Sunday, November 13, 2005

The Industrial Revolution: why did it happen?

Just finished my essay on British Industrial Revlolution. I made an assessment of a paper from Gregory Clark (2003). Clark’s paper sought to explain why there was a very long period in the human civilization history before the Industrial Revolution brought a sustained growth of the world economy – at least for a group of countries – in 1820. The Industrial Revolution and the ‘great divergence’ that followed it could not be explained by massive growth of capital accumulation, both physical and human capital. As he argued, “physical capital accumulation explains only a third of the growth of income per person over time, and about one third of the differences in income per person across countries,” while adding human capital accumulation “only explained another 0.18% of the growth.”

The Industrial Revolution, then, was characterized by the ‘unexplained’ part of the standard growth accounting. This unexplained part is often referred to as Total Factor Productivity (TFP) or technological progress. After about two millennium of low growth technological progress, the world economy marked a jump in the growth of technological progress, from 0.1 to 0.77 percent per year in just a century. Clark called this phenomenon as a growth driven by “knowledge capital.” This knowledge capital alone explained 50-70 percent of growth of income per person.

Why then, there was a sharp increase in growth of knowledge that led to the Industrial Revolution? Clark presented three theories that could explain this: the exogenous growth theory, multiple equilibrium theory, and endogenous growth theory According to the exogenous growth theory, some changes outside of the economy, notably institutional change, were the driver for this growth. These changes would include “changes in the institutions governing the appropriability of knowledge, or the security of all property.” Among the sources of this exogenous growth theory, Clark mentioned the arrival of constitutional monarchy in England in 1689 (North and Weingast 1989) or the Enlightenment movement in 18th century Europe (Mokyr 2003).

Clark disagreed with the exogenous growth theory for at least two reasons. First, still it did not explain why such an institutional change should wait until 1820. Even if it was the constitutional monarchy regime switch and enlightenment movement that drove the changes, the Industrial Revolution should have taken place two hundred years earlier. Second, the data of number of patents did not suggest that the Industrial Revolution economy has provided good protection and reward for innovation.

A second theory is the multiple equilibrium theory. The proponent of this theory, most notably Gary Becker and Robert Lucas, argued that the world economy before Industrial Revolution was in a stagnant, ‘bad’ equilibrium characterized by the Malthusian trap. Only a shock would move the economy from this ‘bad’ to a ‘good equilibrium’ that provided driver for growth. Becker and Lucas argued that the shock was something that created incentives for family to invest in human capital; a signal “in the form of higher relative earnings for educated children.”

Clark again disputes the validity of this theory. He argued that “no evidence of any market signal to parents as we approach 1800 that they need to invest more in the education or training of their children.” Moreover, there was also no evidence that average family size was declining prior to 1800, something that should have verified Becker’s ‘less children, more quality’ argument.

The third theory, the endogenous growth theory, is his champion. According to this theory, the source of growth that led to the Industrial Revolution was within the economy. This internal feature “evolved over time in the long pre-industrial era to eventually create the pre-conditions form modern economic growth.” The internal feature is ‘ideas.’ According to Michael Kremer (1993), “there was substantial but slow productivity growth in the world economy in the years before 1800, and that all got translated into a huge expansion of the world population. That larger population produces more ideas and more rapid growth.”

Clark supported this theory for the reason that it is consistent with the empirical findings that: a) the productivity and technological change growth was positively correlated with growth of population over time, and b) the rate of technological advance is also positively correlated with the size of land area, sin the bigger the land area, the higher is the potential population. He even concluded that not only this endogenous growth theory help explaining how the Industrial Revolution took place, but also why it took place at a certain time in the history. And, finally, this theory led to the conclusion that Industrial Revolution is inevitable.

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