Sunday, August 31, 2014

Was an Industrial Revolution Inevitable? (Part Three)


Let's not ask whether the Industrial Revolution was inevitable. Let's ask something a little less hypothetical: Why England, and why around 1800?

The answer (of course) is "Money!"

Production and consumption both depend on spending. Spending can't happen without money. So if you want an inexplicable increase of industry, you're going to need a matchingly inexplicable growth of funding. I suppose you could say supply creates its own demand, and a doubling of output generates a doubling of income. And, you know, during the era we call the Industrial Revolution, you just might be right. For nothing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency.

Still, the doubling of income comes during or after the doubling of output, not before. So where does the money come to increase output in the first place, so that income may increase enough to sustain the higher level of output? ...But maybe I shouldn't be calling it "money". Maybe I should be calling it accumulated financial capital. Money people would want to sink into new ventures, if they had it.

So where does that money come from? From government spending, perhaps. Government spending is the source of private sector net assets. Government spending could have been a catalyst, providing the funds to generate a doubling of output, and another doubling, and more, till the process took on a life of its own.

Government Spending as Catalyst

The following is brought forward from mine of 31 August, 2010, tweaked just a tad.

Graph #1
You see in Graph #1 a mountain of United Kingdom debt spanning two centuries and more. Remarkably, that mountain of debt occurred at the same time as the Industrial Revolution, and the same time as the rise and reign of the British Empire.

To expand upon coincidence, the two centuries of the mountain of U.K. debt completely envelop the 150 years Keynes called "the greatest age of the inducement to invest." As I noted in an earlier post, one is almost forced to wonder whether that mountain of debt actually helped the economy along, encouraging the Industrial Revolution and leading Britain to the top of the heap.

[Four years ago when I wrote the above paragraph, I did not know there was the question Why England, and why around 1800?. So, four years ago, I said "one is almost forced to wonder" about a relation between England's public debt and the Industrial Revolution. Now I know there is that question. So now I will say: Why England? Because of the public debt. Why 1800? Because of the public debt.]

Graph #2
Outrageous thought? Maybe. Maybe not. Numbers from Measuringworth show GDP increasing at an accelerating pace in the early years of the Industrial Revolution. The 2nd and 3rd dots on the trendline at right (years 1759 and 1801) show the awakening of growth. The 4th, 5th and 6th dots (1811, 1821, and 1830) show accelerating GDP growth. The sharpest growth occurs in the 1821-1830 period, just as the UK's mountain of debt peaks and begins its descent.

So the general trend was a steep increase in debt from 1700 to 1820. And after more than a century of persistent increase in public debt, GDP was growing like never before.

Graph #3
Debt numbers for Graph #3 come from Robert J. Barro, in Macroeconomics: A Modern Approach, Chapter 14, page 342. Barro's mountain (Figure 14.2, page 344) is smaller than Chantrill's (Graph #1, above), but both show a mountain when debt is compared to GDP.

This look at the raw numbers shows that public debt in the UK did not "peak." It simply stabilized after 1820. It was the growth of GDP that made public debt seem to shrink.

The increase in government debt comes before the increase in growth. We have public debt increasing (1740-1790), increasing rapidly (1790-1820), then stabilizing at a high level. We have Real GDP stable (before 1759), increasing slightly at the beginning of the Industrial Revolution (1759-1811), accelerating (1811-1830), and then achieving the sort of growth we long for today.

We have the increase in public debt first, followed by the increase in GDP. Then there is an acceleration of public debt first, followed by acceleration in GDP. And then we have public debt stabilizing while GDP growth continues, causing the long decline in debt as a percent of GDP that appears on Graph #1. In these events, we witness the birth of capitalism.

The Industrial Revolution began in England around the year 1800. Why? Because society was ready, and technology was ready, but most of all because net financial assets were available in sufficient quantity.

10 comments:

The Arthurian said...

I hope I got that "net assets" stuff right... :)

Greg said...

I think you got the net assets right, as I understand it.

Love your links to Keynes' book. I really do need to read that thing as a coherent whole and not just a collection of quotes form the internet

Auburn Parks said...

Great Job Art. And yes, you got the NFA stuff right (just make sure to remember to include the F for financial otherwise you'll get people saying "the Govt doesn't create real wealth" on you).

Your story makes perfect sense to this reader.

Jazzbumpa said...

Very insightful.

I think you've hit on something fundamental here.

To close the loop, you need to address this question: "Why were net financial assets available in sufficient quantity?"

This condition precedes and enables capitalism.

Cheers!
JzB

Jazzbumpa said...

Here's a hint:

East India Company.

Cheers!
JzB

jim said...

Are not financial assets the same thing as what FRED calls "credit market instruments" and everybody else calls "debt"?

The Arthurian said...

Yes...

And?

jim said...

Well there must be some point in calling it by these different names with no mention about it being all the same.

But getting back on topic - preceding the Industrial Revolution there was a large run up of debt. In other words, there was a large increase in taking of goods and services in the present time in exchange for promises to deliver goods and services in the future. It seems pretty obvious that a large increase in such promises would be good motivation for finding ways to produce those promised future goods and services more efficiently.

The Arthurian said...

Well there must be some point in calling it by these different names with no mention about it being all the same.

... what you call it depends on whether you OWN it or OWE it.

But getting back on topic - preceding the Industrial Revolution there was a large run up of debt. In other words, there was a large increase in taking of goods and services in the present time in exchange for promises to deliver goods and services in the future.

Yeah, but it was public debt. Government debt. What were they promising to pay -- interest?

I am not comfortable talking about "promises to deliver goods and services in the future". I don't promise to deliver goods and services. This is not the feudal era. I promise to pay money.

It seems pretty obvious that a large increase in such promises would be good motivation for finding ways to produce those promised future goods and services more efficiently.

Yes, if it was a run up of private debt. But it was public debt.

If one of the responsibilities of government is to provide the money, then that obligation surely supersedes the government's obligation to deliver other goods and services, and even supersedes the government's obligation to maintain the value of the currency. It would be nice to maintain the value AND provide the currency, but to do that one has to limit the use of credit and the accumulation of debt.

Jazzbumpa said...

Despite the unlikely title, this is marginally relevant.

http://slackwire.blogspot.com/2014/08/innovation-in-higher-ed-1680-edition.html

JWM is also posting about money, which is also marginally relevant.

http://slackwire.blogspot.com/2014/08/innovation-in-higher-ed-1680-edition.html

Cheers!
JzB