How should the history of the industrial revolution influence economic reforms?

 
While recently reading Deirdre McCloskey’s ‘Bourgeois Dignity’, Joel Mokyr’s ‘The Enlightened Economy’ and Eric Jones, ‘Locating the Industrial Revolution’ (discussed previously here, here and here) I was pleased to find that these authors have been able to make a strong case that the industrial revolution can be best explained by modern economic growth theory that emphasises the importance of technological progress, innovation and productivity improvement. It is reassuring that this conceptual framework fits the facts relating to the history of the last few hundred years as well as comparative growth experiences of different countries in more recent times.

In their explanations, however, McCloskey and Mokyr move substantially away from the view that because ‘incentives matter’ the best explanation for everything must be found in changes in economic incentives. This does not necessarily involve moving away from a utility maximization framework (although McCloskey does). There is no reason why a Max U framework cannot recognize that inventors may be strongly influenced by the pleasure of discovery and by recognition of their peers; innovators may obtain pleasure from seeing scientific knowledge being put to good use; and everyone may gain some satisfaction from acting in accordance with their own perceptions of their identity, whether that involves behaving like a scientist, a gentleman, a tycoon, a rent-seeker or a mendicant.

In explaining the industrial revolution Mokyr and McCloskey emphasize the importance of beliefs and ideologies – in particular those associated with the Enlightenment. Three inter-related strands of beliefs and ideologies connected to the Enlightenment seem to be particularly relevant:

• First, Mokyr argues that the influence of the Baconian program - with its emphasis on research to solve practical problems - extended beyond formal scientific research. He makes a strong case that the ‘legitimization of systematic experiment carried over to the realm of technology’, including through the proliferation of provincial ‘philosophical’ societies discussing practical and technical issues.

• Second, as emphasized by McCloskey, there was a bourgeois revaluation – a change in attitudes toward the middle classes, markets and innovation. Mokyr links this to norms relating to politeness and gentlemanly behaviour, and an apparent improvement in social trust which reduced transactions costs.

• Third, there is the ideological change stemming directly from the success of the Scottish Enlightenment and, in particular, from publication of ‘Wealth of Nations’ by Adam Smith. As Mokyr writes: ‘The Enlightenment in its different manifestations advocated a set of new institutions that cleared up centuries of mercantilist policies, regulations and social controls, whose objective had been primarily to redistribute resources to politically connected groups and to enhance the interests of the Crown (the best connected group of all). The mercantilist world was unsuitable to a brave new world of continued technological progress driven by free markets, innovative entrepreneurship, and an internationally collaborative effort to advance technology’ (p. 486).

In reviewing Eric Jones book I asked myself whether the industrial revolution could be attributed to economic freedom and suggested that his book had reinforced my view that it could be (even though Jones does not argue strongly in favour of that view). My subsequent reading has not led me to change that view but it suggests that economists interested in economic growth should give more attention to beliefs and ideologies that lie behind the formal rules of the game and their incentive structures.

In writing this I am reminded of comments made by Douglass North in his Nobel Prize lecture in 1993:

‘It is the admixture of formal rules, informal norms, and enforcement characteristics that shapes economic performance. While the rules may be changed overnight, the informal norms usually change only gradually. Since it is the norms that provide "legitimacy" to a set of rules, revolutionary change is never as revolutionary as its supporters desire and performance will be different than anticipated. And economies that adopt the formal rules of another economy will have very different performance characteristics than the first economy because of different informal norms and enforcement. The implication is that transferring the formal political and economic rules of successful western market economies to Third World and eastern European economies is not a sufficient condition for good economic performance. Privatization is not a panacea for solving poor economic performance’.

The fact that privatization by itself is no panacea does not stop me from arguing in favour of it, but I take the point that economic freedom cannot be sustained unless prevailing beliefs, ideologies and norms are supportive.

Postscript:
I should have mentioned the growing importance of freedom of speech as a factor which would have contributed to the various strands of Enlightenment thinking noted above. This enabled the growth of social networks and civil society as discussed by Mokyr (p. 387). The line of argument in Timothy Ferris's book, 'The Science Liberty', (which I discussed here) is also relevant in this context.

Was the industrial revolution mainly about the growth of manufacturing industry?

Some readers may think this question is like asking whether the Pope is a Catholic. The question is worth considering, however, because it raises some fairly common misconceptions about the industrial revolution (some of which I held until recently).

My main reason for reading about the industrial revolution has to do with my interest in human flourishing. The industrial revolution led to a massive, unprecedented and ongoing improvement in living standards, beginning in Britain and then spreading to other parts of the world. From that perspective, the industrial revolution tends to be associated with the advent of sustained economic growth.

However, Joel Mokyr suggests that the best available estimates indicate that growth in per capita income in Britain did not accelerate until the decades after 1830 - well after the beginning of the industrial revolution (‘The Enlightened Economy’, p 256). That makes sense if we define the industrial revolution in terms of the technological innovations which brought about a transformation in the way goods and services were produced in the British economy between 1760 and 1830. One reason why these innovations were not immediately reflected in higher per capita income growth was the rapid growth of population – the English population increased from 6.1 million to 13.1 million between 1760 and 1830 (p.257). Another reason was the initial concentration of major innovations in a relatively small, though rapidly growing, part of the British economy (p. 82).

Information from a table presented by Deirdre McCloskey is graphed below in order to provide some perspective on the contribution of different industries to productivity growth in Britain over the period from 1780 to 1860 (‘Bourgeois Dignity’, p.219).

Figure 1 shows the relatively rapid growth of productivity in some manufacturing industries as well as canals and railways.

Figure 2 shows that despite the more modest productivity growth rate in agriculture, the relatively large size of this sector means that over the period considered its contribution to overall productivity growth was comparable to that of the manufacturing industries with more rapid productivity growth.

So, was the industrial revolution mainly about the growth of manufacturing industry? Perhaps, if we define the industrial revolution so narrowly that it has to refer to the growth of manufacturing industry. If we do that, however, we need another term to describe the processes leading to the advent of economic growth in Britain. Joel Mokyr’s term, the industrial enlightenment, aptly describes the broader processes through which a social climate favourable to innovation was made possible by growing recognition that material progress could be achieved through advances in science and technology.

Mokyr puts the various phases of the industrial revolution in context as follows:

‘The Industrial Revolution was above all a beginning. It cannot be judged on its own grounds without considering what it led to. What is truly significant is not the wave of great inventions made in the years between 1765 and 1800, but the fact that this process did not subsequently fizzle out. Some societies, in Europe and Asia, had witnessed previous clusters of macroinventions, leading to substantial economic changes. ... The “classical” Industrial Revolution in the eighteenth was not an altogether novel phenomenon. In contrast, the second and third waves in the nineteenth century, which made continuous technological progress the centrepiece of sustainable economic growth, were something never before witnessed and that constituted a sea change in economic history like few other phenomena ever had’ (p. 83-4).

Postsript:
I would like to draw attention to Deirdre McCloskey's comment below.

I would also like to draw attention to this video by Hans Rosling on You Tube.

Was the industrial revolution caused by bourgeois dignity or institutional change?

Deidre McCloskey’s important new book serves to establish that if we want to explain the industrial revolution we need to explain why so much innovation occurred in England from the late 18th century and through the 19th century. She suggests that we should dismiss attempts to explain the industrial revolution in terms of such factors as thrift, accumulation of capital (physical or human), transport, geography, natural resources, the slave trade, business organization, imperialism, eugenics and even foreign trade.

The style of the exposition suggests, at times, that Deidre may not suffer fools gladly (or has a wicked sense of humour): ‘If someone claims that foreign trade made possible, say, economies of scale in cotton textiles or shipping services she owes it to her readers (as I have already said twice: I wish you would pay attention) to explain why the gains on the swings are not lost on the roundabouts. Why do not the industries made smaller by the large extension of British foreign trade end up on the negative side of the account?’ (p 221).

Well, I’m not sure Deidre, perhaps there is a link between international trade, specialization and scale economies - but you may have discussed that possibility somewhere else in the book when I wasn’t paying attention. In any case, I agree with you that innovation must have been a lot more important than scale economies.

I was a little more concerned that I didn’t see any recognition of the possibility, as discussed in Eric Jones’ recent book (reviewed here), that clustering of manufacturing in the north of England – as a result of trade and specialization within England - provided an economic environment conducive to subsequent innovations. Perhaps middle class enrichment resulting from trade and specialization could also help to explain why the bourgeois revaluation occurred when and where it did. (The bourgeois revaluation is the greater approval of the middle classes - and of innovation and markets - that began to occur in thought and talk in Holland and England three centuries ago.)

My main concern, Deidre, is that in attempting to clear the field prior to sowing a new crop of ideas (or the old ideas you want to propagate anew) you may be inadvertently slashing and burning some other ideas that are worth preserving. This applies, in particular, to the relationship between institutional change and economic performance as discussed by Douglass North (‘Institutions, Institutional Change and Economic Performance’, 1990). I agree with you that North could not have been correct in attributing the industrial revolution to more secure property rights following the Glorious Revolution. There is, however, more to institutional change than more secure property rights. I reject your attempt to dismiss appeals to institutional change as ‘still another attempt to reduce one of the greatest surprises in human history to a materialist routine’ and to claim that changes in institutions did not have much to do with the industrial revolution (p. 354).

In fact, evidence that you cite in your book seems to conflict with your claim that changes in institutions – the rules of the game - had little to do with the industrial revolution. You acknowledge that ‘the norms of antibourgeois aristocrats and clerics did discourage innovation’ (p. 267). You also suggest: ‘Had the Ottoman or the Qing empires or the Japanese Shogunate admired trade and innovation sufficiently to overcome their worries about the maintenance of state power – encouraging innovation and having a go rather than crushing it – then they, not the Europeans, would have come first’ (p. 371). You note that in France and Spain in the 18th century a nobleman caught engaging in commerce could be stripped on his rank’ (p. 387) and that in France it was necessary to apply to the state for permission to open a factory (p. 395).

I think your true position may be that bourgeois dignity and institutions (economic freedom) are both important in explaining the industrial revolution. This comes through fairly clearly when you write: ‘By adopting the respect for deal-making and innovation and the liberty to carry out the deals that Amsterdam and London pioneered around 1700, the modern world was born’ (p. 397). In such passages you seem to be offering an encompassing theory incorporating both bourgeois dignity and institutional change.

So far so good. I can understand that ideology (an amalgam of perceptions and values) influences the climate of opinion toward commerce and innovation which in turn influences both informal institutions (conventions and codes of behaviour) and formal institutions (regulations, laws, constitutions) which may or may not provide a climate conducive to innovation. Is that all there is to understand?

Perhaps not. The missing element is a sense of personal identity. As you say: ‘In truth, the agent wants to act because she attributes meaning to her life ... She is a human with an identity, not a Max U calculating machine like grass or bacteria or rats’ (p. 307).

That gets me thinking again about identity economics – the idea of George Akerlof and Rachel Kranton that people gain utility when their actions conform to the norms and ideals of their identity (which I first discussed here). Even a person with great potential to be innovative might find that difficult if the norms and ideals of their identity dictated that any attempt to innovate would be futile. If we start thinking in terms of identity economics, however, we might have to question the sub-title of your book – perhaps economics can explain the modern world after all.

'Extract the digit': a vulgar expression?

This question has arisen as a result of use of the expression in a speech made at a public speaking club a couple of months ago. The speech was made by a relatively new member of the club who said something like: ‘The time had come for me to extract the digit and get on with it...’. The subsequent reaction of some members to use of this phrase has made it extremely difficult for him (and several other members including myself) to continue their membership of the club. Members have been told by one of the longest-serving and most distinguished club members that it is not appropriate to vote for people who use such expressions as ‘best speaker’ at club meetings.

If the issue had been raised for discussion in general business, I would have made the point that I cannot remember hearing the expression before Prince Philip, the Duke of Edinburgh, told British businessmen that it was time they pulled their fingers out about 50 years ago (when I was finishing secondary school). He was reported as saying:

‘Gentlemen, I think it is about time we “pulled our fingers out” … If we want to be more prosperous we're simply got to get down to it and work for it. The rest of the world does not owe us a living’: Speech in October, 1961.

I am not sure that mentioning Prince Philip would have been persuasive, however, since the role of members of the royal family in setting social standards is now less widely accepted than it was 50 years ago. Given Prince Philip’s reputation for making social gaffes, some members of our club would possibly consider him, also, to be too rough around the edges to be voted as best speaker.

How can we judge whether or not ‘extract the digit’ should now be viewed as a socially acceptable use of language? It might be relevant to consider whether use of this expression still ranks amongst Prince Philip’s biggest social gaffes. It doesn’t. It is not even included in this long list compiled by BBC news.

A Google search for the phrase ‘pull your finger out’ reveals widespread current usage in Australia. The contexts suggest that it is usually intended to be offensive, but I think most people who are told to pull their fingers out are more likely to be offended by the implication that they are wasting time or procrastinating than by the vulgarity of the expression.

The origins of the expression do not necessarily support a vulgar interpretation. One theory, noted here, is that the expression originated during the times of the Men'o'War. When a cannon was loaded, a small amount of powder was poured into the ignition hole near the base of the weapon. In order to keep the powder secure before firing, a crew member pushed one of their fingers into the hole. When the time came for ignition, the crewman was told to pull his finger out.

Perhaps the apparent vulgarity of the expression lies solely in the imagination of those who think that the metaphor must refer to removal of a finger from a bodily orifice.