Why Study Economic History?
Modern (theoretical) economics has failed us.
By abandoning empiricism (the use of evidence and historical analogical reasoning) for Platonism (theory-first, model-driven analyses), we’ve exchanged robustness for fragility, and predictive power for coin-tosses. There’s a reason economists never get it right.
This is the second article in our series on economic history.
It explores the British Industrial Revolution, its causes and effects, and considers how we can apply history’s lessons to our own economy. It’s time to put the models aside and look at the facts.
The Traditional (Wrong) Causes Of The Industrial Revolution: A Population Explosion And Free Trade
The British Industrial Revolution began in Northern England in the 1760s, and it changed everything—it’s impact and effects cannot be understated.
It created an explosion of material wealth that still benefits us to this day. It ushered in the age of mass production and consumption, of boring factory work and nine-to-five jobs—and of industrial-scale warfare.
It catapulted Britain from “great power” status, to that of the world’s unassailable economic and political hegemon. London was the world’s capital, its emporium, and its greatest city.
So, how did the Industrial Revolution start?
The standard (wrong) answer goes something like this: the Enclosure Acts resulted in tenant farmers getting kicked off the farmland by greedy lords. This, created a surplus population, which provided enough workers to make steam-powered factories profitable.
Finally, because Britain was a free-trading nation, they had markets ready and willing to buy their products, which fueled their growth.
Basically: (1) population growth (or at least a rising population due to mean landlords) and (2) free trade spurred the Industrial Revolution.
This couldn’t be further from the truth.
In fact, it is precisely the opposite: Britain’s population was small, and its economy was highly isolated.
The Real Causes of Great Britain’s Industrial Revolution: Necessity And Creativity (And Luck)
The answer is easy. The Industrial Revolution was caused by:
- Human creativity,
- in response to demographic constriction and existential threat.
Simply put: Britain was a small place with big enemies, and it needed a way to keep up with them—Britons had a choice, get strong or die.
They chose strength through industry.
This is not to say that the Industrial Revolution was some sort of top-down, managed program like the Manhattan Project. Not at all. I’m just saying that the conditions in Britain were opportune for invention and innovation.
In the Eighteenth Century, Britain was one of Europe’s smallest powers. With a population of only 5.7 million, it was dwarfed by its perennial rivals France (25 million strong) and Spain (8.4 million). In fact, it was not even three times as large as its American colonies.
This relative demographic weakness was par for the course until well into the Victorian Era.
Yet despite its small population, Britain was continuously fighting its big neighbors. During the period the British fought in many major wars, including:
- The War of Austrian Succession (1740-48), against France, Spain, Prussia, and Sweden.
- The Seven Year’s War (1756-63), against France, Spain, the Holy Roman Empire, Russia, and Sweden.
- The American Revolutionary War (1775-83), against the USA, France, Spain, and the Netherlands.
- The French Revolutionary Wars (1793-1802) against France and her allies, and Spain.
- The Napoleonic Wars (1803-15) against France and her allies, Spain, and Poland.
- The Anglo-Turkish War (1807-09) against the Ottoman Empire.
- The Anglo Russian War (1807-12), against Russia.
- The War of 1812 against the USA.
This list could easily be three times as long, but I only included the largest conflicts.
You get the point.
These wars forced Britain to evolve a very efficient economy—Britain not only needed to match the production of much larger countries (they needed as many ships, ropes bullets etc. as France), but she also needed to field comparable armies. This caused enormous demographic stress.
For example, at the Battle of Trafalgar (1805) the British navy pitted 33 ships against France’s 18 and Spain’s 15—Britain deployed as many ships despite being less than one-quarter the size of its opponents. This was not a luxury, it was a necessity. Without roughly equal numbers, it would be impossible for Britain to ever win a battle.
Again, during the Napoleonic Wars, Britain was (proportionally) far more militarized than France. In 1812, Napoleon’s Grande Armée consisted of 550,000 Frenchmen (the navy was largely gone thanks to Lord Nelson). In 1812, Britain enlisted 250,000 men by land, and another 120,000 by sea (its fleet was as large as the rest of the world’s combined).
If we divide the number of men serving by the number of total men, we find that 8.3% of Englishmen served during the Napoleonic Wars, while only 4.5% of Frenchmen did—almost twice as many proportionally.
All of this put Britain’s economy under tremendous pressure to make stuff. Britain needed as many ships as France, as many uniforms, as many bullets, even biscuits—all with one quarter the population (less when you account for deployment rates).
Aside from quadrupling the population overnight, the only way to do this was to either:
- import the supplies,
- reallocate all the resources to the wars,
- or to improve their economic productivity.
Importing war material was out of the question, since Britain was fighting all of its potential suppliers, and couldn’t rely on the ones they weren’t.
Reallocation happened to a degree, but it was not a permanent solution because Britain was always fighting. At some point, everything that they were willing to reallocate was already allocated.
The only viable solution was to increase productivity. Again, I am not suggesting that Britain pushed a magic button to invent the power loom or the steam engine (you cannot force invention). I am merely saying that Britain’s economic climate (needing to make lots of stuff with few people) incentivized the invention of labor-saving devices—it provided fertile ground for the seeds of creativity.
Fundamentally, the Industrial Revolution was a black swan event—it was a lucky seed planted in fertile ground.
Important Inventions of the Industrial Revolution
Great Britain’s Industrial Revolution was driven by a number of inventors and their inventions, the most important of which greatly increased productivity.
1. If I were to pick a single most important invention—the one that started the Industrial Revolution, I would go with James Watt’s steam engine (~1775).
Although he didn’t invent the machinery out of whole cloth (Thomas Newcomen designed and built working steam engines decades earlier), Watt significantly improved the design. His engines were twice as efficient as competing models, and provided rotary power, which was amenable for industrial purposes.
Steam engines liberated machinery from the riverfront by providing an artificial source of power.
2. This complimented our next invention, Edmund Cartwright’s power loom (1785). It made English textile workers 40x as productive as their European competition. Power looms not only caused exponential growth, but their adoption was itself exponential, and shows us just how fast the economy was growing.
In 1803 only 2,400 operated, while in 1820 there were 14,650, and by 1829 there were 55,500. The peak came in 1857, when 250,000 looms operated.
In the end, these productivity-boosting inventions (among countless others) allowed Britain to make an enormous amount of stuff with very few people.
This greatly lowered costs, which, in addition to the standardized quality that comes with mass production, created more demand for British goods (both at home and abroad). This, in turn, supported ever-more industry, which required greater domestic investment etc.
The cycle becomes clear when we look at the percentage of income that was being reinvested (into new factories, canals etc.).
In 1700 only 4% of British income was reinvested (most of it went towards consumption), but by 1800 this had more than doubled, reaching 8.5%, and it peaked in 1840 at 10.8%. The Industrial Revolution brought with it extraordinary economic and technological growth, which changed Britain, and the world, forever.
Economic Nationalism and Isolation
The Industrial Revolution, and the exponential economic growth it entailed, happened in the absence of free trade. I want to make this point very clear to you, because it’s an incredibly pernicious lie with a lot of sticking power.
Britain was anything but the laissez-faire “utopia” certain charlatans make it out to be.
Britain’s economy was highly isolated due to (1) the constant state of war and (2) massive tariff walls that protected British industry. In fact, Britain had the highest tariffs in Europe, growing from roughly 30% in the late 1700s to 57% in the early 1820s.
The British were keen on protecting their industry, and it paid off big.
It was this isolation, and the need for autarky (being economically self-sufficient) that created the necessary conditions for industrialization.
Now, some will say that although Britain did not trade heavily with other Western nations, it did trade within its empire (eg. with India), and therefore trade was important to Britain’s economy.
To this I say that during the mid-1700s the British textile industry was faced with a crisis—the market was flooded with cheap Indian cloth that threatened to eradicate British weavers. In response to this, massive tariffs were imposed which kept the British industry alive.
This turned out to be a good thing: it was the textile industry, and its automation, that ushered in the industrial era a few decades later.
If Britain had adopted a policy of free trade at the time, the industrial revolution would probably not have happened (although British consumers would have had access to slightly cheaper Indian cloth).
We are incredibly lucky that our ancestors were not as deluded as us. Free trade doesn’t always work.
Britain’s trade regime, like Venice’s, was systematically designed to be predatory.
Not only did Britain enjoy a trade surplus during the Industrial Revolution, but it imported almost exclusively raw materials and agricultural products, and exported almost exclusively manufactured products.
This ensured that Britain’s economy monopolized the rewards of its advanced technology, while simultaneously locking its colonies, and trade partners, into something called import dependency.
For example, places like Rhodesia needed to buy British goods because they did not make their own, which guaranteed British manufacturers an exceptionally large market. In exchange, Rhodesia traded products that Britain could not produce, such as sugar, which had no competitive impact on the British economy.
Rhodesia depended on British imports for its very survival—Britain did not depend upon Rhodesia (it was just nice to have exotic stuff and additional markets).
This is classic mercantilism, a branch of economic nationalism.
Great Britain’s Successful Mercantile Economy Was Copied Globally
Britain’s recipe for economic success was copied by almost every subsequently successful economy, from Germany, to Japan, to China. Even America copied Britain by adopting highly protectionist policies—it paid off.
What makes this all the more impressive is that Britain was not naturally wealthy—it was a small country on the fringe of Europe, whose greatest historical commodity was sheep. Yet it succeeded by creating the right conditions for technological invention by promoting (and being forced into) economic autarky. By creating a need for innovation.
Unlike Britain, America has endless natural wealth, and yet our economy is failing.
Imagine how rich we would be if we combined our plentiful natural resources with well-calibrated trade policies that focus on stimulating innovation and long term growth, rather than promoting short term consumption and offshoring.
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