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3.2 Industrial Revolution: Industry and Capital - Coggle Diagram
3.2 Industrial Revolution: Industry and Capital
Technological Advancements
Nobody denies the role of technological advancements in the industrial revolution, although they may reject the great inventor narrative. Role of
replacing labour with technology was crucial
Technology based industrialisation narrative:
Urbanisation and opulation density leading to exchange of ideas.
But
Britain was not the most urbanised country at the start of the IR - NE, BE, IT, DE all more urbanised
High literacy.
but
signature rates (a questionable metric of literacy) shows Britain lagging behind NE and DE
Book consumption - Britain still average
High labourer wages - incentivised capitalists to invest into machinery.
but
real wages show this is not correct, wages were stagnant, and real wages were lower than the Low Countries
British Industrial Revolution
Consensus that Britain had a slow growth rate of 0.5% per annum from 1760-1830
But this is aggregate growth - manufacturing sector rose by around 2-3%
Impressive growth in the
big three
: cotton textiles 7%; iron 3%; coal 2.5%. Very prominent exports
Regionally concentrated - eg. cotton in Lancashire. Small workshops clustered together, capital accumulation in a specific area
Positive trade balance facilitated labour shift to manufacturing and services. Agricultre imports financed by manufacturing exports
Institutional Advancements
Acemoglu and others point to institutional advantages in England
Intellectual Property Rights were secured by a patent system
Patents dated back to monopolies which were granted by the crown to certain people in favour. Not permanent, but temporary enjoyments of a privilege.
Patents protected the entrepreneur for a period before become shared knowledge in the public domain
Patents increased towards the end of the 18th century, mainly distrubted to power sources
USA and France develop a cheap and efficient patent system early on, overtake Britain around 1820s
Innovation was broad based, and not exclusively British
Often diffusion of foreign inventions. Improved ploughs were based on Dutch originals
Food preservation and processing innovation was the result of long lasting innovation. Brewing was an early adopter of steam power
British managed to
adapt and perfect
these inventions
Patents were extremely expensive - a fee for an exclusive right. Around £110,000 in modern money
Dichotomy of institutions (Acemoglu)
Extractive institutions: authoritarian political structures, rent-collecting elites, monopolistic or state-dominated economic structure. Ultimate failure despite possible initial strong growth
Inclusive institutons: political pluralism, rule of law, secure property rights, entrepreneurial attitudes, creative destruction. Ultimate self-sustained growth, despite possible initial social and economic dislocation
"republic of letters" aided the exchange of knowledge across national boundaries
North & Weingast: Institutional make-up of Britain and the Netherlands allowed them to militarily outperform larger empires. Could raise more money, tax at a harsher rate without provoking assault
Bank of England was one such institution: result of a deal between the King and a group of London merchants to finance his war in exchange for a chartered bank - private financing of government
Finance
Importance of finance
Creates long distance payments and lag-in-time payments like cheqeus
Banks can help foreign exchange through bills of exchange
National finances (national debt, tax farming)
Secondary capital markets (stock exchanges, bond markets)
Paper money creation - a liability from a bank, a loan you make to a bank by accepting
Before Industrial Revolution
Roots of modern finance are in medieval Italian city states
e.g. foreign exchange, marine insurance, double-entry bookkeeping, bills of exchange, breaking free of religious restrictions on lending, borrowing via public perscription (bonds)
By turn of 18th century, Dutch had picked up the baton of financial innovation, and dominated European financial markets
After 1688, Dutch innovations came to England. BoE established in 1694 in the mould of the Bank of Amsterdam (founded in 1609)
Flurry of new joint-stock corporations led to the South Sea Bubble in 1720
Britain was highly integrated with the northern European financial system
Dutch remained prominent in trading and investing British debt and joint-stock company shares throughout the 18th century. Four big entrepots were Paris, London, Amsterdam and Hamburg
Financial Innovation
Needs of long-distance trade: inconvenience and risk of shipping specie (valuable metals used as currency), development of insurance. Pooling of merchants' esources for transoceanic trade
Needs of inland trade and industry: provision of fixed and circulating capital for business. Circumventing usury laws. Creating sufficient money alternatives to bullion (paper money)
FINANCING WAR
: Paying armies abroad, in gold, during wartime. Maintenance of standing asrmies/navies in peacetime. Military fiscal state (North & Weingast)
Spikes in borrowing and taxation with frequent early modern wars. Armies and navies got larger, standing armies more commonplace, wars became global with colonial empires
Large and recurring need to pay for war led states to look for ways to broaden their borrowing base and reduce their borrowing costs
Institutional reform in NE and ENG allowed for a broader debt base, cheaper debt, and a superior tax-raising ability
80 years war (1568-1648) won partly through the ability of the Dutch Republic to raise large amounts of cheap debt. Willingness of its citizens to accept increased taxation
William III's continental wars made efficient debt management necessary. BoE and South Sea Company set up as debt management devices
"Crowding out"
Usury limit put a maximum on the amount of interest, didn't apply to the state: when the state and private sector competed for funds, the state won
Led to
credit quantity rationing
, drew available loanable funds from both banks and the moneyed classes in general
Negative correlation in lending volumes to the private and public sectors - literature uses this as an explanation for the slow growth in the first industrial revolution
Peace = private economy, war = private economy shuts down
British Finance in IR
State wanted to restrict competition in finance. Highly restrictive laws regulating finance 1721-1826, after the Bubble Act (no joint-stock corporations allowed without parliamentary or royal charter)
BoE Monopoly Act (1708): only partnerships of up to 6 persons allowed in banking
Maximum legal interest at 5% per annum
Money was metallic and neve enough. Foreign coins often circulated
Paper money was limited and highly regional - BoE notes hardly circulated outside London and were high in denomination
Secondary markets (where investors buy and sell securities, providing liquidity and opportunity to profit, like stock exchange)
Focussed on the trading of a few official securities (the public funds)
There were shares of great chartered companies, especially the EIC, and public debt (consols)
Trading did not take place in a physical exchange, but rather in coffeehouses in the back streets, behind the Royal Exchange
Financing business
Very restricted, legislation limited capital that could be raised
Multi-owner structures reserved for big infrastructure schemes
Unlimited liability may have deterred entrepreneurial spirit
Fast-and-loose accounting. Distinction between personal and firm obligations not always clear
Private credit not easily monetised, disinsentivising investors
Small, low-leverage private banks could provide little fixed capital by lending
How was the Industrial Revolution finances?
Payment facilities, small working capital loans
Small working capital loans (for day to day expenses), lending for raw materials, wages (small, modest banks)
Most industrial equity investment may have been through profit plough-back (putting profits back in the business rather than going to shareholders)
Biggest capital needs were for a few large construction projects, or for war. For IR businesses, fixed capital was very modest
Very few corporate bonds