The Spread of Industrialization to the Continent of Europe

Features of Industrialization----the beginnings of Modern Economic

Growth

1. Substantial Rise in Per Capita Incomes

2. Technological Innovation in Production

3. Sectoral Shift: Change in the Economic Structure

4. Population Increases Rapidly

5. Urbanization

How, where, and why did industrialization spread to the Continent of Europe?

But, first….

Why was Britain the first industrial country?

Landes’ question: Why were they so rich----first?

Allen emphasizes role of?

I will emphasize the Pre-Conditions for Modern Economic Growth:

Efficient Resource Allocation

How do you interpret this graph?Food

Manufactures

Conditions for Modern Economic Growth: (1) Trade/ExchangeEfficient Allocation

(2) Productivity Growth

Food

Manufactures

(1)

(2)

What makes markets efficient?

1. Factor prices (prices, wages, interest rates, etc.) are free to change

2. Freedom of entry and exit

3. Property rights, including contracts, are well-established and well-enforced

0

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4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

1990

US$

Per

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ita In

com

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South Korea North Korea

An Extreme Contrast

Five Markets Y= f(L, K, N)• Output markets—producers free to sell goods and

services. No barriers to entry and exit. No transport or tariff barriers. Adam Smith: the division of labor is limited by the extent of the market

• Labor market: Workers have right to choose occupation and wages are market determined. No forced labor.

• Capital market: Households and business should be able to save and invest freely and move their money anywhere. No usury laws and financial contracts honored.

• Natural resource markets: Owners able to buy and sell property freely, write contracts, no arbitrary confiscation.

• Technology market: Inventors have a right to protect their inventions. System of protected patent rights. Storage and transmission of knowledge important, as are intellectual property rights.

Pre-conditions for economic growth in Britain, circa 1750

• Output markets: No internal barriers (tariffs), integrated market with well developed transportation system, turnpikes and water. Generally free entry and price flexibility

• Labor market: No slavery or serfdom. Workers free to move and take jobs. Guilds had lost their influence and unions only appeared in 19th century. Wages free to change.

• Capital market: Capital market generally free. Limited usury laws. Limits on incorporation of companies and on size of banks. Contracts well enforced.

• Natural resource markets: Free market established in land and natural resources.

• Technology market: First patent law 1624, though relatively weak (U.S. 1790, France, 1791)

• Relatively favorable pre-conditions

Pre-conditions for economic growth on the continent: France circa 1750

• In 17th and 18th century, it is largest country in Western Europe----1/2 of total population.

• Rich diverse economy---exports food, wine, textiles, many luxury goods.

• Rising productivity• Powerful state with ability to project power

around the world.• So….why wasn’t France the first industrial

nation? (or the rest of the continent?)

France

1715

Britain

1715

France 1788

Britain

1788

Pop. (millions) 19.3 7.1 26.6 9.4

GDP (£ m) 116 46 281 134

GDP p.c. (£) 6.0 6.5 10.6 14.4

Tax Rev (£ m) 11.0 5.8 19.0 16.8

Taxes/GDP (%) 9.4 12.5 6.8 12.4

Taxes p.c. (£) 0.6 0.8 0.7 1.8

Who Would You Bet On?

Political Differences• Great Britain

– 1688 Parliament dominant voice in politics, king cannot overrule Parliament. Regular Parliaments control the budgets

– Limited franchise represents landed and commercial interests

– 1700 Great Britain is a unitary state—England, Scotland and Wales governed by parliament and laws.

• France– King initiates legislation, but the regional Parlements

(basically courts) can only approve or reject. Equivalent of Parliament—Estates General last met in 1615.

– Parlements are not elected but are filled with hereditary judicial officials

– France not a unitary state

Parliament vs. Parlement• In most of Western Europe in the middle ages, when a

king needed new taxes he called an assembly to vote them to increase compliance---made of representatives of the nobility, clergy and bourgeois. In Spain, the Cortes, in France the Estates-General, and England the Parliament. Only King sitting with this body may change laws and taxes

• In Britain, after English Civil War (1642-1649) and Glorious Revolution (1688)—House of Lords and House of Commons controls taxation and laws. Parliament can change any law

• In France, Estates General atrophies, last meeting 1615. Instead regional Parlements of Paris, Bordeaux, Lyon, Dijon and other provinces pronounce on legality of new laws and taxes proposed by king. No ability to originate legislation. Very difficult to engineer new legislation.

Parlement de Paris

Pre-Conditions for Economic Growth in France, circa 1750

• Output markets: Internal tariff and trade barriers. No integrated market, poor system of roads. Market fragmented.

• Labor market: Choice of occupation not free, controlled by guilds. No free entry and exit. Many elements of serfdom continue in the countryside.

• Capital market: Banking prohibited after 1720. Limited capital markets. Frequent government defaults on the debt.

• Natural resource markets: Less enclosure and less well-defined property rights

• Technology market: French theoretical science advanced but applied science is weak. No patent law until 1791.

Weak Pre-Conditions

French Output Markets

• Adam Smith: “The division of labor is limited by the extent of the market” efficiency, economies of scale and innovation thwarted by small size of markets-----Transportation is the key.

• Roads—unpaved, rutted, muddy

• Rivers---potential great system for transport but nobles and town set up tolls.

• On the Loire, in 1567, there were 120 toll stations.

• Load of salt in 1600 price 25 ecus moved from Nantes to Nevers—100 ecus in tolls

Price

Good

Toll

G2 G1

P2

P1

Effects on Market Integration?

Effects on Regional Specialization?

Demand

Supply

Taxes and Internal Tariffs• Varied from province to province and town to town. • Merchant’s manual: “It is almost impossible that so large a

number of impositions do not lead to confusion and that the merchants should know them sufficiently well to find their way through the disorder, let alone their employees, agents and shippers who are always compelled to rely on the good faith of the officials which is often very suspect.”

• Merchant of Nantes (1701): complained about officials---”these offices are usually filled with covetous officials….They always have means in readiness for humbling merchants, they delay their shipments and cause a thousand and one difficulties in order to obtain an indemnity. They wax rich at the expense of King and commerce.”

• Tolls, taxes and tariffs induce---crime---smuggling

The Gabelles or Salt Taxes—a major source of revenue

Price

Good

Tax

G2 G1

P2

P1

Effects of tariffs and taxes?

Weights and Measures

• No standardized weights and measures

• During the middle ages, each town or region adopted its own.

• Separate measures for liquids in Paris (muid), Orleans (queue), Burgundy (feuillettes), Bordeaux (tourneux) etc.

• Need for merchants to adjust---high information costs.

Louis XIV & Jean-Baptiste ColbertReforming the System

Louis XIV 1638-1713• Crown aware of costs of fragmentation of

markets and it attempted reform to integrate markets BUT also to increase its revenue.

• Only a partial success.• Colbert’s objective was to suppress most of river

and road tolls and unify internal taxes and tariffs.

• Strong opposition from local officials and industries that were protected by these trade barriers.

• Colbert’s biggest achievement was the unification of the region around Paris with the Tariff of 1665.

• But, revenue needs of the king create a new problem…

Labor Markets and Guilds• Manufacturing regulated by the guilds—

they control entry and pricing and quality.• Professional fraternal organizations---

weavers, silversmiths, tailors, doctors, masons

• Apprentices, journeymen, and masters• Traditionally guilds were chartered by the

towns.• Colbert’s plan---the Crown would

henceforth grant the charters and charge fees

Wage

LaborL2 L1

w2

w1

Effects of a guild on wages?

On prices?

What is

Who gets it?

Supply

Demand

Colbert’s regime• Crown begins to control the guilds. Unify treatment of

guilds• Sets the regulations or Reglements volume of detailed

regulations, beginning with 2200 pages of rules that determined who could produce what where.

• Until 1779, it was forbidden to weave anything other than the specified types of cloth without special permission.

• The choice of technique was controlled. The rules governing dyeing of cloth had 317 articles.

• Each town or city could be different—based on existing masters and practices

• Within Burgundy: in Dijon cloth to be 1 ¾ yards wide with warp of 1408 threads, in Samur, Auxerre and Beaune, cloth had to have 1376 threads; in Chatillion it was to be 1 5/8 yards wide with 1216 threads.

Colbert’s regime

• Bleachers of linen must “spread linen on fields gently, to carry it on their shoulders, to put it through water troughs piece by piece.” “It is forbidden to leave cattle in the meadows while the linen is out.” Infractions punished with fines of 100 livres (p.c. income = 91 livres in 1715)

• Masters had to identify cloth (or other product) with their market. Guild officials visited shops to test quality and cloth that did not come up to the standard was confiscated and destroyed.

• BUT, why did the king care?

Regulations Strictly Enforced—the Button Wars

• In Paris, one guild for making coats and one for making buttons—that were used for coats.

• High price of buttons, the coatmakers innovate and create cloth buttons.

• The button makers sue them in court for infringing on their right---they win!

• Why does the king care?

Innovation Stymied• Traditional French textiles—wool, linen and silk• Cotton calicoes enter as imports from India via the

French East India Company—the government trading monopoly.

• Huge demand for cheap, light colorful cloths produced on handlooms in India

• Result—decline in demand for traditional cloth—the guilds protest

• 1686, Crown bans all but expensive cottons, then in 1700 absolute ban, which lasted until 1753. Penalties could include death for smuggling.

• So why not create a new guild? Multiplication of producers will dissipate rents delivered to the Crown.

Comparison with Britain?

• Guilds very weak in Britain, many fewer barriers to innovation.

• Fast forward a 60/70 years.

• By 1850, Britain (with half of the population of France) is producing half the world’s output of cotton textiles, half of world’s output of iron and 2/3 of coal.

Other Countries’ Pre-Conditions?• Germany—not a single nation, but a fiction, the

Holy Roman Empire, a collection of independent states---principalities, dukedoms, bishoprics , free cities, including Frankfurt and Nuremburg. (Mozart was born in Salzburg—under a prince-archbishop). Not pure German—many Poles, Czechs, Slovaks, Danes, Hungarians….

• In 1648, peace treaty reduced number of states to 350.

• Each has its own laws, commercial practices, taxes, tolls, weights, measures, time, currencies, guilds,…and labor and natural resource markets subject to variety of medieval institutions.

Italy (1748)—similar absence of pre-conditions

The French Revolution—the end of the ancien régime in Europe

• Financial crisis in 1789 forces the Crown to call for an Estates-General (three estates—nobility, clergy, and bourgeois). First since 1614.

• Crown wants new taxes but estates complain of unequitable taxes and many other grievances. Refuses to assist Crown. King tries to shut down the Estates-General.

• Result Estates-General is radicalized and declares itself a unicameral National Assembly.

• King made constitutional monarch, but efforts by reactionaries and king further radicalize the public and the legislature---result king dethroned and French Republic declared in 1793.

Etats-generaux 1789

Tennis Court Oath

Sweeping Changes• Output market—creation of unified market

– Tolls, taxes, and internal tariffs abolished in 1789– Unified system of weights and measures—the metric system

• Labor Market– 1789 all privileges of feudalism eliminated, including noble and

clerical tax exemption, labor services, etc.– Loi Chapelier 1791 Freedom of entry into any occupation, end of

guilds• Natural Resources—feudal rules abolished, though

enclosure not required– Sale of royal and noble lands. Between 1780 and 1804 share of

land owned by small and medium proprietors rises from 30 to 62%

• Capital Market– Banks permitted, usury law abolished, but government defaults

on the debt• Technology---first patent law 1791.

Wars of the Revolution and the Napoleonic Wars, 1793-1815

• Laissez-faire, Laisser-passer the credo of the early Revolution!!! BUT…..

• External war (European kings want to snuff out republic) and civil war with royalists and Catholics leads to abandonment of free market.

• Banks and stock market closed. Grain prices regulated. Price and wage controls. Seizure of crops. Government run arms factories.

• The “Terror” looks for economic enemies—sees capitalists as speculators and hoarders working for enemy.

• But, land redistribution unaffected.

Napoleon, 1799-1815

• Coup in 1799---consolidation of the Revolution and return of rule of law, order and property.

• Civil Code and Commercial Code—rule of law and enforcement of contracts

• Banks and stock market reopen, markets freed of most regulations. Freedom of occupation and free land market---although there is political repression.

• War costly---high taxes, mobilization of men• Protectionism---high tariffs or prohibition of

imports

Revolution then Napoleon march across Europe---end of the “old regime”

• French armies march into Germany, Austria, Italy and Spain.

• The large estates of clergy and nobility are seized and sold to raise money for war. New class of small and medium proprietors. A real labor market.

• Guilds and privileges destroyed.• Tolls and tariffs eliminated.• Germany reduced to 39 states—before 350.

Germany after 1815• Many but not all princes restored to power---39

states kept but allowed to restore old economic systems.

• Yet, benefits of free trade visible.• Prussia and North German states set up a

customs union in 1815—the Zollverein.• Customs union = no tariffs between members

and a common tariff against non-members. • Central and southern German states resist,

afraid of damage to industries and anger Austria or France.

• But France raises tariffs in 1822, drives more states into Zollverein

• By 1834, Zollverein includes ¾ of land to become Germany in 1871.

Limits of the free market in Germany

• German rulers suspicious of liberals (economic freedom and political freedom)

• Guilds restored and political repression.• 1848 Revolution almost overthrows re-

established rulers but fails---new repression.

• Freedom of occupation in labor market only occurs in Prussia in 1868.

• Integration very slow—continued multiple currencies—slow domination of Prussian currency.

Unification is a Political Act• Prussian Expansion engineered by Otto van

Bismark, minister to the King of Prussia.• War with Denmark 1864—seizure of disputed

lands• War with Austria-Hungary 1866—seizure of

Austria’s German allies• War with France 1870, seizure of Alsace-

Lorraine----in euphoria, German states declare Prussian king—Emperor of Germany—Kaiser

• War also unifies Italy in 1870 under King of Piedmont.

• Markets are finally unified for each of these nation states.

Bismarck and Garibaldi

Continental Backwardness(GDPpc in 1985 US $, Pop in millions)

• 1870 Pop/1870GDPpc 1913Pop/1913GDPpc

UK 31m $2517 45m $3881

France 36m $1678 39m $2860

Germany 41m $ 711 67m $1549

Italy 27m $1239 36m $2127

Spain 16m $ 673 20m $1082

Second Phase of the Industrial Revolution, 1870-1914

• Spread of existing technology of the First Industrial Revolution from Britain to the continent.

• Development of new technologies– Based on science (use of scientific method)

rather than craftsman/amateur/artisan experimentation.

– Matched to local natural resources on the continent

Cotton Textiles• Huge British lead in 1815• Even earlier: 1786 free trade treaty France-Britain.

Flood of cheap British goods• During Revolution and Napoleon’s rule, trade with Britain

prohibited for France and continent.• By 1815---France and other countries even further

behind cutting edge British technology.• 1820s British spinning machines had over 1000 spindles,

but French factories in 1848 had at most 600 spindles.• Britain forbids emigration of artisans/engineers until

1825---some sneak out begin Belgian and American textile industries.

• Britain forbids export of textile and other machinery until 1848.

Raw Cotton Consumption1850 thousands of tons

• Great Britain 222

• France 59

• Belgium 7

• Zollverein 17

• Difficult to catch up----continental industries seek protection—France and Germany, but not Switzerland.

French Demand French Supply

World Supply

Cloth

Price

0 A B C D

P+T

P

Results?

• Germany and France impose tariffs on British textile imports. Continued dominance of British over German and French mass produced textiles

• Switzerland does not impose a tariff and the Swiss cotton industry becomes modern and competitive.

• Other industries?

Continental Backwardness• English traveler in 1847 in Germany wrote:• The furnace of Eiserfeld stands about a mile up the valley on

a site to which water has been led to drive the blast. The wheel is 24 feet high and the furnace itself not much higher. But the latter stands in the center of a large casting house which affords shelter in the inclement season to the numerous smelters and their gossiping neighbors. Each furnace is limited to a number of days. It is common for every man to manage his smelting during his own days in person. He has therefore two sheds, one for his ore and another for his charcoal.

• Here then through the long winter, the villages sit breaking up their ore with hand-hammers, the never failing pipe in their mouths to light which frequent trips to the furnace below are necessary. As each man turn comes, he wheels his ore to the furnace mouth under the superintendant an official election by the shareholders of whom a majority are villagers. The whole establishment becomes in some measure a portion of the village property.

Even in 1870

• Britain produced half of world’s pig iron or 4 times Germany’s output, 5 times France’s output and 3.5 times U.S. output.

• But, the race would be in steel (newer technology) not iron (older technology)

Fast Transformation• Germany has rich deposits of coal and iron ore in the Ruhr

Valley• Key role of railroads• First—Stockton & Darlington in Britain in 1825.• First on continent in Belgium 1835.• Slow spread initially.• Prussian state subsidizes railroads—economic and military

importance.• 1842 Prussian railway law. State provides 1/7 of the capital

and when profit exceeds 5%, 1/3 of extra goes to government investment fund for more railroads.

• Huge fall in transportation costs as rail network grows• 1820---one ton of coal one kilometer cost 40 pfennings• 1840---one ton cost 14 pfennings by rail• 1850---one ton cost 2 pfennings• Railroads—huge demand for iron and steel

New Technologies--Steel

• Pig iron has 2.4 to 4% carbon, steel has 0.1 to 2% carbon while wrought iron has 0.1% iron.

• Pig/cast iron is hard and can withstand stress but not flexible, wrought iron is plastic or flexible but cannot withstand stress------------but steel is hard and plastic.

• Problem is to get the right mix of carbon and no other impurities.

• First key step is switch from charcoal to coal/coke, finished by 1863

New Steels• Traditional crucible steel melted wrought iron and added

powdered carbon in a crucible to get right mix. Made in batches of 50lbs. If needed more had to do multiple crucibles.

• 1856 breakthrough—Englishman, Henry Bessemer discovered that could de-carburize pig iron by blowing air through molten metal.

• Before it took one day to de-carbonize 5 tons of steel, now it could be done in 10 to 20 minutes.

• Crucible Steel £100 a ton but only £7 for Bessemer Steel.• 1860s development by French Pierre and Emile Martin and

Siemens brothers of Germany of method to recycle waste gases and use them to superheat the forge to economize on fuel----Siemens-Martin furnace.

• English Chemists Gilchrist and Thomas discover in 1878-1879 a solution to the problem of phosphoric ores---produced phosphoric acid that ate furnaces. Add limestone, result is Basic Steel and a slag that could be used as a fertilizer

Bessemer Converter

German Steel• Basic steel a boon to Germany as it has

phosphoric ores.• Combined newly available technologies to build

giant plants that integrate processes.• 1902 German steel mill average output 75,000

tons compared to British output of 40,000 tons.• Mass produced steel---British still produced

specialty steels. • For 1870-1913, iron output in Germany grew at

5.9% and steel output grew at 6.3%, (latter implies that in 20 years output will be 340% greater.)

• By 1900, British begin to import some German steel! Cheaper!

Chemicals—Continent takes the lead

• Alkali industry—bleaches and soaps• Standard Leblanc method produced by-product

of hydrochloric acid• 1863, Ernest Solvay (Belgium) discovered how

to produce ammonia as a by-product instead. His techniques adopted in Germany

• Germany leads in synthetic dyes. New firms of Hoescht and AGFA. Dominate pre-1914 market—British discover khaki dyes for uniforms come from Germany

Electricity

• New source of power.

• Great advantage is that it is easier to transmit power without loss of power. Convert into light, heat, and motion.

• Allows for reorganization of factory floor and elimination of dangerous jungle of belts and shafts

• Faster application in Germany than Britain

Engineering• British have high quality, well-trained and hence

high wage labor force. Production of made to order machines.

• The American System developed during Civil War of standardized interchangeable parts. Automatic lathes and milling machines increase precision. Enable mass production of machines with more capital and cheap labor.

• Germans adopt the American System and produce engines, boilers, locomotives, electrical machines. Later applied (first in US) to sewing machines (for clothes and shoes) and bicycles.

• Mass production and decline in prices

Key Factors Behind Second Wave of Industrialization?

• Human Capital—education

• Research and Development

• What does Crafts have to say?

• Slower British growth. Americans bypass, and Germany following.