Chapter 23
Material Causes are Rebutted
The other Klamerian sphere is the market. Not . . . .
What we’ve learned from economic history. Not demand. Not saving. Not original accumulation, as I have said, and not slavery, not piracy, not poverty, not enclosures [my calculations], as the anti-bourgeois theorists alleged; and especially not what bourgeois economists call “neoclassical reallocations.” Here look into New Growth Theory, taking what is valuable, if anything.
To put the wider Not finding in a sentence: we have not so far discovered any single factor essential to British industrialization. Alexander Gerschenkron a long time ago argued that the notion of essential prerequisites for economic growth, single or multiple, is a poor one (1962a). He gave examples from industrialization in Russia, Italy, Germany and Bulgaria which showed substitutes for the alleged prerequisites. The big banks in Germany and state enterprises in Russia, he claimed, substituted for entrepreneurial ability. (his claim has been much disputed since then). The British case provided the backdrop for comparison with other industrializations.
But anyway Gerschenkron’s economic metaphor that one thing can “substitute” for another applies to Britain itself as much as to the other countries. Economists believe, with good reason, that there is more than one way to skin a cat. If foreign trade or entrepreneurship or saving had been lacking, the economist’s argument goes, other impulses to growth (with a little loss) could conceivably have taken their place. A vigorous domestic trade or a single minded government or a forced saving from the taxation of agriculture could take the place of the British ideal of merchant adventurers left alone by government to reinvest their profits in a cotton factory.
Transportation, for example, is often cast in the hero’s role. The static drama is most easily criticized. Canals carrying coal and wheat at a lower price than cartage, better public roads bringing coaching times down to a mere day from London to York, and then the railway steaming into every market town were of course Good Things. But land transportation is never more than 10 per cent of national income it was something like 6 per cent 1780 1860. Britain was well supplied with coastwise transportation and its rivers flowed gently like sweet Afton when large enough for traffic at all. Even unimproved by river dredging and stone built harbors, Mother Nature had given Britain a low cost of transportation. The further lowering of cost by canals and railways would be, say, 50 per cent (a figure easily justified by looking at freight rates and price differentials) on the half of traffic not carried on unimproved water say another 50 per cent. By Harberger’s Law, 50 per cent of 50 per cent of 10 per cent will save a mere 2.5 per cent of national income. One would welcome 2.5 per cent of national income as one’s personal income; and even spread among the population it is not to be sneezed at. But it is not by itself the stuff of “revolution.”
Yet did not transportation above all have “dynamic” effects? It seems not, though historians and economists have quarreled over the matter and it would be premature to claim that the case is settled (for the pro transport side see Szostak 1991). A number of points can be made against the dynamic effects. For one thing the attribution of dynamism sometimes turns out to be double counting of the static effect. Historians will sometimes observe with an air of showing the great effects of transport that the canals or the railways increased the value of coal lands or that they made possible larger factories — dynamic effects (the word is protean). But the coal lands and factories are more valuable simply because the cost of transporting their outputs is lower. The higher rents or the larger markets are alternative means of measuring what is the same thing, the fall in the cost of transporting coal or pottery or beer.
For another, some of the dynamic effects would themselves depend on the size of the static, 2.5 per cent effect. For example, if the ‘dynamic’ effect is that new income is saved, to be reinvested, pushing incomes up still further, the trouble is that the additional income in the first round is small.
For still another, as has already been stressed, the truly dynamic effects may arise from expensive as much as from cheap transportation. Forcing more industry into London in the early nineteenth century, for example, might have achieved economies of scale which were in the event dissipated by the country locations chosen under the regime of low transport costs. The balance of swings and roundabouts has to be calculated, not merely asserted.
Sector by sector the older heroes have fallen before the march of Notting economists and historians. Marx put great emphasis for instance on the enclosure of open fields, which he claimed enriched the propertied classes and drove workers into the hands of industrialists. By now several generations of agricultural historians have argued, contrary to a Fabian theme first articulated eighty years ago, that eighteenth century enclosures were equitable and did not drive people out of the villages. True, Parliament became in the eighteenth century an executive committee of the landed classes, and proceeded to make the overturning of the old forms of agriculture easier than it had been. Oliver Goldsmith lamenting The Deserted Village wrote in 1770 that ‘Those fenceless fields the sons of wealth divide,/ And even the bare worn common is denied.’ But contrary to the romance of the poem, which reflects poetic traditions back to Horace more than evidence from the English countryside, the commons was usually purchased rather than stolen from the goose.
The result of enclosure was a somewhat more efficient agriculture. But was enclosure therefore the hero of the new industrial age? By no means. The productivity changes were small (McCloskey 1972; Allen 1992), perhaps a 10 per cent advantage of an enclosed village over an open village. Agriculture was a large fraction of national income (shrunk perhaps to a third by 1800), but the share of land to be enclosed was only half (McCloskey 1975; Wordie 1983). Harberger’s Law asserts itself again: (1 /3) (1 /2) (10 per cent) = 1.6 per cent of national income was to be gained from the enclosure of open fields. Improved road surfaces around and about the enclosing villages (straightening and resurfacing of roads went along with enclosure, but is seldom stressed) might have been more important than the enclosure itself.
Nor was Adam Smith correct that the wealth of the nation depended on the division of labor. To be sure, the economy specialized. Ann Kussmaul’s work on rural specialization shows it happening from the sixteenth century onward. Berg and Hudson (Hudson 1989) have emphasized that modern factories need not have been large, yet the factories nonetheless were closely divided in their labor. Most enterprises were tiny, and accomplished the division of labor through the market, as Smith averred. It has long been known that metal working in Birmingham and the Black Country was broken down into hundreds of tiny firms, anticipating by two centuries the ‘Japanese’ techniques of just in time inventory and thorough sub contracting. Division of labor certainly did happen, widely.
That is to say, the proper dividing of labor was, like transport and enclosure, efficient. Gains were to be had, which suggests why they were seized. But a new technique of specialization can be profitable to adopt yet lead to only a small effect on productivity nationally look again at the modest, if by no means unimportant, productivity changes from the puddling and rolling of iron. The gains were modest in the absence of dynamic effects, because the static gains from more complete specialization are limited by Harberger’s Law.
A similar thought experiment shows the force of the argument. Specialization in the absence of technological change can be viewed as the undoing of bad locations for production. Some of the heavy clay soil of the midlands was put down to grazing, which suited it better than wheat. Or the labor of the Highlands was ripped off the land, to find better employment — higher wages, if less Gaelic spoken — in Glasgow or New York. The size of the reallocation effect can be calculated. Suppose a quarter of the labor of the country were misallocated. And suppose the misallocation were bad enough to leave, say, a 50 per cent wage gap between the old sector and the new. This would be a large misallocation. Now imagine the labor moves to its proper industry, closing the gap. As the gap in wages closes the gain shrinks, finally to zero. So the gain from closing it is so to speak a triangle (called in economics, naturally, a Harberger Triangle), whose area is half the rectangle of the wage gap multiplied by the amount of labor involved. So again: (1 /2) (1 /4) (50 per cent) = 6.25 per cent of labor’s share of national income, which might be half, leaving a 3 per cent gain to the whole. The gain, as usual, is worth having, but is not itself the stuff of revolutions. The division of labor: Not.
Geography is still another Not. Some economic historians (e.g. Wrigley 1988) continue to put weight on Britain’s unusual gifts from Nature. It must be admitted that coal correlates with early industrialization: the coal-bearing swath of Europe from Midlothian to the Ruhr started early on industrial growth. But economically speaking the coal theory, or any other geographical theory, has an appointment with Harberger. Coal is important, blackening the Black Country, running the engines, heating the homes. But it does not seem, at least on static grounds, to be important enough for the factor of fifteen. The calculations would be worth doing, but one suspects they would turn out like the others.
The claim is that the economists’ static model does not explain the factor of fifteen. It can tell why it did Not happen, a series of Nots, useful Nots, correctives to popular fable and sharpeners of serious hypotheses. But the kind of growth contemplated in the classical models, embedded now deep within modern economics as a system of thought, was not the kind of growth that overtook Britain and the world in the late eighteenth and nineteenth centuries.
One might reply that many small effects, static and dynamic, could add up to the doubling of income per head to be explained: trade, coal, education, canals, peace, investment, reallocation. No, Not. One trouble is: that doubling, 100 per cent, is not enough, since in time modern economic growth was not a factor of two but a factor of fifteen, not 100 per cent but 1,400 per cent. Another is that many of the effects, whether in the first or the second century of modern economic growth, were available for the taking in earlier centuries. If canals, say, are to explain part of the, growth of income it must be explained why a technology available since ancient times was suddenly so useful. If teaching many more people to read was good for the economy it must be explained why Greek potters signing their amphora c. 600 B.C. did not come to use water power to run their wheels and thence to ride on railways to Delphi behind puffing locomotives. If coal is the key it must be explained why north China, rich in coal, had until the 20th century no industrial growth. The mystery inside the enigma of modern economic growth is why it is modern.
The classical model from Smith to Mill was one of reaching existing standards of efficiency and equipment. To put it in a name: of reaching Holland. Holland was to the eighteenth century what America is to the 20th, a standard for the wealth of nations.
The province of Holland [wrote Adam Smith in 1776] . . . in proportion to the extent of its territory and the number of its people, is a richer country than England. The government there borrows at two per cent., and private people of good credit at three. The wages of labor are said to be higher in Holland than in England, and the Dutch … trade upon lower profit than any people in Europe.
WN, 1776:10: 108.
The emphasis on profit at the margin is characteristic of the classical school. The classical economists thought of economic growth as a set of investments, which would, of course, decline in profit as the limit was reached. Smith speaks a few pages later of “a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries allowed it to acquire” (1776: Lix.14: 111). He opines that China “neglects or despises foreign commerce” and “the owners of large capitals [there] enjoy a good deal of security, [but] the poor or the owners of small capitals . . . are liable, under the pretense of justice, to be pillaged and plundered at any time by the inferior mandarins” (1776: Lix.15: 112; cf. 1776: Lviii.24: 89). In consequence the rate of interest in China, he claims, is 12 rather than 2 per cent (Smith, incidentally, was off in his facts here). Not all the undertakings profitable in a better ordered country are in fact undertaken, says Smith, which explains why China is poor. Smith and his followers sought to explain why China and Russia were poorer than Britain and Holland, not why Britain and Holland were to become in the century after Smith so very much more rich. The revolution of spinning machines and locomotive machines and sewing machines and reaping machines that was about to overtake north west Europe was not what Smith had in mind. He had in mind that every country, backward China and Russia, say, and the Highlands of Scotland might soon achieve what the thrifty and orderly Dutch had achieved. He did not have in mind the factor of fifteen that was about to occur even in the places in 1776 with a “full complement of riches.”
Smith, of course, does mention machinery, in his famous discussion of the division of labor: “Men are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards the single object” (1776: Li.8: 20). But what is striking in his and subsequent discussions is how much weight is placed on mere reallocations. The reallocations, mere efficiencies, we have found, are too small to explain what is to be explained.
In a deep sense the economist’s model of allocation does not explain the factor of twelve. If allocation were all that was at stake then previous centuries and other places would have experienced what Britain experienced 1780 1860. Macaulay says, in a Smithian way, “We know of no country which, at the end of fifty years of peace, and tolerably good government, has been less prosperous than at the beginning of that period” (1830: 183). Yes. But 100 per cent better off, on the way to 1,400 per cent better off? Not. There had been many times of such peace before, with no such result as the factor of fifteen.
To put it another way, economics in the style of Adam Smith, which is the mainstream of economic thinking, is about scarcity and saving and other puritanical notions. In the sweat of thy face shalt thou eat bread. We cannot have more of everything. We must abstain puritanically from consumption today if we are to eat adequately tomorrow. Or in the modern catch phrase: there’s no such thing as a free lunch.
The chief fact of the quickening of industrial growth 1780 1860 and its aftermath, however, is that scarcity was relaxed — relaxed, not banished, or overcome by an “affluent society,” since whatever the size of income at any one time more of it is scarce. Modern economic growth is a massive free lunch.
In 1871, a century after Smith and at the other end of the period (but not the end of modern economic growth), John Stuart Mill’s last edition of Principles of Political Economy marks the perfection of classical economics. Listen to Mill:
Much as the collective industry of the earth is likely to be increased in efficiency by the extension of science and of the industrial arts, a still more active source of increased cheapness of production will be found, probably, for some time to come, in the gradual unfolding consequences of Free Trade, and in the increasing scale on which Emigration and Colonization will be carried on.
1871: Bk IV, ch. ii. l : 62.
Mill was wrong. The gains from trade, though statically commendable, were trivial beside the extension of industrial arts (“science” means here “systematic thinking,” not, as it came to mean in English shortly afterwards, and only in English, the natural sciences alone). The passage exhibits Mill’s classical obsession with the principle of population, namely, that the only way to prevent impoverishment of the working people is to restrict population. His anxieties on this score find modern echo in the environmental and family limitation movements. Whatever their wisdom today, the Malthusian ideas told next to nothing about the century to follow 1871. British population doubled again, yet income per head increased by nearly a factor of four. Nor did Mill’s classical model, as we have seen, give a reasonable account of the century before 1871.
Mill again: “It is only in the backward countries of the world that increased production is still an important object: in those most advanced, what is economically needed is a better distribution, of which one indispensable means is a stricter restraint on population” (1871 : Bk IV, ch. vi. 2: 114). Still more wrong, in light of what in fact happened during the century before and the century after. Mill is unaware of the larger pie to come — unaware, so strong was the grip of classical economic ideas on his mind, even in 1871, after a lifetime watching it grow larger. He says elsewhere, “Hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being” (1871: Bk IV, ch. vi. 2: 116), a strange assertion to carry into the 1871 edition, with child labor falling, education increasing, the harvest mechanizing, and even the work week reducing.
Mill was too good a classical economist, in short, to recognize a phenomenon inconsistent with classical economics. That the national income per head might quadruple in a century in the teeth of rising population is not a classical possibility, and so the classicals from Smith to Mill put their faith in greater efficiency by way of Harberger Triangles and a more equitable distribution of income by way of improvements in the Poor Law. It should be noted that Mill anticipated social democracy in many of his later opinions, that is, the view that the pie is after all relatively fixed and that we must therefore attend especially to distribution. That the growth of the pie would dwarf the Harberger Triangles available from efficiency, or the Tawney Slices available for redistribution, did not comport with a classical theory of political economy. Macaulay’s optimism of 1830 turned out to be the correct historical point: “We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all who came before us, and with just as much apparent reason” (1830: 186). The pessimistic and puritanical classical economists, with the pessimistic and puritanical romantic opponents of industrialization, were wrong.
Here is the economist’s way of stating the problem. Think of the output of Stuff (clothing, food, houses, etc.) and Services (doctoring, teaching, soldiering) in 1780 in Britain as being measured along two axes (bring back that high-school algebra and geometry, now!). The possibilities in 1780 are a curve along which the actual Britain of 1780 took a point, which we’ll call Self-Sufficiency:
{art to be supplied: here a scrunched-up production possibility curve}}
Inefficiency, misallocation, opportunities missed, distortions introduced of the usual static sort are about being inside or on that curve. Note the point Massive Unemployment: that would be a stupid place to be, since you could get out to the curve and have more of both Stuff and Services. You can get a little outside it by trading with foreigners. But only a little outside, to a point like Trade.
How sweet. Now I’ll tell you why I drew the so-called “production possibility curve” for 1780 as such a pathetically scrunched up little curve in the very corner of the axes: because to represent Now on the same diagram the amounts of Stuff and Services (averaged) have to be fifteen times further out. Natch: that’s what being better off means:
{added to last diagram is a modern production possibility curve, very much further out}
But observe. No merely static improvement of matters in 1780 can come remotely close to the curve of Now. That’s the intellectual puzzle in explaining this greatest of historical events.
