Lessons from the Industrial Revolution

Robert Allen’s new book, “The British Industrial Revolution in Global Perspective,” is a major intellectual breakthrough.

Allen, Oxford professor of economic history, has used long-term price data only now available though computer database technology to demonstrate definitively why the Industrial Revolution happened when and where it did.

The causes? Imperialism, cheap coal and happy sheep. Max Weber’s Protestant work ethic had nothing to do with it!

Allen’s conclusions have interesting implications for the global economy today.

To take the causes roughly in chronological order, happy sheep were the result of the 1348 Black Death, which wiped out a third of England’s population and resulted in the restoration of much good agricultural land to grazing.

As a result, English sheep, fed on richer diets than previously, grew longer coats. From these were created the “new draperies” — finer in quality than competitive textiles and, hence, market-dominant.

The depopulation of the Black Death also caused wage rates to rise and, in England, reproductive patterns to change, producing a decline in fertility. England’s lower fertility ensured that the impoverishing 16th and 17th centuries were less impoverishing than elsewhere in Europe and wages remained relatively high.

One of Allen’s more startling discoveries is that real wage rates in Vienna in 1825 were a quarter of their level 400 years earlier. In England, this immiseration did not happen.

Imperialism, next, added both to the wealth of the country and to its urbanization (which increased returns to agriculture, thus further increasing rural wage levels). Extensive trade in exotic goods and the construction of large merchant and naval marines both provided high-wage urban employment, as well as generating large amounts of capital.

The safety valve of North American emigration worked against any Malthusian fall in rural wages, ensuring that new generations were adequately fed and at least modestly educated.

Cheap coal was not a resource unique to England. Belgium, the Ruhr and Poland had extensive coal deposits. Its availability in quantity for early industrialization was, however, due to the rapid growth of London, which generated a building industry large enough to experiment with chimney designs, thus producing houses that could be heated by coal as its cost advantage over wood grew.

Once coal production for fuel was substantial, the mining districts in the Midlands and the Northeast had fuel costs far below those anywhere else in Europe, making highly inefficient experimental technologies, such as the Newcomen steam engine, commercially attractive.

Once British industrialization proceeded down the learning curve, the cost advantages of steam technology, mechanized cotton production, etc., became so great that they allowed those technologies to be adopted in other countries. Thus, Britain’s early industrial success eventually ended its monopoly on industrialization.

Thus policy genius did not produce British industrialization, nor did policy incompetence allow Britain’s early lead to slip away. There were a number of social and policy preconditions, notably secure property rights — without which industrialization could not have happened — but by 1700 several countries had these.

Only Britain’s island status, preventing it from being subjected to devastating war as in 17th century Germany, gave it a special ability to make the crucial first steps.

There are nevertheless a number of modern policy lessons that can be learned from Allen’s analysis. First and most obvious, trade is essential to rapid economic development. By allowing rapid arbitrage between high-cost areas and low-cost areas, it generates capital accumulation, which lubricates other economic activity.

A world in which trade becomes bureaucratized and atomized lessens the possibilities of new wealth generation both directly through placing barriers to economic system optimization and indirectly through lessening the accumulation of capital.

While rapid arbitrage of goods through free trade is highly desirable, rapid arbitrage of labor through free migration is not. No society where unskilled labor is in excess supply has ever been able to use that labor to improve its wealth.

Undifferentiated low-cost human labor has been in excess throughout the vast majority of humanity’s experience — it is only labor scarcity and skill that have raised mankind’s living standards above the Malthusian level.

Low-skill, undifferentiated labor does not pull up its own living standards, though if its supply is limited its living standards may be raised by the efforts of others.

There is thus a huge distinction between trade policy, in which the maximum possible freedom is desirable, and immigration policy, in which complete freedom of migration produces an excess of unskilled labor that drives down wages for the unskilled to Malthusian levels.

This is not only the case in high-wage economies such as the United States. In low-wage economies such as pre-1980 China, India and Africa, the first requirement for economic growth is to reduce the birth rate sufficiently that the society can afford to educate the majority of its young people — and not leave them as a pool of intermittently employed surplus unskilled labor driving down living standards and causing disturbances.

In England, the Black Death produced the first increase in workforce living standards above subsistence levels. In today’s world we cannot rely on disease to help, but must pursue policies of population restraint, particularly in countries such as Kenya where population growth above 2% annually renders economic improvement impossible.

Another lesson from the Industrial Revolution is that it is important to be the very best — or the very cheapest. Mediocrity and average performance win no prizes in economic development, because they do not provide that margin of cost advantage without which the first faltering steps in a new technology cannot be profitable.

Revolutionary new technologies will eventually produce products desirable for everybody, and/or costs far below the previous alternative. However, in the initial phases of a new technology, the cost advantage or performance benefit of a new technique or product is slender.

Hence, that new product will only be profitable for the producers with the very best capability in an area, or the very lowest factor costs (which will not generally include low-cost labor because Malthusian survival puts an effective floor on that cost, making labor cost advantages impossible to sustain).

There is a reason why innovation tends to happen in rich countries, in spite of poorer countries’ lower labor costs and, in many areas, similar skill levels. High labor costs force innovation and, by increasing the return on acquiring superior skills, raise the quality of the labor force itself.

The German approach to economic growth, in which expensive labor is balanced by its superb quality, is entirely economically viable and produces rapid innovation.

Similarly, U.S. innovation tends to be concentrated in high-cost areas such as Silicon Valley, Boston or New York, even though in many cases large numbers of skilled graduates are available from top universities elsewhere. In a high labor cost environment, the pressure to excel, for both companies and the workforce, is inexorable and highly productive.

A further lesson from the Industrial Revolution, in particular from the centrality of coal availability, is that intelligent resource development is extremely important. Many countries had large coal deposits in 1700, but only in England did the development of coal fires for London housing increase the size of the coal mining industry to a level at which energy costs in areas close to the mines were a tenth or less of those for competitors not so located.

Today, Brazil seems to have learned the importance of this best. Its ethanol program, created as a substitute for gasoline, was begun 30 years ago, before many others. It relied on the optimum ethanol source — sugar cane — which produces ethanol about eight times as efficiently as the main U.S. source, corn.

Consequently, Brazil is today the global leader in ethanol technology, an advantage which it can use to develop its capability in other areas.

Similarly, Brazil’s exploitation of the Carajas iron ore deposits has allowed Vale — a major mining corporation headquartered in Brazil — to become the world’s leading iron ore exporter, an immense economic and geopolitical advantage for the country.

Petrobras’ offshore petroleum operations in the Tupi basin are likewise notable for the intelligence with which they have been developed, and will make Brazil a major player in the global oil industry, particularly as its domestic needs are suppressed by the successful ethanol program.

Using resources to bully neighbors, as in Russia, or frittering away resource advantages through environmentalist obstacles, as in the United States, produces a major competitive disadvantage which blights innovation as well as hampers the economy generally.

“Those who cannot remember the past are condemned to repeat it,” said George Santayana.

In the case of the enormous human advance of the Industrial Revolution, understanding how the past happened enables us to avoid mistakes that would prevent further such advances today.

Editor’s note: This feature has been adapted from an article that first appeared on “The Bear’s Lair,” published on the website Prudentbear.com.