11: The Puzzle of the Industrial Revolution
There is some question of the reason the Industrial Revolution occurred around 1800. To some, it seems a mystery that it occurred at all, whereas others seem to wonder why it was "delayed" (EN: there is no indication of why one would assume it should have happened sooner.) The greater mystery may be the reason that it failed to materialize before, given the advancement in various preindustrial societies that persisted for generations only to collapse. Multiple theories exist, and in this chapter the author means to present them in terms of the categories into which they can generally be grouped.
Exogenous Growth Theories
Exogenous theories posit that some force outside of economic activity compelled it to undertake significant changes in reaction.
For many economists, the greatest exogenous force is the institutions that govern society, as it is government that interferes with the natural order of things. In some instances governments protect the security that a person who has or creates a physical artifact retains possession of it; in others, government is the force that separates people from those artifacts.
In this sense, progress depends upon a society to defend the property rights of citizens and to interfere in them as little as possible. In the absence of such rights, products are insecure in the possession of the result of their effort, which undermines their incentive to produce. This results in a subsistence economy, such as the primitive hunter-gatherer tribes - in which individuals are encouraged to produce only what they intend to immediately consume.
In order to progress from an agrarian to an industrial society, producers must not only have security in their possessions, but in the technology to produce it. Where an innovator would be unable to benefit from their invention, this undermines their incentive to research and experiment, but to apply all resources to traditional and certain means of production. In a broad sense, this describes the situation that prevailed in the agrarian era.
This theory also holds up in the comparison of countries in the present age - the chief difference between rich and poor nations is the quality of their governmental institutions. Further evidence is in the changes that take place when government institutions are suddenly and dramatically overthrown - consider the impact of the French revolution or the Soviet one, or the return to democratic rule some years afterward.
This approach may have appeal to economists, but the author asserts that many of them have an unrealistic caricature of life before the industrial revolution, likened to "a mixture of all the bad movies ever made about early societies." Primarily, we can witness from less dramatized accounts of history that property rights existed in many societies long before the industrial revolution took place, and the protection of intellectual property did not occur until long afterward.
Also, consider that the economic policies of a governmental institution are merely a set of rules about who owns what and how ownership is determined - it can be changed at a whim - and the law has no impact to the economy of a nation unless and until action is taken to enforce it. Moreover, if the rules of an institution hindered the welfare of the people, the laws would be widely disregarded and there would be pressure to change the law to one that better reflects the actual practices. By this view, political institutions play no role in long-term economic development, and it is more often the case that the economy shapes policy than vice-versa. History is full of instances of institutions that were subverted, refashioned, or overthrown because they were inefficient.
Consider the collection of interest on loans as an example of the way in which law yields to economic necessity: under early Christianity (and Islam to the present day) the collection of interest is forbidden. But the need for capital was such that loopholes were constantly found, whether the law provided an alternative way to collect interest (rent charges, share of profit, etc.) or the parties involved used an intermediary (borrowing or lending to a Jew, documenting the debt in foreign currencies, etc.) or government simply turned a blind eye to the practice.
Multiple Equilibrium Theories
Other theories look beyond the single institution of the government to multiple societal institutions, suggesting that social progress was prevented b the conflicts between the nobility, the merchants, the clergy, trade guilds, and any number of institutions, each of which sought to serve its own interests without regard to the detriment to society as a whole.
Medieval guilds are a prime example of this: by their collective power they served to impose a limit on the number of skilled tradesman in a given field of endeavor, which kept wages high but decreased the output as a whole - and in some instances the gilds were wealthy and powerful enough to buy the favor of politicians.
Other institutions have a similar influence, each attempting to maximize their own economic benefits, but the result is inefficiency of the economy as a whole. It's further theorized that the system can be shocked into change, but eventually reforms itself to regain political power afterward. This is theorized to be the reason that economic progress was stifled, but it is not particularly compelling: there is little proof that institutions exerted such influence on a constant basis in all societies, and there are also long periods in history in which no such institutions existed, yet progress did not result in their absence.
Another theory focuses on a particular institution - specifically slavery (or serfdom) - was so inefficient that it consumed societal excesses, and colonialism had the same effect from an external source, with "predatory states" sapping the production of their colonies. Therefore, it was only with the advent of democracy that economic growth became possible. There is historical evidence that suggests this correlation, in that the nations that rose to economic power (Britain and the United States) did not do so until these conditions were established. However, it can also be seen that other nations failed to develop economically under the same conditions.
It is more reasonable to consider that the productivity increases brought about by industrialization made these institutions untenable. That is, slavery became unnecessary because fewer workers could produce more food from less land; colonialism became unnecessary because it became more efficient to produce goods to trade rather than controlling the production of raw materials. If either of these institutions were inefficient prior to industrialization, they would have been abandoned prior to industrialization.
It does seem to be the case that the end of these institutions contributed to increased productivity - a free man has the incentive of self-interest to become more productive, whether by his own labor or by the productivity of an operation, but this is a precipitating effect rather than a cause.
This is not to discount the historical evidence of emancipation prior to industrialization, such as Roman slaves buying their own freedom, etc. In the Malthusian era, the incidence of slavery, serfdom, and indentured servitude wax and wane - but even in periods where slavery was virtually abolished (at the fall of the Roman empire or the 1500s in Europe), there was no permanent change in the economic model.
Human Capital
Another argument that has recently attracted significant income is that preindustrial societies were characterized by large families: parents would have large numbers of children, and each child would be given little training or education; and that there is a dramatic decrease in births per woman in the postindustrial world. As such, the revolution is attributed to "more maternal attention" devoted during childhood and having fewer people of "higher quality." This may also be a confusion of cause and effect.
However, it has been shown that the number of births is less significant than the number of children who survive to adulthood - and as such it can be observed that there was not significant population growth in most preindustrial societies. Moreover, comparing the number of children who survived to adulthood in the preindustrial era demonstrated that more children were raised by wealthy families (specifically, those who had already accumulated wealth) than were raised by poor families (who aspired to become wealthier), a distinction that may be lost in the aggregate.
It's also questioned whether the level of material attention improved the quality of children. While there is evidence to suggest that a better educated worker is more productive, maternal attention does not equate to education. We also find no signal to parents in preindustrial society that there was a need to invest in the education of their children - children of the time were expected to (and did) adopt the profession of their fathers. It was not until the early twentieth century that a connection was made between education and welfare
A final flaw in the human capital theory is that the demographic transition in Europe and the United States occurred around 1890, which was over a century after the industrial revolution began.
Endogenous Growth Theories
None of the exogenous theories of economic growth satisfactorily explains the institutional changes that occurred, or why it occurred in Europe in 1760 as opposed to Greece in 500 BC or Babylon a millennium before. However, the endogenous theories that consider factors within the economy itself, rather than external forces that influence the economy, provide a more reasonable explanation.
One such theory (Kremer) maintains that the incentives for individuals to create knowledge are the same regardless of the society in question. That is, knowledge is discovered by one individual and shared with others - and the more diverse the group of people with whom you are in contact, the more you will benefit from the exchange of ideas. Prior to 1800, there was a low population in general and, more importantly, little contact between people in different locations.
(EN: This seems a logical theory, but lacks the same scrutiny as was directed to the exogenous criteria: what evidence is there that people shared ideas more in one age than in others? Why is it that the population and diversity of previous ages, such as the Roman Empire, did not result in a similar explosion of transformational knowledge?)