Modern economic growth started with the British industrial revolution.

How did capital,

labour, and institutions contribute to this process?

From 1750-1860, Britain launched itself onto a path of sustained economic growth
known as the Industrial Revolution. This was achieved through a series of rapid technological
and structural changes, culminating into the first instance of modern economic growth. The
question of how labour, capital and institutions contributed to this effort has been largely
debated by economic historians, and the two major views emerge: from Robert C. Allen, that
the emphasis is on unique combination of factor prices, and from Joel Mokyr, that the
emphasis is on institutions in driving Britain’s growth. In this essay I shall systematically argue
that it was rather the culmination of three factors: institutions, which introduced strong property
rights; capital, the innovation of which was facilitated by these rights; and skilled labour, the
operation of which was directed so as to efficiently contribute to the revolution.

Capital in the form of Macro inventions emerged in 18 century Britain as a response

th

to high wages relative to cheaper capital. This prompted the substitution of capital for labour,
which led to the emergence of technologies that improved productivity and enlarged the scale
of production. Only Britain, in Allen’s view, had this distinct combination of factor prices
(Allen[]). Inventions such as the Spinning Jenny reduced the need for labour employed in
hand spinning techniques, while the Newcomen Steam engine improved steam powered
technology which aided in mining inputs such as coal, both of which led to growth in total factor
productivity that contributed to the revolution.
According to Allen[] the development of iron and steel technologies introduced
the revolutionary process of coke smelting, leading to the cheaper production of iron. Britain
was now able to develop railroad networks and steam powered transport. Invariably, this
promoted the modernisation of its economy. He argues further that these inventions were
particularly significant in their contribution to the revolution because they ushered in the
production of newer and more improved technologies, increasing the rate of industrialisation.
Allen emphasizes the major role capital played in mechanising the textiles/cotton industry: this
meant more yarn being produced than ever before, and at cheaper costs. This made Britain
a dominant producer of cotton of the 18/19 century, giving it a competitive advantage over its
th

rivals.
Allen claims that only Britain was able to absorb the high research and development expenses
associating in producing this new machinery, which led to sustained growth of the capital
stock. Therefore, the whole process was profitable; allowing the economy to modernize
thorough a rapid capital accumulation and its accelerated adoption promoted growth across a
range of industries that fuelled the revolution.

As Britain embarked on a path of sustained modern growth, it gave rise to a burgeoning

industrial sector that required labour to fuel its economic expansion and growing consumer
demand. Economic historians debate that it was the revolution of the agricultural sector that
prompted the release of labour from agriculture to the industry, who were then employed in
the operation of large-scale machinery, which increased production in the late 18 centuryth

(Mathias 1969).
Another case where labour contributed to the process of Britain’s revolution was through the
advent of an industrious revolution. Literature suggests that as household income increased,
the higher wages prompted an increase in demand of newer and higher quality goods (DeVries
[1994]). De Vries claims that these changes in consumption pattern led to an increase in
household labour annually, suggesting that labour’s contribution to the revolution was through
an increase in the participation rate in the economy.
Voth provides empirical evidence against this illustrating that working hours in England
increased from 1750, peaking around the 1800’s, coupled with a reduction in holidays in Britain
(Voth [1998]). This suggests that labour: women, children and men increased industriousness
by working more days to support higher consumerism and operating industrialised machinery,
thus contributing to the revolution.
However, Clark and Van Der Werf [1998], argue the number of days worked remained the
similar during the aforementioned period, which allows us to question whether an industrious
revolution really took place that contributed to the revolution. Here, Voth’s data seems to be
promising, as it is collected from 2000 observations during the late 18 century, whereas
th

Clark’s observation set is based off just 37, suggesting that there was an increase in
household working hours in response to rising consumerism, which drove the revolution.
Broadberry presents another view where labour is said to be involved in industrial activity that
took place before the Industrial revolution, known as the ‘proto industry’, as a consequence of
seasonal unemployment in the agricultural sector. Labour engaged itself in activities that were
not agricultural related, which helped generate a ready pool of labour that was well trained
and qualified to work in factories for the industrial sector in the late 18 century (P.Kriedte et
th

al [1981]).

An early example of institutional change is the Glorious revolution during 1688-89

when political institutions came into play, creating a stable government system that
established secure property rights, whilst encouraging the development of a functional capital
market sector (North and B. Weingast[]). North and Weingast suggest that these institutions
constrained government power, which opened up a greater freedom in the economy for private
capital markets and entrepreneurial interest to flourish. This view suggests that institutions
promoted investment in human and physical capital that drove technological progress and
sustained modern economic growth in Britain (Acemoglu[]).
Literature suggests that institutions the led to the increased enforcement of patents, also
known as intellectual property rights that directly influenced innovations during the revolution.
They provided protection for innovators of technologies, such in the textile and iron industry,
however some economic historians argue that patents may have reduced overall innovation
due to the expenses involved in acquiring them, which could mean that they had a limited
contribution the revolution (Khan and Sokoloff 2004).
Mokyr[2009] further highlights the role of institutions in contributing to the revolution claiming
that it was the presence of scientific institutions that generated a phase of enlightenment,
providing the necessary knowledge to inventors for developing technological innovations. He
argues that institutions such as the Royal Society connected innovators to businesses, which
generated the right economic environment that incentivised the production of Macro
inventions that contributed the industrial revolution. Mokyr debates that these institutions
helped minimize rent-seeking through promoting the role of science and experimentation,
which the improved competitiveness in Britain’s economy, thus driving its revolution. Although
Allen doesn’t credit Mokyr’s view on the enlightenment creating an advantageous institutional
setting that made markets operate efficiently during the revolution, Crafts reconciles their
competing views concluding that scientific knowledge and factor prices were equally
significant (Carfts[]). Therefore, institutions responded to the unique combination of factor
prices contributing to the success of the 18 century technologies that industrialised Britain.
th

The British Industrial revolution wasn’t dependant on any one single factor that
contributed to its growth, but a rather a culmination of three (labour, capital and institutions)
that set it on a path of modern economic growth. Economic historians such as Allen have
emphasised the unique factor prices that only Britain had, which facilitated the technological
innovation that developed its industries: iron, textiles and steam, thus generating the
necessary profits to sustain it. As labour was freed from the agricultural sector and became
employed in the industrial sector, working hours increased, supporting higher consumerism in
the economy. All of this helped Britain industrialise at a much faster rate. As put forward by
Mokyr, the presence of institutions created incentives that promoted the innovation of
technologies. Literature suggests these institutions, economic and political allowed Britain to
have a strong legal system in the economy, which helped reduce transactions costs and
boosted the sharing of knowledge that was central to Britain’s technological progress and
drove the revolution. These three elements contributed collectively in making Britain’s
Industrial Revolution the first example of modern economic growth.
Bibliography: