Trade and the industrial revolution. (Lecture 1) презентация

M112 Master Degree in International Relations, LUISS Guido Carli

the extraordinary economic development in the 19th century tell us about the relationship between trade and innovation?
Was trade one of the main factors causing the industrial revolution? Would the revolution have happened in a closed economy?
How did the geography of international trade change and the balance of power among different continents change as a result of the industrial revolution?

FO, Chapters 6 (pp.311-345) and 7 (pp.378-383)

traditional woolen textiles industry (the share of wool fell from 60 per cent in 1752-54 to 20 cent in 1810). As a result Agriculture’s share of British male employment fell from 61 per cent in 1700 to 29 per cent in 1841

Eventually innovations spread to most other industrial sectors (metallurgic industry, transportation).

Three main factors of change
technical innovations
creation of new waterways
railways

1. Industrial Revolution: background

weaving introduced from the second half of the eighteenth century. Crucial breakthrough when steam engines were used as the power source for looms (first steam power loom built in 1785).
Steam power was then used for transportation. Steamships replaced sailing ships which were still used for longer routes and steamships mainly for inland canals but by the late 1830s steamships were regularly crossing the Atlantic.
Coal used instead of organic sources (human, animal power, wood)
Refrigeration. Developed in the 1830s and refined over the following two decades, mechanical refrigeration allowed to transport beef and other perishable products from the United States to Europe as early as 1870;
Electronic telegraph in the 1840s: communication time between Europe and North America cut ten days (time it took by ship) to minutes. This had a profound impact especially on the financial industry.

travel from Manchester to London reduced from 4-5 days in 1780 to 36 hours in 1820). Horse-drawn carriages.
Navigable waterways in Britain quadrupled between 1750 and 1820;
Canal construction in France, the river Rhine, in Italy the river PO which, since the prehistory, has always been used as a main waterway.
Erie Canal, constructed between 1817 and 1825, reduced the transportation costs between Buffalo and New York by 85 per cent and cut the journey time from 21 to eight days.
Suez Canal (101 mile long) opened in 1869. It cut the distance from Britain to Bombay from 10,667 miles too 6224 miles. It accelerated the use of steamships because sailboats could not be used on the canal. (they had to be towed. First which tried was wrecked)
Panama canal (launched in 1879 but completed only in 1907)

and Darlington Railway. In Italy the first railway was between Napoli and Portici in 1839 (it used English steam locomotives);
1869: A transcontinental line linked the East and West coasts of the United States;
1885: the Canadian-Pacific railroad was completed;
In the decade prior to the First World War main railways were built in Argentina, India, Australia, China and elsewhere, largely financed by British capital. India was the fourth country in the world in terms of total railway mileage.
From virtually nothing in 1826, almost a million kilometers of rail had been built by 1913 (Maddison, 2008).

of transporting commodities (freight rates as a percentage of the price of a commodity). (p.383)

coal from Britain to Genoa: from 213 % in 1840 to 54 % in 1910.
wheat from East Coast of US to Britain: from 10.3 % in 1830 to 3.2 in 1910
rice rom Rangoon to Europe: from 73.8 per cent in 1880 to 18.1 in 1910

not just greater quantities of goods being traded but also a greater variety of goods which greatly increasing competition

population and wages’ growth

English population rose from 5.9 million in 1751 to 14.9 million in 1841 “due to increase in marital fertility: average age of marriage for females came down from 26 in the early 700s to 23 by 1830-37”. FO p.315
In the past population expansion led to a decline in living standards. because of diminishing productivity (which would provoke famines, diseases and other disasters). This reduced population or slowed down its growth. Malthus (late 18th century) predicted that population growth, by exceeding resource growth, would lead to catastrophes.
This did not happen. In fact real wages increased. From the industrial revolution on population growth ceases to vary endogenously, thanks to technical progress.
New land (in the US) and coal allowed Europe the escape the curse of diminishing returns

to process 100 lb. (45 kilograms) of cotton:
50,000 in India.
2000 in England (fell to 300 by 1795, 135 by 1825, 40 in 1972) (p.320)
besides spinning and weaving, innovations were introduced also in bleaching, dyeing and printing, were used also in other industries (silk, linen. woolen) and had a strong impact on the industries producing the intermediate products (like chemical industry)

been considerable discussion on whether the sources of growth during the British Industrial Revolution are to be found more on the side of supply or of demand. Did the technological innovation spur growth or was the demand increase due to the opening up of frontiers and reduction of transportation costs?

What type of evidence would one have to look at to answer this question?

that Britain’s terms of trade fell significantly implies that British supply curves must have been shifting out more rapidly than the demand curves for British manufactured goods. Overseas demand was not the exogenous driving force behind British industrial output growth.

However this does not imply that trade was irrelevant to that growth. Domestic innovation and inventiveness were crucial factors, but three questions:
what would have been the effects of those innovations on resource constraints
and on demand in the absence of international trade
have those innovations been favored by international trade

new technologies led to a considerable increase of productivity especially in the textile industry. This in turn required a huge increase of raw material (cotton), land where to grow it, workers to produce it and capital to invest in the new equipment. Britain had abundant supply of workers and capital but scarce availability of land and raw material.
Trade helped relieve these resource constraints.The unprecedented expansion of the textile industry caused a surge in imports of raw cotton and most of this cotton (3/4 in 1850s) came from the US. However the US had vast amount of land but scarce workforce, which had to be imported through the slave trade. Triangle:
Slaves supplied from Africa to the US.
Raw cotton supplied from the US to England.
Finished cotton textiles supplied by England to the US and elsewhere.

of the main British imports for over two hundred years were first sugar and then cotton from the New World.
According to Eric Williams in his famous book Capitalism and Slavery (1966) it was the profits of the Atlantic slave trade that financed the Industrial Revolution was . Critics have argued that (a) the profits derived from it were a small share of national income and (b) in the long run it was technological progress rather than capital accumulation that supported income growth. However there is no doubt that
Africans were the main component of the labor force which produced the essential raw material for the British industry. Slave trade reached its peak in the years of the industrial revolution and almost 80 per cent of US export were produce by Africans. tables 5.1 and 6.6
the slave trade became a very profitable business. “Eltis and Jennings (1988) report that Britain’s terms of trade with Africa fell from 112 in 1750 to 40 in 1800 (that is to say, the price of slaves in terms of imported manufactures rose by a factor of two and a half)” FO p. 340

one of the key factors that facilitated Europe’s rapid industrialization throughout the 1800s was the access to a vast amount of uncultivated land in the Americas which had various effects:
it could be used to grow the large quantities of agricultural products needed to feed a fast-expanding European population;
It allowed Europe’s labour and land to be freed up for further industrialization
The result was declining food prices which benefited industrial workers and urban consumers – helping to fuel further industrialization and urbanization – but disadvantaged landowners and farm laborers.

had important implications for British manufacturers on the demand side. Trade prevented cotton textile and other export prices from falling much faster than they would have done had the British economy been closed. External demand cushioned the fall in price by shifting the demand curve facing Britain’s producers of exportable goods much further to the right than would otherwise have been the case

competitive pressures create an incentive for a firm to become more efficient but they also reduce the monopoly rents that induce a firm to invest in innovation. Larger potential profits, but also more potential competitors.
In the initial stages of the Industrial Revolution the first effect dominated the second. Today econometric studies generally agree that trade-induced competition contributes to productivity improvement because of shift of output towards more efficient firms and improvement in individual firms.
two other channels through which trade affects innovation:
Imports and FDI allow domestic firms and markets access to superior foreign technology.
Exporting firms are more prone to innovate and improve productivity through “learning by doing” (evidence un conclusive) (N. Kiriyama 2012 Trade and Innovation, OECD Policy Working Paper n. 135, 2012

demand and supply

Trade systematically raises the elasticities of supply and demand facing an economy. Absent trade, input costs would have risen, and output prices would have declined, more rapidly than would otherwise have been the case.

This would hardly have increased the profitability of investing in new textile technology.

cheaper raw materials, the vast markets for their manufactured goods and the technological progress allowed them to advance at a much greater pace, both economically and technologically, than the rest of the world.
In 1860, the three leading industrial countries produced over a third of total global output; by 1913 their share was a little under two-thirds (of a much larger total). In 1820, the richest countries of the world had a GDP per capita about three times the poorest (see Figure B.1); by 1910, the ratio was nine to one and by 1925, fifteen to one (Maddison, 2001).
China and India suffered a great deindustrialization. In 1750 the developing world accounted for three-quarters of world manufacturing output, with China accounting for nearly a third, and India for a quarter. In 1913, India’s share was just 1.4%, China’s share was just 3.6%, and the share of Europe and her British offshoots was almost 90%. Even if data are not very not accurate, size of change is un-disputable and staggering (p.324)

in productive techniques and centuries-old developments in the international economy, the most important of which being the continuous development of the New World.
It was greatly favored by international trade and has in turn revolutionized the international trading system.
It also created huge economic asymmetries in the world economy, and strengthened the geopolitical dominance of Europe over Africa and Asia. It opened up the era of the Pax Britannica