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Lecture 4: The Invention of Invention: Modern Economic Growth Comes to the North Atlantic, 1870-1914 For September 8, 2009 J. Bradford DeLong Professor of Economics, U.C. Berkeley Research Associate, NBER This Draft: August 26, 2009

From Carl Sandburg, “Chicago” (1916): Hog Butcher for the World, Tool Maker, Stacker of Wheat, Player with Railroads and the Nation's Freight Handler; Stormy, husky, brawling, City of the Big Shoulders: They tell me you are wicked and I believe them, for I have seen your painted women under the gas lamps luring the farm boys. And they tell me you are crooked and I answer: Yes, it is true I have seen the gunman kill and go free to kill again. And they tell me you are brutal and my reply is: On the faces of women and children I have seen the marks of wanton hunger. And having answered so I turn once more to those who sneer at this my city, and I give them back the sneer and say to them: Come and show me another city with lifted head singing so proud to be alive and coarse and strong and cunning…. Laughing the stormy, husky, brawling laughter of Youth, half-naked, sweating, proud to be Hog Butcher, Tool Maker, Stacker of Wheat, Player with Railroads and Freight Handler to the Nation.


Once Again: Perspective Four thousand years from now, what will students of global economic history be taught in the five minutes that they have to cover the years 1870-1913. They will be taught, probably, four things: •

First, that the world at the start of the twentieth century—even the most advanced economies at the start of the twentieth century—were very, very poor relative to how they would be at the century’s end.

Second, that in the late nineteenth century transportation costs had finally fallen low enough and transport speeds had become high enough to make mass intercontinental shipment of goods and people possible.

Third, that this fall in transportation costs had for the first time created the possibility of a global economy—an economy in which movements of people and goods across oceans and between continents were central to how the economy worked, rather than mere precious and luxury froth on the surface of a deep ocean.

Fourth, that much of the economic history of the several decades immediately before World War I can be read as the working-out of the economic, political, and technological logic of the—relatively sudden—creation of the first true global economy.

However, these patterns of migration, of international investments, of the international division of labor, and of economic growth established in the decades before World War I would not last. They were destroyed by wars, politics, and changes in technology in the three decades after 1914. When the global economy was knit back together in the decades after World War II, it was knit back together in a different pattern—and now it is reweaving itself into yet a different pattern still.


8.1: The 1870 Inflection Point of Economic Growth In the world’s North Atlantic region every year between 1870 and 1914 saw populations rise; agricultural labor productivity improve; farmers pushed out of agriculture where they were no longer needed and pulled into mining, manufacturing, and urban services where they were; and technology diffuse as people in Des Moines, Iowa and Birmingham, Alabama but also Vienna, Cracow, and Barcelona learn how to apply the industrial technologies invented in Manchester, London, Liege, and Lowell, Massachusetts. Most important, every year between 1870 and 1914 saw newer and better industrial technologies emerge from the first industrial research laboratories ever.

8.1.1: More Production or Fair Distribution? This by and large came as a surprise. Indeed, it is fair to say that as of 1870 the idea that modern economic growth would take hold and grip the world was still a fringe, utopian one—more-or-less confined to dreamers and socialists, and not even all of them. I have already noted that when in 1871 British economist, moral philosopher, and democratic socialist John Stuart Mill revised his Principles of Political Economy, he left intact the passage: Hitherto it is questionable if all the mechanical inventions yet made have lightened the day's toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes...

But more noteworthy is that Mill immediately follows with this passage: [These mechanical inventions] have not yet begun to effect those great changes in human destiny, which it is in their nature and in their futurity to accomplish. Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of judicious foresight, can the conquests made from the powers of nature by the


intellect and energy of scientific discoverers become the common property of the species, and the means of improving and elevating the universal lot...

To Mill, not productivity growth but a fairly-distributed and democratic political-economic order—“just institutions”—and universal fertility control—“the increase of mankind… under the deliberate guidance of judicious foresight”—were the keys. Only then could the “conquests made from the powers of nature” become “the means of improving and elevating the universal lot.” To Mill, the hopes of the working class for anything other lives of dire material penury and sodden boredom rested not in scientific research and technological innovation, but rather in educational and moral uplift: only severe fertility restriction could open a gap between working-class standards of living and dire subsistence, and thus working-class happiness depended much more on intellectual, social, and philosophical uplift than on a high or even a moderate material standard of living. Mill, in short, believed that the industrial age was and would remain a Malthusian age. By 1913 it was clear that Mill was wrong. It was clear that Mill was wrong because something important had happened to the progress of invention. As of 1913 there was no fertility control: outside of France the population was growing faster than ever. And there was no just distribution of economic product: societies were becoming more, not less, unequal in relative terms. Yet the universal lot in western Europe and North America was definitely improving and elevating. The industrial revolution, it turned out, was not just a lucky set of individual inventions but instead had set in motion something truly new: the invention of invention and innovation: the new industrial economy created by the industrial revolution could be counted on to throw out additional innovations of the same magnitude as the railroad and the power spindle at least once a generation. For after 1870 the character of the industrial growth process changed.


8.1.2: Lighting the Rocket of Modern Economic Growth As Arthur Lewis wrote more than thirty years ago, this idea that each year would realize enough progress and improvement that one could see it was a very new one. In his words, “The process of continuous growth began in England, spread during the first half of the nineteenth century to the United States, France, Belgium, and Germany, in that order…” but had spread no further by 1870. It was only thereafter that modern economic growth “set out to conquer the whole world,” becoming “an escalator, taking countries to ever-higher levels of output per head. Countries get on the escalator at different dates… and can fall off.” Why 1870? Because, as Lewis recognized, there was something fundamentally different about the pre-and post 1870 growth process. Before 1870 inventions and innovations—those of the “classic” agricultural and industrial revolutions”—were discoveries and adaptations that produced new and better ways of doing old things: of making thread, of weaving cloth, of carrying goods about, of making iron, of raising coal, and of growing wheat and rice and corn. The steam engine of the eighteenth century required precision metalworking to make the boilers and the pistons and the pipes strong enough not to burst, and the valves smooth enough to function. This came about because of western Europe's four-century love affair with iron, copper and gunpowder: the making of firearms was the womb of the metal-bashing technologies that are at so much of the core of our industrial civilization. The steam engine of the eighteenth century also required something really important for a steam engine to do. That need was found in the necessity of keeping coal mines from flooding. And the steam engine of the eighteenth century also required a really cheap source of heat. That was found at the bottom of the coal mines where the flooding was taking place, for where could energy possibly be cheaper than at the bottom of a coal mine? Without this confluence—skilled metalworking harnessed to the service of pumping water out of the place where coal was most abundant—it is hard to see there being an eighteenth-century


technological-industrial revolution in England that produced the steam engine. With the steam engine, with cheap plantation-grown cotton ideally suited for machine spinning, and with practical metallurgy to make iron rails and iron wheels cheaply, the fuse that was the industrial revolution was lit. Steam power propelled the automatic spindles, looms, metal presses, and railroad locomotives of the nineteenth century. But the fuse might well have sputtered out before it lit the rocket. Greg Clark of UC Davis points out that there had been previous narrowly-focused bursts of invention and innovation that had revolutionized particular sectors: printing, the windmill, the musket, the seagoing caravel, and before then the watermill, the horse collar, the heavy plow, the legion, the phalanx, the olive press and so forth. Admittedly, none of them were as large as the coal-steamcotton-spindle-loom-rail complex of the early nineteenth century. But they did revolutionize their pieces of the economies of their day. Yet none of them lit off the rocket of continuous rapid modern economic growth that we have ridden since 1870—as the British Industrial Revolution proper did. Robert Allen of Oxford has, I believe, the best take on why the fuse finally lit the rocket in 1870. As he sets up the problem in the conclusion of Robert Allen (2009), The British Industrial Revolution in Global Perspective: [T]he famous inventions of the British Industrial Revolution were responses to Britain's unique economic environment and would not have been developed anywhere else.... But why did those inventions matter?.... Weren't there alternative paths to the twentieth century? These questions are closely related to another... why didn't the Industrial Revolution peter out after 1815?...

His answer is that before the nineteenth century: [O]ne-shot rise[s] in productivity [before] did not translate into sustained economic growth. The nineteenth century was different…. Why?… [Because] the great achievement of the British Industrial Revolution was... the creation of… engineering…. Machinery


production was the basis of three developments... (1) the general mechanization of industry; (2) the railroad; and (3) steam-powered iron ships. The first raised productivity... the second and third created the global economy and the international division of labor... Steam... accounted for close to half of the growth in labor productivity in Britain in the second half of the nineteenth century…. All three of the developments... depended on two things: the steam engine and cheap iron.… [T]he British inventions… were… transformative... [T]echnologies invented [elsewhere—for example]… paper production, glass, and knitting [in France]—were not.... The British were not more rational or prescient than the French... simply luckier in their geology…. [T]here is no reason to believe that French technology would have led to the engineering industry, the general mechanization of industrial processes, the railway, the steamship, or the global economy.…1

And in all of this cotton was key. No American slavery, no large-scale cotton production and exports from America’s south to Britain, and quite possibly no nineteenth-century industrial revolution. Echoing Eric Hobsbawm’s “he who says ‘Industrial Revolution’ says ‘cotton’,” Allen writes: Cotton played a supporting role… [as] it grew to immense size.... Mechanization in other activities did not have the same potential... global industry with.. price-responsive demand... cotton... sustained the engineering industry by providing it with a large and growing market for equipment....

And Britain was key. No British high-wage low-interest rate incrediblycheap –coal economy, and no Industrial Revolution—at least not in the nineteenth century: [T]he macro-inventions of the eighteenth century... increased the demand for capital and energy relative to labour. Since capital and energy were relatively cheap in Britain, it was worth developing the macro-inventions there and worth using them in their early, primitive forms. These forms were not cost-effective elsewhere...


As Allen sums up his argument: “[T]here was only one route to the twentieth century—and it traversed northern Britain…” But it is important to remember that the coal-steam-cotton-spindle-loomrail complex was the fuse, not the rocket itself. Arthur Lewis stresses that the process of economic growth took off after 1870 because invention: added a new twist—that of making new commodities: telephones, gramophones, typewriters, cameras, automobiles, and so on, a seemingly endless process whose latest twentieth-century additions include aeroplanes, radios, refrigerators, washing machines, television sets, and pleasure boats. Thus a rich man in 1870 did not possess anything that a rich man of 1770 had not possessed; he might have more or larger houses, more clothes, more pictures, more horses and carriages, or more furniture than say a school teacher possessed, but as likely as not his riches were displayed in the number of servants whom he employed rather than in his personal use of commodities…

Not just a wave of particular innovations and inventions, but an ongoing process of continual technological advance: steel manufacture and chemical processing and oil wells and internal-combustion engines and vacuum processing and telegraphs and electric motors and the iron-hulled ocean-going steamship.

8.1.3: The North Atlantic Becomes Industrial The technology started in Britain. Very soon it was profitable and productive as well in New England and in Belgium—but in noplace else. However, it did not stay that way. The technology developed, and developed in ways that allowed it to escape high-wage cheap-capital incredibly-cheap-coal Britain: However, British engineers improved this technology.... This local learning often saved the input that was used excessively in the early years of the invention's life and which restricted its use to Britain. As the coal consumption of rotary steam power declined from 35 pounds per horsepower-hour to 5 pounds, it paid to apply steam power to more and more uses.... Old fashioned, thermally inefficient steam engines were not "appropriate" technology for countries where coal was


expensive. These countries did not have to invent an "appropriate" technology for their conditions, however. The irony is that the British did it for them....

The result was that by the eve of World War I the economies of the North Atlantic were modern and industrial, and there were tentacles of industrial technology spreading out elsewhere into the wide world. In 1913 Britain burned 194 million tons of coal. In 1987 it would only burn 116 million tons–and the total coal-equivalent energy consumption of Britain today is only twice what it was back in 1913. Energy would be used much more efficiently at the end of the twentieth century than at the beginning. But at least in Britain (and in a few other places also lapped by the North Atlantic), at least as far as energy is concerned, the economy was what we would call modern. On the other side of the North Atlantic, in the United States, railroads carried passengers some 35 billion miles in 1913: that's 350 miles per person per year: a lot of modern technology used for travel even then. (But today U.S. airlines would carry passengers some 700 billion miles in a year—that's 2,500 miles per person.) The production of modern-quality steels had been some 5 million tons a year in 1870, would rise to some 70 million tons a year by 1913, and would grow to 170 million tons by 1950. What would be the fundamental building material of the twentieth century—steel—was effectively invented anew in the second half of the nineteenth, with the invention first of the Bessemer process and then of the Thomas-Gilchrist process. Before 1870 making high-quality steel had been a process limited to the most-skilled blacksmiths of Edo or Damascus or Milan or Birmingham, with much hammering reminiscent of Alberich the dwarf in Das Rheingold. Chemistry as we know it emerged from German universities and laboratories in the second half of the nineteenth century. By the eve of World War I Germany produced a full quarter of the world’s chemical output; rayon became a competitor to silk in the first decades of this century. The internal combustion engine as well. On the eve of World War I already some 1.7 million passenger cars were registered in the United States along with some 100,000 trucks But the United States was far ahead


of even the other North Atlantic countries in its use of internal combustion engine vehicles: there were only some 132,000 passenger cars in Britain. On the 1889 centennial of the storming of the Bastille during the Great French Revolution, France held a universal exposition. At the center of it was not some tableau of the martyrs of the French Revolution, but a construction of steel: the tower designed by and named after Gustave Eiffel that has dominated the Paris skyline ever since. As historian Donald Sassoon writes, the French Revolutionary centennial became a: consecrat[ion of]… commerce and trade, modernity, and the wonders of technology exhibited in the Galerie des Machines… Under the banner of modernity, progress, and the peaceful pursuit of wealth, the French people would regain national pride and unity after the humiliating [military] defeat of 1870…

8.1.4: Corporate Enterprise The new technologies of the end of the nineteenth century were associated with the rise of the modern corporate enterprise. By the end of the 1880s, industrial enterprises found themselves in the middle of a web of ocean steamship, land railroad, and telegraph communication systems that greatly multiplied their ability to order materials and ship products. The vastly expanded potential of the delivery system led to a vast expansion in the size of the enterprise. The expanded firms were more capital intensive than their predecessors, and their continued profitability required that the expensive capital be used to the utmost: coordination of the flow of inputs from suppliers and of output through distributors as well as of product through the factory itself. Such coordination could not just happen: it required professional management. The modern managerial enterprise–the profession of management itself–was born with the twentieth century. The new technologies of the end of the nineteenth century were associated with the rise of the modern corporate enterprise. By the end of the 1880s, industrial enterprises found themselves in the middle of a web of ocean steamship, land railroad, and telegraph communication systems that greatly multiplied their ability to order materials and ship products. The


vastly expanded potential of the delivery system led to a vast expansion in the size of the enterprise. The expanded firms were more capital intensive than their predecessors, and their continued profitability required that the expensive capital be used to the utmost: coordination of the flow of inputs from suppliers and of output through distributors as well as of product through the factory itself. Such coordination could not just happen: it required professional management. The modern managerial enterprise—the profession of management itself—was born with the twentieth century.2

8.2: Accounting for American Growth In the United States the belle époque, the Gilded Age, the period of prosperity set in motion around 1870 lasted longer than elsewhere in the world. China collapsed into revolution in 1911. Europe descended intot eh hell of World War I in 1914. In America the period of progress and industrial development lasted longer—perhaps from when the guns fell silent at the end of America’s Civil War at Apomattox in 1865 until the start of the Great Depression in the summer of 1929. In 1869 the United States had 35 million people in it, at an average measured economic standard of living of some $1,600 year-2008 dollars per year, at least two-thirds farmers or other small-town rural dwellers. By 1929 farming and other small-town rural dwellers were down to oneeighth of the population, America had 122 million people in it, and the average measured economic standard of living was some $6,000 year2008 dollars per year. These give us growth rates of 1.9% per year for the population of the country and of 2.1% per year for output per capita. (Contrast with growth rates of 2.9% per year for population—from 4 to 35 million—and 1.4% per year—another near-tripling—in measured economic output per capita in the years up to the Civil War.) The continuation—nay, the acceleration—of growth in output per worker alongside continued population growth was remarkable given that the frontier had closed in the immediate aftermath of the Civil War. The


natural resources the United States had then conquered were pretty much all that there were. And it was the conquest of those resources that had driven America’s economy forward for its first near-century.

8.2.1: American Growth Accounting from Settlement to the Civil War Begin with a rule of thumb: in a pre-industrial economy, the proportional growth rate of production is roughly: (8.1)

gy =

1 1 1 gk + gn + gE 4 4 2

where gy is the proportional growth rate of production per worker, gk is the proportional growth rate of the economy’s capital stock—the produced € means of production that are the products of human ingenuity and previous savings—per worker, gN is the proportional growth rate of available and exploitable natural resources per worker, and gE is the proportional growth rate of labor efficiency—the extent to which inventions, innovations, organizational improvements, and reductions in transactions costs and other forms of economic inefficiency enable workers to work smarter and more productively even with the same stock of accumulated useful savings and the same flow of useful natural resources. The growth rate of total output is a quarter times the growth rate of capital, plus a quarter times the growth rate of national resources, plus a half times the growth rate of the efficiency—organizational, technological, et cetera—with which they work. Over any substantial period of time without large changes in the proportion of income saved, it is the case that output and the capital stock grow at the same rate—gy=gk—which means that in a pre-industrial economy like the United States up to the Civil War: (8.2)

gy =

1 2 gn + gE 3 3


European settlement of the region that was to become the United States started in earnest around 1650 as three groups—religious fanatics, canny traders, and simple pirates—converged on the region. The religious fanatics wanted to build theocracies. The canny traders wanted to exchange products abundant in Europe for things valuable in Europe but scarce in America. The pirates wanted to loot and steal. Their descendents became the American colonists. The American colonists were rich by pre-industrial standards—perhaps twice as rich as their predecessors and compatriots back even in northwestern Europe. There was lots of unoccupied farm land located on or near watercourses with easy access to the towns, and to the sea. Why there was so much unoccupied farm land in 1650 is an interesting and horrifying story. America had been isolated from the Eurasian disease pool for the twelve thousand years since the end of the last ice age. And Europeans domesticated lots of animals—and slept near them. Because the disease pools were isolated, each side after contact in 1492 was very vulnerable to the other side’s diseases. And because Europeans had domesticated and lived cheek-by-jowl with all kinds of animals for thousands of years lots of diseases had jumped the species barrier in Eurasia, and so the Europeans had many, many more diseases. That, plus conquest, war, plunder, genocide, torture, and enough culture shock to stun a grizzly bear, caused the Amerindian population of the Americas to crash from fifty to a hundred million in 1492 to perhaps five million in both American continents by 1650, with very low population densities in the seventeenth century everywhere but in what had once been relatively densely populated corn lands. The first generations could farm as much land as they wished—and it was very good land to farm too. The religious fanatic settlers were pleased in the short run but disappointed in the long run—their theocracies crumbled. The canny traders were disappointed in the short run (save for the Company of His Majesty’s Merchants and Adventurers Venturing to Hudson’s Bay) but pleased in the long run as settlements grew and began to export. The pirates were disappointed in both the short and the long run: there was


little in the way of valuable movable property to grab and steal in what was to become the United States. 1640 saw perhaps twenty-five European colonists in the region that is now the United States. 1790 saw that population equal four million. Then, just about independence, the U.S. east of the Appalachian mountains begins to run out of good, currently-unoccupied land. Between 1790 and 1860 the population of the United States grew from 4M to 31 million—with a split changing from two million in Virginia and further south and two million in Maryland and further north in 1790 to nine million in the South (four million of them slaves who were not attached to the Peculiar Institution of African-American slavery, or rather were too strongly attached to the Peculiar Institution for their liking) and twenty-two million in the North at the start of the Civil War. From 1790 to 1860 average living standards roughly doubled—call it from $1000 year-2008 purchasing-power dollars in 1790 to $2000 year-2008 purchasing-power dollars in 1860, but that is just a guess: a rate of growth of real production per worker of 1.0% per year from 1790 to 1860 accompanying a rate of population growth of 3.0% per year (which happens to be the rough demographic limit: very few human populations no matter how well-situated have ever managed to do more than double every twenty-five years, which is what growth at 3.0% per year means). Britain in this 1790-1869 era had the fastest rate of growth of the efficiency of labor. We think that the value of gE in Britain over this period was roughly 0.6% per year. The value in America was surely somewhat less, but not extraordinarily less. Let’s assume it was equal and substitute it and our value of 1.0% per year for gy into our equation (8.2) like this: (8.3)

1 2 1.0% = gn + 0.6% 3 3

We can then subtract to get the term with the growth rate of natural resources per capita by itself:



2 1 1.0% − 0.6% = gn 3 3

and then multiply:

€ (8.5)

1.8% = gn

This tells us that the growth rate of natural resources per worker in the United States between independence and the Civil War was 1.8% per € year—which, with a 3% per year population growth rate, means that available natural resources per capita were growing at 5% per year as the United States spilled out over the Appalachian mountains and across the continent from California to the New York island, from the redwood forests to the Gulf Stream waters. Suppose the stock of available and accessible resources had not grown at all: suppose that the U.S. had been penned up behind the Appalachians from independence on. What would have happened to real living standards in America then? We can use our equation but this time with a –3.0% for the growth rate of resources per capita:

1 2 (−3.0%) + 0.6% 3 3


gy =


gy = −0.6%

In that alternative-history world, American living standards would have fallen at 0.6% per year throughout the first two-thirds of the nineteenth € century. That’s a lot like the nineteenth-century experience of China (although starting from a higher living-standard base). The pace of technological advance before 1870 was not fast enough to deliver rising living standards to a population expanding at the rough demographic limit that the United States was expanding at—not without tremendous increases in available and accessible natural resources. This is why the history of the United States in the years up to the Civil War is a history of


transportation improvements—riverboats, canals, steamboats, and railroads—of westwards settlement—land clearing and experiments with new crops and new varieties of crops—and of conquest, genocide, and Amerindian removal—the Cherokee Trail of Tears, the Battle of Horseshoe Bend, The Battle of Tippecanoe, etc.

8.2.2: American Growth Accounting from the Civil War to the Great Crash of 1929 Come 1870 and the frontier is effectively closed. Yet American economic growth continued. The focus of American growth shifted from expansion and resources to industrialization: movement to the factory rather than the westward farm frontier. America became an industrial economy. Even farming became an industrial occupation: no longer muscle, ox, and horsepower but automatic reapers, harvesters, pumps, stationary gasoline engines, tractors. So we shift to a different rule-of-thumb in our accounting for economic growth: (8.8)

gy =

1 1 gk + gE 2 2

where as before gy and gk are the growth rates of output per capita and the capital stock per capita, respectively. Let’s subtract off half of the growth € rate of output per capita from both sides: (8.9)

1 1 1 gy = (gk − gy ) + gE 2 2 2

Let’s give the difference between the growth rates of the capital stock and the growth rate of output per worker a name: d, for capital € deepening—the extent to which the economy becomes “more industrial” in the sense that each unit of output made is backed by and in fact requires an increasing number of units of capital behind it. And let’s multiply both sides of the equation by 2:



gy = d + gE

This is a very simple equation. In an industrializing economy, the growth rate of output per worker will be equal to the growth rate of the efficiency € of labor E plus the amount of capital deepening d. What generates a high rate of capital deepening? Two things: a differential fall in the price of capital goods—an economy that gets differentially better at making machines and structures—and a rise in the savings rate, in the share of production that is on average saved and invested for the future. Between 1870 and 1929 we saw an annual rate of capital deepening in America of 1.2% per year, and an acceleration of productivity growth in the efficiency of labor to a rate of 0.9% per year. Plug these numbers into our industrial growth equation: (8.10) gy = 1.2% + 0.9% = 2.1% And we see the growth-accounting drivers of post-1870 America. Output per worker and per capita, which had been growing at 1.0% per year € before, doubles to 2.1% per year. And some 4/7 of this economic growth in measured economic output per capita came from capital deepening—more capital, more produced means of production, more machines backing up each worker—with 3/7 coming from improvements in the efficiency of labor—working smarter made possible by more education, organizational improvements, and other improvements in technology not directly related to those that made capital goods cheaper.

8.3: Sectoral Patterns 8.3.1: The Persistence of Agriculture Even as of 1913, in the United States, and in western Europe outside of Britain, farmers still made up the largest single occupational group. More than half the population still lived in the country, farming the land or providing the basic goods and services that farmers needed. Agriculture was still a very substantial share of GDP in the late-nineteenth century. It


was only halfway through its long decline to its present role as a very small share of economic activity in industrialized economies. In the American west, and in the other countries that Arthur Lewis named “regions of European settlement”3—Canada, Australia, New Zealand, and Argentina—farming was not only the core of the economy but farmers were relatively rich, both compared to those dwelling in the cities and compared to those who had remained in Europe.4

Figure 8.1: Agricultural Shares of GDP in Other Major Industrial Economies Agricultural Share of GDP (1938 Prices) 60%




Canada France Germany


Italy Japan




0% 1890








The eve of World War I still saw more than one out of three Americans at work at work in agriculture, and one in thirty at work in mining. And with the exception of Belgium, other European countries were much closer to the American than the British pattern in their distribution of the labor force between town and country, and among sectors.5 This turned out to have powerful implications for politics as World War I drew closer: too much political influence was still exerted by agrarian landlords who saw themselves as the descendents of knights who fought for their kings with their swords, and proved their worth through battle.6

Figure 8.2: Building Out the Railroad

Railroad Kilometers by Region, 1870 and 1913 450,000 400,000 350,000 300,000 250,000

1870 200,000


150,000 100,000 50,000 0 Western Australia Europe & Canada



South America



Asia ex India


Africa ex S.A.

South Africa

8.3.2: The Cheapness of Steel and Rails Relatively cheap ways of making the fundamental building material of the twentieth century—steel—emerged in the second half of the nineteenth, with the invention first of the Bessemer process and then of the ThomasGilchrist process. World steel production was some 70 million tons a year by 1913, and would grow to 170 million tons by 1950.

8.3.3: High-School Education The years before World War I saw a large increase in education, as at least elementary school became the rule for children in leading-edge economies. And years of education grew as well. In countries like the United States that made the creation of a literate, numerate citizenry a high priority—and that encouraged those with richer backgrounds, better preparations, and quicker or better trained minds to go on to higher education—industrialists and others soon found the higher quality of their workforce more than making up for the taxes to support mass secondary and higher education. The U.S.’s edge in education was a powerful factor in giving the U.S. an edge in productivity—and Germany’s edge in education was a powerful factor in giving Germany an edge in industrial competitiveness also. In the United States in 1910 some 355,000 were attending college, making up nearly five percent of their age cohort. In Germany in 1910 some 1,000,000 students were enrolled in post-elementary education.7 Still, not all education was formal education. With the possible exception of Great Britain, a lack of technically trained and educated workers does not seem to have been a major contraint on economic or industrial growth in the years before World War I. Much necessary technological knowledge could be (and can today still be) learned on the job.8 And the higher wages and salaries paid to trained engineers and craftsmen induced the boom in education.


8.4: Science, Technology, and Economy before World War I Why is it that the nineteenth century—particularly the late nineteenth century—saw the invention of invention and innovation? What made innovation not just an occasional flash of lucky insight but a continuous process, one in which you could invest in? One important factor is that by the second half of the nineteenth century people believed in their science enough to invest large amounts on money betting that science could do things—new and very valuable things—that had never been done before.

8.4.1: Submarine Telegraph Cables Science fiction writer Neal Stephenson marvels at that “highest of hightech industries” of the 1860s, the telegraph: specifically the trans-oceanic submarine telegraph, the history of which is preserved at the Museum of Submarine Telegraphy in Porthcurno, Cornwall: During the decades after [Samuel] Morse's [first telegraph message] "What hath God wrought!" a plethora of different codes, signalling techniques, and sending and receiving machines were patented. A web of wires was spun across every modern city on the globe, and longer wires were strung between cities.... [T]elegraphy, like many other forms of engineering, retained a certain barnyard, improvised quality until the Year of Our Lord 1858, when the terrifyingly high financial stakes and shockingly formidable technical challenges of the first transatlantic submarine cable brought certain long-simmering conflicts to a rolling boil... the persons of Dr. Wildman Whitehouse and Professor William Thomson, respectively... an inquiry and a scandal that rocked the Victorian world. Thomson came out on top, with a new title and name - Lord Kelvin.... Undersea cables, and long-distance communications in general, became the highest of high tech.... [...] Very long gutta-percha-insulated wires were built. They worked fine when laid out on the factory floor and tested. But when immersed in water they worked poorly, if at all. The problem was that water, unlike


air, is an electrical conductor.... When a pulse of electrons moves down an immersed cable, it repels electrons in the surrounding seawater, creating a positively charged pulse in the water outside. These two charged regions interact with each other in such a way as to smear out the original pulse.... If the sending operator transmitted the different pulses - the dots and dashes - too close together, they'd blur.... Long cables act as antennae, picking up all kinds of stray currents.... These problems were known, but poorly understood, in the mid-1850s when the first transatlantic cable was being planned. They had proved troublesome but manageable in the early cables that bridged short gaps, such as between England and Ireland.... [I]n 1858 when the Atlantic Telegraph Company laid such a cable from Ireland to Newfoundland: a copper core sheathed in gutta-percha and wrapped in iron wires. This cable was, to put it mildly, a bad idea.... Let's just say that after lots of excitement, they put a cable in place between Ireland and Newfoundland. But for all of the reasons mentioned earlier, it hardly worked at all. Queen Victoria managed to send President Buchanan a celebratory message, but it took a whole day to send it. On a good day, the cable could carry something like one word per minute. This fact was generally hushed up, but the important people knew about it - so the pressure was on Wildman Whitehouse... [who] convinced himself that the solution to their troubles was brute force... 5-foot-long induction coils capable of ramming 2,000 volts into the cable. When he hooked them up to the Ireland end of the system, he soon managed to blast a hole through the gutta-percha somewhere between there and Newfoundland, turning the entire system into useless junk.... William Thomson had figured out... that incoming bits could be detected much faster by a more sensitive instrument.... Eight years after Whitehouse fried the first, a second transatlantic cable was built to Lord Kelvin's specifications with his patented mirror galvanometers at either end of it. He bought a 126-ton schooner yacht with the stupendous amount of money he made from his numerous cable-related patents, turned the ship into a floating luxury palace and laboratory for the invention of even more fantastically lucrative patents. He then spent the rest of his life tooling around the British Isles, Bay of Biscay, and western Mediterranean, frequently hosting Dukes and continental savants who all commented on the nerd-lord's tendency to stop in the middle of polite conversation to scrawl out long skeins of equations on whatever piece of paper happened to be handy...


Invention became an industry…

8.4.2: Nicola Tesla The most famous inventor at the start of the twentieth century was Thomas Alva Edison (1847-1931), "the wizard of Menlo Park," New Jersey, who registered more than 1000 patents and founded 15 companies—including what is now called General Electric. But everyone tells the story of Thomas Alva Edison. Let us look at somebody different.

Figure 8.3: Nikola Tesla in His Laboratory

At least as interesting as the story of Edison is the story of Nikola Tesla (born July 10, 1856; died January 7, 1943): Tesla’s “eccentric personality,” as people put it, coupled with bizarre and utopian claims


about the future course of science and technology made it extremely difficult for him to find and maintain either financial backers or a supporting engineering staff. He was, as much as anyone since Mary Wollstonecraft Shelley’s fictional Dr. Viktor von Frankenstein, the model of the mad scientist. And our entire electrical power grid and everything that draws off of it, our electric appliances and engines today, based as they are on alternating-current generators, polyphase systems and longdistance transmission through high-voltage power lines, are Tesla’s much more than they are Thomas Edison’s. The world from space at night, illuminated by the electric power grid, is Tesla’s world.

Figure 8.4: The Electrified World at Night (Composite Photo)

Tesla and his allies beat Thomas Edison and his in the struggle over whether electricity was going to be AC or DC. And his was the first, or at least one of the first, demonstrations of radio in 1894, which was at the time regarded as a great mystery: it was Albert Einstein who, when asked to explain radio, said: You see, a wire telegraph is a kind of a very, very long cat. You pull his tail in New York and his head is meowing in Los Angeles. Do you understand this? And radio operates exactly the same way: you send


signals here, they receive them there. The only difference is that there is no cat…

Nikola Tesla was born on July 10, 1856, the fourth of five children, in the Austrian Empire ruled by Emperor Franz Josef Habsburg from Vienna near its border with the Turkish Empire ruled by Sultan-Caliph Abdülmecid I Osmanli, in what is now the Krajina region of the Republic of Croatia. His father was a Serbian orthodox priest. His mother was illiterate—albeit a priest’s daughter. His parents wanted him to become a priest. He did not want to.9 I had a violent aversion against the earrings of women but other ornaments, as bracelets, pleased me more or less according to design. The sight of a pearl would almost give me a fit but I was fascinated with the glitter of crystals or objects with sharp edges and plane surfaces. I would not touch the hair of other people except, perhaps, at the point of a revolver. I would get a fever by looking at a peach and if a piece of camphor was anywhere in the house it caused me the keenest discomfort. Even now I am not insensible to some of these upsetting impulses. When I drop little squares of paper in a dish filled with liquid, I always sense a peculiar and awful taste in my mouth. I counted the steps in my walks and calculated the cubical contents of soup plates, coffee cups and pieces of food—otherwise my meal was unenjoyable. All repeated acts or operations I performed had to be divisible by three and if I mist I felt impelled to do it all over again, even if it took hours… Of all things I liked books the best. My father had a large library and whenever I could manage I tried to satisfy my passion for reading. He did not permit it and would fly into a rage when he caught me in the act. He hid the candles when he found that I was reading in secret. He did not want me to spoil my eyes. But I obtained tallow, made the wicking and cast the sticks into tin forms, and every night I would bush the keyhole and the cracks and read, often till dawn, when all others slept and my mother started on her arduous daily task…

At 19 he went to college in Graz at the Austrian Polytechnic, but he dropped out after two years, broke off relations with his family and friends, worked as an engineer for two years, and apparently suffered a nervous breakdown. His father persuaded him to return to college at


Prague’s Karl-Ferdinand University, but he attended for only one summer and then his father died. 1881 finds Nikola Tesla working for a startup, the National Telephone Company of Hungary in Budapest, as chief electrician and chief engineer. But he does not stay. 1882 sees him in Paris working as an improver and adapter of American technology. And June 6, 1884 sees Nikola Tesla arrive in New York with a letter of recommendation from Charles Batchelor to Thomas Edison: I know two great men and you [Thomas Edison] are one of them; the other is this young man [Nikola Tesla]...

Tesla went to work for Edison Machine Works. He would later claim that Edison promised him $50,000—the entire net worth at the time of the Edison Machine Works, the same multiple of average wages back then that $5 million would be today, and the same share of GDP back then that $30 million would be today—to improve and redesign Edison’s direct current generators, but that in 1885 Edison refused to pay. Tesla quit and found himself digging ditches for a living for a couple of years before finding his own financial backers. The day after Edison died, Tesla spoke for the newspapers: [Edison] had no hobby, cared for no sort of amusement of any kind and lived in utter disregard of the most elementary rules of hygiene  ... His method was inefficient in the extreme, for an immense ground had to be covered to get anything at all unless blind chance intervened and, at first, I was almost a sorry witness of his doings, knowing that just a little theory and calculation would have saved him 90 percent of the labor. But he had a veritable contempt for book learning and mathematical knowledge, trusting himself entirely to his inventor's instinct and practical American sense…

He also did not like Albert Einstein, claiming that relative was: ...[a] magnificent mathematical garb which fascinates, dazzles and makes people blind to the underlying errors. The theory is like a beggar


clothed in purple whom ignorant people take for a king ... its exponents are brilliant men but they are metaphysicists rather than scientists...

And: I hold that space cannot be curved, for the simple reason that it can have no properties. It might as well be said that God has properties. He has not, but only attributes and these are of our own making. Of properties we can only speak when dealing with matter filling the space. To say that in the presence of large bodies space becomes curved is equivalent to stating that something can act upon nothing. I, for one, refuse to subscribe to such a view‌

Figure 8.5: Tesla and WestinghouseĘźs AC Electric Generators, 1893


Nevertheless, Tesla found backers and made inventions. 1887 sees Tesla as the proprietor of Tesla Electric Light and Manufacturing (but his financial backers soon fire him from his own company). 1888 sees Tesla demonstrating an alternating-current induction motor—the ancestor of all our current alternating-current motors—at the American Institute of Electrical Engineers meeting. 1889 sees Tesla working at the Westinghouse Electric and Manufacturing Company’s laboratory in Pittsburg. In 1891 at the age of 35 Tesla is back in New York establishing his own laboratory. In 1892 he becomes vice president of the American Institute of Electrical Engineers and receives his patents for the polyphase alternating-current electric power system. And in 1893 Nikola Tesla and George Westinghouse use alternating-current power to illuminate the Chicago’s World Fair—the first World Fair ever to have a building for electricity and its applications. Quite apart from the lighting plant, the Westinghouse Company showed at the World's Fair a complete polyphase system. A large twophase induction motor, driven by current from the main generators, acted as the prime mover in driving the exhibit. The exhibit, then, contained a polyphase generator with transformers for raising the voltage for transmission; a short transmission line; transformers for lowering the voltage; the operation of induction motors; a synchronous motor; and a rotary converter which supplied direct current, which in turn operated a railway motor. In connection with the exhibit were meters and other auxiliary devices of various kinds. The apparatus was in units of fair commercial size and gave to the public a view of a universal power system in which, by polyphase current, power could be transmitted great distances, and then be utilized for various purposes, including the supply of direct current. It showed on a working scale a system upon which Westinghouse and his company had been concentrating their efforts; namely, the alternating-current and polyphase system. It has been maintained with some plausibility that the most important outcome of the Centennial Exposition of 1876 was that the people of the United States there discovered bread. So it may be maintained with even more plausibility, that the best result of the Columbian Exposition of 1893 was that it removed the last serious doubt of the usefulness to mankind of the polyphase alternating current. The conclusive demonstration at Niagara was yet to be made, but the Wolrd's Fair


clinched the fact that it would be made, and so it marked an epoch in industrial history. Very few of those who looked at this machinery, who gazed with admiration at the great switchboard, so ingenious and complete, and who saw the beautiful lighting effects could have realized that they were living in an historical moment, that they were looking at the beginning of a revolution.'' Adopted from "A Life of George Westinghouse," by Henry G. Prout, 1921.

The late 1880s and 1890s see Westinghouse and Tesla and their backers struggle against Edison and his backers in the so-called “war of the currents.” Thomas Alva Edison had bet on a direct current—DC—electrical grid. Direct current worked very well with incandescent lamps and with the motors of the day. Direct current fit well with storage batteries, which meant that you only had to build the expensive generating capacity for average loads rather than peak loads. And Edison was no mathematician, so he did not understand what Tesla was getting at when Tesla worked for him: “[Tesla's] ideas are splendid, but they are utterly impractical…” The alternating current—AC—systems of Tesla and Westinghouse, by contrast, allowed the efficient transmission of electric power over long distances through very high-voltage power lines. Once the energy got where you want it to go, it could then be reduced to a voltage that isn’t immediately fatal via a step-down transformer: the alternations of the high-voltage alternating current created a magnetic field which, as it changed, produced a low-voltage alternating current in the other coil of the transformer. There was no equivalent trick for Edison’s direct-current system: he had to push your power at low voltage across long distances thus incurring extremely large resistance power losses. On the other hand, it was not obvious before Tesla’s induction motor how alternating current could be used to power anything useful. The 1890s see Westinghouse and Edison nearly bankrupt themselves as each struggles to build out an electrical power grid fast enough to become the dominant standard.


Westinghouse and Tesla won—although ConEd still had 4600 DC customers as of 1998. All in all, Tesla designed, built, and patented: 1892: polyphase alternating-current electric motor. 1896: radio. 1897: teleoperation. 1898: radio-controlled model boat. 1898: spark plug.

Tesla proposed: ICBM Tele-operated mechanisms Autonomous robots Death rays

1899 sees Tesla move from New York to Colorado Springs to conduct experiments in high-voltage power distribution—both through wires and wireless—and the wireless power distribution experiments soon turned into radio. But Tesla was not especially interested in radio. Tesla was interested in distributing electric power to the world without having to build power lines, and in distributing electric power to the world for free: a kind of open-source electric power movement antedating the open-source software movement by ninety years. Marconi and his backers were to win the patents over and profit from radio—at least until World War I when the U.S. Navy seized all radio intellectual property as of vital importance for national security. This does not mean that Tesla failed to find financial backers. J.P. Morgan backed him for a while, before deciding in 1907 to rationalize operations and replace the visionary inventors by managers who would focus on he bottom line. Indeed, collecting royalties on his own patents would have made Tesla rich on the same scale of magnitude as oil baron John D. Rockefeller. But Tesla did not really believe in intellectual property. And


enforcing his rights would have driven his friend Westinghouse’s company to the wall and into the hands of the bankers much earlier.

8.5: British Relative Decline W. Arthur Lewis (1979), Growth and Fluctuations, 1870-1913 (London: George Allen and Unwin): When we talk about productivity we must distinguish between the old industries of the industrial revolution, including coal, pig iron, textiles, and steam power, and the new industries which grew up after 1880, especially electricity, steel, organic chemicals, and the internal combustion engine. British productivity was much higher than German productivity in the old industries around 1880. Therefore it was easy for German productivity to keep rising. In Britain, however, the old technology had been extended about as far as it could go. In the cotton textile industry, and again in the utilization of coke for making pig iron, productivity moved onto a plateau in the 1880s, Even so, German productivity was still lagging, and had not fully caught up with the British even in 1913. For British productivity to have increased considerably the British would have had to convert to American methods. This involved using about twice as much horsepower per head, and getting about twice as much product per head…. Why did the British not adopt American methods?… British entrepreneurs were under heavy pressure in the last quarter of the century…. American methods were fairly widely known. If entrepreneurs had expected them to yield the same output in Britain as in the USA, they most probably would have adopted them. [Yet] there is no dispute that the difference between British and American productivity from the same inputs was substantial…. In boots and shoes, where British and American factories were using almost exactly the same machinery, American output per manhour exceeded the British by about 80 percent…. The causes of these differences are also well-known. The American pace is faster. The work is organized to produce a faster flowthrough…. Phelps-Brown believes there was actually a slackening of the pace of British factory workers from the 1890s onward, which he


attributes to the rise of trade unionism and the increasing resentment of the working class against the factory system. This cannot be porvied, but is not without plausibility. How did American entrepreneurs get away with increasing the pace?… At least from the 1870s onwards American workers were subjected to severe and long bouts of unemployment..,. Why did they not earn to fear innovation as much as the British workers? Some certainly did, but their fear could not be so easily translated into action. For one thing, there was always that long line of immigrants looking for jobs…. [By] the time trade unions achieved power in the USA, they were so concerned about wages that many maintained their own work-study experts to help the less-efficient firms… Britain’s competitive weakness was not in the old industries but in the new… characterized by a higher scientific level…. [A]ny intelligent and observant person with a stroke of genius could invent the steam engine or the flying shuttle… innovation after 1880 needed something more… scientific knowledge to develop electrical machinery, organic chemicals, or workable internal combustion engines…. Between academic science and industry lay a big gulf which had to be bridged. The Germans bridged it in the last quarter of the nineteenth century, but the British failed to do so.

8.5.1: Britainʼs Relative Decline The United States became the world’s leading-edge nation—the richest, the most prosperous, the most modern, and the highest technologied—only because Great Britain, the nineteenth-century “workshop of the world” seemed to falter in its economic growth. The story of America’s rise to economic preeminence is in many ways simply the reverse of the story of Great Britain’s rapid turn of the century relative economic decline. Great Britain had been the first industrial nation. Its commercial dominance of the seventeenth and eighteenth centuries, coupled with its established sheepherding industry, its plentiful supplies of water power, coal, and iron, and a relatively large pool of wage-workers without traditional rights to occupy the land gave it crucial economic advantages at


the start of the industrial revolution. In textiles, steam power, iron production, and canal building Great Britain led the way throughout the eighteenth and nineteenth centuries. The last years of the nineteenth century saw Great Britain the richest country in the world (save for Australia, the late nineteenth century sheep-raising equivalent of OPEC), with the heaviest industrial base, the most comprehensive railroad network, and ruling over the largest Empire the world had ever seen. British productivity has grown more rapidly in the twentieth century than it did in the nineteenth. Britain's relative decline springs from its inability to partake fully of the acceleration of growth in productivity that the twentieth century saw. And American economic preeminence sprang from the American economy’s ability to create and ride the wave of this growth acceleration. Perhaps Britain’s advance contained the seeds of its inability to lead the productivity revolutions of the twentieth century. Britain’s relative prosperity had been based on a set of technologies that greatly multiplied the productivity of unskilled workers. The poor British educational system, its weak corps of technical engineers, and the easy availability of unskilled Irish and rural British workers were no great handicap as long as the most dynamic edge of the economy intensively used both machines and unskilled workers, but not skilled workers. But technologies that made heavy use of skilled workers would be the locus of industrial development in the twentieth century. In any event, the trends that Lewis sees are clear: In the last years of the nineteenth and the first years of the twentieth century Britain lost its leading position in new, modern industry after new, modern industry. Organic chemicals became German (and American), British railroads became smaller and slower than those on the continent, the development of the automobile lagged behind France and the United States, the electric power grid was put into place slowly, the telephone network was rudimentary, and so on. Even in textiles, Britain began to be excluded from foreign markets on the basis of too high a price. British levels of productivity remained


high. They just failed to grow at the same rate as in the rest of the leading edge of the industrial world. And British companies lost, or failed to develop, market position in what were going to become the leading industries of the first half of the twentieth century.

Some authors—like Nicholas Crafts—argue that Britain’s pattern of industrial development was inherently unsuited for it to maintain its position as technological leader into the twentieth century. Crafts argues that Britain’s greatest revealed comparative advantages around the turn of the century were in rails and shipbuilding, iron and steel, textiles, alcohol and tobacco, apparel, and industrial equipment. By contrast, America’s greatest revealed comparative advantages were in the making of nonferrous metals, of agricultural equipment, of industrial equipment, of cars and aircraft, metal manufactures, and of electical machinery. Since the first set of industries were already mature and the second weren’t, Crafts argues, there was every reason to expect Britain to lose its relative position as industrial leader.10 But this begs the question. Britain’s loss of market position in the most technologically advanced industries is surprising, for in those industries lies the most natural comparative advantage of the leading industrial nation—the ability to use modern technologies and skilled engineers to create new goods and new wasy of making them. The leading industrial nation is the richest, has the most experience with modern technology, and would seem to be the best set up to train and mobilize labor and capital to take advantage of new opportunities. Yet British firms and workers did not do so. In fact, in the thirty years before World War I factors of production behaved as if there was something pernicious about locating in Britain. On net both British capital and British labor left the island for better opportunities elsewhere. As U.C. Davis economist Gregory Clark puts it, by 1910 you could combine British labor and British capital in the textile city of Fall River, Massachusetts, and obtain 50 percent more output per worker hour and 20 percent more output per machine hour than back in the textile city of Manchester, in England. The first public power station in


England, in 1881, was built by the German firm of Siemens. On the eve of World War I, the German electrical manufacturing industry was more than twice as big as Britain’s. Alfred Chandler describes the rise of German dye firms to market dominance, in spite of the fact that the largest markets for dyes were in Britain until World War I. Starting in the 1880s, the major German firms—Bayer, Hoechst, and company—decided to build mammoth plants along the Rhine river, which would produce some ten times as many kinds of dyes as previous plants. To distribute the products the German firms for the first time integrated distributors into the manufacturing firms, rather than relying on wholesalers. And by the turn of the twentieth century the German dye manufacturers—relying on low costs made possible by economies of scale, and expanded distribution through sales forces that would push dye out the door and teach customers how to use it. By 1913 some 85% of textile dyes were produced in Germany; some 3% were produced in Britain. One reason for Britain's slower growth than the other industrial powers is that its rate of investment was low. There have always been four candidate reasons: a deficiency in natural resources, the British labor relations system, and the British educational system, and a banking system that failed to mobilize capital for large-scale industrial firms. Of these, resource-based explanations for British relative decline are unsatisfactory. Germany and the United States had superior natural resources. Yet water transportation was very cheap. Britain grew no cotton, yet had no trouble dominating the world cotton spinning and weaving industry for a century. Japan today produces steel in large quantities from Australian iron ore and Brazilian and American coal. Right-wing analysts have tended to blame Britain’s industrial decline on the bloody-mindedness of British unions, unwilling to see firms earn profits or to allow economic readjustment and change to take place. Leftwing analysts have tended to blame Britain’s industrial decline on its class structure and deficient educational system. These are not separate causes, but a single interlinked system: unions were bloody-minded and the


educational system was deficient because Britain had strong class distinctions. And the deficient educational system and poor labor relations reinforced class distinctions. For those who governed Britain did not see an educated population as a high priority. As economic historian David Landes wrote, in Britain: For every idealist or visionary who saw in education an enlightened citizenry, there were several ‘practical’ men who felt that instruction was a superfluous baggage for farm labourers and industrial workers. These people, after all, had been ploughing fields or weaving cloth for time out of mind without knowing how to read or write all they would learn in school was discontent. Under the circumstances, Britain did well to have roughly half of her [elementary] school-age children receiving some kind of elementary education around 1860.11

This was a far lower percentage than found in the United States or in Germany. What was true of elementary education was even more true of technical and engineering education. In Britain, technical education was the business of private firms. Why should they train workers who might well go elsewhere for jobs? And why should they train workers if such training only upped the bargaining power of British unions? Thus the year 1914 saw close to 40 percent of Britain's national capital stock-of its produced means of production-located overseas. No other country has matched Britain's high proportion of savings channeled to other countries. Britain's overseas investments were concentrated in government debt, in infrastructure projects like railroads, streetcars, and utilities, and in securities guaranteed by the local government. Britain did not do well out of its overseas investments. In the forty years before World War I, British investors in overseas assets earned low returns, ranging as low to perhaps 2% per year in inflation-adjusted pounds on loans to dominion governments. Such returns were far below what presumably could have earned by devoting the same resources to the expansion of domestic industry. British industry in 1914, and British infrastructure, were not as capital intensive as American industry and infrastructure were to become by 1929. It is difficult to argue that Britain's


savings could not have found productive uses at home if only they could be challenged appropriately and managed productively. And it is difficult to argue that foreign investments were more secure. In a depression at home—the major risk facing investors in British industry—exports to Britain drop far in both quantity and price, and firms and governments across the oceans declare bankruptcy. Why, then, did British investors commit their wealth overseas? One possibility is that the high rates of return presumably available at home were not really there: the absence of British engineering skill, and the aggressive wage demands of British unionized workers would have prevented home investments from earning even the small profits earned abroad. A second possibility is that British investors did not understand the framework in which they were embedded. Perhaps they imagined that home investments—even a diversified portfolio of industrial, railroad, and utility corporations—were risky, while overseas investments guaranteed by the local government were safe.12 Certainly a contributing factor was the failure of Britain to develop institutions for channeling the savings of thousands into the capital stock of one giant enterprise. How is an individual saver, in an age where the efficient size of an operating corporation is vast beyond his means, to evaluate which industries and companies have good prospects, monitor the management to which he has committed his capital, and control and replace the management when it does not do its job? Such tasks require the growth of financial intermediaries: investment banks of one form or another. German analysts, especially, criticized the pre-WWI British banking system because of the lack of such a monitoring system: the complete divorce between stock exchange and deposits...causes another great evil, namely, that the banks have never shown any interest in the newly founded companies or in the securities issued by these companies, while it is a distinct advantage of the German system, that the German banks, even if only in the interests of their own issue credit, have been keeping a continuous watch over the development of the companies, which they founded.13


And so few were willing to invest in companies that might become large organizations that contributed to the rapid advance of productivity. The scarcity of British engineering talent was matched by a scarcity of venture capital: there was plenty of capital for infrastructure or for government debts, but little for the progressive entrepreneur. Britain’s relative economic decline should have given libertarians much more cause to pause and take stock than they have. For turn-of-the-century Britain was, from a libertarian point of view, a laissez-faire utopia in which the government did little and the private market system did everything. Yet economic preeminence in the twentieth century appears to have required much more than an initially-rich country and a laissez-faire economic policy. It also required a government willing to invest in education to create a skilled labor force and a solid corps of technologically-trained engineers, it required financial institutions to channel savings into the domestic accumulation of the machines that embody industrial technology, it required a labor movement eager to share in and not to block economic reorganization and technological change, and modern business enterprises to take advantage of economies of scale and to translate scientific knowledge into productive engineering applications. In all of these Britain was deficient. In all of these the United States was—by luck—abundant.

8.5.2: Exceptional America Because it was in relative terms so prosperous and so technologically advanced, the United States in the twentieth century was the country where people looked to see the shape of the future, just as Holland in the seventeenth and Britain in the nineteenth centuries had been the focuses of institutional and economic innovation and the balance wheels of world economics and politics. For much of the twentieth century, the United States seemed to observers from Europe and elsewhere to be a qualitatively different civilization: it lacked the burden of the past that constrained the politics and oppressed the peoples of the nations of


Europe, and freed from the burden of the past it could look toward the future. The sources of America’s twentieth-century exceptionalism were many. We have already noted how the scale of the country induced the rise of modern management, and how the scale of the country encouraged mass production: industries that could take advantage of the potential demand created in a continent-wide market. Gavin Wright and others have stressed the crucial role played by natural resources in America’s industrial supremacy: in a world in which transport costs are still significant, a comparative advantage in natural resources becomes a comparative advantage in manufacturing. Others stress the links between a resource-rich economy and the “American system” of manufactures, relying on standardization, attempts to make interchangeable parts, heavy use of machinery—and wasteful use of natural resources like materials and energy.14 In the twentieth century this American system was to lead straight to the possibilities of mass production, not because of any far-sighted process of industrial development but through myopic choices that generate further technological externalities.15 The end result was a United States that had a remarkable degree of technological and industrial dominance over the rest of the world for much of the twentieth century. We can see some of the admiration and wonder that turn of the century America triggered by gazing at the early twentieth century United States through the eyes of a 1916 transitory immigrant who, later, recorded his experiences in his autobiography. Unlike the bulk of the people who had left the Old World for the New in the previous half century, Lev Bronstein did not want to be there. He was a political exile: one of those feared by Czars and policemen, and hunted and exiled because they were feared. But once he and his family had landed in New York, he and his family made the best of it. The Bronsteins:


rented an apartment in a workers’ district, and furnished it on the installment plan. That apartment, at eighteen dollars a month, was equipped with all sorts of conveniences that we Europeans were quite unused to: electric lights, gas cooking-range, bath, telephone, automatic service-elevator, and even a chute for the garbage.These things completely won the boys over to New York. For a time the telephone was their main interest; we had not had this mysterious instrument either in Vienna or Paris...

They—particularly the children—were overwhelmed by the prosperity of the United States, and by the technological marvels that they saw in use everyday: ...the children had new friends. The closest was the chauffeur of Dr. M. The doctor’s wife took my wife and the boys out driving... the chauffeur was a magician, a titan, a superman! With a wave of his hand, he made the machine obey his slightest command. To sit beside him was the supreme delight.

He stayed in the United States for less than a year. The Russian Revolution came, and he returned to the city of St. Petersburg (whose name was changed, first to Petrograd, then to Leningrad, and now back to St. Petersburg). As Leon Trotsky (an alias taken from one of his former Czarist jailers in Odessa in order to evade the police) he became Lenin's right-hand, the organizer of Bolshevik victory in the Civil War, the first of the losers to Stalin in the subsequent power struggle, and finally the victim of the Soviet secret police, assassinated with an ice-pick in his head outside Mexico City in 1940. Trotsky was never allowed back into the United States: he was, after all, a dangerous subversive, with a long-run plan that included the overthrow of the government of the United States by force and violence. Thus he had no time to more than "catch the general life-rhythm of the monster known as New York." But on his departure Trotsky felt—or at least he later wrote in exile that he had felt—as if he was leaving the future for the past: I was leaving for Europe, with the feeling of a man who has had only a peek into the furnace where the future is being forged...16


12,371 words: August 26, 2009. 1

Robert Allen (2009), The British Industrial Revolution in Global Perspective <> (Cambridge: Cambridge University Press: 9780521687850), p. 272 ff. 2 See Alfred Chandler (1978), The Visible Hand (). 3 See W. Arthur Lewis (), Origins of the International Economic Order (Princeton: Princeton University Press: ?????). 4 See Kevin O’Rourke and Jeffrey Williamson (1998), Globalization and History: The Evolution of a Nineteenth Century Atlantic Economy (Cambridge: MIT Press: ?????). 5 For the spread of industrialization across the European continent, see Sidney Pollard (), Peaceful Conquest (). 6 Joseph Schumpeter (), Imperialism (), was perhaps the most eloquent of those who condemned this conquest mentality. Norman Angell (1911), The Grand Illusion (), wrote an especially anguished cry against those who thought that nations gained strength and power through war and conquest. See also Arno Mayer (1984?), The Persistence of the Old Regime (). 7 The German engineering and technical tradition. 8 See Kenneth Arrow (1962), “The Economics of Learning-by-Doing,” Expand… 9 Nikola Tesla, My Inventions 10 See N.F.R. Crafts (1998), “Forging Ahead and Falling Behind: The Rise and Relative Decline of the First Industriation,” Journal of Economic Perspectives 12:2 (Spring), pp. 193-210. 11 David Landes (1969), The Unbound Prometheus (Cambridge: Cambridge University Press). 12 Footnote on the equity premium. 13 Jacob Reisser 14 David Hounshell, From the American System to Mass Production. 15 See Paul David (1975), Technical Choice, Innovation, and Ecoomic Growth (Cambridge: Cambridge University Press); H. John Habakkuk


(1962), American and British Technology in the Nineteenth Century (Cambridge: Cambridge University Press); Temin (). 16 Leon Trotsky (1929), My Life.



Econ 115: Lecture 4: The Invention of Invention... the North Atlantic, 1870-1914  

For September 8, 2009 J. Bradford DeLongProfessor of Economics, U.C. Berkeley Research Associate, NBER Once Again: PerspectiveFour thousand...

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