By Sergey Puchkov
Economics Undergraduate Student

Trade as the Cause of the Industrial Revolution in Britain

As Robert C. Allen put it, “Britain’s empire served Britain’s economy.” Between 1500-1750, Britain established a colonial trade empire, and overtook Mediterranean economies in the production and export of wool and draperies. The development of commerce led to: (1) the growth of London, (2) increasing returns to education, and (3) a “consumer revolution,” as increasing imports created incentives for work.

This produced the high-wage economy of pre-industrial Britain, with wages high relative to consumption goods, capital and, most importantly, energy. This price structure, unique to Britain, created the demand for labour-saving technologies. “Induced invention” became the driver of the Industrial Revolution. Within this framework, the Scientific Revolution, property-protecting institutions and abundance of coal were all necessary for industrialisation to proceed, but remained enabling rather than causal factors. They provided a supply of new technology; Allen’s thesis ensures there was demand for invention.

Allen’s focus on the explosive, commerce-driven growth of London (the population of which increased tenfold in the period 1500-1700) as the driver of rising wages is reflected in other academic work: Wrigley called London the “engine of British growth.” Allen’s emphasis on trade as promoting increases in human capital is also supported by a wide range of literature, often seen as responsible for the accumulation of “knowledge and skills,” as well as “adaptability.” Interestingly, increased market size plays no role in his argument. O’Rourke, on the other hand, emphasised the importance large markets and export expansion as a causal mechanism. He divided the Industrial Revolution into two phases, the first biased towards unskilled labour, the second towards skilled, as the “basic scientific knowledge rose above the necessary threshold.”

The turning point is identified around 1800, brought about by the rise of exports to expanding markets. The argument, however, is unfit to assess trade as a primary cause of the Industrial revolution, as trade and technological progress are endogenised in industrialisation. While O’Rourke’s model makes trade responsible for the expansion of Britain’s industry, the expansion happens after Britain becomes a “mature industrial economy.”

We thus return to Allen’s causal mechanism of induced invention. Acemoglu provides a similar, but explicitly microeconomic, approach to technological change. He identifies the “equilibrium bias” of technological change (i.e. direction of innovation) as dependent on two factors: the “price effect” (that encourages innovation away from a scarce resource) and the “market size effect” (that encourages technical improvement favouring an abundant one); innovation is then carried out by profit-maximising firms who take both into account. Viewing labour as “scarce” (i.e. expensive) and energy as “abundant” (i.e. cheap), this approach provides additional support for Allen’s argument.

Acemoglu’s framework illustrates, however, the weakness of a model that would present trade as a single causal factor: an alternative cheap or abundant resources is required. This point is also clearly illustrated by a comparative approach. Colonial trade and high wages explain why the Industrial Revolution happened in Europe.

They also explain why it happened in Northern Europe, and not in the great colonial empires of Spain and Portugal: Spain’s gold imports unleashed inflation and rendered its exports uncompetitive, while Portugal lost its lucrative South Asia colonies to the Netherlands. But why did the Industrial Revolution not happen in the Netherlands? As De Vries, argues, the Dutch wage was higher than the British in the period 1580-1790; the Netherlands were, in fact, experiencing a Golden Age and developed a highly material, consumption-based culture. An explanation is offered by “divergent fuel trajectories.” While the rising prices of timber provoked a substitution of coal as the main energy source in Britain, peat was the “backstop technology” in the Netherlands. While ultimately less efficient than coal, it was more attainable, and accounted for the fact that the coal fields of Belgium and Germany remained undeveloped until the 19th century.

Counterarguments

The trade argument involves several causal mechanisms: commerce creates an increase in human capital, that causes a rise in wages, spurring consumption, and a further increase in human capital as education becomes affordable; the resulting high wage, provided there is a cheap energy source, induces labour saving-innovation. There are three strands of criticism that need to be disputed for the argument to hold.

First, some historians have questioned the human capital channel. Very few have dismissed it completely (e.g. McCloskey argued that it was merely a “desirable human ornament,” and general literacy was unrelated to industrialisation), as there is a general consensus that human capital played a pivotal role.

Morgan and Mokyr, however, suggested an institutional explanation, arguing that the British labour force (1) was in a better physical condition due to better nutrition and (2) its distribution was skewed towards high-skill workers. It seems, however, that, while British institutions were important (e.g. the apprenticeship system), both (1) and (2) fit well within the trade argument. Trade was the initial catalyst that gave the stimulus for wage increase that both improved nutrition and made education affordable (e.g. apprenticeships were quite expensive), ultimately resulting in the skewed skill distribution Morgan and Mokyr describe.

Second, it is unclear whether import of luxury goods increased incentives for work. While Berg argues that there was a great increase in consumption of luxury goods as a result of colonial trade, that increase was likely to be limited to a small social group. Broadberry argues that there was no increase in pre- industrial consumption at all. Even if one assumes that consumption did increase, however, it was more likely to affect the Industrial Revolution by generating domestic demand. Gilboy, DeVries, McKenrick and Brewer have all argued for complex pre-industrial changes in household behaviour, but they were linked with institutional and social changes, rather than increasing imports. Fortunately, however, consumption is merely an additional mechanism in the trade argument, and far from vital for it to hold.

Finally, induced invention is the most contentious part of the trade argument. Many scholars have emphasised supply-side factors in driving invention. According to Clark, technological breakthroughs were induced by a greater supply of innovation (brought about by the Scientific Revolution) at modest rates of reward, not unusual returns to innovation. The fallacy of this argument, however, is that it assumes that induced invention was a result of “extravagant returns to investors.”

The induced invention argument, however, does not depend on such returns existing, but merely on the high labour-energy price ratio. Mokyr criticises the induced invention concept by arguing that (1) not all invention was labour saving (e.g. gas lighting, vaccinations), (2) many labour-saving technologies were actually developed in France (e.g. the Jacquard loom) and (3) high wages would not imply dear labour given the fact that the productivity of British workers was higher.

Historical evidence, however, contradicts all three. First of all, the efficiency of British labour increased dramatically only after the start of the Industrial Revolution. Secondly, the technologies Mokyr discusses were developed when the Industrial Revolution was well underway; it was initially driven by textile manufacturing innovation, indisputably motivated by reducing labour costs. The argument that many labour-saving inventions were of French origin is also dubious; the Scientific Revolution was a Europe-wide phenomenon, and innovation on the eve of the Industrial Revolution was by no means limited to Britain. The uniquely high demand for labour-saving invention, however, meant that innovation was happening at a greater rate and a wider scale in Britain than anywhere else.

Conclusion

Demand-side explanations are highly robust, and provide a compelling argument as to why the Industrial Revolution happened in Northern Europe, where high wages induced labour-saving innovation. Trade, in turn, provides a cohesive argument for the the increase of wages in the first place, and can therefore be viewed as a primary cause of the Industrial Revolution, more so than supply-side factors (e.g. the Scientific Revolution). The presence of a cheap energy source, however, is crucial for demonstrating why Britain industrialised before the equally commercially successful Netherlands. The trade argument, therefore, holds, but only given the enabling factor of coal abundance.

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Feature image: “Coalbrookdale by Night” (1801) by Philip James de Loutherbourg