The Rise of the Modern Economy
The seeds of the modern economy may have first sprouted in northwestern Europe, but it soon spread to much of the rest of the world. By the end of the 19th century, much of Western Europe, the US, and Canada were rich. Why did this episode of innovation and expansion, which began in Britain and soon spread elsewhere, become self-sustaining? How did this episode ultimately impact the wider population? How did it spread? Why did it spread rapidly to some parts of the world but it took centuries to spread elsewhere?
The Industrial Revolution was a revolution. What made it so revolutionary was that Britain was ultimately the first economy to achieve sustained and permanent per capita GDP growth over a long period. Possibly the most important economic change brought on by the Industrial Revolution was that the structure of the economy changed. Since the Neolithic Revolution some 6,000–10,000 years ago, most people in every settled society in the world were engaged in agriculture. While there were a few smaller states built on trade, never before was a large state anything but overwhelmingly agricultural. This changed with industrialization, first in Britain and then elsewhere.
Initially, the fruits of industrialization were not widely distributed. The figure below reveals that while GDP per capita took off in the late 18th and early 19th centuries, wages stagnated until the 1830s. Real wages even fell slightly in the second half of the 18th century, just as Britain was industrializing.
But sustained increases in real wage and standards of living would eventually come, both in Britain and beyond. With respect to technological development, most advances since the 1870s have been built on the scientific knowledge-base of humanity. The Second Industrial Revolution, generally dated from 1870 to 1914, differed from the first in its use of science. This was important because it accelerated the rate of technological change. New inventions in medicine, chemicals, and energy paved the way for more inventions as well as improvements upon those inventions. They also enabled more scientific discoveries. This period saw a feedback from science to technology that is still the dominant paradigm today.
The technologies of the Second Industrial Revolution affected nearly all industries. They revolutionized transportation. Rail became much more efficient and less costly due to cheaper and more durable steel. Bicycles, automobiles, and airplanes came on the scene. Harnessing electricity allowed for an improved telegraph, railway, and indoor lighting. Health improved. Modern sewerage systems, disinfectants, and medicines like aspirin became widespread.
Numerous other countries were at the forefront of the Second Industrial Revolution. Germany led the way in chemistry. France and the US were also leaders. Education was critical to the Second Industrial Revolution. The types of goods produced in this period required highly educated workers for their manufacture. Places that led in education were therefore the most capable of taking advantage of the new economic opportunities afforded by the second wave of industrialization.
One dramatic change was demographic. Fertility, in particular, increased in the first few decades of the First Industrial Revolution (see the figure below). This was largely due to better economic opportunities and urbanization. The growing population put downward pressure on wages, which did not rise despite increases in productivity.
However, after 1870 Malthusian predictions (that more babies would eat up all the extra income) proved wrong. Key to this was a demographic transition to lower birth and death rates (see the figure below). Families began to deliberately choose family size within marriage. We discuss the literature on why the demographic transition happened at different times in different countries in this chapter.
How did these economic changes spread to the rest of the world? In the famous Solow model, so long as innovations in leading economies become available to less developed economies, poorer countries will grow faster than richer countries. This is called catch-up growth or convergence. Catch-up growth can help explain why from the late 19th century onwards many European economies began to experience accelerated growth. Those that caught up imported the technologies of the First and Second Industrial Revolutions. But catch-up growth was either slower or non-existent in other parts of the world.
Many of the factors considered in previous chapters can account for why some countries converged whereas others did not. Consider institutions. Where there are few checks on autocratic political power, technology adoption may not occur. In places that converged with the world’s economic leaders, most notably Western Europe and North America, the quality of political institutions improved dramatically. We consider various institutional explanations for catch-up growth, or lack thereof, in this chapter.
Culture also played a role in shaping patterns of convergence and divergence. When long-held cultural beliefs about Western inferiority were pervasive, adoption of Western industrial technologies was unlikely. Even when foreign technologies are desired, many conditions need to be just right. We draw from the lessons provided in the first half of the book which provide insight into why geographic, demographic, institutional, cultural, and colonial conditions incentivize technology adoption and trade expansion. Importantly, these features often interact with one another. We discuss these interactions in this chapter.
One key point made in this chapter is that not all countries took the same path towards modern economic growth. It is mistaken to suppose the only way a country can grow rich is through industrialization. While this was true of Britain, the US, and Germany, there were also countries that grew rich without industrializing. Foremost among them were Denmark, the Netherlands, Australia, and New Zealand.
We conclude this chapter with an extended look into how the US became rich. While we cannot dive into each country's history in such a short book, the US is an important case because it became the world's richest economy and largest industrial producer in the 20th century (see the figure at the top of the page). We draw from the lessons laid out earlier in the book to understand how the US became rich.