This Is the End


Markets, Risk and Human Interaction

September 26, 2011

We Can Learn from Industrial Revolution Policies

Some of the dominant policy issues of today – immigration, energy, the emergence of China – have their analogues in the great Industrial Revolution. The key government policies that laid the foundation for the Industrial Revolution in England include supporting the immigration of skilled workers, allowing for private ownership of farm land, weakening the unions of the day (the guilds), and addressing the energy crisis (in charcoal). And contrary policies in Italy and Spain – countries that were far wealthier and advanced than was pre-Industrial Revolution England – derailed a similar revolution from occurring in continental Europe.

England would not have been anyone's first bet as the cradle of the Industrial Revolution. When compared to the developed countries of the time, such as Italy, the Netherlands, France, and Germany, sixteenth century England was an also-ran, and had fewer than 4 million inhabitants, compared to 15 million in France, 11 million in Italy, and 7 million in Spain. We all know the key innovations and developments that sparked the Industrial Revolution:

TextilesFor centuries preceding the Industrial Revolution England produced the best wool in Europe, and from the fourteenth century onward moved more and more into the production of woolen cloth. Wool and woolen cloth represented the bulk of English exports. Four inventions mechanized textile manufacturing and ushered in the Industrial Revolution: the spinning-jenny, patented by Hargreaves in 1770; the water frame, invented by Arkwright in 1769; Crompton's mule introduced in 1779; and the self-acting mule, which was brought into use until Roberts improved it in 1825. The most famous invention of all, patented by Cartwright in 1785, was the power-loom. And add to these a critical one from America: the cotton gin.

Coal and Iron. Meanwhile, the iron industry had been equally revolutionized by the invention of smelting by pit-coal brought into use between 1740 and 1750, and by the application in 1788 of the steam-engine to blast furnaces. In the eight years that followed, the amount of iron manufactured nearly doubled. Improvements were introduced in puddling, rolling, and other processes. The production of coal increased more than proportionately. The smelting of iron and the use of the steam-engine created fresh demand for coal, so capital and innovation extended to mining, leading to steam pumps, timber roof supports, and safety lamps.

The factory system. Prior to the Industrial Revolution, manufacturing was organized according to the "domestic system". Manufacturing was carried on in houses by a master working with a few journeymen and apprentices, usually in country villages. The implements of manufacture belonged to the master. The raw material—wool, linen, metal, or whatever —was the property of a town merchant or capitalist, who distributed it to the manufacturers in their houses in the villages, paying them for the product and then selling or exporting it. The power spinning machines were too large to be used in a house and required a large scale power plant. As a result, the Industrial Revolution led to an increase in the size of plants and a resulting concentration of labor and capital into centralized production centers. Shipbuilding, textile manufacture and the like required plants worth millions of pounds with hundreds of workers. Manufacturing thus moved from the traditional domestic or guild system to what became known as the factory system. The factory system brought with it capital-intensive production methods, power, and regimented laborer.

Less discussed are the government policies that provided the foundation and then nurtured these innovations:

Investing in infrastructure
The roads in England were in terrible condition at the start of the Industrial Revolution. It took a week or more for a coach to go from London to Edinburgh. Ruts were four feet deep, hardly a mile could be passed without seeing carts broken down.

Infrastructure projects, both by private turnpike companies and by public authorities, covered England with good roads. And even more important that the roads was the development of the infrastructure of the waterways. The first canal was completed in 1761, and within a few years a system of canals gave ready transportation for goods through all parts of the country. The investment in infrastructure, augmented by the introduction of steam engines for both rail and boats, was one of the most critical foundations for expansion of the Industrial Revolution, and indeed for the nineteenth century in general.

Opening immigration for skilled workers
Another policy that enhanced England’s position for industrialization was the influx of skilled immigrant. Persecution in France and Spain and economic difficulties in Spain and elsewhere drove people to more hospitable countries, with England at the top of the list. This immigration was not merely an infusion of labor, but of skilled labor that brought with it new methods of production: Flemish cloth; Walloon weavers, thread-makers and iron smiths; French Huguenots silk-weavers; clocks and metal goods from Normandy and Brittany; Spanish needles; Venetian glass; fine milled paper from Germany.

Not surprisingly, the immigrants were frequently harassed by English craftsmen, who saw in them as potentially dangerous competitors. But the Crown had policies to protect them, and ultimately the English craftsmen learned their techniques and often improved them.

Weakening the guilds
The influx of immigrants could only benefit England to the extent they were allowed to ply their trades. The English government put policies in place that assured this. In England the government – through the action of the Crown – did not permit restrictive practices of the crafts guilds In the cities, guilds also weakened because of the domination of the mercantile class, which controlled the market and the raw material of the craftsmen. Many immigrants did not stay in the cities, because once in the countryside the power of the guilds was dampened further.

In contrast to England, where manufacturing escaped from the controls of the city guilds, thereby allowing skilled immigrant, in Italy the guilds remained dominant, thwarting the few attempts to introduce innovations. Manufacturing remained stagnant in Italy, entrenched in the past. The result was a gradual replacement of Italian goods and services by foreign ones because the English – along with the Dutch and the French – could offer lower prices due to their innovations in production. Italian products were of a higher quality, but Italian manufacturers were constrained by guild regulations to use less efficient, traditional methods. The English and the Dutch swamped the textile market. Their products were inferior, lighter and less durable than the Italian products, but they cost a good deal less.

And not only did Italy lag in efficiencies of production. The guilds led to higher labor costs. Competition lowered wages outside Italy; while within Italy the guild organization kept wages up. At the beginning of the seventeenth century, Italian wages were out of step with wages in other countries. As a result there was a marked decline in Italian exports along with reduced investment in manufacturing and shipping.

Establishing private agricultural land
Traditionally the agricultural land in England was largely held in commons. Towards the late 1600's the government enacted laws that permitted enclosures, effectively privatizing land. Enclosing agricultural lands provided a scale of production and a level of control by the owners that led the to radically improved the efficiency of agricultural production. Rotation of crops, better fertilizers, drainage, breeding of better livestock (by one contemporary estimate, between the early and late 1700s black cattle increased from 370 pounds to 800 pounds, and sheep from 28 pounds to 80 pounds), were among the characteristics of the new farming, and these were practical only to those who had some capital, knowledge, and enterprise – all of which came more naturally to larger tracts of land under private ownership.

These improvements led to a cascade of further consolidation because those who continued to work the small farms could not compete and so sold them to neighboring landowners who had already created a production edge through earlier consolidation.

As with most of the other policies, enclosures came with its social costs. A popular piece of doggerel declared that:
The law locks up the man or woman;
Who steals the goose from off the common;
But leaves the greater villain loose;
Who steals the common from the goose."

Nonetheless, the resulting agricultural revolution played a large part in the industrial revolution. Not only in terms of the production of food to fuel the labor, but in the flow of farmers into the industrial sector.

Overcoming the energy crisis by forcing a move to new energy sources
The Industrial Revolution can be viewed as the control and redirection of energy toward production. But early on this was stymied because of deforestation and the resulting shortage of the primary fuel of the time: charcoal. To give an idea of the shortage, as early as the 1500's and into the 1600's the price of oak (primarily used in shipbuilding) rose twelve-fold, and the price of timber for charcoal increased five-fold.

In the sixteenth century England ordered a governmental inquiry into timber wastage and deforestation and then instituted a number of Acts of Parliament to suppress the cutting of timber for industrial purposes. As a result, foundries were forced to reduce their activities and England began to use coal for heating and in industrial processes. People were wary of the toxic fumes, but had no alternative. The transport of coal by sea from Newcastle to London increased from 35,000 is 1550 to 560,000 tons a century late. By 1738 a French traveler wrote that coal was "the soul of all English Industries."

As it turned out, this energy crisis, by forcing a move toward coal (and helped in that regard by the fact that England was relatively sparsely populated by forests in the first place but was abundant in coal), ended up helping to push England down the road towards industrialization.

Bringing in capital
Capital had not existed in any large amounts in medieval England, and even in the later centuries there was no group that focused on investing capital into industry. Agriculture and manufacturing were carried on with very small capital, usually the capital each farmer, artisan, or merchant might have of his own. There was no use of credit either from individuals or from banks for industrial development.

But capital was required to buy the new machinery at the heart of the industrial age. These machines were far too expensive for the old cottage weavers. Capital therefore had to be brought into manufacturing. This capital came from various directions.

Capital from Privateering
Privateering, also known as commerce-raiding, was basically government-sanctioned piracy. Strange as it may seem, with the development of England's seafaring capability and the flow of precious cargo from the Americas, privateering became an important source of capital accumulation in England. Indeed, in the three years following the defeat of the Spanish Armada in 1588, over two hundred English ships were involved in privateering, and over three hundred foreign ships were captured.

Capital from Spain
Meanwhile, Spain, which had an early lead on capital because of the influx of American treasure, enjoyed a period of splendor and economic superiority but lacked the human capital due to a cultural antipathy, even prejudice toward productive labor, to put that capital to good use.

So Spanish merchants turned to foreign producers and provided their capital to the foreign enterprises. A Venetian ambassador remarked, "Spain cannot exist unless relieved by others, nor can the rest of the world exist without the money of Spain."

The capital from the Americas thus provided Spain with purchasing power but ultimately stimulated the development of Holland, England, France, and other European countries.This prosperity, easily funded but inevitably of limited duration, led many to abandon farming and to regard craft and mercantile activities as menial occupations. Instead resources poured into the academies, whose product occupied the clergy and the increasingly bloated government bureaucracy rather than productive industry – and disguised structural unemployment as well.

In 1675 Alfonso Nuñez de Castro wrote:
Let London manufacture those fabrics of hers to her heart's content; Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocades; Italy and Flanders their linens, so long as our capital can enjoy them; the only thing it proves is that all nations train journeymen for Madrid and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody.

In short, seventeenth century Spain lacked entrepreneurs and artisans but had an overabundance of bureaucrats, lawyers. As England was building the foundation for the industrial revolution, easy-come-easy-go Spain provided capital even as it sank into decline.

Capital from rescinding primogeniture
The economic way of life in medieval England was framed by two economic realities: Virtually all wealth was in the form of land, and the land could not be sold. Wealth was held in land even up to the seventeenth century it was the universal outlet for savings in England-primarily because there were not many alternative investments. As late as the sixteenth century, more than 80 percent of production was based on agriculture. What limited industry there was bore little resemblance to the Industrial Age that would follow centuries later. Some towns had specialized industry-brewing, salt making, iron working, paper mills-but this was still not characteristic of the economy as a whole. And because land was the preponderant store of wealth, it was also the source of social stature and political power. A large landed estate gave its owner great local influence in controlling elections and sharing in patronage and opened the door for him to join the gentry.

As early as the time of the Norman Conquest in 1066, land could not be sold or even used as collateral for a loan because feudal lords exchanged it for a knight's military service. A knight could no more transfer his land than he could pass on his military obligation. This this limitation on the right to transfer land carried the weight of law because of another import into England: primogeniture. Landholders had a right to their land only for the course of their lives, after which the deed was transferred according to the rules of primogeniture, which meant it generally passed to the oldest son.

The cost of having capital be literally land-locked capital became increasingly apparent on a practical level as new avenues for wealth and investment opened up. The development of overseas commerce and the increasing involvement of leading merchants in the lucrative business of lending money to the government expanded investment opportunities. Finally, there were prospects for building fortunes apart from land ownership. The landed gentry had an incentive to extract the wealth from their land to pursue other opportunities, so various artifices were used to circumvent primogeniture.

The new-found liquidity in the land progressed during the Tudor and early Stuart reigns, resulting in the rapid growth and independence of the English gentry and their servants. Now that land could be used as collateral, it opened up new possibilities for borrowing and lending. An embryonic capital market developed in London, and by the seventeenth century in other cites as well. The end of primogeniture thus helped allow capital to find its way into financing the emerging opportunities of the Industrial Revolution.

Breaking down class barriers for artisans and engineers
In the Middle Ages, science and technology were separate and distinct. Science was philosophy; technology was craft. Science had no interest in technological affairs, and technological developments were the fruits of uneducated artisans. For example, physicians viewed themselves as scientists and philosophers, and so had nothing to do with the surgeons, who were considered technicians and simple artisans.

But developments in ocean navigation, in the watch and clock industry, and in experimental science required increasing numbers of precision instruments which in turn led to a new, superior sort of technician who could interact with the scientists, with both the technician and the scientist engaged in similar problems. It required an elevation in the status of the artisans, engineers and skilled workers, and a partnership between these occupations and the more elite and lettered of science and philosophy. This interaction between the philosopher-scientist and the artisan was promoted by so august a body as The Royal Society of London, which charged some of its members with compiling a history of artisan trades and techniques.

This new attitude, an attitude toward science that placed pragmatism before idealism, that applied mathematics to explaining the real world, and that introduced experimentation and empiricism (along with statistical methods – the experimenters of the seventeenth century endlessly recorded, cataloged, and counted) as an integral part of the scientific process, underlies the inventions of the Industrial Revolution. The willingness to have science deal with the practical rather than the philosophical, to solve the concrete problems of production, and to team up with the skilled artisans – a partnership across class lines that was unique to England -- was critical for the technological developments behind the Industrial Revolution.