Script 3 Summary

Industrial Revolution … Again

• Great Divergence
• factory system
• new energy sources - fossit fuels
  • mills, railways, steam ships
• higher growth rate → especially in GDP
• revolution … quick, sudden, violent change
  • ind. rev. took 60-70 years, not so quick
  • but economy changed forever → violent
    • social and cultural
    • “culture of growth”
    • political and institutional changes
• no large country has developed without (some) industrialization

Indicators of change

• decline in agriculture and textiles (primary sector)
  • growth in clothes (and other secondary sectors)
  • growth in tertiary sector
• total output and labor productivity of factories rising quickly
  • enables increases in building, transport, transaction (finance) sectors
  • services productivity increase was slower than industry growth
    • still considerable volume increase, just not productivity increase
  • cotton greatest relative growth

Productivity/Efficiency Growth

• Cobb-Douglas model
  • large population growth → large labor increase
  • capital per worker only grew after ind. rev., not during
    • land per worker decreased
  • increased education for higher productivity factor
• “age of improvement”
• e.g. cost of cotton yarn fell from 9$to0.4$
• reduced coal consumption due to technical innovation with steam engines
  • consumption of coal:
    • 49% mines, 21% textiles, 12% metal, …
• steam engines in more machines (e.g. locomotive/ships)
• exponential rise in coal energy consumption per capita
• best suited for basic resources and simple products
  • cotton, linen, wool, iron, buttons, nails

Benefits of Factory System

• central location for workers/sources of power
• Economy of Scale and serial production
• separation worker and owners (capital formed)
• separation home and firm (production and consumption)
• discipline (“time is money”)
• subdivision → unspecialized workers (women, children)
• Marx Alienation

Why Britain?

Factors

Obvious Factors

• geography
  • island with many rivers
    • water transport cheaper than on land before railway
• market integration
  • division of labor
  • colonialism
  • export to colonies
• institutions and politics
  • centralized government, rule of law
  • patent protection, property rights, pro-market politics
• demography
  • not too fast population growth → Malthusian
• agriculture
  • increasing efficiency prior to ind. rev. → specialization, urbanization
  • dissolution of feudalism → market integration, institutions

Less Obvious Factors

• social changes
  • income oriented vs status oriented
  • protestant reformation → success of earth > afterlife
  • rational decision-making
• intellectual changes
  • elite knowledge
• per capita incomes
  • already wealthy/productive before ind. rev.
    • domestic market orientation, colonies → jobs, ports, imports
  • better nutrition/health → better physical work ability

Explanations

Institutions - Property Rights

• glorious revolution
  • budget right
  • better material and intellectual property rights → “private property”
  • rich people can lend money to government → Bond
    • investments less risky and more likely → more credit
  • lower transactions cost, better financial markets
  • contra-argument to financial markets:
    • relatively bad financial setup for ind. rev.
    • Limited Liability was seen as problematic
• patent registrations took off after 1760
  • evidence mixed
    • many key inventions not patented
    • many patents worthless → taking to court difficult
  • indicator for innovation seeking of time

Demand-Side explanation

• by Jan de Vries
  • actual “revolution” even before ind. rev.
  • people worked more and harder (also women, children)
    • marked-oriented production
  • greater interest in consumption than in leisure
• new goods (sugar, coffee, tea)
  • also furniture, clocks, pottery, ironware, books

Induced Innovation - Labor replaced by Capital and Energy

• labor became more expensive
  • incentive for labor-saving machines
  • very cheap energy cost
  • higher income → better education → more/better inventions
  • higher income → better nutrition → better work output

Culture of Growth - social status and enlightenment

• culture of “growth” and “progress”
• scientific revolution
  • pan-european, not just biritish
  • “Knowledge is power” → overcome poverty
• incentives to innovate > directed inventions
  • reputation for engineers, patents, prestige > population size
  • “tweakers” and “tinkers” - people that could fix and work on machines
    • innovation by chance, not by deliberate action

Consequences of Ind. Rev.

• separation of production and consumption
• urbanization and factory towns at first a planning disaster
  • economic Inequality, agriculture seen as “backside” of country
• Great Divergence as global problem
• Climate Change
  • due to increased transport and fossile fuels used (especially coal in beginning)

Energy as Production Factor

• energy (or coal) can be seen in land and capital sense
  • land … subterranean forest adding value
  • capital … coals needs to be paid for
• how to verify? Elasticity between output factor and coal price / coal availability
  • conclusion: not fully substituteable (coal is not a dependent factor if no steam engine is involved)
  • different measurements: coal usage, emissions, effective energy
    • nice video on effective energy (wanna find out how many cats you need to power Norway for a year?): https://www.youtube.com/watch?v=t-O-Qdh7VvQ