Bourgeois Deeds: How Capitalism Made Modernity 1700-1848

Chapter 4:

Foreign Trade Was Not It,

Nor the Slave Trade, Nor Imperialism

Another thing we have learned in the past thirty years of research into the era, to put the findings in a nutshell, is that reallocation was not the cause. Shuffling resources around is not the way to the factor of fifteen. Expanding this industry and contracting that one might get you, if you’re lucky or skilled, a national gain of 10 percent. But not 1400 percent. To put the findings another way, we have learned many Nots: that industrialization in Britain as in the followers has not been mainly a matter of foreign trade, not a matter of internal reallocation of the labor force, not of transport innovation, not investment in factories, not education, not even science. The task of the next thirty years will be to untie the Nots.

Consider foreign trade. An old tradition carried forward by Rostow and by Deane and Cole puts much emphasis on Britain’s foreign and colonial trade as an engine of growth. What the recent research has discovered is that the existence of the rest of the world mattered for the British economy, but not in the way suggested by the metaphor of an “engine of growth.”⁹⁰

What has become increasingly clear from the work of Williamson and Neal (Williamson 1985, 1987, 1990b; Neal 1990) among others is that Britain functioned in an international market for many goods and for investment funds. More exactly, the fact has been rediscovered—it was a commonplace of economic discussion by Ricardo and the rest at the time (it became obscured in economics by the barriers to trade erected during the European Civil War, 1914 45, and aftermath just ended).

By 1780 the capital market of Europe, for example, centered in Holland and England, was sophisticated and integrated, capital flowing with ease from French to Scottish projects. True, the market dealt mainly in government debt. The old finding of Pollard (1964) and others survives: industrial growth was financed locally, out of retained earnings, out of commercial credit for inventories and out of investors marshaled by the local solicitor (Richardson 1989). But “the” interest rate relevant to local projects was determined by what was happening in wider capital markets, as is plain for example in the sharp rises and falls of enclosure in the countryside with each fall and rise in the rate of interest, like housing construction nowadays. The interest rate in the late eighteenth century also determined booms and busts in canal building. And the interest rate in turn was determined as much by Amsterdam as by London.

The same had long been true of the market in grain and other goods, as David Ricardo assumed in his models of trade c. 1817 as though it were obvious. The disruptions of war and blockade masked the convergence from time to time, and regulations, such as the Corn Law, could sometimes stop it from working. But the European world had a unified market in wheat by the eighteenth century, as is becoming clear. Already in 1967 Braudel and Spooner had shown in their astonishing charts of prices that the percentage by which the European minimum was exceeded by the maximum price fell from 570 per cent in 1440 to a mere 88 per cent in 1760 (1967: 470). Prices continued to converge, a benefit of the rapid growth of productivity already noted in shipping and railways. The same could be said of prices of iron, cloth, wood, coal, skins and the rest of the materials useful to life around 1800. They were beginning to cost roughly the same in St Petersburg as in New York.

The reason the convergence is important is this: an economic history that imagines the British economy in isolation is wrong. If the economy of Europe is determining the price of food, for example, it makes little sense to treat the British food market as though it could set its own prices (except, of course, by protective tariffs: which until the 1840s it imposed). Purely domestic assumptions, such as those around which the controversy over agriculture’s role in industrialization have raged, will stop making sense.⁹¹ The supply and demand for grain in Europe, or indeed the world, not the supply and demand in the British portion of Europe, was setting the prices faced by British farmers in 1780. Likewise for interest rates or the wages of seamen. Centuries earlier the price of gold and silver had become international.

The intrusion of the world market can become so strong that the domestic story breaks down entirely. One can tell a domestic story in the eighteenth century of how much was saved, but not a domestic story of what interest rate it was saved at. One can tell a domestic story in the early nineteenth century of the supply of labor from a slowly growing agricultural sector, but not a domestic story of the entire supply of labor to Liverpool, Glasgow and Manchester, if Ireland is not included. Nots.

Pollard, again, argued persuasively that for many questions what is needed is a European approach, or at least a north western European regional approach.⁹² He wrote in 1973, “the study of industrialization in any given European country will remain incomplete unless it incorporates a European dimension: any model of a closed economy would lack some of its basic and essential characteristics.”⁹³ The political analogue is that it would be bootless to write a history of political developments in Britain or Italy or Ireland 1789 to 1815 without reference to the French Revolution. Politics became international—not merely because French armies conquered most of Europe but because French political ideas became part of political thinking, whether in sympathy or in reaction. Likewise in economic matters. The world economy from the eighteenth century (and probably before) provided Britain with its framework of relative values, wheat against iron, interest rates against wages.

The point is crucial, to return again to the puzzle, for understanding why the classical economists were so wrong in their dismal predictions. Landlords, they said, would engorge the national product, because land was the limiting factor of production. But the limits on land seen by the classical economists proved unimportant, because north west Europe gained in the nineteenth century an immense hinterland, from Chicago and Melbourne to Cape Town and Odessa. The remarkable improvement of ocean shipping tied Britain to the world like Gulliver to the ground, by a hundred tiny threads. Grain production in Ukraine and in the American Midwest could by the 1850s begin to feed the cities of an industrial Britain; but the price of wheat in Britain was constrained even earlier.

Trade, then, was important as a context for British growth. Yet it was not an engine of growth. For the period in question Mokyr makes the clearest case.⁹⁴ The underlying argument is that domestic demand could have taken the place of foreign demand (Mokyr earlier [1977] had shown likewise that the shuffling of domestic demand was no more promising). To be sure, Britons could not have worn the amount of cotton textiles produced by Lancashire at its most productive: cotton dhotis for the working people of Calcutta would not have become fashionable at the High Street Marks and Spencer. But in that case the Lancastrians would have done something else. The exporting of cotton cloth is not sheer gain. It comes at the cost of something else that its makers could have done, such as building more houses in Cheshire or making more wool cloth in Yorkshire.

In other words, the primitive conviction most people have that foreign trade is the source of wealth is wrong. Nations, or villages, do not have to trade to live. (The power of the conviction is shown nowadays by the role of fish exports in the political economy of Iceland or of exports generally in that of Japan.) Exports are not the same thing as new income. They are new markets, not new income. They are a shift of attention, not consciousness itself. Not.

The trade, of course, benefits the traders. Although not all the income earned in trade is a net gain, nonetheless there is such a gain. But—here’s the nub—the gain can be shown in static terms to be small. One of the chief findings of the “new” economic history, with its conspicuous use of economic models, is that static gains are small. Robert Fogel’s calculation of the social savings from American railways is the leading case (1984, replicated by Hawke in 1970 for Britain with broadly similar results). However essential one may be inclined to think railways were, or how crucial foreign trade to British prosperity, or how necessary the cotton mill to industrial change, the calculations lead to small figures, far below the factor of fifteen.

The finding that foreign trade is a case in point, with small static gains, can stand up to a good deal of shaking of the details. Its robustness is a consequence of what is known informally among economists as Harberger’s Law (after A. C. Harberger, an economist famous for such calculations). That is, if one calculates a gain amounting to some fraction from a sector that amounts to again a fraction of the national economy one is in effect multiplying a fraction by a fraction. Suppose X per cent of gain comes from a sector with Y per cent of national income. It follows from highly advanced mathematics (do not try this at home) that the resulting fraction, X times Y, is smaller than either of its terms. For most sectors and most events—here is the crucial point—the outcome is a small fraction when set beside the 1,400 percentage points of growth to be explained 1780 to the present, or even beside the 100 percentage points of growth to be explained 1780 to 1860.

To take foreign trade as the example, in 1841 the United Kingdom exported some 13 per cent of its national product. From 1698 to 1803 the range up and down of the three year moving averages of the gross barter terms of trade is a ratio of 1.96, highest divided by lowest (Deane and Cole 1962; Mitchell and Deane 1962: 330); Imlah’s net barter terms range over a ratio of 2.32, highest divided by lowest (1958). So the variation of the terms on which Britain traded was about 100 per cent over century-long spans like these. Only 13 per cent of any change in income, then, can be explained by foreign trade, statically speaking: 100 x 0.13 = 13. Another Not.

Faced with such an argument the non economists, and some of the economists, are likely to claim that “dynamic” effects will retrieve trade as an engine of growth. The word “dynamic” has a magical quality—the economist Fritz Machlup once placed it in his list of “weaselwords.” Waving “dynamic” about, however, does not in itself suffice to prove one’s economic and historical wisdom. One has to show that the proffered “dynamic” effect is quantitatively strong.

For example, one might claim that the industries like cotton textiles encouraged by British trade were able to exploit economies of scale, in perhaps the making of textile machinery or the training of master designers. There: a dynamic effect that makes trade have a larger effect than the mere static gain of efficiency. Not Not.

It may be true. And in fact a smaller cotton textile industry would have been less able to take advantage of technological change nationally. After all, cotton was unusually progressive. But is the dynamic effect large?

One can answer the question by a thought experiment. If the cotton textile industry were cut in half by an absence of foreign markets 1780 1860 the importance of cotton in national productivity would have fallen from 0.07 to 0.035. Resources would have had to find other employment. Suppose that the released resources would have experienced productivity growth of 0.5 per cent per year (on the low end of the available possibilities) instead of the princely 2.6 per cent they in fact experienced in cotton. The cotton industry in the actual event contributed a large amount   namely, (0.07) (2.6 per cent) = 0.18 per cent per year   to the growth of national income; this one giant contributed some 18 per cent of the total growth of income per person nationally 1780 1860. With the hypothetical cut off of trade the resources would contribute instead (0.035) (2.6 per cent)+(0.035) (0.5 per cent) = 0.11 percentage points a year. The fall in national productivity change can be inferred from the difference between the actual 0.18 per cent attributable to cotton and the hypothetical 0.11 per cent attributable to a half sized cotton industry and the industries its resources went to. The difference is about a 7 per cent fall in the national rate of productivity change, that is, a fall from (notionally) 1.00 per cent a year to 0.93 per cent a year. In the eighty years 1780 1860 such a lag would cumulate, however, to merely 9 per cent of national income, Remember that a 100 per cent change is to be explained. The dynamic effect sounds promising, but in quantitative terms does not amount to much. Another Not.

A “dynamic” argument, further, has a serious problem as an all purpose intellectual strategy. If someone claims that foreign trade made possible, say, unique economies of scale in cotton textiles or shipping services, she owes it to her readers to tell why the gains on the swings were not lost on the roundabouts. Why do not the industries made smaller by the large extension of British foreign trade end up on the losing side? The domestic roads in Shropshire and the factories unbuilt in Greater London because of Britain’s increasing specialization in Lancashire cotton textiles may themselves have had economies of scale, untapped. (The argument applies later to the worries over “excessive” British specialization in foreign investment, insurance and shipping).

All this Not saying is not to say that foreign trade was literally a nullity. Trivially, of course, some goods—the banana for the Englishman’s breakfast table was the popular instance late in the nineteenth century, raw cotton the most important instance throughout—simply cannot be had in England’s clime. Trade is a conduit of ideas and competitive pressures, as is best shown by the opening of Japan after 1868. And trade insures against famine, as the Raj knew in building the railways of India. And much the License Raj in India was broken down by the opening of the economy for trade. But a literal closing of trade, foregoing bananas at breakfast, cotton for underwear, wheat in a famine, is not what is contemplated. The question is, was trade a stimulus to growth in the simple, mercantilist way usually contemplated in the literature? Not.
* * * *

It follows from the unimportance of trade—at any rate in explaining the doubling of per capita real income in the eighty years from 1780 to 1860 and especially in explaining the subsequent explosion on the way to the factor of 15—that parts of trade were unimportant, too. For example, the slave trade could not have been the cause of Britain prosperity. Show this briefly. Profits tiny. The impulse to find some terrible sin at the origins of our Western prosperity is strong. Admitting the sin relieves guilt.

Imperialism, too, was a part of trade. But imperialism, it can be shown, did not help the British, or the First World generally. The modern corollary is that the prosperity of the West depends not at all, or at worst very little, on exploiting the Third World. I know this runs against the grain of much post-imperialist thinking. Thus André Comte-Sponville, a teacher of philosophy at the Sorbonne, who doesn't claim to know much about economics, feels nonetheless confident in declaring without argument that “Western prosperity depends, directly or indirectly, on Third World poverty, which the West in some cases merely takes advantage of and in others actually causes.”⁹⁵

Look at the accounting and then look at the numbers.

British imperialism was about protecting the sea routes to India. But India itself, I claim, was of no use to the average person in Britain. By the time Victoria became Empress of India the thieving nabobs, Clive of India and all that, were long gone. In 1877 there no more straightforward opportunities left for thievery by the British. And as rich as Clive had (briefly) been, his enrichment was trivial in national terms. In fact by 1877 the British East India Company (and likewise about the same time the Dutch East India Company check this!) had gone, losing its police powers after the First War of Indian Independence in 1857, and closing entirely in 1871. A company is presumably a more focused institution for thievery than a responsible government. The directors of the Company would have liked to have known of opportunities for super-profits through Company rule in India during the late 19^th century. They themselves had not been able to find them in time.

Britain in 1877 traded with India. But trade is trade, not thievery. Bombay sent jute to Dundee and Manchester sent dhotis to Calcutta. Such trade could have been achieved on more or less the same terms had India been independent or, a more plausible counterfactual, considering the military technology of the European powers in the 18^th century, and the disorders of the late Mughal Empire, had become a French rather than a British colony. And even if the trade with India contained some element of exploitation, which is unlikely, and has certainly never been proven, the trade was tiny by comparison with Britain’s trade with rich countries like France or the German Empire or the United States. Give the statistics here: India trade compared with European. Therefore whatever Britain-favoring exploitation there might possibly have been needs to be discounted by the low share of the India trade in the total.

In short, the average person in Britain got little or nothing out of the British Empire. Yet Queen Victoria loved being an Empress and Disraeli loved making her one, so imperial India happened.

Acquiring Cape Town was an important part of protecting the sea routes to India, of course, as was messing about in Egypt and so forth. But these ventures were no more “profitable” than India itself. True, some British investors, and Rhodes himself, made money out of South Africa. But that does not mean that the great British public did. The cost of protecting the Empire devolved almost entirely on the British people. (A century earlier the British had likewise paid for the defense of the first empire, in what is now the United States; notoriously, the colonials refused to pay as little as a small tax on tea for imperial defense.) British taxpayers 1877-1948 paid for the half of naval expenditure that was for imperial defense, a by no means negligible part of total British national income each year.⁹⁶ They paid for the Boer War. They paid for the imperial portions of World Wars I and especially II. They paid for protection of Jamaican sugar in the 18^th century and protection for British engineering firms in India in the 19^th. They paid and paid and paid.

What were the vaunted benefits to the British people? Essentially nothing of material worth. They got bananas on their kitchen tables that they would have got anyway by free trade. They got employment for unemployable twits from minor public schools. Above all they got the great joy of seeing a quarter of the land area on world maps and globes shaded in red.

Economically, it did not matter. Public education mattered a great deal more to British economic growth, as did a tradition of industrial and financial invention, and a free society in which to innovate. Look at the accounting and the magnitudes. Most of British national income was and is domestic. The foreign income was largely a matter of mutually advantageous trade having nothing to do with empire—Britain invested as much in places like the United States and Argentina as in the Empire, and there is no evidence in any case that returns to investment in the Empire were especially high.⁹⁷ British imperialism was not, except in its earliest stages, mere thievery. The British worried in 1776-1783 and in 1899-1902 and in 1947 about the loss of their various bits of empire. But is the average British person worse off now than when Britain ruled the waves? By no means. British national income per capita is higher than ever, and is among the very highest in the world—adjusted to purchasing power parity in 2007, a little bit above France, Germany, Italy; a good deal below its former colonies Hong Kong, Singapore, Ireland, and the United States. Did acquisition of Empire, then, cause spurts in British growth? By no means. Indeed, at the climax of imperial pretension, in the 1890s and 1900s, the growth of British real income per head notably slowed.

The same accounting and magnitudes apply to other imperialisms. The King of Belgium was a notably ruthless thief in the Congo. But to what benefit to the ordinary Belgian? Did Belgian growth depend on Belgium’s little empire? Not at all. In depended on brain and brawn in coal mines and steel mills at home. Individual Dutch people, as Multatuli explains in his amazingly early anti-imperialist novel, Max Havelaar (1860)—compare Uncle Tom’s Cabin—got rich trading spices from the Dutch East Indies. But the ordinary Dutch seaman or farmer earned what such work earned in Europe in 1860. Would anyone claim that owning Greenland and Iceland and a few scattered islands elsewhere was what made the Danish farmers the butter merchants of Europe? Did the French as a whole get great benefits from lording it over poor Muslims in Africa and poor Buddhists in Vietnam? One doubts it. French economic success depended on French education, French ingenuity, French banking, French style, French labor, French law, French openness to ideas.

Sic transit, I am arguing, all manner of claims that Western wealth is founded on the despoilment of the East or the South. Rich countries are rich mainly because of what they do at home, not because of foreign trade, foreign investment, foreign empire, past or present. If the Third World decamped tomorrow by magic to another planet, the economies of the First World would scarcely notice it. So too in the 20^th century: when after World War II the Europeans lost their empires their incomes per head went sharply up, not down. The one exception to the post-War loss of empire, Russia, grew more slowly enchained to its Eastern European possessions than it would have had it adopted Western capitalism in 1945. Look at East vs. West Germany.

That is, we cannot account for the riches of rich countries by reference to exploitation of poor people. This ought to be obvious from the history of South Africa. Keeping the blacks uneducated and the coloreds excluded from certain professions did not benefit white South Africans on the whole, no more than Arab men on the whole are made better off by keeping Arab women illiterate and refusing to allow them to drive. Exploiting people is bad. And commonly (if not always) it hurts the ordinary people alleged to benefit from the exploitation.

Of course it makes some of the exploiters better off. But these turn out to be a tiny minority, the unusually well-connected or the unusually violent, a few Afrikaner trade unionists in South Africa and the House of Saud in Saudi Arabia. American slavery, which was profitable for those who owned slaves, did nothing good for the poor whites of the Confederacy, though, alas, like workingclass imperialists in Britain, they thought it did, and therefore flocked to the colors under the command of plantation owners. That people think they are better off by being associated with an empire or apartheid or slavery or segregation does not mean they actually are, says the economist.

What comes out of the economics, in other words, is that on the whole, and time and again, the attempt to live off poor people has not been a wise idea. Even the rich in former times, who did live off poor people, were poor by the standard of modern economic growth. As Adam Smith memorably put it at the end of the first chapter of The Wealth of Nations, “the accommodation . . . of an industrious and frugal peasant . . . exceeds that of many an African king.”⁹⁸ For 1776 this may in fact be doubted. But now, imagining the riches in health and wealth of a working person in a modern economy, and comparing these to the riches extracted in olden times from the poor, it cannot.

If contrary to fact poor people were rich, not poor, and if the exploitation was all a matter of pass laws and violence, not mutually advantageous exchange, then some societies could possibly benefit from imperialism. But that’s not what the accounting and the magnitudes suggest about the British empire, or about apartheid. And even exploiting rich people is not such a wonderfully enriching idea, as Hermann Göring’s program of European enslavement showed. Trading with free people turns out to be better, and in fact the more rich countries trade with each other (as they mainly do) the richer they become. Germany did better in “dominating” (i.e. trading with) Eastern Europe after 1945 and especially after 1989 than any of its lebensraumische plans of the 1930s could achieve. We are made better off by having fellow citizens who are well-educated and well-trained and fully employed, even though we will then have to sacrifice having plentiful maids and drivers. If exploiting poor people had been such a good idea for the rich people, then white South Africans would now be—or at any rate would have been on February 1, 1990—a lot better off than whites in Australia or Holland. They are not, and were not.

It is in ourselves, not in our stars or in our foreign relations, that we are underlings. The mass of overlings that modern economic promises does not come from the zero-sum taking of riches from other people. It comes from inside.

Chapter 5:

Strictly “Material” Causes are Thus Rebutted

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."

To put the wider Not finding in a sentence: we have not so far discovered any single factor essential to British industrialization. A long time ago Alexander Gerschenkron 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. But the British case provided anyway the backdrop for comparison with other industrializations.

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.⁹⁹ 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 allegedly 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 pastoralism 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, perhaps a 10 per cent advantage of an enclosed village over an open-field village.¹⁰⁰ 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.¹⁰¹ 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.¹⁰² 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 continue to put weight on Britain’s unusual gifts from Nature.¹⁰³ 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 that 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.E. 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 20^th 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 20^th, 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.”¹⁰⁴ 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 brow. 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:

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.

Good. Now I’ll tell you why I drew the so-called “production possibility curve” for 1780 as such a 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. Of course: that’s what being better off means.

Look at the diagram. None of the static arguments, and most of the dynamic, explain what happened in modern economic growth. No merely static improvement of matters in 1780 or 1700 can come remotely close to the curve of Now. That’s the intellectual puzzle in explaining this greatest of historical events.

The economist Bryan Caplan has argued recently that the economist and the citizen disagree on four points (Caplan **date, pages). The economist says that markets work well through the earning of profit, that foreigners deserve as much ethical weight as we do, that production not “jobs” is the point, and that things are getting better and better. The average citizen believes on the contrary that the TV market need close regulation, that protection against the “flood” of Chinese goods is a good idea, that a football stadium that “generates jobs” must be a good idea, too, and that the sky is always falling. Caplan argues that an economy governed on Citizen Principles will impoverish the citizens. He worries, as many have since Tocqueville and before, that a democratic politics can lead to disastrously redistributive policies, such as Peron’s Argentina. That’s right, it can, and is the worst system that has been tried, except for those others. My point here is that every economy until Holland and England and the English American Colonies was governed on a similarly self-destructive theory. The theory was the Aristocratic Principle that most people exist for the comfort of a small group of lords and priests and kings. Oddly, the Aristocratic economic policy and the Citizen economic policy resemble each other: expropriation of profit and the close regulation of markets, xenophobia, irrational projects of public works, and a grim zero-sum belief that one person’s or one country’s gain is another’s loss. The brief reign of the more genial Economist’s Principles led to the modern world.


Chapter 6:

Nor Was It Nationalism
The danger in the argument so far is the Fallacy of the Immeasurable. It’s not entirely cogent to keep measuring material causes, finding the ones you have managed to measure to be small, and then conclude that The Cause must be immeasurable. The method is what John Stuart Mill recommended in his System of Logic, but it is biased towards the immeasurable. What may be missing is an unnoticed but still measurable alternative. Maybe I’ve missed some material cause. Yet a cumulation of Nots does suggest that we are looking in the wrong place. One after another of the proffered explanations has failed. As the last diagram suggests, no case can be made that adding them all together would change much.