the gold standard. Japan. the Dutch Indies and Indo-China.
largely because the rapid increase in population absorbed the resources of the country in the fight against sheer famine. can be regarded as a convergence theory. a development that eventually leads to the separation of management and ownership. both directly and because they have made South-East Asia an obviously unsafe field for the investment of foreign capital. Alfred Chandler offers a dual definition of modern business. development slowed down. If we conduct our analysis at a very abstract level and consider the fundamental trend in business organizations. In India.Burma was given its independence along with India. both of which are organizational types closely associated with the development of modern. Chandler's model. In Indo-China the French became involved in a colonial war. War was also waged in Indonesia before the Dutch were compelled to accept an independent Indonesian Republic in union with the Dutch Crown. These struggles restricted economic development. Activity 1. and there are significant time-lags where different nations were involved. large-scale firms. there is indeed considerable evidence pointing toward convergence. too. 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. The modern firm usually has the characteristics of a managerial organization and employs either the U-form or M-form (typically the latter) structure. Each country has had different development characteristics. symbolizes modern business. We can characterize the systems as: competitive capitalism in the United States. based on this dual definition. 158 . and became a prey to civil war.1 Chandler's other definition focuses on management structure and emphasizes the U-form (Unitary-form) or M-form (Multi-divisionalform). cooperative capitalism in Germany. or managerial capitalism. 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. The advent of the managerial firm. and group-enterprise capitalism in Japan. One definition focuses on the formation of "managerial hierarchies." this refers to the rise of professional managers. especially at the outset. Yet this convergence process takes place along different paths. personal capitalism in the United Kingdom.
state-of-the-art technology. 159 . indicated that the business enterprises of latecomers would necessarily have different characters. Organizational capabilities thus played a critical role in Mitsubishi. In contrast. the owners of Mitsubishi. In Japan. For that reason. Gerschenkron's model thus provides a non-convergence theory that can be used to examine of the development of capitalism in Japan. whereas Mitsui and Sumitomo. Mitsubishi. It remained an "entrepreneurial firm" in the sense that its founders still owned and managed the enterprise. managerial capitalism was thus evolving. By adopting advanced technology from developed countries. even though in a different form than it was in the US.e. Gerschenkron's model. Mitsubishi. just as they did in the similar cases of Du Pont and the German family firms. powerful professional managers had control. they were called "political merchants. These zaibatsu tended to have close connections with government. ownership remained in family hands. family ownership.. which stressed the various paths followed in the development of capitalism. The owners' say was limited to final authorization. conglomerates with the following features: product diversification. special financing systems. Alexander Gerschenkron's model of development emphasized the different nature and paths of latecomer economic growth." although they were engaged not only in commerce but also in manufacturing and mining.In contrast to Chandler's model. there was in the case of Mitsubishi a partial separation of ownership and management even before World War II. and political intervention in the form of industrial policy. We can look in more detail at three examples. however. In Mitsui and Sumitomo. and nation-wide eminence. and the professional staff had the actual managerial capabilities. employed a large number of university graduates and ultimately it too created a managerial hierarchy. latecomers could rapidly catch up with the early starters. which already had long histories lasting several hundred years. had direct control because it was a newly-developing firm. and Sumitomo. had evolved past that stage. Latecomers were frequently able to gain advantages: larger scale. the Iwasaki family. it was the professional managers who directed these zaibatsu. ‘Furthermore. The Formative Years from the Late Nineteenth Century to World War II One of the most remarkable characteristics of Japan’s modern economic development was the appearance of zaibatsu. While the Mitsui family and the Sumitomo family were almost the only stakeholders. using the best known zaibatsu: Mitsui. i. Mitsubishi's case is quite similar to that of the Korean chaebol which developed after World War II. In Japan.
however. which rapidly expanded as a result of the acquisition of these assets. but they used the holding company form or H-form. In the beginning. The government tried for a time to do more than that. Rather. 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. But political relationships of this sort carry the risk that political circumstances will change. The General Headquarters of the Allied Powers ordered the "voluntary" dissolution of the zaibatsu and prohibited the use of zaibatsu names. which were thought to be one of the driving forces behind the war. Mitsubishi. With the end of the occupation. while the government's policy was most effective in developing infrastructure. such as Mitsui. but it then backed away from direct investment. For some years. It is nevertheless true that Japan’s industrial policy fits the Gerschenkron model very well. The government tried to foster industrialization by establishing and running state-owned factories and mines. private economic powers such as the zaibatsu were instrumental in developing Japan. effective structures. They began to hold regular meetings of 160 . each of the companies of the former zaibatsu was isolated. using organizational forms that we can call "group enterprise capitalism. the zaibatsu became less involved in politics. for the most part. even though government policy was not particularly successful in promoting the evolution of modern firms. with no special organizational ties or network with the other companies.The zaibatsu were characteristically diversified. Japan experienced a drastic change in its economic system. Initially. not the U-form or the M-form which Chandler depicted as "modern. succeed." This form was different than American capitalism. and Sumitomo. Japan in the Post-World War II Period After the defeat of World War II. the old constituent firms began to meet and exchange information. the zaibatsu succeeded in developing modern. the zaibatsu and the government were thus closely connected." Despite this difference. But these efforts did not. Mitsui and Mitsubishi especially maintained close relationships with the government. The main reason they drew together and reestablished their special relationships was to ensure protection against unfriendly takeovers by outside interests. The occupation army forced the dissolution of the zaibatsu. but both were increasingly coordinated through the visible hand of a managerial style of organization. and eventually. and the government sold the public organizations to the zaibatsu.
identified by the euphemistic expression of "subcontracting" companies). even compared to the United States) was partly due to the U. as does the ubiquity of managerial firms in Japan. These inter-market keiretsu do not have an hierarchical structure. which differs from the ideal type posited in the Chandler model. Some scholars hold that the hierarchical keiretsu (such as the Toyota group. the Honda group. a thorough form of managerial capitalism. and each member firm has an equal relationship in shareholding and transactions. This fullyachieved managerial capitalism (an extreme form. the Big Six kigyo shudan. like the Mitsui group. the Toshiba group. in Japan they also have an industry-wide H-form (Holding-company form). Although these large firms with many subsidiaries and affiliated firms have the multi-divisional structure which Chandler underlined as that of the modern firm. establishment of prestige. including the Fuyo group. the Sony group. occupation forces and partly to the continuation of the prewar trend toward control by professional managerial hierarchies separated from ownership. with complete separation of ownership and management. and others"4) is much more important than the inter-market keiretsu (namely.presidents and secretaries. This trend toward consolidation accelerated in the 1960s in a further effort to bolster protection against takeovers by foreign companies. can be called "hierarchical" because it is structured along the lines of parent/subsidiaries "affiliated" companies (at times. each of which make a member firm a parent company. Each member of the keiretsu is a large firm in itself. The strength of the inter-market keiretsu is debatable"5 because its functions are limited to particular activities like protection from outside interests. With this transformation. with numbers of subsidiaries and affiliated firms. in addition to the aforementioned Mitsui. the Mitsubishi group and the Sumitomo group (the direct descendants of prewar zaibatsu) were formed. the DKB group. Mitsubishi and Sumitomo). This secular trend fits very well in the Chandlerian model. the Matsushita group. inter-market keiretsu. was established in Japan. This particular form. and not in the classical form of dispersed shareholdings in a centralized corporation. and the promotion of 161 . In these inter-market keiretsu. family ownership no longer existed and mutual shareholding among member companies became deeply entrenched. the Canon group. In this way. and the Sanwa group. But it is worth noting that the change took place in a different form.S. through mutual-shareholding among firms. the Hitachi group. This hierarchical keiretsu is created by various spinoffs and acquisitions.
enterprise unions. 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. involving. The Japanese Management System (JMS) The JMS was established in the 1950s and 1960s: it included a new form of labour management. as I will explain later. outsourcing and downsizing have come to be regarded as crucial elements of business strategy. But recently. the JMS was becoming more competitive on a global basis. an idea that has aroused strong opposition. a close relationship between industrial engineers and shop floor workers). Accordingly. marketing. Chandler's model teaches us that bigness is beautiful. Japan's capitalist development thus follows a distinctive path. to the sort of managerial capitalism that Chandler emphasized. Instead of scaling up and diversifying. changes that are seen as indispensable for achieving competitive advantage. These hierarchical keiretsu evolved by spinning off successful parts as quasi-independent companies. In contrast. quality control circles. apply to Japan. especially in recent years. flexibility through job rotation." two of the vogue concepts in management circles in recent years. The lean production system of Japan 162 . as Gerschenkron suggested. The JMS was in particular based on hierarchical keiretsu. we see more and more US. Put differently. while also using acquisitions to extend and reconstruct their networks. This was particularly true in such assembly-type manufacturing as automobiles and electrical products. when the weaknesses of the American style of big business were becoming apparent. 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. life-time employment. and management. But recent developments in the United States and Japan raise doubts about this interpretation of modern business evolution. it was a JMS form of "outsourcing" and "downsizing. During the years since 1970. and respect on the part of industrial engineers for on-site experience (thus. (and Japanese) firms spinning off subsidiaries"9 and tightening their strategic focus. the seniority system. for instance. the two Chandlerian themes. the rise of managerial capitalism and the shift to coordination through the visible hand.large-scale inter-firm projects. 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. Hierarchical keiretsu made a parent company slim and made it desirable to purchase from suppliers. Basically.
Organizational flexibility dictates that structural forms should and can change according to the shifting demands of the environment (especially the market and technological environments).' is now the mainstream of development in assembly-type manufacturing. chemicals. In such situations.g.. In high-tech industries. but the U. firms have generally been strong because they continued to invest. adopted the Uform and then the M-form. competition has intensified.S. software. and computers). we must consider the venture capital business in the United States.-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. This new form. U. more and more integrated. which attracts our interest because of its agility. From a long-term historical perspective. the goal of organizational flexibility seems to be central to the basic flow of business development. which is especially suitable to lean production systems like the Toyota Kanban System. In biotechnology. If we consider the development of networks (and the keiretsu is a sort of network) or the increasing importance of venture business. As Chandler acknowledged. Firms have.g. This is especially true if we compare developments during the Third (electronic related) Industrial Revolution with the Second." He classified industries into three categories: high-tech industries. While Chandler's interpretation is persuasive. But they have also adopted different forms like the H-form of the hierarchical keiretsu. and research and development have become more and more crucial to business success. firms in stable-industries performed poorly because they did not invest enough to keep their competitive advantage. in the last two hundred years. firms have become bigger and bigger. and other industries. He discussed the difficulties of large.is dominant in these two industries. including pharmaceuticals. it seems that some of the most important trends that Chandler identified are now being reversed.. By way of contrast. it does not sufficiently account for the many cases of venture businesses such as Microsoft and other successful enterprises of that sort. and stable-tech industries. but it no longer sufficed in stable-industries (e. and more diversified by utilizing economies of scale and scope. 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. as Chandler indicated.S. low-tech industries. He concluded that investment along traditional lines was still important and American firms still did it well in high-tech industries (e. 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 163 . To be sure. automobiles and iron and steel).S. the performances of U.
This structure was different from the typical U-form and M-form which developed in the United States. downsizing.capital." continuing the trend that began when the more flexible M-form replaced the U-form of organization. Japan's capitalism achieved this end in the period between the late nineteenth century and the occupation after World War II. In this sense. the Chandlerian model is applicable to Japan. In this regard. away from bigness and economies of scale and scope. which was not the case in Japan. The latter form of management structure. but it did so by following a different path. and outsourcing are gaining ground. Japanese firms achieved coordination through managerial organizations. Present trends. some businessmen are now stressing the importance of nonkeiretsu transactions. 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. In some cases. Managerial capitalism. In this regard. the Chandlerian model will have to be revised in significant ways insofar as Japan and the other industrial powers are concerned. Gerschenkron is especially useful when we examine the process by which Japan arrived at managerial capitalism and coordination through organization. Like businesses in the United States and Germany. seem to be moving in a direction different from managerial capitalism. Institutional investor capitalism. Conclusion The development of modern business in Japan. Even in Japan's keiretsu. not through the market. If these trends continue. is characterized by the separation of management from ownership. Although all three are in East Asia. that endpoint. in the form of zaibatsu in the pre-war time and keiretsu in the post-war years. 164 . broadly speaking. a central characteristic of the Japanese management system. was the pre-requisite for lean production. Japan’s brand of capitalism was more organization-oriented than that of the Chinese firms or Korean chaebol. "large" has become "not logical. Japan’s managerial capitalism was unique and was even more complete than that of the United States. arrived at the same Second-IndustrialRevolution endpoint as the United States. in particular hierarchical keiretsu. In Japan group-enterprise capitalism prevailed. however. Blood-relationships and family ownership were paramount. the Chinese and Korean businesses were different.
emerged. But even Japan. but great efforts are now being made to regain it. including the cultivation of the silkworm. provided the basis of living for most of the Japanese people. A large part of this trade was lost as a result of the war. there is 165 . That crisis. Their agricultural holdings are mostly very small -. and behind it has been the sheer need to eke out scanty resources for the supply of a rapidly increasing population. with farreaching negative consequences on their populaces.Japan. the Japanese are too crowded together to live tolerably without a great export trade. Indeed. especially of textile goods. 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. under American tutelage. When there is no development. though far more highly developed than any other Asiatic country. as a large-scale exporter. Japanese industrialism was at all stages a remarkable tour de force. has resulted in development eluding most of the others. though showing signs of moderation in some countries. was by no means fully industrialised by Western standards. Agriculture. 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 -.70 per cent of the farms being of less than 2½ acres -.and the country was poor in raw materials as well as in cultivable land.from textiles to bicycles and electrical gadgets. put temporarily out of the world market and retarded in economic development by defeat in war.
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. political and civil strife worsened. the balance of payments weakened. which was then implemented by experimentation. and a significant body of literature that is very critical of SAPs has emerged. These disastrous development results were. Unfortunately. the economic crisis has made life an endless series of vicious circles that are now spreading economic suffering in a concentrated fashion. However. there is no effort to work toward development. and corruption became more rampant. urbanization burgeoned. of the countries had to contend with an adverse international economic environment. 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). the physical infrastructure deteriorated. and consequently provided the imperative for policy reform in those countries. famine and malnutrition became more pronounced. environmental degradation expanded. unemployment and crime escalated. In most of Africa. Policy reform can be defined as changes in government policy. The economic crisis in Africa represents a historical tragedy. The circle becomes complete and reinforcing. although making a convincing case in some of their 166 . across the board. Despite some views to the contrary. primarily the World Bank and the International Monetary Fund. most of the critics of SAPs. it is policy change. and where there is hopelessness. in most of Africa. if not all.hopelessness. agricultural productivity declined. Among other things. budget deficits soared. capital flight deepened. That combination produced disastrous results. some. poverty and socioeconomic inequalities increased. institutional structure. or administrative procedures that are designed to alter economic activity and improve performance ( Roemer and Radelet 1991 ). The SAPs have triggered a fierce debate over their effectiveness as an antidote to the economic crisis in Africa. in turn. Moreover. and the historical evidence now suggests that such a crisis need not have occurred. the brain drain intensified. the external debt burden became heavier. the catalyst behind the deepening economic crisis in Africa. post independence development policy was formulated through a statist ideological framework. Put more succinctly.
It is therefore a survival strategy for the rural poor. This rapid urbanization in Africa can be attributed primarily to rural-to-urban migration. 167 . drawing on Southern Africa country examples to illuminate and illustrate the analytical perspective. with Mozambique having the highest rate at 8. This chapter.4 percent ( World Bank 1995b). However. 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). During the 1980s the crisis worsened. on the other hand have failed to provide convincing and implementable alternatives for economic recovery in the African countries. for example. urban poverty has been increasing as urbanization has become much more rapid. 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. after an initial period of growth immediately after independence. Most of those consequences are related to insufficient capacity for labor absorption in the urban areas.criticisms. despite the fact that most of the poor in Africa live in the rural areas. the percentage share of net migration in urban growth was 85 percent for the period 197590 ( Findley 1993 ). when coupled with the other elements of the economic crisis in Africa. rapid urbanization has some very serious consequences. most of the Africa economies began to decline. which is structured as a comparative analytical review.5 percent during the period 1980-93. all of the Southern African countries had urban population growth rates that exceeded 3. With the exception of South Africa. examines the origins and nature of the economic crisis in Africa and the policy framework giving rise to it. Basically. and the lack of government capacity to provide the requisite social services ( Hope 1995a). However. Migration to urban areas is a rational economic decision for those in search of economic betterment.. the decline became more rapid and had reached crisis proportions before donor-supported policy reforms were implemented. In Tanzania. In the 1980s.of urban unemployment. resulting in increasing rates .
moving from 3. in most of the countries. while in Zimbabwe the decline was less dramatic for the same two periods. for example. In Zambia. for example. real wages in the formal sector have also been declining ( Vandemoortele 1991 ). In Tanzania. Since 1980. the growth rate of manufacturing employment declined from 2.79 percent).(informal) sector employment and activities.9 percent in 1970-80 to 0. one of the few positive things to have emerged from the ensuing economic crisis in the region. Much of the decline in formal-sector employment can be attributed to the decline in manufacturing employment. However. In terms of formal-sector wage rates.5 percent.48 percent to 3.14 percent ( Khan 1994 ). all of the Southern African countries had average annual labor-force growth rates that exceeded 2 percent during 1965-95. real wages have declined more rapidly than per capita income. for example.96 percent) and Mozambique (1. ironically. and it is projected that during 1995-2005 the majority of the countries will have labor-force growth rates exceeding 2. with some countries surpassing the 3 percent mark ( World Bank 1995b). 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. This suggests that the wage earners have borne a heavy burden of the economic crisis ( Vandemoortele 1991 ).9 percent in 1980-90. In addition. The great majority of that documentation suggests that the evolution of the subterranean 168 . In South Africa. As a matter of fact. formal-sector employment has been declining since the 1980s ( World Bank 1995c). The phenomenal expansion of the subterranean sector has been documented in numerous studies and reports in recent years. 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 ). With the decline in formal-sector employment.With respect to capacity to absorb labor. 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 ). The expansion of subterranean-sector employment in Africa is. this growth in the labor supply has not been matched by a similar growth in formal-sector employment. 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. with the exception of Lesotho (1. there has been an increase in 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 ( Morandé 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
did not have enough foreign reserves to cover a full month of its imports and. The worst performer was Lesotho. Although such external factors as fluctuations in the terms of trade did also have 172 .7 percent of GDP in 1984 and declining to -46. savings indicate the flow of real resources that are not consumed and therefore: available for possible investment. It has been shown elsewhere that the presence of high and variable inflation lowers both investment and domestic savings. have had higher rates of savings than the slowergrowing countries such as Tanzania. This performance was achieved primarily through improved rates of private investment.93. On average. with the exception of Botswana. By 1989. Tanzania. During the 1980s. which put considerable faith in the role of government to plan and allocate resources for economic development.1. reaching a high of -. can grow. in this regard. Conclusions The economic crisis in the majority of the African countries is rooted in the postindependence policy framework. in Southern Africa. 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 ).7 percent in 1980-85 ( World Bank 1994c). The average annual growth of gross domestic investment in Lesotho was 15.9 percent in 1985-95 compared to -. The final aspect of the economic crisis to be considered relates to savings and investment. 1995 ). such as Botswana. and therefore income. Savings determine the rate at which productive capacity. Angola had the lowest rate of gross domestic investment. In the Southern African region. gross domestic savings as a proportion of GDP declined during most of the 1980s.contrast. Lesotho had negative gross domestic savings during the 1980s. the more rapidly growing countries. by the end of the 1980s. the country was worse off than it was in the 1960s ( Sarris and Van den Brink 1994 ). On the other hand. In addition. while large debt ratios tend to crowd out savings and investment ( Hadjimichael et al. 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).4 percent of GDP by 1989 ( World Bank 1995a). Angola's gross domestic investment was only 12 percent of GDP. measured as a proportion of GDP. Investment in Africa was uneven in the 1980s and was too low to support both a sustainable expansion in output and greater economic diversification. Lesotho's gross domestic investment in the latter half of the 1980s was the highest in Southern Africa. for example.
It does not claim to be exhaustive. among other things. all of which have GNP per capita below U. However. Some authors. provided the imperative for policy reform which emerged most dominantly in the form of structural adjustment programmes. Nonetheless. political and social disaster. However. Sierra Leone. although this chapter is not concerned with the policy response to the economic crisis in Africa. most of the countries embarked on development policies in the 1960s and 1970s that. On the other hand. 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 ). and the ensuing economic deprivation at the human level. the country needs to diversify its economy beyond dependence on diamond exports to come to grips with its problems of unemployment 173 . suffice to say here that the SAPs have met with varying degrees of success. to date. 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. two countries -. 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 ). Consequently.$300 and a large percentage of their population below the poverty line. Botswana has been a model of economic success with its sound development management and good governance ( Hope 1995b). This chapter has provided one analytical perspective on the economic crisis in Africa. In Africa." This economic deterioration at the national level.Botswana and South Africa -. it is the internal policy framework that played the much more crucial role in the birth and growth of the economic crisis in Africa.S. economic growth and development became elusive and the majority of the African countries accelerated into a deep economic crisis. the SAPs retain their dominance as the preferred policy response to the economic crisis in Africa. Tanzania. have gone even further by arguing that "the first three decades of African independence have been an economic. such as Landell-Mills ( 1992) .are well poised to maintain and/or improve their economic performance. distorted their price structures and removed their comparative advantage. and Zambia. Ethiopia.some influence on the resultant economic crisis. As a result. Nevertheless. Mozambique. there have been no real alternative policy frameworks that have been adopted and implemented by the African governments.
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. and to accumulate resources for reconstruction and development projects 174 . particularly. With respect to South Africa. South Africa has the potential to become a major economic power in the world economy. among other things.and income inequality ( Hope 1996a ). Given its already substantial industrial base. Such a potential must be prudently tapped. to mitigate the estimated 30 to 40 percent unemployment rate among the Black population ( Lundahl and Moritz 1993 ).