Lecture 7

Technological Change and the Industrial Revolution

What we mean when we say Capitalism

Technological Breakthroughs in the Industrial Revolution

Key Innovations1. Power: water power and especially steam power

2. Textiles: spinning, carding, weaving

3. Metallurgy: iron and steel making

Later stages

1. Telegraph (“Victorian internet”)

2. Chemicals (especially for fertilizers), dyes

3. Electrification

4. Transport: ocean steamers, rail

5. Agriculture: mechanization, fertilizers

Why Europe? And why not China?

Some Factors which Contributed to the Industrial Revolution in Europe

1. Competing political jurisdictions in Europe

2. Scientific Revolution

3. Relative economic and political freedom

4. Economic institutions and incentives : market economy, early patent laws, growing international trade, market competition

The Value of Economic Institutions

James Watt (inventor of the steam engine): “an engineer’s life without patent was not worthwhile”

What is Capitalism?Capitalism is a “social system.” What does that mean? We will identify a social system along four dimensions. 

•Economic institutions•Political institutions•Social norms•Belief systems 

Economic institutions refer to the rules for the allocation of the “factors of production” (land, other primary commodities, labor, capital, technology) and the final outputs of the production process (consumption and investment goods). Political institutions refer to the methods for organizing power in the society, particularly the nature of the state as the monopoly of “legitimate violence.” Does the state govern based on a “rule of law,” or on the basis of traditional or religious claims?  Social norms refer to the behavioral patterns enforced by concerns of social acceptability and status, and include behavioral patterns involving gender roles, pursuit of wealth, marriage and fertility patterns, trust and cooperation with members of the society and with members outside of the society, living patterns, hierarchical relations and occupational choice Belief systems refer to the prevailing social theories about the operations of the physical world, including the balance of science versus religion in the formulation and testing of hypotheses and in the design and use of technologies. Science in turn is associated with methods of rational inquiry: empirical analysis, testing and refutation of hypotheses, publication of competing ideas and empirical evidence.

Capitalism is a very special social system, with distinctive characteristics along all four dimensions.   Capitalism economic institutions: Factors of production and final outputs are allocated mainly though not exclusively on the basis of private ownership and market exchange. Tradeable property rights are established for land, labor, capital, and technology (e.g. patents, trademarks, and copyright).  Capitalist political institutions: The state holds the monopoly of legitimate violence in the society, though other groups may wield illegitimate violence (such as the mafia or terrorists). The state operates according to rational bureaucracy (predictable procedures established by publicly known rules) and is bound by the rule of law (that is, law governs the behavior of the state itself). The state provides critical services as a third-party judge and enforcer of private contracts through judicial and police processes. There is a formal equality of citizenship before the law. Social institutions: there is a norm of social equality (“liberty, equality, fraternite”), which historically has tended to broaden to include previously excluded social groups (“sororite”). There is a norm of social mobility based on merit. Individualism is favored relative to group conformity. Social relations are contractual. High expectation of social change. Belief systems: increasing secularization of belief. Preeminence of the scientific method. Rational inquiry and acceptance of “manipulation” of nature through technology.   We also note:

• A close historical relationship between the period of modern economic growth and the development of capitalism as a social system.

• Capitalist institutions seem to foster the mechanisms of growth.

 

Economic

institutions Political institutions

Social norms Belief systems

Capital Accumulation

Protection of property rights favoring saving and investment. Availability of contractual instruments to establish new business activities (e.g. corporation as form of business organization)

Predictability of state action. Reliability of contract enforcement. Protection of personal safety and physical property. Protection against state predation.

High social mobility creating incentives for wealth accumulation throughout society; human capital accumulation developed on a broad base

Acceptability of wealth accumulation (e.g. the “spirit of capitalism” in Calvanist doctrine); rational exploitation of new technologies

Division of Labor

High degree of specialization favored by market relations. Changes in the division of labor accompanying changes in economic opportunities and technology

Contract enforcement lowers the costs of specialization

High degree of mobility allows for allocation of individuals to areas of maximum comparative advantage. Acceptance of change allows for creation of new social roles.

Social roles are viewed through contractarian terms rather than as divinely inspired.

Technological change

Intellectual property rights establish claims over inventions (patents), brands (trademark), and literary and artistic works (copyright)

State permits private holding of technology, and encourages private innovative activity. May support scientific inquiry to the provision of “public goods”

Acceptability of “creative destruction” through the introduction of new technologies

Scientific basis of technological advancement.

Economic Political Social Belief Capitalist Market

exchange, private property

Rational, rule of law; state as enforcer of private contracts

contractarian (social equality, mobility, and change; and norms of contractual trust)

secular; scientific methods underpin technological advance

Traditional Economic allocations based on birthright (slavery; serfdom). Limited market exchange

Traditional sources of authority (e.g. the “Mandate of Heaven” of China’s dynasties)

Hierarchical patterns fixed in social norms (Confucian obligations; Indian caste relations)

Religious sanction to social organization and technology

Absolutist Economic allocations dependent on state assignment; high degree of state ownership ( patrimonial rule); limited market exchange

State limitations on private contracting; state claims on private holdings

Status dependent on political orientation (e.g. party membership as key to social status)

Technology and science are mobilized as instruments of state power

Exploitative (e.g. colonial)

Economic institutions designed to transfer income from one group to another; Unequal application of property rights and contract enforcement

State power is exercised on behalf of a limited group within the society

Low status is reserved for a significant portion of the society, on the basis of race, ethnicity, geography

Groups are excluded in their access to particular technologies

Hobbesian (life as “solitary, poor, nasty, brutish, and short”)

Property rights not established or protected by state; collapse of the division of labor

No organized state; no monopoly of legitimate or actual violence

Lack of shared social norms

Technology oriented towards self-protection and military purposes

Examples of some alternative 19th and 20th century social systems that we will discuss  

•Great Britain

•Lands under British Colonial Rule (e.g. Rhodesia)

•Tsarist Russia

•Ch’ing Dynasty in China

•Soviet Union