EC2096 L6 Economic History C5

EC 2096
ECONOMIC HISTORY SINCE 1900

CHAPTER 5
The Development of
Modern Industry
Copyright © 2014 by Singapore Institute of Management Pte Ltd. All rights reserved.
EC 2096
ECONOMIC HISTORY SINCE 1900
CHAPTER 5
The Development of
Modern Industry
Copyright © 2014 by Singapore Institute of Management Pte Ltd. All rights reserved.
This chapter examines:
•Why manufacturing grew so fast in the early

20th century
•Why American manufacturing developed in a

different way to the UK
•Assembly-line production and new

organisational structures in industry (both
American developments).
Objectives:
(1)To show the nature of the modern business corporation

and how it developed in the 20th century
(2)To explain how and why American industrial development

took a different character to either the UK or continental
European models.
Learning outcomes
(1)To explain how far UK manufacturing became a model

for other countries
(2)To explain why mass production first started in the USA
(3)To suggest and evaluate reasons why the US industrial

structure changed
(4)To show how US industry differed from UK industry

before WWI.
In this Chapter
(1)Why the manufacturing sector expanded in the late 19th

and early 20th centuries.
(2)Why American manufacturing was not a copy of UK
manufacturing.
(3)Why the development of assembly-line production
occurred first in the USA and not in the UK or continental
Europe.
(4)The development of new organisational structures in
industry, another American phenomenon of the period.
5.1 THE EARLY DEVELOPMENT OF MANUFACTURING
The UK was the first country to industrialise but did not maintain its lead. (Note:
Around 1870 the UK had the most industry and the second highest GDP per head in the
world, behind Australia).
By 1914 the USA and Germany surpassed Britain in terms of industrial output.
The biggest industrial power was the United States which as early as 1913
produced more than a third of world industrial output:
5.1.1 Characteristics of UK economy in late 19th century
Important HISTORY lesson: UK was the first industrial country yet it was not
predictable that it would remain at the top.
Perhaps to understand the UK’s comparative economic decline today, it would

be important to look at the way the UK industrialised?
Which economic questions come out of Table 5.1?

There are some interesting ones…
Q1: Why did the USA and Germany grow faster

than the UK after 1870?
Q2: What differences did policies make – did they

make the UK’s relative decline, and the USA and
Germany’s relative rise, faster or slower?
ANS: Britain’s GDP growth rate was much higher than

it was before it industrialised. However, its growth rate
was lower than in other industrial countries.
This was primarily because Total Factor Productivity

(TFP) growth was low. The USA had a big advantage
of a much more favourable resource base than the UK.
Nevertheless, the TFP calculations suggest that Britain
was doing less well than might have been expected.
Recap:
TFP is a way of measuring efficiency by calculating the amount of each input (labour,
capital and other resources) used and the price of the inputs to the producer. This shows
how well the producer and ultimately the whole economy is using the factors at its disposal.
5.1 THE EARLY DEVELOPMENT OF MANUFACTURING5
5.1.2 Social development
Modern economists use ‘Human Development Index’ (HDI) to measure the

quality of life from variables like life expectancy at birth and literacy:
Although UK had a much higher per capita income in 1870, its HDI index,
although higher, was not proportionally as high as the difference in income.
The disappointing social development (HDI) in Britain partly explains US,
and later German, ‘catch up’.
5.1 THE EARLY DEVELOPMENT OF MANUFACTURING5
Q: HDI measures education, among other things.

Why might deficient education have led to slower growth in Britain?
ANS:
1. Workers whose literacy and numeracy skills are weak are likely to be less
flexible and slower to learn new skills.
ANS:
1.Workers whose literacy and numeracy skills are weak are likely to be less
2.The type of education might have been important.

a. In Britain there was less secondary and tertiary (university) education in
science and technology than in Germany and the USA.
b. Secondary and tertiary education in the UK was more likely to be in the
humanities and aimed at an elite who took jobs in the colonial service or the
professions.
ANS:
3. The main route to industrial training in the UK was by apprenticeship. This
was fine as long as UK industry was changing relatively slowly. But in the
20th century, it made the acquisition of new skills more difficult since the
younger workers were taught by older workers with older skills.
ANS:
1. Workers whose literacy and numeracy skills are weak are likely to be less
2. The type of education might have been important. In Britain there was less
secondary and tertiary (university) education in science and technology than in
Germany and the USA. Secondary and tertiary education in the UK was more
likely to be in the humanities and aimed at an elite who took jobs in the colonial
service or the professions.
3. The main route to industrial training in the UK was by apprenticeship. This
was fine as long as UK industry was changing relatively slowly. But in the
20th century, it made the acquisition of new skills more difficult since the
younger workers were taught by older workers with older skills.
5.1.3 Government trade policy
Economic policy in the UK was markedly different to policy in other countries:

The government did not intervene very much in the economy before WWI.
In other countries there was more intervention.

In the UK there was no policy to aid particular industries; no tariffs to protect
‘infant industries’ that were just starting because UK regarded itself as a trading
country where tariffs were inappropriate.
5.1.4 The size of the agricultural sector
The main difference between the UK and the other industrial countries was in the
proportion of the labour force in agriculture (15 per cent in the UK in 1870,
compared with about 50 per cent in most other rich countries).
The main difference between the UK and the other industrial countries was in the
proportion of the labour force in agriculture (15 per cent in the UK in 1870,
compared with about 50 per cent in most other rich countries).
Note: There seems to be an inverse relationship between GDP per capita and the
proportion of it in agriculture.
Compared with continental Europe, but not USA, agriculture became capitalist in
Britain much earlier. As early as 1800 most British farms were quite large. They
were worked by wage earners, not peasants.
Implications for profits and investment: Shifting labour from agriculture to industry
is an important source of economic growth.
The problem was that this process in the UK had been completed by 1870.
The UK could not continue to grow by transferring labour from agriculture to

industry; it could not be done twice.
Continued growth could only come by increasing productivity within industry and
services, for example by the development of high-technology industries for which
the UK was not as well equipped as the USA or Germany.
UK remained ahead in the export of manufactures but not because UK industry
was more productive but that UK was the first industrial country and the
government followed policies that maximised trade, such as free trade.
This explains a large part of UK economy devoted to textiles; a non-‘high tech’

product. So dominance in textile exports did not predict that UK would still
dominate trade in industrial products in 20th century. By 1913, Germany was
close to catching up with UK manufactured exports.
Q: If country A has lower labour productivity in exports relative to a competing
country B, how can country A remain competitive?
Q: If country A has lower labour productivity in exports relative to a competing
country B, how can country A remain competitive?
ANS: Country A can remain competitive by paying lower wages than country
B, which will offset the lower productivity.
So, other things being equal, UK wages in the export industries that competed
with the USA and Germany (this was not all British exports, of course) decline
relative to wages in those countries.
Q: In the last chapter, we said that food prices in the UK fell after 1870
because of cheap imports from the regions of recent settlement.
How would this have affected the position of British workers whose wages
were held down by foreign competition?
Q: In the last chapter, we said that food prices in the UK fell after 1870
because of cheap imports from the regions of recent settlement.
How would this have affected the position of British workers whose wages
were held down by foreign competition?
ANS: Lower food prices helped offset lower money wages.

Food was an important part of consumption.
Hence, real wages (money wages divided by prices) could still rise even if
money wages stayed constant.
5.2 THE GROWING STRENGTH OF US INDUSTRY
Factors explain the growing strength of American industry after 1870:
1.New ways of organising firms

2.The size of the domestic market
3.New industrial structures
4.Managerial capitalism
5.Cheaper Inputs
6.The use of new technology
Factors explain the growing strength of American industry after 1870:
5.2.1 New ways of organising firms

5.2.2 The size of the domestic market
5.2.3 New industrial structures
5.2.4 Managerial capitalism
5.2.5 Cheaper Inputs
5.2.6 The use of new technology.
As early as 1850, a few American industries had been different to those in the UK.
These industries were part of the ‘American System of Manufactures’.
The early American entrepreneurs solve the problem of a shortage of skilled labour
by reducing the amount of craft skills needed by sub-dividing tasks.
→Each person made one part of a clock and used labour-saving machinery.
→The parts were then fitted together.
→Because they were also short of capital, the machines were poor quality.
→American consumer products, like clocks, were cheaper than UK equivalents.
(They were of much poorer quality than UK goods made by skilled labour.)
These methods only applied to a limited range of industries: guns, clocks, and
furniture. The real beginnings of mass production came much later, towards the end
of the 19th century.
Then several American industries were using the assembly line to produce goods.
This gave very large economies of scale.
These methods only applied to a limited range of industries: guns, clocks, and
furniture. The real beginnings of mass production came much later, towards the end
of the 19th century.
Then several American industries were using the assembly line to produce goods.
This gave very large economies of scale.
The essence of the assembly line was a strict division of labour. Each worker on the
assembly line carried out only one task. The product then moved along the
assembly line to the next worker who performed a different task – but still only one
task.
Each worker had the use of a large amount of capital equipment, which increased
his output.
Because they had only one task, each worker could become very proficient at it. Nor
did they have to spend time looking for parts, tools etc.
Hence there was an increase in output per worker (labour productivity rose).
Moreover, it was easy to train them which reduced the demand for highly skilled (and
expensive) labour in the USA.
Mass production first started in industries where there was

already a continuous process, for example:
paint making, sugar and food processing.
A famous early example was meat packing

(canned food), which started in Chicago.
This demonstrates that mass production was used long before

its most famous example: the Ford Car plant, which was built
to manufacture the Model T Ford in the early 20th century.
It was the most famous example of the work of Frederick

Taylor who was the key figure in the development of mass
production.
5.2.1.1 Ford’s assembly line
The Model T Ford car is a classic example of a mass-produced consumer product.
Ford’s idea was to minimise costs by producing a very large number of identical
products, even in colour, which was black.
What Ford realised was that the same product would be bought for different reasons.
Many cars were bought by farmers and small-town businessmen, for example. The
Model T Ford car could be both a consumer product (to take you and your family on a
picnic) and a factor of production (to take a sack of potatoes to market).
This meant that the cars could all be the same. In turn, this allowed Ford to produce
the high volume necessary to minimise costs.
The introduction of the assembly line to the Ford plant in Detroit increased labour
productivity by about 12 times.
But it was not easy to get the assembly line to work. It took Henry Ford three years
after he started to produce the Model T to perfect his assembly lines.
There were three variables which had to be optimised:

• the layout of the plant
• the speed at which the line moved
• the speed at which the workers worked.
The subdivision of production required a very high degree of management control.
Tasks had to be identified, incentives paid and quality maintained.
Time and motion studies, called ‘scientific management’, were common in Ford plants.
(This was partly the work of Frederick Taylor who had been
instrumental in optimising the layout of mass production plants
for many years.)
Mass production made it easy to see who was a good worker

and who was not. The less good workers were dismissed immediately.
5.2.6 The use of new technology
Demand was extremely important to American industry.
By 1900 the American population was already double the size of that in the UK, and
individual consumption levels were 50 per cent higher than in the UK.
That means that the consumer market in the USA was three times the size it was in
the UK.
Obviously, the ability to mass-produce depends on the existence of a large market for
those products, especially in decreasing cost industries.
In economic jargon, the lowest point of the average cost curve

Only occurs at high levels of production.
5.2.3 A new industrial structure
In the 19th century the USA had a large number of firms which were all in competition
with each other, but by the early 20th century a new industrial structure had
developed.
US firms were large and instead of perfect competition, either a very small number of
‘trusts’ (a big financial monopoly) controlled a whole industry, or firms made
agreements with each other to restrict or even eliminate competition.
(Note: In contrast, the old competitive structure was still common in the UK. A small number of
firms controlling an industry is an ‘oligopoly’, agreements between such firms are called ‘cartel’
agreements.)
As the US had tariffs on industrial imports, this made anti-competitive agreements
easier to make.
Tariffs push up prices. In a competitive market where there is tariff protection, local
firms expand production to fill the gap left by now-expensive imports.
But it is in the interests of the local companies to restrict output, so

that prices will be high. The winners from a tariff are the local firms,
shareholders and workers. The losers are foreign producers and
domestic consumers.
Modern example: President Reagan allowed a tariff on steel imports. The winners
were the US steel industry. The losers were all users of steel. On the other hand, a
tariff makes local firms behave in a competitive manner – not to restrict production
and raise prices.
5.2.4 Managerial Capitalism
The new industrial structure in the USA required managerial innovations.
With a large number of small and highly competitive firms, management was not
difficult. If the firm performed well it made profits; if it performed badly it made losses.
Firms were regulated by the market.
BUT large uncompetitive firms cannot be regulated by the market. At its simplest, a
competitive firm is faced with a perfectly elastic
demand curve, but an oligopolistic firm is faced by
a downward-sloping demand curve.
The new structure required that managers examine

the internal organisation of the firm and make the firm as efficient as possible.
In the 1820–80 period, the people who owned firms were also the people who
controlled them, often, members of one family firm.
It is not true, however, that Britain was dominated by ‘family control’ and the USA
by ‘managerial capitalism’. British industry was quite dynamic. There was more
family control of companies in Britain, but only because the American companies
had on average been set up more recently than British companies.
As a consequence, the stock market was less important in Britain than in the
USA.
However, the stockholders did not control the firm.
The big US corporations were run by managers who controlled the business and
made decisions.
This is what ‘managerial capitalism’ means. The change in the way the firms were
managed led, in many firms, to a change in objectives. Profit might not be the main
objective. Increasing the size of the firm might be more important.
Modern practice: One popular method to make managers think profits first is to
make their salaries partly dependent on profits by offering bonuses or giving
managers the option to purchase shares at an advantageous price.
The price of inputs fell.
In the late 19th century in Europe, machine tools were made in-house, by skilled
workers, not on the production line.
However, in the USA large firms, mass-production methods and professional

management led to specialist large machine tool companies.
This meant lower prices for equipment.
Similarly electricity was cheaper in the USA.

5.2.6 New Technology
Production lines and large-scale plants needed new technology.
The USA led in this respect as well.
The production line could not have operated without electric power, for example.
5.3 GERMANY AND ‘CATCH-UP’ WITH THE USA
Why couldn’t these changes be replicated in Europe, in particular in Germany? In

some ways, the German economy was more like the US economy than was the
UK economy:
a.There were large vertically integrated firms. Germany was the dominant
producer of chemicals, for example.
b.Germany had created a highly skilled labour force.
c.Germany was also investing in education and research laboratories – just like
the USA, but unlike Britain.
(Note: In theory, Germany should have been able to catch up with the USA. But even at
the beginning of the twenty-first century, German industrial productivity was still below that
of the USA.)
It took a long time for Germany to catch up because:
1. The USA had an abundance of resources compared with Europe.

Nowadays, the location of raw materials is not very important. In the main, they
are not a major cost for industry and, most importantly, the cost of transport by
large ships and pipelines is low. This was not true in the early 20th century.
As a result of their abundant resources US companies had lower prices for inputs
such as iron ore, coal, timber, oil and agricultural products. This gave US industry
an absolute advantage.
The resource question is one reason German industry could not achieve the
same levels of productivity as American industry at the time.
2. US had a well-developed market for consumer goods

US market was larger and the consumers richer than in either the UK or
Germany. The USA was the first mass-consumer society. By the late 1920s, most
Americans were able to spend something on leisure and on new mass-produced
consumer durables, which had become much cheaper.
2. As early as 1914 Kellogg’s cornflakes, Levi jeans and

other brands had become familiar to US consumers.
Advertising and the cinema provide a guide to the ‘good
life’. By the late 1920s, 80 per cent of households had
consumer durables such as radios, refrigerators and cars.
It was possible because of consumer credit. Families
acquire consumer durables as they were prepared to go
into debt.
5.4 UK INDUSTRY
The UK economy was different and one consequence was that British firms
operated on a much smaller scale than American firms.
Most British industries had far more firms than the same industries in the USA.
UK family-owned businesses would not give control to managers, like in the

USA. But this would be a travesty. UK markets were more segmented than
American markets, partly because exports were more important to UK industry
than to the USA. So, on average, the firms were smaller in the UK.
The USA also had a large, protected domestic market, quite homogeneous in
tastes, which allowed greater economies of scale. (Note: The UK was
considerable poorer than the USA in the early 20th century.)
5.4 UK INDUSTRY
UK also had more skilled workers than the USA and they were paid less.
Consequently, it was cheaper for UK firms to use skilled workers to make

small-scale, high quality, ‘niche’ products as opposed to large-scale, mass-
produced goods.
SUMMARY
Mass production began in the USA, associated with changes in finance,
management and in the organisation of the firm. It was aided by tariff
protection.
British industry did not have the same structure, had no import protection, and
in some respects the UK had an inappropriate educational system.
Germany had a strong industrial structure and appropriate education, yet still it
did not match levels of productivity in the USA. This was because the US
resource environment and the size of the market were much more favourable
to large-scale production. Consequently, Germany found it impossible to catch
up in this period.
LEARNING OUTCOMES
You should be able to:
• explain how far UK manufacturing became a model for other countries
• explain why mass production first started in the USA
• suggest and evaluate reasons why the US industrial structure changed
• show how US industry differed from UK industry before WWI.

LEARNING OUTCOMES
1. How far was the development of the UK economy in the 19th century
unique? Was the UK economy well placed to achieve high productivity
growth in the 20th century?
2. Does an increase in bureaucracy in giant non-competitive companies

lead to more or less efficiency?
3. What happened to American industry when it was faced with new

technology in the late 20th century? Were American companies flexible
enough to cope, for example, with Japanese competition?
LEARNING OUTCOMES
1. How far was the development of the UK economy in the 19th century
unique? → 5.1.1
Was the UK economy well placed to achieve high productivity growth in

the 20th century? → 5.1
2. Does an increase in bureaucracy in giant non-competitive companies

lead to more or less efficiency? → 5.1
3. What happened to American industry when it was faced with new

technology in the late 20th century? Were American companies flexible
enough to cope, for example, with Japanese competition? → 5.2
PLEASE SUBMIT
ASSIGNMENT 1 TO MY
GMAIL BY NEXT WEEK
GRP 1 & 2
GRP 3 – 5
END

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EC 2096

ECONOMIC HISTORY SINCE 1900

•Why manufacturing grew so fast in the early

•Why American manufacturing developed in a

•Assembly-line production and new

(1)To show the nature of the modern business corporation

(2)To explain how and why American industrial development

(1)To explain how far UK manufacturing became a model

(2)To explain why mass production first started in the USA

(3)To suggest and evaluate reasons why the US industrial

(4)To show how US industry differed from UK industry

(1)Why the manufacturing sector expanded in the late 19th

Perhaps to understand the UK’s comparative economic decline today, it would

Which economic questions come out of Table 5.1?

Q1: Why did the USA and Germany grow faster

Q2: What differences did policies make – did they

ANS: Britain’s GDP growth rate was much higher than

This was primarily because Total Factor Productivity

Modern economists use ‘Human Development Index’ (HDI) to measure the

Q: HDI measures education, among other things.

2.The type of education might have been important.

Economic policy in the UK was markedly different to policy in other countries:

In other countries there was more intervention.

The UK could not continue to grow by transferring labour from agriculture to

This explains a large part of UK economy devoted to textiles; a non-‘high tech’

ANS: Lower food prices helped offset lower money wages.

Factors explain the growing strength of American industry after 1870:

1.New ways of organising firms

Factors explain the growing strength of American industry after 1870:

5.2.1 New ways of organising firms

Mass production first started in industries where there was

A famous early example was meat packing

This demonstrates that mass production was used long before

It was the most famous example of the work of Frederick

The Model T Ford car is a classic example of a mass-produced consumer product.

There were three variables which had to be optimised:

The subdivision of production required a very high degree of management control.

Tasks had to be identified, incentives paid and quality maintained.

Mass production made it easy to see who was a good worker

In economic jargon, the lowest point of the average cost curve

But it is in the interests of the local companies to restrict output, so

The new industrial structure in the USA required managerial innovations.

The new structure required that managers examine

However, the stockholders did not control the firm.

The price of inputs fell.

However, in the USA large firms, mass-production methods and professional

This meant lower prices for equipment.

Similarly electricity was cheaper in the USA.

Production lines and large-scale plants needed new technology.

The USA led in this respect as well.

Why couldn’t these changes be replicated in Europe, in particular in Germany? In

It took a long time for Germany to catch up because:

1. The USA had an abundance of resources compared with Europe.

It took a long time for Germany to catch up because:

2. US had a well-developed market for consumer goods

It took a long time for Germany to catch up because:

2. As early as 1914 Kellogg’s cornflakes, Levi jeans and

UK family-owned businesses would not give control to managers, like in the

Consequently, it was cheaper for UK firms to use skilled workers to make

You should be able to:

• explain how far UK manufacturing became a model for other countries

• explain why mass production first started in the USA

• suggest and evaluate reasons why the US industrial structure changed

• show how US industry differed from UK industry before WWI.