Oxford economic historian Robert Allen’s seminal book “The British Industrial Revolution in Global Perspective” has some ground breaking insights into the mystery that is economic development. His conclusion : imperialism, cheap coal and happy sheep brought about British ascendancy. Part of these happened co-incidentally as a by-product of other changes and part as a result of conscious policy action.
Lets start with the “happy sheep”. The “Black Death” of 1348 wiped out a third of England’s population giving sheep more available land to graze. This meant richer diet and longer coat for the sheep as well as finer drapery for the British textile industry of the time. Almost as a byproduct of an unmitigated disaster they attained a competitive advantage. But it just didn’t end with sheep, the partial de-population of Britain meant that while the real wages were falling and/or stagnating for the next two centuries or more in continental Europe, in relative terms the British bucked the trend. Implications of this are profound as it meant more capital was available to increase the skill base of the relatively scarce manpower in Britain. Relative rise of their purchasing power compared to rest of Europe translated to, among other things, a generally better educated and better trained workforce.
With that came grander ambitions and empire building was not far behind. British imperialism, just like in all other European powers before and since, played a pivotal role in both capital accumulation, resource availability and rapid urbanization of Britain. Captive markets in the colonies provided ready demand for the nascent industries beyond what the domestic market could. Merchant and naval vessel building and marines provided plentiful urban employment, leading to rapid movement of population to urban centers like London, Liverpool and Manchester. This also created a domestic division of labor and increase in demand [and hence prices] of agricultural produce. As a result rural wages and standard of living improved as well. Once the safety valve of emigration to the colonies in North America and Australia opened up, chances of real wage rates racing to the bottom as productivity improved also diminished.
Last but not the least critical factor was cheap coal that was available for British Industry, first domestically and later from colonies. Belgium, Poland and Germany’s Ruhr region also had similarly large deposits of coal. But the rapid urbanization for the reasons cited above gave Britain a larger aggregate demand for its energy industry than any other country. This created economies of scale that permitted coal to be extracted and priced at a significant discount to its competitors in Europe giving England a head start with its industrialization. Britain’s energy cost advantage also allowed her the luxury to experiment and perfect initially highly inefficient experimental technology of steam engines without it causing a competitive disadvantage. But as the technology was perfected and its scale grew so did British industrial pre-eminence.
Mechanized cotton and textile production started a new global industrial order that drove the slave trade to run the massive American plantations. It also provoked the aggressive expansion of captive markets in the colonies [often by brutal means and through systematic destruction of local producers and production techniques to eliminate any local competition] of India and other parts of Asia. All the capital accumulating from this rapidly growing industries gave birth to financial centers in London and Amsterdam.
Another geo-political advantage Britain had over other continental powers was being an island it was naturally protected from warfare that went on periodically in Europe during its earlier stages of industrial development. There was no devastating war that set them back like it happened in the cases of Germany, France and Spain. Sea acted as their first line of defense and given how important a role both commercial and naval marine played in their Imperial expansions they understood its importance and perfected its use before most others.
As we can see the rise of British Industrialization before others were not quite the product of some policy genius or even the fabled “protestant work ethic” of Max Weber, nor was the eventual dissipation of their comparative advantage [due to inevitable dissemination of technology] some policy disaster. The cumulative effects of a unique admixture of historical, demographic, socio-political and geo-political happenings gave birth of the Anglo-American model of industrial development.
Given that some of these factors are universal preconditions while others are idiosyncratic to the unique British experience it behooves us to deconstruct the elements that lead to often elusive economic development. As a precondition we must identify and account for any fortuitous or time specific change that might have facilitated the processes of change in Britain to draw more generally applicable policy precepts. First, we can’t hope for a “Black Plague” to reduce our population to facilitate wages to rise above Malthusian survival levels. A bit of social imagination shows that same effect, albeit over a slightly, longer time scale can be achieved by population control schemes as used in China in recent times with the “one child” policy.
The “happy sheep” phenomenon means in 21st century development dialectic a need to optimize land utilization in a sustainable manner. There is no better way to raise real wages and standard of living of the rural populace. There is also no better way to sustain urbanization, be it in current form or in more futuristic urban design patterns, without agriculture. That means as a pre-condition respect for private property, proper land reform and titling, spreading awareness and the practice of sustainable agriculture. With the rise of a more bio-tech based production of pharmaceuticals we are about to enter a time when industrialization itself will rely more on organic agents. Sheep or transgenic animals and similar custom designed plants will be very much part of the “industrial infrastructure” of tomorrow. With the rise of the importance of Living matter in our economic endeavors will rise the importance of the elements that sustain life itself: water and air. The more efficient an economy will be in using these core change elements faster will they build a firmament for real economic development.
Imperialism provided both a source of resources [both human and material] and a captive market in the initial stages of industrial development. This is why free AND fair trade is so important. There is simply no substitute for access to large market/s for capital accumulation and building of savings surplus. Therefore, a fair framework for international trade and voluntary free trade arrangements that benefits all participating countries can be modern day functional substitutes for the old colonial captive markets. The caveat here is to make sure global economic and financial institutions that partake in so called “development lending” or any other form of “foreign aid” are not used as a battering ram to make some country accede to a trade agreement contrary to its interest. Just as a country’s ability to produce something or provide some service better than others is a competitive advantage, so is its ability to be the ultimate consumer of a product or service. So, access to technology and capital should be the natural price to pay for access to a market of equal economic value.
On the other hand, a world in which trade becomes atomized by protectionism, the possibilities of new wealth generation is drastically reduced, both directly through placing barriers to economic system optimization and indirectly through lessening the accumulation of capital. Since WWII, we have seen the rise of East and South east Asian countries through various stages of development. By and large they followed different degrees of neo-mercantilism under stable technocratic despotic regimes focused on stability and national consensus above all. Coupled with pre-existing cultural propensity for high savings, this lead to huge trade and capital account surpluses. As a result, we have seen in Asia the fastest development both in terms of industrialization and in terms of bringing people out of poverty, in human history. After some false starts and much unwelcome interference by the American empire, Latin American states and some other states in parts of Asia and Africa are trying to incorporate these lessons into their national development strategies. Unlike the early stages of European industrialization, Asia was not decimated by a plague and therefore did not have a need to go on a colonial adventure to create a captive market [The brief Japanese attempt being the sole exception]. They benefited from large local and regional population and above all “free trade” structures created by the West. They just figured out how to use it to their advantage. Be that as it may, this process of development will remain vulnerable as long as they’re dependent on a Western designed flawed monetary order and western export markets. If the monetary structure along with the concomitant political economy of Dollar hegemony is abandoned the need for such neo-mercantilist dependency becomes utterly redundant.
The other great contributer to the British Industrialization was of course “cheap coal”. The economies of scale provided by rapid urbanization and proximity to the point of use that made coal’s effective price on the market in Britain much cheaper than on the continent. This acted as a major factor cost advantage. Today we see parallels in Brazil’s use of sugar cane ethanol [optimum efficient source] as opposed to corn ethanol, as a petroleum substitute given the relative abundance of sugar alcohol based fuel in the country. This will now allow Brazil to export off shore oil and gas for capital accumulation. A combination of hydro-power and nuclear energy will further provide for any domestic industrial power needs. All of this was possible due to the social imagination three decades ago to take the radical step of switching to an efficient source of domestic fuel. Unlike some other resource rich countries like Russia and Venezuela, they have also not used their natural resources as a overt tool of political influence. They have also not let sentimental environmentalist obstructionism slow them down in maximizing their domestic resource utilization to enhance their sustainable competitive advantage. No wonder many other countries around the world are now making attempts to emulate their strategy.
While free movement of goods and capital that produces mutually beneficial outcome is highly desirable free movement of labor is not. This is because economic development ultimately rests on social imagination to design the best ways to use a society’s unique resources. Large undifferentiated, intermittently employed labor force never pulls themselves out of Malthusian survival level wages, sometimes called “poverty”. Therefore through a combination of productive skill enhancing education and lowering of birthrate [thankfully these two are generally positively correlated worldwide across cultures] labor force can be made into a scarce resource that can demand higher real wages. Unrestricted immigration of skilled/unskilled workers between nations would drive down real wages as labor will become an undifferentiated mass. This scenario while profitable for companies in the short term, acts to stifle innovation. It is high labor costs that encourages higher productivity and forces companies to be innovative. It is also what attracts the best and the brightest to them. The return on innovation and enhancing one’s skill level tends to be higher in high wage areas. This is why we see most inventions to happen in high cost/ high skill areas within an economy like Silicon Valley, Boston in the US, Switzerland in Europe etc. Conversely, places that can produce something for the cheapest price possible [ not due to low labor factor cost as that have a Malthusian floor, but due to other non-labor factor advantages] can also generate sustainable economic surplus. Average cost or mediocre quality design/production provides no marginal cost advantage, therefore they make it much harder to introduce a new technology or a product.
Ultimately new technology and production techniques will increase factor efficiency. If done in a sustainable manner this will result in a secular increase in productive capacity and deflationary pressure on prices of products as producing them gets progressively cheaper. In societies that have an aging population or a cultural tendency towards savings, i.e. to defer current consumption for future consumption this pressure will be magnified. Current “fix” for this challenge in conventional economic theory seems to be the psuedo-solution of a permanent monetary inflation regime created via debt based money system and a fractional reserve banking system. This is not a sustainable system as it is structurally flawed. Therefore, the practical path to real economic growth, to produce real economic development that improves quality of peoples’ lives, is to raise real wages at a slightly higher rate than the structural rate of deflation created by increased non-labor factor efficiency and consumption under a sound money regime.
BY
SYED SHADMAN RAHIM
EXECUTIVE DIRECTOR
BIGS