ECONOMIC GROWTH AND INDUSTRIALISM

Since the mid-nineteenth century, neoclassical economists, Marxists, and institutionalists have debated the role of markets, popular movements, and institutions (including states, cultural milieux, and corporations) in nineteenth-century European economic growth and industrialism. A review of major works by scholars of these persuasions identifies underlying issues that remain relevant.

the debate begins

Neoclassical economics traces its origins to Adam Smith (1723–1790) and argues that once the dead hand of state coercion is lifted, economic affairs will follow the laws of supply and demand and an informed rationality that seeks to maximize utility (in the case of individuals) or profits (in the case of firms). Prominent neoclassical economists include Alfred Marshall (1842–1924), William Stanley Jevons (1835–1882), and Milton Friedman (b. 1912). Marxists accept the central role of the free market—the play of supply and demand—in the development of nineteenth-century capitalism, but stress capitalism's susceptibility to economic crises and the role of popular collective movements in challenging the capitalist order. Prominent Marxists include Rosa Luxembourg (1870–1919), Vladimir Lenin (1870–1924), and Ernest Mandel (1923–1995). Institutionalists emphasize the role of institutions in both sustaining markets and correcting their faults. They tend toward pluralistic explanations and see political ideologies as important elements in reform. Prominent institutionalists include John Rogers Commons (1862–1945), Karl Polanyi (1886–1964), and Douglas North (b. 1920).

Neoclassicism

During the first two-thirds of the nineteenth century, neoclassical thought was still in formation, but its early progenitors generally followed Smith in advocating laissez-faire—the idea that the state should not intervene in economic matters. In Britain during this period a remarkable series of popularizers incorporated the tenets of laissez-faire into the common intellectual heritage of the Anglo-American world. Despite periods of disfavor these principles have ever remained close to the popular consciousness.

The devoted follower of Adam Smith and advocate of laissez-faire Richard Cobden (1804–1865) became famous for his leadership of the struggle to repeal the Corn Laws, laws designed to protect British farmers by limiting the import of corn when prices fell below a fixed point. Cobden fought for free trade—defined as trade among countries with minimal tariffs and no trade barriers. Like many early free traders, Cobden sought to slash state budgets to the bone and was aggressively antimilitaristic. He contrasted the voluntary, interest-oriented principles of free trade with the coercive practices of states. He feared that Britain's economic supremacy was threatened by the costs of imperial hegemony and tried to severely cut the British armed forces, including the navy. Cobden believed that taxes spent on the fleet increased production costs, rendering British goods less competitive than those produced in the United States, which at that time spent practically nothing on the military.

Marxism

Writing in late 1847, Karl Marx (1818–1883) agreed that market expansion and the reorganization of production were the dynamic forces in capitalist expansion but believed that capitalism's days were numbered. Like Cobden, the young Marx identified industrial capitalism with free trade. As a critic of capitalism, Marx wanted to expose the elements of economic compulsion hidden behind the libertarian, antistatist rhetoric of laissez-faire economics. He believed that his world was hurtling toward a homogeneous, bourgeois-dominated world of child labor, fourteen-hour working days, starvation wages, and periodic crises. Bourgeois-controlled states could never fundamentally reform capitalism. Reform movements were basically training grounds for keeping workers in shape for the final conflict. In the end, general immiseration would produce socialist revolution.

Institutionalism

In contrast to both Cobden and Marx, the German civil servant and publicist Georg Friedrich List (1789–1846) believed that state power and national communities were central to the creation of competitive capitalist economies. List, the father of dependency theory, feared that British doctrines of laissez-faire served to prevent other countries from successfully industrializing and so competing with Britain. For List, laissez-faire was a British ideology designed to devastate Continental Europe's fragile "infant industries" by opening them to full-blown British competition. List emphasized that industrializing countries must not neglect the state. In his view, Adam Smith "ignores the very nature of nationalities, seeks almost entirely to exclude politics and the power of the State, presupposes the existence of a state of perpetual peace and of universal union, underrates the value of a national manufacturing power, and the means of obtaining it, and demands absolute freedom of trade" (quoted in Szporluk, p. 136).

major twentieth-century contributions

The quarrels of Cobden, Marx, and List were taken up by succeeding generations. In the course of the debate different theorists expanded their theories in new directions and modified or amended the arguments of their intellectual predecessors. Neoclassicists showed a new interest in history, Marxists recognized that states possess considerable autonomy, and institutionalists broadened their understanding of economic structure.

Neoclassicism

Generally uninterested in history, late-twentieth-century neoclassical economists were nonetheless attracted by a nineteenth-century European case in which an extraordinary and unprecedented mobility of labor and capital produced sustained economic growth. In Child Labor and the Industrial Revolution (1990), the neoclassical economist Clark Nardinelli takes a positive view of child labor in the cotton factories—long considered one of the horrors of the English Industrial Revolution. Nardinelli reminds us that most young working-class children were expected to work and argues that factory laborers received a better wage than those employed at home. According to Nardinelli, child labor in the factory was a choice made by parents to increase family income, something that ultimately benefited the children themselves. From Nardinelli's perspective, legislation restricting child labor was an attack on working-class households and it only occurred when child labor was already in decline.

While Nardinelli performs a helpful task in pushing historians to question easy assumptions about child labor, his argument is hardly uncontested. Some scholars argue that he underestimates the degree to which child labor was not a product of choice but of compulsion—many child laborers were drafted from orphanages, and some parents sent their children to work under the pressure of local welfare authorities. Some question the assumption that parents making the decision to send children to work in the factories did so for the good of the family. Finally, some argue that the advance of child labor produced a decline in the demand for adult labor, reducing adult wages and ultimately undermining family income.

Marxism

Twentieth-century Marxist historians offered some insight into the origins of the Industrial Revolution, although their explanations involve amendments to rather than literal interpretations of Marx's text. From his earliest writings, Karl Marx identified the capitalists' coercive hold over wage labor, but later Marxists stressed the influence of imperial conquest. For example, the work of Eric Williams (1911–1981), a Marxist from Trinidad, still influences debates over the origins of the English industrial revolution. In Capitalism and Slavery (1944) Williams argues that Caribbean unfree labor was used to subsidize the growth of British wage labor. He presents the British prohibition of the slave trade in 1807 as part of an effort to protect the declining profitability of its West Indian colonies. This effort was vital to the British economy, where super profits from the colonies played an instrumental role in the financing of early factories. Particularly interesting is Williams's implicit abandonment of Marxist stage theories of development. Williams saw Caribbean slavery not as a backward form of production but as one of the major paths of capitalist advance in the eighteenth-century Atlantic world.

Scholars have cast doubt on many of the concrete linkages between West Indian planters and the birth of the factory proposed by Williams, but his powerful idea that Caribbean slavery fueled the English industrial revolution still commands support. By 1820 there was already a mass consumer demand for coffee, sugar, and tobacco in Europe. In the Caribbean there was also a mass market for the cotton goods and hardware produced by English factories. Slaves needed cotton clothes, and planters required ironware. England's monopoly on these markets during the Revolutionary Wars provided cotton masters and hardware producers with an extensive and secure market. The willingness of the British state to intervene to secure Caribbean markets and the Caribbean's central importance to British economic development suggest some problems in Cobden's devaluation of British naval power.

Institutionalism

Institutionalists too offered insight into capitalist origins. The Hungarian Karl Polanyi (1886–1964) roundly criticized neoclassical accounts of economic growth and industrialization for their lack of realism. Like Marx, Polanyi also argued that the supposed voluntarism of trade and commerce was under girded by force. Polanyi portrayed men like Richard Cobden as zealots who ignored the human consequences of subjecting society to self-regulating markets. To illustrate his case, Polanyi analyzed the 1795 Speenhamland Act—an effort by English magistrates to supplement wages of poor workers based on the price of bread and family size. In the Speenhamland area farmers responded to the magistrates' subsidies by lowering wages, reducing all laborers to impoverished and degraded pauperism. Thus, mistaken social policy influenced by free market principles, not the desire for self improvement, drove laborers to the factory gates.

Looking at the spread of the gold standard—the use of gold as the currency of international trade—as a prime example of efforts to create a self-regulating market, Polanyi discerned a "double movement" in which societies that adopted market principles simultaneously implemented social reforms to protect sensitive populations from market exposure. Whatever their ostensible political principles, no elected legislature in Britain, France, or Germany would tolerate a laissez-faire that produced crippled children or public starvation. Polanyi saw laissez-faire as an impossible ideal but feared that fanatical efforts to implement it could produce dramatic responses, from communism to fascism.

Polanyi was a passionate advocate, truly horrified by the premises of neoclassical economics, but his own response was often intemperate and onesided. He seriously exaggerated the effects of Speenhamland legislation and differentiated it too sharply from earlier English welfare provisions. Polanyi emphasized the importance of culture in organizing distribution in premodern societies; markets were only one way to organize distribution, cultural forces based on reciprocal exchange or ceremonial redistribution had played a much more important role in the human past. His work encouraged anthropologists and economists to emphasize the constructed character of markets, but Polanyi's own adamant refusal to recognize markets in the ancient past weakened his case. Polanyi's concern about the ecological damage produced by unchecked capitalist development in nineteenth century Europe were unusual for his time.

Strongly influenced by institutionalism, the economic historian David Landes's work gave a new centrality to technological innovation. His 1969 masterwork, The Unbound Prometheus, traces out the series of innovations that transformed nineteenth-century Europe. He distinguished a "First Industrial Revolution," a British-led wave of innovation in the late eighteenth and the first half of the nineteenth centuries, and a "Second Industrial Revolution," a more broadly shared wave of technologies in the last quarter of the nineteenth century. His division of economic growth into an age of cotton, iron, and steam and an age of steel, chemicals, and electricity has proved enduring.

While Landes presented important insights into the character of European nineteenth-century growth, his work remained somewhat short on explanation. Why Europe? Why the nineteenth century? To explain economic growth, neoclassical authors drew on Adam Smith, who claimed that humans had a natural propensity to truck and barter and that markets had an inherent tendency to grow and expand. Faced with a world in which capitalist expansion seemed largely confined to the Western world and Japan, Landes, like Polanyi, turned to culture. Smithian individualism, it turned out, was less a feature of universal human nature than a product of Western and Japanese cultures of individualism, rationalist in means and activist in ends. While Landes's explanation was intriguing it was also poorly specified. Did cultural explanations explain why, over four centuries, Western economic leadership passed from Venice to Amsterdam to London? The dynamic expansion of Islamic merchants toward Southeast Asia in the same period as the West's expansion across the Atlantic seemed kindred developments. Did cultural factors explain Islamic mercantile abilities in Asia but not in Europe?

the debate continues

Debates among neoclassicists, Marxists, and institutionalists continue, although some elements of common ground have emerged and there is an increased sense that the old moorings are giving way. States, institutions, and popular movements generally play a more important role in accounts, by all schools, of nineteenth-century economic growth and development.

Neoclassicism

Since the late twentieth century, work in economic history strongly influenced by neoclassical approaches has shown a new attention to the political dangers of unrestrained markets and even recalls Karl Polanyi. For example, Timothy J. Hatton and Jeffrey G. Williamson's Age of Mass Migration (1998), a study of transatlantic migration between 1850 and 1914, largely validates the predictions of neoclassicists. The remuneration of unskilled workers in low-wage economies such as those of Ireland and Sweden rose as laborers moved across the Atlantic, and income inequality within these nations decreased. Meanwhile, the relatively higher wages in industrialized portions of the Americas declined with a resultant increase in inequality. But Hatton and Williamson note that continued long-term decline in wages and increasing inequality in American nations led to the rise of popular protectionist movements that eventually closed American labor markets to European migrants. The implicit lesson is that state intervention to moderate the workings of markets may be necessary to preserve their operation.

Marxism

In The Great Divergence (2000) Kenneth Pomeranz presents 1800 as a key dividing point in the evolution of European economic growth and development. Pomeranz echoes Eric Williams in arguing that imperial conquest was one decisive element in British success. Arguing persuasively that efforts to compare the huge Chinese empire and a relatively small nation in a tiny continent are unwieldly at best and unfair at worst, Pomeranz instead compares England and a highly commercialized portion of the Chinese empire, the lower Yangtze, a comparison that challenges many longstanding assumptions about non-European economies. In the seventeenth and eighteenth centuries, living standards, agrarian productivity, birth rates, market development, energy consumption, and enforceable property rights in the lower Yangtze were similar to those in England.

Pomeranz argues that both regions were approaching the limits of growth in 1800 and were facing strained resources and falling productivity. England was saved by its coal resources and the windfall profits of imperial conquest. The conquest of the Americas was especially important because American resources were complementary to those of England and Europe. The apparently limitless American acreage produced saleable commodities that would have placed impossible demands on the extremely limited European acreage had it been diverted to supply these growing markets. For example, sugar, cotton, tobacco, timber, and coffee were much in demand in Europe, but could not be produced, or at least produced efficiently, on the Continent.

Pomeranz is generally suspicious of cultural explanations and instead emphasizes the capitalism-coercion nexus. Whereas Western governments mobilized military power to defend their economic interests, the Chinese government was focused on the military threat from Eurasia and its efforts to extend its influence into Southeast Asia. Defending mercantile interests was a much lower priority than for the Portuguese, the Dutch, and the English.

The Pomeranz argument has introduced important new elements into our understanding of European growth and industrialization. Much debate has focused on his assertion that English production was facing diminishing returns and falling prices in 1800. Regardless of whether this argument is accepted, the great merit of Pomeranz's study is to have encouraged scholars to reexamine their beliefs about the institutional structure of premodern Asian economies. Broad, slapdash comparisons of Asia and Europe are clearly outmoded, and an era of more focused comparison with more attention to institutional characteristics seems the wave of the future. Along the way, historians' appreciation of the role of armed force in capitalist advance is likely to increase.

Institutionalism

The late twentieth century also witnessed a resurgence of institutionalism in economics, political science, and sociology. Scale and Scope (1990), Alfred Chandler's comparative study of business organization in England, Germany, and the United States, pioneered this development. In it, Chandler argues that history matters a great deal in the formation of business organization. Chandler shows that the "Second Industrial Revolution" was a more complex and differentiated process than David Landes had suggested. Differences in the organization of corporate enterprise were an important factor in each nation's adoption of the new technologies. Chandler shows that British entrepreneurs had developed in an era of swashbuckling individual competition focused on productivity. British entrepreneurs were much less willing than Americans or Germans to develop impersonal business structures or to attend to distribution and research as well as production. But the industrial giants of the era, Germany and the United States, developed their own different patterns. The German banking structure encouraged cooperation among large corporations in which powerful banks had a common interest, leading to a "cooperative managerial capitalism" in contrast to the American "competitive managerial capitalism." American institutionalists have suggested that many of these differences in national corporate organization remain and have profoundly influenced corporate development; hence they explain the very significant differences in industrial organization and industrial relations in these different countries. Thus, increasingly institutionalists emphasize the importance of contingency (possibility) and historicity (historical actuality) in analyses of economic growth and development. Much recent work suggests that industry and industrial relations can be organized in a variety of ways, each of which can sustain international economic competition.

conclusion

This brief survey of debates over European economic growth and industrialization reveals the enduring presence of competing neoclassical, Marxist, and institutionalist interpretations. These debates originated in the earliest days of European economic growth and industrialization and continue up to the present day. They have contributed powerfully to our understanding of the nineteenth century European economy, especially as the three schools of thought have moved toward one another in important ways. Since the 1850s both neoclassicists and Marxists have increased their appreciation of the role of institutions. Neoclassicists have begun to consider the effects of mass movements, Marxists of state coercion and warmaking, and institutionalists of culture, contingency, and historicity.

See alsoIndustrial Revolution, First; Industrial Revolution, Second; Protectionism; Trade and Economic Growth.

bibliography

Primary Sources

Cobden, Richard. "America." In The Political Writings of Richard Cobden, 97–153. London, 1867.

Marx, Karl. The Communist Manifesto. 1847. New York, 1998.

Polanyi, Karl. The Great Transformation. New York, 1944.

Williams, Eric. Capitalism and Slavery. 1944. Chapel Hill, N.C., 1994.

Secondary Sources

Chandler, Alfred. Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, Mass., 1990.

Duchesne, Ricardo. "On the Rise of the West: Researching Kenneth Pomeranz's Great Divergence." Review of Radical Political Economists 36, no. 1 (winter 2004): 52–81.

Hatton, Timothy J., and Jeffrey G. Williamson. The Age of Mass Migration: Causes and Economic Impact. Oxford, U.K., 1998.

Hejeebu, Santhi, and Deirdre McCloskey. "The Reproving of Karl Polanyi." Critical Review 13, nos. 3–4 (1999): 285–314.

Humphries, Jane. "Cliometrics, Child Labor, and the Industrial Revolution." Critical Review 13, nos. 3–4 (1999): 269–283.

Landes, David. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. London, 1969.

Nardinelli, Clark. Child Labor and the Industrial Revolution. Bloomington, Ind., 1990.

Pomeranz, Kenneth. The Great Divergence: China, Europe, and the Making of the Modern World Economy. Princeton, N.J., 2000.

Polanyi-Levitt, Karl, ed. The Life and Work of Karl Polanyi: A Celebration. New York, 1999.

Solow, Barbara L., and Stanley L. Engerman, eds. British Capitalism and Caribbean Slavery: The Legacy of Eric Williams. Cambridge, U.K., 1987.

Szporluk, Roman. Communism and Nationalism: Karl Marx versus Friedrich List. Oxford, U.K., 1988.

Tilly, Charles, and Chris Tilly. Work under Capitalism. Boulder, Colo., 1998.

Michael Hanagan