The Economies of Take-Off

THE ECONOMICS OF TAKE-OFF
INTO SUSTAINED GROWTH

OTHER INTERNATIONAL ECONOMIC ASSOCIATION PUBLICATIONS
MoNOPOLY AND CoMPETITION AND THEIR REGULATION

THE BusiNEss CYCLE IN THE PosT-WAR \'\loRLD
THE THEORY OF WAGE DETERMINATION
THE EcoNOMICs oF INTERNATIONAL MIGRATION
STABILITY AND PRoGRESs IN THE WoRLD EcoNOMY
THE EcoNOMIC CoNSEQUENCES OF THE SIZE OF NATIONS
THE THEORY OF CAPITAL
EcoNOMIC DEVELOPMENT OF LATIN AMERICA
INFLATION
INTERNATIONAL TRADE THEORY IN A DEVELOPING WoRLD
EcoNOMic DEvELOPMENT FOR AFRICA SouTH oF THE SAHARA
EcoNOMIC DEVELOPMENT WITH SPECIAL REFERENCE TO EAsT AsiA
THE THEORY OF INTEREST RATES

THE EcoNOMics oF EDuCATION
PROBLEMS IN EcoNOMIC DEVELOPMENT
THE EcoNOMIC PRoBLEMS oF HousiNG
PRICE FoRMATION IN VARious EcoNOMIEs
THE DISTRIBUTION OF NATIONAL INCOME
EcoNOMIC DEVELOPMENT FOR EASTERN EuROPE
RISK AND UNCERTAINTY
EcoNOMIC PROBLEMS OF AGRICULTURE IN INDUSTRIAL SoCIETIES
INTERNATIONAL EcoNOMic RELATIONS
BACKWARD AREAS IN ADVANCED COUNTRIES
PuBLic EcoNoMics
EcoNOMIC DEVELOPMENT IN SouTH AsxA
CLASSICS IN THE THEORY OF PUBLIC FINANCE
NoRTH AMERICAN AND \\<'EsTERN EuROPEAN EcoNo~nc PoLICIEs
PLANNING AND MARKET RELATIONS
THE GAP BETWEEN RICH AND PooR NATIONS
LATIN AMERICA IN THE INTERNATIONAL EcoNOMY
MoDELS oF EcoNOMIC GROWTH
SciENCE AND TECHNOLOGY IN EcoNOMIC GRoWTH
ALLOCATION UNDER UNCERTAINTY
TRANSPORT AND THE URBAN ENVIRONMENT
THE ECONOMICS OF HEALTH AND MEDICAL CARE
THE MANAGEMENT OF WATER QUALITY AND THE ENVIRONMENT
AGRICULTURAL PoLICY IN DEVELOPING CouNTRIES
THE EcoNOMIC DEVELOPMENT OF BANGLADESH
EcoNOMIC FAcToRs IN PoPULATION GROWTH

THE
ECONOMICS OF TAKE-OFF
INTO
SUSTAINED GROWTH
Proceedings of a Conference
held by the International Economic Association
EDITED BY
W. W. ROSTOW
PALGRAVE MACMILLAN
ISBN 978-1-349-00228-3 ISBN 978-1-349-00226-9 (eBook)
DOI 10.1007/978-1-349-00226-9
© International Economic Association [963

Softcover reprint of the hardcover 1St edition 1963 978-0-333-03155-1
All rights reserved. No part of this publication may
be reproduced or transmitted, in any fonn or by any
means, without permission.
First Edition 1963

Reprinted [964,1965,1968, [969, [97[, [974
Published by
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CONTENTS
PAG&
LIST OF PARTICIPANTS ix
INTRODUCTION AND EPILOGUE. W. W. Rostow xiii
CHAP.
1. LEADING SECTORS AND THE TAKE-OFF. W. W. Rostow 1
2. NoTES ON THE TAKE-OFF. S. Kuznets 22
3. INDUSTRIALIZATION IN THE UNITED STATES (1815-60).
D. C. North 44
4. THE TAKE-OFF IN BRITAIN. H. J. Habakkuk and Phyllis
Deane 63
5. GOVERNMENT AcTIVITY AND INDUSTRIALIZATION IN GER-
MANY (1815-70). W. Fischer 83
6. THE TAKE-OFF IN GERMANY. W. G. Hoffmann 95
7. THE TAKE-OFF HYPOTHESIS AND FRENCH EXPERIENCE. J.
Marczewski 119
8. THE TAKE-OFF IN JAPAN (1868-1900). S. Tsuru 139
9. THE EARLY PHASES OF INDUSTRIALIZATION IN RussiA:
AFTERTHOUGHTS AND COUNTERTHOUGHTS. A. Gerschenkron 151
10. POPULATION GROWTH AND THE TAKE-OFF HYPOTHESIS. H.
Leibenstein 170
11. TECHNICAL PROGRESS, THE PRODUCTION FUNCTION, AND
DEVELOPMENT. H. Leibenstein 185
12. AGRARIAN STRUCTURE AND TAKE-OFF. M. Boserup 201
13. AGRICULTURE AND EcoNOMIC DEVELOPMENT. 0. G. de
BulhOes 225
14. CAPITAL FoRMATION IN THE TAKE-OFF. A. K. Cairncross 240
15. SociAL OVERHEAD CAPITAL AND EcoNOMIC GROWTH. P. H.
Cootner 261
16. FOREIGN CAPITAL AND TAKE-OFF. K. E. Berrill 285
SuMMARY REcoRD OF THE DEBATE. D. C. Hague 301
INDEX 477
v
ACKNOWLEDGMEN TS
The International Economic Association wishes to
thank all those who did much to ensure the success of
the Conference recorded in this volume. Special grati-
tude is due to the management and staff of the Insel
Hotel at Konstanz where the Conference was held in a
most beautiful setting. That the weather was throughout
unkind was no possible fault of theirs.
vii
LIST OF PARTICIPANTS
Dr. 0. Aukrust
Midtasen 55, Ljan, Oslo, Norway
Professor Ragnar Bentzel
Handelshogskolan i Stockholm, Sveavagen 65, Stockholm,
Sweden
Mr. Kenneth Berrill
St. Catharine's College, Cambridge
Dr. H. C. Bos
Netherlands Economic Institute, Pieter de Hoochweg 122,
Rotterdam, Netherlands
Dr. Mogens Boserup
4 Route de Chancy, Geneva, Switzerland
Professor Jacques Boudeville
29 rue Jasmin, Paris 168 , France
Professor Octavio Bulhoes
Brazilian Institute of Economics, Funda~ao Getulio Vargas,
Praia de Botafogo 186, Rio de Janeiro, Brazil
Professor A. K. Cairncross
Department of Social and Economic Research, University of
Glasgow, 12 Bute Gardens, Glasgow W.2, U.K.
Professor C. M. Cipolla
Facolta di Economia e Commercio, lstituto Universitario di
Venezia, Ca' Foscari, Venice, Italy
Dr. Paul Cootner
Center for International Studies, Massachusetts Institute of
Technology, 50 Memorial Drive, Cambridge 39, Mass.,
U.S.A.
Miss Phyllis Deane
Department of Applied Economics, 7 West Road, Cambridge,
U.K.
Professor Dr. D. Delivanis
50 Jan Smuts, Athens, Greece
Professor Leon Dupriez
Institut de Recherches economiques et sociales, Universite de
Louvain, Place Mgr Ladeuze, Louvain, Belgium
Professor Luc Fauvel
31 his rue Campagne Premiere, Paris 148 , France
ix
The Economics of Take-off into Sustained Growth
Professor Dr. Wolfram Fischer
Sozialforschungsstelle an der Universitat Munster, Rheinland-
damm 199, Dortmund, Germany
Professor Alexander Gerschenkron
Department of Economics, Harvard University, M-7 Littauer
Center, Cambridge 38, Mass., U.S.A.
Professor Eugenio Gudin
Rua da Candelaria 19, Rio de Janeiro, Brazil
Professor Gottfried Haberler
326 Littauer Center, Harvard University, Cambridge 38, Mass.,
U.S.A.
Professor Douglas Hague
Department of Economics, The University, Sheffield 10, U.K.
Professor Dr. Walther Hoffmann
Institut fiir Industriewirtschaftliche Forschung der Universitat
Munster, Universitatsstrasse 14-16, Munster, Westf., Ger-
many
Professor Emile James
6 avenue de Segur, Paris 7e, France
Professor Dr. W. A. Johr
Goethestrasse 77, St. Gallen, Switzerland
Professor Simon Kuznets
333 Tuscany Road, Baltimore 10, Maryland, U.S.A.
Professor David Landes
Department of History, University of California, Berkeley 4,
California, U.S.A.
Professor Harvey Leibenstein
Department of Economics, University of California, Berkeley 4,
California, U.S.A.
Professor W. A. Lewis
University College of the West Indies, Mona, Kingston 7,
Jamaica, West Indies
Professor Edward Lipinski
Rakowiecka 6 m. 26, Warsaw, Poland
Professor Erik Lundberg
Borjesonsvagen 42, Bromma, Stockholm, Sweden
Professor Jean Marczewski
46 rue de Rennes, Paris 6e, France
Dr. Gautam Mathur
55 Grantchester Street, Cambridge, U.K.
Professor Dr. Fritz Neumark
Gesellschaft fur Wirtschafts- und Sozialwissenschaften, Merton-
strasse 17, Frankfurt-am-Main, Germany
X
List of Participants
Professor Douglass C. North
Institute for Economic Research, University of Washington,
Seattle 5, Washington, U.S.A.
Professor E. A. G. Robinson
The Marshall Library, Downing Street, Cambridge, U.K.
Professor W. W. Rostow
Center for International Studies, Massachusetts Institute of
Technology, 50 Memorial Drive, Cambridge 39, Mass.,
U.S.A.
Dr. H. W. Singer
Department of Economic Affairs, United Nations, New York,
N.Y., U.S.A.
Professor Robert Solow
Department of Economics and Social Research, Massachusetts
Institute of Technology, Cambridge 38, Mass., U.S.A.
Professor S. Tsuru
Institute of Economic Research, Hitotsubashi University,
Kunitachi, Tokyo, Japan
Observer
Mrs. G. Podbielski
Research and Planning Division, U.N. Economic Commission
for Europe, Geneva, Switzerland
Xl
INTRODUCTION AND EPILOGUE
Bv W. W. ROSTOW
SPECIAL pressures and distractions, at play first on Professor

Hague and then on myself, confront me with the task of writing this
reply to the debate a little more than two years after it took place at
Konstanz. There may be some virtue in this lapse of time. It may
permit a detachment that mitigates the chivalrous irregularity of the
Association's invitation to one contentious participant to provide
an introduction to this book. This procedure was judged at the
time more appropriate than my taking the time of the conference to
reply to Professor Landes' summing up at the ninth session and to
Professor Solow's, at the final session.
I
Re-reading the papers and Professor Hague's summary of the
discussion I believe that in this volume the conference speaks well
for itself. The Association succeeded in bringing together a distin-
guished group of historians, specializing on particular nations ;
statisticians ; theorists ; and experts on functional aspects of
growth. They answered, each from his own perspective, the
question : Is the concept of take-off useful, misleading, or wrong ?
In so doing they laid on the table their latest reflections on the pro-
cess of economic growth and, either implicitly or explicitly, their
own analytic approaches to the problem. Those contributions are,
evidently, the principal justification for the volume.
As for the take-off, it will have to look after itself. Each reader
will make his own assessment of the debate. Like all intellectual
constructs it will survive only if it meets the hard pragmatic test of
usefulness to others - if it illuminates problems that deeply concern
them. No market is- or should be- more ruthlessly competitive
than the market-place of ideas, even though, as the record of this
conference suggests, it is an oligopolistic market ; that is, the coming
in of a new idea is felt by the other producers to involve a potential
shift in the shape of the demand curve that confronts their own
products, and they react appropriately. As I remarked at one point
in the debate, the introduction of a new concept - especially a new
term - is an act of aggression against respected colleagues and
xiii
friends. Both at the time - and in retrospect - I found the debate
instructive.
Taking stock of the papers and the discussion at this distance I
shall use this occasion to do two things. First, I shall reply more
spaciously than the discussion permitted to Professor Kuznets'
criticism of the take-off. His approach was not only more frontal,
but also embraced many of the issues raised by others. Beyond
Professor Kuznets' four grand questions, the summary of the dis-
cussion contains, by and large, what I would still wish to say about
the other papers, with one exception - Professor Solow's final
statement. My second purpose will be, therefore, to respond briefly
to his interesting challenge to re-formulate the take-off concept in
terms an economic theorist is likely to find more comprehensible.
II
The first of Professor Kuznets' questions is whether there is a
sharp rise in the investment rate during take-off and a sharp rise in
the rate of growth of total national product.
He begins with an 'implicit' conclusion; namely, that the take-
off should see a sharp rise in total national product. In fact, a rise
in the rate of investment need not yield an equivalent acceleration
in national product. The magnitudes are not rigorously related in
the short period; and even over the long period capital-output ratios
may vary. Moreover, forces may be operating during the take-off
which yield stagnation or even decline in certain massive sectors of
the economy (for example, within agriculture, in agricultural surplus
areas); and these could damp or even overwhelm the effects on real
product of the rise in the rate of investment in social overhead
capital and industry.
In the general case, I am confident that the data - if we had
them - would exhibit an acceleration in national product during the
take-off years ; but I shall confine my observations here to the
movement of the investment rate during take-off.
In presenting the notion of the take-off, I pointed out the follow-
ing factors which might alter what we might call 'pure Arthur Lewis'
(or 5-10 per cent) behaviour of the investment rate during the
take-off.
( 1) Variations as among nations in the rate of population
increase.
(2) Variations in the level of investment required for social
overhead capital (mainly transport) in the pre-take-off and
take-off decades.
xiv
Introduction and Epilogue
(3) Variations in the capital-output ratio.
(4) The enclave case; that is, a high rate of investment in a
narrow region or export sector, with very damped effect-
if any - on the economy as a whole.
In addition, I noted a difficulty which has evidently not been
remedied and may prove beyond remedy ; that is, we do not have
reliable investment data for the pre-take-off decades in most
societies.
The reader may also recall that I referred to the rise in the invest-
ment rate during take-off as a 'necessary but not sufficient condition
for the take-off'; and in the summary of the stages of economic
growth (Economic History Review), I referred to the achievement of
a sustained rate of net investment of the order of 10 per cent as an
'essentially tautological' way of defining take-off.
What is the point here ? The point is that within normal ranges
of population increase and of the capital-output ratio, a regular and
substantial increase in national product per head requires, by
definition, a net investment rate of something like 10 per cent. We
can find cases where such rates persisted in pre-take-off decades,
usually because of heavy outlays for long-distance transport or
because of limited enclaves of modern economic activity. There is
nothing in the take-off analysis as a whole to make a shift in the
investment rate itself a crucial test of the take-off.
On the other hand, I am confident that a rise in the investment
rate will prove to be a normal take-off phenomenon, when more
evidence is available. Of its nature, the take-off process is likely to
bring about a rise in the investment rate for three reasons. The
rise will come about in part through the plough-back of profits in
the rapidly industrializing sectors ; that is, in the leading sectors
themselves and those directly linked to them, where a high marginal
rate of saving is likely to prevail.
It will come about also from the more widespread expansion of
investment in modern sectors that the acceleration of urbanization
(and the probable rise in per capita income) during take-off are
likely to bring about.
And the usually substantial role of governments during the take-
off - notably in mobilizing social overhead capital- is likely to
reinforce the other two tendencies.
I submit that a careful scrutiny of both contemporary and
historical data - where they exist - including the data on Great
Britain, Germany, Sweden, and Japan in this volume are consistent
with this view : the investment rate is likely to rise during take-off ;
the extent of the rise will vary with specific factors, notably the scale
XV
of social overhead requirements ; but a rise in the investment rate
is not the sole relevant criterion for take-off.
Behind this argument lies my disagreement with the following
passage from Professor Kuznets' paper : 'All that is claimed here is
that aggregative data for a number of countries do not support
Professor Rostow' s distinction and characterization of the "take-
off" stage. On the other hand, the fact that the evidence is confined
to aggregative data does not limit their bearing. Economic growth
is an aggregative process ; sectoral changes are interrelated with
aggregative changes, and can be properly weighted only after they
have been incorporated into the aggregative framework ; and the
absence of required aggregative changes severely limits the likelihood
of the implicit strategic sectoral changes.'
With this I disagree. Modern economic growth is essentially a
sectoral process. It is rooted in the progressive diffusion of the
production functions modern technology can provide. These
changes in technique and organization can only be studied sectorally.
The sectors are, of course, intimately interrelated ; and changes in
income flows play a role ; but the aggregates - like any other index
number - merely sum up the performance of the sectors. Put
another way - of course growth is, in one sense and on one defini-
tion, an aggregative concept ; that is, it consists in a regular expansion
of output per head. But without sectoral analysis we cannot explain
why growth occurs. I would not, of course, abandon the aggregates.
But to confine growth analysis to them is to play the piano while
wearing mittens.
III
Professor Kuznets' second point follows from his first : 'There
is no clear distinction between the "pre-conditions" and the
"take-off" stages'.
In presenting the concept of take-off, I sought to make clear that
it flowed directly from the form of sectoral analysis I developed in
The Process of Economic Growth and, in particular, it derived from the
notion of leading sectors in growth analysis elaborated from The Process
and first presented at the lEA Conference at Santa Marguerita in 1955.
Contrast, if you will, these two passages. First from Professor
Kuznets' 'Notes' (p. 28):
'But a review of the empirical evidence on this point
rthat is, on leading sectors] holds little interest if I am correct in
assuming that the major distinctive characteristic of the 'take-
off' is a marked rise in the rate of growth of per capita and hence
of total income.'
XVI
Second, from the conclusion of the take-off article in the Economic
Journal (1956):
'This hypothesis is, then, a return to a rather old-fashioned
way of looking at economic development. The take-off is defined
as an industrial revolution, tied directly to radical changes in
methods of production, having their decisive consequence over a
relatively short period of. time. . . . What this argument asserts
is that the rapid growth of one or more new manufacturing sectors
is a powerful and essential engine of economic transformation.
Its power derives from the multiplicity of its forms of impact,
when a society is prepared to respond positively to this impact.
Growth in such sectors, with new production functions of high
productivity, in itself tends to raise output per head; it places
incomes in the hands of men who will not merely save a high
proportion of an expanding income but who will plough it into
highly productive investment ; it sets up a chain of effective
demand for other manufactured products ; it sets up a require-
ment for enlarged urban areas, whose capital costs may be high,
but whose population and market organization help to make
industrialization an on-going process; and, finally, it opens up a
range of external economy effects which, in the end, help to pro-
duce new leading sectors when the initial impulse of the take-off's
leading sectors begins to wane.'
This is the central proposition. I believe the national product and
investment aggregates will normally reflect this complex sectoral
process. But we must look directly at the take-off process in the
sectors, not at the aggregates alone.
It is possible that we have all been so deeply committed by the
Keynesian revolution (and by Marx' economic analysis) to think in
terms of two-sector models - in which output is broken down into
consumption and capital goods ; income, into spending and saving
- that there is a perhaps unconscious resistance to overcome before
we are prepared to enter deeply into sectoral analysis. Both theoreti-
cal and statistical analysts would, evidently, prefer to stay with the
large aggregates.
The point takes on a certain drama because, in my own education,
I derived much from the early work of Professor Kuznets on secular
trends in prices and production. As my paper for this conference
suggests, I moved on from his analysis of deceleration in individual
sectors to examine the various spreading effects which flow from
them. When this is done systematically, the over-all sequence of
growth becomes not merely a matter of movement in the aggregates ;
it becomes a succession of surges, in clustered sectors, linked in turn
xvii
to the sequence of leading sectors which mark the story of modern
economic history.
This is the view, I submit, which is implicit or explicit in the
work of most economic historians of particular nations ; this is the
view which, in the end, underlies the most pertinent generalized
insights in the work of Schumpeter and Walther Hoffmann; and
this is the view which once caught the imagination of Professor
Kuznets himself, as the long footnote quotation on pp. 3-4 of
my paper will indicate.
In a quite technical and literal sense, the stages of growth analysis
is in part - on the supply side - an elaboration of Kuznets' early
judgment that : 'As we observe the various industries within a given
national system, we see that the lead in development shifts from one
branch to another'.
Let me relate this argument to the distinction in time between
the take-off and the pre-conditions periods. How were the take-off
dates set ? As I say in the paper submitted to the conference :
'. . . working with historical data, I have sought to use the full
range of quantitative and nonquantitative materials available to
form an approximate judgment as to when the rate and scale of a
leading sector's growth has been such as to induce substantial
further expansion in the economy, also of high momentum, via
its backward and lateral linkages. The take-off dates I have
tentatively offered on other occasions are the product of such
investigations of the total impact of the initial group of leading
sectors in the industrialization process of particular economies.
It is the coming in of the first leading sector (or sectors), on a scale
and with a momentum to induce substantial spreading effects
which creates the sa/tum economies sometimes execute.
'Now a major proviso. It cannot be too strongly emphasized
that the secondary effects of rapid growth in a sector suffused with
new technology are not automatic. They are potential effects
which require active exploitation by a society's men and institu-
tions. In fact, one measure of a society's ability to move into
sustained economic growth is its ability to seize upon and to exploit
with vigour all three types of potentiality which flow from a
leading sector.
' . . . Growth is, thus, only an automatic process if one can
assume that a society will respond actively and effectively to the
potentials for growth available to it.
'In the light of this argument, the take-off must be defined in
two steps : first, it is the period in the life of an economy when,
for the first time, one or more modern industrial sectors take hold,
with high rates of growth, bringing in not merely new production
functions but backward and lateral spreading effects on a sub-
xviii
stantial scale ; second, for a take-off to be said to have occurred,
the economy must demonstrate the capacity to exploit the forward
linkages as well, so that new leading sectors emerge as the older
ones decelerate. It is this demonstration of the capacity to shift
from one set of leading sectors to another which distinguished
abortive industrial surges of the transition period from a true
take-off. This functional requirement has determined that the
take-off be defined as embracing, say, a 20-year interval. Some
such substantial period is necessary to demonstrate that a society
is capable of overcoming the structural crisis which the initial
surge of growth is likely to bring and is capable of introducing the
changing flow of technology upon which sustained growth
depends.'
I would be gratified - and I am sure Professor Kuznets would
be easier in mind - if I could offer a straightforward statistical test ;
for example, the period of maximum rate of growth in a designated
leading sector. But the problem is not that easy. First, the maxi-
mum rate of growth for a new industry is likely to come at a time
when its scale is not significant enough to induce the spreading
effects which are key to the take-off analysis. Second, the spreading
effects themselves are difficult to trace with statistical precision,
notably what I call the lateral and forward effects.
Nevertheless the spreading effects are keyed to the notion of leading
sectors. Professor Kuznets' mathematical illustration (pp. 29-30)
of the limited impact of one or two high growth sectors on the
industrial production index misses this point. The industrial
growth directly and indirectly induced by the surge in British cotton
production in the last two decades of the eighteenth century or
induced by the railway surge in the United States in the two decades
before the Civil War cannot be estimated by looking at cotton or
railway statistics alone.
In the present state of knowledge, then, the estimate of when a
take-off occurs cannot be a simple statistical exercise, although it
requires the use of all the statistical data available. One must
examine the whole performance of an economy to satisfy oneself
that it is responding actively to the potential spreading effects which
derive from the leading sectors. It follows from this fact that there
is a margin of legitimate debate about when a take-off should be
dated.
In presenting the take-off, I referred explicitly to two problems,
both of which bear on Professor Kuznets' feeling that the line
between pre-conditioning and take-off may be fuzzy.
One is the case of an abortive industrial surge which does not
lead on to self-sustained growth. Many nations have experienced
xix
such surges: the United States during the Napoleonic Wars, for
example ; India in the last decade of the nineteenth and the early
twentieth century ; Brazil in the period 1901-12 ; Argentina and
China during the First World War. The subsequent periods of
stagnation or relapse are so clear in such cases that they do not
present great difficulty.
The more difficult problem is what one might call the problem
of the decade preceding take-off - a problem referred to in the
original take-off article. The surges of industrial growth which
marked the take-off did not, of course, arise out of the blue. The
take-off, in my view, is a recognizable discontinuity in the stream
of history ; but it is not a process without a history.
The pre-take-off decades are, generally, dominated by changes
in the economy and in the society as a whole which are essential
for later growth. These changes are likely to involve the training
of new men ; alterations in agricultural institutions and techniques ;
an expansion of trade at home and abroad, an expansion of cities ;
and in many cases there are important political changes as well in
the pre-take-off decades which are necessary before take-off can
begin. But, of course, there is likely also to be some expansion in
industrial output.
In Britain the years of war with the United States ease the prob-
lem ; that is, there is, despite much industrial ferment, not much
basis for including the 177o's in the take-off. But what about the
183o's for the United States; the 184o's for Germany ; the 186o's
for Sweden; the 188o's for Russia?
These are all, in my view, debatable cases on my sectoral defini-
tion of take-off. I have examined the evidence and weighed it. I
have concluded that, on balance, the scale of the leading sectors and
the extent of their spreading effects in these preceding decades do
not justify their inclusion in the take-off ; and that the activities
dominating the economy in these intervals were primarily non-
industrial, typical of the pre-conditioning process rather than the
take-off. But I do not regard my assessments of each case as final
or beyond challenge.
Of its nature, this is a problem that can only be dealt with case
by case ; and the country papers included in this book provide an
opportunity to do so. What I would say here is, simply, that the
quite tractable problem of 'the preceding decade' is the only problem
I perceive in distinguishing, in particular cases, the pre-conditions
from the take-off.
XX
IV
Professor Kuznets' third point is the following : 'The analysis
of the take-off and pre-conditions stage neglects the effect of historical
heritage, time of entry into the process of modern economic growth,
degree of backwardness, and other relevant factors on the character-
istics of the early phases of modern economic growth in the different
traditional countries'.
I would not agree that I have neglected these factors, if by neg-
lect is meant a failure to consider them, to refer to them, and to make
certain preliminary observations about them. The problem may
arise from the fact that Professor Kuznets focused his attention
on the take-off article published in The Economic Journal in 1956
rather than on Chapter III in The Stages of Economic Growth.
Moreover he did not have available the paper focused directly on
the dynamics of traditional societies I presented to the Stockholm
Conference of 1960, nor the still more ambitious communal effort
to order the preconditioning process, to which I contributed : The
Emerging Nations (Boston, 1961, ed. M. F. Millikan and D. L. M.
Blackmer).
If by neglect Professor Kuznets means that there is much more
to be done in trying to make order of the interval between the first
modern intrusion on a traditional society and the period of take-off,
I whole-heartedly agree.
The key economic problems of the pre-conditions are, I believe,
fairly straightforward and familiar. I list them as a sequence on
pp. 8-9 of my paper for this conference. They appear in different
form in each nation, of course, depending on its prior economic
history, population-resource balance, etc. But I do not believe the
strict economics of the pre-conditions period will present us with
great difficulties, if we choose to do systematic cross-comparisons
of national experiences.
The great challenge in the analysis of the pre-conditioning process
will lie, I believe, in its non-economic dimensions : the psycho-
logical, social, and political processes which interact with each other
and with. economic change, to move societies from their own parti-
cular version of a traditional society to their own particular version
of a growing society. Here, I would simply agree that, although I
have had somewhat more to say about the range of problems than
Professor Kuznets' stricture would imply, we all have more work to
do.
xxi
v
Professor Kuznets' fourth point, concerns the question of how
self-sustained growth really is. Here I shall simply quote the most
relevant passage from my paper for this conference which attempts
to deal with this important and wholly legitimate query :
'. . . To what extent is growth truly automatic after the take-
off ? In one sense, it follows directly from the fact of deceleration
that growth is not automatic. If, on this view, a society is to
sustain a high average rate of growth, it must engage in an endless
struggle against deceleration ; for while the flow of modern
science and technology may offer the potentiality of fending off
Ricardian diminishing returns indefinitely, a society which wishes
to exploit this potentiality must repeat the creative pain of actually
introducing new production functions as the old leading sectors
decelerate ; and it must demonstrate the capacity to exploit with
vigour their potential spreading effects. In this sense sustained
growth requires the repetition of the take-off process. (A point
made in the original take-off article.) It requires the organization
around new technology of new and vigorous management ; new
types of workers ; new types of financing and marketing arrange-
ments. It requires struggle not against the constraints of the
traditional society - whose economic bonds are decisively broken
in the take-off - but against constraints created in the previous
generation or two, around the peculiar imperatives of an older
set of leading sectors now no longer capable of carrying the
economy forward at its old pace.
'There is, then, nothing automatic and easy about the inner
mechanics - the logistics, as it were - of sustained growth.
'But in a larger sense, the experience of take-off may, when we
have a longer time perspective, prove to be a definitive transition,
like the loss of innocence. The reason for this judgment is that
behind the whole industrial process lies the acceptance of the
Newtonian outlook, the acceptance of the world of modern science
and technology. Phases of difficulty and even relative stagnation
after the take-off may, of course, occur; and they may be protracted.
'In short, on present historical evidence, it appears fair to say
that the larger psychological, social, technical, and institutional
changes required for a take-off are such as to make it unlikely that
we shall see a true lapsing back. Men in societies must continue
to struggle to keep growth moving forward ; and one of the pur-
poses of this mode of analysis, rooted in leading sectors, is to
specify the nature of that struggle. But the deeper fundamentals
required for an effective take-off appear, on present evidence,
sufficiently powerful to make growth an ongoing process, on long
term. Nevertheless, we still have much to learn about the longer
spans of the industrialization process.'
xxii
VI
In the end, Professor Kuznets suggests that we substitute the
notion of the 'early modern growth stage' for the take-off. This is,
evidently, a matter which each of us will decide for himself. I can
understand how a concentration on aggregative evidence might
lead to this view ; and, as I said in the original take-off article :
'from the perspective of the economic historian the isolation of a
take-off period is a distinctly arbitrary process'. A part of my mind
and of my training is wholly sympathetic to the notion that economic
history - like other forms of history - is a seamless web.
To understand why, on balance, I find the notion of take-off
proper and essential, one must go back to what it is that distinguishes
a modern society from a traditional society. Here Professor Kuznets
and I substantially agree. He says : 'Behind all this is the increasing
stock of useful knowledge derived from modern science, and the
capacity of society, under the spur of modern ideology, to evolve
institutions that permit a greater exploitation of the growth potential
provided by that increasing stock of knowledge.'
The history of traditional societies offers us many cases of growth,
including cases of significant changes in production functions.
What is lacking is a more or less regular flow of innovation on a scale
capable of defeating Ricardian diminishing returns and the Mal-
thusian propensities of the people. On this view of what modern
growth is about, the take-off has a particular meaning that transcends
the aggregates and the sectors ; it is the phase when a society
demonstrates the capacity not only to mount an accelerated industrial
surge, but to move on to absorb and apply new production functions
- progressively spreading the techniques that modern technology
can offer, as deceleration operates on the initial leading sectors.
In that sense, the take-off is a definitive watershed in a society's
history : the innovational process has ceased to be sporadic and is
a more or less regular institutionalized part of the society's life.
The demonstration of that capacity gives the take-off a fundamental
historical meaning.
The basic problem that the counterpoint between Professor
Kuznets' and my position poses is this : how shall we relate aggrega-
tive to sectoral analysis; or in the term I derived from Warren
Weaver and used in my paper for the conference, how shall we make
growth analysis a system of 'organized complexity' ? We must come
to understand how the sectoral forces we know to be both relevant
and interrelated link to each other and to the growth process as a whole.
In a sense our task is to relate and to make order of the insights
xxiii
of the early and the later work of Professor Kuznets. The later
Kuznets moves from the austere world of reputable statistics, of a
high order of aggregation, to the grand qualitative vision of the
diffusion over the face of the globe of modern science and technology.
The heart of the growth process lies in between, in the interwoven
life of the sectors.
VII
Now, briefly, a word in reply to Professor Solow. He asks:
how can one translate all this fuzzy talk about take-off into something
which an economic theorist can understand and grapple with ; what
are the initial conditions, parameters, and changes in rules of
behaviour which distinguish a take-off from earlier periods?
In one sense, the problem may not be soluble. Economic
growth is the result of an interacting process involving the economic,
social, and political sectors of a society, including the emergence of a
corps of entrepreneurs who are psychologically motivated and
technically prepared regularly to lead the way in introducing new
production functions into the economy.
Economic theory has been, in Warren Weaver's phrase, a world
of 'problems of simplicity' ; and from this fact it has derived its
great power, over a limited range. It may not be able to function
in the world of 'organized complexity', which growth analysis, at
its best, is bound to be. Growth analysts cannot and should not cut
their labours down to the level of simplification, aggregation, and
abstraction which the tools of economic theory require, any more
than they should restrict themselves to the consideration of those
variables only for which reputable statistical measures exist.
On the other hand, formal economic theory has already contri-
buted some substantial insights to growth analysis (e.g. the Harrod-
Domar model and Professor Solow's work on production functions
and 'the residual') ; and the effort at communication should be
pressed from both sides.
Can the take-off concept be expressed, then, in terms of initial
conditions, changes in rules of behaviour, and parameters?
First, the parameters. As a first approximation one can describe
these as three : the rate of population increase, the state of existing
technology, and the availability of known natural resources. In
fact, all are subject to change out of inter-action with the growth
process itself ; but no great violence is done by assuming them
fixed for purposes of formally examining what a take-off is about.
As Professor Solow points out we require a definition. For these
purposes we define the take-off as the period when a society begins
xxiv
regularly to absorb new production functions in a setting where the
direct and indirect consequences of this new mode of behaviour
yield a more or less regular increase in output per capita.
Second, the initial conditions. The whole process of the pre-
conditioning is, in a sense, a statement of the initial conditions.
For a society to absorb new production functions in ways which
generate the spreading effects on which the take-off depends requires
massive prior change away from the pattern of the traditional society.
Technically this pre-conditioning embraces a build-up of transport
sufficient to begin to make the markets of the economy interact
quickly and efficiently and to make domestic raw materials available
at tolerable economic cost ; an initial minimum quantum of literate
and technically trained personnel in the working force ; an initial
minimum quantum of power resources, and other overhead capital.
In addition, for take-off to proceed successfully, the bases must be
laid during the pre-conditions period for the generation of increased
flows of agricultural products and, usually, of imports. These are
required both to feed the inevitably expanding urban population and
to meet fixed and working capital requirements which the economy,
at its assumed stage, cannot itself generate.
This whole set of changes in the economy's infra-structure,
working force, its agriculture, and foreign exchange earning (or
borrowing) capacity can be generalized in the proposition that
before take-off can occur there must be, in the widest sense, a certain
minimum prior build-up of social overhead capital if the necessary
spreading effects from the take-off's leading sectors are, in fact, to
occur or if the take-off is not to be distorted or actually aborted by
the lack of adequate flows of working (and fixed) capital in the form
of agricultural products and imports. The scale of this prior mini-
mum build-up will vary from one economy to another depending
on its prior history, geography, natural resources, etc. Both history
(pre-1914 Russia) and the contemporary scene (post-1958 Com-
munist China) indicate that nations have begun take-off without a
balanced stock of pre-conditioning capital, and these structural flaws
raised serious problems for them during the take-off years.
Third, changes in rules of behaviour. The prior build-up of
social overhead capital, in the special generalized sense used above,
is a necessary but not sufficient condition for take-off. There must
also emerge a minimum initial group of entrepreneurs prepared,
in the assumed environment, to launch the take-off's leading sectors
and to react positively, in the sectors linked backward and laterally
to the leading sectors, to the potentials for profit which the momen-
tum of the leading sectors provide. Their central differentiating
XXV
characteristic resides in their willingness and ability to introduce new
production functions. They can be either public servants or private
entrepreneurs ; but the innovations required in the social overhead
sectors (including, for these purposes, agriculture and the generation
of adequate flows of foreign exchange) has usually decreed that
entrepreneurs, as here defined, emerge in both.
Technically, it is the inescapable role of the state in these social
overhead functions that justifies the proposition, stated in The
Stages of Economic Growth, that the most important pre-condition
for take-off is often political.
Thus, one can say to Professor Solow that take-off requires by
way of initial conditions the prior build-up at a certain minimum
quantum of social overhead capital, to provide the technical condi-
tions for the requisite spreading effects ; and it requires a change in
rules of behaviour such that new production functions available are
actually brought to bear in the capital stock, within the initial leading
sectors and those linked backward and laterally to them.
The resulting path of change in output per head will be deter-
mined by the parameters, as well as by the scale and efficiency of
the entrepreneurial corps, in the public and private sectors - effi-
ciency being measured by the rate at which they close the gap between
existing relevant technology and pre-take-off technology in the
economy. At this stage, as Professor Solow properly reminds us,
the path of growth will be affected by the consumption function and
conventional income analysis comes into its own.
I am not clear whether this abstracted reformulation will permit
economic theorists to grip the take-off analysis in ways interesting
for them ; but Professor Solow's brilliant final statement justifies
the effort.
XXV1
Chapter 1
LEADING SECTORS AND THE TAKE-OFF

BY
W. W. ROSTOW
Massachusetts Institute of Technology
I. INTRODUCTORY
THE purpose of this chapter is to clarify the basic economic
mechanism which underlies the notion of the take-off - the idea
of leading sectors - and to relate the workings of this mechanism
to the other conditions required for take-off.
The exposition proceeds as follows : Part I examines the theo-
retical and empirical foundations for the concept of leading sectors.
Part II relates the leading sector mechanism to the take-off. Part
III considers how the initial leading sectors link to the other
variables which help determine when and how a take-off occurs.
Part IV presents certain concluding observations.
II. RETARDATION AND THE THEORY OF PRODUCTION

We begin with a narrow question : Why does the introduction
of modern technology tend to assume the form of a series of leading
sectors? 1
The pioneering economic study of how new technology is intro-
duced into a given sector is Kuznets' Secular Trends in Prices and
Production. This book remains, in my view, a classic whose impli-
cations for economic theory in general and the economics of growth
in particular remain still to be developed, despite the elaborations
of Arthur F. Burns and others. 2 Kuznets demonstrated, in a merging
1 For an analysis of the sectors of the economy, under the headings of primary
growth (leading) sectors, supplementary growth sectors, and derived growth sectors,
see chapter xi, Process of Economic Growth, Second Edition, Oxford, 1960.
2 S. S. Kuznets, Secular Movements in Production and Prices, Boston and New
York, 1930. Also, A. F. Burns, Production Trends in the United States since 1870,
New York, 1934. Although my own introduction to sectoral analysis and the
economics of retardation came via Kuznets' work, W. G. Hoffmann developed
similar ideas, in parallel, in the 1930's. See notably, The Grooth of Industrial
Economies (tr. W. 0. Henderson and W. H. Chaloner) Manchester, 1958, a revised
and expanded version of his 1931 Stadien und Typen der Industrialisierung; and
British Industry, 1700-1950 (tr. W. 0. Henderson and W. H. Chaloner) Oxford
1955, an expanded version of the 1939 German edition.
I
of technological, economic, and statistical analysis, how the intro-
duction of a new production function in a given sector (including
new supplies of raw materials) leads to a phase of rapid growth
in that sector often accompanied by a decline in the price of its
output ; and how a set of forces converge to decree that the path
of output in that sector will decelerate. The rapid increase in output
results from the decrease in costs of production of an old product
(or commodity) or the introduction of a new product with high
price (or income) elasticity of demand. Kuznets identified four
major factors which determined deceleration : the slowing down of
technical progress ; the damping effect of slower-growing comple-
mentary industries ; limitations of finance, as the fast-growing indus-
try achieves large-scale operation ; and competition from the same
industry in a younger country (with, presumably, lower money costs). 1
In addition, Merton has suggested how these technical and
economic factors may be reinforced by a secular decline in the
quality of entrepreneurship.z The actual path of deceleration may,
thus, fall below that which would have occurred if the Kuznets
variables alone were operating on the sectoral curve.
The Kuznets hypothesis introduces a powerful element of
potential order into the theory of production.l It is a commonplace
1 Kuznets, op. cit. chapter 1, pp. 1-58. For further discussion of the range
of forces which determine retardation and references to other analyses, see the
author's Process of Economic Growth, Second Edition, Oxford, 1960, pp. 96-108.
The most complete single analysis of the various dimensions of retardation is,
probably, that of A. F. Burns, op. cit. chapter iv, 'Retardation in the Growth of
Industries', pp. 96-173; but see also, W. G. Hoffmann, British Industry 1700-
1950, Part B, III and Part D, III.
2 R. K. Merton, 'Fluctuations in the Rate of Industrial Invention', Quarterly
Journal of Economics (1934-5), pp. 465-8.
J The distinctions I have in mind here are closely related to those drawn by
Warren Weaver in his essay, 'A Quarter Century in the Natural Sciences', Presi-
dent's Review, Annual Report of the Rockefeller Foundation, New York, 1958, pp.
7-27. Weaver distinguishes, in the history of modern science, 'problems of sim-
plicity', in which, 'under a significant range of circumstances, the first quantity
depends wholly upon the second quantity, and not upon a large number of other
factors'; 'problems of disorganized complexity . . . in which the number of
variables is very large, and . . . in which each of the many variables has a
behaviour which is individually erratic, and may be totally unknown. But in spite
of this helter-skelter or unknown behaviour of all the individual variables, the
system as a whole possesses certain orderly and analyzeable average properties' ;
and 'problems of organized complexity •.. which involve dealing simultaneously
with a sizeable number of factors which are interrelated into an organic whole .
A good deal of formal economic theory consists in 'problems of simplicity'; the
bulk of statistical analysis of whole economies or major segments of them consists
in 'problems of disorganized complexity', where an identification of persistent
average behaviour is regarded as sufficient; the concept of take-off and stages-of-
growth analysis represents an effort to get on to the middle ground of 'organized
complexity', in much the way we have succeeded in doing in business cycle
analysis. See, for example, the author's 'Some General Reflections on Capital
Formation and Economic Growth', a chapter in Capital Formation and Economic
Growth, A Conference, National Bureau of Econom1c Research, Princeton, N.J.,
1955, where the case is made for 'organized disaggregation' in growth analysis.
2
Rostow- Leading Sectors and the Take-off
that different sectors will expand or contract at different rates. But
most analyses of the production process are conducted as if these
distinctions in rate are essentially random ; and that it is sufficient
to examine by statistical techniques the average performance of the
economy as a whole, or certain highly aggregated sectors within it.
If, however, we assume that the life of any sector touched by new
production functions will follow a more or less systematic path of
deceleration, it follows that the sectors of an economy can be dis-
tinguished by, as it were, their distance from their technological
origin ; and, as Kuznets demonstrated, the paths of deceleration
may be expressed in the form of equations which specify the pro-
perties of the logistic curves which result. It follows also that the
average performance of an economy can be held constant only by
the introduction of new production functions which will compensate
for the deceleration built into the older sectors.
Sustained economic growth becomes dependent, then, on the
recurrent coming into the capital stock of new technology and new
production functions (including new land or raw material supplies)
which, by imparting rapid growth to a limited number of sectors,
manage to keep the average level of growth relatively steady against
the inevitable erosion imposed by the passage of time on the mo-
mentum of individual sectors.
The Kuznets insight gives the theory of production a shapeliness
- a degree of organization - which requires a close examination
of individual sectors, the links among them, and their economic,
technological, and entrepreneurial history if we are to understand
average aggregate performance and its fluctuations. The assump-
tion that differences in rate of output in the sectors are random, and
capable of meaningful analysis only by means of averaging tech-
niques, at high levels of aggregation, ceases to be permissible.
Spreading Effects: Backward, Lateral, and Forward

Now we must go beyond the Kuznets analysis of retardation.
The effects of a sector touched by new technology and experiencing
a rapid growth phase transcend the sector itself. 1 There are three
1 Although Kuznets did not analyze the spreading effects of leading sectors, his
language at certain points implies a transcendent role for key sectors in their rapid
growth phase (op. cit. pp. 3-4, S, and 10):
'The picture of economic development suffers a curious change as we examine
it first in a rather wide sphere, then in a narrower one. If we take the world from
the end ofthe eighteenth century, there unrolls before us a process of uninterrupted
and seemingly unslackened growth. We observe a ceaseless expansion of produc-
tion and trade, a constant growth in the volume of power used, in the extraction
of raw materials, in the quality and quantity of finished products.
'But if we single out the various nations or the separate branches of industry,
3
separable consequences of the rapid growth stage of such a sector
which give concreteness to our instinctive sense that certain indus-
tries play a disproportionate role in growth, at various historical
intervals, which justifies the notion of a leading sector.
Extending my own previous analysis of this problem (and draw-
ing a bit on Hirschman's vocabulary 1 ) I shall call these effects:
backward, lateral, and forward.
Backward Effects. Depending on its technological character, the
the picture becomes less uniform. Some nations seem to have led the world at
one time, others at another. Some industries were developing most rapidly at the
beginning of the century, others at the end. \Vithin single countries or within
single branches of industries (on a world scale) there has not been uniform,
unretarded growth. Great Britain has relinquished the lead in the economic world
because its own growth, so vigorous through the period 1780-1850, has slackened.
She has been overtaken by rapidly developing Germany and the United States.
The textile industries which had so spectacular a rise toward the close of the
eighteenth and the beginning of the nineteenth century ceded first place to pig
iron, then to steel, while in tum the electrical industries assumed the leadership
in the '80s and '90s.
'The view becomes further variegated if we distinguish the different industries
in their national units. The rapid development of the English textiles came much
earlier than that of the American. The Belgian coal output had reached nearly
stable levels in the beginning of the twentieth century when American and German
coal production were still showing substantial growth. Industries within the limits
of one country frequently show a retardation of development as compared either
with the national industry as a whole or with the same industry on a world-wide
acale . . . .
'As we observe the various industries within a given national system, we see
that the lead in development shifts from one branch to another. The main reason
for this shift seems to be that a rapidly developing industry does not continue its
vigorous growth indefinitely, but slackens its pace after a time, and is overtaken by
industries whose period of rapid development comes later. Within any country
we observe a succession of different branches of activity leading the process of
development, and in each mature industry we notice a conspicuous slackening in
the rate of increase. For example, the vigorous development of copper mining
during the years 1880-1900 in the United States did not continue unabated, nor
did that of steel after 1870-1900, nor railroad construction after 1830-1880. • . .
'In many industries there comes a time when the basic technical conditions are
revolutionized. When such a fundamental change takes place, a new era begins.
In the manufacturing industries it is frequently the period when the machine
process first supplants hand labour to a substantial extent. In the extractive
mdustries, it is either the moment when the sources and use of a commodity are
discovered (petroleum) or when a new and wide application is found for a com-
modity hitherto but little used. As concrete examples of such periods, one may
mention the decade 1780-90 for the cotton industry and pig iron production in
Great Britain, the decade 1860-70 for steel, the decade of the '80s for the copper
industry, the decade of the '30s for anthracite, and of the '40s for bituminous coal
in the United States, the first and second decades of the nineteenth century for
zinc smelting (Belgium-Saxony), the '60s for petroleum (United States), and the
decade of the '70s for lead (United States). In all these cases we observe a revolu-
tionary invention or discovery applied to the industrial process which becomes the
chief method of production. Our generation has been the eye-witness of such
changes in the automobile and radio industries.' Similarly Hoffmann's analyses of
growth, while not focused on the indirect consequences of rapid expansion of
particular sectors, is often couched in language which suggests a transcendent r61e
for particular industries and industrial complexes at particular stages of national
growth.
1 A. 0. Hirschman, The Strategy of Economic Developmnrt, New Haven, 1958,
especially Chapter 6, 'Interdependence and Industrialization', pp. 98-119.
4
Rostow - Leading Sectors and the Take-off
new sector, in its rapid growth phase, will set up requirements for
new inputs of raw materials and machinery which require, in turn,
an extension of modern contriving attitudes and methods. These
inputs may be material as, for example, modern cotton textiles
stimulated the fabrication of textile machinery and steam engines,
and encouraged, over a broad front, improved metallurgy. But the
new induced inputs may be human ; as, for example, cotton textiles
required new types of factory workers, foremen, and industrial
managers. And they may also be institutional : as, for example,
the railways stimulated new arrangements for mobilizing long-term
capital on a large scale from small savers. 1
Lateral Effects. In addition the leading sector will induce
around it a whole set of changes which tend to reinforce the indus-
trialization process on a wider front. Modern industrial activity
surrounded itself with urban men, services, and institutions whose
existence strengthened the foundations for industrialization as an
ongoing process : a disciplined working force organized around the
hierarchies decreed by technique; professional men to handle the
problems of law and relations to the various markets for input and
1 A few examples may illuminate the rille of backward linkages. In John
Lord's partial compilation of the industrial distribution of steam horse-power in
the period 1775-1800, the proportion installed in cotton mills increased as follows:
1775-85, ·7 per cent; 1785-95, 36 per cent; 1795-1800, 49 per cent (Capital and
Steam Power, 1750-1800, London, 1923, p. 175. For further evidence on the
early installation of steam engines in cotton mills, see A. E. Musson and E. Robin-
son, 'The Early Growth of Steam Power', Economic History RetJiew, April1959).
With respect to the American railways, Paul Cootner concludes: 'In 1849,
locomotives accounted for 435,000 horsepower or 35 per cent of the [steam horse-
power] total. In the course of the next decade, the railroads acquired almost 75
per cent of the additional output, and its total rose to 1,943,000 horse-power or 60
per cent of the total. In a very real sense the American engineering industry was a
product of the growth of the railroad .. .' (P. H. Cootner, Transport Innovation
and Economic DetJelopment: The Case of the U.S. Steam Railroads, unpublished
doctoral dissertation, 1953, M.I.T., Cambridge, Mass., chapter iv, derived from
C. D. Daugherty,' An Index of the Installation of Machinery in the United States
since 1850', Harvard Business RetJiew, vi, 1927-8, pp. 283-4.) Between 1850
and 1860, rails rose from 8 per cent of pig iron production in the United States to
22 per cent; and, by 1881, rails were absorbing 76 per cent of steel output, and
34 per cent of total pig iron output. (J. H. Swank, History of the Manufacture of
Iron in All Ages, Phila., 1890, pp. 316, 324, 387, 388.) In the twentieth century,
the automobile has provided the most striking example of backward linkages.
For example, by 1938 the automobile industry in the United States was the largest
single consumer of the output of the following industries, absorbing the indicated
percentages of their output :
% % %
strip steel . 51 alloy steel . . 54 plate glass 69
bars. 34 steel in all forms 17 nickel 29
aheets . . 41 gasoline 90 lead . 35
malleable iron • 53 rubber 80 mohair . 40
(Automobile Facts and Figures, New York, 1939, p. 39. For only slightly lower
proportions for 1958 and contemporary scale of plastics consumption in auto-
mobiles, see Automobile Facts and Figures, Detroit, 1959, p. 60.)
5
products ; urban overhead capital ; institutions of banking and
commerce ; and the construction and service industries required
to meet the needs of those who manned the new industrial struc-
ture. The coming in of a new leading sector thus often transformed
the whole region where it took hold ; as, for example, the cotton
textile revolution transformed Manchester and Boston and the auto-
mobile industry transformed Detroit. Wherever they went, the
railroads induced the transformation of old urban centres or the
creation of new ones, not merely for railroad maintenance but also
to handle the marketing and commercial traffic that the railroads
made possible and profitable. These lateral effects - symbolized
by the acceleration in urbanization during take-off - expanded the
proportion of modern folk in the total population and strengthened
modern attitudes towards the production process far beyond the
narrow impact of the new activity itself and the inputs it directly
induced.
Forward Effects. Finally, modern industrial activity created the
setting in which new industrial activity was induced, either by
cutting the cost of an input to another industry ; by providing a
new product or service whose existence was a challenge to the
enterprising to exploit ; or by creating a bottleneck whose removal
was evidently profitable and which therefore attracted inventive
talent and entrepreneurship. Leading sectors thus set up incentives
and open up possibilities for a wide range of new economic activities,
sometimes, even, setting the stage for the next major leading sector.
The expansion of the cotton textile industry in eighteenth-century
Britain directly and powerfully increased incentives to free cotton
manufacture from its dependence on water power ; and it thus
helped create the setting within which Watt, delicately nurtured by
Boulton, performed a task whose consequences reached far beyond
the cotton textile industry. Even more directly the expansion in
cotton textiles increased the incentive to find ways of transporting
cotton material and finished products more cheaply between port
and factory ; and it thus accelerated the coming of the Manchester-
Liverpool and Boston-Lowell lines, whose prompt success led others
to launch railway lines on a broader economic front. Similarly the
high obsolescence rate of iron rails created a powerful incentive
later in the century to solve the problem of cheap steel which, once
available, in turn created an incentive to improve shipbuilding,
construction, and machine-building techniques. Leading sectors
have had forward effects not only on technology but also on raw
material supply. Railroads thrown out into new territories to exploit
the possibility of rising grain prices have, along the way, found it
6
possible to link with rich mineral resources whose availability, m
turn, set in motion long chains of sectoral expansion.
It is the combination of these three types of spreading effects
from rapidly growing sectors infused by new production functions
which justifies empirically the notion of leading sectors in economic
growth.
III. LEADING SECTORS AND THE DATING OF TAKE-OFF

We come now to the following question: when, along a Kuznets
path of deceleration, is it proper to regard a rapidly growing sector
as a leading sector ? The problem arises because deceleration
normally begins virtually from the moment a new production
function takes hold. 1 An annual series for railroad mileage opened
in a new country might, for example, look like this : 0, 100, 500,
1500, 2000, etc. With the rate of increase under steady decline it
is evident that the correct criterion cannot be, simply, the interval
of maximum rate of growth of the sector itself.
The interval when a new sector can be regarded as an effective
leading sector is a compound of two related elements : first, the
interval when it attains not merely high momentum but a certain
substantial scale ; second, when its backward and lateral spreading
effects pervade the economy over a wide front.
Growth must be viewed, then, not merely in terms of a series of
decelerating individual sectors, but in terms of clusters of sectors,
linked backward by the Leontief chain, which have further lateral
and diffuse consequences for growth. In conception, both back-
ward and lateral effects are quantitative, although difficult to measure
with precision, especially in the early stages of national growth when
data are likely to be scanty. But it does not appear beyond the
range of research and calculation to investigate this matter sys-
tematically.
Thus far, working with historical data, I have sought to use the
full range of quantitative and non-quantitative materials available
to form an approximate judgment as to when the rate and scale of
a leading sector's growth has been such as to induce substantial
further expansion in the economy, also of high momentum, via its
backward and lateral linkages. The take-off dates I have tentatively
1 Where a radically new production function is introduced into an existing
industry - as in the case of the cotton industry of the eighteenth century - a
phase of increasing rate of increase may occur, before retardation sets in. See,
for example, rate of increase of raw cotton imports, 1741-1831, E. Baines, History
of Cotton Manufactures, London, 1835, p. 348.
B 7
offered on other occasions are the product of such investigations of
the total impact of the initial group of leading sectors in the indus-
trialization process of particular economies. It is the coming in of
the first leading sector (or sectors), on a scale and with a momentum
to induce substantial spreading effects, which creates the saltum
economies sometimes execute.
Now a major proviso. It cannot be too strongly emphasized
that the secondary effects of rapid growth in a sector suffused with
new technology are not automatic. They are potential effects which
require active exploitation by a society's men and institutions. In
fact, one measure of a society's ability to move into sustained eco-
nomic growth is its ability to seize upon and to exploit with vigour
all three types of potentiality which flow from a leading sector.
The pre-1914 railroads, for example, had enormous and wide-
spread effect in stimulating growth in Britain, the United States,
France, Germany, Sweden, Japan, Canada, and Russia. But their
effects were narrow, not merely in colonial India, but in China,
whose political and social leadership were not deeply committed
to the modernization process ; and also in relatively comfortable
Argentina, content until the 1930's to enjoy the comparative advan-
tage of production and trade in foodstuffs. Growth is, thus, only
an automatic process if one can assume that a soci~ty will respond
actively and effectively to the potentials for growth available to it.
In the light of this argument the take-off must be defined in two
steps : first, it is the period in the life of an economy when, for the
first time, one or more modern industrial sectors take hold, with
high rates of growth, bringing in not merely new production functions
but backward and lateral spreading effects on a substantial scale ;
second, for a take-off to be said to have occurred, the economy must
demonstrate the capacity to exploit the forward linkages as well, 1
so that new leading sectors emerge as the older ones decelerate.
It is this demonstration of the capacity to shift from one set of
leading sectors to another which distinguished abortive industrial
surges of the transition period from a true take-off. This functional
requirement has determined that the take-off be defined as em-
bracing, say, a 20-year interval. Some such substantial period is
necessary to demonstrate that a society is capable of overcoming
the structural crisis which the initial surge of growth is likely to
1 Theoretically - and in fact - the basis for the subsequent leading sectors
need not lie only in forward linkages generated by the initial leading sectors;
although historically such technological and market connexions have been
extremely important. The new leading sectors might arise from the application
of technology generated independently of the first leading sectors or from the
rapid expansion of output in sectors stimulated by high income elasticity of
demand, as incomes rise.
8
bring and is capable of introducing the changing flow of technology
upon which sustained growth depends.
IV. HOW SELF-SUSTAINED IS SELF-SUSTAINED

GROWTH?
This latter condition relates to a larger issue which has been
posed in discussions of the stages of growth as a whole : How self-
sustained is sustained growth? To what extent is growth truly
automatic after the take-off ?
In one sense, it follows directly from the fact of deceleration that
growth is not automatic. If, on this view, a society is to sustain a
high average rate of growth, it must engage in an endless struggle
against deceleration ; for while the flow of modern science and
technology may offer the potentiality of fending off Ricardian dimin-
ishing returns indefinitely, a society which wishes to exploit this
potentiality must repeat the creative pain of actually introducing
new production functions as the old leading sectors decelerate ; and
it must demonstrate the capacity to exploit with vigour its potential
spreading effects. In this sense sustained growth requires the re-
petition of the take-off process.' It requires the organization around
new technology of new and vigorous management ; new types of
workers ; new types of financing and marketing arrangements. It
requires struggle not against the constraints of the traditional society
- whose economic bonds are decisively broken in the take-off -
but against constraints created in the previous generation or two,
around the peculiar imperatives of an older set of leading sectors
now no longer capable of carrying the economy forward at its
old pace.
These transitions from one set of leading sectors to another are
neither trivial nor abstruse phenomena. We can identify their
consequences in the sweep of modern economic history and on the
contemporary scene. I am inclined to think, for example, that
' If I may quote from the original take-off article (Economic Journal, March
1956, p. 44): 'At any period of time it appears to be true even in a mature and
growing economy that forward momentum is maintained as the result of rapid
expansion in a limited number of primary sectors, whose expansion has significant
external economy and other secondary effects. From this perspective the behaviour
of sectors during the take-off is merely a special version of the growth process in
general; or, put another way, growth proceeds by repeating endlessly, in different
patterns, with different leading sectors, the experience of the take-off. Like the
take-off, long-term growth requires that the society not only generate vast quantities
of capital for depreciation and maintenance, for housing and for a balanced com-
plement of utilities and other overheads, but also a sequence of highly productive
primary sectors, growing rapidly, based on new production functions. Only
thus has the aggregate marginal capital-output ratio been kept low.'
9
when we have fully examined the 1880's, we shall find the wide-
spread deceleration in that decade related in part to the process of
disengagement from the railroad era and to the process of catching
hold fully of the potentialities implicit in the new leading sectors :
steel, electricity, and chemicals. I am reasonably certain that, as
time passes, we shall interpret a significant element in the interwar
sluggishness of Western Europe as due to the process of disengage-
ment from the old leading sectors of the pre-1914 1 and wartime
years and to the rather slow preparation for the age of high mass
consumption which in the 1950's at last fully seized Western Europe,
as the old men of steel and electricity and heavy chemicals have
been superseded by the bright young men of automobiles and
plastics, electronics, and aeronautics. Indeed, Belgium can be re-
garded still as a nation which was permitted by a series of accidental
circumstances to prolong its stay, in reasonable comfort, in the
pre-1914 set of leading sectors and which must re-engage in new
directions if it is to maintain its status and momentum. And it may
not be unhelpful to view the present sluggishness of the American
economy as an interim between the time when the automobile and
all its works has lost the capacity to serve as a leading sector and the
time when new leading sectors take hold. z
There is, then, nothing automatic and easy about the inner
mechanics - the logistics, as it were - of sustained growth.
But in a larger sense, the experience of take-off may, when we
have a longer time perspective, prove to be a definitive transition,
like the loss of innocence. The reason for this judgment is that
behind the whole industrial process lies the acceptance of the
Newtonian outlook, the acceptance of the world of modern science
and technology. Phases of difficulty and even relative stagnation
after the take-off may, of course, occur ; and they may be protracted.
For example, interwar Europe was trapped by a world economic
environment, by its own political and social attitudes, and by its
own economic policies in such a phase of relative stagnation ; but
beneath the surface, even in Britain (as Sayers has demonstrated 3),
the technological and entrepreneurial basis for new leading sectors
and for the new phase of growth which flowered in the 1950's were
1 The statistical evidence on rates and patterns of growth for Germany, Great
Britain, and the United States suggest that the pre-1914 leading sectors may have
begun to lose their capacity to sustain the rate of growth towards the close of the
pre-1914 decade.
• See the author's 'The Problem of Achieving and Maintaining a High Rate
of Economic Growth: An Historian's View', American Economic Review, May
1960, pp. 106-18.
3 R. S. Sayers, 'The Springs of Technical Progress in Britain, 1919-39',
Economic Journal, June 1950.
10
being created. Similarly, in Spain, we have observed since the end
of the Civil War a quite purposeful effort to forestall the further
march of the stages of economic growth. But Spain had come far
enough forward in the process of modernization, at least in the
North, for this effort to fail, notably in the world of modern com-
munications ; that is, there is reason for confidence that, over the
next decade, we shall see a clearly marked resumption in Spanish
economic growth.
In short, on present historical evidence, it appears fair to say
that the larger psychological, social, technological, and institutional
changes required for a take-off are such as to make it unlikely that
we shall see a true lapsing back. Men in societies must continue to
struggle to keep growth moving forward ; and one of the purposes
of this mode of analysis, rooted in leading sectors, is to specify
the nature of that struggle. But the deeper fundamentals required
for an effective take-off appear, on present evidence, sufficiently
powerful to make growth an ongoing process, on long term. Never-
theless, we still have much to learn about the longer spans of the
industrialization process.
V. LINKAGES BETWEEN LEADING SECTORS AND

OTHER FACTORS
Having sought to clarify the role of leading sectors in the take-off,
it is necessary now to relate this mechanism to the other economic
variables which determine whether, when, and how sustained growth
becomes a more or less regular feature of a society's performance.
I shall proceed by considering, in brief notes, some of the link-
ages which exist or do not exist between the leading sectors of the
take-off and certain functional dimensions of growth which are
dealt with elsewhere in this book : population ; agriculture ; tech-
nology; capital formation (including social overhead capital); and
foreign exchange.
(i) Population
The rate of population increase is only obliquely linked to the
leading sectors of take-off ; and it is not linked in any simple or
systematic way. This judgment can be illustrated with respect to
the three directions in which population increase influences the
growth process ; i.e. via the population-resource balance, the
industrial labour supply, and the level of effective demand.
II
With respect to the population-resource balance, a very high
rate of population increase in a setting where good agricultural land
is limited may require excessive diversion of domestic resources and
foreign exchange into food supply and may thus delay or damp the
build-up of social overhead capital, the acquisition of foreign ex-
change for industrial purposes, and the coming of momentum in
modern industrial sectors. But it does not follow that ample supplies
of good land automatically accelerated the coming in of industrial
sectors of high momentum. As the early history of the United
States, Canada, and Argentina suggest, a highly favourable popula-
tion-resource balance, even when accompanied by high rates of
population increase, may make so attractive a continued concentration
on food and raw material production that industrialization may be
delayed. Moreover, we can observe in cases of both weak and
strong population pressure on resources (e.g. the United States of
the 1850's and Russia of the 1890's) that the installation of a large-
scale railway net can trigger the expansion of a cluster of industrial
sectors, if the society is otherwise prepared to respond positively to
the potential stimulating impulses railways provide.
Population pressure also relates, of course, to the problem of
labour supply to industry. Francis Cabot Lowell's most difficult
problem in creating a viable factory system in the Boston area, was
to recruit a working force under circumstances where the alternative
of good land was available to virtually all who wished to farm ; and
some part of the low growth rate of France after 1848 relative to
Germany, is to be explained by the relatively light pressure on land
caused by a damped population increase, and the consequently
lesser flow of rural men to the cities. In most cases, however, the
problem of recruiting an adequate industrial work force has not been
a decisive variable in determining when industrialization takes hold.
In none of the historical cases examined in this book - excepting
perhaps the regional case of New England- did the lack of labour
supply present a direct inhibition on the emergence of leading sectors.
The most general proposition would appear to be that ample
supplies of cheap labour provide a basis for effective competition
with more advanced economies, once the other conditions for an
industrial surge have been established, notably the emergence of
industrial entrepreneurs, an adequate mastery of existing industrial
technology, and aa ability to organize the minimum training required
to create an industrial working force.
The rate of population increase enters into still another dimen-
sion of the growth process through its effects on the size of the
domestic market and the rate of increase of domestic demand. In
12
a setting such as Britain in the second half of the eighteenth century,
where increased social overhead capital was being created and an
increase in agricultural productivity was maintaining or improving
the level of food supply, a rising population can be an important
stimulus from the side of demand to the development of industries
with high income elasticity of demand, at low income levels ; e.g.
beer brewing and textile manufacture. And even when income per
head is not rising, the price elasticity of demand (perhaps made
effective by protective tariffs) can provide a market basis for indus-
trialization, under conditions of rapid population increase. But,
once again, the outcome depends on the relation between population
increase and other variables: there is, evidently, no automatic
market connexion between population increase and the emergence
of leading sectors rooted in an expanding effective domestic demand.
(ii) Agriculture
An increase in agricultural production and productivity plays a
multiple role in economic development which can hardly be over-
estimated. 1
(a) The income above minimum consumption levels incor-
porated in land rents, and usually sterilized or used at low produc-
tivity in traditional or transitional societies, must be diverted into
the modern sector and become part of the basis for building social
overhead capital or (less frequently) for expanding directly modern
industry.
(b) Increased domestic food supplies are needed to meet the
increase in population and accelerated urbanization, which are
almost universal characteristics of the pre-take-off period, without
causing an excessive drain on foreign exchange. And in cases
where resource endowments permit an agricultural surplus, an in-
crease in agricultural productivity can earn the increased foreign
exchange which economic modernization as a whole demands.
(c) Increased agricultural productivity may be required to pro-
vide a basis of increased income per head in order to provide either
an enlarged domestic market for consumer goods or increased
popular taxation without a repression of rural living standards.
More narrowly, developments in agriculture may relate quite
directly to the emergence of leading industrial sectors, in one of the
three following ways.
Agriculture as an Input to a Leading Sector. The gathering
momentum of the British cotton textile industry in the 1780's set
1 See Stages of Economic Growth, pp. 21-4.
13
up a requirement for an enlarged and cheapened supply of raw
cotton, to which the cotton gin and the spread of the plantation
system in the American South was a direct response. This new
source of cheap supply helped permit the British cotton textile
industry to exploit the high price and income elasticity of textile
demand on a world basis and thus to attain the scale and spreading
effects within Britain, which justify its status as the leading sector
in the British take-off.
Agriculture and the Foreign Balance. Agriculture has served as
an indirect input to leading sectors by earning foreign exchange for
industrialization, and by providing a basis on which foreign loans
could be persuasively negotiated, which permitted, in turn, the rapid
construction of railway systems which served as leading sectors in
take-off. American cotton and wheat, Japanese silk, and Russian
wheat played this role in the respective take-offs of the three countries.
Leading Sectors as Inputs to Agriculture. There is a sense in
which the second and decisive decade of the American take-off (the
1850's) and the pre-1914 Russian take-oF. were triggered by the
transport requirements for exploiting the grain fields of both coun-
tries. The first phase of accelerated industrialization was, to a
degree, a by-product of an agricultural revolution. The rising
world grain prices of the 1850's and the late 1890's made the massive
laying of rail lines attractive ; and the direct and indirect conse-
quences of railroadization, pushed both nations into take-off. Rail-
roadization was well under way in the United States in the 1840's
and in Russia in the 1830's; and it was the industrial rather than
the agricultural consequences of railroadization that created the
take-off in each case. Nevertheless, the timing of these industrial
surges related directly to the world grain market position and to
the existence of hitherto unexploited possibilities for increasing
agricultural production.
On a lesser scale and in a less decisive way, agriculture has
contributed to industrialization by inducing new manufactured in-
puts ; e.g. with respect to the German chemical fertilizer industry
and the American farm machinery industry, which achieved an
early precocity in a setting of abundant land and scarce labour.
(iii) Technology
The potential spreading effects which may flow from the achieve-
ment of high momentum in a given industrial sector evidently have
something to do with the technology required in that sector. For
example, cotton textile factories require a different kind of input
I .f.
with wider potential ramifications in introducing industrial know-
how than, say, breweries; railways, than meat-packing plants.•
But the lesson of economic history appears to be that the response
of the society to the potentials of a new sector using modern tech-
nology is probably a more important variable than the nature of
the technology itself. In the fourth quarter of the nineteenth cen-
tury strong impulses towards industrialization flowed from the
introduction of the steam saw and cream separator in Sweden,
where the will and ability to exploit the potential spreading effects
was strong ; while the Argentine response to extensive railroadiza-
tion before 1914 was weak. As Lockwood emphasizes, the organiza-
tion after 1868 of marketing and quality control in the Japanese
silk industry - with low modern technological content- had signi-
ficant general effects in modernizing the economy ; 2 whereas in
China in the early twentieth century, the development of quite
modern cotton textile mills in a few cities had only a damped effect.
It is, of course, difficult sharply to separate those spreading effects
which result from the scale and momentum of a sector from those
attributable to the responsiveness of a society to the potential back-
ward and forward linkages. Nevertheless, wherever power-driven
machinery is involved, the potential exists to learn a wide range of
the fundamental tricks of an industrial society. The incentive to
learn will be greater if the modern industry is substantial, profitable,
and rapidly expanding. But the wide range of leading sectors which
have proved consistent with a take-off suggests that the technology
involved is not, in itself, a decisive variable.
(iv) Capital Formation: Industry and Social Overhead Capital

The sources of capital required for the early stage of industrial-
ization are familiar enough ; and they are dealt with at length in
Chapters 14 and 15. As economic history has come to be re-
examined in the same terms as the problems of contemporary
underdeveloped areas, we have come increasingly to accept these
three propositions. First, a very high proportion of total capital
1 For example, a recent study of the economic history of Argentina suggests
that the acceleration in industrialization from the mid-1930's was due, in part,
to the fact that wider spreading effects flowed from the import-s\.ibstitution in-
dustries that then took hold than from the earlier phase of industrialization, closely
linked to the handling and processing of agricultural products. G. Di Tella,
The Economic History of Argentina, 1914-1933 and M. Zymelman, The Economic
History of Argentina, 1933-1952, unpublished doctoral dissertations, 1959 and
1958, respectively, M.I.T., Cambridge, Mass.
a W. W. Lockwood, The Economic Development of Japan, Princeton, 1954
pp. 338-9.
B2 IS
investment in the preconditions and take-off period must go into
social overhead capital ; and this fact lays a heavy burden on the
role of the state in the early stages of industrialization. Second,
in most but not all of the early industrialization processes the initial
supply of capital is not a crucial bottleneck. The able and willing
industrial entrepreneur can usually scrape up enough to start, if
technology permits a beginning in a small way. And if rapid
increases in output are attained, a high rate of marginal saving can
provide the basis for expansion. Third, the emergence of a rate
of net investment sufficient to outstrip the rate of increase in popu-
lation and to yield a substantial and positive net rate of growth is
at least as much the result of prior growth as a cause of growth.
Both historical and contemporary experience would suggest that
we must look at the investment process in these early stages not
in terms of a once-over shift in the proportion of resources allo-
cated to investment, at the expense of consumption, but as a dynamic
process in which developments in agriculture, social overhead
capital, the foreign balance, and industry interact to produce a rise
in total output under institutional circumstances (including fiscal
policy) which also yield a high marginal rate of savings.I
In this process of interaction, there is a certain evident priority
in time for investment in the build-up of social overhead capital,
including that form which yields men with modern technical
training and outlook.
In the eighteenth century education, in this broad sense, in-
' This dynamic view of the manner in which the rate of capital formation
increases bears on the question of the likely course of living standards during the
take-off. Two sector growth models - like Marx and those derived from Keynes-
ian income analysis -lend themselves to the hypothesis that living standards
are likely to fall as industrialization begins ; that is, there is a tendency to slip
into some version of the notion that what is involved is a kind of once-over shift
in the proportion of income invested, bound to bear harshly on the level of con-
sumption. In fact, the outcome for living standards during the take-off depends
heavily on what happens in the agricultural sector, for an exceedingly high pro-
portion of consumption at likely take-off levels of income consists of food and
fibres. In some cases, an increase in agricultural output faster than the rate of
population increase will depend on large social overhead outlays of long gestation
period; e.g. where massive irrigation projects are involved. Since increased food
and fibre consumption is an important component of such investment, a conflict
must exist between investment and consumption. In general, however, increases
in agricultural productivity have hinged on widespread changes in method, where
the investment involved is of short gestation period and highly productive. It is
to the detailed economics of the agricultural sector that one must look to weigh the
likely upshot for living standards during the take-off, not merely to the large aggre-
gates ; and both theory and history suggest that many current formulations are
excessively pessimistic. More than that, leaving the social overhead problem aside,
a rise in domestic income (which in most poor societies implies a rise in agricultural
productivity and retained income) is an essential market foundation for the spread
of industrialization, unless leading sectors are to be built around the requirements
for military expansion. This issue arises directly in Prof. Tsuru's treatment of
Japan, Chapter 8.
x6
volved neither large resource outlays nor conscious policy : although
Adam Smith, among others, was aware that the character of the
educational system was a significant variable in the growth process.
In pre-1868 Japan, the quiet sending of men abroad proved a signi-
ficant and, in the end, essential and productive form of investment,
although trivial in resource terms. In the American North the
spread of public primary education in the first half of the nineteenth
century was a quite massive factor in the society's modernization ;
and the engineering bias of training at the United States Military
Academy provided a highly useful corps of men who played a
strategic role in the construction of the American transport network.
In Germany, the technical schools represented a wider and more
conscious effort to provide the human capital for industrialization.
In short, the educational process, formal or informal, consciously
created or casually introduced, represents an essential primary
investment required for industrialization.
Similarly, take-off has been preceded, virtually without excep-
tion, by a substantial build-up of transport and other forms of
social overhead capital. The most important functions of such
investment have been, of course, to reduce transport costs within
the economy, to permit resources to be cheaply and efficiently com-
bined, to enlarge the domestic market, and to make possible the
efficient conduct of foreign trade. It is in such a market setting
that the initial leading sectors are likely to emerge.
The problem of capital supply directly to the leading sectors
depends, of course, on what those sectors turn out to be. Where
railways have served as a leading sector government has usually
played an important role : as the guarantor of a minimum rate of
return ; via subsidies ; or by directly financing and managing the
construction and operation of the lines. Broadly speaking, the
degree of government intervention has depended on the length of
the lines and especially on when a rapid increase in traffic could be
expected. 1 Where lines were laid into new areas, which required
a considerable period of development, government intervention or
subsidy on a large scale was generally required to cover this time
interval. Where railway lines linked existing and proximate com-
mercial and industrial centres, private enterprise has been able to
carry a higher proportion of the load.
On the other hand, when the leading sectors have been in, say,
textiles or import substitution industries the initial sums required
1 For the relative role of government in financing various American railways
of differing length, gestation period, and period of production, see P. H. Cootner,
op. cit., especially Chapters II and IV.
could usually be privately raised, and subsequent expansion financed
by plough-back of profits. It was the entrepreneur rather than the
initial pool of capital that was crucial.
One dynamic consequence of the take-off for the capital forma-
tion process deserves notice. Quite aside from the increase in invest-
ment in the take-off industries themselves and in the industries
stimulated by backward linkages, the lateral effects of take-off eased
the problem of capital formation by enlarging urban areas and
shifting the structural balance of the society. In the rural areas of
a traditional or transitional society income above minimum levels
of consumption tended to flow to landowners who often sterilized
a substantial proportion of the surplus in high living or in invest-
ment of low productivity. This tendency, at least as much as
pressure from the peasantry, justified land reform schemes. The
saving habits of urban populations (and the greater ease of taxing
them) made the expansion of the cities an important element in
raising the rate of investment in modern activities. Thus the lateral
as well as the backward linkages which accompany take-off may
assist the raising of the marginal rate of saving and increase the
resources accessible to the modern sector of the economy.
(v) Foreign Exchange

As the analysis thus far has already suggested, foreign trade can
relate to the take-off process in four distinct ~ays.
First, an increase in exports may be essential to acquire the
resources (including the security for capital imports) required for
the build-up of social overhead capital.
Second, an increase in exports may be essential to acquire the
equipment and industrial raw materials necessary to build and
operate the first group of industrial sectors; and, more generally,
to permit the economy to acquire the resources which industrial--
ization demands but which neither its existing industrial skill nor
its natural resources can immediately and economically providt>.
Third, an increase in exports may be essential to provide
economically a margin of food supplies to feed a growing and
increasingly urban population.
Fourth, an expansion of exports in commodities with high price
or income elasticity of demand may provide the foundation for
rapid growth in the leading take-off sector (as in the case of Britain 1 )
or in agricultural or raw material sectors which, m turn, help set
1 For a cogent argument of this point see K. Berrill, 'International Trade
and the Rate of Economic Growth', Economic History Review, April 1960.
18
in motion the industrialization process (the United States, Russia,
Sweden).
The relative importance of these functions has varied with the
situation of each nation, notably with the scale of transport invest-
ment required to create an effective domestic market, with its
endowment of agricultural and raw material resources, and with the
size of its domestic market.
The role of import-substitution industries (generally shielded
by tariffs) deserves a special word. In New England the regional
take-off was based on the emergence of an economical cotton textile
industry, capable of competing in the American market with certain
mass consumption grades of British textile manufactures ; and the
Japanese take-off was based, less exclusively, on this kind of develop-
ment. In France, Germany, and Russia the emergence of such
import-substitution sectors played a substantial but lesser role in
the take-off. In later cases of the twentieth century, take-offs have
been based on import substitution not primarily in textiles but in an
expanding range of metal-fabricated products, for both consumption
and capital formation (e.g. Argentina, Mexico, India).
Such cases of leading sectors rooted in import-substitution do
not contravene the argument that the expansion of foreign trade is
an essential condition for industrialization, in its early stages ; for
new import requirements are created as the leading sectors take
hold, even if the leading sectors lie in the range of import-substitution
industries. The consequences for Argentina of Peron's policy
towards agricultural exports and the scale of assistance required to
India, during its take-off, at a time when its existing exports are
not capable of radical expansion, underline from recent experience
how and why the take-off is likely to increase sharply the total
import requirement. Nevertheless, the case of take-off based on
import substitution leading sectors deserves special analysis ; for
take-offs have been triggered not merely by the vigorous exploitation
of expanding markets for exports, but by a creative reaction to a
crisis in the foreign balance.
VI. SOME CONCLUSIONS

What conclusions emerge from this exploration of linkages ?
1. It is clear that, by one route or another, each of the variables
on our agenda bears on the development process in general and
can help determine what kinds of leading sectors are appropriate
to a given economy's take-off, and when they emerge. The rate
19
of population increase, the population resource balance, the rate
of increase in agricultural output and in agricultural productivity,
the character of technology brought to bear in the leading sectors,
the availability of capital and, notably, capital for social overhead
outlays, and the evolution of foreign trade are, evidently, all relevant
variables in examining the early stage of economic development.
They belong to any system of 'organized complexity' addressed to
the process of economic growth.
2. How these variables relate to one another - the patterns
they may form- can vary greatly. There is no single set of link-
ages that logic or historical experience decrees as universal. Like
biologists we are examining differing arrangements of the building
blocks of growth.
3. The outcome for an economy of any particular set of initial
technical relationships - in the population resource balance, agri-
cultural resources, etc. - appears greatly to depend on the institu-
tional and human response to them. In the vocabulary of The
Process of Economic Growth, the propensities appear more important
than the yields ; that is, an active response to an unpromising
technical economic setting may produce a better result than a
sluggish or complacent response to a more promising setting. No
serious analysis of growth can be confined to its economic elements.
4. Although we are dealing with a system inherently interacting,
there does appear to be a certain rough sequence in the development
process, certain bottlenecks or thresholds which must be overcome
before growth can proceed. The initial requirement appears to be
the emergence of a minimum cadre of modern men ; that is, men
who, for one reason or another, are willing to initiate modern
economic activity and trained to do so. Second, there must begin
a set of changes in agriculture which fulfil the three basic functions
outlined on p. 13 and notably the transfer of some part of the rent
flow into the supply of capital for the creation of social overhead
capital. Third, the internal market must be restructured and the
bases prepared for efficient foreign trade by the build-up of social
overhead capital ; and this has required, in varying degrees, the
leadership (or acquiescence) of the state and thus required important
changes in the substance of politics and political objective. Fourth,
there must emerge increased capacity to earn foreign exchange.
Fifth, in a setting framed by these developments, entrepreneurs
must emerge willing and able to manage the leading sectors and to
respond to the potential spreading effects they set in motion. This
sequence - and notably the sequence of the second, third, and
fourth elements - can be logically defended ; but, in historical
20
cases they sometimes tumbled together in ways difficult to dis-
entangle. The initiating role of modern men and the climactic role
of an adequately large and responsive cadre of industrial entre-
preneurs are easier to discern in the historical cases.
5. As the leading sectors take hold and their potential spreading
effects are exploited, the other elements in the growth process
remain important. A growing society requires an expanding flow
of modern men, agricultural products, social overhead capital, and
foreign exchange - not merely an initial stock. But the key to con-
tinuing growth - as to its initiation - is the spreading out to more
and more sectors of the best relevant technology that the existing
world pool can provide, and the endless expansion of the pool itself.
As I have argued elsewhere, the fundamental distinction between
the economy of a traditional or transitional society and a modern
growing economy lies in whether industrial innovation has or has
not become a more or less regular flow. 1 Traditional societies were,
evidently, capable of phases of growth in population, income, and,
almost certainly in income per head ; but their expansion phases
came to a halt, and generally gave way to a self-reinforcing process
of decline. These growth phases were marked by the emergence
of men concerned with and capable of handling complex production
and trade processes ; by improvements in agriculture and the exten-
sion of acreage ; by the expansion of social overhead capital and
of both domestic and foreign trade. Although the proximate cause
of the down-turns has varied widely, the fundamental cause appears
an inability to break through the ceiling in productivity imposed
by pre-Newtonian science and technology. The story of some
traditional societies contains all the preconditions for take-off except
a flow of modern industrial technology into their capital stock
sufficient to fend off Ricardian diminishing returns to land and to
cope with the Malthusian propensities of the people. Industrial-
ization and modern economic growth can be viewed, therefore, as
depending in the end on the systematic and progressive application
of modern science and technology to the economy. Although a vast
series of technical and societal changes must occur before this capacity
becomes built into a society's outlook, habits, and institutions, the
take-off is the interval when these deeper changes yield their result ;
and the emergence of leading sectors is the form this result assumes.
1 The Stages of Economic Growth, Cambridge and New York, 1960, pp. 4-6;
and ' Industrialization and Economic Growth', paper prepared for the First Inter-
national Congress of Economic History, Stockholm, August 1960. In this context
industrialization includes, of course, the application of techniques, rooted in
modem technology, to agricultural and raw material production and processing,
as well as to industrial fabrication, in the narrow sense.
:n
Chapter 2
NOTES ON THE TAKE-OFF

BY
SIMON KUZNETS
Harvard University
I. REQUIREMENTS FOR A THEORY OF STAGES

THE sequence of stages, of which the take-off is one, is offered by
Professor Rostow as a scheme for viewing and interpreting modern
economic development. It is, therefore, a gloss on the major dis-
tinction between modern and non-modern (traditional) types of
growth ; and I regret that in offering his scheme, Professor Rostow
does not spell out the characteristics that are inherent in modern
economic growth and distinguish it from the traditional and other
types. Many come easily to mind : a high and sustained rate of
increase in real product per capita, accompanied in most cases by a
high and sustained rate of increase in population ; major shifts in
the industrial structure of product and labour force, and in the
location of the population, commonly referred to as industrialization
and urbanization ; changes in the organizational units under whose
auspices and guidance economic activity takes place ; a rise in the
proportion of capital formation to national product ; shifts in the
structure of consumer expenditures, accompanying urbanization and
higher income per capita ; changes in the character and magnitudes
of international economic flows ; and others that could be added.
Behind all this is the increasing stock of useful knowledge derived
from modern science, and the capacity of society, under the spur
of modern ideology, to evolve institutions which permit a greater
exploitation of the growth potential provided by that increasing
stock of knowledge.
The distinction between modern economic growth and other
types and our concentration on the former are justified by a basic
working assumption - that we can study the characteristics of such
growth most effectively if it is not merged with the evolution of
economies before the eighteenth century or with the growth of such
parts of the world as have not yet succeeded in tapping the sources
of modern economic growth. If we assume that modern economic
22
Kuznets- Notes on the Take-off
growth is different from other types and affected by new and dif-
ferent factors, we would only confuse matters and set ourselves an
impossible task by treating the growth of Germany in the second
half of the nineteenth century and that of France in the thirteenth
century, for example, as members of the same family of economic
growth processes. In short, while allowing for historical con-
tinuity, we assume that modern economic growth is something
quite new; and in order to observe it clearly, perceive its mechanism,
and understand its driving forces, we must distinguish it from other
types and study it by itself.
Distinguishing stages within modern economic growth is an
operation similar to that which distinguishes modern from non-
modern economic growth ; and the basic working assumption that
justifies the former parallels the one that justifies the latter. By
claiming that stage A is distinct from stage B, we are saying that
the characteristics commonly found in stage A are so distinct from
those in stage B that it is methodologically improper to mix the
two indiscriminately. Stages within an economic epoch or some
such general construct, like the constructs themselves, are a classi-
ficatory device, governed by the working assumption that the
generality of observation and invariance of analytical relations
secured thereby are maximized.
An adequate test of such a working assumption comes at the
end, not at the beginning, of a long period of study. But this does
not mean that we need take seriously every suggestion of stages or
other dividing lines within the sequence of modern economic growth
- particularly if we recognize the major differences between it and
non-modern growth. For if these differences are recognized, and
the cumulative character of growth is taken as a matter of definition,
it is all too easy to suggest 'stages'. Since modern economic growth
presumably has roots in the past, a non-modern economy stage and
a stage of preparation are clearly suggested : and we can easily
divide the latter into several 'phases'- initial preparatory phase;
middle preparatory phase ; final preparatory phase. Then, since,
again by definition, modern economic growth is not attained in a
few years, we can discuss the early or emergence period, the middle
stage, maturity (biological analogy), post-maturity, and so on. The
very ease with which separate segments can be distinguished in the
historical movement from non-modern to modern economic growth
and within the long span of the latter should warn us that any
sequence of stages, even if offered as a suggestive rather than a
substantive scheme, must meet some minimum requirements - if
it is to be taken seriously.
23
The following requirements are relevant.
(a) A given stage must display empirically testable character-
istics, common to all or to an important group of units experiencing
modern economic growth. This means the specification of modern
economic growth ; identification of the units that have manifested
such growth ; and establishment of empirically testable character-
istics claimed to be common to these units at the given stage.
(b) The characteristics of a given stage must be distinctive in
that, not necessarily singly but in combination, they are unique to
that stage. Mere precedence (or succession) in time does not
suffice: given the unidirectional character of growth (by definition),
any period is necessarily characterized by larger economic magni-
tudes than earlier ones and by the structural shifts that accompany
such larger magnitudes (particularly a rise in per capita income).
Stages are presumably something more than successive ordinates
in the steadily climbing curve of growth. They are segments of
that curve, with properties so distinct that separate study of each
segment seems warranted.
(c) The analytical relation to the preceding stage must be indi-
cated. This naturally involves more than saying that the preceding
stage is one of preparation for the given. More meaningfully, we
need identification (again in empirically testable terms) of the major
processes in the preceding stage that complete it and, with the usual
qualifications for exogenous factors, make the next (our given)
stage highly probable. Optimally, this would permit us to diagnose
the preceding stage before the given stage is upon us, and thus would
impart predictive value to the whole sequence. But even short of
this difficult aim, it means specifying the minimum that must happen
in the preceding stage to allow the given stage to emerge.
(d) The analytical relation to the succeeding stage must be
indicated. Here too a clear notion (again in empirically testable
terms) must be given of the occurrences in the given stage that
bring it to a close - aside from mere passage of time. Optimally,
such knowledge would permit us to predict, before the given stage
is finished, how long it still has to run. But even short of such
precision, we should know the essentials that occur during a given
stage to bring about its end and clear the ground for the next
stage.
(e) These four requirements relate to the common and dis-
tinctive characteristics of a given stage, viewed as one in an analytical
(and chronological) sequence that links successive stages. However,
these common and distinctive characteristics may differ among
important groups of units undergoing modern economic growth.
24
Consequently, the fifth requirement is for a clear indication of the
universe for which the generality of common and distinctive charac-
teristics is claimed ; and for which the analytical relations of a
given stage with the preceding and succeeding ones are· being
formulated.
II. CHARACTERISTICS OF THE TAKE-OFF

Against the background of the requirements just stated, we may
consider Professor Rostow's discussion of the common and dis-
tinctive characteristics of the take-off stage, and the relations between
it and the contiguous stages.
The three common characteristics explicitly listed by Professor
Rostow are:
'(a) a rise in the rate of productive investment from (say) 5 per
cent or less to over 10 per cent of national income (or net
national product) ;
'(b) the development of one or more substantial manufacturing
sectors with a high rate of growth ;
' (c) the existence or quick emergence of a political, social and
institutional framework which exploits the impulses to ex-
pansion in the modern sector and the potential external
economy effects of the take-off and gives to growth an
ongoing character.' 1
To these we may add three more characteristics, implicit or
explicit in Professor Rostow's discussion.
(d) A marked rise in the rate of growth of national income (or
net national product) and of per capita income, in constant prices.
This follows directly from the rise in the proportion of investment
listed under (a), and Professor Rostow's discussion of the 'Prima
Facie Case' (ibid. p. 34) which assumes no rise in the marginal
capital-output ratio. The rate of growth of real income per capita
rises from close to zero to about 2 per cent per year.
(e) The leading sectors in the take-off (apparently a particular-
ization of the manufacturing sector in (b) SK) have ranged historically
'from cotton textiles, through heavy-industry complexes based on
railroads and military end-products, to timber, pulp, dairy products,
and finally a wide variety of consumer goods' (ibid. p. 46). But
in general these sectors were leading because of the enlarged demand
for their products brought about by appropriate transfers of income,
capital imports, etc. ; because of their new production functions ;
1 'The Take-Off into Self-sustained Growth', The Economic Journal, Vol.
LXVI, no. 261, March 1956, p. 32 (referred to henceforth as Rostow-1).
25
because of their profitability and inducement to entrepreneurs to
plough back profits ; and because of the expansion and technical
transformation in other parts of the economy effected by their
expanswn.
(f) The take-off is a relatively short period : in many of the
countries identified by Professor Rostow appreciably less than thirty
years, and in most of these close to two decades.
How distinctive are these characteristics ? Do they occur in
combination only in the take-off stage and not in any other stage
- particularly the preceding transition or pre-conditions stage and
the succeeding self-sustained growth or drive to maturity stage?
Professor Rostow is not explicit on this point. Presumably the
transition stage does not see a rise in the investment proportion
from 5 to 10 per cent or more. Yet much of what Professor Rostow
would attribute to the take-off has already occurred in the pre-
conditions stage. 1 Thus, the agricultural revolution assigned to the
pre-conditions stage 'must supply expanded food, expanded markets,
and an expanded supply of loanable funds to the modern sector'
(Rostow-II, p. 24); much of social overhead capital is already
invested in transport and other outlays - in the pre-conditions
stage (ibid. p. 24); and, in general, 'the essence of the transition
can be described legitimately as a rise in the rate of investment to
a level which regularly, substantially, and perceptibly outstrips popu-
lation growth' (ibid. p. 21 ). In short, one wonders whether the
three specifically stated characteristics of take-off could not be found
in the pre-conditions stage - unless explicit qualifications are
attached, e.g. that the investment proportion in that earlier stage
must stay below 5 per cent ; that the marked agricultural revolution
does not immediately call for, and in fact is possible without, a
contemporaneous rapid growth in some manufacturing sector ; and
that investment in overhead capital in transport, etc., is not neces-
sarily accompanied by a rapid growth of one or more modern
manufacturing sectors. Finally, one should note that characteristic
(c) of the take-off mentions both the existence and the quick emergence
of the political, social, and institutional framework favourable to
exploiting 'the impulses to expansion in the modern sector' as
admissible alternatives. But if that framework already exists at th<!
beginning of the take-off, its emergence must be assigned to the
pre-conditions stage. How then does the latter differ from the
take-off in which the framework emerges ?
The line of division between the take-off and the following
1 The Stages of Economic Growth (Cambridge, 1960), Chapter 3, pp. 17-35
(referred to henceforth as Rostow-11).
26
stage of self-sustained growth or drive to maturity is also blurred.
Presumably the latter stage is marked by the existence of the proper
social and institutional framework - which also exists during the
take-off. Presumably this later stage also witnesses the rapid growth
of one or more modern manufacturing sectors. Indeed, the only
characteristics that are distinctly appropriate to the take-off and not
to the next stage are the rise in the rate of productive investment
to over 10 per cent of national income or net national product ; and
the implicit rise in the rate of growth of total and per capita income.
But are we to assume that both the rate of investment and the rate
of growth of product (total and per capita) level off at the high values
attained at the end of the take-off stage ? And is it this levelling
off, the cessation of the rise in the rate of investment and in the
rate of growth, that terminates the take-off stage? No explicit
statement is made by Professor Rostow ; Rostow-II, Chapter 5,
contains a list of dates when 'maturity' was reached in a number
of countries but little discussion of what took place between the end
of the take-off stage and the terminal point of the next stage.
Given this fuzziness in delimiting the take-off stage and in formu-
lating its distinctive characteristics; given the distinctiveness only
in the statistical level of the rate of productive investment (and the
implicit rate of growth), there is no solid ground upon which to
discuss Professor Rostow's view of the analytical relation between
the take-off stage and the preceding and succeeding stages. At any
rate, the brief comments that can be made within the scope of this
paper will follow the review of the empirical evidence.
To what universe do the common characteristics claimed for the
take-off period apply ? In his most recent presentation, Professor
Rostow distinguishes the 'general' case of a traditional society from
that of the small group of nations (the United States, Australia,
New Zealand, Canada, and 'perhaps a few others') 'born free'.
(Rostow-11, pp. 6 and 17-18.) The distinction is particularly im-
portant in the analysis of the pre-conditions stage, and Professor
Rostow does not indicate whether the characteristics of the take-off
stage in the originally traditional societies are different from those
in the countries 'born free'. The distinction made in the discussion
of pre-conditions is not repeated in the discussion of the take-off;
unless the qualification about the rates of investment higher than
5 per cent in some countries (Canada and Argentina) before the
take-off stage (necessitated by heavy overhead social capital needs,
see Rostow-11, p. 8) can be interpreted as such. But this qualifica-
tion does not stress the distinction between traditional and free-born
countries : social overhead capital needs were presumably heavy in
27
Russia and for that matter, on a relative scale, in Switzerland. We
may therefore infer that Professor Rostow, who includes the dates
of the take-off period for both types of economy in the same list,
assumes that the characteristics of the take-off are broadly the same
for all countries undergoing modern economic growth.
III. EMPIRICAL EVIDENCE ON THE TAKE-OFF STAGE

In dealing with the empirical evidence on the take-off, I am
impeded by three difficulties. First, much of the specific evidence
on the take-off period will presumably be presented in the individual
country papers ; and I am neither competent to assemble it nor
eager to duplicate it. Second, quantitative evidence, and much of
it must by the nature of the case be quantitative, is not available
for some of the take-off periods suggested by Professor Rostow.
Third, as already indicated, Professor Rostow's discussion does not
yield a description of take-off characteristics sufficiently specific to
define the relevant empirical evidence.
Thus I do not know what 'a political, social, and institutional
framework which exploits the impulses to expansion in the modern
sector, etc.' is ; or how to identify such a framework except by
hindsight and conjecture ; or how to specify the empirical evidence
that would have to be brought to bear to ascertain whether such a
framework is 'in existence or in quick emergence'. It seems to
me that the passage just cited defines these social phenomena as a
complex that produces the effect Professor Rostow wishes to explain ;
and then he treats this definition as if it were a meaningful identi-
fication.
It is easier to define the characteristic that specifies 'the develop-
ment of one or more substantial manufacturing sectors with a high
rate of growth' once high is explained. But a review of empirical
evidence on this point holds little interest if I am correct in assum-
ing that the major distinctive characteristic of the take-off is a
marked rise in the rate of growth of per capita and hence of total
income. If the rate of growth does accelerate, some sectors are
bound to grow more rapidly than others, as has been demonstrated
in Arthur F. Burns' and my own work on production trends-
partly in response to the differential impact of technological oppor-
tunities (including raw material supplies), and partly in response
to the different income elasticities of the demand for various goods.
Under these conditions, one or more manufacturing sectors, and
one or more sectors of agriculture, transportation, services, etc., are
28
bound to show high rates of growth. The pertinent question is
why manufacturing - rather than agriculture, transport, or any
other rapidly growing industry - should be specified as the leading
sector.
In considering this question, the two constitutive characteristics
of a leading sector must be kept in mind. First, sector A leads,
rather than follows, if it moves not in response to sectors B, C, D,
etc. within the country, but under the impact of factors which,
relative to the given national economy, may be considered auto-
nomous. These may be technological changes embodying some
new inventions ; changes in the resource base resulting trom new
discoveries ; changes in foreign demand, which, being external to
the given economy, may be considered autonomous ; and breaks
in social structure (political revolution, agrarian reform, and the
like), which could be viewed as changes exogenous to economic
processes proper. The point to be noted is that the autonomous
nature of this characteristic, relative to the given national economy,
rests upon the origin of the stimulus, not upon the scope of the
response. The latter may depend largely upon many other factors
besides the stimulus, factors that are part and parcel of a given
economy and society.
This brings us to the second constitutive characteristic of a lead-
ing sector, the magnitude of its effects; or more specifically, the
magnitude of its contribution to a country's economic growth.
Sector A may be leading in the sense of responding to an autonomous
stimulus, but unless its contribution to the country's economic
growth is substantial, it does not 'lead' the country's economic
growth - no matter how high its own rate of growth. After all,
a thousandfold rise in the production of plastic hula hoops over a
decade does not make it a leading industry.
How to set the lower limit to a significant contribution is a ques-
tion that can be answered only in terms of empirical, quantitative
analysis. We must distinguish the direct contribution - what the
autonomous growth of sector A, the result of its weight in the
economy multiplied by its percentage rate of growth, adds to the
growth of the economy, total and per capita; from what sector A
contributes indirectly, through the effects of backward and forward
linkages with sectors B, C, D, .. ; and, finally, from what it may
contribute, again indirectly, through its effects on social structure
and qualities of the population (e.g. urbanization, organizational
form of the economic unit, education, and the like), which in turn
affect a country's economic growth in a variety of ways. The
magnitude and particularly the timing of these direct and indirect
29
effects differ. A sector's direct and indirect contributions in a given
period may be quite small - even though its own percentage rate
of growth is high and the novelty of its technology makes it the
cynosure of the eyes of its contemporaries and of latter-day his-
torians ; whereas in a later period its contributions may be far
greater - even though its rate of growth has declined and the
bloom of its novelty faded.
The establishment of these leadership characteristics of sectors
- both in terms of the autonomous character of the impulse and
the timing and magnitude of their direct and indirect contributions
to a country's economic growth - is thus a task that involves
intensive study, not merely of the leading sectors proper but also of
those affected by them, extending into the quantitative framework
of the whole economy. Leadership of sectors, or any other element
in the acceleration of the rate of growth can be established only
after careful analysis of the particular circumstances preceding and
during the period of acceleration- country by country, and by the
application of statistical, theoretical, and other tools to the historical
evidence. This type of analysis, lacking in Professor Rostow's dis-
cussion, will, I hope, be provided in the country papers ; it is beyond
my powers here.
I can, therefore, turn to the purely statistical characteristics
claimed for the take-off stage. But even here I find it difficult to
specify Professor Rostow's meaning. I assume from the context
that 'rate of productive investment' refers to net rather than gross
capital formation ; and that the adjective 'productive' means the
inclusion of all components of the presently accepted definition of
capital formation. But does he mean net domestic capital formation,
i.e. all net additions to the stock of material reproducible capital
within the country, whether financed by domestic savings or by
capital imports (and excluding capital exports, when such occur);
or net national capital formation (usually referred to as net capital
formation without further qualification), i.e. only net additions to
reproducible stock within the country financed by domestic savings
plus capital exports, if any ? Professor Rostow emphasizes changes
within the country (under characteristic (c) above) that should help
mobilize domestic savings, and much of his discussion is in terms
of maximizing domestic savings, i.e. in terms of the net national
capital formation proportion to national income. This emphasis is
corroborated by the use of national income as denominator, since
the proper denominator for the net domestic capital formation is
net domestic product ; although for most countries the two totals
are statistically close. Yet in the analysis of capital-output relations,
JO
the appropriate ratio, particularly for a capital importing country,
is that of net domestic capital formation to net domestic product.
Professor Rostow cites long-term data for Sweden and Canada, and
for one he uses the domestic capital formation proportion and for
the other the national capital formation proportion. There is the
further question whether the ratios of capital formation to national
product should be based on totals in current or in constant prices :
the former are more appropriate to the view of the proportion as a
savings rate ; the latter to the view of the proportion as affecting
output.
Before presenting the statistical results, I shall attempt to resolve
these doubts, and define the measures more precisely. For a capital
exporting country we may use the ratio of net national capital forma-
tion to national income or net national product ; and for a capital
importing country we shoufd use both net national and net domestic
capital formation, as proportions of net national and net domestic
product, respectively. Further, we shall use ratios based on current
price totals only, partly because the available price indexes are crude
and partly because in most cases the differences in long-term move-
ment between the capital formation proportions based on current
and on constant price totals are not appreciable., We can then ask
whether in the periods of take-off dated by Professor Rostow the
rises in these capital formation proportions are of the magnitude he
suggests. I shall deal here with four countries, all included in
Professor Rostow' s 'general' category : (a) Great Britain, (b) Ger-
many, (c) Sweden, (d) Japan.
(a) For Great Britain Phyllis Deane has recently completed a
major study. Her results indicate a net national capital formation
proportion for England and Wales in 1770-1800, a period close to
Professor Rostow's dates of 1783-1802, of about 6·5 per cent -
compared with about 5 per cent indicated by Gregory King at the
end of the eighteenth century. Miss Deane's estimates, which
thenceforth apply to the United Kingdom, suggest a climb to about
9 per cent for the period from the 1820's to the 1850's, and a further
rise to a pre-World War I peak of 14 per cent in the 1905-14 decade.
The picture is thus one of a slow and relatively steady, rather than
sudden and rapid acceleration. The rate of growth of total national
income (in constant prices) follows the same general pattern. For
England and Wales, Miss Deane's estimates suggest an annual rate
of growth for 1770-1800 of 1· 5 per cent, compared with 0·9 per cent
for 1740-70 and 0·3 per cent for 1700-40. Then the rate of growth
for the United Kingdom rises to well over 2·5 per cent per year in
the last quarter of the nineteenth century.
31
(b) For Germany (the territory of the German Reich in 1913)
we have the studies by Professor Walther Hoffmann of net capital
formation and by Professors Hoffmann and J. Heinz Muller of
national income- both covering the period back to 1851. For
1850-73, the period dated by Professor Rostow as the take-off, we
have the following proportions of net capital formation to national
income (in current market prices): about 8·5 per cent for the
1850's, 9·75 per cent for the 1860's; 13·5 per cent for the 1870's.
The rise is appreciable, but is due in part to the favourable business
cycle of the 1870's; and in the 1830's the net capital formation
proportion is still below 14 per cent. Then the proportion con-
tinues to rise to a peak of 16·5 per cent in 1901-13. Here the net
capital formation proportion increases only about 60 per cent in the
twenty-odd years dated as the take-off, and doubles only after a
steady and sustained climb for about six decades. This steady rise
in the net capital formation proportion is accompanied by a relatively
stable rate of growth of net national product- about 2·5 per cent
per year for the entire period, somewhat more in the decades from
1851 to 1880, and somewhat less in the decades from 1880 to 1913.
(c) For Sweden the most recent estimates, by Dr. Osten Johans-
son, currently at the University of Stockholm, are a thorough
revision of the older series which I used in my earlier paper and which
Professor Rostow cites in his discussion. The major correction was
for the understatement of construction in the early decades.
The directly available estimates yield a gross domestic capital
formation proportion (to gross domestic product) of somewhat over
9 per cent in 1861-70. On the assumption of a ratio of capital
consumption to gross domestic capital formation of about 0·4, the
net domestic capital formation proportion is almost 6 per cent. The
gross domestic capital formation proportion climbs, somewhat un-
steadily, to 13 ·5 per cent in 1901-10, and the implied net capital
formation proportion to over 8 per cent. The rise continues to a
peak in 1941-50 of 21 per cent gross, and roughly 13 per cent net.
In short, the net domestic capital formation proportion rises gradually,
and doubles only after almost eight decades, not just two or three.
The national capital formation proportions present about the
same picture, except that the steady climb begins after the 1880's.
From an average of about 9·5 per cent gross in 1861-80, the gross
capital formation proportion rises to 11 per cent in 1891-1910, to
over 14 per cent in 1911-20, and to 20·5 per cent in 1941-50. The
corresponding net national capital formation proportion would be
somewhat less than 6 per cent in 1861-90, almost 7 per cent in 1891-
1910, and slightly over 12 per cent in 1941-50.
32
The rate of growth of total product is also gradual. Although it
ranges from 1·8 to 5·4 per cent per year for decadal periods (the
high rate being for 1941-50), the average for 1871-80 (Professor
Rostow's 'take-off' dates are 1868-90) is about 2·3 per cent per
year, compared with 3·2 per cent for the 1860's and 3·4 per cent for
1891-1910. The averages for the longer periods suggest a per-
ceptible although gradual acceleration in the rate of growth, from
2·6 per cent for 1861-90 to 2·9 per cent for 1891-1920, to 3·8 per
cent for 1921-50.
(d) For Japan the recent, and only acceptable, estimates of capital
formation by Professor Henry Rosovsky of the University of Cali-
fornia, cover a period beginning in 1888 ; and therefore include
only part of 1878-1900, the take-off period dated by Professor
Rostow. The gross domestic capital formation proportion excluding
military investments (which were large in Japan) was between 10
and 11 per cent in 1888-97 ; and the gross national proportion was
slightly higher. On the assumption that capital consumption was
about 0·4 of gross domestic capital formation, the corresponding net
capital formation proportions were between 6 and 7 per cent ; and
there is no ground for assuming that they were significantly lower
in the preceding decade. Subsequently, the domestic capital forma-
tion proportion fluctuated around the same level until World War I;
and it was only after that war that the domestic capital formation
proportion rose significantly- to between 16 and 17 per cent on
a gross basis and to between 10 and 11 per cent on a net basis. The
national capital formation proportion moved somewhat more errati-
cally, with substantial capital imports in 1900-10 and 1920-30; but
the broad secular trend was the same. Not until four or five decades
later were the capital formation proportions twice their initial size.
There is no evidence of a perceptible acceleration in the rate of
growth of either total or per capita income. From 1878 to 1902
the average rate of growth of total income was about 4·9 per cent
per year; from 1893 to 1912 it was 3·2 per cent; from 1908 to
1932, 4·9 per cent; from 1918 to 1942, 4·9 per cent. 1 The average
rate of growth of income per member of the gainfully occupied
population for the same four long periods was: 1878-1902-
3·7 per cent per year; 1893-1917- 2·6 per cent; 1908-32-
4·3 per cent; 1918-42- 4·0 per cent.
Two or three more of the countries for which Professor Rostow
suggests tentative dates of the take-off period could be added here.
1 These and the following rates are from Kazushi Ohkawa and others, The
Growth Rate of the Japanese Economy since 1878, Tokyo, 1957, Table 6, p. 21,
and Table 7, p. 24.
33
But the presentation of the full statistical evidence, even for a few
countries, would far transcend the limits of this paper ; and sum-
maries like those above are barely adequate. We now have long-
term records on capital formation and national product for twelve
countries, excluding those in the Communist Bloc ; and a detailed
discussion of these is now in preparation. 1 All I can do here is
summarize the evidence for the few countries in Professor Rostow's
list and consider its bearing on his assumptions concerning the
movement of the capital investment proportions, and the implicit
movement of total product during what he defines as the take-off
period. Unfortunately, I do not now have adequate estimates for
France, Belgium, and Russia, additional countries in Professor
Rostow's list.
(i) In a number of countries, the net capital formation propor-
tions, particularly domestic, at the beginning of the dated take-off
periods are substantially higher than '5 per cent or less'. This is
certainly true of Germany: of the United States, where the esti-
mates by Professor Robert Gallman for the 1840's and the 1850's
suggest a gross domestic capital formation proportion of between
15 and 20 per cent; of Canada where Dr. 0. ]. Firestone's estimates
indicate gross domestic capital formation proportions of 15 per cent
in 1870, 15·5 per cent in 1890, and 13·5 per cent in 1900. Also, in
so far as net rates of 6 to 7 per cent may be considered significantly
higher than those of '5 per cent or less', this is true of Great Britain,
Sweden, and Japan.
(ii) In no case does the net domestic capital formation propor-
tion even approach twice its initial size in the two or three decades
dated as the take-off; and while the movements of the net national
capital formation proportions are more erratic, they too fall far
short of doubling during Professor Rostow's take-off periods.
(iii) There is no evidence to support the assumption of a mar-
ginal net domestic (or national) capital-output ratio of 3·5 to 1.
The ratio is neither the same for different countries, nor stable
over time. Thus for the United Kingdom, the marginal net national
capital-output ratio at the beginning of the nineteenth century was
about 3 (it was about 4 for England and Wales in 1770-1800, if
the crude data can be trusted). In Germany in the 1850's the net
national capital-output ratio was between 3 and 3·5 ; in Sweden
in 1881-90, on a gross basis, the ratio was between 3 and 4, but on
1 It will appear as Paper VI in the series being published in Economic Develop-
ment and Cultural Change. Paper V, dealing with the international comparison of
capital formation proportions for recent, post-World War II years, appeared in
July 1960 (Vol. VIII, No. 4, Part II). Since the detailed statistical data and
sources are cited in these two papers, I decided not to repeat them here.
34
a net basis it would have been between 2 and 3·5; in Japan in
1888-97, the gross domestic capital-output ratio was about 3, and
the net somewhat less than 2. Moreover, in many countries the
net capital-output ratios show a marked trend over time. For
example, in the United Kingdom, the marginal net national capital-
output ratio, which was 3 in the first part of the nineteenth century,
rose to almost 6 in the period from 1880-89 to 1910-13; and even
the net domestic capital-output ratio rose from about 3 before the
middle of the nineteenth century to 3·7 in the three decades before
World War I. The net national capital-output ratio for Germany
rose from between 3 and 3·5 in the 1850's to about 5·5 for the
decades from 1891 to 1913.
(iv) In no case do we find during the take-off periods the
acceleration in the rate of growth of total national product implied
in Professor Rostow's assumptions of a doubling (or more) in the
net capital formation proportion and of a constant marginal capital-
output ratio. The capital formation proportions, if they rise, climb
at a sustained rate and for a much longer period than the two or
three decades of take-off. Rates of growth of total product, if they
show any long-term acceleration (and those for only a few countries
do within the period beginning with the take-off stage) increase
slowly - and certainly over a longer period than the short span of
the take-off.
The summary above relates to a few countries, none of which is
in the Communist Bloc, and is based upon crude estimates. But
the data are firm enough to suggest rough orders of magnitude ;
and they bear directly upon what seem to be the essential statistical
characteristics of the take-off period as Professor Rostow identifies
them. Unless I have completely misunderstood Professor Rostow's
definition of take-off and its statistical characteristics, I can only
conclude that the available evidence lends no support to Professor
Rostow's suggestions.
IV. DISTINCTIVENESS AND GENERALITY OF THE

TAKE-OFF STAGE
The failure of aggregative data to reveal the characteristics
claimed by Professor Rostow as common to the take-off stage, at
least in countries that did not experience the drastic and forced
transformation associated with Communist revolutions, is disturb-
ing. It casts serious doubt on the validity of the definition of the
'take-off' as a generally occurring stage of modern economic growth,
35
distinct from what Professor Rostow calls the 'pre-conditions' or
'transition' stage preceding it and the 'self-sustained' growth stage
following it. The doubt is only reinforced by some more general
questions concerning Professor Rostow's overall scheme. These
questions can be discussed under three heads: (a) the meaning of
pre-conditions ; (b) effects of the wide diversity of historical heritage
of pre-modern economies on the characteristics of their transition
to modern economic growth; (c) the meaning of self-sustained
growth.
(a) Professor Rostow's discussion of the pre-conditions stage
treats it, and indeed much of the sequence, as analogous to a
mechanical, or more specifically, an aeronautical process- despite
his several references to economic growth as essentially 'biological'.
The picture suggested is that of the sequence involved in putting
an aeroplane (or a glider) into flight. First there is the checking
and fuelling, providing the pre-conditions ; then there is the rela-
tively brief take-off, during which the driving force is accelerated
to produce the upward movement ; and finally there is the levelling-
off into self-sustained flight. This analogy, perhaps unfair to
Professor Rostow's stage sequence, is useful because it pinpoints
the basic question in connexion with the whole pre-conditions
stage : can such pre-conditions be created without at the same
time producing changes throughout the economy that, in and of
themselves, initiate modern economic growth - a higher rate of
increase of total product, a higher rate of capital formation, growth
of one or several modern productive sectors, and so on ? To put
it differently, is it realistic to talk of the pre-conditions created in
one time span and of the initiation of modern economic growth in
another span chronologically distinct ?
The answer to this question depends upon what the pre-
conditions are. Since the modern developed economies make
effective use of a wide variety of technical and social inventions,
many of which date back to a time far earlier than the initiation
of modern economic growth, pre-conditions whose creation is
chronologically distinct from the early periods of modern economic
growth can easily be found. Thus many current commercial
instruments, maritime laws, and monetary practices originated, in
much their modern form, long before the second half of the eighteenth
century, which may be taken as the date of the beginning of modern
economic growth. But for the pre-conditions that Professor Rostow
emphasizes in his discussion (Rostow-II, chapter 3)- transforma-
tion of agriculture and overhead capital investments - the answer
is, to my mind, quite different. I do not see how, particularly in
36
the 'general' traditional society not 'born free', a major change in
agricultural productivity that provides more food per capita and
more savings can be effected without a rapid growth of some manu-
facturing and other sectors which provide not only employment for
the displaced agricultural population but also the producer and
consumer goods required for the higher agricultural productivity
and by the people who share in its benefits. And the production
relations associated with increased overhead capital investments
should bring about similar concomitant changes. Indeed much of
what Professor Rostow says in chapter 4 about income shifts and
income flows in the process of take-off (particularly about agricul-
tural incomes in Rostow-11, pp. 46-7) is equally relevant to the
discussion of pre-conditions in chapter 3.
Perhaps by further specification one could distinguish clearly,
and in chronological sequence, some phases of the agricultural
revolution and of increased capital investments that precede the
distinctive changes that can be established for the take-off stage ;
but I doubt that this is possible. For any significant transformation
of agriculture in the crowded traditional societies and any marked
rise in overhead capital investment are, to my mind, already part
and parcel of modern economic growth ; and, given the technologi-
cal, economic, and social interrelations within the economy, can
hardly occur unless they are accompanied by the changes that Pro-
fessor Rostow assigns to the take-off stage. In short, the case for
separation between the rather vaguely defined pre-conditions stage
and the apparently more sharply defined take-off stage presented in
Professor Rostow's discussion seems to me extremely weak. And
Professor Rostow's casual reference to the duration of the pre-
conditions stage- 'a long period up to a century or, conceivably,
more' (Rostow-1, p. 27)- does not make the case stronger.
(b) In his recent book, Professor Rostow treats 'traditional'
economy as a single stage in a sequence of five stages; and, as
already indicated, draws only one relevant distinction, that between
the small group of nations 'born free' and all others - the latter
being a single category of traditional economies. Thus, it includes
the Western European countries, whose civilization was in many
ways the cradle of modern economic society, and which, during
the epoch of merchant capitalism, were on the 'taking' side vis-d-vis
much of the rest of the world. It also includes the old Asian coun-
tries with their different history and endowments, the African
societies with their specific heritage and culture, and many countries
in the Western Hemisphere which are not among the 'free-born'.
Disregarding for the present a major question as to the legitimacy
37
of characterizing all pre-modern economies as a stage, we are forced
to conclude that such treatment implies that the stages of pre-
conditions and take-off are presumably characterized by basically
the same important features in all these countries.
To say that this is a heroic over-simplification is not to condemn
the scheme out of hand. After all, modern economic growth, when
and where it occurs, does have distinctive characteristics - not
merely by definition, but because it draws upon a transnational
stock of useful knowledge and of social invention, and is powered
by human views and desires that have many similar features the
world over. Yet it is fair to argue that the stocks of knowledge
and social inventions themselves change over time ; and that the
modern economic growth of different countries is a process of com-
bining the different complexes of historical heritage with the common
requirements of the modern 'industrial system'. The parameters
of the combination are likely, therefore, to differ from country to
country, depending upon their specific historical heritage; upon
the time when they enter modern economic growth ; and upon
their relations with other countries, particularly those already de-
veloped. The proper analysis of the process of modern economic
growth in individual countries requires, therefore, a far more mean-
ingful typology of 'traditionalism' (or, to use another term, 'under-
development') than is provided by Professor Rostow. Nor can we
disregard the timing of the process in relation to other countries,
an aspect that plays such an important role in Professor Gerschen-
kron's intriguing hypothesis of the increasing 'strain of backward-
ness' and the association between the degree of backwardness and
the characteristics of the transition to modern economic growth
briefly discussed in his paper for this conference.
The point of the comment is that it is in the early phases of a
country's modern economic growth particularly that these distinct
peculiarities of historical heritage, position in the sequence of spread
of the industrial system, and relation to other already developed
countries put their impress upon a country's growth. After 70 to
100 years of modern economic growth, one developed country would
conceivably be similar in its characteristics to others - despite
differences in initial position. (Even this comment has limited
validity: compare Japan today, after eight decades of rapid eco-
nomic growth, with say Germany or France after a century of it.)
However, in the early phase the differences in pattern of growth
are likely to stand out most clearly, for at that point the diverse
historical heritages have not yet been overlaid with the similarities
imposed by sustained modern economic growth. And since the
J8
Kuznets -Notes on the Take-off
take-off stage, which to my mind overlaps with much of the pre-
conditions stage, is an early phase of modern economic growth,
the differences among countries in the parameters of the take-off
are likely to be more notable than those in growth at later stages.
An adequate stage theory or any other analytical scheme for studying
economic growth, should point out not only the similarities but also
the major differences - the latter associated with observable differ-
ences in historical antecedents, timing of entry into the process of
modern economic growth, and other relevant factors. Professor
Rostow's disregard of the major sources of differences in the early
phases of modern economic growth among the developed 'tradi-
tional' countries imposes severe limits on his claims to generality.
(c) The 'self-sustained' growth that is supposed to occur in the
stage following take-off is somewhat of a puzzle. Is it self-sustained
in a sense in which it is not during the take-off and/or any earlier
phase ? If the reference is to the higher level of per capita income
attained at the end of the take-off, which permits higher levels of
savings and capital formation, which, in turn, permit higher rates
of growth (assuming the marginal capital-output ratio is constant),
then one can argue that the same automatic mechanism operates
during the take-off - once a significant increase in per capita income
occurs, which presumably happens at the beginning of the take-off
stage. If the reference is to the existence of favourable social
institutions, these must also have existed through most of the
take-off stage. Furthermore, many institutional changes are gradual,
and if they have continually improved during take-off or earlier,
their effects on the rate of growth should have been continuous.
Consequently, since both income increases and institutional im-
provements abounded, it is difficult to accept the suggestion that
growth was not self-sustained before the end of the take-off stage,
but acquired that property only during the succeeding stage.
Obviously, the term is an analogy rather than a clearly specified
property or characteristic ; and for this reason alone should be
avoided. In one sense any growth is self-sustained : it means an
irreversible rise to a higher level of economic performance that may
make it easier to find reserves for further growth- whether these
are funds for capital investment, greater efficiency of the labour
force supplied with more consumption goods, economies of large
scale, etc. In another sense any growth is self-limiting: the rise
to a higher level may mean a reduction in incentive, pressure upon
scarce irreproducible resources, and, perhaps most important, the
strengthening of entrenched interests that are likely to resist growth
in competing sectors. And, indeed, the analysis of any widely and
39
broadly conceived process of economic growth must reveal these
and many more self-sustaining and self-limiting impacts of growth.
If then Professor Rostow characterizes one stage of growth as 'self-
sustained' and others, by inference, as not, he must mean that in
the latter stages the obstacles generated by past and current growth
outweigh the self-sustaining impacts ; whereas in the former stage
the self-sustaining impacts outweigh the self-limiting ones. Obvi-
ously, both sets of impacts need documentation, both need to be
weighed in terms of empirical evidence - far more than Professor
Rostow provides in his casual characterization. Given the two sets
of impacts of economic growth just suggested, the outcome is un-
certain ; and the process can never be purely self-sustained, since
it always generates some self-limiting effects. In this sense, economic
growth is always a struggle ; and it is misleading to convey an im-
pression of easy automaticity, a kind of soaring euphoria of self-
sustained flight to higher economic levels.
V. CONCLUDING COMMENTS
The gist of the discussion in this paper can be summarized in
a few brief propositions.
(a) Leadership of a sector depends upon the origin of its growth
in an autonomous impulse, not in response to other sectors in the
country ; and upon the magnitude of its direct and indirect contri-
butions to the country's economic growth. The autonomous im-
pulse and the various types of contribution to growth differ in
timing ; and the identification and chronology of leading sectors
requires specification and evidence lacking in Professor Rostow's
discussion.
(b) The doubling of capital investment proportions and the
implicit sharp acceleration in the rate of growth of national product,
claimed by Professor Rostow as characterizing his 'take-off' periods,
are not confirmed by the statistical evidence for those countries on
his list for which we have data.
(c) There is no clear distinction between the 'pre-conditions'
and the 'take-off' stages. On the contrary, given the pre-conditions
emphasized by Professor Rostow, viz., transformation of agriculture
and overhead capital investments, there is a prima facie case for
expecting the 'pre-conditions' and the 'take-off' stages to overlap.
(d) The analysis of the take-off and pre-conditions stages neg-
lects the effect of historical heritage, time of entry into the process
of modern economic growth, degree of backwardness, and other
40
relevant factors on the characteristics of the early phases of modern
economic growth in the different 'traditional' countries.
(e) The concept (and stage) of 'self-sustained' growth is a mis-
leading oversimplification. No growth is purely self-sustaining or
purely self-limiting. The characterization of one stage of growth as
self-sustained, and of others, by implication, as lacking that property,
requires substantive evidence and analysis not provided in Professor
Rostow's discussion.
A few additional comments may help to put these conclusions
into proper perspective.
First, the evidence used to test Professor Rostow's scheme is not
conclusive. Some non-Communist countries for which we have
no data may have experienced a period of growth conforming with
Professor Rostow's take-off stage. Also, his scheme may fit the
Communist take-offs, but my knowledge of them is inadequate
for checking. All that is claimed here is that aggregative data for
a number of countries do not support Professor Rostow's distinction
and characterization of the take-off stage. On the other hand, the
fact that the evidence is confined to aggregative data does not limit
their bearing. Economic growth is an aggregative process ; sectoral
changes are interrelated with aggregative changes, and can be
properly weighted only after they have been incorporated into the
aggregative framework ; and the absence of required aggregative
changes severely limits the likelihood of the implicit strategic sectoral
changes.
Second, although we concentrated on the take-off stage, and
the two contiguous stages - pre-conditions and self-sustained
growth - much of what was said applies by inference to other
stage.s in Professor Rostow's scheme. Moreover, the characteriza-
tion of the 'traditional' economy as a stage raises numerous ques-
tions. But an explicit discussion of the rest of the scheme would
take us too far afield.
Third, my disagreement with Professor Rostow is not on the
value and legitimacy of an attempt to suggest some pattern of order
in the modern economic growth experience of different countries.
On the contrary, I fully share what I take to be his view on the
need to go beyond qualitative and quantitative description to the
use of the evidence for a large number of countries and long periods,
in combination with analytical tools and imaginative hypotheses, to
suggest and explain not only some common patterns but also, I
would add, the major deviations from them. However, for reasons
clearly indicated above, I disagree with the sequence of stages he
suggests.
If we cannot accept Professor Rostow's sequence of stages, and
particularly his notion of a distinct and commonly found take-off
stage, what are we left with ?
Let us begin by agreeing that modern economic growth displays
certain observable and measurable characteristics, which in com-
bination are distinctive to it, i.e. were not evident in earlier economic
epochs ; and that these characteristics can, in principle, be estab-
lished with the help of quantitative and other data wherever such
growth occurs. What these characteristics are is a matter for dis-
cussion ; but I believe that agreement could easily be reached on
some of them, e.g. those relating to rates of growth of national pro-
duct, total and per capita, and to structural shifts that commonly
accompany them. Let us assume for purposes of illustration that
identification of such growth requires a minimum rise in per capita
income sustained over a period of at least two or three decades, a
minimum shift away from agriculture, and any other identifiable
indispensable components of modern economic growth that we may
specify.
With this specification of what modern economic growth is, it
becomes possible, given the data, to place its beginning in the various
countries in which modern economic growth occurred. The date
of inception need not be a year, or even a quinquennium; it may
be a band of some width, but still narrow enough to permit us to
say that the two or three decades following it are the early phases
of modern economic growth and the two or three decades prior to
it are the ones directly preceding the beginning of modern economic
growth in the country - without missing much in between. If,
then, we consider it important to study just the early decades of
modern economic growth, and/or those immediately preceding it,
in the hope of finding characteristics and relations that would permit
us to construct an adequate theoretical scheme, we may want to
call the first two or three decades following the initiation of modern
economic growth the 'early growth phase' and the two or three
decades preceding it the 'late pre-modern phase'.
Obviously, the two or three decades are just illustrative, and the
period may vary in length from country to country : the phase
segregated for concentrated study would have to be defined in
terms of some reasonably realistic preliminary notions concerning
the length of time during which the distinctive characteristics of
early growth persist or during which the immediate antecedents
must be studied. The firm point in this approach is the feasibility
of dating the beginning of modern economic growth by some 'hard'
data, relating to one or several characteristics that are constituent
42
elements in the very definition of modern economic growth. In
doing this, all that we specify is the early phase of the segment of
the long record of modern economic growth on which we wish to
concentrate. The termination of the period is then to be decided
on the basis of any substantive hypotheses concerning the distinctive
characteristics of the early phase ; although one would assume that
since the span of modern economic growth in most countries is not
much over a hundred years, there are narrow limits to the length
of the early growth phase that an economist of today can set.
The term 'early phase of modern growth' is far less appealing·
than take-off : it does not carry the suggestive connotation of the
latter. And the same is true of 'late pre-modern period' compared
with pre-conditions, and of 'middle growth period' compared with
'self-sustained growth'. But the appealing terms employing me-
chanical or biological metaphors carry the danger of misleading us
into believing that the suggested connotations are relevant to ob-
servable reality. It is my conviction that at the present stage of
our knowledge (and ignorance), it is the better part of valour to
link the constraining influence of phase distinction to the bare lines
of observable and measurable growth processes ; and to concentrate
discussion on the early decades of modern economic growth in those
countries for which we can identify its beginning, with excursions
into the pre-modern growth past and the post-early decades of
modern growth when they seem warranted. The designation 'early
phase of modern economic growth' would, I suspect, fit the papers
in this conference better than the specific reference to the take-off.
43
Chapter 3
INDUSTRIALIZATION IN THE UNITED

STATES (1815-60)
BY
DOUGLASS C. NORTH
University of Washington
I. INTRODUCTION
THE economic growth of the United States clearly accelerated
between the end of the second war with England and the Civil
War.' This acceleration is evident not only in 'extensive' expan-
sion - increasing output as a result of the vast increase in land and
resources, labour, capital, and entrepreneurial talent- but also in
the substantial increase in efficiency of productive factors which
characterized the period. 2
The extensive expansion and increased efficiency characterized
every sector of the economy.J An overall explanation of this acceler-
ated growth therefore must inevitably examine not just one sector
but the growth in the economy as a whole since it is clear that the
extensive expansion, growth of regional specialization and inter-
regional trade, and falling transport costs were all a critical part of
the development of the national economy. Equally critical were its
1 See Robert Gallman, 'Commodity Output in the United States, 1839-1899',
24th Conference on Income and Wealth (forthcoming). A summary of this evidence

and further discussion are contained in testimony and statements of Raymond W.
Goldsmith in Hearings before the :Joint Economic Committee, Congress of the States,
Part 2, Historical and Comparative Rates of Production, Productivity, and Prices,
86th Congress, 1st Session (Washington: Government Printing Office, 1959),
pp. 230-80.
2 See particularly the discussion by Goldsmith, ibid. pp. 277-9.
3 Gallman's figures, lac. cit., provide evidence of productivity change in the
Commodity Sectors. For data on agricultural productivity which suggests little
change before 1850, but a sharp increase in the decade before the Civil War,
see M. W. Towne and W. D. Rasmussen, 'Farm Gross Product and Gross In-
vestment during the 19th Century', 24th Conference on Income and Wealth
(forthcoming). Undoubtedly the most striking increases in efficiency came in
transportation during this period. For fragmentary evidence on land and inland
waterways see George Taylor, The Transportation Revolution, 1815-1860 (New
York: Rinehart & Company, 1951), Chapter VII and T. W. Berry, Western Prices
before 1861: A Study of the Cincinnati Market (Cambridge: Harvard University
Press, 1943), Part I. For data on ocean transportation see Douglass C. North
'Ocean Freight Rates and Economic Development, 1750-1913', :Journal of
Economic History, XVIII, No. 4, December 1958, pp. 539-55.
44
North- Industrialization in the United States
connexions with the International Economy. However, given the
specific focus of this conference and the limitations of the length of
this paper, I have confined this essay to the growth of manufacturing
in the United States and more particularly in the New England and
Middle Atlantic states where industrialization occurred during this
forty-five year period. 1
II. THE SCALE OF EXPANSION

There can be no doubt that American industrialization was well
under way before the Civil War. Since Tench Coxe's rough esti-
mates in 1810, the value of manufacturing output had increased
approximately tenfold while population had increased only four and
one-half times.z In the final decade before the Civil War cotton
textile output had increased by 77 per cent, wool textiles by 42 per
cent, hosiery goods by 608 per cent, carpets by 45 per cent, men's
clothing by 55 per cent, boots and shoes by 70 per cent, coal mined
by 182 per cent, pig iron by 54 per cent; bar, sheet, and railroad
iron by 100 per cent, and steam engines and machinery by 66 per
cent. 3
While the Census data before 1840 are so poor that they are
almost worthless, 4 the gross outlines of this manufacturing develop-
ment are clear. Between 1810 and 1820 manufacturing output
showed a drastic decline in every state in the North-east, a decline
much magnified by the incomplete nature of the returns for 1820
and the inclusion of household manufactures in the 1810 figure.
Nevertheless, the decline was real enough. By 1830 most north-
eastern states showed an increase over the 1810 figures, and Massa-
chusetts showed a very substantial increase, indicating that the textile
and boot and shoe industries had effectively taken hold during that
decade. It is the decade of the 1830's, however, which gives clear
evidence of an acceleration in the growth of manufacturing through-
out the North-east. Monographic studies of the individual industries
support the very incomplete census returns which show a dramatic
1 The rest of this paper is taken from a chapter of a forthcoming study of
mine of 'U.S. Economic Growth between 1790 and 1860' (to be published by
Prentice-Hall in December 1960). This monograph explores in a broader context
the expansion of the economy during this period and the interrelationship between
sectors in the U.S. and International Economy in the course of this expansion.
a U.S. Bureau of Census, Eighth Census of the United States, 1860, Manu-
factures (Washington: Government Printing Office, 1865), p.v. Hereafter cited
as Eighth Census, Manufactures.
3 Statistics from Eighth Census, Manufactures, Introduction.
4 See Robert C. Morgan and W. A. Shannon, Treasury Department Technical
Paper 10, Executive Documents 34th Congress, 1st Session, Vol. 4, 1855-56.
45
expansion during that decade in Connecticut, New Jersey, New
York, Pennsylvania, and Rhode Island. Manufacturing incorpora-
tions indicate a similar trend. 1 Thereafter, the successive census
figures show a continuing rapid growth of manufacturing and indi-:
cate clearly that by the end of the 1830's the acceleration of manu-
facturing development was well under way. The ability of the
North-east to weather the very sharp depression of 1839-43 and
to emerge with expansion in manufacturing during the rest of the
1840's is vivid evidence of the new position of manufacturing. The
Massachusetts Manufacturing Census of 1837 shows a value of output
of $86,282,616, while that of 1845 only two years after the bottom
of the depression was $124,749,457. 1
While the initial impetus took place in the 1830's, the manu-
facturing base broadened and the pace was still further accelerated
during the expansion that followed the depression of 1839-43.
Gallman's figures indicate that during the five years 1844-49 manu-
facturing development was not particularly rapid (the rate of growth
in constant prices was 68·3 per cent for that quinquennium).J By
1860 the United States was second only to the United Kingdom as
an industrial nation.4
III. MODERN VERSUS HOUSEHOLD MANUFACTURE

It is important to distinguish the manufacturing development
which I have in mind from the widespread existence of household
manufacture and locally oriented handicraft activities which accounted
for so much of the census totals of manufactures in early periods.
Niles' Register gives a census of the manufacturing interests in and
around Mt. Pleasant, Ohio, in 1815, a town described as having a
population of about 500 ; '. . . 3 saddlers, 3 hatters, 4 blacksmiths,
1 G. H. Evans, Business Incorporations in the United States, 1800-1943 (New
York: National Bureau of Economic Research, 1948), Chart 1, p. 13, Chart 3,
p. 23.
• J. P. Bigelow, Secretary of the Commonwealth, Statistical Tables: Exhibiting
the condition and products of certain branches of Industry in Massachusetts, for the Year
Ending Aprill, 1837 (Boston: Dutton and Wentworth, 1838) and Dewitt Francis,
Secretary of the Commonwealth, Statistical Information Relating to Certain
Branches of Industry in Manufactures for the Year Ending June 1, 1855 (Boston:
William White, Printer of the State, 1856). The figure for 1855 was $295,820,681.
3 Gallman, loc. cit. Table 9.
4 Folke Hilgerdt in Industrial and Foreign Trade (Geneva: League of Nations,
1945), p. 13, shows the United States with 23·3 per cent of world manufacturing
output in 1870 far ahead of Germany (13·2 per cent) and France (10·3 per cent)
and only exceeded by the United Kingdom (31·8 per cent). Since Gallman's
figures show that the decade 1860-70 was one of very slow manufacturing growth
(25·5 per cent increase in constant prices), it is clear that the United States was
already second only to the United Kingdom in 1860.
46
4 weavers, 6 boot and shoemakers, 8 carpenters, 3 tailors, 3 cabinet-
makers, 1 baker, 1 apothecary, and 2 wagon makers' shops- 2
tanneries ; 1 shop for making wool carding machines ; 1 with a
machine for spinning wool ; 1 manufactory for spinning thread from
flax ; 1 nail factory ; 2 wool carding machines. . . . Within the
distance of six miles from the town were - 9 merchant mills ; 2
grist mills ; 12 saw mills ; 1 paper mill, with 2 vats ; 1 woollen
factory, with 4 looms, and 2 fulling mills.' 1 It is clear that the
wide variety of manufacturing existed because of the isolation of
the local market from imported goods as a result of the high transfer
costs. Reduction in transport costs and the extension of the size
of the market resulted in specialization, division of labour, and the
localization of industry. Thus, the diverse activities which charac-
terized the isolated town of 1815 would be reduced as the market
widened to only those which are typically residentiary in character.
The decline of household manufacture between 1820 and 1845 as
the Erie Canal opened up western New York has been illustrated
graphically in Arthur Cole's The American Wool Manufacture/·
Industrialization of a region means the development of manu-
facturing for a larger market than the particular geographic area,
which is only another way of saying that it implies the localization
of manufacturing activity. Moreover, if this localization reflects
only the location advantages of simply processing an exhaustible re-
source such as lumbering or copper smelting then it hardly qualifies
as an industrial area. Such processing, while it may lead to further
manufacturing development, has two important disadvantages
as a base for sustained manufacturing expansion :
1. It is immediately tied to a resource which is subject to dimin-
ishing returns.
2. It is of a character which induces little additional manufactur-
ing activity in the way of subsidiary or complementary industry.
While the first of these points is obviously important, it is the second
point which gets at the heart of the much abused notion of indus-
trialization.
An industrial revolution consists of a dynamic series of changes
in which initial developments in manufacturing provide strong
inducements for additional investment in subsidiary or comple-
mentary industries.J Not only must the initial manufacturing be
1 Niles' Weekly Register, X (June 8, 1816) as quoted in George Taylor's The
Transportation Revolution, pp. 207-8.
2 Two vols. (Cambridge: Harvard University Press, 1926), p. 280.
J Hirschman's emphasis on unbalanced growth strikes me as a particularly
useful way to look at the whole process. A. 0. Hirschman, The Strategy of Eco-
nomic Development (New Haven: Yale University Press, 1958), Chapter IV.
47
of a character that has extensive backward and/or forward linkages, 1
but the factor endowments of the region must be such that these
new industries will be located within the region rather than be im-
ported. As a result it is difficult to generalize about a particular
kind of manufacturing initiating industrialization. The process
depends both upon the linkages associated with a given industry at
a particular state of technology z and upon other factor endow-
ments, which will dictate to what degree this induced investment
occurs within the region or nation rather than elsewhere. While
these linkages are important in getting industrialization under way
when the region is a marginal producer of manufactures, and the
linkages facilitate investment decisions with respect to initiating new
industries, sustained development and spread of manufactures ulti-
mately requires that the region's factor endowments should improve.
Therefore, while analysis of the early manufacturing development of
an economy inevitably focused on the industries that first succeeded
and upon the complementary and subsidiary industry that evolved, the
spread of manufacturing beyond these immediate industries requires
an examination of the changing factor endowments of the region.
An important aspect of the localization of industry which typi-
cally characterizes the spread of industrialization is the growth of
a large number of specialized firms. Localization of industry has
not necessarily implied large plants, but it has meant an increasing
specialization of function in large numbers of relatively small plants.
As the market grew larger the firm became increasingly specialized,
and auxiliary activities which initially had to be undertaken by an
individual firm in order to produce or market a product could more
efficiently be done by other firms which could concentrate on pro-
ducing the equipment, supplying the raw material, marketing the
product, or even training the labour force. It is this growth of
specialized function with the increasing size of the market that
results in Adam Smith's classic argument that productivity of
labour is fundamentally influenced by specialization of function.l
It was the development of a large number of complementary and
auxiliary manufacturing activities in typically small but growing
plants which characterized the emergence of the North-east as a
manufacturing centre and which contributed significantly to in-
creased efficiency in the economy.
1 A. 0. Hirschman, The Strategy of Economic Development (New Haven: Yale
University Press, 1958), Chapter VI.
• Quite obviously these linkages would change at different states of technology
and as a result an industry might well set off industrialization in one era and not
in another.
1 See George J. Stigler, 'The Division of Labour is Limited by the Extent of
the Market', Journal of Political Economy, LIX, No. 3 (June 1951), pp. 185-93 .
...,s
IV. THE STRUCTURE OF MANUFACTURING INDUSTRY

The general development of manufacturing in the United States
before 1860 was primarily of two kinds : on the one hand, resource
oriented manufacturing consisting at least initially of the simple
processing of raw materials in which there were location advantages
at sites near such materials (lumber, meat packing) or at breaks in
transportation (flour milling) ; on the other hand, manufacturing
in which capital requirements were relatively modest (cotton goods,
boots and shoes, men's clothing, leather, and woollen goods). The
former were the major types of manufacturing in the West and
influenced the evolving pattern of western urbanization (Cincinnati,
TABLE 1
LEADING BRANCHES OF MANUFACTURE IN THE UNITED STATES, 1860
Value of Value added Rank

Employment Product by by
(OOO's of S) Manufacture Value
(OOO's of S) added
s s
1. Flour and meal 27,682 248,580 40,083 4
2. Cotton goods 114,955 107,338 54,671 1
3. Lumber 75,595 104,928 53,570 2
4. Boots and shoes 123,026 91,889 49,161 3
5. Men's clothing 114,800 80,831 36,681 5
6. Iron (cast, forged, 48,975 73,175 35,689 6
rolled, wrought)
7. Leather 22,679 67,306 22,786 9
8. Woollen goods 40,597 60,685 25,030 8
9. Liquors 12,706 56,589 21,667 10
10. Machinery 41,223 52,010 32,566 7
Source: Eighth Census, Manufactures, pp. 733-42.
Chicago, Buffalo). The North-east, which accounted for three-

fourths of the country's manufacturing employment in 1850 and
for 71 per cent in 1860, concentrated on the latter type. Table 1
gives a breakdown of the leading branches of manufacturing in
1860. Textiles played the leading role and were strategic in terms
of backward and forward linkages in the case of four of the ten
leading manufactures (cotton goods, men's clothing, woollen goods,
machinery).
Early developments in the cotton textile industry, after Samuel
Slater's initial undertakings at Pawtucket, were modest in size and
scattered throughout the East. Between 1815 and 1831, however,
the number of spindles per establishment tripled and by 1860 the
49
number had tripled again. 1 Introduction of the power loom and
the performance of all cloth-making operations with water power
initiated the growing size, specialization, and localization of the
industry. 1 While the Boston Manufacturing Company at Waltham
in 1813 was spectacularly successful,J and the industry revived and
expanded in the 1820's, it was not until the decade of the '30s that
the tendency towards specialization and localization was clearly
evident:~ Before 1830 mills in Virginia had about the same number
of spindles as those in Massachusetts. By 1860 the average cotton
factory in New England had nearly 7000 spindles, compared to
2000 in the South and West.s The average number of looms per
factory was 163 in New England, 24 in the South, and 49 in the
West. 6 The localization of the industry was also marked. In 1860
70 per cent of the capital was invested in New England mills and
75 per cent of the cloth came from there. Another 23 per cent came
from the Middle Atlantic States.'
The early success of the Whitham mill was a result of producing
a coarse cloth which was in growing demand in America and could
be woven on the new power loom. "This plain white 'sheeting'
lent itself to mass production and met a wide variety of needs in a
predominantly agricultural society. New England mills following
in the footsteps of the Boston Manufacturing Company found that
they could compete with British textiles in this type of product and
had a market that grew with the developing regional interdependence.
Between 1820 and 1860 the relative efficiency of cotton textile
firms improved vis-a-vis competition from abroad,s and as a result
the product line was broadened somewhat. Forward linkages from
the cotton textile industry in the form of final consumer goods were
an important part of the spread of manufacturing in the North-east,
particularly after the innovation of the sewing-machine. It was the
backward linkage into the textile machinery industry, however,
1 V. S. Clark, History of Manufactures in the United States (New York:

McGraw-Hill, for the Carnegie Institution, 1929), p. 452. Hereafter cited as
History of Manufactures.
• Clark, History of Manufactures, pp. 450-3.
s So successful indeed that even during the difficult period of British dumping
of manufactures from 1816-19, it earned a very good rate of return.
4 Clark, History of Manufactures, p. 452.
s Ibid.
6 Eighth Census, Manufactures, pp. x-xiii. Factories in the middle states were
smaller on the average than New England but larger than in the South and West.
' Ibid. pp. ix, xi.
• The most obvious evidence of this was the United States' ability to enter the
export market in cotton textiles in the last three decades before the Civil War.
For some indirect evidence of productivity changes see Caroline Ware, The Early
New England Cotton Manufacture, a Study in Industrial Beginnings (Boston:
Houghton Mifflin Company, 1931), pp. 112-14.
so
which had more important consequences for the growth of manu-
facturing. Between the creation in 1813 of a machine shop as an
adjunct of the Boston Manufacturing Company and the Civil War,
'the manufacture of textile machinery evolved from a local trade
sporadically practised by many small shops to an industry charac-
terized by a few large shops and an increasing number of smaller,
more specialized shops all of which were beginning to compete
vigorously for business on a national scale'. 1 In the early period
many cotton textile mills made their own machinery, but with the
growth of the market the machine shops became separated from the
mills and began to concentrate on machinery construction. Some
were highly specialized, building only one or two types of machinery.
Others broadened to include a number of different types of textile
machinery, but also machine tools, locomotives, stationary engines,
and a number of other metal products as well. 2 This backward
linkage into textile machinery had further important linkage effects
back into iron casting, machine tools, and metal working, creating
in the process skills and training which were effectively applied to
other machinery and machine tool undertakings. It is worth quot-
ing Gibb's conclusion with respect to this formative period.
'The manufacture of cloth was America's greatest industry.
For a considerable part of the 1813-53 period the manufacture of
textile machinery appears to have been America's greatest heavy
goods industry, occupying the primary position in point of size
and value of product among all industries which fabricated metal.
Size, however, is not the most critical measure of importance.
From the textile mills and the textile machine shops came the
men who supplied most of the tools for the American Industrial
Revolution. From these mills and shops sprang directly the
machine tool and locomotive industries together with a host of
less basic metal fabricating trades. The part played by the textile
machinery industry in fostering American metal working skills
in the early nineteenth century was a crucial one.' 3
In the case of woollen goods, the development in terms of
growing specialization and localization paralleled the cotton textile
industry in many respects. The most important difference was the
later technical development in wool, a difference which was true
of Britain as well.4 While the industry experienced rapid technical
advance before 1830, the two decades that followed were periods
1 George S. Gibb, The Saco-Lowell Shops, Textile Machinery Building in New
England, 1813-1849 (Cambridge: Harvard University Press, 1950), p. 168. Here-
after cited as Saco-Lowell Shops.
2 Gibb, Saco-Lowell Shops, p. 168.
3 Ibid. p. 179.
• Arthur H. Cole, The American Wool Manufacture, I, p. 234.
SI
of accelerated growth in which the woollen industry became highly
localized in New England with Massachusetts assuming the pre-
eminent position just as in the case of cotton textiles, and in which
the wool textile machinery industry became effectively separated
from the woollen goods industry.
A few large specialized enterprises dominated loom building,
scouring, carding, and spinning machinery respectively. 1 Not only
did the wool-working mills give up their machine construction and
become dependent upon the specialized builder of textile apparatus,
but the small local machine shops were also displaced by the special-
ized machinery producer. 2
In the final decade before the Civil War the concentration of
the industry and the growth of large-scale specialized firms were
still further accentuated. Between 1850 and 1860 the value of
output in New England mills increased by 62 per cent, compared
to 7 per cent in the Middle Atlantic States and 10 per cent in the
West. In absolute terms the value of output in New England was
$40·6 million compared to $15·9 million in the Middle Atlantic
States, $3 ·1 million in the Western States, and $2 million in the
Southern states.J The size of firm grew rapidly in the North-east,
geared as it was to a national market, in contrast to the predominantly
local market of the West. Writing of the period before 1870, Cole
says:
'For the whole area of the Ohio and Upper Mississippi Valleys,
the mills averaged less than two sets apiece, although New England
factories could boast an average of five or six sets - more pro-
ductive sets too. Furthermore, the connection of these establish-
ments with the local market remained intimate . . . . Mr. John
L. Hays, moving spirit and first secretary of the National Associa-
tion of Wool Manufactures, summarizes the situation when he
reported of Western producers : that they were ''confident if they
did not attempt to make their mills too large, and continued to
seek their principal markets in the counties and local districts
where they were established . . . they should be prosperous".' 4
Whilst the boot and shoe industry was more primitive than the
textile industry, both in terms of technology and factory organiza-
tion, it showed an equal tendency to concentrate in New England,
and particularly in Massachusetts, and for the size of firm there to
exceed that of firms elsewhere. Approximately 60 per cent of the
industry was located in this area and more than half of these estab-
1 Cole, The American Wool Jl.,fanufacture, I, p. 276.
• Ibid.
3 Eighth Census, Manufactures, p. xxxv.
4 Cole, The American Wool Manufacture, I, p. 276.
52
lishments were in Massachusetts. 1 Their average capitalization and
number of employees were well above the mean for the rest of the
country. Between the 1830's and 1860 the industry passed from the
domestic stage to the factory system with the increasing size of the
market as the most important element in this transformation.z By
1860 the sewing-machine, which had already revolutionized the
clothing industry, was just beginning a similar transformation of the
boot and shoe industry.
The products of the iron industry present a varied picture during
the period prior to the Civil War. While pig-iron production was
concentrated in Pennsylvania (580,049 tons out of the U.S. total of
987,559 tons in 1860),3 the various products derived from it were
more scattered. Bar, sheet, and railroad iron were also concentrated
in Pennsylvania, while Massachusetts was the leading state in iron
wire and iron forgings. New York, Pennsylvania, and Massachusetts
in that order produced the bulk of the iron castings.
An important part of iron output was turned immediately into
final consumer goods. Stoves were the major single commodity,
with a value in 1860 of $10,709,972. Railroads were the most im-
portant single demand from industry. The value of bar, sheet,
and railroad iron produced in 1860 was almost $32 million. A
little less than half that value, equal to 235,107 tons, was railroad
iron. Yet railroads were certainly not the dominant factor in the
iron industry. While the value added of rails was approximately
$6·5 million in 1860 and roughly equal to the value added of bar
iron, it was dwarfed by the value added of the polyglot classification
of iron castings which in 1860 was $21 million. Indeed, the value
added in stove making alone was equal to that of iron rails. Cer-
tainly, the iron industry mirrored the state of American manufac-
turing prior to the era of steel (which was just beginning to develop).
Iron was used in a broad range of consumer and producer goods,
and casting was the major method by which the metal could be
transformed to meet the needs of the time. After 1845 rolling mills
had developed in eastern Pennsylvania which were especially geared
to making heavy rails, and they presaged the growing importance
of the railroad in inducing large-scale production in the iron and
steel industry. 4 But such a development was just beginning before
the Civil War.
1 Eighth Census, Manufactures, p. lxvii.
~ See Blanche Hazard, The Organization of the Boot and Shoe Industry in
Massachusetts before 1875 (Cambridge: Harvard University Press, 1921), Chap-
ters IV and V.
J Statistics from this section are from Eighth Census, Manufactures, pp. clxxviii-
cxcvi.
53
V. THE CAUSES OF EXPANSION

The timing, pace, and character of American manufacturing
development before the Civil War resulted from the following
factors:
1. By all odds the most important influence was the growth
in the size of the domestic market. Two English Commis-
sions which investigated United States manufacturing in the
1850's,' whose reports represent the most careful evaluation
of American manufacturing progress prior to the Civil War,
place first emphasis upon the size and composition of the
market. They noted not only the absolute size and rate of
growth of the population, but also the high average wealth
of the people. Wallis was particularly impressed by the fact
that 'all classes of the people may be said to be well dressed
and the cast off clothes of one class are never worn by an-
other'.2 They were most impressed by the standardized
method of production which lent itself to mechanical tech-
niques and therefore to low unit costs geared to large-scale
output of a standardized product. The growing localization
of industry, specialization of function, and increasing size of
firm all were basically related to the growth. in the market
which stemmed from the regional specialization and growth
of interregional trade which began after 1815, but was really
accelerated with the surge of expansion in the 1830's. The
markets for textiles, clothing, boots and shoes, and other
consumer goods were national in scope, reflecting the decline
of self-sufficiency and the growth of specialization and division
of labour. Derived demand for machinery and products of
iron expanded in response to consumer goods industries.
The cotton trade was the immediate impetus for this
regional specialization. In response to growing foreign de-
mand, the South became a highly specialized cotton-pro-
ducing region. Because of the structural characteristics of
the Southern economy, the growing income from the cotton
trade led to extensive expansion into new cotton lands, but
' The two investigations were: The official reports presented to the British
Parliament by Sir Joseph Whitworth and George Wallis, later published separately
as The Industry of the United States in Machinery, Manufactures, and Useful and
Ornamental Arts (London: George Routledge & Co., 1854), and Report of the
Commission on the Machinery of the United States (Parliamentary Papers, 1854-55,
L). The two investigations are summarized in D. L. Bum, 'The Genesis of
American Engineering Competition, 1850-1870', Economic History, Supplement
to the Economic Journal, II, No.6, January 1931, pp. 292-311. The Whitworth
volume is hereafter cited as Industry of the United States, the report of the Com-
mission as Machinery of the United States.
• Whitworth and Wallis, Industry of the United States, p. 99.
54
induced little investment in the production of other goods
and services. In consequence the South's high propensity
to import led to a rapidly growing demand for foodstuffs in
the West, and services and manufactures in the North-east.
It was this growing regional specialization based on the
cotton trade which was the most important determinant of
the pace of westward expansion and the development of
manufacturing in the North-east. The income from the
cotton trade alone (not counting insurance, brokerage, freight,
and other income directly induced by cotton) increased from
$25 million in 1831 to $71 million in 1836 and set off the
expansion of that decade. The widening of the market for
manufactures was one important consequence of this ex-
pansion.1 The growth of specialized methods of distribution
and the decline of the auction system betokened this new
dimension of the market. 2
Declining transport costs played an important part in this grow-
ing interregional specialization. The fall in ocean freight rates,
river freight rates in the West, and Erie and Pennsylvania Canal
rates were important early influences. Even before the advent of
the railroad, interregional trade had effectively widened the market
for eastern manufactures. The development of industry in Massa-
chusetts in the 1820's and in the other North-eastern states in the
early 1830's gives evidence of the rapid develpmment of inter-
regional trade dependent upon the fall in water transportation rates.
The spread of railroads in the North-east between 1835 and 1850
did play an important role in the further growth and localization
of industry. This was particularly true of New England in general
and Massachusetts in particular, where the most efficient size firms
in textiles and a variety of other industries tended to develop.
The effective connexion of East and West by railroad in the 1850's
further decreased the transfer cost barrier to localized industry.
2. The concentration of manufacturing in the North-east
stemmed from a number of factors, some of which were
specific to a particular industry. By far the most important
underlying reason, however, was the prior development in
the years before 1815, and particularly during the French
and Napoleonic Wars, when the groundwork was laid.J The
1 The growth of regional specialization, the structural characteristics of the
three regions, and the expansion of interregional trade are described in some
detail in my forthcoming study of U.S. Economic Growth.
2 See Clark, History of Manufactures, pp. 356-60; Cole, The American Wool
Manufacture, I, p. 286; and the abundant material in Eighth Census, Manufactures,

Introduction.
3 Between the years 1793 and 1807 income from shipping, the export and re-
export trade had increased approximately seven-fold and led to the rapid growth
55
growth of large urban centres, the development of a capital
market first around foreign trade and then the cotton trade,
social overhead investment in transportation facilities, and
the growing supply of labour first from agriculture and then
from immigrants, will be examined briefly in turn.
By 1815 the major urban centres and the largest market for
manufactures existed in the North-east. Rapid growth during the
years 1793-1808 had made New York, Philadelphia, Baltimore, and
Boston natural centres for the development of residentiary manu-
facturing. While Baltimore and Boston remained fundamentally
commercial and financial cities, Philadelphia and New York became
the two most important manufacturing cities in the country. With
manufacturing valued at $136 million and $159 million respectively
in 1860, they possessed approximately 15 per cent of the country's
total manufacturing output. The composition of manufacturing
in these cities indicates that much of it was residentiary, or had
begun as locally oriented manufacturing and gradually expanded to
serve a larger market.I The major manufactures in New York
were men's clothing, sugar refining, boots and shoes, bread and
crackers, cabinet furniture, machinery and steam engines, and
newspaper printing. Philadelphia showed a similar pattern. In
contrast to the highly localized manufacturing which developed in
New England, the manufactures of these two cities, with a few ex-
ceptions such as men's clothing, were primarily geared to serve the
expanding local and regional market.
The early development in the North-east of a capital market
around foreign trade and the cotton trade, as compared with its
relatively primitive state in the other regions, was another important
influence on manufacturing development. The growth of savings
institutions and financial intermediaries in the North-east aided a
wide variety of early manufactures. In the case of the New England
textile industry its development was implemented by the shift of
capital out of shipping into textiles.z While the location of sites
with abundant water power dictated specific locations within New
England, the predilection of Boston capitalists for textile manu-
facturing within the region was a contributing factor.J Moreover,
of urbanization, capital markets, internal transport, and other ancillary services in
the North-east. It was the base provided by this prior growth which gave the
North-east an initial advantage for subsequent development. The details of this
development will be found in my forthcoming study.
1 See the breakdown in Eighth Census, Manufactures, pp. 379-85, for New
York, and pp. 522-7 for Philadelphia.
3 It also played a part in the localization of the shoe industry. See Edgar M.
Hoover, Jr., Location Theory and the Shoe and Leather Industries (Cambridge:
Harvard University Press, 1937), p. 268.
s6
the abundance of financial intermediaries in Boston and the North-
east provided the large amounts of loan capital essential to the rapid
expansion of the textile firms. 1 It should be noted in passing that
while foreign capital went almost exclusively into transportation and
financing cotton expansion, the indirect effect was nevertheless to
increase the supply of capital and therefore to facilitate the financing
of manufacturing.
Banking, insurance, port facilities, warehousing, the develop-
ment of a distribution system for imports, and the early growth of
roads and turnpikes connecting the hinterland with the major ports,
were all social overhead investments which facilitated the develop-
ment of manufacturing. It is worth noting in this connexion that
manufacturing evolved in those industries where imports had been
largest, thus demonstrating that a market existed, and where a
distribution system to reach that market had been created.:z. While
the British recaptured a large share of that market between 1815-19,
the tariff and then the solid expansion of the industry in subsequent
decades merely followed the path of the well-developed import trade.
While the supply of labour did not in any immediate sense reflect
the prior development of the region, in an indirect sense it did,
in two important respects :
(a) The earlier agricultural settlement in New England not
only provided the well-known female labour force of the
early textile mills, but was also increasingly at a com-
parative disadvantage in competition with western agri-
culture, resulting in ready migration from the farm.3
(b) The prior development of the major seaports and their
dominance of the country's foreign trade resulted in their
becoming immigration centres. While the English and
German immigrants were relatively better off and proved
more mobile within this country, the Irish were destitute
and formed a reservoir of unskilled labour in the North-
east. In 1850, 55·5 per cent of the immigrants were in
the North-east.4 Not only did they shift the supply curve
of labour to the right, but the immobility of the Irish and
1 See Lance Davis, 'Sources of Industrial Finance: The American Textile
Industry, A Case Study', Explorations in Entrepreneurial History, IX, No.4, April
1957, pp. 189-203; and by the same author, 'The New England Textile Mills
and the Capital Markets: A Study of Industrial Borrowing, 1840-1860', The
Journal of Economic History, XX, No. 1 (March 1960), pp. 1-30.
• For a discussion of this point in connexion with contemporary development
problems see Hirschman, The Strategy of Economic Development, Chapter VII.
3 See Morris D. Morris, 'The Recruitment of an Industrial Labour Force in
India with British and American Comparisons', Comparative Studies in Society
and History, II, No. 3 (April1960), pp. 315-20.
4 Thomas W. Page, 'Distribution of Immigrants in the United States before
1870',Journal of Political Economy, XX (1912), pp. 676-94.
57
their lack of skills and social position made them in effect
a non-competing wage group at the bottom of the ladder
of social structure.' They fitted in very well with the
needs of an industrializing society.
3. The growth of manufacturing in the North-east reflected
a general improvement in its factor endowments vis-a-vis
their combination in manufacturing. In the early period,
however, certain industries were leaders in this process and
induced further investment, backward into the capital goods
industries and forward into final consumer goods industries.z
In this regard the textile industry played a leading role. Its
backward linkages into textile machinery, machine tools, and
products in the very early years of manufacturing development
have been described above. They were far more important
than this quantitative value indicates, witness the numerous
other machinery and machine-tool products which developed
in these shops to provide for the needs of other industries.
Forward linkages with a vast array of final consumer goods
industries to meet the needs of the north-eastern urban
dweller, the southern slave and planter, and the western
farmer made the complex of industries which grew up around
cotton and wool by far the most important in pre-Civil War
America.J
The iron industry, too, while a large part of its output
served other industries, nevertheless had important forward
linkages in final consumer goods such as stoves and in back-
ward linkages in pig iron and coal production.
4. Underlying the backward and forward linkages which induced
the chain reaction of manufacturing growth in the North-
east were the conditions that made these subsidiary and
complementary industries develop here rather than elsewhere
and that led to sustained technical development of the leading
industries themselves. While the growth and structure of
the capital market were discussed above, the resource endow-
ments and the quality of labour and entrepreneurial talent
deserve further elaboration.
1 Brinley Thomas, Migration and Economic Growth (Cambridge: Cambridge
University Press, 1954), pp. 166-7.
• While the railroad was not itself a manufacturing industry, it did induce
manufacturing growth during this period. Its backward linkages into railroad
iron, locomotives, and railroad cars were important; yet in the pre-Civil War era
it does not compare in importance with the textile industry as the statistical data
in the preceding section indicate. As an impetus to manufacturing development
the railroad was more important in its cost-reducing effects upon transportation
during this period.
3 The character of consumer demand, therefore, played an important role in
forward linkages. The varied demands for clothing in a temperate climate, for
example, are in marked contrast to India where final demand was simply for cloth.
I am indebted to my colleague, Morris David Morris, for this point.
ss
The early growth of the iron industry throughout the
North-east using bog iron and then the Pennsylvania ores
led to widespread growth of metal work and casting at an
early date. The large supply of coal in Pennsylvania provided
a cheap source of power for steam engines and coke for further
iron development. Abundant water power in New England
was a critical determinant of textile manufacturing sites.
These (and other) natural resource endowments were clearly
important in the expansion of manufacturing in the North-east.
The size of the market provided the opportunity. Prior
developments in the North-east and the factor endowments
were important in the specific location of manufacturing, but
the rapid spread and success of manufacturing, the effective
development of backward and forward linkages owes a basic
debt to the quality of labour and entrepreneurial talent. Any-
one who reads carefully into the period cannot help but be
impressed with:
(a) the efficient adaptation of foreign innovation to American
manufacturing ;
(b) the widespread success in innovating a broad range of
new manufacturing techniques, particularly labour-saving
ones; and
(c) the widespread mechanical skills and knowledge that made
possible the rapid spread of these innovations on the
American scene. 1
Samuel Slater's introduction of spinning machinery was only
one spectacular illustration of the introduction of English machinery.
Lowell's investigation of the British textile industry, and his subse-
quent construction of a power loom with the aid of Paul Moody,
represented the real beginning of large-scale efficient cotton textile
production. Other illustrations in every branch of manufacturing
indicate clearly the willingness and ability of American entrepreneurs
and mechanics to take over foreign innovations as they became
practicable on the American scene.
English investigators of the 1850's were particularly impressed
with the native American ability to develop new production methods.
From Eli Whitney's and Simeon North's development of inter-
changeable parts and efficient techniques in the small arms industry
to the innovations and methods of American arsenals, the armament
industries were a remarkable source of experimentation in produc-
tion methods. The lock and clock industries were a constant source
1 For a more extended discussion of these three points see John E. Sa
'The American System of Manufacturing', The Journal of Economic History,
No.4 (1954), pp. 361-79.
59
of amazement to the British Commissions. 1 The wood-working
industries particularly impressed them. They noted that the indi-
vidual firms were not necessarily large, but that everything was
performed by machinery. 2 Automatic machines for producing wood
screws, files, and cut nails all impressed the investigators in com-
parison with production techniques in Great Britain.J The con-
stant concern with labour-saving machinery was considered by the
commissioners to be a fundamental explanation of the indigenous
development of such innovations, and the relatively high price of
labour was seen as the driving force.4 Certainly, the results were
striking. Important innovations developed in every industry, fre-
quently in small shops and firms at the hands of mechanics with
little or no formal scientific training.
Equally as impressive as the broad base of mechanical develop-
ments was their ready adoption throughout various industries. The
commissioners were struck by the different attitude towards machin-
ery in the New World as contrasted with the old.
'The comparative density of the old and the new countries,
differing as they do, will account for the very different feelings
with which the increase of machinery has been regarded in many
parts of this country [England] and the United States, where the
workmen hail with satisfaction all mechanical improvements, the
importance and value of which, as releasing them from the
drudgery of unskilled labour, they are enabled by education to
understand and appreciate.' s
Contemporaries were in widespread agreement about the under-
lying causes of the rapid innovation of industrial techniques (whether
indigenous or adapted from abroad) and their widespread utilization.
Gibb quotes a prevailing view as follows :
'From the habits of early life and the diffusion of knowledge
by free schools there exists generally among the mechanics of
New England a vivacity in inquiring into the first principles of
the science to which they are practically devoted. They thus
frequently acquire a theoretical knowledge of the processes of the
useful arts, which the English labourers may commonly be found
to possess after a long apprenticeship and life of patient toil.' 6
1 Whitworth and Wallis, Industry of the United States, p. 12, Report on
Machinery, pp. 558, 616, as cited in D. L. Bum, loc. cit. p. 295.
• D. L. Burn, loc. cit. p. 294.
, Ibid.
4 Ibid. p. 306-7. See also Clark, History of Manufactures, I, p. 435, for further
testimony from contemporaries on this subject.
s Whitworth and Wallis, Industry of the United States, Preface, viii.
6 Zachariah Allen, Science of Mechanics (Providence: 1829), p. 349 as quoted
in Gibb, Saco-Lowell Shops, p. 178.
6o
North - Industrialization in the United States
Whitworth and Wallis were thoroughly impressed with the im-
portance of broadly based education '. . . so that everybody reads,
and intelligence penetrates through the lowest grades of society'. 1
It is worth quoting at some length the conclusion of the English
investigators with respect to the role of education in American
industrialization.
'The compulsory educational clauses adopted in the laws of
most of the States, and especially those of New England, by which
some three months of every year must be spent at school by the
young factory operative under 14 or 15 years of age, secure every
child from the cupidity of the parent, or the neglect of the manu-
facturer; since to profit by the child's labour during three-fourths
of the year, he or she must be regularly in attendance in some
public or private school conducted by some authorized teacher
during the other fourth.
'This lays the foundation for that wide-spread intelligence
which prevails amongst the factory operatives of the United
States ; and though at first sight the manufacturer may appear
to be restricted in the free use of the labour offered to him, the
system re-acts to the permanent advantage of both employer and
employed.
'The skill of hand which comes of experience is, notwith-
standing present defects, rapidly following the perceptive power
so keenly awakened by early intellectual training. Quickly learn-
ing from the skilful European artisans thrown amongst them by
emigration, or imported as instructors, with minds, as already
stated, prepared by sound practical education, the Americans
have laid the foundation of a wide-spread system of manufacturing
operations, the influence of which cannot be calculated upon, and
are daily improving upon the lessons obtained from their older
and more experienced compeers of Europe.' 2
It is perfectly clear that the critical influence in American manu-
facturing development was not so much one or two strategic indus-
tries, but the general improvement of factor endowments for
manufacturing. The most striking fact apparent to the investigator
of manufacturing of the period is the broad variety of industrial
activities which were growing up on every side. Nobody can read
the studies of the British investigators without being impressed by
the fact that this manufacturing development reflected a broadly
based ability to produce profitably a vast range of finished goods.
Certainly, in the 1820's and 1830's the linkages associated with the
textile industry were important when the North-east was a marginal
producer of manufactures. However, by the middle of the 1840's
1 Whitworth and Wallis, Industry of the United States, Preface, ix.
a Ibid. pp. 160-1.
61
Tlu! Economics of Take-off into Sustained Growth
when the surge of the expansion got under way (1843-57), it was
not one or two industries which were leading sectors, but a much
more generalized ability to produce manufactures. The most strik-
ing contrast between the 1840 Census figures on manufactures and
the 1860 figures is not so much the rapid growth of output as the
spread of manufacturing into new industries.
VI. CONCLUSIONS
In summary, then, the development of manufacturing in the
North-east got under way, after the sharp readjustment following
the war of 1812, around a few industries which the import trade
had already shown to possess growing markets. Its location in the
North-east was dictated by prior developments which had occurred
there as well as the natural resource endowment of abundant water
power. The linkages associated with the textile industry were an
important influence in the developments of the 1820's and early
1830's. It was the growth in the size of the market as a consequence
of regional specialization, however, which led to the acceleration in
manufacturing development and the specialization of function of
the firm in the 1830's. The cotton trade of the South and the decline
in transport costs were the proximate influences in this growing
regional specialization and the development of inter-regional trade.
If the growing size of the market made possible the development
of manufacturing, it was the quality of entrepreneurial talent and
the labour force that could effectively take advantage of these oppor-
tunities. The adaptation of foreign inventions as soon as profitable,
the variety of native innovations, particularly those which cut labour
costs, and the rapid spread of new techniques were indicative of
the 'quality' of labour and entrepreneurial talent. While the under-
lying aspirations and motivations of people in American society
were obviously important, the investment in human capital was a
critical factor both in innovations and in the relative ease with which
they could spread. The primary source of this quality of the labour
force and entrepreneurial talent was the widespread free education
system in the North-east, although the skills of English and German
immigrants were an important supplement.
The surge of expansion that began in 1843 was clearly an era
in which the North-east had ceased being a marginal manufacturing
area and could successfully expand into a vast array of industrial
goods. By 1860 the 'problems' of industrialization were behind in
the development of the United States.
6a
Chapter 4
THE TAKE-OFF IN BRITAIN

BY
PHYLLIS DEANE
Cambridge University
and
H. J. HABAKKUK
Oxford University
I. INTRODUCTION
THE process of industrialization which gathered momentum in
Britain during the second half of the eighteenth century and initiated
the sustained upward movement of real incomes that the Western
world now takes for granted, involved revolutionary changes in the
structure and organization of the economy. The origins of some
of these changes can be traced to earlier centuries. Some of them
are still working themselves out. It is generally agreed, however,
that the crucial transformation occurred fairly rapidly - certainly
within the century between 1750 and 1850, probably in a consider-
ably shorter time. More recently Professor Rostow has given added
interest to the problem of identifying and of timing the British
industrial revolution by viewing it as the prototype of the take-off
- 'that decisive interval of the history of a society when growth
becomes its normal condition' . 1
It is the object of this paper to examine the British experience
in the light of this view. In particular we shall consider three related
questions suggested by Professor Rostow's analysis of the British
case:
1. Was the period 1783-1802, to which the take-off is allocated,
the period within which self-sustained growth may be said
to have begun ?
2. Did this period involve such radical changes in production
functions, such a decisive transformation of the economy that
economic growth was thenceforward more or less automatic ?
3. Did the rate of productive investment rise from perhaps 5 per
cent of national income to near 10 per cent in the course of
these two decades ?
1 W. W. Rostow, The Stages of Economic Growth, p. 36.
6J
It will be evident that it is not possible to provide unambiguous
answers to questions such as these. This is so for two reasons. In
the first place, the questions themselves are ambiguous. How can
we tell at what point of time the process of growth became 'self-
sustaining' or 'self-reinforcing' ? It is not enough to call a move-
ment irreversible because it was not reversed. How 'radical' must
a transformation be to rank as 'decisive' ? How do we distinguish
productive investment from unproductive investment in any measur-
able sense?
In the second place the data are inadequate. The concept of
take-off is essentially a quantitative concept. It is isolated in terms
of 'scale' and 'momentum' and 'critical levels' in economic activity.
It is recognizable in statistical series, structural measures, and rates
of growth. It stands or falls by the statistics, and of course eighteenth-
century statistics are notoriously incomplete. We may add them
up, break them down, or extrapolate them which way we will, but
the fact remains that we are operating with a very few basic series. 1
Even if we knew exactly what these signified we should still only
have part of the story. The rest has to be filled in by imaginative
guesswork.
II. THE RATE OF GROWTH

First of all then, what happened to the overall rate of economic
growth in the last two decades of the eighteenth century. Did it
differ in scale or momentum from what had gone before ?
The basic statistic of course is the population statistic. The
eighteenth-century figures are estimates at decade intervals based on
incomplete records of births, burials, and marriages, but they may
be good enough to indicate the relative scale and momentum of
the changes which took place in the second half of the century.
What they suggest for England and Wales is a stagnant population
in the first few decades of the century, a rise of about 3! per cent
between circa 1741 and circa 1751, about 7 per cent in the 'fifties,
'sixties, and 'seventies, 9! per cent between 1781 and 1791, 11 per
cent 1791-1801, 14 per cent 1811-21 and 18 per cent 1821-31,
after which the rate of growth tended to decline. In the crucial
twenty years then, the percentage increase was appreciably above
the preceding period (about 22 per cent compared with about
15 per cent) but the significant shift came in the period before that
- effectively before the middle of the century.
1 See the Table 3 to this paper where the implications of some of these basic
series are calculated in terms of percentage change per decade.
64
Habakkuk and Deane- The Take-off in Britain
Why the population of this country began to increase when it
did and what the factors were which made it gather momentum and
changed its geographical distribution are matters of controversy.
The inadequacy of the population data renders most conclusions
speculative. A study of the regional pattern of the existing estimates
suggests, however, that in the first instance at any rate, the changes
were independent of the main impact of the industrial revolution.
The population of the counties in which the industrial revolution
may be said to have taken place (Lancashire, West Riding, Warwick-
shire, and Staffordshire) seem to have been growing quite markedly
(probably through an increased birth rate) in the first half of the
eighteenth century when the population of England and Wales as a
whole barely increased by 5 per cent. 1 A similar conclusion con-
cerning the independence of the population upsurge was reached
by Professor Chambers in his detailed study of the population
changes which took place in Nottingham during the eighteenth
century. 'The initiating impulse in the new pattern of population
growth must, however, be looked for in long series of substantial
balances of births over deaths between 1743 and 1763, a change
which took place independently of contemporary economic factors
and may perhaps be described as an example of the autonomous
action of the death rate.' z
If population was growing more rapidly in the last two decades
of the century national income must have been rising even more
rapidly to lift average incomes. Unfortunately eighteenth-centurv
estimates of national income are irregular and unreliable, and for
the last two decades of the century are vitiated by the war-time
inflation which makes it impossible to measure the change in the
value of money in any convincing way. It is significant, perhaps,
that for the first four decades of the century commentators were
content to use, without adjustment, the national income figures
arrived at by Petty and King at the end of the seventeenth century.
If there was growth it does not seem to have been at all obvious to
contemporary users of national income figures. By the 1760's and
1770's, however, contemporaries seem generally to have been con-
scious of an improvement in the economic environment. When
1 See Deane and Cole, The Course of British Economic Growth, for estimates of
the changing rates of population growth in different regions of England and Wales
during the eighteenth century.
• J. D. Chambers, 'Population Change in a Provincial Town, Nottingham
1700-1800', in Studies in the Industrial Revolution, edited by L. S. Pressnell, p.
119. See alsop. 112 where he suggests that the upward trend in population was
already under way before the innovations associated with the industrial revolution
began to be developed in Nottingham 'and in its early stages has more claim to
be regarded as a cause than as an effect of industrial expansion'.
6s
Arthur Young began to compile his elaborate national income esti-
mates on the basis of his agricultural tours, economic progress was
clearly evident 1 and exaggerated income estimates were the conse-
quence.
Arthur Young's estimates, after adjusting for apparent omissions,
suggests a total national income of about £130 million circa 1770 in
relation to a population of about 7 million. It is not possible to ad-
just for over-optimism, but it appears to affect most of his calcula-
tions - probably with particular force those relating to agriculture,
where he was strongly influenced by the evidence of the progressive
farmers whom he was most interested to visit. The only other
estimate we have for the period is the result of Joseph Massie's
calculations of average incomes for the various social groups in the
population, made in support of a polemic on the sugar trade and
not intended to be aggregated into a national income total. This
suggests a national income of between £80 and £90 million circa
1759 in relation to a population of about 6! million and possibly to
a slightly lower level of prices than that confronting Young. The
disparity between these two estimates is a fair measure of the uncer-
tainty left by contemporary calculations of the level of incomes at
this period.
When we try to relate this evidence - uncertain as it is - to
the more convincing contemporary calculations made in relation to
the first income tax introduced by Pitt at the turn of the century the
comparison is complicated by extensive price changes. Bread cost
under 6d. for the 4-lb. loaf in 1770 and over 1s. 3d. in 1800. The
price paid by Westminster School for coal was half as high again in
1800 as it had been in 1770. The Gilboy-Schumpeter index suggests
that consumers' goods more than doubled in price between 1770
and 1800 and producers' goods rose by more than half. If changes
of this order are a fair reflection of the fall in the value of money
then it was more than enough to wipe out any increase in average
money incomes during the last three decades of the eighteenth
century, however conservatively we interpret the national income
estimates. But in the abnormal conditions of a major war it is diffi-
cult to accept as measures of changes in the value of money price
1 Cf. Adam Smith, Wealth of Nations, Cannon Edn., Vol. I, p. 200: 'In Great
Britain the real recompense of labour, it has already been shown, the real quantities
of the necessaries and conveniences of life which are given to the labourer has
increased considerably during the course of the present century'. Tooke, A His-
tory of Prices, London, 1838, lays great stress on the unusually abundant harvests
which prevailed in the half century following 1715, p. 60: 'This long period of
great abundance and consequent cheapness of the prices of provisions was one
which appears to have been attended with a great improvement in the condition
and habits of the great bulk of the population'.
66
Habakkuk and Deane - The Take-off in Britain
indices which are heavily weighted by cereals or by government
purchases of producers' goods. The evidence of the contemporary
estimates remains inconclusive.
When we try to construct our own series of real output estimates
for the eighteenth century we are thrown back on the handful of
overseas trade and excise series which is virtually all that we have
in the way of annual data for this period, plus a few uncertain bench-
mark estimates for particular products and periods. An attempt to
construct output indices with this inadequate material is described
elsewhere. 1 The results of the calculation are shown below. It is
heavily influenced - perhaps rightly so - by the series for over-
seas trade, which has a weight of 21 per cent in the total. It is this
more than anything else which accounts for the marked increase in
TABLE 1
EsTIMATED GROWTH RATES IN ENGLAND AND WALES
Compound rates of growth per annum at 1700 weights •
Indicator of
Indicator of Real
Real National
National Output
Output per Head
% %
1700-40 0·3 0·3
1740-70 0·9 0·3
1770-1800 1·5 0·6
• At 1800 weights the end of century rates of growth are somewhat lower.
average real incomes in the last three decades of the century z - a

rise which we were unable to derive from the contemporary national
income estimates.
The estimates which form the basis of this table were constructed
at decade intervals, and much less confidence can be attributed to
growth rates calculated over shorter periods of time than the thirty-
year intervals used here. If, however, we take the risk involved and
focus on the results for the last two decades we find a marked
acceleration in the rate of growth - to about 1·9 per cent in aggre-
gate terms and about 0·9 per cent in per head terms. To some
extent, of course, this acceleration reflects the rebound following
1 Deane and Cole, The Course of British Economic Growth. To be published.
a Series for goods entering primarily on to the home market (beer, spirits,
candles, glass, and paper for example) show very much smaller rates of growth
over the last three decades. See Table 3.
67
the American war which caused 'the first continued fall in foreign
trade in the century, a long decline which began to be felt in 1776
and continued until the end of hostilities' .1 If these estimates
overstress the significance of the export trade then the rebound
effect exaggerates the bias and overestimates the acceleration in the
last two decades. 2
What this amounts to then is that on the most generous inter-
pretation of the evidence for an acceleration in the rate of output
at the end of the eighteenth century there appears to have been a
marked increase in the rate of growth of average real incomes in
the period attributed to the take-off. In overall terms, however,
the acceleration that dates from the 1740's is at least as marked. If
we are looking for the critical threshold beyond which growth be-
came more or less automatic, is it not as reasonable to see it in the
1740's when, for the first time in English history, population began
to expand continuously without being checked by an output barrier ? 3
III. CHANGES IN PRODUCTION FUNCTIONS

The critical threshold, however, must be defined in terms of
changing production functions and not merely of rates of growth.
If these changes were more radical, decisive, and far reaching in the
period 1780-1800 than at any other period, then we may attribute
the take-off to it. Is it possible to see in this period, rather than in
any other, the introduction of these changes in economic organiza-
tion which caused the output barrier to recede and eventually to
outstrip the rate of population growth ?
Earlier bursts of economic growth had been checked by the pro-
duction barriers in agriculture. Professor Phelps Brown has sug-
gested, for example, that, 'The fifteenth century, for all the Wars
of the Roses, had been a high plateau of economic prosperity ; we
know that the wage of a mason or carpenter then would buy him
1 D. M. Joslin, 'London Bankers in War Time, 1739-84', in Studies in the
Industrial Revolution, ed. by L. S. Pressnell.
• Circa 1800 British domestic exports were equivalent in value to about 15 per
cent of national income to which their direct contribution (after excluding their
import content) was even less. By giving the series a considerably higher weight
than its contribution to national income it is assumed that it reflects similar changes
in output for the home market.
3 It is, of course, not necessary to assume that it was the output barrier which
effectively checked population growth in this country before 1740. The main
reason for high death rates seem to have been epidemic deceases and the flaring
up of epidemic disease, and these were not closely related to standards of living.
The high death rates of the 1720's and 1730's, for example, occurred at a time of
low grain prices.
68
as much of the basic materials of consumption as his successors in
the same crafts were getting around 1880, and it is very probable
that this material well-being was general'. He attributes the decline
to 'a great growth of population, pressing ever harder on inexpen-
sive food supplies'. 1 In the eighteenth century, however, food
supplies proved expansible. By the middle decades of the century
English exports of corn were running at an average annual level
of over half a million quarters- compared with under 100,000 in
the first decade or so. At its peak in 1750 the export of corn amounted
to nearly a million quarters, a surplus equivalent to the subsistence
requirements of something like a quarter of the total population.
It is not easy to see why the agricultural revolution, which was
well under way by the third quarter of the century, 2 should be
regarded as a 'pre-condition' of continuous economic growth rather
than as part of the series of radical changes in methods of produc-
tion which generated the self-reinforcing process. For the break-
through in agriculture was not a once-and-for-all change - like the
introduction of a new crop (potatoes in Ireland for example), which
relaxed an economic restraint without changing the basic conditions
of production. It made an important and continuing contribution
to the increase in real incomes which took place in the first six or
seven decades of the nineteenth century, i.e. during the period which
Professor Rostow has described as the 'drive to maturity'.
The two classic examples of industries which changed radically
in this period were cotton and iron. It is the former to which the
Rostow model gives the role of 'the original leading sector in the
first take-off'.J Cotton was essentially a new industry in this country.
In the 1760's the manufacture which contemporaries described as
the cotton industry produced a coarse mixture cloth with a limited
market, and probably contributed less than one half of one per
cent of the English national income.4 When Arkwright's water
frame (patented in 1769) produced cotton yarn of sufficient strength
to serve for warp as well as weft and Hargreave's spinning jenny
(patented in 1770) enabled one spinner to operate 16 spindles, the
first steps had been taken in creating a new industry. Between the
early 1770's and the early 1780's average annual imports of raw
cotton doubled in volume : between then and the beginning of the
1 E. H. Phelps Brown, The Growth of British Industrial Relations, p. 2.
• Cf. A. H. John, 'The Course of Agricultural Change, 1660-1770' in Studies
in the Industrial Revolution, edited by L. S. Pressnell, p. 147, where it is suggested
that the period 1730 to 1763 'can be regarded as the culmination of the first stage
in agricultural improvement'.
3 Rostow, op. cit. p. 53.
• At that stage a large proportion of raw cotton imports were intended for
candlewicks.
nineteenth century they multiplied more than sixfold. By 1802
the industry probably accounted for between 4 and 5 per cent
of the national income, and by 1812 between 7 and 8 per cent: 1
by the latter date it had outstripped the woollen industry and
was the leading British manufacture. By then, according to
G. H. Wood's estimates, about 100,000 men, women, and children
were employed in cotton factories and about 200,000 as hand
loom weavers. z
Radical changes also took place in the iron industry. Between
1788 and 1796 the estimated output of pig iron roughly doubled,
and between 1796 and 1806 doubled again. This sudden spurt was
the consequence of two major technical advances which became
effective in the 1780's and which put the finishing touch, as it were,
to a long series of earlier innovations. The application of Watt's
steam engine to iron smelting and forging ensured 'the final victory
of coke over charcoal'. J In 1788 7 tons of coal were required to
produce a ton of pig iron; by 1802 the average was only 5.4 Of
Cort's puddling process Ashton writes that 'The effects of his labour
were immediate. Whereas a tilt hammer had been able with diffi-
culty to produce a ton of bar iron in twelve hours, no fewer than
fifteen tons of metal could be passed through the rollers at the same
time ; and the iron produced as it was throughout with pit coal
was of a quality which enabled it to be substituted for charcoal
iron in all cases except that of making steel.' s These improvements
in technique came in time to supply the needs of a major war. It
was in the first decade of the nineteenth century that the navy began
to take British bar iron in preference to imported bar iron. It may
safely be assumed that most other consumers changed over at about
the same time.
This then was a decisive enough transformation which had the
effect of quadrupling output in under two decades. Output did
not continue to expand at this rate. In the next two decades it
probably doubled, which may not have been a much more rapid
rate of progress than had taken place between circa 1760 and 1788
1 See Deane and Cole, op. cit., where it is estimated that the value of the
output of the cotton industry (excluding value of cotton wool) was about £11
million circa 1802 and about £23 million circa 1812. These figures can be related
to estimates for the national income of Great Britain, of about £232 million circa
1801 and about £301 million circa 1811.
• This was in relation to a total occupied population of about Sl million persons.
G. H. Wood's estimates of the numbers employed in the cotton industry from
1806 onwards are in Journal of the Royal Statistical Society, 1910.
1 Schubert in Singer, Holmyard, Hall and Williams, History of Technology, Vol.
IV, p. 103.
+ R. Meade, Coal and Iron Industries of the United Kingdom, p. 813.
s T. S. Ashton, Iron and Steel in the Industrial Revolution, p. 93.
70
though obviously the absolute year-to-year changes were proceeding
at a totally different level in the early nineteenth century. 1 At the
peak of its relative importance, however, circa 1805, it is unlikely
that the iron industry (including the value of the mining sector)
contributed more than 6 per cent of the British national income. In
these terms, that is, it was of the same order of importance as the
cotton industry, and somewhat less important than the woollen
industry if we include the value of British wool in the latter's
product.
The figures of course are open to question as are most statistics
of the British industrial revolution. What is less questionable is
the broad order of magnitude of the changes wrought by and in
these two industries. At the beginning of the nineteenth century
it is doubtful whether they accounted together for much more than
10 per cent of the British national income: at the beginning of the
1780's their share may have been as high as 3 per cent. Even
assuming a high degree of interdependence with other industries
and ascribing to the two industries together an overall rate of growth
which implied sixfold multiplication of real output in two decades,
their direct effect on the rate of growth of an economy whose popu-
lation was already increasing at the rate of nearly 1t per cent per
annum could not have been decisive.
Of course there is one sense in which the spectacular rise of the
cotton industry in the last two decades of the eighteenth century
can be regarded as a decisive factor in the British industrial revolu-
tion. Certainly it captured the imagination and fired the ambitions
of contemporaries. When cotton factories offered permanent em-
ployment to men, women, and children whose economic oppor-
tunities had hitherto been limited to casual agricultural labour and
irregular domestic industry, when they yielded increasing returns
to manufacturers who would plough back their profits into the
business, and when they provided merchants with a product which
had mass appeal and a falling price, they set an example which was
not limited to the cotton industry. It is difficult to measure the
force of successful example, but it is not difficult to accept the view
that it may be a significant solvent of traditional resistance to the
economic transformation that steady growth demands.
It may be argued, as Schumpeter did, that successful innova-
tion sets up multiplier effects which create a wave-like response
over a much wider area of activity and time than that directly
1 H. G. Roepke, 'Movements of the British Iron and Steel Industry', Illinois
Studies in Social Sciences, Vol. 36, Urbana, 1956, gathers estimates of the output
of iron in the eighteenth and nineteenth century. He suggests 1760 as the
'turning point' in the shift from charcoal to coke furnaces. Ibid. p. 15.
71
affected by the original change. ' If we are to form an idea as to
the quantitative adequacy of innovation we must bear in mind that
all it should, according to our scheme, be adequate for, is "ignition".
. . . Looked at in this manner the development in the cotton trade
alone would be adequate to explain a Kondratieff upswing. We
do not hold that it was the only starter. But it was by far the most
important one and its action can be clearly followed up.' 1 In the
quinquennium following the Napoleonic wars, for example, the ex-
port of cotton manufactures accounted for more than 40 per cent
of the value of British foreign trade : even as early as 1796--8 the
proportion had been 13! per cent.
Except in providing an important new domestic export, or by
sheer force of example, however, it is difficult to see how the cotton
industry could have led the national economy in any meaningful
sense of the word. It served a mass market and was therefore
capable of growing rapidly to a considerable size ; but its inter-
relations with other industries were not of a kind which would
automatically stimulate expansion elsewhere. Its raw material was
imported and its capital-output ratio was low. The multiplier effect
of investment in cotton cannot have been very great. The concept
of a leading sector requires much more careful examination than
has been given to it here, but, on the face of it the cotton industry's
qualifications for the role are not impressive.
There were other developments in these two decades which
should be taken into account in the search for evidence of decisive
technological advance. The one invention above all others which
must have contributed most to future rates of growth was the steam
engine. But not until the 1830's and 1840's did steam begin to
play an important part in powering the British economy. As late
as 1870 less than a million horse-power was currently generated by
steam in the factories and workshops of Great Britain. It was the
next two or three decades that saw the massive introduction of
steam power.
Canals also deserve consideration in this context. It has been
estimated, for example, that the typical load of a single horse aver-
aged i ton by pack, 2 tons by wagon (on macadam roads), 8 tons
by iron rails, 30 tons by river barge and 50 tons by canal barge. 2
The building of a canal thus represented a radical change in the
production function for transport - in its neighbourhood - and it
is small wonder that in favourable locations 'fantastic' dividends
1 J. A. Schumpeter, Business Cycles, Vol. I, pp. 274-5.
2 By Skempton in Singer, Holmyard, Hall, and Williams, History of Technology,
Vol. III, p. 438.
were sometimes paid. 1 The canal mania of the early 1790's involved
heavy investment by contemporary standards.
Seen in broader perspective, however, the canals appear to have
been of limited importance. Skempton states that 'by the end of
the eighteenth century some 2000 miles of navigable water existed
in England, of which approximately one-third was in the form of
canals built between 1760 and 1800; one-third was in the form of
"open" rivers which were naturally navigable ; and the remaining
third had been created as the work of engineers, chiefly between
about 1600 and 1760'.2 Nor did the canal mania provoke anything
like the scale of investment which was normal in the railway age.
Without intensive research into the histories of individual canals
it is not possible to trace the course or amount of investment in
this sector. A study of the more accessible material in contem-
porary publications, however, suggests that between 1760 and 1835
a total of about £20 million was invested in canals (including some
associated river navigations). Of this between £2! and £3 million
was invested before 1790 and about £13 million between 1790 and
circa 1820- most of it in the period 1792-1805. These figures do
not suggest that the canals had a powerful overall effect on the
national economy. Had it not been for the mania, which concen-
trated so much promotion (though not construction to the same
extent) within a very few years, they would have attracted much
less attention among the causes or components of the British indus-
trial revolution.
In sum, although there is no doubt that important and fruitful
changes in industrial technique and economic organization took
place in the last quarter of the eighteenth century and the first few
years of the nineteenth, it is not obvious that these were the main
determinants of an increasing national rate of economic growth
either then or in the immediate future. Nor is it clear why these
developments - either individually or in conjunction - should have
been in some sense self-reinforcing. That there were crucial changes
in both the cotton and the iron industry within this period was
fortuitous. So also was the concentration of a major canal boom
in the 1790's. It was not until the 1830's that steam power began
to be used on any scale outside mines, blast furnaces, and spinning
mills. The changes in production functions which took place in
1 Cf. Asa Briggs, The Age of Improvement, p. 30 : 'Fantastic dividends were
sometimes paid - the Oxford canal for instance paid 30 per cent for more than
thirty years though the average dividend was well under 8 per cent'. And W. T.
Jackman, The Development of Transportation in Modern England (1916). Vol. I,
p. 367, reports that by 1792 the Bridgewater canal (which had cost £220,000 to
build) was bringing in £80,000 a year from freight traffic.
• History of Technology, op. cit. Vol. Ill, p. 456.
73
the 1780's and 1790's were immensely important in certain indus-
tries and in certain regions, and they were the forerunners of a long
series of similar changes in other industries and other areas. It
may be doubted, however, whether they were sufficiently important
to the economy as a whole to 'build compound interest into its habits
and institutional structure. 1
IV. THE RATE OF INVESTMENT

If national income data for the eighteenth century are suspect,
capital formation data are virtually non-existent. Gregory King's
figures for circa 1688 suggest a capital formation proportion in the
region of 5 per cent of net national income. The estimates made
by modern investigators suggest that in the 'mature' economy of
the 1870's up to World War I, the corresponding proportion generally
averaged 10 per cent or more. What we do not know is when the
change took place and whether it was sudden or gradual.
It does not seem reasonable to suppose that much of the change
could have taken place in the pre-industrial era. During the first
three-quarters of the eighteenth century there had certainly been
substantial investment in urban buildings and amenities, in river and
canal navigation, in roads and in enclosures. But these improve-
ments were spread over a long period of time. It is unlikely that
they involved an addition to the annual rate of national savings of
more than, say, 1 per cent of national income.
If one begins to make distinctions between 'productive' and
'unproductive' investment, however, it is difficult to say anything
at all at the level of the national aggregates. The productiveness of
an enclosure, for example, depended on the use that was made of
it, and there may have been many cases in which the land was less
productively worked by the new owner than by the subsistence
producers whom he dispossessed from common and waste. On the
other hand, if returned nabobs put their savings into stock breeding
or rotation experiments rather than in hunting reserves or country
houses their capital may have made a much more important contri-
bution to national economic growth. It may be possible to assess
these factors by systematic research into actual case histories but
not in terms of national capital formation proportions and rates of
economic growth.
At the aggregate level, then, it seems likely that the upward
pressure on the annual rate of saving and investment took its maxi-
' Cf. Rostow, op. cit. p. 7.
74
mum effect some time between the early 1780's when the steam-
engine, the new textile factories and blast furnaces were being
installed and the late 1840's when the railway construction boom
was at its height. The Rostow model of the take-off requires that
it should have been largely compressed within the space of two
decades, for it postulates 'as a necessary but not sufficient condition
for the take-off the fact that the proportion of net investment to
national income (or net national product) rises from, say, 5 per cent to
over 10 per cent, definitely outstripping the likely population pressure
(since under the assumed take-off circumstances the capital/output
ratio is low) and yielding a distinct rise in real output per capita' . 1
It is difficult to credit that a change of this order of magnitude
could have occurred in Britain in the last two decades of the
eighteenth century, when, moreover, the country had committed
itself to a major war. 2 Circa 1802 the national income of Great
Britain was probably about £230 million : in 1783 if we assume a
20 per cent increase in the price level and no increase in average
real incomes per head the total may have been in the region of
£160 million. The implication then is that an average annual rate
of investment of under £10 million per annum circa 1783 had risen
to over £20 million circa 1802.3 The quantitative data for the period
-for what they are worth - do not support a shift of this order
of magnitude.
It may be supposed that an appreciable part of the increase in
the rate of investment which took place in this period would be
directly related to the industries whose production functions were
so sharply revised, i.e. to cotton and iron. For the cotton industry
a contemporary estimate put the capital invested in buildings and
machinery at nearly £9! million circa 1802 and an earlier estimate
put the capital invested in the industry during 1783-87 at nearly
£1 million, which represented a doubling of the existing stock. This
suggests that between 1783 and 1802 something like £8 million
were invested in the cotton industry. In the iron industry 215 blast
furnaces were said to be in existence by 1806 which at a generous
allowance of £50,000 a piece would represent a total capital of about
£11 million, most of which had been invested in the previous two
decades. An analysis of the evidence available on canal and dock
projects suggests that these - which represented the most important
1 Rostow, op. cit. p. 37.
a Between 1783 and 1801 government expenditure more than doubled and at
the census of 1801 the numbers recorded as being in the army and navy repre-
sented something like 10 per cent of the total occupied population of Great Britain.
3 If we assume a steeper fall in the value of money and some increase in average
real incomes between 1783 and 1802 the implied rise in the annual value of capital
formation is even larger.
75
forms of new capital formation outside of industry and agriculture
- may have absorbed capital of up to £1! million annually in the
last decade of the eighteenth and the first decade of the twentieth
century. 1
The contemporary estimates are, of course, highly speculative
and we have little evidence against which to check them. Where
we can do so, however, they seem to give an exaggerated rather
than a conservative view of what was taking place in the field of
capital formation. There is very little material of other kinds and
what there is does not suggest larger changes in the volume of capital
formation. Figures of brick output, for example, which begin in
1785, were liable to fluctuate widely (they nearly doubled in the
canal mania of the early 1790's), but production in the quinquen-
nium 1800/4 was only 25 per cent above the 1785/89 quinquennium
- a rise that was not much greater than the increase in population.
The machine age had not yet begun. The first factory for the
manufacture of textile machinery was set up in 1790, but by the
end of the century had made only 19 mules. 2 Probably less than
1000 steam-engines of all kinds were at work in Britain at the turn
of the century, yielding a total horse-power of between 10,000 and
15,000 and a total capital of under half a million pounds.J
There is thus no evidence that the industries which are said to
have 'ignited' the industrial revolution had had much effect on the
national rate of capital formation by the beginning of the nineteenth
century. The scale of their activities was still quite small. Then,
according to the estimates made by Beeke and Colquhoun, roughly
55 per cent of the national capital was in land, 14 or 15 per cent in
buildings, about 9 per cent in farm capital, about 2 per cent in
public property, and the remaining 20 per cent in industry, com-
merce, and transport (including canals and turnpike trusts).4 Nor
1 These estimates are made and discussed in Deane and Cole, op. cit.
• B. P. Dobson, The Story of the Evolution of the Spinning Machine.
3 Cf. John Lord, Capital and Steampower, 1750-1800 (1923), p. 176: 'The
number of steam engines in Great Britain and Ireland in the year 1800 was 321,
representing a total horse power of 5,210'. This, however, relates to Boulton and
Watt engines only and though they were the most expensive and powerful they
were not the only ones available. It has been estimated that they built no more
than a third of the engines installed in Lancashire during the period of their
patent (1775-1800) and that by 1794 only about half of the engines operating in
Cornwall were of their make. 'Thus in the two counties which made most use of
steam power before 1800 Boulton and Watt had nothing like a monopoly: their
engine had not succeeded in ousting the Newcomen engine and piracies of their
own were innumerable.' See A. E. Musson and E. Robinson, 'The Early Growth
of Steam Power', Economic History Review, April1959, p. 439.
4 Rev. H. Beeke, Observations on the Produce of the Income Tax, etc. (1800),
and P. Colquhoun, Treatise on the Wealth, etc. of the British Empire (1815). The
contemporary estimates of national capital were largely obtained by capitalizing
income estimates. See Deane and Cole, op. cit. for a discussion of them.
76
do the estimates made by Pebrer circa 1833 suggest that the share
of land had fallen by the latter date. Indeed, so far as there
is evidence for an increased rate of investment during the period
covering the turn of the century it is most impressive in the agri-
cultural sector. Enclosures of common pasture and waste by Act
of Parliament involved about 75,000 acres in the period 1727-60,
about 478,000 between 1761 and 1792, about 274,000 in 1793-1801
and reached their peak of nearly 740,000 in the period 1802-15.
Because we do not know how large a proportion of total enclosure
the statutorily enclosed acreage represents, these figures are not con-
clusive evidence of a rising rate of investment in agriculture : but
they do afford some support for the view that the agricultural revolu-
tion was still in progress.
V. THE R6LE OF INTERNATIONAL TRADE

It would seem, therefore, that it is possible to exaggerate the
scale and decisiveness of the economic change which was achieved
in Britain during the last two decades of the eighteenth century.
The rate of growth may have accelerated, but the beginnings of the
acceleration derive from an earlier period. Certainly the pace of
industrialization quickened, but the industries which responded to
innovation were a mere fraction of the national total at this stage.
It was not industry but agriculture which developed increased pro-
duction on a scale which permitted population to increase and to go
on increasing at this period.
There was one sector, however, in which the acceleration which
took place in the last two decades was sufficiently sudden and im-
portant to suggest a break-through. This was in the sphere of
international trade. The volume of domestic exports expanded
more strongly at this period than ever before - or indeed ever after,
though something like this impetus reappeared in the mid-nineteenth
century. There was a somewhat stronger upsurge in the volume
of re-exports and, of course, in total imports. If we are looking
for evidence of a take-off which occurred in the last two decades
of the eighteenth century and which continued to power the economy
throughout the 'drive to maturity' we may find it here. This was
the sector which developed increasing returns by carrying the pro-
ducts of British industry to mass markets, which reaped the advan-
tages of new resources and technical progress in primary producing
countries and which created a world demand for new products.
The view that the take-off originated in the overseas trade sector
has been developed in a recent article by Kenneth Berrill. 'The
77
crux of the argument . • . is that the most vital circumstance for
the first industrial revolution was the market condition in the
trading area, and this was only slowly ripening before 1780.' 1 This
is in many ways the most satisfying interpretation of the British
experience. Indeed the evidence that there was a decisive change
of momentum affecting the whole economy in the last two decades
of the eighteenth century derives almost exclusively from the evi-
dence of the overseas trade statistics. Nor is it necessary, on this
interpretation, to make the innovations in cotton and iron carry a
heavier burden of significance than those industries warranted. For
even without the cotton and iron components the volume of domestic
exports increased by about half over the decade 1779/83 and 1789/93
and about a third over the decade 1789/93 to 1799/1803. This was
still a stronger sustained rise than any of the earlier export figures
show for a comparable period.
The timing of the upsurge that appears in the overseas trade
figures, however, seems to owe more to the fortunes of war than to
technological change. As a result of the American war the volume
of exports to North America in the quinquennium 1780/84 was
only 65 per cent of the 1770/74 level; and imports from this area,
which were the source of an important British export trade, had
dropped to 27 per cent of their pre-war level. The cessation of
hostilities would itself explain a large part of the rise which took
place in the 1780's. In the 1790's, on the other hand, the French
wars, by crippling Britain's major commercial competitors on the
continent of Europe, opened up substantial new markets for domestic
and entrepot traffic. Between 1790/4 and 1800/4 the volume of
exports from Britain to Europe almost doubled, after several decades
of stagnation, and those to North America increased by 58 per cent.
To the extension of the market which took place in the 1790's and
early 1800's the power of the British navy contributed at least as
much as the inventiveness of British industrialists.
For exports (including re-exports) the big leap came between
1780/4 and 1800/4 when their total volume more than doubled. At
that time it was Britain which was in effective control of the trade
routes across the Atlantic and to the Far East. She alone could
take full advantage of the markets created by growing populations
and incomes in Europe and the United States. In the next decade
the continental blockade and the American boycott reduced this
advantage and exports increased by only 20 per cent. Table 2
illustrates the expansion of exports to Europe and North America
1 K. Berrill, ' International Trade and the Rate of Economic Growth',
Economic History Review, April 1960, p. 358.
78
which began as a rebound from the American War, gathered mo-
mentum in the 1790's, and was matched by an almost equally strong
expansion of imports from Asia and the British West Indies.
Thus although British industrialists were confronted by inflation
and high taxation during the war period, British merchants drew
on sources from which many of their competitors were debarred
to supply expanding markets in the old world and the new. 1 This,
rather than the lowering of costs in domestic industry, explains the
TABLE 2
THE CHANGING DIRECTION OF BRITISH TRADE
Official values (in millions of pounds) of exports and imports from
or to Great Britain : quinquennial totals
Other Central
Europe Asia North America Br. West Indies and Southern
America
Expts. Impts. Expts. Impts. Expts. Impts. Expts. Impts. Expts. Impts.
1760/64 43·7 21·9 7·0 6·0 11-1 5·3 5·4 10·6 0·8 2·8
1765/69 38·0 24·4 8·1 9·1 10·9 6·2 6·0 13·9 t 0·3
1770/74 38·9 24·7 5·2 9·9 15·7 7·1 6·7 16·1 t 0·4
1775/79 36·8 25·4 6·3 7·0 5·7 2·8 6·9 16·6 t 0·2
1780/84 27·5 26·1 6·8 8·7 10·2 1·9 7·2 13·3 0·5 0·3
1785/89 39·2 31·0 11·9 16·6 14·5 5·8 7·8 19·6 0·1 0·8
1790/94 47·4 37·9 17·0 17·9 24·0 6·1 13·9 20·9 0·3 1·3
1795/99 55·6 38·7 15·5 24·4 33·8 9·3 20·0 24·0 4·2 4·9
1800/4 89·6 45·6 18·6 23·4 37·9 12·5 19·1 38·2 1-9 6·4
1805/90 76·4 40·0 13·5 21·1 38·6 12·2 25·0 40·0 14·7 11·2
1810/14. 113·5 40·0 10·7 27·0 28·3 11·2 25·5 40·9 21·8 24·4
1815/19 135·7 41·9 14·9 40·2 49·3 16·8 28·6 40·3 21·0 11·4
• Partly estimated: 1813 figures not available.
t Negligible (under £100,000).
expansion of exports in the war period. Indeed there is little evi-

dence - even in the cotton industry-that there had been a large
absolute fall in the price of the final product by the end of the first
decade of the nineteenth century. True, the spinning section had
enjoyed a spectacular fall in costs and the cost of the raw material
had declined sharply, but the weaving and finishing sections were
still operating with much the same techniques as they had used
for centuries, and wages were inflated by the wartime labour short-
age. It is significant, for example, that the declared value of cotton
manufactures did not fall below the official value untill815.z
1 Probably merchants were able to evade much of the tax burden of the war.
It was in the nature of the income tax system that farmers and industrialists oper-
ating in definable locations and with fixed capital, were more essily assessed to
tax than merchants and shopkeepers. Duty assessed under Schedule D, for
example, was about £31 million in 1813 as in 1806, wheress duty assessed under
all other Schedules had gone up by about a third.
3 The official value reflected prices prevailing at the end of the seventeenth
century, and probably for much of the eighteenth century before the price inflation
of the last two or three decades.
79
The case for regarding international trade as the crucial factor in
British economic growth at this period requires further examination.
The precise mechanism by which it became an 'engine of growth'
or a 'leading sector' has still to be explored. There seems little
doubt, however, that an expansion of the volume of overseas trade
was capable of having important multiplier effects on the British
economy at the end of the eighteenth century, that it tended to be
self-reinforcing (in that imports tended to generate exports and vice
versa) and that it provided British entrepreneurs with a means of
exploiting advances in productivity both in this country and abroad. 1
Two other features of British economic history lend support to this
thesis. One is that the Great Specializations of the nineteenth
century coincided with the most rapid rate of sustained growth in
real incomes that this country has ever known. The other is that
when world trade collapsed in the interwar period of the twentieth
century the British rate of growth and of capital formation fell to
pre-industrial levels.
VI. THE INDUSTRIAL REVOLUTION AS A TAKE-OFF

The conclusion which emerges from the above discussion there-
fore is that the changes in overall rates of growth, in production
functions, or in rates of capital formation which took place during
the period 1783-1802 were not in themselves decisive enough to
constitute a take-off as defined for the Rostow model. Indeed it is
doubtful whether any period of two or three decades in British
history could be cast in this mould of 'a period when the scale of
productive economic activity reaches a critical level and produces
changes which lead to a massive and progressive structural trans-
formation' in the economy and the society of which it is a part. 2
Probably the railway age comes closer to this than any other. The
construction boom was massive enough. At its peak (1847) ex-
penditure on railways reached 12 per cent of national income, which
was more than the total declared value of U.K. domestic exports.
It was in the 1830's and 1840's, if at all, that the rate of capital
formation shifted to a new level and the revolutionary importance
of the railways for other sectors of the economy than those directly
affected by the construction boom needs no emphasis. On the
other haf\d, by the 1830's, when the railway age gathered momentum,
1 Cf. Berrill, op. cit. p. 358 : 'Had it not been for the productivity of the virgin
upland soil of the southern United States the first Industrial Revolution might
have been delayed quite a while'.
a Rostow, op. cit. p. 40.
So
TABLE 3
INDICATORS OF THE RATE OF GROWfH 1731-1831
Percentage volume change per decade 1
1729/33 1739/43 1749/53 1759/63 1769/73 1779/83 1789/93 1809/13 1819/23
to to to to to to to to to
1739/43 1749/53 1759/63 1769/73 1779{83 1789/93 1799/1803 1819/23 1829/33
% % % % % % % % %
Population • -0·4 +3·6 +7·0 +7·3 +6·8 +9·5 +11·0 +14·3 +18-1
Imports t -0·8 +8-1 +18-1 +30·5 -10·9 +61-1 +56·8 +8·0 +3·7
Domestic exports t +10·4 +49·4 +14·7 -3-2 -16·9 +77-1 +58·5 +26·8 +38·6
Re-exports t +15-1 -2·3 +21·2 +26·4 -19·4 +31-6 +62-3 -4·8 -2·2
Cotton t -12 +72 -5 +33 +110 +272 +84 +60 +46
Silk§ -38 +15 +25 +24 +6 +37 -8 +16 +18
Scots linen II +19 +73 +66 -7 +11 +34 +15 -4 +40
Yorks woollens 4!1 +32 +14 -1 +73 +20 +61 +43 +8
Printed goods •• +22 +36 +45 +43 +5 +103 +101 +50 +55
00
Beer tt +2 +6 +3 -5 +11 +6 +9 +11 -3
... Spirits tt +63 -18 -61 +8 -4 +68 -7 +57 -23
Candles§§ -3 +11 +12 +3 +6 +10 +19 +8 +26
White ~lass 1111 +2 +4 +9 - +5 +9 +6 +25
Paper 4![ +15 +28 +30 +24 +14 +47 +16 +33 +20
Tin ••• +8 +31 +15 +13 -9 +28 -22 -12 -42
Hides and skins*** +5 +4 +9 - +5 +9 +6 +25 ..
• Brownlee's estimates for eighteenth century: census results thereafter.
t At official values ( 1697 prices).
: Raw cotton imports.
§ Imports raw and thrown silk aggregated with thrown given l weight raw.
II Scots linen stamped for sale.
~ Broads and narrows aggregated with narrows given l weight broad.
•• Excluding paper. Excise data.
tt Strong and small and table beer aggregated with small and table given l weight strong : excise data.
U England and Wales only : excise data.
§§ Excluding wax candles - excise data.
Jill All glass excluding botUe glass : excise data in tons.
'11'11 Using Coleman's method of aggregating different kinds paper. England and Wales only.
••• Excise data.
1 N.B.-AJl above percentages (except those for population for which decade interval observations only were available)
were calculated by comparing annual averages for quinquennia indicated.
the British economy had been growing rapidly (by pre-industrial
standards) for nearly half a century.
In the end it seems that the most striking characteristic of the
first take-off was its gradualness. Professor Nef has traced the pro-
cess of industrialization back to the sixteenth century. The sustained
rise in the rate of growth in total output probably dates back to the
1740's. If the 1780's be taken as the starting-point for the revolu-
tionary changes in industrial technique and organization then it took
about a century for the long-term rate of growth in average real
incomes (measured over thirty-year periods) to rise from about 1 per
cent per annum to just over 2 per cent per annum. It took as long
for the share of agriculture in the national product to drop to near
10 per cent and nearly another half century for it to fall below
5 per cent. The evidence suggests a long steady climb, inspired
by periodic bursts of energy or of enterprise and lagging seriously
only in the twentieth-century interwar period.
82
Chapter 5
GOVERNMENT ACTIVITY AND INDUS-

TRIALIZATION IN GERMANY (1815-70)
BY
WOLFRAM FISCHER
(University of Munster)
I. THE BRITISH AND CONTINENTAL CASES

IT is often said that industrialization on the Continent was not
initiated by private enterprise alone as in the British Isles, but was
essentially assisted by government activity. 'On the Continent the
State played a much more active part in fostering economic prog-
ress than was customary in England or Scotland in the early nine-
teenth century', writes W. 0. Henderson, one of the foremost
experts in the comparative economic history of Europe in the
nineteenth century. 1 'To a Frenchman, or a German, the economic
activities of the government in Ireland were normal while the
laissez-faire attitude of the government in England was abnormal.'
On the Continent, indeed, governments were responsible not
only for what we call today the 'infra-structure' - roads, bridges,
canals, and railways, or the organization of the postal services -but
they also owned numerous landed estates, forests, mines, foundries,
factories, and banks. Government property had always played a
considerable role in the national economy. In 1850 one-fifth of
the coal output of Prussia came from state-owned mines ; in 1907
one-tenth of all workers in industry, commerce, and transport in
Germany were employed in public enterprises. 2 State control was
exercised through civil servants who operated state-owned under-
takings. In mining and the iron and steel industry especially public
enterprises could dominate the entire sector.
Another means of government influence took the form of so-
called 'industrial promotion' ( Gewerbeforderung). By that term
nineteenth-century Germany understood a series of measures by
which governments promoted industrial progress indirectly. They
1 W. 0. Henderson, The State and the Industrial Revolution in Prussia, 1740-
1870, Liverpool University Press, 1958, p. xvi.
• Ibid. pp. xvii-xxiii.
secured patent rights or technical knowledge ; established technical
and commercial schools ; provided for industrial exhibitions ; sent
officials, students, manufacturers, or technicians to England, France,
and Belgium to study industrial methods there ; encouraged native
craftsmen to employ imported machinery ; or encouraged foreign
craftsmen to settle in their countries.
Continental governments were, of course, familiar also with the
two 'normal' means of exercising influence on economic affairs :
economic measures, especially those of fiscal policy, such as customs,
taxes, subsidies, monopolies, or other privileges ; and the construc-
tion of a legal framework for trade and industry. But they did not
limit their activities to constructing that framework, as might have
been the case sometimes in Britain and in other 'classical' instances.
In considering government activity in Germany at the outset of
industrialization we may thus distinguish three different functions :
(i) Governments acting as legislator:
(a) patent law
(b) trade law
(c) customs law
(ii) Governments acting as administrator:
(a) fiscal policy
(b) general economic policy and in particular industrial
promotion
(c) mfra-structure
(iii) Governments acting as entrepreneurs :
(a) landed property, including forests
(b) mines and industries
(c) banking, insurance and other institutions for capital
formation.
II. GOVERNMENT AS LEGISLATOR

Any consideration of government activity in nineteenth-century
Germany should take into account that here, as in most Continental
states, older traditions continued. Germany had no French Revolu-
tion ; and Germany neither had the chance of building a modern
society from the foundations as did America, nor a long trend
towards a more liberal or democratic way of life as in England.
German territories had, it is true, been modernized step by step
since the later middle ages. Moreover in the age of enlightenment
many princes had introduced reforms into their governments and
even into their social systems. But there was no revolutionary break
84
Fischer - Government and Industrialization in Germany
with the past, no abolition of the 'feudal system', whatever we
understand by that ambiguous term.
Finally, down to 1870, there was no real central government.
Though the three hundred odd territories of the Old German Em-
pire did not revive after defeat by Napoleon, some thirty still
'sovereign' states existed within the borders of the 'German Con-
federation' (Deutscher Bun d). Each of them passed its own legis-
lation and made its own economic policy. The Zollverein (founded
1834) only served to co-ordinate the customs and their administra-
tion ; its activity was, at least at the ~tart, rather a matter of fiscal
than commercial policy. 1 Most of the attempts to co-ordinate
economic policy and economic legislation in Germany by means of
the Zollverein failed completely or were at least delayed for decades.
A comprehensive code of commercial law for the whole Zollverein,
though proposed by Wiirttemburg in 1836, was not introduced
before 1857-61, when most of the Zollverein states adopted a
Prussian draft. A monetary convention between the Zollverein and
Austria, concluded in 1857, collapsed because of Austria's failure
to restrain her inflation. Within the Zollverein, only an exchange
between the Prussian thaler and a new gulden was fixed, giving both
the character of a Zollverein currency, while each member reserved
the right to issue currency.z
The extent to which economic legislation could remain, down
to 1870, no more than a matter of many governments informing
each other of their plans and principles but acting on their own, is
well illustrated by the case of the patent law, generally recognized
as important for industrialization.
At the beginning of the nineteenth century a specific patent law
was unknown in Germany. Technical inventions were protected in
the same way as commercial rights. The common legal instrument
was the privilegium exclusivum securing its holder certain mono-
polistic rights : the exclusive right of exploiting certain minerals ;
the exclusive right to produce or trade in certain goods ; the ex-
clusive right of employing certain specialized workers ; the exclusive
right to use certain machines or methods. The commercial and
technical sides of those privileges were as yet not distinguished.
Since physiocratic and liberal theories spreading over Germany
in the late eighteenth and early nineteenth centuries opposed such
monopolies because of their restrictive effects, it became necessary
1 Cf. W. Fischer, 'The German Zollverein: A Case Study in Customs Union',
Kyklos, Vol. XIII, 1960, pp. 65-89. W. 0. Henderson, The Zollverein, 2nd ed.,
London, 1960.
• Cf. W. M. Frh. v. Hissing, 'Der deutsche Zollverein und die monetliren
Probleme', Schmollers Jahrbuch, Vol. 79, 1959, pp. 71-86.
ss
to find some means of protecting technical inventions. Rigid liberals
wished, it is true, to deny monopolistic protection even to the in-
ventor, but generally it was accepted that protection should be
granted to innovators for the products of their ingenuity within
limits both of time and space.
The means for doing so was patent legislation as developed
earlier in the Western countries. Once more in nineteenth-century
Germany, Prussia was the first to modernize. After 1810 a patent
law was drafted which became effective in 1815, the year the new
order in Germany was established after Napoleon's exile. It con-
fined grants of monopoly to genuinely new inventions involving
considerable improvements or to devices imported for the first time
from abroad and put to practical use. Of special interest in this
definition is the phrase 'first introduction from foreign countries'.
This is an additional protection which may be regarded as typical
for a backward area needing the import of inventions and innova-
tions to overcome its backwardness. The question whether such
'introductio11 patents' ought to be granted aroused widespread dis-
cussion within the Zollverein states ; and, as time went on, it was
more generally argued that this type of patent was not a protection
of genuine inventions and original ideas so much as a reward to
those industrialists clever enough to appropriate foreign improve-
ments.
Another characteristic feature of the Prussian legislation, dis-
tinguishing it from that in other Western states, was the establishment
of a special authority to examine the patent claims from the technical
aspect. Whereas in England anybody ready to pay for the protection
of an invention could claim it, in Prussia the state determined
through its own experts whether the invention was actually 'new
and genuine' as the law prescribed. Government reserved to itself
the judgment which in liberal England was left to economic com-
petition. This is one of the very interesting differences between the
English and Continental process of industrialization.
But not all German governments chose the same system. As
often in the development of new forms and institutions for economic
development, Prussia's closest competitor, apart from Austria, was
Saxony. Saxony, with the exception of the western parts of Prussia,
was the earliest and most intensively industrialized area of Germany ;
and it took a more liberal point of view. Her leading officials did
not believe as strongly in the wisdom of governmental intervention
as did Prussia's. Partly because of a more developed and better
proportioned social structure, with a broader middle class, partly
because of a powerful mistrust of Prussia and of her political methods,
86
Saxony preferred to develop her own approach towards the political,
social, and economic problems of the century. As regards patent
law, she did not establish any technical authority, nor did she deter-
mine the value of the claimed rights before granting them, but, as
in England, left all this to private competition. When the other
Zollverein states discussed the issue of a common Zollverein
patent law in the 'thirties and 'forties, Saxony not only cited the
successful English example but also pointed out that the Prussian
authority, in spite of its high standards, had rejected several far-
reaching inventions like the Schonherr loom (introduced as a novelty
even in England) and had protected various rather obscure projects
which never succeeded or were of no practical use.
It is interesting to note that the southern German states tended
to prefer Prussia's solution to that of Saxony. In addition to the
Prussian case for testing inventions, they argued that technical inno-
vations to be patented should not only be 'new and genuine' but
also 'essential and useful'. In the 'fifties, the famous Professor
Redtenbacher of the Karlsruhe Polytechnical School, originator of
'scientific machine-building' and expert to the government of Baden,
argued that Germany and her states were too small and her industry
insufficiently developed to permit a patent system without govern-
mental control. Registration fees as high as those in England could
not be afforded by German inventors as the prospective gains from
their patents were small in a scarcely developed industry, while
low registration fees would encourage too many unimportant im-
provements to be registered. In this situation government examina-
tions offered the only chance of a reasonable patent system. Less
promising projects might be examined by the authorities of the
individual states ; inventions of more consequence by a common
authority to be established by the Zollverein.
But the Zollverein never established any such authority. As
a loose association of sovereign states the Zollverein left it to the
members to organize their own offices. Not until the foundation
of the Second Empire was a common federal patent law issued and
a common patent authority established. 1
Judging from these attempts of the German states to secure a
common patent law between 1815 and 1870, we may say that they
were still in search of an adequate legal framework for an industrial
economy, and perhaps this is typical for the take-off period in any
country.
Where the states could act on their individual responsibility,
1 For the whole issue cf. W. Fischer, Staat und Industrie in Baden, 1800-1850,
Vol. I, Berlin, 1960.
the process of adaptation to industrialism was more rapid and far-
reaching. The reform of the Prussian mining laws may serve as an
example. In mining, traditions and old 'feudal' laws were particu-
larly strong ; the expansion of the Ruhr area, for instance, was
handicapped by them, where they could not simply be disregarded.
From the 'forties, the leading entrepreneurs of the Ruhr area had
pressed the government to adapt its legislation to modern conditions
of large-scale enterprise. Thus a series of laws were passed in the
period 1851-65 freeing mining enterprises from the state super-
vision characteristic of earlier legislation. The government reduced
its own functions to those of special police and technical supervision.
Liberal principles now dominated where, fifty years earlier, the state
had managed private enterprises and distributed profits to the owners. 1
The development of legislation governing trade (Gewerberecht)
was not so unequivocal. Some German states, particularly in the
west, preserved the freedom of trade and enterprise which had
grown up in Napoleonic times. Others, such as Hanover or Bruns-
wick, returned to rigid regimentation. Prussia was the first (1807-10
a"nd 1845) to liberalize her trade, although freedom was restricted
to a certain extent in 1849. Most of the medium-sized states chose
a middle course here also. They abolished the strict rules of the
past but preserved the right of concession at least for bigger under-
takings, particularly joint-stock-companies and banks. They pro-
moted industry but controlled it. 2 Liberal principles finally became
dominant in the general commercial codex of the Northern German
Confederation of 1869 which ultimately became the commercial law
of the ' Reich' after 1871.
The development of German customs legislation in the nineteenth
century is better known than that of patent and trade law. There
have been many studies of the history and economics of the Zoll-
verein.J It is sufficient to mention that when the Prussian customs
legislation of 1818 laid the foundation of the German customs
system, fiscal and political issues were more important than economic
issues. Economic advantages were desired rather for trade and
1 A. Prym, Staatswirtschaft und Privatunternehmung in der Geschichte des
Ruhr
kohlenbergbaus, Essen, 1950; F. Schunder, Tradition und Fortschritt: Hundert
Jahre Gemeinschaftsarbeit im Ruhrbergbau, Stuttgart, 1959; W. Fischer, Wirtschafts-
und sozialpolitische Auffassungen bei der Reform des preussischen Bergrechts, 1851-
1865, in preparation.
2 K. v. Rohrscheidt, Vom Zunftzwange zur Gewerbejreiheit, Berlin, 1898.
W. Fischer, Handwerksrecht und Handwerkswirtschaft um 1800, Studien zur Sozial-
und Wirtschaftsverfassung vor der industriellen Revolution, Berlin, 1955.
3 The best comprehensive history is W. 0. Henderson (see footnote 1, p. 83).
See also: A. H. Price, The Evolution of the Zollverein, 1949. For the economic
aspect see, e.g., J. Viner, The Customs Union Issue, London, 1950, or J. E. Meade,
The Theory of Customs Union, Amsterdam, 1955.
88
commerce in general than for industrialization and growth of the
national economy especially. The idea of a protective tariff system,
advocated by Friedrich List and the German Trade Association
(Deutscher Handelsverein) since 1819, did not come under govern-
ment consideration before the 'forties, when the competition of the
English cotton industry pressed hard on those of Saxony, Silesia,
Rhineland, and South Germany and when British iron and iron;.
products threatened to prevent the expansion of German basic
industries. But even then, and down to 1870, the German customs
system never became as highly protective or as exclusive as those
of Austria, Russia, France, or the United States. Germany took a
middle course between free-trading Great Britain and Switzerland
on the one side, and protective continental countries on the other.
As a means for forcing industrialization the customs system was
hardly used by German governments.
III. GOVERNMENT AS ADMINISTRATOR

The same conclusion emerges from an examination of German
fiscal policy. Nineteenth-century Germany did not make extensive
use of fiscal measures for economic development. Fiscal policy
aimed to safeguard the exchequer. Certainly there were some fiscal
measures that promoted industry and others that obstructed it.
Certainly there were vested interests which tried to influence govern-
ment measures in one or another direction. As early as 1841 asso-
ciations were formed in the cotton and sugar industries which
demanded from the member states of the Zollverein changes in
customs and taxes to suit their specific requirements. In some of
the states, such as Saxony or Baden, the whole industry joined in
associations to fight for its interests. Often these associations were
used by governments for expert advice on commercial and even
fiscal issues. Their activities grew when, in the 'fifties and 'sixties,
the Zollverein negotiated important commercial treaties with foreign
countries. But their influence and demands were never decisive in
economic affairs of national interest. Until the 'eighties vested
interests were never strong enough in Germany to compete with
the authority of government.
On the whole, down to 1870- and certainly down to 1848-
governments in Germany still acted on their own judgment and
considered it superior to that of the common citizen. Whether
constitutional (as in the southern states) or stiindisch (as in Prussia)
the state relied in the first place not on the citizen but on the civil
89
servant. One can still describe that regime as an enlightened
bureaucracy acting for the common interest of, but not through, the
citizens. The same form of government prevailed in economic
affairs ; although the commercial middle class, at least in some
regions such as the Rhineland, emancipated itself more and more.
But the normal German businessman of the mid-century, living in
a town of perhaps three to five thousand, in a state varying from some
hundred thousands to a million or two people, and ruled by a bene-
volent prince and a paternalistic government, was still to be regarded
as a man of limited horizon, competent to do his daily business but
not to serve common interests or to develop new ways of life.
It was that spirit of benevolent bureaucracy which created the
specific German form of industrial promotion. As in the eighteenth
century the lower classes had been educated for 'industry' - in
diligence, reliability, assiduity- now the middle-class citizen was
educated for entrepreneurship. There were, of course, many who
declined to be thus patronized. The debates of the few German
Parliaments before 1848 and the Frankfort Parliament in the revolu-
tion show these liberal middle classes in action ; but in the second
half of the century, wide industrial areas were still promoted in this
way. The most famous example was in Wi.irttemberg where Ferdi-
nand Steinbeiss, a former mining engineer and industrial manager,
was employed by the newly established Central Office for Trade
and Industry (Zentralstelle fiir Handel und Gewerbe) in 1848 to
promote the economic development of the country through indirect
government assistance. 1 He and colleagues with similar functions,
like Beuth with his Gewerbeinstitut in Prussia, represent one of the
most interesting factors of German industrial development.
It is impossible even to list the activities these industrial pro-
motion offices attempted. Their common aim was to help native
industrialists, technicians, and artisans to develop a more active,
more enterprising form of business. 'Encouragement to industry',
it might be called. Whether they gave scholarships to gifted young
men like Gottlieb Daimler, a Suebian gunsmith, whether they bought
new machinery at government expense for exhibition or for lease
to interested businessmen, whether they co-ordinated a group of
more enterprising individuals in some particular area, whether they
helped to establish commercial and technical associations or co-
operated with the Chambers of Commerce -the aim was always
to stimulate the spirit of enterprise and innovation.
It seems to me that this is one of the most important functions
1 P. Siebertz, Ferdinand von Steinbeiss: ein Wegbereiter der Wirtschaft, Stutt-
gart, 1952.
for governments of underdeveloped countries, more important per-
haps than planning and directing industry itself. For economic
growth and industrialization will only take off finally in some country
when there are enough skilled and enterprising men able and willing
to undertake innovations and to make social and economic behaviour
conform to industrial patterns.
IV. GOVERNMENT AS ENTREPRENEUR

State-owned enterprises may be a most effective means for
government intervention of this kind. It is not our immediate prob-
lem to decide whether the best solution for gravely underdeveloped
countries is the totally socialized economy ; we have only to analyse
German conditions at the period of the take-off. The German eco-
nomy of the nineteenth century was never 'backward' in the sense
given to the term in the second half of the twentieth century. It was
'backward' in comparison with England, France, Belgium, or
Switzerland but progressive in comparison with eastern or southern
Europe, not to speak of the rest of the world apart from North
America. There was a highly differentiated organization of artisan-
ship, there were developed forms of trade, there was an intensive
agriculture and a fairly high standard of general education. The
gap between Germany and the most developed countries was indeed
large, but not insurmountable. Germany needed only two or three
generations to overcome this gap and to step into the first rank of
industrial countries.
From the seventeenth century onward, state-enterprise did much
to surmount the gap. Some of the most highly developed industries,
more particularly those producing luxuries and armaments, were
owned by princes and were carefully nurtured. In the nineteenth
century, the attitude to that kind of state entrepreneurship changed.
More and more it was made a ruling principle that the state ought
not to manage commercial undertakings itself. Private enterprise
had proved to be more efficient ; and state-enterprise was said to
be tainted by unfair competition. From the latter eighteenth century
onwards the 'chambers', the forerunners of the ministries of finance,
sought to dispose of princely properties, particularly but not exclu-
sively in the form of land.
There were notable exceptions to that general rule. In Prussia,
but not in Prussia alone, the needs of the armed forces induced the
government to retain a number of key positions in the basic and
armament industries. The nationalization of the railway system was
91
later carried out for this reason. For the same reasons the Prussian
state tried to regain a decisive influence in the coal industry at the
beginning of the twentieth century. This was, however, subsequent
to the period of take-off.
More peaceful arguments were adduced when, about 1840, for
the first time a German government and parliament - that of the
Grand Duchy of Baden - decided that a whole railway system
should be built and run by the state. 1 The railway was felt to be
so important to that small and narrow country in the extreme
south-west of Germany with its important through-traffic from the
north to Switzerland and Italy, that it could not be left to private
interests. Like the waterways, roads, and bridges, the new instru-
ment of traffic was to serve mainly the public welfare. Moreover
the cautious people of Baden thoroughly mistrusted private specu-
lation in capital accumulation for the railway. Even before the fever
following the credit mobilier project in France in the 'fifties they
would not trust private bankers to raise such enormous sums with-
out government assistance, implying state-guarantees as well as
supervision. Finally, their patriotism made them fear foreign infil-
tration. They knew that native capital would form but a small
part of the capital needed, and they did not wish to become dependent
on the bankers of Frankfort, Cologne, or Basle, or on French and
English big business. This patriotism, which, in Germany, finally
changed into ambitious nationalism, is an important factor in
shaping a country's industrial development. To most statesmen,
economic growth and social welfare in backward countries seem
only to be achievable by compulsory exclusion of foreign influence.
Economic arguments alone are seldom a counterbalance to such
feelings. To that rule Switzerland appears to remain one of very
few exceptions.
For economic growth, the accumulation of capital plays today
a very similar role to that of railways in the traffic system of a
nineteenth-century continental state. Ambitious economic politi-
cians are seeking to bring institutions for capital accumulation, such
as banks, insurance companies, and the like, under their control.
In nineteenth-century Germany many of these institutions grew
out of the older functions of lending money to princes and the
nobility. Many of the private bankers had always been in close
contact with a court and a government. Just as these often de-
pended largely on their money-lenders, so the bankers for their part
depended on the favours of a government and on the monopolistic
position often granted to them.
1 A. Kuntzemiiller, Die badischen Eisenbahnm, 2nd ed., Karlsruhe, 1953.
92
Fischer- Government and Industrialization in Germany
But beside that close relationship between private bankers and
government, there were important financial institutions owned by
the state itself and run by its civil servants. In a country like Baden,
which did not establish a central bank until 1870, the most im-
portant institution for capital accumulation was the 'Amortization-
Office' (Amortisationskasse ), a public institution founded to amortize
the government debts of the Napoleonic period, but used increas-
ingly by the government to promote development and to meet
structural crises, particularly during the depression years 1847-9. 1
The most famous of such state-owned financial institutions in
Germany is the Prussian Seehandlung. 2 The Seehandlung (Over-
seas Trading Corporation) was founded by Frederick the Great in
1772 with an initial capital of 1· 2 million thalers and privileges
typical of the age of mercantilism. During the wars of the French
Revolution it was much concerned with war finance ; but thereafter
beside its main function, the raising of government loans, its chief
manager, Christian von Rother, took on the second function of
what may be called 'development banking'. He raised loans for
road building and the establishment of factories. He tried to find
new markets for Prussian manufactures, particularly for the hard-hit
Silesian and Westphalian linen industries. He established state-
owned warehouses at Stettin and New York and sent ships to South
America and the Far East. In the 'forties two vessels owned by
the Seehandlung sailed regularly from Hamburg (a sovereign State
and never a Prussian seaport) to India, China, Brazil, and the West
Indies. The Seehandlung engaged also in wholesale trade in linens,
woollens, flour, salt, and alum.
Between 1822 and 1843 it exported linen worth more than
4·7 m. thalers. In the 'twenties the Seehandlung was financially
responsible for the construction of some 600 miles of highways.
In June 1825 about 15,000 men were employed on construction of
these. Though first an opponent of railways, Rother finally bought
railway shares to the amount of some million thalers. As a pro-
moter of industry he aimed to establish model factories and to
alleviate unemployment and underemployment in districts where
crafts were declining. In the 'forties, the Seehandlung possessed
quite a number of factories, most of them in association with local
entrepreneurs or banks. In some of the Seehandlung's factories
modern British machinery was installed and skilled British artisans
were brought to Prussia to teach workers to use it. An examination
1 Cf. W. Fischer, Staat und Industrie in Baden, 1800-1850, Vol. I, Berlin, 1960.
• Cf. the chapter' Rother and the Seehandlung, 1810-1848' in W. 0. Henderson,
The State and the Industrial Revolution in Prussia, 1740-1870, Liverpool University
Press, 1958.
93
of the location of the Seehandlung factories in the 1840's shows that
nearly all of them lay east of the Elbe in small remote towns and
villages. Because of its many activities the Seehandlung had to
face accusations of unfair competition with private enterprise. After
1837, when Rother was appointed president of the Royal Bank in
Berlin while remaining in charge of the Seehandlung, he used his
combination of offices to reform the Prussian banking system. In
1846 he transformed the Royal Bank into the Bank of Prussia, a
modern central bank which became the forerunner of the Reichsbank
in 1875.
Second only to the technical assistance and advice of Beuth's
Gewerbeinstitut, Rother's industrial, commercial, and financial
activities were the most effective instruments of the Prussian govern-
ment in promoting economic development in the first half of the
nineteenth century. Both men serve as admirable examples of
Schum peter's dictum that 'the social stratum that supplied the
personnel of public administration was - excepting the urban re-
publics (Reichsstiidte) such as Hamburg or Bremen or Frankfurt
- much superior in intelligence, horizon, training, energy to the
personnel of such private industry as there was'. 1
It would be wrong to fail to emphasize in conclusion that the
countervailing tendency, the growing capacity of private enterprise
and entrepreneurship, became much stronger in Germany as the
nineteenth century progressed. There were active private pioneers
of industry in every region. 2 But local differences represent one
of the basic facts which must always be kept in mind in studying
the history and economics of German industrial growth.
1 J. A. Schumpeter, Business Cycles, Vol. I, 1939, p. 283.
• Examples may be found inter alia in : M. Barkhausen, 'Staatliche Wirtschafts-
lenkung und freies Unternehmertum im westdeutschen und im nord- und siid-
niederliindischen Raum bei der Entstehung der neuzeitlichen lndustrien im 18.
Jahrhdt.', Vierteljahrsschriftfiir Sozial- und Wirtschaftsgeschichte, Vol. 45,1958, pp.
168-241 ; W. Kollman, Sozialgeschichte der Stadt Barmen im 19. Jahrhundert,
Tiibingen, 1959 ; H. Kisch, 'The Textile Industries in Silesia and the Rhineland :
A Comparative Study in Industrialization', Journal of Economic History, 1959,
pp. 541-64; W. Fischer, 'Ansiitze zur lndustrialisierung in Baden, 1770-1870',
Vierteljahrsschriftfiir Sozial- und Wirtschaftsgeschichte, Vol. 47, 1960; F. Zunkel,
Entwicklungstendenzen im rheinisch-westfiilischen Unternehmertum, 1834-79, in
preparation.
94
Chapter 6
THE TAKE-OFF IN GERMANY 1

BY
WALTHER G. HOFFMANN
University of Munster
I. INTRODUCTORY REMARKS
IN dividing the process of economic growth into different stages
the question arises whether quantitative criteria such as investment
ratios and the rate of growth of real income would suffice or whether
qualitative criteria should be applied in addition. In our opinion
only the application of both sets of criteria can be adequate. The
economic upheavals in Germany during the first half of the nineteenth
century can be accounted for by qualitative changes which sometimes
proceeded discontinuously, as, for instance, those brought about by
the 'freedom of trade' (Gewerbefreiheit) and the establishment of
the Customs Union (Zollverein). Sometimes these changes occurred
slowly and continuously as was the case with the transition from
traditional to rational methods in the economy. These qualitative
changes had quantitative effects in the long run. There was no
sudden acceleration in the rates of growth in real income and in
number of production series. Hence we are led to apply qualitative
as well as quantitative criteria when demarcating the take-off period
in Germany and offering an analysis of it.
Apart from the general issue mentioned above we are faced
with a special problem in Germany : how far can the area which
was later to be known as the 'Deutsches Reich' be regarded as a
single economic unit during the initial period under consideration?
During the take-off period, Germany, unlike most other countries,
had not yet achieved her political unity. Before the Customs Union
was set up in 1834, the establishment of an internally unified market
was hindered by the customs barriers between the individual German
states. The unifying process was further hindered by the lack of
transport and communication facilities, a feature shared by other
countries as well. The economic integration of Germany led to a
1 I am indebted to Dr. Franz Knoll for his help in preparing this paper, which is
part of a broader study on the growth of the German economy.
95
better exploitation of the available resources, and hence may be
thought to have influenced the rate of growth of the social product
in the whole area.
Owing to her political disunity it is more difficult to characterize
the initial phase as a take-off period for the whole of Germany
than it would be for other countries. We shall try to establish the
fact that sustained growth in Germany - to use Professor Rostow's
terminology- set in after 1855/60 and that the preceding period
can be divided into a pre-conditions period from the end of the
eighteenth century till 1830/35 and into a take-off period between
1830/35 and 1855/60; we must bear in mind, however, that the
individual regions reached these phases at different times.
II. THE DEVELOPMENT OF POPULATION

In the nineteenth century there was a great increase of popula-
tion in all the countries of Europe undergoing industrialization. In
England this rise had already begun in the eighteenth century. The
growth of population set in shortly before, or simultaneously with,
the onset of economic growth, and was stronger in regions which
experienced quick industrialization than in regions which stagnated.
Hence there would seem to be some interrelation between the growth
of population and the growth of the economy. However, indus-
trialization is neither the cause nor the outcome of the growth of
population. In fact, the development of population and the transi-
tion into sustained growth are each dependent on the same circum-
stance: the dissolution of the old social order. This rendered
possible economic growth and encouraged the growth of population.
Before the beginning of the nineteenth century the size of popula-
tion was determined not by birth control measures but by fluctua-
tions in the frequency of and age at marriage. Essentially no limits
were imposed on the number of children once a marriage was
contracted. The age and frequency of marriage depended by and
large on the availability of employment as a peasant in the country-
side or a master craftsman's appointment in one of the guilds in
the city ; i.e. the age at and frequency of marriage depended on
the proportion of marriageable persons to the number of available
posts. 1
When the number of jobs rose as it did during the late Middle
Age through colonization, the marriage age fell and the frequency
1 Gerhard Mackenroth, Bevolkerungslehre, Berlin, Gottingen, Heidelberg, 1953,
pp. 119-22,413-32.
Hoffmann- The Take-off in Germany
of marriages rose, leading to a growth in population. As soon as
the colonization period ended, the marriage frequency fell and the
marriage age rose, resulting in stagnation in the size of the popula-
tion} By contrast, the nineteenth-century increase in population
can be explained by the break-down of this restrictive interrelation
between marriages and jobs as a result of the emancipation of the
peasantry and the introduction of 'trade freedom' (Gewerbefreiheit).
The traditional attitude regarding the size of the family (no birth
control) was maintained. 2 It was half a century later that birth
control set in and led to a fall of birth rates in Germany after 1875.
Since, however, death rates began to fall sharply at about the same
time, the growth of population continued without interruption till
the First World War.
The relevant periods during the first half of the nineteenth
century are 1816-1830/5, and 1830/5-1855/60. The first period
is characterized by a high though declining net birth surplus and
the latter by a relatively low net birth surplus, whereas after 1855/60
the net birth surplus is relatively high in Prussia as well as in Saxony
and Bavaria. The surge of population in the period 1816-30 cannot
be accounted for solely as the effect of the emancipation of the
peasantry. To a large extent it can be attributed to the extraor-
dinarily high marriage rates after the Napoleonic Wars for many
marriages had to be postponed during the wars. Besides, in
periods of hardship the death rates tend to be higher than normal
because the old and the sick die earlier as a result of destitution.
At the close of the emergency period, on the other hand, the
death rates are below normal due to the previous incidence
of deaths. The low level of death rates after the Napoleonic Wars
and their gradual rise till 1830/35 can be best explained on this
basis.
It is useful to study the development of the German population
after the first thirty years of the nineteenth century according to
its regional differences. One notices parallels between the growth
of population and the social changes at the start of industrialization,
even though at first sight the development in certain agrarian pro-
vinces seems to contradict this. Of all German states the economically
advanced kingdom of Saxony shows the strongest rate of growth
in the period following 1827. This strong increase in population
is dependent on very high birth rates and death rates which are
somewhat higher than the national average. After 1900 the birth
rates in Saxony fell very quickly and the birth surplus lay below
1 Gerhard Mackenroth, op. cit. pp. 114 ff.
a Ibid pp. 439 ff.
97
the national average (Graph 1). A similar movement occurred in
the Prussian provinces of Westphalia and Rhineland. From 1841-76
the birth rates rise and are above the national average. The death
rates rose slightly in Westphalia compared to the national average
but remain under the level of the latter throughout. After 1876
the birth rates in Westphalia fell relatively slower than the national
rates. The growth of population in this industrially significant
province was caused not only by the gains through migration from
Eastern Germany and Eastern Europe but also by its own quick
natural growth. Of special interest is the temporal sequence of the
Graph 1
Live Birth and Death Rates in Germany
Bavaria
Saxony
Prussia
40
35 German
30 -'•,_, __ , ... ,.- /'-..,_,,,... ., ........ , .......
- ...,"-,,..... _..... " ,, .. _, ..........,_~------- Reich
25
20 - ,,.. ... ............, ............... ,_ .... ...
15~--~~~~~--~~~~~~~~~~--~~~~~
1816'20 ·2s '30 ·3s '40 '45 ·so ·ss '60 '65 ·7o '75 '80 '85 '90 '95 190o·os 'IO ·1s
- - Birth rates ------ Death rates
population surges in Saxony and the Rhenish-Westphalian region ;

this corresponds to the temporal sequence of economic expansion
in these regions.
The large natural increase in population in the regions under-
going industrialization since the beginning of the nineteenth century
can hardly be explained by a high and quickly growing real income
per head. The cause of the strong growth in population in the
industrially advancing regions of Germany is the change of the
economic and social structure. The conventional social attitude
regarding marriage and the size of the family which had been formed
through centuries of tradition continued to be partially upheld in
the countryside, especially in the western parts of Germany, even
98
Hoffmann - The Take-off in Germany
after the emancipation of the peasantry. This meant that a relatively
large proportion of farm-hands remained unmarried. By contrast,
the rural population which migrated into the cities and found
employment in industries broke away from their traditional ties and
very quickly adopted the new social conventions such as low mar-
riage age and high marriage frequency which led to high birth rates.
In the case of the Rhenish-Westphalian industrial regions the high
birth rates were also partly accountable for by the fact that the
greater number of newcomers stemmed from East German regions
where the birth rates were very high and being used to large numbers
of children they maintained the same pattern in the size of the family,
at least during the first generation.
Moreover, generally speaking, regions with net immigration
possess a very favourable age structure, so that compared to regions
with the same gross reproduction rate, the birth rates were higher
than in regions with an unfavourable age structure.
In addition to the industrially developed regions the population
also grew very fast in the agrarian eastern provinces of Prussia.
The fact that a considerable growth of population is found in agrarian
regions does not undermine the assertion of a positive correlation
between industrialization and the growth of population. We find
that the same increase in population in the two cases, viz. in rural
and non-rural regions, corresponds to different circumstances,
though in the last resort it can be derived from the same source :
the upheaval in the economic and social order. The upheaval as
an outcome of the emancipation of peasantry was far stronger, how-
ever, in the agrarian regions of East Germany than in the West
German parts ; this can be accounted for by the differences in the
agricultural systems of these regions before the emancipation of
peasantry occurred. In West Germany the system of land owner-
ship had developed on the French pattern according to which the
farmers' dues were confined mainly to payment in kind. The land-
lords let their land for rent to the peasants. East of the Elbe,
however, one found extensive landed property which the landowner
cultivated personally to a large extent. Here the cultivation of the
peasants was insignificant and their dues consisted mainly of service
rendered with hand and team (Hand- und Spanndienste). According
to this agricultural system the peasants in East Germany depended
for their living on their landlords, whereas in West Germany the
peasants were relatively free and their relationship to their landlords
was roughly that of tenants. 1 The social and economic effects of
1 Josef Kulischer, Allgemeine Wirtschaftsgeschichte, 2. Bd., Miinchen, 1918,
pp. 87 ff.
99
the peasants' emancipation were therefore far more decisive in East
Germany than in the West. In the East the peasants were freed
from their servility whereas in the West the tenants were freed only
by paying off their dues. The attitude towards marriage and the
size of the family was influenced by the degree of change in the
agricultural system brought about by the peasants' emancipation.
In the West the effects of the change in the agrarian system were
relatively mild and the traditional attitudes were preserved, whereas
in the East the revolutionary changes in the agricultural system
probably encouraged the changes in the traditional family outlook.
The difference in the death rates between East and West Germany
can be taken to have been dependent on the differences in the
standard of living, that is to say the high mortality in the East corre-
sponds after the emancipation of the peasantry to higher birth rates.
The total increase in the population of Germany can be attributed
to varying regional influences, though it can be traced to the same
common circumstance.
As far as a generalization from these results is permissible, it
can be assumed that the social changes which were associated with
industrialization led to a high rate of growth in population after the
take-off period.
III. THE DEVELOPMENT OF AGRICULTURE

In the first half of the nineteenth century additional food re-
quirement in Germany caused by the growth of population and the
rise of real income could be met by increasing agricultural pro-
duction or by decreasing the export surplus of food. AJ3 Germany
did not possess other primary products for which a demand existed
in the world market and since the more developed countries had
cost advantages in the production of manufactured goods, the possi-
bility of importing capital goods, such as English machines, depended
on Germany's export surplus of food. In the early stages of develop-
ment the import of foreign capital goods greatly facilitates industrial
growth. Thus the increase in agricultural production which allows
the country to continue the exchange of food for foreign capital
goods quickens the pace of industrialization. Since, in the period
of industrialization, the ratio of employees in agriculture to total
employment diminishes, a rise in agricultural productivity is neces-
sary to increase the agricultural production to an extent sufficient
to maintain an export surplus. Moreover, rising real income per
100
head in agriculture is essential for raising the demand for manu-
factured goods (such as textiles) especially as initially the demand
originating from industrial workers is insufficient to promote indus-
trial growth.
As to the technique of agricultural production the three-field
system prevailed in Germany in the beginning of the nineteenth
century. In the three-field system with pasturage one-third of the
acreage is cultivated for winter crops, one-third for summer crops,
and the remainder is left fallow. In a variant of this system including
stall feeding of cattle, two-thirds of the fallow land are cultivated
for fodder crops so that only one-ninth of the total acreage is left
fallow. Around 1816 the utilization of arable land in Prussia corres-
ponded to that under the three-field system. 34·6 per cent of the
tilled land was cultivated for winter crops, 38·8 per cent for summer
crops, 5·2 per cent for root crops (mainly potatoes), and 21-4 per
cent was left fallow. 1 During the following decades the more pro-
ductive system of crop rotation was introduced, as advocated in
particular by Albrecht Thaer. The changing distribution of tilled
land in Prussia and Germany as a whole in the period 1800-1913
lends support to this conclusion. The introduction of crop rotation
leads to a reduction in fallow land and to a great increase of acreage
for root and fodder crops. The figures in Table 1 indicate .this
development.
TABLE 1
UTILIZATION OF ARABLE LAND, 1800-1913 2
(Per cent)
-
About 1800 1861 1883 1900 1913
Germany Prussia Prussia Germany Prussia Germany Germany
Corn 61 ·1 73·4 64·4 55·2 60·3 57·6 60·7
Root crop 2·3 5·2 13·2 14·8 16·9 17·3 19·6
Fodder crop 3·9 - 6·1 11·3 8·8 11·5 11·5
Pasturage - - - 5·8 - 4·1 2·8
Fallow land 25·0 21-4 16·3 7·2 14·0 4-8 2·6
Misc. 7·7 - - 5·7 - 4·7 2·8
Innovations such as the improvement in agricultural techniques

ran parallel to an increase in tilled land. The extension of tilled
land took place in the first half of the nineteenth century and came
1 H. W. Graf v. Finckenstein, Die Entwicklung der Landwirtschaft in Preuszen
und Deutschland und in den alten prtuszischen Provinzen von 1800-1930, Wtirzburg,
1960, p. 85.
• Eberhard Bittermann, Die landwirtschaftliche Produktion in Deutschland, 1800-
1950, Halle (Saale) o.J., p. 24, and H. W. Graf von Finckenstein, op. cit. p. 87.
IOI
to an end in 1865. As Table 2 shows tilled land in 1800 amounted to
34 per cent of the total acreage both in Prussia and in Germany as
TABLE 2
UTILIZATION OF GERMAN AND PRUSSIAN SOIL, 1800-1913 I
(Per cent of total area)
Total
Agricultural Arable Meadows Pasturage Forests Waste
Acreage Land Land
G p G p G p G p G p G p
about
1800 55·5 53-1 34·3 34·1 11·0 19·0• 10·2 - 25·0 23-9 19·6 23·0
1849 - 60·8 - 45·2 - 15·6• - - - 20·3 - 19·0
1864 - 69·3 - 51-4 - 17·9• - - - 24·6 - 7·1
1878 68·0 69·1 48·5 52·5 11·0 9·2 8·5 7·4 25·7 24·6 6·3 6·3
1883 66·0 67·1 48·7 52·9 11·0 9·1 6·3 5·1 25·7 24·6 8·3 8·3
1893 65·1 67·2 48·8 53·1 11·0 9-Q 5·3 5·1 25·8 24·7 9·1 8·1
1900 64·8 67·1 48·8 53·3 11·0 9·0 5·0 4·8 25·9 24·9 9·3 8·0
1913 - 66·5 - 53·2 - 8·9 - 4·4 - 25·3 - 8·2
• Inclusive pasturage. G =Germany; P =Prussia.
a whole. In 1864 it had reached 51 per cent in Prussia at the expense

of fallow, waste land, and pasturage. Although we lack figures for
Germany till 1878 we presume that the German development
matched that of Prussia.
Agricultural Output per ha
(5 years averages) Wheat
22
Graph 2
20
-
II
~ 16
...." " 14
0 12
~
1100 -44/50 56/60 66/70 76/10 16/90 96/1900 06/10 lt/13
The improvement of agricultural methods created the conditions

for an increase in yield per hectare (Graph 2).
In Germany's agriculture three phases can be distinguished in
1 E. Bittennann, op. cit. pp. 13 ff.; H. W. Graf v. Finckenstein, op. cit.
p. 100.
102
Hoffmann- TM Take-off in Germany
the increase in total production. The first phase, which lasted from
the beginning of the century till 1861/65, can be characterized as
a period of extensive growth. Agricultural production increased on
the average by 1·9 per cent per year during this period. The increase
in production was due to a slow increase of the hectare yield and
the extension of tillage. The second phase, which lasted till 1890,
was a period of relative stagnation of production. The extension
of tillage was at an end and any increase in production was therefore
due only to the increasing yield per hectare which, however, was
relatively slight. During this period agricultural production grew
on an average by 0·7 per cent per year. The third phase, from
1890 to 1913, with an annual increase of 2·0 per cent, again shows
a rapid growth of production, which was due to the sharp increase
of the yield per hectare. The .use of artificial fertilizers made this
increase in hectare yield possible. This phase can be described as
a period of intensive growth.
In the first half of the nineteenth century the increase in total
agricultural production was far greater than the increase of population
(Graph 3). During the period 1816-65 the population of Germany
grew by 59 per cent, whereas the growth of agriculture production
is estimated at 135 per cent. This increase in the total agricultural
production per head was mainly due to the disproportionately large
increase in production of animal products, estimated at 213 per cent.
By contrast, the increase in production of vegetable products esti-
mated at 62 per cent hardly exceeded the growth of the population
during the same period.
If in 1816 the ratio of total employment to population is esti-
mated at 42 per cent and the share of agricultural employment at
65 per cent, the number of employees in agriculture can be calculated
at 6·78 million. In 1861 the share of agricultural employment
amounted to 52 per cent and the number of employees to 8·253
million.
The increase of labour productivity (volume output per em-
ployee) during the period 1816/61 works out at 78 per cent; i.e.
the average rate of growth of agricultural productivity was about
1·3 per cent. This increase in labour productivity was probably
due to a great extent to an increase in labour intensity and more
rational methods of cultivation after the emancipation of the peas-
antry. Peasants who had formerly been compelled to take up
statute labour in addition to administering land let to them by the
feudal landowners now began to cultivate their own property or
took up work as farmhands. The free peasant came to be directly
interested in the results of his work and the prospects of better
B IOJ
wages, etc. operated as an incentive for greater labour intensity
even for the free farmhand.
The emancipation of the peasantry started in Germany at the
beginning of the nineteenth century. The legislation required was
ratified in Baden in 1783, in Prussia in 1807, in Bavaria in 1808,
in Hessen in 1811, and in Wiirttemberg in 1819. In West Germany
the emancipation of the peasantry was largely accomplished by 1830
and in East Germany by 1840 under the approval of the large estate
landlords. The rest of the peasants were finally freed in 1850. 1
The emancipation of the peasantry overcame the obstacles against
the spreading of a new economic attitude in the countryside, and
constituted a necessary pre-condition for regional and social mobility
of labour which was indispensable in the course of growth.
In accordance with the hypothesis formulated at the beginning,
a strong increase of labour productivity took place in Germany
from the turn of the century till 1855/60, i.e. during the take-off
period.
IV. THE DEVELOPMENT OF TRANSPORT AND INDUSTRY

Economic growth is closely connected with the development of
the transport system. In the past the economies grew by establish-
ing industries or by increasing agricultural production for export.
In consequence the exchange of goods between different places was
intensified and the development of transport became necessary. In
the first case, this took place internally within a country ; in the
second, between home and abroad. If the transport system is
backward economic growth is inhibited. Hence it is not a random
fact that in most cases the volume of transport shows a higher rate
of growth than the volume of total production.
TABLE 3
GERMAN MERcANTILE ToNNAGE z
(1000 register tons)
1816 291 1845 423
1820 276 1850 534
1825 225 1855 633
1830 276 1860 812
1835 . 293 1865 933
1840 367 1870 1008
1 Josef Kulischer, op. cit. pp. 434 ff.
• Max Peters, Die Entwicklung tier deutschen Reederei seit Beginn diues Jahr-
huwlerts, Jena, 1899; Vol. 2, Jena, 1905.
104
The growing exchange of goods between Germany and overseas
countries induced, after a setback in the 'twenties, a steady increase
in the mercantile tonnage.
As Table 3 shows, the level of 1816 had been regained in 1835.
In the following period, from 1835 to 1870, a steady growth at an
average rate of 3·7 per cent p.a. can be observed. This process may
be attributed in part to the establishment of the Customs Union
which favoured the expansion of foreign trade because the domestic
Industrial and Agricultural Production

and Railroad Construction r,../'k- (3Railroad
~~
Construction
years moving averages)
~
I/I
!.
)I
Graph 3 II /1~ I II
I I U
I\ /\It I
11 \ Kt~/'V/ Producer Goods Industries
v"'l
Changes
+ 100% f Total Industrial Production
+70 } / Consumer Goods Industries
I~/V
+50
+30 I ,..._-/
+10
_,/"/
0 -10
-20
/ ,..
I ,.../·-··
--
-30 I ,-·-·
--
-·-·'
--
-40 /
/
--
-so
------ -----------
-::--==------ ____ .....
_...,...- Total Agricultural Vegetable

_. _. _..- Production Products Products
years averages)
-------- (5
k4
taoo ·os
----I I I t I
·1o '15 ·2o '25 '30 '35 ·4o '45 ·so
I I I I I
·ss
I I I I I I I I
'60 '65 '70 '75 ·ao ·as '90 '95 '1900 ·os '10 '15
t I I I
customs barriers were removed. The development of German mer-

cantile tonnage lends additional support to the thesis that the
take-off began in the 'thirties.
The construction of the German railways began in 1835. In the
years 1842-8 it reached its first peak. In the same period, the
characteristic trade cycle set in and continued till the First World
War. In the following decade the construction of the railways con-
tinued at a lower level. The level of 1846 was not reached again till
1868. In the decade 1870-80, extraordinarily high investments in
the railways were made. Railway construction constituted an im-
portant incentive both qualitatively and quantitatively for the early
105
industrial development in Germany and had an additional effect
on economic growth as more lines were built.
There is a close connexion between the development of the
railways and the cyclical movements of the producer goods indus-
tries.1 This connexion seems to be plausible as coal, iron, and steel
are the dominant goods comprised in the index of production for
producer goods. The production of these goods when viewed
together exhibited rates of growth above the average and was
therefore the most important agent of industrial development from
the beginning of the nineteenth century onwards. But we should
not overlook the fact that the metal industry and coal mining were
strongly promoted by the Prussian government as early as the reign
of Frederick the Great. The average rate of growth of producer
goods production is about 6·3 per cent in the interval 1834--55/60
(Graphs 3 and 4). When this period is subdivided it is noticed that
coal mining grew relatively slowly till 1832/5 after which the pace
accelerated. In contrast, the iron industry shows a relatively steep
rate of growth after 1850/5, a period which nearly coincides with
the transition to sustained growth. Another significant agent of
industrial development is machinery, though we lack quantitative
data for it. This industry received a decisive impetus through the
construction of locomotives and the adoption of technical develop-
ments from abroad during the first half of the century. In the first
thirty years of the nineteenth century the only opportunities for
technical training lay in studying abroad in the economically de-
veloped countries of Western Europe, above all in England, or in
learning from English technicians employed in Germany. The
noteworthy enterprises of machine manufacture were directed by
engineers who had been either trained in England or were them-
selves Englishmen. 2 The Gewerbeinstitut founded in 1821 by Beuth
in Berlin, which was the forerunner of the Technical Institute in
Berlin, remained for a long time the most important centre for
technical training in Germany, but was unable to turn out a suffi-
cient number of technicians. The technical instructors of this
institute passed on the knowledge they had received from abroad.
August Borsig, who about the same time as Maffei constructed the
first German locomotives in 1841 had been a student at this institute
along with Schichau, Egells, and Eggestorf among others. Although
1 The distinction between producer goods and consumer goods refers only to
manufacturing production and is therefore not to be mixed with the aggregates
consumption and investment.
• Conrad Matschosz, Preuszens Gewerbeforderung und ihre groszen Miinner,
Berlin, 1921, pp. 69 ff. ; and W. 0. Henderson, Britain and the Industrial Europe,
1750-1870, Liverpool, 1954, pp. 139 ff.
106
Production of Mining and Iron

and Steel Industries
Graph 4
Changes
+ 100%
+70
+SO
0
-10
-20
-30
-40
-so
'40 '45 ·so ·ss '60 '65 ·7o '75 '80 '85 '90 '95 19oo ·os ·1o ·u
English engineers were often employed in machine manufacture, in

the iron industry and as technical personnel in the railway companies,
Henderson estimates that fewer English technicians were engaged
in Germany than in France where they totalled 1300-1400 in 1825.1
Even in 1850, when technical knowledge was far more advanced,
1 W. 0. Henderson, op. cit. p. 141.
IO']
Production of Food, Drink and

Tobacco Industries
Graph 5
,,,.
+70
+sg
+4 ,r--v~
r....i
+20
+to .......,
,.,
0
-tO
-20 '\ i
-30
-40 Confectionery
-50
,.
German machine manufacturers largely used English machines as

their models. Moreover, some English enterprises were installed
in Germany. The best known among them are James (Aachen),
Williams (Guben), Cockerill, and W. T. Mulvany.
A$ may be expected, the annual rate of growth of consumer goods
industries at 2·0 per cent in the period 1834-60-was substantially
lower than that of the producer goods industries (Graphs 3, 5, 6).
108
It should be taken into account that these production series partly
include handmade products as for instance those of the bakeries
and the butcheries. Disregarding sugar production and confection-
ery, the textile industry exhibits the strongest growth within this
group, in particular the cotton industry (Graph 6). Sugar, con-
fectionery, cotton, and silk manufacture are the determining agents
of development in the consumer goods industry. The beetroot
sugar industry was a new industry and hence advanced faster than
the other consumer goods industries. The most important feature
of the textile industry is the changes in the technique of production.
The rise in demand owing to the growth of population and the
increase of real income is of minor importance. This presents a
contrast to the iron and steel industry where the rise in demand is
the most significant factor, dependent on the construction of railways
and the start of mechanization of the whole industrial production
system. In the textile industry, the introduction of mechanical
spinning units and looms caused the conversion of a handicraft,
which had ranked as supplementary occupation in some regions, to
the status of a modern industry.
This technical development in the textile industry began in the
spinning section. About 1870, according to Schmoller, machine
spinning had definitely displaced hand spinning. 1 The results of
the statistical surveys in Prussia confirm this statement (Table 4).
TABLE 4
EMPLOYMENT IN HAND AND MECHANICAL SPINNING IN PRUSSIA z
(OOO's)
Hand Mechanical
Years Spinning Spinning
1849 97 36
1852 93 37
1855 90 37
1858 67 35
1861 26 40
The mechanization of the weaving process followed far more

slowly. So long as the wages were low, the mechanical loom had
no cost advantage over the hand loom. Hence for a long time
several weaving factories were operating entirely or mainly with
hand looms. Technical engineering provided no concentration
1 Gustav Schmoller, Zur Geschichte der Kleingewerbe im 19. Jahrhundert, Halle,
1870, p. 492.
a Jahrbuch far die amtliche Statistik des Preus:lischen Staatn, 1. Jg., Berlin,
1863, pp. 449 ff.
109
Production of Textile Industries
(""'.
_......., \l
;·~
Graph 6 ,"...,,.:
,,
,
. ...,•r-.1
,:.,_.'
. ,.:
;y''v'
, ... Woollen and
,~IV Worsted Yarn
Changes
+100%
,, :
:i /
Jr.,,' "'1 ,-v'
,l·.r-·
_..,
I I I ....,.
!"'•~!Cotton Yarn
' ,
+70
+50 ,J /V "'
~I" J Woollen and
+30
+10
jV ,1"' Worsted Goods
0
-10 : /v'
,: ,.J
-20 • ' I ~ ,
-30 r; \/ .,
" •\ , ,tt.."",:r "
-40 I I
-so '"
AI
I I
#I
.,.,.
,. :
I 1 I
,rA..v_,.'
I •,' " ..._,
': ~ v
,:
/
\, ~",r"#
/'
~/"
l
·1 r'
: \ ,fe .".:
,.. ... \!. ~
,~ lJ
r-.\,~I
,
,...__.
- Linen Yarn
, ..,/\:
,_,.,., .. ,.,.,.,.,.,.,,....,1 ~- \J \.
,_,
I \ ,._.,
\ .../' \ ~',,"
\: \ ~~i'·1 ,..
,, " "''·-'
'
tendencies in this respect. The advantage of weaving factories
consisted in their better insight into and their better exploitation of
the market situation. Even as late as 1860, the cottage hand looms
110
could compete with the factory-size weaving establishments. But
in the long run the inerease in wages ensured the advance of me-
chanical weaving. The progress of mechanical weaving is clearly
recognized in the statistics for Prussia (Table 5).
TABLE 5
HAND AND MECHANICAL LOOMS IN PRUSSIA I
Total Number
Total Number of Hand Looms Number of
Year of Looms exclusive of Mechanical
(OOO's) Cottage Hand Looms
Looms (OOO's)
1846 453 162 4,603
1849 467 179 5,018
1852 481 189 5,268
1855 489 190 6,178
1858 496 196 7,882
1861 467 191 15,258
1875 - 201 45,262
In the textile industry, therefore, the handicraft with its tradi-

tional methods of production was superseded first in spinning and
finally in weaving. A similar situation prevailed in the distilleries
where the commercial enterprises steadily supplanted the rural dis ·
tilleries. This accounts for the strong increase in alcoholic produc-
tion after 1855/60.
Summing up, it can be stated that coal mining and the iron and
steel industry exhibited as leading industries a rate of growth higher
than average in the take-off period. In the consumer goods
industry the linen industry stagnated, food products, beverages, and
tobacco showed an increase in accordance with the income per head
whereas the cotton, sugar, and confectionery industries, which were
new industries from the standpoint of both technique and products,
expanded swifter than the rest. As in the case of iron production
the consumer goods industries such as meat, beer, spirits, leather,
and leather products exhibited, in 1855/60 a transition into pro-
gressive and sustained growth, which justifies us in referring to this
period as the onset of sustained growth.
It remains to be seen how the first stages of industrialization
were financed. Let us first consider the question of capital imports.
Since figures for the balance of trade and services start only in
1 Jahrbuchfur die amtliche Statistik des Preuszischen Staats, 1. Jg., Berlin, 1863,
pp. 449 f., 450 ff., 5. Jg., Berlin, 1883, p. 208.
B2 III
1880 onwards no exact data are available for the preceding periods.
We find private estimates made by contemporary authors 1 which
were based on the Customs Union's statistical data for the volume
of trade. From this it is seen that the Customs Union had an
export surplus in the years 1834 and 1838, and an import surplus
in 1842, 1845, 1851, and 1857; then again there was an export
surplus in 1854, 1860, and 1864. The sum of the export surpluses
exceeded the sum of passive batance. Although no definite con-
clusions can be drawn for want of figures concerning the balance of
services, apparently one may assume that the service balance was
passive because German goods were transported mainly by foreign
vessels. It seems probable that Germany imported capital only to
a very small extent. The passivity of the balance of trade during
the first railway boom, 1842-8, indicates that capital imports con-
centrated during these years.
The inquiry into the sources of domestic capital can best be dealt
with in connexion with the type of business pioneers.z The pioneers
in the progressive branches of coal mining, iron, and machine pro-
duction were mainly technicians. Some of them were busy con-
verting the existing handicraft enterprises into modern industrial
installations. Alfred Krupp and Hoesch are regarded as repre-
sentative of this group. These enterprises were mainly self-financed.
Among the founders of enterprises in the early phases of industrial-
ization were Tappert (cotton spinning, 1791), Freund (machinery
about 1816), Egells (iron foundries and machinery, 1821), Eggestorff
(engines and iron foundries, 1835), Schichau (machinery, 1837),
Borsig (machinery, 1835), Jacob Mayer (iron, and steel works, later
known as the Bochumer Verein, 1838). Information is not available
regarding the origin of the initial capital for these enterprises. In
a few cases, the Prussian government provided J the initial capital
especially in the early phases. All these enterprises began operating
with a few workers and were financed mainly out of profits, even
after the take-off period.
Another group of pioneers, viz. the owners of large estates,
played the dominant role in the development of Silesia's iron and
steel industry and coal mining. The main figures here are Count
Henckel-Donnersmark and Count Schaafgotsch. Finance presented
no difficulties, for the proceeds from their landed property were at
their disposal, and besides, these landlords had an unlimited credit.
1 A. Bienengriber, Statistik des Verkehrs und Verbrauehs im Zollverein, 1842-
1864, Berlin, 1868, pp. 452 f.
a W. G. Hoffmann, 'Industriefinanzierung', Handwlirterbuch der So:llialwissm-
•chaftm, Stuttgart, Tiibingen, G6ttingen, 1956, Bd. 5, pp. 257-64.
J Conrad Matschosz, op. cit. pp. 46, 48.
112
The Prussian government had already set up iron works in Upper
Silesia in the last two decades of the eighteenth century. In 1796
the first blast furnace running on coke was installed in the govern-
ment's iron factory in Gleiwitz. Similarly in the government factory
'Konigshiitte' the Heinitz blast furnace and the Reden blast furnace,
both running on coke, were established in 1802.
The public sector had definitely provided the largest share of
the funds necessary for setting up the social overhead capital. Road
construction with very few exceptions is an item of public expendi-
ture, undertaken by the state, province, district, or municipality. In
the early years railway construction on the other hand was mainly
undertaken by private companies. In 1840, 92 per cent of the total
railway lines of Germany was in the hands of private railway com-
panies; in 1850 the share was reduced to 65 per cent, in 1860
55 per cent, and in 1870 57 per cent.I
The government's share in the long-term financing of railway
construction can be assumed to be greater than its share in the
railway lines suggests, for it may be taken for granted that munici-
palities, districts, and provinces had taken over a substantial part
of shares of the private railway companies. Most of the shares of
private companies were owned by private businessmen as the rail-
way companies distributed substantial dividends. The first German
railway company, the Niirnberg-Fiirther Ludwigsbahn, paid annual
dividends from 12 to 20 per cent during the period 1836--60. At the
same time the average dividend of the private German railway com-
panies were about 6 per cent.z In many cases the Prussian govern-
ment favoured private investment in railways by guaranteeing
dividends of about 4 per cent.
V. INVESTMENT (SAVINGS) AND CONSUMPTION

IN THE GERMAN ECONOMY
Having provided a sectoral analysis of the economy we shall now
compare the conditions for over-all economic growth in the take-off
period with those of the later phases and see how capital growth and
consumption differ in these two periods. For want of material the
subject can be dealt with only from 1850 onwards. However, the
characteristic feature of the decade 1850-60 conveys an idea of
the main figures which governed the entire period from 1830/5.
1 Zeitschrift des Preuszischen statistischen Bureaus, Erginzungsheft 12, pp. 162 ff.
• Otto Hubner, Jahrbuch fur Volkswirtschaft und Statistik, Jg. 1-7, Leipzig,
1852-61.
IIJ
The average investment ratio is estimated at 7 ·4 per cent during
the years 1851/5 and 8·4 per cent during the years 1856/60 (Table 7)
Accordingly, if one ascribes an investment quota of 5 per cent as a
realistic figure to the period 1831/55 then it would be feasible to
account for an average rate of growth of the real social product at
1·4 per cent, assuming a capital coefficient of 3·5. As the rate of
growth of population was about 1 per cent, the rate of growth in real
income per head during the take-off period amounted to 0·4 per
cent. At the beginning of sustained growth in 1865 one can calculate
an average rate of growth of real income per head, at 1·5 per cent
(Graph 7).
20 Income, Investment and Graph 7

Capital Coefficient
18
16
14
% 12
l
10
8
Capital Coefficient s.s
••::~~~:!...
.......--....,-· ..
_....--·-·· •••. _/(S years 5.0
6 .. \ .... _.,.,..............,'
4 so 4.5
40 4,0
.
"!!
20 ~
10
i
The rise of investment ratio in the take-off period is indicated

by the relatively quick expansion of the iron and steel industry,
which ranks as a capital goods industry. Our hypothesis that
Germany had already entered the take-off period in the 'forties
is supported by A. Spiethoff in whose opinion the German economy
began to participate in the international trade cycle with its boom
of 1843/7, i.e. it entered a new phase of life. I
The distribution of investment according to sectors and branches
fluctuates (Table 6). Investment in agriculture and in railways
1 Arthur Spiethoff, article 'Krisen' in Handwiirterbuch der Staatswissenschajt,
4th edition, ]ena, 1925 1 Vol, 6, p. 50.
114
accounts for 20 per cent each in 1851/5. In the same period invest-
ment in industry amounts to 16 per cent. Non-agricultural dwell-
ings require about 30 per cent of total investment except for the
temporary fall to 13·5 per cent in 1856/60. It is worth noting that
at that time about half the total capital stock consisted of building
construction, whereas machine capital by contrast was noticeably low.
TABLE 6
COMPOSITION OF INVESTMENT
(1913 prices: per cent)
1851/5 1856/60 1906/10

Agriculture
Buildings 23·2 19·8 6·2
Machinery 5·1 5·6 z.t
Livestock 0·3 8·3 1·3
Inventories 6·9 9·9 0·2
Total 21·2 43·7 9·8
Industry
Buildings 5·6 5·8 1H·
Machinery} 10·5 11·3 30·2
Inventories
Total 16·1 17·1 41·7
Non-afliicultural 31-1 13·5 29·3

dwe lings
Public buildings 5·1 4·2 5·2
Underground 6·4 5·0 5·3
constructions
Railways 20·2 16·7 8·8
Disregarding capital imports, savings were derived by and large

from private households and enterprises (Table 7). Nevertheless,
compared to later periods, the government had a relatively large
share, viz. 15 per cent, a figure which confirms the government
activity mentioned above. When one relates the personal savings
to the personal disposable income, one obtains an average saving
ratio of about 7 per cent during the decade 1850/60. One may
assume that during 1830/5 the ratio was lower, at any rate not higher.
It cannot be decided to what extent this rise in the individual saving
ratio, as assumed above, was caused by the increase in real income
us
TABLE 7
INVESTMENT AND SAVINGS
(1913 prices)
Ratio of ~
Capital Ratio of Personal Undistributed Public Social ~
Output Investment Savings Savings Insurance Personal Savings
to Income Profit to Disposable I
To Total Savings Personal Income I I....
i
i
&l
1851/5 3·5 7·4 84·9 n.a. 15·1 6·7
1856/60 3·3 8·4 84·1 n.a. 15·9
-- 7·7 ~
1906/10 3·6 15·7 84·8 8·3 5·0 1·9 14·9 ~
~
I
.
0\ ~
TABLE 8
RATIO oF DISTRIBUTION oF PRIVATE AND PuBLIC CoNSUMPTION ~·
(1913 prices)
~
;;:-
Beverages Housing Expenditure for
Private Public Admini- Military Food Spices Textiles Heating
strstive Tobacco Lighting Vegetable Animal [
Consumption to Expenditures to Products to Food ~
NNP public consumption • Expenditure to Private Consumption Consumption
~
1851/5 85·0 7·6 71 29 46·5 17·6 11·8 13·3 44 56 s.
1856/60 84·5 7·1 69 31 45·0 18·6 13·2 12·8 45 55
1906/10 75·9 8·5 63 37 39·0 14·1 14·4 16·3 38 ()2
~-- - --···--
- - - -
• Current Prices.
and to what extent by the income distribution becoming more
unequal.
A$ to the structure of consumption 92 per cent of the total
consumption was allocated to private consumption and about 8 per
cent to public consumption of individual states, provinces and
municipalities (Table 8). One-third of public consumption was
absorbed by military expenses. In 1906/10 the share was still
larger. Regarding private consumption in 1851/60 about 90 per
cent went in food, clothing, and housing expenses, whereas later
with growing welfare more 'non-essentials' came to the forefront.
One may assume that at the beginning of the nineteenth century
this ratio was over 90 per cent. In the take-off period, the share
of clothing and housing expenditure was relatively small. The food-
consumption standards were marked by high expenditure on rye
products, as well as beans, lentils, peas, and potatoes, whereas the
consumption of confectionery, pork, and eggs which was to dominate
later, was relatively undeveloped at that time.
On reviewing this analysis of the economy one can see that it is
difficult to demarcate the process of industrialization into independent
periods on the basis of quantitative criteria. Nevertheless it can
hardly be doubted that by the middle of the nineteenth century
economic conditions were well set in Germany to allow for a transi-
tion into sustained growth.
VI. A COMPARISON OF UNITED KINGDOM AND GERMANY

IN THE MIDDLE OF THE NINETEENTH CENTURY
Since the process of industrialization began in England before it
spread over to the Continent one is inclined to ask what the margin
was between United Kingdom and Germany, especially during
the take-off period in Germany. If one assumes that developing
countries have a higher rate of growth than economically advanced
countries, it would also be of interest to what extent this margin is
narrowed. In quantitative terms Germany developed faster than
the U.K., i.e. the hypothesis of a higher rate of growth in the young
developing country is confirmed. The differences in the rates of
growth between Germany and the U.K. vary in sectors and branches,
so far as statistics are available (Table 9).
Concerning the margin between the two countries in the period
1830--60, German consumption of coal and the production of pig
iron and cotton yarn per head amounted up to 10 per cent of the
117
respective levels of the U.K. As for the 'old' wool industry, Ger-
many's production of woollen yarn rose up to one-third of the level
of the U.K. The rise of real income led to a strong increase in
consumption of wool products, although 'new' cotton goods were
reaching the market at the same time.
TABLE 9
PRODUCTION AND CoNSUMPTION STANDARDS PER HEAD OF
POPULATION IN GERMANY COMPARED WITH THE UNITED KINGDOM 1
(U.K.=100)
Production of
Consumption Length of
of Coal Cotton Woollen Railway Lines
Pig Iron Yam Yarn
1820 6 - - - -
1830 7 10 - 15 -
1840 7 8 5 26 24
1850 7 6 7 29 35
1860 10 9 11 34 45
1870 17 16 13 39 53
1880 22 23 13 48 80
Another noteworthy feature is the quick expansion of the rail-

ways in Germany between 1840 and 1860 in comparison to the U.K.
This relatively rapid intensification of the transport system when
compared to the growth of population can be regarded as an especially
favourable factor for Germany's transition into sustained growth
before 1870.
1 Calculated from Walther G. Hoffmann, British Industry, 1700-1950, Oxford,
1955; Michael G. Mulhall, Dictionary of Statistics, London, 1899; Annual
Abstract of Statistics, No. 92, 1955.
II8
Chapter 7
THE TAKE-OFF HYPOTHESIS AND

FRENCH EXPERIENCE 1
BY
J. MARCZEWSKI
lnstitut de Science Economique Appliquee, Paris
I. THE PROBLEM
Is Rostow's take-off hypothesis valid for France ?
If so, is it right to assume, as Rostow explicitly does, that the
phase of economic growth designated by this term occurred between
1830 and 1860?
If not, how should we amend Rostow's hypothesis to make it
applicable to France ?
These are the questions with which this paper is concerned. The
figures on which the argument rests are those obtained by the Study
Group on Long-term Series whose work I direct at the Institute of
Applied Economics in Paris and whose scientific collaborators are
J. C. Toutain and T. Markovitch. This group carries on the re-
search work started in 1950 by Fran~ois Perroux. It should be
made clear, however, that our investigations of the growth of the
French economy since 1700 are far from being completed, and that
most of the quantitative data used in this paper are provisional and
remain subject to significant modification. For this reason its results
should not be regarded as definitive. From the point of view of the
state of our work, it would be better if this Round Table took place
two or three years later, when we hope to have a complete and
detailed series on output, income, consumption and capital forma-
tion over the last two centuries. No national accounting figure
can really be regarded as acceptable unless it fits several sets of
magnitudes co-ordinated and evaluated independently one from the
other.
1 Translated from the French by Elizabeth Henderson.
119
Tire Economics of Take-off into Sustained Growth
II. HAS THERE BEEN A TAKE-OFF IN FRANCE?

Let us consider Rostow's principal conditions of the take-off.
1. A Sharp Rise of the Productive Investment in Net National Product
Our work on economic growth in France has not yet taken us
far enough to be able to say anything on the use of national resources.
To do so, we would need calculations of product, disposable income,
and the latter's distribution between consumption and saving. As
it is, we have not even an approximate idea of the rate of investment
TABLE 1
GROSS DOMESTIC PRODUCT
(Million francs at current prices)
Physical Product Services

Gross
In- Do-
Agri- dustry Hous- Com- Profes- Govern- Total mestic
cul- and Total ing merce sions ment Pro-
ture Crafts duct
1781-90 2,483 1,574 4,057 300 750 1,180

......300 ......530 .........
5,937
.........
1803-12 3,294 2,444 5,738 (325)• ...
1815-24
1825-34
3,761
4,341
... ...
7,279
350 ...... ... ...
2.938 450
1835-44 4,498 3,979 8,477 630 860 306 1,261 3,057 11,534
......
1845-54 5,293 5,107 10,400 655 1,200 338 1,920 4,113 14,513
1855-64
1865-74
1875-84
8,323
8,482
7,975
6,043
7,101
14,366 860
15,583 1,190 ...... ......619 ...
... ......
7,889 15,864 1,474 1,900 3,690 7,683 23,547
1885-94 7,291 8,869 16,160 2,077 1,800 740 3,380 7,997 24,157
1895-04 7,642 10,383 18,025 2,816 2,400 1,025 3,800 10,041 28,066
.........
1905-13 10,264 14,520 24,784 3,156 2,880 1,209 4,152 11,397 36,181
......... ......... ......... .........
192Q-24 35,800 85,505 121,305 3,540
1925-34 67,300 132,670 199,970 7,478
1935-38 61,300 108,860 169,160 8,814
• Interpolated figures.
to national product. Nevertheless, we have tried to arrive at some

provisional figures of private productive capital formation, on the
basis of the nineteenth-century writers' estimates of national wealth.
We· then compared this figure of private productive capital forma-
tion with our own provisional estimates of net domestic product
calculated by entirely different methods. The results of these
calculations are set out in Tables 1, 2, and 3.
The last column of Table 1 represents gross domestic product.
It consists of two parts: goods, or physical product, and services.
Goods include the product of agriculture, industry, and crafts. Our
120
Marczewski- The Take-off Hypothesis and French Experience
data for agriculture are satisfactory enough, being derived, as they
are, from direct calculations on physical quantities. So far as
industry and crafts are concerned, the results of direct quantitative
calculations comprise 96 per cent of these branches' total product
TABLE 2
GROSS CAPITAL FORMATION
(Annual averages in million francs at current prices)
1788 1839 1852 1880 1892 1902/3

to to to to to to
1839 1852 1880 1892 1902/3 1912
Housing 224 306 876 1,587 1,812 1,046
Net capital formation 150 210 720 1,350 1,520 710
Depreciation 74 96 156 237 292 336
Agriculture 147 340 276 35 111 749
Net capital formation 47 200 130 -80 0 525
Depreciation 100 140 146 115 111 224
Indwtry and commtJTce 138 861 2,212 3,117 3,445 5,117
Net capital formation 60 640 1,400 1,580 1,520 2,630
Depreciation 78 221 812 1,537 1,925 2,487
Gross private capital forma- 509 1,507 3,364 4,739 5,368 6,911
tion (total)
Gross domestic product 8,735 13,500 19,750 14,000 16,800 34,750
Gross private capital forma- 5·8 11·2 17·0 19·7 20·0 19·9
tion per cent of gross
domestic product
TABLE 3
NET CAPITAL FORMATION
(Annual averages in million francs at current prices)
1788 1839 1852 1880 1892 1902/3

to to to to to to
1839 1852 1880 1892 1902/3 1912
Net capital formation
Housing 150 210 720 1,350 1,520 710
Agriculture 47 200 130 -80 0 525
Industry and Commerce 60 640 1,400 1,580 1,520 2,630
Total 257 1,050 2,250 2,850 3,040 3,865
Net domestic product 8,483 13,043 18,636 22,111 24,472 31,703
Net capital formation per 3·0 8·0 12-1 12·9 12-4 12-2
cent of net domestic pro-
duct
at the beginning of the period considered, that is, at the end of the
eighteenth century. But as we proceed through the nineteenth
century, this percentage becomes steadily smaller and is down to
70 at the beginning of the twentieth century. As regards value
Ial
The EcotWmics of Take-off into Sustained Growth
added, we calculated the figures for those branches of industry and
crafts for which we possessed quantitative data, and then added a
global figure, in the proportions indicated by various contemporary
writers, for the value added by branches for which we have not as
yet been able to make direct estimates. Despite the provisional use
of this expedient, the order of magnitude of the figures relating to
physical product will probably need no major revision. The same
cannot be said of services. Only the series for housing rests on
reasonably certain data. For commerce, the professions, and govern-
ment we simply took Perroux's earlier estimates, as published in
Income and Wealth, Series V. These are no more than a first approxi-
mation ; we had no time to improve them, and, as will be seen,
they cover only a few decades. In particular, the figures for 'govern-
ment' actually represent not the product proper of the public sector,
but the sum of expenditures by central government authorities.
There is thus some double-counting due to the inclusion of the
expenditure on goods already comprised in the physical product.
On the other hand, no account at all is taken of the product of local
authorities and of transport.
The series for capital formation, in Tables 1 and 2, are even less
satisfactory than those for aggregate domestic product. They were
worked out rather hastily, for the purposes of this Round Table,
from various estimates of private wealth taken from nineteenth-
century authors. Thus capital estimates and income estimates come
from entirely different sources and are not strictly comparable. Our
product series are still incomplete and therefore understate the
truth, while capital formation, especially from the second half of
the nineteenth century onwards, has probably been overestimated.
With these reservations, we may state that gross capital forma-
tion, which represented about 6 per cent of gross domestic product
between 1788 and 1839, rose to about 11 per cent between 1839
and 1852, and, at the end of the nineteenth century, reached 19 to
20 per cent. The corresponding percentages for net capital forma-
tion are 3, 8, and 12. These figures would seem to fit in with
Rostow's condition of a doubling of the rate of net capital formation
to net product during the take-off. However, we must bear in
mind that neither product nor capital developed in a linear fashion.
This is particularly true of the period 1788-1839. From rather high
initial levels before the Revolution, both product and capital de-
clined during the years of the Revolution, probably reaching their
lowest level around 1796. From 1797 onwards, and especially after
the establishment of the Consulate in 1799, industrial production
recovered rapidly. Thus the increase in the rate of capital forma-
122
tion to product may well have begun - and in my opinion probably
did begin- not around 1840, but at the beginning of the nineteenth
century. On the other hand, it is equally likely that the method
of valuing industrial capital on the basis of stock exchange quotations
tends to exaggerate capital growth in relation to the growth of pro-
duct. Joint stock companies did not begin to appear in really large
numbers in France until a few years after the promulgation of the
1867law.
2. Leading Sectors
Table 4 lists those industries which, during any one of the
periods under consideration, registered a rate of growth well in
excess of the rate of growth of industry and crafts as a whole.
Column 2 shows the geometrical average of the annual rate of growth
of the total net domestic product of industry and crafts, including
those branches for which we have not yet made direct calculations.
The figures in brackets in the same column refer to the rate of
growth of those industries for which we did make direct quantitative
investigations. This latter figure is more reliable than the former,
but does not encompass the whole of the industry and crafts sector.
Column 3 lists the industrial products which, during the period
considered, registered markedly higher rates of growth than did the
total product of industry and crafts. The item 'residual industries'
represents those branches of activity for which we made no direct
calculations. Column 4 indicates the percentage share of the value
added by each of the selected industries in the gross average \talue
added by all industries during the period under consideration.
Finally, column 5 shows the geometrical average of the selected
industries' annual rates of growth.
It seems reasonable to assume that, to impart any significant
impulse to the economy, an industry must have both a markedly
higher rate of growth than total product, and a more than negligible
specific weight in the total value added. These twin conditions are
fulfilled by the industries the products of which appear in italics in
column 3. It will be seen that in general the industries which grow
fastest have a very low specific weight. The impulse they impart
to economic activity as a whole can therefore hardly be very strong.
This is an argument against Rostow's thesis of the dominant role
of leading sectors. It suggests that the acceleration of growth ob-
served during certain periods owes more to general causes affecting
all industrial production than to causes affecting particular branches.
Let us now examine the separate periods.
123
The Economics of Take-off into Sustained GrO'lOth
TABLE 4
INDUSTRIES GROWING MUCH FASTER THAN THE WEIGHTED AVERAGE
OF THE TOTAL INDUSTRIAL PRODUCT*
Total Selected Industries

Industrial
Product Annual
Period (Geom. %Share Rate of
Avera~ Product of Value Growth
Annual ate added t (Geom.
of Growth) Average)
(1) (2) (3) (4) (5)
1781/90 1·98 Coal 0·31 5·7
to (1·95) Cotton manufactures 8·21 5-1
1803/12 Cotton yams and fabrics 6·37 5-1
(22 years) Beer 0·75 4-7
Residual industries 3-61 3·0
1803/12 2-86 Raw sugar 0·22 8·9
to (2-56) Refined sugar 1-63 8·4
1825/34 Residual industries 7-92 H
(22 years) Cotton yams and fabrics 7-72 4·7
Cotton manufactures 6·57 H
Coal 0·43 J.8
Silk yams and fabrics 2-37 J.S
1825/34 3-52 Cast iron 0·16 14·9
to (J-17) Rubber 0·01 12·8
1835/44 Zinc products 0·02 11-3
(10 years) Silk manufactures J-12 9·0
Chocolate 0·07 6·2
Antimony products 0·01 6·1
Pig iron 0·95 5·8
Coal 0·53 5-6
Iron and steel semi-manu- 2-19 5·5
factures
Cotton yams and fabrics 8·60 H
Silk yams and fabrics 3-35 5·0
Cotton manufactures 4·43 4·8
Tin products 0·02 4·6
]rem and steel f:.oducts 5-53 4·4
Stesrine cand es 0·06 4·4
1835/44 2-45 Non-ferrous metals 0·13 23-6
to (2·09) Jute yams and fabrics 0·07 18·2
1845/54 Chemicals 1·01 14·9
(10 yesrs) Rubber 0·02 14·9
Cast iron 0·21 5·3
Silk yams and fabrics 5·01 5·0
Residual industries 16·84 4·6
Zinc products 0·04 4·4
Silk manufactures 4·75 4-3
• The table lists only those industries the rate of growth of which is at least 20 per cent
higher than the overall rate of industrial growth.
t Average of value added during two consecutive ten· year periods.
124
TABLE 4 (continued)
Industrial
Product Annual
Average Product of Value Growth
Annual Rate added t (Geom.
of Growth) Average)
(1) (2) (3) (4) (5)
1835/44 2·45 Coal 0·65 4·3
to (2·09) Edible oils 0·44 4·2
1845/54 Iron ore 0·15 3-8
(10 years) Salt 0·17 3·4
Pig iron 0·92 3·2
Tobacco 0·08 3·2
Iron and steel semi-manu- 2-20 3·0
factures
1845/54 2·76 Jute 0·22 23·9
to (2·51) Non-ferrous metals 0·20 20·3
1855/64 Non-ferrous metal ores 0·02 15·6
(10 years) Rubber 0·04 12·5
Nickel products 0·01 11-6
Crude steel 0·01 9·6
Raw sugar 0·48 7·7
Iron ore 0·38 7·4
Refined sugar 0·65 6·8
Iron and steel semi-manu- 1·79 6·5
factures
Cast-iron products 0·54 6·3
Pig iron 0·88 6·3
Coal 0·45 6·1
Copper products 0·25 6·1
Iron and steel products 5-40 5·9
Stearine candles 0·13 4-9
Lead products 0·18 4·7
Beer 0·34 4·0
Edible oils 0·48 4·0
Leather 5·12 3-7
Dressed skins and hides 2·10 3·7
Tobacco 0·08 3-4
1855/64 2·72 Nickel products 0·01 14-9
to (2·44) Crude steel 0·03 10·0
1865/74 Chemicals 2·00 9-6
(10 years) Raw sugar 0·64 9·2
Antimony 0·01 8·4
Jute yarns and fabrics 0·37 6·8
Cast iron 0·32 5·3
Chocolate 0·21 H
Non-ferrous metals 0·15 5·0
Coal 1-63 4·8
Bitumen 0·01 4·2
TABLE 4 (continued)
~---------

Industrial
Product Annual
of Growth) Average)
(1) (2) (3) (4) (5)
1855/64 2·72 Stearine candles 0·13 4·0
to (2-44) Residual industries 19·35 3·8
1865/74 Copper products 0·24 3·8
(10 years) Refined sugar 0·84 3·4
factures
1865/74 2·75 Steel 0·07 17·6
to (2-49) Nickel products 0·01 16·8
1875/84 Antimony products 0·01 9·8
(10 years) Chemicals 2·06 4·6
Rubber 0·09 4-1
Iron and steel products 7·42 4·0
Jute yarns and fabrics 0·47 4·0
Lead Products 0·13 3-8
factures
Silk manufactures 2·20 3·3
1875/84 2·20 Chemicals 2·41 8·3
to (1·67) Steel 0·09 5·9
1885/94 Jute yams and fabrics 0·63 5·5
(10 years) Non-ferrous metal ores 0·09 5·3
Nickel products 0·03 5·0
Residual industries 22·41 3-9
Wool yarns and fabrics 6·24 2·7
Silk manufactures 1·88 2·7
Bitumen 0·01 2·7
Cotton yarns and fabrics 5·60 2·6
Alcohol 0·60 2·6
1885/94 2-47 Cast steel 0·01 18·6
to (2·05) Residual industries 26·74 9·4
1895/04 Rubber 0·19 8·3
(10 years) Crude steel 0·17 7·5
Iron ore 0·11 4·9
Food preserves 1·22 4·6
Zinc products 0·19 4-1
Non-ferrous metal ores 0·09 3-6
Chemicals 2·95 3·4
• The table lists only those industries the rate of growth of which is at least 20 per cent
higher than the overall rate of industrial growth.
t Average of value added during two consecutive ten-year periods.
126
Marczewski- The Take-off Hypothesis and French Experimce
TABLE 4 (continued)
Industrial
Product Annual
of Growth) Average)
(1) (2) (3) (4) (5)
1885/94 2·47 Iron and steel products 11·90 3·3
to (2·05) Pig iron 0·60 3-3
1895/04 Antimony products 0·01 3·2
(10 years) Silk yarns and fabrics 1·29 3·2
factures
Cotton yarns and fabrics 3-95 3·0
1895/04 2-85 Artifical fibre yarns and 0·99 23-6
to (2·50) fabrics
1905/13 Artifical fibre manufac- 0·99 16·7
(9l years) tures
Cast steel products 0·04 12·8
Iron ore 0·22 10·8
Crude steel 0·32 7·2
Pig iron 0·70 4·7
factures
Residual industries 28·10 4·4
Cast-iron products 0·20 4·0
Beer 0·47 3·6
Iron and steel products tHO 3·5
Rubber 0·43 3·5
Between 1781/90 and 1803/12 the total industrial product ex-

panded at an annual rate of about 2 per cent. This rate is distinctly
lower than that of the subsequent periods, and might therefore be
interpreted as supporting the assumption that the take-off occurred
only after the 1830's. But we must not forget that the curve repre-
senting the development of the product between 1781/90 and 1803/12
is really U-shaped, its trough roughly corresponding to the year
1796. The growth of industrial product between 1796 and 1812
was thus much faster than the average of the period ; it must have
reached an annual rate of 3 per cent, which is quite comparable with
the rate of growth in subsequent periods. Among the industries
showing both a more than negligible relative weight and a high rate
of growth, the cotton industry as a whole is outstanding (growth
rate 5·1, weight 14·6 per cent).
The following period, from 1803/12 to 1825/34, is characterized
by a general rate of expansion of 2·9 per cent. Again the cotton
industries (growth rate 4·4, weight 14·3 per cent) are in the lead,
together with the silk industry (3·5, 2·37 per cent). The wool
industry, with the much higher specific weight of 19·83 per cent,
expanded at a rate of only 2·7 per cent, which is less than the weighted
average rate for industrial product as a whole. Sugar shows a high
growth rate, but too low a specific weight to count as an impulse to
production as a whole. The residual industries (building materials,
ceramics, construction and public works, timber and furniture)
register growth rates in the neighbourhood of 7 per cent.
The ten-year period 1825/34 to 1835/44 has similar character-
istics as the preceding one. The general rate of industrial growth
is 3·5 per cent. Silk (growth rates 9 and 5 per cent, weights 3·12
and 3·35 per cent) and cotton (growth rate 5, weight 13 per cent)
still head the list of rapidly growing industries. The iron and steel
industry (5·5, 2·19 per cent) is strengthening its position, and iron
and steel products (4·4, 5·53 per cent) are newcomers in the leading
sector. Among the residual industries, the gas industry is note-
worthy for especially rapid progress.
All in all, the first forty years of the nineteenth century consti-
tute a fairly homogeneous period of fast growth (3 to 3·6 per cent
annually), largely dominated by the cotton and silk industries.
Engineering, the iron and steel industry, and coal assume importance
only towards the end ofthe period.
The next decade, 1835/44 to 1845/54, is marked by a slackening
of growth. The weighted average rate of growth of industrial pro-
duct falls to 2·45 per cent. Cotton disappears from the leading
sector ; silk still forms part of it, but with growth rates not above
5 per cent. Jute and the chemical industry make great strides for-
ward, without as yet giving any significant impulse to other activities.
Iron and steel, as well as coal continue to expand at moderate rates.
We may say that the period is one of transition between the rapid
expansion of the cotton and silk industries, the edge of which is
already blunted, and the upsurge of the railways, the full effect of
which is not seen until the 1850's.
The three decades from 1845/54 to 1875/84 show an almost
uniform rate of growth a little over 2·7 per cent. Iron and steel,
metal products, and coal are the leaders, with rates of growth generally
ranging from 3 to 6 per cent. Modern steel production, still at its
beginnings (steel rails were manufactured only from 1866 onwards),
registers growth rates of 10 per cent and more; non-ferrous metals
occasionally come close to 20 per cent. Several other industries,
128
though technically not directly related to railways, like jute, sugar,
and chocolate, feel the benefit of rising demand swelled by the rapid
growth of income. The chemical industry quickly consolidates the
lead it gained during the preceding decade. Among the residual
industries, pride of place belongs to construction and public works,
and to the related reproduction of building materials and ceramics.
This development no doubt owes much to the impulse deriving from
Baron Haussmann's fabulous enterprise. But the principal overall
growth factor in these thirty years is railway construction.
This last statement leads me into a diversion. I want to make
clear the exact nature of the difference of opinion between Rostow
and myself. Rostow says that the take-off in France began in 1830
and was essentially due to railway construction. My answer is that
there was no true take-off in France at all ; the growth of the French
economy was very gradual and its origins lie far in the past. In
any case, even if one insists on giving the name of take-off to the
acceleration characteristic of the period of industrialization, this
take-off began as early as 1800 or thereabouts- or even, as I shall
presently show, around 1750. Furthermore, even if the take-off
had not, in fact, occurred until about 1830, it could still not have
been due to railway construction, which did not begin to exert any
sizeable influence on the economy as a whole until the 1850's. It
is true that the first railway concessions in France were granted in
1823 and that the first permanent way, between Saint·Etienne and
Andrezieux, was completed and opened to traffic in 1828. But, as
is shown in Table 5, the total length of the railway network at the
end of 1844 was hardly more than 600 km. Railway construction
did not begin to expand significantly until after the promulgation
of the 1842 law, and its large-scale effects on the economy as a whole
do not antecede the decade 1855/64.
Table 5 shows, in col. 1, the initial investment expenditure of
the railway companies. This unfortunately includes expropriatiqn
indemnities and is therefore not fully representative of what we
would nowadays call 'productive investment'. None the less we
may reasonably assume that these figures approximately reflect the
development of the railways' direct demand for the goods and
services of other industries. The remaining columns in Table 5
contain some quantitative indicators of the development of railways,
such as the length of the permanent way and the number of loco-
motives and other rolling stock, both for trunk and local lines.
These quantitative indicators represent ten-year increments and
therefore faithfully reflect the course of expansion during the corres-
ponding decade. All of them show that railway construction could
129
not have had any determinant influence on the economy before
1850. At their peak, in the ten-year period 1855/64, initial investment
expenditures on railways amounted to 7·2 per cent of gross industrial
product - a telling figure for the enormous direct and indirect
TABLE 5
RAILWAY CONSTRUCTION IN FRANCE
Initial Ten-Year Increments

Investment Trunk Lines Local Lines
Expenditure
Period Annual Other Other
Average Loco- Rolling
Network Loco- Rolling Network motives
in Million km. motives Stock km. Stock
Francs No. No. No.
1825/34 4 52 - - - - -
1835/44 34 560 - - - - -
1845/54 175 1987 1222 26,660 - - -
1855/64 437 6191 2358 62,084 - - -
1865/74 263 7206 1346 51,070 432 - -
1875/84 398 7198 2206 69,280 1770 185 3348
1885/94 280 6553 2408 67,969 517 119 1527
1894/04 210 8033 977 36,442 2067 245 3466
1905/13 312·5 • 2502 2033 60,225 3432 385 5089
• Annual average 1905jl2.
TABLE 6
POPULATION OF TOWNS WITH MORE THAN 50,000 INHABITANTS
Geometrical Average
Year Population of Annual Rate
(thousand inhab.) of Increase (per cent)
1801 1825·4 -
1851 3285·6 1-18
1866 4965·4 2·79
1881 5840·1 1·09
1901 7260·6 1-10
1906 7506·6 0·67
1911 8296·2 2·02
1921 8527·5 0·27
1926 8840·1 0·72
1931 9278·9 0·97
1936 9482·3 0·43
influence of railway construction on economic expansion during

that period.
The railways also had considerable effect on urbanization, as is
shown in Table 6. The population increase in towns with over
130
50,000 inhabitants was especially marked between 1851 and 1866,
though it is interesting to note that the population of these towns
had already grown at a rapid rate between 1801 and 1851. Although,
therefore, rail construction certainly did accelerate urbanization, the
latter is not a phenomenon peculiar to the period which Rostow
regards as the take-off period.
The decade 1875/84 to 1885/94 is again one of transition, like
1835/44 to 1845/54. The rate of growth of industrial product is
down to 2·2 per cent. The railway expansion begins to slacken
(see Table 5). The last few years underwent the effects of the great
depression of 1892-96.
By contrast, the last twenty years preceding the First World War
show brisk recovery. In spite of the economic crisis of 1900-1,
the rate of growth of industrial product is 2·5 per cent for the period
1885/94 to 1895/1904, and nearly 2·9 per cent for the period 1895/1904
to 1905 J13. The dominant features in this development are the
expansion of the engineering industries (with iron and steel products
having a growth rate of 3·5 per cent and a weight of 13·4 per cent
at the end of the period) and the appearance of new industries, such
as artificial fibres and rayon. Among the residual industries, first
place is undoubtedly occupied by electricity and its many applica-
tions, the large expansion of which had begun before the end of the
nineteenth century.
To sum up, we can say that a detailed examination of the various
branches of activity contributing to the formation of the industrial
product does not lead us to identify any period of the nineteenth
century as a take-off period. Neglecting short-term cyclical fluctua-
tions, we observe that industrial development was steady and fast
during the whole of the 115 years which intervene between the
establishment of the Consulate and the First World War. At most,
we can distinguish three periods of acceleration (1799 to 1844, 1855
to 1884, 1895 to 1913) separated by two periods of slowing-down
(1845 to 1854 and 1885 to 1894). It should be noted, incidentally,
that the precise time-limits of these changes in pace remain to be
determined, since the method of ten-year averages necessarily blurs
the turning-points of the growth curve.
Now, if we cannot find the take-off in the nineteenth century,
should we look for it in the economic history of the eighteenth ?
There is some temptation to do so. Between 1701/10 and 1781/90,
industrial growth proceeded at a rate of about 1·9 per cent, with a
significant acceleration during the years 1750-85. Or should we
say that the take-off in France did not occur until after 1945, seeing
that since the Second World War the rates of growth have reached
IJI
or exceeded 6 per cent ? Or should we simply conclude that in very
ancient countries, like France, the phenomenon of a take-off in
Rostow's sense does not take place at all, because the economy
grows very gradually over several centuries ?
TABLE 7
DIFFERENT TYPES OF GROWTH
Gs
Gw
Increasing Decreasing
Increasing with in- Preponderant develop- Development limited to
I creasing GwjGs ment of old industries a few old industries
Intensive growth Partial intensive growth
(Height of a growth (Decline of a growth
cycle- phase 3) cycle- phase 4)
Increasing with Preponderant develop-
I decreasing GwfGs men t of new industries
with growth ofold ones
Intensive and extensive
growth
(Upswing of a growth
cycle - phat~e 2)
Stationary or de- Slowing- down of
creasing with Gwj growth in the absence
Gs increasing or of structural renewal
stationary
Structural ageing
(End of a growth
cycle- phase 5)
Stationary or de- Preponderant develop- Slowing- down of
creasing with de- ment of new industries growth through the de-
creasing GwjGs with slowing-down in cline of old industries
the growth of old ones despite the creation
of new ones
Extensive growth Delayed extensive growth
(Beginning of a growth (Delayed beginning of
cycle- phase 1) a growth cycle -
phase la)
III. THE QUEST FOR ANOTHER EXPLANATION

In trying to find another explanation to replace Rostow's hypo-
thesis, I was led to distinguish certain types of industrial growth in
function of three variables :
132
(a) the weighted rate of growth of total industrial product- Gu:
(b) the single rate of growth of total industrial product- Gs
(c) the ratio GwfGs.
Table 7 sets out all the possible combinations of these three
variables. As a result we get six types of growth, each of which has
its own well-defined and measurable characteristics. These types
generally succeed one another in the order shown in Table 7 and
may be regarded as phases of a growth cycle spanning several de-
cades. The most rapid type of growth is extensive and intensive
growth, the slowest is delayed extensive growth. Sometimes, the
two last phases of the cycle are missing ; extensive growth may
follow immediately upon intensive growth, without break in con-
tin'.lity and without an intervening phase of structural ageing. This
happens when innovations are effectively applied at a pace rapid
enough to ensure continuous structural renewal.
TABLE 8
COMPARISON OF SINGLE AND WEIGHTED RATES OF GROWTH
FOR FORTY-TWO FRENCH INDUSTRIES
Single Weighted
Period Rate Rate Gw/Gs Type of Growth
1781/90-1803/12 1·81 1·95 1·08 Partial intensive

1803/12-1825/34 3·05 2·56 0·84 Intensive and extensive
1835/44-1845/54 3·35 2·09 0·62 Delayed extensive
1855/64-1865/74 3·21 2·44 0·76 Structural ageing
1865/74-1875/84 2·57 2·49 0·97 Partial intensive
1875/84-1885/94 1·57 1·67 1·06 Structural ageing
1895/04-1905/13 2·68 2·50 0·93 Intensive
Table 8 illustrates an attempt to apply this analytical method

to the concrete case of the forty-two French industries for which
we already have quantitative data.
But we have to enter an important reservation. Table 8, such
as it is reproduced here, cannot and must not be regarded as an
interpretation of historic fact in France. It is merely a laboratory
experiment, without immediate practical significance. Obviously,
the inclusion of residual industries not shown in the Table would
modify the three parameters considered and this might, in certain
cases, lead to a qualitative reclassification of the period under
review.
133
Furthermore, however important industry may be in economic
development, industry alone is not determinant for all the charac-
teristics of an age. We must also consider the other sectors of
economic activity, namely, agriculture and services. Table 9 shows
the growth of gross agricultural product to have been much slower
than that of industrial product. The periods of greatest agricultural
expansion were 1750/60 to 1770/80, 1815/24 to 1825/34, 1835/44
and 1845/54 to 1855/64; throughout these, the rates of growth were
TABLE 9
GRoss AGRICULTURAL PRoDucT AT CoNSTANT (1905j13)
MARKET PRICES
(Million 1905/13 francs)
Geometrical Average
Period Gross Product of Annual Rate
of Growth
1701-1710 2,685 -
1751-1760 3,157 0·32
1771-1780 4,116 1·33
1781-1790 4,155 0·09
1803-1812 4,762 0·62
1815-1824 5,090 0·56
1825-1834 5,728 1-19
1835~1844 6,601 1·43
1845-1854 7,290 1·00
1855-1864 8,217 1·20
1865-1874 8,713 0·59
1875-1884 8,356 -0·42
1885-1894 8,326 -0·04
1895-1904 9,256 1·06
1905-1914 10,265 1·04
1920-1924 10,417 0·15
1925-1934 11,817 1·82
1935-1938 11,753 -0·08
below 1·5 per cent annually. In other periods the rate of growth
generally remained below 1 per cent. From 1855/64 onwards,
agricultural expansion slowed down, largely under the influence of
overseas competition. The year 1873 marked the onset of the great
agricultural depression which lasted until about 1896. This ex-
plains the negative rates of growth during the ten-year periods
1865/74 to 1875/84 and 1875/84 to 1885/94. The recovery after
1896 certainly owed much to the introduction, by Meline, of the
protectionist tariff in 1892. However, while his protectionist policy
1 34
made room for a rather modest expansion in agriculture, it also
contributed to the hardening of the country's productive structure
and in the long run slowed down the growth of the French economy
as a whole.
Agricultural product and the product of industry and crafts
together make up the physical product, the growth of which is
shown in Table 10. It will be seen that the highest rates of growth
were achieved during the first seventy years of the nineteenth cen-
tury and during the years 1896 to 1913. The slackening of growth
TABLE 10
GROWTH OF PHYSICAL PRODUCT AT CONSTANT (1905/13)
MARKET PRICES
Physical Product in Geo- Geo-

Million Francs metrical Physical metrical
Average Popula- Product Average
Period In- tion
Agri- dustry Annual (millions) per Inhab. Annual
cul- and Total Rate of in Franca Rate of
ture Crafts Growth Growth
1781/90 4,155 604 4,760 - 26·8 178 -

1803/12 4,762 931 5,693 0·82 29·0 196 0·44
1815/24 5,090 - - - - - -
1825/34 5,728 1,730 7,458 1·22 32·57 229 0·70
1835/44 6,601 2,446 9,047 1·95 34·23 264 1-43
1845/54 7,290 3,115 10,405 1·41 35·78 291 0·98
1855/64 8,217 4,091 12,308 1-69 37-39 329 1·23
1865/74 8,713 5,339 14,052 1·33 36-10 389 1-69
1875/84 8,356 7,004 15,360 0·89 37·67 408 0·48
1885/94 8,326 8,711 17,037 1·04 38·34 444 0·85
1895/04 9,256 11,121 20,377 1·81 38·96 523 1·65
1905/13 10,265 14,520 24,785 2·08 39·60 626 1·82
1920/24 10,417 14,828 25,245 0·14 39·21 644 0·22
1925/34 11,817 19,750 31,567 3·02 41·83 755 2·24
1935/38 11,753 17,003 28,756 -1·32 41-91 686 -1·37
between 1875 and 1896 seems to have been largely due to the agri-
cultural depression, for the rates of growth of industrial product
show no diminution until after 1885. In periods of rapid growth
the ten-year maximum rates of growth are registered between 1825/34
and 1835/44, between 1845/54 and 1855/64, and between 1895/1904
and 1905/13. It should be noted that these maxima coincide with
those of agricultural product. On the other hand the spurts observed
took place during periods which, by common consent, have always
been regarded as periods of especially rapid growth : the first years
of the July Monarchy and of the Second Empire, and the 'Belle
Epoque' of the 1900's.
IJS
In Table 11, the inclusion of services gives us the rates of growth
of total gross domestic product. These rates are generally below
those of physical product. There is some shift in the time pattern :
thus the period 1892 to 1902/3 appears to have been one of more
rapid growth than the period 1902/3 to 1912. But in view of the
TABLE 11
GROWTH OF GROSS DOMESTIC PRODUCT AT CONSTANT (1905/13)
MARKET PRICES
(Million 1905/13 francs)
1788 1839 1852 1880 1892 1902/3 1912
Agriculture
Product 4,155 6,601 7,522 8,356 8,558 9,559 10,177
Geometrical aver- - 0·92 1-01 0·38 0·20 1-11 1·01
age of annual
rate of growth %
Industry and Crafts
Product 604 2,446 3,359 7,004 9,313 12,141 15,370
Geometrical aver- - 2-78 2·36 2-66 2·49 2·69 2·38
age of annual
rate of growth %
Services
Construction 1,149 - 1,534 1,784 2,577 2,994 3,214
Commerce 1,142 - 1,652 1,992 2,055 2,629 3,487
Professions, 1,203 - 2,720 4,027 3,920 4,974 5,205
Government
Total 3,494 - 5,906 7,803 8,552 10,597 11,906
Gross domestic 8,253 - 16,787 21,363 26,427 32,297 37,793
product
Geometrical aver- - - 1-11 1-15 1·11 2·00 1·67
age of annual
rate of growth %
Gross domestic 306 - 469 617 689 829 956
hroduct per in-
abitant (francs)
Geometrical aver- - - 0·67 0·98 0·92 1·87 1-41
age of annual
rate of growth %
uncertainties which still surround the estimates of services, it is no

doubt wiser to limit ourselves to the goods sector.
All in all, we can say that the only argument which speaks in
favour of the existence of a take-off in France is the apparent ab-
surdity of the contrary assumption. Take physical product per
inhabitant during any nineteenth-century period, say, 1845-54.
136
Table 10 gives us the figure of 291 francs at 1905/13 prices. Then
reduce this amount, going backward in time, at the average rate
of growth during the nineteenth century, say, 1·2 per cent per annum.
We would soon arrive at physiologically impossible levels. Two
hundred years back, our 291 francs become 26·78 francs at 1905/13
prices. We can be absolutely cer in that in 1645 a man would
have starved or frozen to death if his yearly income could have
bought no more than the basket of goods worth 26·78 francs at
1905 J13 prices. It follows that prior to the nineteenth century the
rate of growth cannot have been a steady 1·2 per cent; it must
have been either close to zero, or alternately positive and negative.
In my opinion the second assumption is nearer the truth.
Before the nineteenth century growth proceeded through alter-
nate periods of spurts and decline, which were essentially deter-
mined by political events. The Hundred Years War (1334-1445)
was followed by rapid expansion, which in turn was interrupted
around 1562 by the Religious Wars. During the reign of Henri IV
the process of growth quickened again, only to be slowed down once
more during the first half of the seventeenth century by political
and religious unrest and by the crushing burden of taxation under
Richelieu. The first half of the reign of Louis XIV, which received
its mark from Colbert's policies, was undoubtedly favourable for
industrial expansion, but perhaps less certainly so for agriculture.
Intensifying warfare after 1685 caused a heavy set-back to economic
activity ; the curve of economic development reached its lowest
point around 1715 and then climbed remarkably steeply after 1750,
to reach a peak shortly before the 1789 Revolution. A$ an im-
mediate result of the Revolution itself, we see a sharp decline,
which ebbs out between 1796 and 1799. From then onwards we
are in the period which we have analysed in detail in this paper
and which ended up with the 1913 peak. Mter a new set-back
due to the First World War, the 1913 level was once more attained
in 1924 and greatly surpassed by 1929. Thereafter, 1929 levels
were not reached again until 1949. Since the Second World War
the pace of growth has been quickening markedly, as a result of
the greater weight of industry in the national product as a whole,
of the acceleration of technical progress, and of deliberate govern-
ment policy. We see that, far from being a cpntinuous process,
growth proceeds through periods of spurts and periods of slacken-
ing or even decline, so that linear extrapolation of present growth
rates into the past is precluded.
In these circumstances I believe that it is hard to speak of a
true take-off of the French economy, and, more generally, that
IJ7
it is impossible to conceive of any theory of growth applicable to
all countries in all ages, without making this theory extremely vague.
What is feasible, in my view, is a theory of certain types of growth.
The steady growth observed during the nineteenth century is growth
of the industrial type. Now we can obviously construct a theory of
industrial growth. But, if we ask ourselves what are the causes of
this industrial growth, we shall find we are back at the causes which
general historians named a long time ago : the great explorers'
overseas discoveries during the fifteenth century, the advent of
merchant and financial capitalism, the great technical inventions,
the philosophical revolution of the eighteenth century. The secular
effect of all these factors was to initiate a growth process of the
industrial type. The latter's birth date may be said to be the moment
when the relative share of industry in total physical product began
to rise. If this precise phase of economic development is to be
called take-off, then the take-off in France occurred around the
middle of the eighteenth century, or, at the latest, towards 1799.
Personally, I am inclined to choose the earlier date, because the
share of industry in physical product actually began to increase
steadily from 1715/20 onwards. The French take-off would thus
have come very soon after the English take-off. But, for a number
of historical reasons, the most important of which no doubt resides
in the two countries' different agricultural structure, industrializa-
tion proceeded much more slowly in France and within narrower
limits than was the case in England. This is yet another argument
for considering growth as an extremely complex phenomenon sub-
ject to the influence of innumerable factors and, for this reason, not
lending itself to representation by over-simplified models.
Chapter 8
THE TAKE-OFF IN JAPAN,

1868-1900 1
BY
SHIGETO TSURU
Hitotsubashi University
I. THE ESSENTIAL MEANING OF TAKE-OFF

INTERPRETED
S 1 N c E I am not quite yet ready to share with Rostow his stages-of-
growth theory in its entirety, it is proposed to discuss at the outset
my own interpretation of what Rostow essentially appears to mean
by the expression of 'take-off'.
One technical condition for take-off, that the rate of productive
investment has to rise from somewhere around 5 per cent to over
10 per cent of national income, is obvious enough. But this invest-
ment-income ratio is not uniquely related to a particular level of
men's productivity in begetting material goods. The same level of
productivity-mix could be associated with a low investment economy
or a high investment economy. In the former case, it might be that
wasteful consumption in the form of arms or conspicuous con-
sumption by the privileged class is high ; and, in the latter case, it
could be that the institutional constraint provides a mechanism of
keeping average consumption level down to a bare minimum. For
any given society one could think of a certain minimum level of
current basic consumption, customarily conditioned by the taste and
mores of that society at that time, over and above which, to the
extent available, can be designated as surplus. Surplus can be
utilized in a number of alternative ways, such as (a) for wars, (b)
for conspicuous consumption by the privileged class, (c) as earnings
to be repatriated to a mother country, (d) for shifting the general
consumption level upwards, (e) for productive investment, and (f)
may even be given away. The essential condition for take-off seems
1 This is a preliminary version of the paper being prepared for the Konstanz
meeting of I.E.A., September 2-11, 1960. The writer, having been 'on the road'
so to speak for several months now, has not been able, before the deadline of
June 1, to weave supporting concrete data fully into the structure of argument
presented here. It is hoped that a completed version will be ready by the time
of the meeting.
1 39
to be that there be created a mechanism in the society such that
surplus will be habitually channelled into productive investment
instead of being consumed in some other way. 1
A$ a matter of approximation it can be stated, I believe, that
the surplus takes different forms in different types of society. Under
the feudal system it is appropriated by the feudal ruling class and
is disposed of in a characteristic manner. Under capitalism it takes
the form essentially of profit. And under socialism, it may be said,
the surplus takes the form of a social fund whose size, within limits
given by technological conditions, is an object of social control. The
fact that the size, as well as the manner of disposal, of the surplus
is intimately related to a particular form the surplus takes is a matter
of great importance. In a capitalist society privately owned capital
constitutes a basic unit of economic activities ; and its essential
quality is to expand itself continually. Capital which remains stag-
nant or which does not beget itself in an ever expanding manner
does not justify itself as capital.z Thus under capitalism, profit,
which in a broad sense of the term is the form of the surplus there,
constitutes the major motivating force for advancing economic
activities ; and when it is realized, it is essentially under the control
of private capital, and is generally destined for investment. There-
fore, once capitalism is established, and so long as it is vigorous
and viable, it may be said that growth is a built-in characteristic of
the system.
We repeat, then, that the essential condition for take-off is that
there be created a mechanism in the society such that surplus will
be habitually channelled into productive investment instead of being
consumed away. In the case of the People's Republic of China
this is being achieved by means of the central control of the surplus
with an explicitly-stated precept that 'the rise of productivity shall
1 Rostow's thesis that there has to be a productivity rise in agriculture in the
transitional process between a traditional society and a successful take-off and
that 'the rate of increase in output in agriculture may set the limit within which
the transition to modernization proceeds' (The Stages of Economic Growth, p. 23)
does not seem to me to be essential. Japan's case may provide us with a test. It
is doubtful if physical productivity per land-area for any particular crop-product
rose in any significant measure before the decade of the 1890's. Total physical
output per agricultural family did rise through a better use of the slack-season
hours, as well as through a more intensive utilization of dependents' labour, in
producing a more diversified list of products. But it is significant that average
real income of peasants showed practically no rise, again, until the decade of 1890's.
a When Schumpeter remarked : 'Unlike other economic systems, the capitalist
system is geared to incessant economic change. . . • Whereas a stationary feudal
economy would still be a feudal economy, and a stationary socialist economy would
still be a socialist economy, stationary capitalism is a contradiction in terms'
('Capitalism in the Postwar World' in PostwaT Economic Problems, edited by S. E.
Harris, pp. 116-17), he undoubtedly must have had in mind this self-expanding
character of private capital.
Tsuru - The Take-off in Japan
be faster than the rise of real wage'. In the case of the Federation
of Malaya it could be achieved by somehow making it obligatory
for the entrenched foreign capital to reinvest their profit in Malaya
instead of repatriating it abroad. 1 The take-off of Japan, of course,
has already taken place ; and the dominant fact of the situation,
I believe, was that Japan developed into a capitalist economy some-
time during the latter half of the nineteenth century and that with
the progress of capitalism what Rostow calls 'the compound interest'
came to be sustained. In other words, to discuss the take-off of
Japan is first to ask such questions as: (a) how was the milieu
favourable to the capitalistic development prepared ; for example,
the spreading of money economy, the construction of social over-
head capital, etc.? (b) how was the mechanism developed to mobi-
lize financial resources to be channelled into productive investment
in the hands of industrial capitalists ? And whence did such re-
sources come? (c) how did the supply of capitalistic entrepreneurs
emerge? (d) how did the supply of workers emerge- the type of
workers who were amenable to the discipline of modern industrial
factories? and (e) how were the technological innovations needed
for sustained growth brought about? It may be seen that some
of these questions are equivalent to the problems highlighted by
Rostow in connexion with the pre-conditions stage as well as with
the take-off stage. But his theoretical framework is different from
mine, and it will be dangerous to stress any particular equivalence
too much. Thus what I propose to do in what follows is to present
my views on the characteristic aspect of Japan's take-off period in
an attempt to indicate, in terms mainly of my own framework, the
essential factors which seem to me to have contributed to Japan's
attaining of growth-sustained economy. Occasions will be taken to
comment on Rostow's thesis as I go along.
II. CHARACTERISTICS OF JAPANESE CAPITALISM IN ITS

INITIAL STAGE: ANCILLARY FACTORS CONSIDERED
Since this essay is not meant to be a full treatment of the subject
of capitalistic development in Japan, it may be advisable to give
here a brief account of some of the relevant factors in the situation.
1 During the five years, 1949-53, the average annual repatriation of profits
and interest away from Malaya amounted to $18·8 per capita of Malayan popula-
tion. (See The Economic Dl!fJelopment of Malaya, Report of a Mission Organized
by the International Bank for Reconstruction and Development, 1955.) Compare
this figure with the average per capita investment figure of $5 to $10 in most of
the south-east Asiatic countries.
First, the matter of chronological orientation. Ports were
opened for external trade in 1859. But the real political turning-
point was the Restoration of 1868 which brought to the top an
entirely new leadership committed strongly to what Rostow calls
'reactive nationalism'. The period from 1868 to 1881 was that of
post-Restoration reforms and continuing internal strife (a major
civil war broke out in 1877) culminating in the inflation of 1877-81.
The Matsukata deflation of 1881-85, often suggested to be com-
parable to the English Restriction Period of 1815-21, 1 prepared the
ground in many ways for the orderly functioning of capitalistic
enterprises. A decade subsequent to this deflation period, i.e. 1886-
1895, was the period of extremely rapid growth in the economy,
especially in mechanized cotton spinning, the terminal year being
the year Japan ended her war against China with victory. Rostow
considers Japan's take-off period to cover roughly the twenty years
between 1880 and 1900.
Next, a few points of relevance may be mentioned in the sphere
of international economic relations. Until Japan's victory in the
Sino-Japanese War which brought her the windfall of a large in-
demnity payment in gold and sterling,Z there was only an insignificant
inflow of foreign capital permitted during the first thirty years of the
new Japan. On the other hand, outflow of specie was sizeable until
1881, needed for the balancing of her current trade accounts. It
should also be noted that Japan was de facto on the silver standard
until 1897 and undoubtedly her exports benefited from the de-
preciation of silver against gold in the 1890's.J That Japan did not
gain her tariff autonomy until 1899, freeing herself from the 5 per
cent limitation imposed upon her under a pre-Restoration agreement
with foreign powers, is also a feature of her take-off period to be
remembered.
A brief statistical summary is also in order. The best available
study of Japan's growth rate 4 shows that the average annual growth
1 Schumpeter wrote on the English Restriction Period as follows : 'As
it was,
policy consisted in providing a secure frame for entrepreneurial activity, in reducing
burdens and fetters to a minimum and in defending this system with energy-
ruthless energy. even- against outbreaks of discontent and misery'. Business
Cycles, 1939, p. 266. This description applies perfectly to the Matsukata deflation.
• It amounted to ¥364,000,000, equivalent to about one-third of Japan's national
income at the time.
3 G. Droppers, commenting on the government's move for adopting the gold
standard, wrote in 1896: 'If she [Japan] succumbs to the mania for gold at the
present moment when her entire economic progress is a demonstration of the
blessings of silver, she will have forgotten the lessons of experience precisely at
the moment when they are most apparent and of the greatest utility to her' (The
Far East, Vol. 1, No. 2, March 20, 1896, p. 21).
4 K. Ohkawa and others, The Growth Rate of the Japanese Economy since
1878, 1957, p. 21.
rate of real national income, based on the comparison of overlapping
decades, was 4·3 per cent for 1878-87 to 1883-92, 4·9 per cent for
1883-92 to 1888-97, and 5·5 per cent for 1888-97 to 1893-1902.
If these estimates are even roughly correct, they imply, on the
assumption of a capital-output ratio of, say, 3, the net investment
to income ratio of 13 to 16 per cent in the last quarter of the nine-
teenth century. As for the trend of price movements, a substantial
degree of inflation is indicated during the three decades preceding
the Restoration of 1868,1 then an unsettled condition is observed
during the first ten years of the new regime followed by the inflation
of 1877-81. The succeeding Matsukata deflation brought down the
general price level nearly to the pre-inflation level; and after 1886
the index 2 moved in the following manner :
1886 100 1892 124
1887 103 1893 115
1888 104 1894 122
1889 113 1895 131
1890 130 1896 141
1891 121 1897 156
The index kept on rising steadily to 388 in 1929 and 628 in 1941.
In comparison with other capitalist countries, a generally inflationary
trend is marked throughout the period of industrial development
in Japan.
One other preliminary point has to occupy us before we pro-
ceed to our central task of attempting to explain Japan's take-off;
and that is, the preoccupation of Restoration leaders with all the
things implied in the 'reactive nationalism' and the progress made
in rounding out social overhead capital.
The preoccupation referred to dictated the policy of shunning
the importation of foreign capital and expressed itself in the eager-
ness to introduce, and to assimilate, the advanced arts of Western
countries ; but, above all, it reflected itself in the peculiarly arma-
ment-oriented policy of industrial development. In a sense, this
was a legacy of the pre-Restoration bakufu (central feudal) and clan
governments which, partly for their internal political reasons, vied
with each other in introducing modern weapons and the means to
make them. It is significant that before a single cotton spinning
machine was imported or a single mile of railroad was built the
construction of a reverberatory furnace was completed (1852), a
1 The price index for rice, with the average of 1830-46 as 100, stood at 404
in 1868 and the similar index for ginned cotton was 279 in 1868. (See T. Nawa,
Nihon Bosekigyo to Genmen Mondai Kenkyu, 1937, pp. 156-7.)
• The index compiled by Ohkawa and others, but its base shifted from 1928-32
to 1886. See Ohkawa and others, op. cit. p. 130.
1 43
lathe-machine was imported (1856), and a shipyard was constructed
to make steam-run warships (1863). The new regime intensified
its efforts in this direction further by enunciating, in 1880, the
policy of self-sufficiency in the production of armaments in both
semi-finished and finished stages. From that time onwards, a
characteristic situation prevailed in Japan that arms requirements
played the role of an axis which, with generous government sub-
sidies, tended to pull key heavy industries up to the standard dic-
tated by military purposes.•
Rounding out social overhead capital in its broadest sense also
bears the mark of the nationalistic concern of government leaders.
Railroad building was not to be entrusted to the hands of foreigners
or private individuals. Although the first stretch of railroad, 18
miles long, was built (1872) with the aid of British capital and
foreign engineers, the first line constructed entirely by Japanese
(the Keishin Line, 11 miles long, between Kyoto and Otsu) was
completed (1880) before Japan had a total mileage of railroad of
more than 100. The mileage grew after this at the rate of doubling
every three years or faster, to attain the total of 1880 miles by 1892.
The landmarks in the development of modern means of communi-
cation were the commencing of governmental postal service in 1871,
the introduction of telegraph in 1869 and the setting up of a public
corporation for the service in 1872, and the installation of the first
telephone line in 1877. Unique in the administrative set-up of the
Restoration government was the Kobu Sho (Department of Indus-
trial Matters), which, though short-lived (1870-85), served as an
indispensable midwife of almost all the industrial projects including
the task of rounding out social overhead capital. Tasks charged
to, and carried out (if falteringly) by, the Department included: To
provide an institution for instruction in technology ; 2 to supervise,
and to manage, all the mines; to construct, and to repair, railroads,
telegraph, and light-houses; to build, and to repair, commercial-
' In 1880 was invented the 'Murata' rifle, the first rifle made in Japan, which
was later (1885) perfected into a magazine rifle. In 1881, Osaka Iron Works was
established by Hunter, an employee in the Japanese Navy; and Naval Ordnance
Factory in Tsukiji, Tokyo, adopted the Krupp method, commencing the produc-
tion of steel. In 1882, Osaka Arsenal started producing bronze-steel in order to
make Japan self-sufficient in copper. Also in 1882, the Kamaishi Iron Works
was opened by the government. In 1883, the Kyodo Transport Company was
established under government sponsorship, one of the main purposes being the
strengthening of naval defence. The first vessel above 1000 tons, Kosuga maru,
was built at the Nagasaki Dockyard in this year, too. It may be noted that all
these developments occurred several years before mechanical cotton spinning
started the first stage of its real development, which came in 1887-90.
• The Technical School (Kogakuryo), established in August 1871 by the
Department, instituted a most strenuously intensive curriculum (eleven and one
half hours of scheduled class work every day) to develop native experts as rapidly
as possible.
Tsuru- The Take-off in Japan
and war-ships; to survey land and sea; to process (refining and
casting) copper, iron and lead ores for use in various manufactures,
and to engage in the construction of machines, etc. In discussing
the ramifying development of social overhead capital in Meiji Japan,
one probably should not fail to mention the energy and speed with
which the public education system was instituted and made to
spread in the early years of the Restoration. Coupled with the
attempt to simplify the language and adapt it to modern technical
needs as well, the early success of universal education in Japan was
undoubtedly one of the most important factors in the rapid modern-
ization of Japan.
III. CHARACTERISTICS OF JAPANESE CAPITALISM IN ITS

INITIAL STAGE: THE MECHANISM OF 'COMPOUND
INTEREST'
A stroke of institutional transformation which changed the
manner of disposal, if not the size, of the surplus was the Land Tax
Reform of 1873 combined with the once-for-all step of commutation
of feudal pensions.
During the latter-day years of the Tokugawa rule, it is estimated
that the share of the feudal ruling class (lords and retainers) in the
gross product of agriculture averaged around 37 per cent while the
remainder was divided between landowners and cultivators roughly
in the proportion of 4 to 6. The Reform of 1873 was deliberate in
freezing, at least initially, the relative ratios of distribution. The
formula 1 was worked out in such a way that 34 per cent of the
gross product would go into government as tax, 34 per cent to the
owner and 32 per cent to the tenant. The two significant innova-
tions were (a) that the land value, instead of crop results, was made
the basis of taxation to be paid by the landowner, and (b) that pay-
ment in kind, which was the practice under the feudal rule, was
replaced by money payment, although tenants continued to pay the
1 The formula for tenant-cultivated land was as follows :
L=rRP-(!+t')L
'
where L stands for land value, R for the quantity of rice crop, P for the unit price
of rice, r for the percentage of rent to be paid in kind by tenants, t for the rate
of land tax, t' for the rate of local surtax, and i for the conversion rate of interest.
Originally both R and P were meant to be cu"ent figures. But they were frozen
subsequently. All other parameters were given initially, r=68 per cent, t=3 per
cent, t' = 1 per cent, and i = 4 per cent, although t was reduced to 2· 5 per cent in
1877. Given the initial values of parameters, L becomes equal to 8·5 times RP.
For the owner-cultivated land also, the formula and parametric values were chosen
in such a way as to yield the same result of L = 8· 5 RP.
1 45
rent in kind. Now if the new central government had used the land
tax revenue to support the livelihood of lords and retainers on a
similar scale to that under the Tokugawa rule, the Restoration would
have witnessed little change. What in fact was done was to trans-
form the 'status income' of the feudal ruling class into the form of
transferrable assets, a kind of deadweight bonds unmatched by any
productive efforts or physical assets, bearing interest of 7 to 10 per
cent. 400,000 families were involved in this commutation step, the
majority of whom received on average 400 yen worth of bonds.•
For the period of 1868-80 as a whole, the land tax occupied 79 per
cent of the central government revenue ; and, on the other hand,
42·1 per cent of government expenditures in 1878 consisted of
interest payments.
The Land Tax Reform and the commutation of feudal pensions
in themselves did not change the picture immediately. But their
substantive contents, coupled with the progress of inflation, had a
tremendous leverage effect, which, of course, was not quite inde-
pendent of policy intents of the Restoration leaders. Although it
would be a mistake to attribute too much to these reforms, some
of the major consequences related to them miJ.y be mentioned as
follows:
1. The Land Tax Reform perpetuated, for at least a generation
more, the severe degree of exploitation in the feudal period
of cultivating tenant-farmers. The rent-in-kind system made
it certain that they would not benefit from any price rise of
their crops.
2. The land tax rate appeared to be rather exorbitant, taking
away as much as one-third of the gross value of the crop ;
but it gradually lost its severity through the rise both in price
and productivity of the rice crop. 2 Before this mitigation
occurred, however, a large number of small-size landowners
had suffered under the heavy burden of taxation and had
had to sell their land to join the ranks of tenant farmers ; and
relatively big landowners, who managed to survive the period
of severity, came to enjoy a large surplus in the subsequent
period.
3. Many of the erstwhile feudal pensioners found income from
the commutation bonds too meagre for their living even
1 500 of the so-called 'lord class' received on average ¥60,000. One koku of
rice cost ¥5·5 in 1877 and a family of four probably needed 4 koku of rice (¥22)
simply to subsist a year, and even the 10 per cent interest income on the principal
of ¥400 would have been barely sufficient for minimum living.
2 The tax, as mentioned earlier, was a flat rate on the frozen value of land to
be paid in money. AB the price of rice rose and/or the productivity rose, the tax
became a smaller and smaller proportion of the gross value of the crop. By 1878,
when inflation was in progress, the proportion of the tax in the gross value, which
originally stood at 34 per cent, came down to 12 per cent.
146
before the inflation came. But the inflation of 1877-81 had
crushing effect on them, forcing them to sell their bonds and
to seek employment somewhere. With the progress in infla-
tion, the burden of interest payment on the government
coffers also became smaller and smaller.
4. Government made use of the land tax revenue as a base
for issuing various types of bonds, including industrial bonds.
Thus while taking care of the expenses incurred on account
of the compromise with the old regime, the Meiji government
was able to channel some of the surplus directly into pro-
ductive investment as well as to resort to deficit financing for
creating new industries.
5. As the land tax had to be paid in money instead of in
kind, the money economy spread rapidly in the rural sector
of the economy as well. At the same time, the revision of the
National Bank Act in 1876, which permitted National Banks
to issue their notes with the Commutation Bonds as collateral,
created an attractive outlet for the holder of these bonds ;
and it stimulated the emergence of National Banks every-
where, causing the instrument for commuting feudal pensions
to function as capital to spread the network of the banking
system throughout the country. In June 1876 there were
only 4 National Banks; but three years later there were 139.
Here, then, are the trends and consequences of the Land Tax
Reform and the commutation of feudal claims to income occurring,
though with different timing and speed, in the years roughly from
1873 to 1881. The inflation of 1877-81, which itself was partly a
consequence of the measures associated with the commutation,
helped to sharpen the process in the direction in which the events
were moving. The most important of the trends, it may be said,
was the income-redistribution effect and the polarization consequent
on the Land Tax Reform, etc., creating on the one hand a large
number of dispossessed peasants and former retainers and on the
other a class of increasingly rich landowners and merchants. The
government, which shared in the surplus, had an enlightened,
energetic policy of channelling the surplus into productive invest-
ment, first under their direct ownership and supervision and then
shifting to the policy of encouraging private enterprise, even if
monopolies, with appropriate subsidies. The Matsukata deflation
of 1881-5 was the period when all these trends and factors conspired
to unite in preparing the ground for a rapid industrial development
in the following decade.
At the risk of over-simplification, the essential features of Japan's
'compound interest' mechanism in the last quarter of the nineteenth
century may be skeletonized as follows :
147
Producers in the agricultural sector constituted the Atlas on
which the severest burden fell. Even with the rise in physical pro-
ductivity of rice and the diversification of typical products by an
average peasant, including the ever-expanding industry of cocoon-
raising, the lot of the majority of the rural population remained the
same. Their added productivity expressed itself either in a greater
surplus garnered by landowners and merchants or in relatively lower
prices for the products.
The continuing plight of poor peasants contributed to cause an
extremely low supply price for factory labour force, especially the
type of labour force which the leading manufacturing industry of
the time, i.e. cotton textiles, required. Young girls before marriage
were recruited from destitute farm areas often in the form of con-
tract labour in which parents were paid a nominal lump sum. Even
in cases where the offer of labour for factory work was 'voluntary',
the supply price depended largely on the consideration of supple-
menting the family income and not much more. It might be said
that the survival of traditional family relations in Japan, encouraged
tor the interest of those who benefited from cheap labour, retarded
the emergence of the category of wage income as a payment for
principal breadwinners. And it was only natural that the low wage
rate in one important sector of the economy became the standard for
other sectors and tended to pull down wages of all the alternative
employment.
Being able to utilize excessively this cheap labour force, new manu-
facturing industries of Japan could easily overcome various handi-
caps (such as the lack of tariff autonomy, the almost complete
dependence on foreign supply of machinery, etc.) to establish them-
selves quickly with a high rate of profit. With their profit earnings
high, Japan's manufacturing firms became geared to a high rate of
growth, supplementing their internal saving and sale of equities by
heavily depending on commercial banks even for risk capital. The
zaibatsu structure of firms in Japan, which developed quite early,
helped spread the risk over a wide range of capitalistic pursuits, a
single zaibatsu organization encompassing practically all the major
new industries as well as banking, warehousing, insurance, shipping,
and foreign commerce.
To the extent that the economy was geared to a high growth
rate, the investment demand was high and took care of a significant
portion of effective demand needed for the sustained prosperity. But,
even so, the expansion of markets was imperative for products of
new manufacturing industry, in particular, cotton textiles. In
general, the low income condition of peasants and workers pre-
148
Tsuru- The Take-off in Japan
eluded the creation of a mass market ; and the drive for exports
was the natural consequence. 1 Japan's exports at that time were
aided by (a) a deliberate policy of dumping, 2 (b) a fortuitous circum-
stance of silver depreciation, and (c) the expansionist military policy
towards the continent of Asia. This latter expansionist orientation
assured another sector of markets for Japanese industries, namely,
the arms and arms-related industries which had a sheltered exis-
tence as regards not only the guarantee of sale with profit but also
the supply of needed funds.
It cannot be doubted that cotton manufacturing was a leading
industrial sector in Japan's take-off as Rostow points out. But it
is questionable if the rapid growth of cotton manufacturing could
be said to have been 'a powerful and essential engine of economic
transformation' (p. 58). I believe that the foregoing analysis points
up sufficiently the complexity of the problem if we were to pin down
such an 'engine of transformation'. Instead, I am rather inclined
to see in the fact of the rapid growth of cotton manufacturing in
Japan the developments which I believe are typical of the take-off
period in a large number of countries : namely, the rise of joint-
stock companies and the prevalent use of machinery in factory
production. The former facilitates the pooling of scattered savings
in the economy for concentrated use in risk enterprises, and the
latter renders production relatively independent of limitations of
organic growth and permits cumulative mass production.
In the case of Japan, the stock market became an established
institution in 1878 ; but initially their business was mainly the
1 Rostow states that 'an environment of rising real incomes in agriculture,
rooted in increased productivity, may be an important stimulus to new modem
industrial sectors essential to the take-off' (p. 23). Japan's case does not seem to
support this thesis although he applies it to Japan. (Seep. 67.) The first task the
Japanese cotton textile industry was confronted with was to replace the British
and other foreign imports within Japan; and while this was only half-way done, it
started an energetic move to drive a wedge in the world market. After only a few
years of initial expansion of 1886-89, the mechanized spinning industry found
itself with an unsold stock of cotton yams and the industry had to agree on cur-
tailment of operation for three months in 1890 when there were in existence only
278,000 spindles. The first attempt to find an export market for cotton yams was
also made in 1890.
a For example, the average price of cotton yams per kori moved as follows
(Source: Koda Yudo, Hompo Mengyo no Tokeiteki Kenkyu, pp. 32-3):
Average Average
Price Export
at Home Price
y ¥
1890 83·00 21·89
1891 73·00 71·31
1892 76·00 7·33
1893 82·00 5·01
149
handling of government bonds. In 1879, for instance, the turnover
of corporate shares amounted only to 1 per cent of that of govern-
ment bonds. Such a ratio, however, rose to 13 per cent in 1885,
then to 85 in 1886, and to 10,900 in 1887. The total amount of
authorized capital in non-financial corporations increased from 13·4
million yen in 1884 to 189·4 million yen in 1890; and cotton manu-
facturing and railroads were by far the biggest industries which
shared in this phenomenal multiplication of the corporate form of
enterprise.
On the question of the supply of machinery, Japanese producers
made full use of the flexibility of supply of foreign makers while
at the same time taking active steps towards learning how to make
it themselves. The lack of any inhibition in the purchase of foreign
products in this regard, backed up of course by the availability of
foreign exchange, made it possible for Japan's cotton manufactur-
ing industry to expand as rapidly ~ investment funds were forth-
coming. Average annual importation of spinning machinery, for
example, amounted to ¥56,000 during 1883-6; but it rose to
¥125,000 in 1887, then jumped to ¥1,110,000 in 1888, and after
a few years' stagnation it picked up again to reach the level of
¥5,402,000 by 1897. It is obvious that if Japan had been mindful
of attaining self-sufficiency in machine-making too soon she would
not have been able to expand cotton manufacturing as rapidly as
she did. On the other hand, it is also evident that the pressure to
expand Japan's exports- the pressure which had already been felt
on account of the narrow domestic market - became all the stronger
because of the need for sufficient foreign exchange. Were it not
for the victory in the Sino-Japanese War (1894--95), which brought
her the windfall of gold and sterling (364 million yen) as indemnity
and which also opened a way for importation of foreign capital for
the first time on any significant scale, it clearly would not have been
possible for Japan to incur the aggregate unfavourable balance in
commodity trade on the scale of 310 million yen over 1896-1900
and yet to take steps to join the camp of gold standard countries
in 1897. Successful and successive wars, too, may be said to have
been an important factor in the rapid industrialization of Japan.
Chapter 9
THE EARLY PHASES OF INDUSTRIALIZA-

TION IN RUSSIA: AFTERTHOUGHTS
AND COUNTERTHOUGHTS
BY
ALEXANDER GERSCHENKRON
Harvard University
I. INTRODUCTION
THE following pages do not purport to cast the topic in a new
mould. My views on the course of European industrialization in the
nineteenth century in general and on that of Russia in particular
have been laid down in a number of essays published within the
span of the last ten or twelve years. 1 This circumstance, however,
should cause no disappointment to the members of this Conference.
A paper on an assigned topic resembles the proverbial gift horse in
that no reasonable person will expect too much from it. Still, it
need not be entirely toothless, and it is possible that a confronta-
tion of my views with those of Professor Rostow might yield one
or two additional insights ; at the very least, it may draw sharper
contours around the methodological problems involved.
II. A SUMMARY VIEW OF RUSSIAN

INDUSTRIALIZATION, 1885-1914
Something more will be said presently on the crucial question of
appropriate spatial and temporal limitations in historical studies.
1 The most relevant among those essays may be listed as follows : ' The Rate
of Industrial Growth in Russia since 1885 ', The Journal of Economic History,
Supplement VII, 1947 ; ' Economic Backwardness in Historical Perspective ', in
The Progress of Underdeveloped Countries, edited by B. Hoselitz, Chicago, 1952;
'The Problem of Economic Development in Russian Intellectual History of the
Nineteenth Century', in Continuity and Change in Russian and Soviet Thought,
edited by E. Simmons, Cambridge, Mass., 1955; 'Review', ibid.; 'Notes on the
Rate of Industrial Growth in Italy, 1881-1913', Journal of Economic History,
December 1955 ; 'Reflections on the Concept of "Prerequisites" of Modern
Industrialization', L' Industria, 1957, No. 2 ; 'Caratteri e problemi dello sviluppo
economico russo', Rivista Storica ltaliana, 71, No. 2, 1959; 'Rosario Romeo e
I' accumulazione primitiva del capitale ', Rivista Storica Italiana, 71, No. 4, 1959.
151
Suffice it to say here that my research has been confined to the
European industrialization of the nineteenth century. My basic
observation, used as a point of departure, is as simple as are the
propositions to be derived from it. It may be formulated as follows :
During the period under review the map of Europe offered a motley
picture of areas varying very considerably among themselves with
regard to the degree of their economic backwardness ; in the course
of the same period, processes of rapid industrialization began in
several of those areas from very different levels of economic back-
wardness.1 This, however, was of crucial significance for the nature
of the subsequent development. Depending on a given country's
relative economic backwardness on the eve of its industrialization,
the course and character of the latter tended to vary in a number of
important respects. Those variations may be summarized in the
form of a few brief propositions.
1. The more backward a country's economy, the more strongly
its industrialization tended to start discontinuously as a
sudden great spurt proceeding at a relatively high rate of
growth of manufacturing output.
2. The more backward was a country's economy, the more pro-
nounced in its industrialization was the stress on bigness of
both plant and enterprise.
3. The more backward was a country's economy, the more pro-
nounced in its industrialization was the stress on producer
goods as against consumer goods.
4. The more backward was a country's economy, the heavier was
the pressure in the course of its industrialization upon the
levels of consumption of its population.
5. The more backward was a country's economy, the greater
was the part played in its industrialization by special institu-
tional factors designed to increase the supply of capital to the
nascent industry and, in addition, to provide it with less
decentralized and better informed entrepreneurial guidance ;
the more backward the country, the more pronounced was the
coerciveness and comprehensiveness of those factors.
6. The more backward the country, the less able was its agri-
culture to play any active role in the process of industrializa-
tion by offering to nascent industry the advantages of a
1 There is no need at this moment to justify the identification of the economic
area with a politically bounded country; nor to explain how the concept of the
degree of economic backwardness can be rendered measurable beyond saying that
in actual historical fact the differences in the level of economic development among
the countries of Europe were sufficiently discreet so that application of various
conceivably appropriate criteria yields very similar results with regard to the
ordinal array of the countries concerned; accordingly, for the purposes at hand,
the degree of backwardness in the given historical circumstances may be regarded
as an operationally usable concept.
Gerschenkron - Industrialization in Russia
growing internal market based in turn on growing produc-
tivity of agricultural labour.
Russia's place in the concert of European countries seated accord-
ing to the respective rank of economic backwardness was hardly
in doubt. When, in 1910, E. V. Tarle surprised the Russian public
by stating his fantastic thesis that Russia in the last quarter of the
eighteenth century was not a backward country, he stirred up a
controversy which still has not quite found its well-deserved rest.l
No such claims have confused the students of Russian economic
history in the second half of the nineteenth century. It was not
doubted that Russia in, say, 1875 was burdened with the most
backward economy among the major countries in Europe. Remain-
ing within the Continent, one had to cross the Pyrenees or the
Balkans in order to find economically even less advanced states of
any size. 2
The story of Russian industrialization in the last fifteen years or
so of the past century would seem to conform very well to the general
propositions set forth in the preceding. There was a sudden and
considerable acceleration in the rate of growth of Russian industrial
output in the second half of the 1880's. During the decade of the
1890's the rate of growth kept rising, reaching an average level of
about 8 per cent a year for the decade. It is worth noting that the
process was still gathering further momentum in the last few years
before 1900 when the upsurge, or at least its first act, was termin-
ated by the onslaught of the general crisis in Central and Eastern
Europe. It is, of course, true that interspatial and intertemporal
comparisons of industrial growth, particularly in periods of rapid
advance, must be treated with great caution.J Yet, when all is
said and done, the Russian rate of growth in the 1890's appears to
be a good deal above the annual average rates of growth achieved
during periods of rapid industrialization in, say, Germany (while
the German rates in turn exceeded comparable rates that had been
still earlier attained in England).
Similarly, the relative top-heaviness of the Russian industrial
structure as well as its relative concentration upon producers' goods
strongly impress themselves on any observer of Russian economic
1 E. V. Tarle, 'Byla li Yekaterininskaya Rossiya otstalaya strana ?'(Was Russia
under Catherine [II] a Backward Country ?), reprinted in E. V. Tarle, Sochineniya,
Vol. IV, Moscow, 1958, pp. 441-68.
• Cf. in this connexion my forthcoming paper on 'Some Aspects of Industrial-
ization in Bulgaria, 1878-1939 '.
3 Cf. my illustrations of the formidable quantitative significance of the index
number problem in : Alexander Gerschenkron, A Dollar Index of Soviet Machinery
Output, Santa Monica, 1951.
153
history of the period. Furthermore, during the years of industrial
upsurge in Russia the economic well-being of the Russian peasantry
was subject to extraordinary pressures. Those pressures have since
been belittled by the Soviet government's policy of super-industrial-
ization and wholesale collectivization in the 1930's. There is no
doubt, however, that in no Western country did the periods of
'industrial revolutions' exact sacrifices from the populations com-
parable to those made in Russia in the closing years of the last
century. In fact, the peasant unrest in the early years of the cen-
tury, culminating in the great wave of peasant rebellions during the
revolution of 1905, may be seen as the direct consequence of the
burdens which the industrialization of the 1890's had imposed upon
a rural population which had been eking out a miserable existence
from a barbarously primitive agriculture.
Nor can there be any doubt that all the basic features of an
industrialization that had begun in conditions of extreme backward-
ness were powerfully reinforced and accentuated by deliberate action
on the part of the gov{"rnment. Using a panoply of measures
ranging from the high protective tariff via subsidies, profit guarantees,
tax reductions, and tax exemptions accorded to industrial enter-
prises, to manifold laxities in enforcing bothersome laws and ordin-
ances and police and military help in case of labour conflicts, and
culminating in huge government orders at extremely high prices,
the Russian state furthered the growth of domestic industries. In
pursuing those policies, the state, or more concretely the Ministry
of Finance, was characteristically interested in those branches of
industry which in later usage began to be circumscribed as 'heavy
industry' ; at the same time, it was the large-scale enterprises which
established and ran large-scale plants that received help and encour-
agement. In these important respects, the policies of the Russian
government essentially reproduced the policies of the so-called
'investment banks' in a number of Central European and West
European countries. But the differences in degree were clearly
noticeable ; for the Russian government's discrimination against
'light industries' and against small enterprises in any branch of
industry was applied with even greater consistency and ruthlessness.
The several years of stagnation which came in the wake of the
crisis of 1900 tended to obscure the results of the great spurt. To
a sharp-eyed American tourist who visited the country in 1901,
'ten or fifteen years of violent stimulus seemed resulting in nothing'. 1
But Henry Adams was wrong. He failed to grasp the extent of the
1 The Education of Henry Adams, an Autobiography, Boston and New York,
1918, p. 444.
1 54
transformation that had taken place within the industrial structure
of the economy, to say nothing of the quantitative expansion of
that structure. A far-reaching modernization had occurred with
regard to technology, modes of entrepreneurial behaviour, managerial
practices, and aptitudes of the labour force.
This brief summary of the golden period of modern industrial-
ization in Imperial Russia must suffice here. What matters is not
a full story of the great spurt of the nineties. For that the reader
must be referred to the essays mentioned in footnote 1 on page 151,
and beyond them to a body of literature quoted or cited in those
essays. The interest at this point lies in the methodological implica-
tions. In general, the quality of an historical approach can be
gauged most clearly from a scrutiny of the limits beyond which it
cannot be pushed, and by its confrontation with the results of alter-
native views of the same subject matter. Thereby a firmer basis
may be laid for a discussion of Professor Rostow's views.
It is only the inveterate tendency of historians to prefix the
definite article to every generalization about the course of historical
events that calls for the trivial observation that the view of Russian
industrial history as summarized in the foregoing is only one of
several possible and plausible views. An illustration can be easily
provided. Instead of viewing the Russian industrialization as a
special case of an all-European pattern varying along the gradient
of economic backwardness, and instead of regarding the Russian
government as merely casting into bolder relief certain intrinsic
features of industrialization in conditions of backwardness, it is
quite possible to turn the problem round and to view the govern-
ment and its political interest as primarily determining the course
of Russian industrialization. It is then easy to order the historical
material in such a way as to put the main weight of emphasis upon
the role of the state. The result may be regarded as the 'traditional'
pattern of spurts of economic development in Russia. For the first
indications of such a pattern would go back beyond the days of
Peter the Great into the depth of the pre-Petersburg Russia of the
sixteenth century. Every spurt appears then as a recurring complex
of several unfolding sequences. At their origin stood a fundamental
conflict : the political tasks of Russian statesmen were quite 'modern'
in the sense that they had to match wits, policies, and power with
the advanced nations of the time, while the economy that should
have given sustenance to the political effort was hopelessly back-
ward. Hence economic development became a function of diplo-
matic and military pressures. When the latter rose there were
sudden attempts at economic modernization, designed to raise the
1 55
economic potential as quickly as possible to a level more consonant
with political needs. In their very nature, those violent spurts in-
evitably imposed heavy obligations upon the population ; this in
turn required extraordinary - and quite unmodern - means of
coercion and repression in order to make the population accept the
burdens. The government's interest in continuing the spurt might
pass with the passing of military and political conditions that had
provoked the spasm of economic activities. But often the spurt
continued until the exhaustion of the population's ability to suffer
and to endure forced a change of pace and policy upon the govern-
ment, letting the country relapse once more into a protracted state
of stagnation.
The differences between the two approaches are obvious. Partly,
they comprise variations in the course of events, but partly also
variations in the interpretation of identical events. Industrialization
of Russia involved the country's westernization under any circum-
stances. But in the 'traditional' pattern the very attempt to imitate
the West with regard to modes, techniques, and levels of production
required moving farther away from the West in some other equally
momentous respects. To the extent that the peasantry was reduced
to serfdom in order to force it to bear the cost of economic progress,
westernization of the economy seemed to be inseparably connected
with its 'orientalization '. Moreover, the 'traditional' pattern with
its built-in period of stagnation following the spurt implied a more
or less prolonged 'post-spurt' period during which the economic
backwardness of the country was again on the increase. Finally,
the injection into the body social of 'oriental' elements tended
eventually to reinforce the tendency towards stagnation. If serfdom
was originally introduced in order to promote economic develop-
ment, it became one of the major obstacles to further progress.
Thus a curious zigzag course was an integral part of the 'traditional'
pattern. By contrast, the 'all-European' pattern of growth may
indeed involve eventual decelerations, but specific obstructions of
economic development are not assumed to be created in the very
process of growth.
At the same time, elements which are common to both patterns
call for different explanations according to the pattern chosen. As
a rule, simple political interpretations in the 'traditional' pattern
are parallelled by more complex economic sequences in the 'all-
European' pattern. For in the former the government policy alone
is the explicandum. Thus in the former the urgency of military
plans, be they aggressive or defensive, serve as a sufficient reason
to explain first the start and then both the speed and the extent of
l56
Gerschenkron- Industrialization in Russia
the effort at economic development. A smashing military defeat,
suddenly revealing the weaknesses of a system is then regarded as
having caused the change in government policy. On the other hand,
if governmental action is viewed as merely accentuating and rein-
forcing causal sequences that are inherent in the economic situation
of the country concerned, political explanations will prove inade-
quate. Then, in order to explain the beginning of the great spurt,
i.e. the kink in the output curve, one may wish to regard the situation
preceding the outburst as one of tension between the potential
advantages of industrialization and the actual stagnant state of
affairs. In such a situation, further increase of tension - be it by
a technological innovation abroad that is particularly suitable to the
conditions of backwardness, or through removal of some consider-
able obstacle or obstacles to industrial progress by government
action - may move the country across the critical line beyond which
all the accumulated and as yet unutilized opportunities suddenly
come to life. It is precisely because industrialization had been so
slow in coming that the existing opportunities extend over wide
ranges, making possible simultaneous growth along a broad front
so as to permit additional advantages stemming from the creation
of circuits of reciprocal demand, generous mutual transmittals of
external economies, and unimpeded scope for indivisibilities. These
are some of the factors that make for increased tension in the pre-
spurt period ; they must be taken into account in interpreting the
meaning of Propositions (1) and (2) as set forth above. 1
Similarly, in terms of the 'traditional' pattern the concentration
on producers' goods is an obvious result of the nature of the govern-
ment's demand. If, however, the interpretation is in terms of the
'all-European' pattern, the stress on producers' goods must be
related to different factors.z One of them is the fortuitous circum-
stance that in the second half of the nineteenth century technological
progress happened to be a good deal faster in the area of producer
goods than in that of consumer goods. The later in the century
was the occurrence of the great spurt of industrialization, the more
pronounced was the differential between the rates of technological
innovations in the two areas. The more backward was an area, tht:
greater was the role played in its industrialization by borrowed
technology and the greater, therefore, the propensity to concentrate
on those branches of output within which recent technological
1 Vide supra, p. 152.
• It is true, of course, that for the world as a whole industrialization implies
an increase in the share of capital goods in total output. But for each individual
country the existence of opportunities to import machinery and equipment from
abroad provides, in principle, for widely disparate types of industrialization with
regard to the relative rates of growth of consumer and producer goods.
157
The Economics of Take-off into Sustaitted Growth
progress had been most pronounced. At the same time, however,
in the given conditions of the nineteenth century technological pro-
gress went hand in hand with, and in fact presupposed, increases
in the scale of industrial plants. Thus technological factors go far
to explain the relationships summarized in Proposition (3) above ; 1
as they also serve to cast further light on Proposition (2) 2 in which
bigness of plant is related to a country's degree of backwardness.
For technology, producers' goods, large scale of plant, and high rate
of growth- all these are closely interrelated. In particular, it has
been often observed that producer goods allow of wider and more
complex complementaries than consumer goods. To use Professor
Dahmen's term, producer goods make for larger and more effective
development blocs, and the more backward a country the more the
success of its industrialization may depend on the existence of a
hierarchy of well-adjusted development blocs.
Let us return now to the industrialization of Russia at the end
of the nineteenth century and try to ascertain the applicability to it
of what has been called the 'traditional' pattern of Russian economic
development. Clearly, our instruments of perception are not fine
enough to separate conjoint motivations and to gauge their relative
importance and influence. Yet to look for the elements of 'tradi-
tionality' in the great spurt of the 1890's is not necessarily a useless
enterprise, and may yield a few additional insights into the nature
of the transformation that was taking place.
No one studying the course of economic change in Russia during
the period under review can fail to be impressed with the extent
and intensity of the government's intervention. Military pressures,
grand designs in the field of foreign policy, old fears and new
resentments visibly hovered over Russian policies of industrializa-
tion. After the defeat in the Crimean War it was believed that the
abolition of serfdom, construction of railroads with imported
materials and equipment, and comprehensive judicial and adminis-
trative reforms would suffice to change Russia's military position
in the world. The ease with which Disraeli deprived Russia of
many of the fruits of her victory over the Turks and Prince Gorcha-
kov's helplessness at the Congress of Berlin (1878) demonstrated to
Russian statesmen that further and more positive action in the
economic field was called for, if the balance of power was to be
redressed. True, the diplomatic defeat at Berlin was not immedi-
ately followed by rapid industrialization. It took several years to
draw the inferences and to overcome the traditional aversion from
industrialization. But the connexion between the two phenomena
1 Vide supra, p. 152. z Vide supra, p. 1 52.
is undeniable. 1 Nor can it be gainsaid that the government's interest
in railroad building and in industries serving railroad construction
was clearly co-determined by considerations of military strategy
and the desire to assure for the army and the navy more efficient
and more plentiful supplies of products of domestic industries.
Finally, the period of stagnation that came after 1900 showed clearly
that the patience of the peasantry was exhausted ; as such it was
an all too familiar epilogue to a period of rapid growth. Those were
unmistakable elements of the 'traditional' pattern.
On the other hand, the incompleteness of the traditional pattern
in the 1890's must not be overlooked. Most of all, one would look
in vain, during the spurt of the 1890's, for any serious institutional
device that would be 'oriental' in nature and still would be designed
to make the continuation of the spurt possible. 2 More important
is another, although not unconnected point. To appreciate fully
the nature of the great spurt of the nineties one has to look beyond
it, across the years of industrial stagnation from 1900 to 1906 to
the resumption of industrial activity that began in 1907 and con-
tinued until the outbreak of World War I. In comparing the period
just mentioned with the years 1885-1900, certain differences stand
out clearly and can be summarized as follows :
1. The rate of industrial growth, exceeding as it did six per cent
per year on an average, was somewhat lower in 1907-14 than
in 1885-1900, but still quite high.
2. The Russian government, concerned with healing the wounds
in the Russian budget which had been inflicted by the war
with Japan and the revolution, did not resume the policy of
encouragement of industrial growth to any comparable extent.
3. As a result, some of the industrial enterprises which had been
established under the tutelage of the state during the earlier
period found themselves standing on their own feet and con-
tinuing their development in conditions of independence,
while others came under the financial protection of banks
1 This is not the place to supply qualifications and reservations. The con-
nexion between military interests and industrialization is never a simple one.
There is always the reproduction of the classic Colbert-Louvois conflict between
long-term plan and concern with immediate needs. There is, furthermore, the
traditional concern with agriculture as the source of manpower - rusticorum
mascula militum proles- and of draft power for the army. There is, finally, the
fear of the military leadership and of the social groups from which it springs that
industrialization while increasing the military potential of the country will reduce
the weight of the army within the state. All these were present in Russia of the
period.
• Neither the establishment of strong representatives of the central government
equipped with sweeping powers over the self-governing institutions of the peasantry
(1889), nor the attempt to provide additional protection to the field commune
(1893), can possibly vitiate the statement made in the text. Those measures were
neither important enough nor retrogressive enough to be so considered.
1 59
which for the first time began to surply long-term credits to
industrial enterprises and in genera to mould their policies
upon the pattern of investment banks in other European
countries.
4. With regard to bigness of plant and enterprise and to the
preference for producers' goods as against consumers' goods
the banks continued the policy previously pursued by the
Russian government ; there is, furthermore, no doubt that the
banks in many ways encouraged the cartelization and merger
movement which became very conspicuous in the years pre-
ceding the outbreak of World War I, causing the scale of
enterprise to grow even faster than the scale of plant.
5. Finally, the years 1907-14, unlike those of the earlier period,
were marked by some relaxation of the pressures upon the
levels of consumption of the masses of the population. Cer-
tain improvements, however modest, were undeniable.
It remains only to draw the inescapable conclusion. If one
regards the great spurt of 1885-1900 in isolation, at least the partial
applicability of the 'traditional' pattern along with the 'all-European'
pattern is a very defensible proposition. If, on the other hand, one
regards the whole period 1885-1907 as a unity, although an articu-
lated one, a somewhat broader and perhaps more interesting view
tends to emerge. Then indeed it becomes possible to see the great
spurt of those years as one during which the features of the 'tradi-
tional' pattern appear not only in an incomplete,. but also in a
valedictory fashion. Most important in this respect is that the
period of stagnation after 1900 was greatly foreshortened in com-
parison with its historical antecedents and lasted only for a few
years. Mter 1907 none of the 'traditional' features seem to be
clearly discernible in the process of continuing industrial growth.
In other words, while during the early part of the period 'traditional'
and 'all-European' features compete for the attention of the student
and for preference in his emphasis, in the later part of the period
it is easy to interpret Russia as partaking in a general process of
industrial development in conditions of diminishing economic back-
wardness. Another way of describing the change would be to say
that while in previous spurts of economic growth quantitative
westernization in terms of levels of output had been purchased at
the price of institutional sacrifices, on the threshold of the new
century both quantitative and institutional patterns of industrializa-
tion were integrated and became, as it were, 'homodromic '.
This cursory view of nearly three decades of Russian industrial-
ization before World War I may be conveniently terminated at this
point and with this conclusion. For elaborations and reservations
160
Gerschenkron- Industrialization in Russia
relating specifically to Russia, the interested reader may refer to the
previously cited articles. On the other hand, to the extent that
what has been said about Russia is only a segment within this
writer's general approach to the problems of European industrializa-
tion, a critical evaluation of that approach may be profitably pre-
sented against the background of Professor Rostow's views.
III. APPROACHES TO MODERN INDUSTRIAL HISTORY

If one looks back upon the skeleton of an approach to industrial-
ization as summarized in the six propositions offered at the beginning
of the preceding section, some of the similarities to, and the differ-
ences from, Professor Rostow's approach become apparent at once.
As to the former, the most important- and from this writer's
point of view, the most welcome- similarity between the two
schemes is the stress on the discontinuous character of the develop-
ment. The idea that there is a 'beginning' of industrialization
which can be ascertained in an operational fashion by an increase in
measurable quantities of crucially significant magnitudes is common
to both approaches. But at this very point of quantitative opera-
tionality the differences begin and then expand to other areas.
Some of them refer to the mode of measurement ; others are con-
ceptual in nature.
As one reads through the pages of The Stages of Economic
Growth, 1 one is surprised by the emphasis Professor Rostow places
upon the rate of growth of national income and the share of invest-
ment therein. He discusses them as though reliable information
on such magnitudes were readily available. While it is true that
we know at least something about the composition of historical
incomes at current prices at given points of time, it should be clearly
understood that the work done so far on the rate of growth of national
income in the nineteenth century is altogether inadequate (two or
three significant exceptions to the contrary notwithstanding) to
serve as a basis for any serious generalization about long-term
changes in the rate of growth. The highly uncertain, if not adven-
turous, way in which in many cases the component series have been
constructed is not necessarily the most critical deficiency of historical
computations of national income. Worse, much worse, is the way
in which data at current prices usually are converted into con-
stant prices. The procedures used for this purpose - whenever
1 W. W. Rostow, The Stages of Economic Growth, A Non-Communist Manifesto,
Cambridge, 1960.
161
not modestly concealed - appear to be unbelievably crude. As a
result, the statistical data yielded by the various deflating operations
often tend to defy interpretation. It would seem that the first task
facing students of long-term changes in the volume of national
income should be to decide to forego the use of price indices that
have been prepared for very different purposes (such as the study of
price fluctuations) and to construct appropriately weighted series
specifically adjusted to the requirements of the deflating procedure. 1
As long as this is not done, one perhaps might be able to measure
the rate of overall change in national income over long periods of,
say, 75 or 100 years, as has been done, e.g. in the studies of Fran~ois
Perroux and Walther Hoffmann, but it would seem quite illusory
to expect to isolate the relatively short and strategically significant
periods of rapid growth. It may be noted that those deficiencies are
merely technical in nature and antedate as it were the posing of the
index number problem which likewise will have to be faced; once
the elementary crudities and inadequacies have been removed. It
is my belief, therefore, that to the extent that Professor Rostow's
generalization are derived from existing long-term national income
statistics, their empirical anchorage is not as firm as it should be.
This is particularly true in the case of Russia. For the time being,
there are simply no reliable estimates of national income in Russia,
be it at current or constant prices for the periods before 1900, and
what is available for the years 1900-13 is much too thin, much too
short, and much too unreliable for any useful inference.
The deficiency of the data and their processing, however, is not
the whole story. Even if complete and reliable data were available,
it would still be very questionable whether national income figures
can be expected to reveal the inception of new processes of growth.
By and large, it was true in Europe that the more backward a country
on the eve of its great spurt of economic development, the higher
was the percentage of the population gainfully employed in agri-
culture and the stronger was the concentration of growth upon a
relatively very small area outside of agriculture. Under these
conditions a good deal of time must elapse before even a very rapid
growth in the small area can affect national income as a whole and
become distinguishable as a separate factor from the violent crop
fluctuations which tend to dominate national income in countries
where agriculture is backward and extensive in nature. Therefore,
to concentrate on national income data very often may lead to errors
1 Cf. Alexander Gerschenkron, 'Problems in Measuring Long-Term Growth
in Income and Wealth', Journal of the American Statistical Association, Vol. 52,
December 1957, pp. 450-7.
162
in timing of periods of growth which in turn may lead to errors in
causal imputation and general interpretation. For these reasons,
the general approach to European industrial history and the special
case of Russian industrial history as sketched out in Part I of this
paper are based on quantitative evidence referring to the growth of
manufacturing and mining rather than national income as a whole.
Needless to add that while series on industrial output are more
readily available, much more reliable, and much more meaningful
than those on national income, considerable care must be exercised
in using them and, in particular, whenever possible, appropriate
tests must be made to gauge the quantitative significance of the
index number problem involved. 1
There is, however, a further difference between the approach
as presented here and Professor Rostow's approach. It lies in
what to my mind is a certain rigidity or absoluteness with which
Professor Rostow treats the concept of the 'beginning'. It should
be understood, of course, that any attempt to draw a starting line
across the flow of time is of necessity conventional ; that it makes
sense only in terms of the criteria applied by the historian, and that
it must be judged solely in terms of these criteria. The present
writer found that, on the whole, the presence of two distinguishing
features was sufficient for his purposes in recognizing a 'great spurt'
of industrial growth: (a) a fairly resolute kink in the curve of indus-
trial output, indicating a sudden and substantial rise in the rate of
growth, and (b) a continuation of the spurt across a period of inter-
national depression without any conspicuous diminution in the rate
of growth. This is not very dissimilar from Professor Rostow's
second criterion for the take-off which consists of a 'high rate
of growth of manufacturing' ; for reasons mentioned above, his
first criterion referring to national income is difficult to accept ;
while his third criterion referring to institutional changes in the
course of the take-off touches upon the problem of prerequisites or
pre-conditions and must be treated separately below. 2 The trouble,
however, is that situations depictable in terms of such criteria are,
or at least can be, seen as recurring. Professor Rostow assures his
readers that the Russian Five Year Plans 'are to be understood not
as a take-off, but as a drive to maturity'.J It must be so, because
he is the best judge of what his terms mean. Still it is awkward
that the three criteria for the take-off listed by Professor Rostow
without any doubt fit the Soviet case. In fact, given space, it could
1 Cf. the forthcoming study: Alexander Gerschenkron, Index Number Problem
in Indices of Industrial Output: A Quantitative Appraisal, RAND Corporation.
• W. W. Rostow, The Stages of Economic Growth, p. 39.
J Op. cit. p. 66.
be shown that they fit it much better than they do the period 1885-
1914. It is true, of course, that after having described a previous
experience as a take-off, one is caught in the vice of a suggestive
or at least auto-suggestive simile, is forced to view the take-off
as a unique experience, and accordingly is precluded from regarding
the Soviet experience as still another take-off. To do so would
pervert the concept or at least subvert the metaphor. From the
point of view of the present writer's approach as presented in the
foregoing, rigidly formulated assertions of this kind are neither
necessary nor, perhaps, desirable. First, because what one may
choose to regard as a 'great spurt' need be neither the first nor the
last phenomenon of the kind. From a different point of view, it
may prove very useful to consider what happened in Petrine Russia
of the early eighteenth century as a 'great spurt' of industrial
development. And one may wish to go on rediscovering 'great
spurts' whenever the specific situation of 'tension' has reproduced
itself. To speak of an 'initial' great spurt can make sense only
within a given spatial and historical framework. It is as important
to place one's model within a clearly specified historical period as
it is imperative not to overlook - still less to disguise - the arbitrary
and very relative nature of our choices in this respect. Clearly, such
choices tend to predetermine the results or at least the interpretation
of the results of research. An explicit justification is, therefore,
very much in order. World War I and the Revolution that followed
it need not, but very profitably can, be seen as having created a
break in the historical flow, quite apart from the fact that by the
end of the 'twenties Russia no doubt was more backward in relation
to advanced countries than it had been in 1914, thus making for
new 'tensions'. Instead of regarding Russian economic develop-
ment in the 1930's as something altogether different from the 1885-
1914 experience, it might be said with some explanatory force that
it was precisely the tragedy of the Russian situation that as a result
of violent historical convulsions and by the will of a ruthless dicta-
torial government, the country was forced to act as though it. had
not had its 'initial' great spurt of modern industrialization and in
fact to revert even farther back into the depth of Russian history
by reproducing a much more complete replica of what has been
called in the preceding 'the traditional pattern' of Russian economic
growth.
This paper being concerned primarily with the early phases of
industrialization in Russia, there is no need to go into Professor
Rostow's attempt to present the whole flow of Russian economic
development as conforming well to his general scheme of growth
164
through a series of more or less distinguishable stages. But a few
brief remarks may be in order because they may serve to point up
the same methodological problem of choice and emphasis. Professor
Rostow's contention that 'in its broad shape and timing . . . there
is nothing about the Russian sequence . . . that does not fall within
the general pattern' 1 is interesting but can cause no surprise. In
historical analysis of this kind, the basic methodological precept, of
course, is that everybody finds what he is seeking. Those who seek
uniformity can find uniformity and those who seek diversity can
find diversity. It all depends on how broad the student chooses
his shape and his timing to be. If a very broad and long view is
taken, most differences tend to come out in the historical wash.
This is satisfying, but the pleasure is obtained and maintained at
some little cost. If one concentrates on the results of growth, some
of the problems faced in the process of growth inevitably disappear.
To give an example from the point of view of the approach as pre-
sented in Part I of this paper, one might distinguish advanced areas,
areas of medium backwardness, and areas of very considerable
backwardness. In terms of sources of capital supply to, entrepre-
neurial guidance in, and organizational independence of industrial
enterprises, England's industry enjoyed the maximum of inde-
pendence. In an intermediate area such as Germany a period of
industrial development under the tutelage of the banks (before, say,
1900) was followed by a period in which the independence of
industrial enterprises markedly increased. In an area of very con-
siderable backwardness such as Russia, tutelage by the state was
followed by tutelage by the banks, while signs of industrial enterprises
that were unsheltered and unguided either by the government or
by the banks were just beginning to appear in the years preceding
World War I. Thus in the end- of the historical period con-
sidered - everything seemed to lead to the same goal. In this
sense, the case of Russia - seen in latum et in longum - is the
general case. But to say this is to debar oneself from perceiving
the industrialization in the making, that is to say, from compre-
hending the industrial development of Europe as a case of unity
in diversity. 2 If the latter is desirable, Russia would still appear
I Op. cit. p. 66.
• It must be admitted, however, that the very broad view has the advantage
of being somewhat less dependent upon accuracy of fact or figure. It is, for
instance, incorrect to say that the 'traditional society' in Russia was 'shocked by
Napoleon' (Rostow, op. cit. p. 65); the contrary is true and the Napoleonic in-
vasion and Napoleon's defeat tended to strengthen the existing regime ; the period
of reforms during the reign of Alexander I preceded mther than followed the War
of 1812; nor, to give another example, is there much foundation for saying that
the 'Russian take-off was aided by the rise in gmin prices and the export demand
for grain which occurred in the mid-1890's; for it was this rise that made attractive
x6s
as subsumable under the 'general case' ; this is done, however,
not by neglecting the peculiarities of the Russian development or
just mentioning them as being 'unique' or exceptional, but by
seeing them as deviations that can be systematized and thus brought
within the purview of a general approach ; of a pattern, that is,
arranged along a scale of gradations of economic backwardness.
Thus, while the two approaches ostensibly deal with very similar
matters, in reality the direction of the exploratory interest and, as
a result, also the subject matter in each case tend to differ a good deal.
This should become particularly clear when attention is focused
upon the conception of pre-requisites or pre-conditions of industrial
development. There has been a good deal of confusion with regard
to that concept. Sometimes it is interpreted in an unduly strict
fashion as 'necessary and sufficient' conditions to be fulfilled before
economic development and industrialization can begin. 1 Unfortun-
ately, economic historians have no operational method at their
disposal to determine either the 'necessity' or the 'sufficiency' of
individual prerequisites, except by inferring from the occurrence
of an event that it has been necessarily and,sufficiently pre-condi-
tioned, which is probably as correct as it is unexciting. 2 At the
same time, it is also clear that much of what passes in modern
discussion under the name of pre-conditions (such as the emergence
of entrepreneurs, investment in fixed and working capital, or em-
ployment of hired labour) is not in the nature of pre-conditions at
all, but the very stuff economic development or industrialization is
made of.J The refuge from the double curse of non-operational
conceptualization and useless tautology seems to lie in the listing
of a number of empirically obtained factors to which in the indus-
trial history of one or several countries it appears reasonable to
the laying of vast railway nets .. .' (op. cit. p. 66). By the time Russian grain
prices started rising significantly, the peak of railroad construction was over. But
Professor Rostow's scheme is so broadly constructed and so thoroughly permeated
by a delightful pressappochismo that errors of this type cannot seriously detract
from its value. Nor does the fact that while Russia is credited with having gone
through its take-off before World War I, the Austrian-Hungarian monarchy
which in the beginning of the century by any conceivable standards was a good
deal more advanced than Russia is said to have been in 'an early pre-conditions
state' (op. cit. p. 118). It is possible, incidentally, that correcting the last-mentioned
point might even give Professor Rostow the opportunity of connecting Austria's
not entirely passive role in bringing about World War I with a specific post-take-
off situation of choices in that country.
1 Thus Professor Rostow asserts that 'in the late eighteenth century . . . only
in Britain were the necessary and sufficient conditions fulfilled for a take-off',
op. cit. p. 31. The twin concept reappears on p. 37.
• As is mentioned below, even the correctness of this way of predicting in
reverse is questionable once the concept of 'prerequisites' or rather the possible
useful concepts of 'prerequisites' are subject to closer investigation.
3 It is therefore not surprising to see Professor Rostow at one point (op. cit.
p. 49) mix pre-conditions and conditions of growth very freely.
166
Gersclumkron- Industrialization in Russia
impute the subsequent industrial development. Such factors then
are regarded as pre-conditions of economic growth. Abolition of an
archaic framework in agricultural organization and/or increase in
productivity of agriculture, or creation of an influential modern elite
which is materially or ideally interested in economic development,
or the provision of what is called social overhead capital in physical
form and for 'original accumulation' of capital in the sense of previ-
ously established claims on current national income - all these are
cases in point and, in one form or another, are very properly men-
tioned by Professor Rostow. 1 Beyond that, some reference to the
multifarious forms in which the prerequisites are fulfilled in the
individual areas is designed to take care of the 'unique' factors in
development. This is a procedure that is well in line with the
broadly generalizing spirit of Professor Rostow's schemata, and as
such unexceptionable within his framework.
The approach as presented in Part I of this paper, however,
calls for a different procedure. It may be briefly summarized as
follows : If the list of factors to which industrialization appears
reasonably imputable in a very advanced country is applied to
countries whose economic development has been delayed, two
things will forcibly impress themselves upon the observer: (1) Some
of the factors that had served as prerequisites in the advanced country
either were not present at all, or at best were present to a very
small extent, in the more backward countries. (2) The great spurt
of industrial development occurred despite the lack of these 'pre-
requisites'. The value of posing the problem in this fashion lies in
the fact that it inevitably directs research towards a further ques-
tion, to wit, in what way and through what devices did backward
countries substitute for the missing 'prerequisites'? It may appear
then that some of the alleged 'prerequisites' are not needed at all
in industrializations proceeding under different conditions. But the
positive result of raising the question is more important. For,
almost at once a series of various substitutions becomes visible
which can be readily organized in a meaningful pattern along the
lines of increasing economic backwardness.
Then, to give one example, the previously discussed role of the
banks in Germany can be regarded as a specific substitute for the
inadequate 'original accumulation of capital' in that area of medium
backwardness, while the budgetary policies of the Russian govern-
ment under Count Witte may be seen both as a substitute for
insufficient 'original accumulation' and as a substitute for policies
of credit creation by investment banks for which conditions in
I Cf. op. cit. pp. 22-6.
167
Russia were not yet ripe. And, to give another, no less significant,
example, the Russian government's purchases at generous prices
of industrial goods from the nascent industries may be seen as a
substitute for a non-existent 'internal market' of Russian peasantry,
while the government's high pressure taxation policies were to a
considerable extent a substitute for the very inadequate increase in
the productive capabilities of Russian agriculture. Perhaps nothing
can emphasize more strongly the limitations of an unduly simplified
and excessively generalized approach than the comparison between
the respective historical loci of the enclosure movement in England
and in Russia. It may indeed make sense to espouse the traditional
view of the English eighteenth century enclosures and to regard
them as assuring increases in the supply of agricultural produce
and being therefore in the nature of a prerequisite for the 'industrial
revolution' in England. But the great spurt of Russian industrial-
ization had long passed its peak and had entered into its second and
much calmer stage when as a result of Stolypin's legislation the
traditional framework of the village commune - even more archaic
than the open-field system in England - began to be demolished
and the road to output-raising enclosures was at length opened. 1
Thus the English 'prerequisite' when translated into Russian,
tended to become - sit venia verbo - a 'postrequisite '. 2
These are important relationships. They deepen and enrich
the value of an approach which pivots around the concept of relative
backwardness. A study of these relationships in the course of past
I Even so, Professor Rostow's statement (op. cit. p. us) that "Russia ...
slowly completed its preconditions and moved, from the 1890's forward into a
take-off .. .' may be operationally obscure, but it is not incorrect provided that
the term pre-condition -to use the Reverend Doctor Folliott's apt phrase -is
'taken in its utmost latitude of interpretation'. Indeed, railroads had been built
and the serfs emancipated ; besides, we are very properly in the healthy habit of
thinking th11t any effect has been wholly and sufficiently caused. Yet we may also
wish to go beyond the obvious. Assuming that the function of a concept of this
kind is to serve as a programme for research and using the term prerequisite within
the meaning suggested in the text, one could argue that in a very backward country,
such as Russia, where the eruptive character of the great spurt is particularly marked,
one would expect industrialization to 'start' without completing what in other and
more fortunate countries went under the name of 'prerequisites'. Seen in this
way, even the reverse inference from the fact of subsequent growth becomes less
cogent logically and less plausible historically.
• Cf. the forthcoming study by the present writer: 'Agrarian Policies and
Industrialization in Russia, 1861-1914'. Delayed as the agrarian reform was, it
hardly would have occurred if there had been a greater shift away from the tradi-
tional institutional framework. Stolypin, the servant of the autocracy, dared
attack the traditional system of communal land tenure. If men like Miliukov or
Maklakov- the outstanding representatives of Russian political liberalism -had
come to power, the agrarian reform most likely would have consisted in expropri-
ating the estates of the gentry in favour of village communes. In conditions of
considerable backwardness, the problem of 'political and social prerequisites'
defies simple solutions and generalizations as much as does that of 'economic
prerequisites'.
168
industrializations creates certain sets of expectations with which
one may approach the exploration of yet unstudied conditions both
in the past and in the present. But the expectations may or may
not justify themselves. It would be deceptive therefore to try to
elevate them to the rank of predictions. In the past, much origin-
ality was displayed by backward countries in creating substitution
patterns for 'missing prerequisites' of industrial growth. And there
is no reason to assume that the creative sources will spring forth
less richly in future. Still, it makes good sense to try to explain
the new as a deviation from the old on the assumption that the
deviations can be ultimately organized into a still fuller whole. To
do this is both the task of the economic historian and his hope.
But the task will be frustrated and the hope perverted should the
economic historian forget that in constructing his various approaches
and in his very attempts to improve them, he also pushes towards
the limits of their applicability, to the point, that is, at which the
approach has fulfilled its exploratory function and must recede
before a different method of looking at processes of economic change.
This writer at least has increasingly felt that after having spent
some time and thought in exploring the growing advantages of back-
wardness, it may be in order to devote attention to such difficulties
and obstacles to economic development as accumulate with the
increase in the degree of economic backwardness. Such a shift
in interest may well reveal some specific 'missed opportunities' in
the course of Russian economic history and may lead to a more
general concept of 'nodal points' at which the advantages of back-
wardness reach optimal levels and beyond which lies at least a
limited period of declining promise and growing disability. But
this should be the topic of another paper.
x6c)
Chapter 10
POPULATION GROWTH AND THE TAKE-

OFF HYPOTHESIS
BY
HARVEY LEIBENSTEIN
University of California
I. INTRODUCTION
LIKE Pirandello's 'Six Characters in Search of an Author' Professor
Rostow has given us an interesting historical hypothesis in search
of a theory. 1 While this quip exaggerates the case, since the
Economic Journal (1956) articles do have many statements about
economic behaviour, nevertheless, I believe it is correct if we interpret
'theory' in a narrow sense. The central hypothesis, and this is all
that I shall be concerned with in this paper, is that at some point
in a country's development events may occur that will considerably
speed up its rate of growth, and that when this persists for two or
three decades z the country then enters a stage of self-sustained
growth. This hypothesis is worth considering on many grounds,
not the least of which is that Rostow has succeeded in clothing it
in a language that gives his hypothesis great suggestive and evocative
power.
Some writers have been tempted to use the analogy of an aero-
plane for the take-off. If I were the inhilbitant of an island whose
last contacts with civilization were as it was a century ago, and if a
ship-wrecked sailor suddenly appeared and told me about heavier-
than-air machines that flew, and if he explained that for flight to
take place the flying entity had to have wings of a certain shape
(the pre-conditions), and that it had to be travelling at a certain
speed before it left the ground, then I would indeed find this an
1 By a theory I have in mind a clearly stated set of equations, or their verbal
counterpart, including behaviour relations, that would lead to a definite set of con-
clusions consistent with at least some observations.
• All of my references to the Take-off Hypothesis are based on the March
1956 article in the Economic Journal. Whether or not the 'two or three decades'
part of the hypothesis is correct is a matter for historians to debate. I take it that
this part of the hypothesis was meant to be interpreted elastically. I shall so inter-
pret it here.
Leibenstein- Population Growth and the Take-off Hypothesis
interesting relationship, one which would lead me to think about
aeroplanes and how they function. Nevertheless, it would not be
a 'theory' of aerodynamics. In short, it would be an hypothesis
based on observation that would inspire me to look for the theory,
but it would not of itself suggest the theory. I go out of my way
to develop this point because I am sympathetic with Rostow's
central hypothesis. 1 But, if the hypothesis is true there is still a
great deal to be done ; namely to develop the theory with which this
inductive hypothesis is in conformity. In other words, one of the
deductions from such a theory should be the historical hypothesis
that Rostow has given us.
My job in this paper is to consider the population element in
connexion with economic development in general and the 'take-off'
hypothesis in particular. In the absence of a theory it is difficult
to analyse whether what we know about the population element fits
the hypothesis. I could probably invent models in which it would
fit the hypothesis and others in which it would not. Yet, on the
whole, I think that the population element is really important for a
theory of development consistent with a take-off type hypothesis,
and I trust that the following remarks will suggest that this is
the case.
The discussion that follows will be suggestive rather than
rigorous, since in the space allotted it is clearly impossible to con-
sider in detail a large number of alternative theories and to examine
the population element in each of them. Since the population
variable is only one of many in any theory of development we shall
have to allude from time to time to some of the other variables in
the system, but this will be done rather sketchily for the reason
just given.
Many authors on development seem to treat population growth
as an exogenous and autonomously determined variable that repre-
sents a hurdle to per capita income growth. In the discussion that
follows I will argue that viewing population growth entirely as an
autonomous variable is not a view that is likely to be consistent with
the take-off hypothesis. On the other hand, population is not an
entirely endogenously induced phenomenon. I shall argue that
both elements (autonomous and endogenously induced population
growth) are involved simultaneously, that they are to a great extent
inversely related to each other, and that this view of the matter is
most likely to be consistent with a take-off type hypothesis.
1 I am, in a sense, committed to being sympathetic since the type of theories
that I have attempted to develop in the past have been in conformity with what
I interpret to be Rostow's central non-gradualist position. Cf. my Economic
Backwardness and Economic Growth, John Wiley and Sons, New York, 1957.
171
II. THE TAKE-OFF HYPOTHESIS IN A CONSTANT

POPULATION ECONOMY
Would the take-off hypothesis hold in an economy in which
the size of the population remained constant irrespective of other
social and economic changes that took place ? This is, of course,
an artificial situation since the same forces that promote economic
growth are also likely to induce demographic changes. Nevertheless,
it is desirable to consider this question as a first step in determining
the role that population plays in a process of economic growth for
which the central hypothesis is true. The hypothesis is presum-
ably a denial of gradualism - a denial of the possibility that an
economy can grow in a sustained fashion without several decades
of accelerated growth. Is this likely in the absence of population
growth?
The empirical evidence seems to suggest that almost all countries,
including the most backward, do have a positive rate of net invest-
ment, at least on the average over periods such as decades. 1 Those
who are prone to make inductive generalizations on this score sug-
gest that on the average this might be at least 5 per cent. This
implies that with a capital-output ratio of 3 or 4 to 1 such economies
could grow at rates in excess of 1 per cent. Superficial deductions
from this suggest that in the absence of population growth, all back-
ward economies would have positive rates of per capita income
growth. Indeed, one might argue that these 'rates would be higher
than we have just stated because in the absence of population growth
the burden of dependency would probably be lower. The level of
consumption might therefore be less, and as a consequence, the
rate of investment would be higher.
On the other hand, we must consider the possibility that the
causal nexus could work the other way round. It may be that
it is the fact of population growth that induces the rate of invest-
ment necessary to maintain that level of population growth and not
vice versa. That is, in the absence of population growth a positive
rate of net investment would not show up. One could invent
arguments that would suggest that this might be the case. For
example : Entrepreneurs invest in anticipation of demand. Popu-
lation growth signifies an expansion of demand. The ones who
invest and save are, in a backward economy, likely to be the same
people. The reason they save is because they invest simultaneously,
and if that investment did not take place the difference would
1 Cf. the evidence summarized in Simon Kuznets' Economic Growth.
172
simply be spent on consumer goods. The vast majority in a back-
ward economy does not save anything at all, and investment is
carried on by entrepreneurs who are forced to save as a consequence
of their desire to invest. Thus, the argument might run, an economy
that behaves in this fashion would not grow in the absence of popu-
lation growth.
While it is possible to develop a model in which the economy
would not grow with zero population growth, it seems hardly likely
to me that this would be a realistically plausible model. In other
words, it is hard to believe that gradual development would not take
place in an economy with a constant population. To begi~ with,
population growth is not the only factor that stimulates investment,
and as a consequence, the absence of population growth would still
leave other forces that could act as stimulants. From time to time
one would expect that cost-reducing innovations would stimulate
investment. In addition, with an unequal distribution in income
there would surely be some people whose incomes were sufficiently
large, and their sacrifice in current consumption sufficiently small,
that they would have an inducement to invest. Of course, others
would disinvest simultaneously, but this influence is likely to be
less without population growth than with it. At the same time,
other possessors of capital would want to maintain their existing
standard of living and output and hence would replace their capital
when it wore out. Gradual improvements in organization and dis-
coveries of various sorts that are the outcome of experience would
also add to the productive capacity of the population. In addition,
occasional windfall gains, such as an especially good harvest, might
leave people with a temporary surplus for still further investment.
All in all, I suspect that the likelihood 1 is that in the absence of
population growth, economies would experience gradually rising
per capita incomes, and in several centuries such gradually rising
per capita incomes would lead to reasonably high levels of per capita
income.
In fact, this last has not generally occurred in the backward
economies of the world. What has happened often seems to have
been expansion of the economy without growth in per capita income.
We might deduce from the previous discussion that this expansion
was not stimulated entirely (if at all) by population growth. On
the contrary, the historical evidence would seem to suggest the exact
opposite type of economic causation. In other words, it was the
rate of population growth, whether or not induced by economic
1 There is no necessity about this argument. It is based on what appears to
me as reasonable likelihood.
I7J
expansion, that ate up the fruits of expansion and resulted in ex-
pansion in the aggregate sense without much improvement per head.
If this last argument is correct, then a take-off type theory would
not hold for a constant population economy. In other words, it
seems likely that in such an economy there would be innumerable
patterns of growth, some more gradual than others, that are both
conceivable and likely. There would seem to be no special reason
on these grounds to have a rapid period of per capita income growth
before an economy could take off into self-sustained growth.
It is of interest that the previous discussion was mostly about
the investment function and not the population growth function.
This is the area in which one of the main difficulties of discussing
the take-off really lies. Since the take-off hypothesis does not
specify an investment function it is very difficult to argue whether
or not population growth is crucial to the theory. For it is mostly
in relation to an investment function that the importance of popu-
lation growth to economic growth can become evident. We have
suggested some ad hoc reasons why investment might take place at
low rates of growth with a constant population. If we look at some
of the existing growth models other reasons become evident. For
example, a growth model of the Joan Robinson type, 1 in which
investments depend on the magnitude of the profits, would yield
a similar result. There is nothing about the model that determines
a specific division between wages and profits, and for some divisions
gradual growth rates would be possible. In other words, there is
no reason to believe that a constant population economy implies a
stationary state.
Similarly, investment models that depend on the accelerator do
not necessarily imply the take-off thesis if the population is station-
ary. There is no special reason why the accelerator should work
if the rate of growth is relatively large and not when it is rather
small. Once again, there is nothing about the accelerator theory
per se that implies the impossibility of very gradual growth.
III. AUTONOMOUS POPULATION GROWTH AND

THE TAKE-OFF
A nice feature of population growth for a take-off type hypo-
thesis is that it creates an obvious reason - though not the only
reason by any means - why low rates of investment do not work.
Low rates of investment imply low rates of aggregate income growth,
1 Joan Robinson, The Accumulation of Capital, Macmillan, 1956, Book II.
1 74
and the low rate of aggregate income growth may not be sufficient
to overcome the rate of population growth. Hence, the familiar
phenomenon of expansion of the economy and expansion of the
work force without at the same time any increase in per capita
income. If, for a moment, we assume a given level of population
growth - say 2 per cent - then the rate of investment has to be
sufficiently high so that aggregate income expands at more than
2 per cent. 1 It is quite possible that unless an economy gets used
to such higher rates of investment for quite a period of time it will
not learn to sustain such a high rate and will not permanently be
able to exceed this rate. Only if it has a sustained experience of
per capita income growth will it be able to sustain through its own
operations a higher growth rate than the rate of population. What-
ever one might think of this view of the matter, it surely must seem
clear that with the population element thrown in it would be easier
to develop a theory of growth consistent with a Take-off hypothesis
than it would be without the population element.
But how should we treat the population element ? Consider
first the population variable as a completely exogenous element.
There is the commonly held view that the rate of population growth
is determined by factors that have little if anything to do with changes
in economic variables. Mortality rates are presumed to be deter-
mined by advances in sanitation, public health, and medicine, and
fertility rates are determined by sociological and cultural conditions
unconnected with the level of income. This view of the matter
must also imply that the rates of population growth that we observe
in backward economies have increased over time. On purely
statistical grounds this would appear to be the case since the current
population of the world would be inconceivably large if it had been
growing at 1! to 2 per cent say, for the last two thousand years.
But suppose for a moment that the autonomous population
growth rate is constant, say, at 1! per cent per year. This would
imply that economies must maintain a growth rate in aggregate
income of 1! per cent, or failing to do so, to suffer steadily diminish-
ing levels of per capita income. We might expect that some economies
with favourable resource endowments should be able to exceed that
level of growth. Others would hit this level of growth, while still
others would fall behind. The histories of such countries would,
therefore, fall into three categories : (1) Some countries would
enjoy increasing levels of per capita income, some at quite gradual
1 As far as I could tell, Professor Rostow seems to see population as an
autonomous factor that is an obstacle to per capita income growth. (Economic
Journal, 1956.)
175
rates, (2) others would just maintain a constant level of per capita
income, and (3) for still others their per capita income level would
be getting perpetually worse. But it seems that the third and first
groups do not quite fit the facts to the extent that we know them.
Relatively few countries have had steadily worsening per capita
incomes starting at low level, and few countries have experienced
'Very gradual growth. In other words, if the rate of population
growth is nothing more than an obstacle to per capita income growth
then it is difficult to understand why there should not have been
quite a few countries that have experienced sustained per capita
income depression. The obstacle theory of population growth is
not completely helpful to a take-off hypothesis. If an obstacle
exists then it is simply necessary to overcome the obstacle by a
little bit and we are over it. It is not necessary for the rates of
investment to soar considerably above the obstacle before it can
take-off into sustained growth.
Also, and most important, the obstacle theory is not consistent
with the common phenomenon experienced in backward economies,
that of economic expansion in the aggregate sense without per capita
income growth. This last statement simplifies the facts somewhat,
but it is really not too far from the truth. Of course, even in back-
ward countries per capita incomes have fluctuated considerably, and
in many cases the secular trend may have been a slowly rising one.
But these fluctuations· in trend magnitudes are surely exceedingly
small compared to the differences in per capita income that exist
between advanced and bac.kward countries and the differences in
the rates of growth in per capita income that must exist between the
advanced and backward countries.
In other words, if a non-gradualist take-off hypothesis is correct,
then we might as a first approximation consider the per capita
incomes of the non-take-off countries to be approximately constant
(as a secular trend). But, if this is the case, then it is surprising
that so many backward countries should have investment rates that
just enable them, in the long run, to maintain their level of per
capita income. But it is surprising only if we insist on maintaining
the hypothesis that population growth is entirely an exogenously
determined obstacle to development.
Furthermore, if countries that are still backward are able to
sustain a rate of income growth equal to the rate of population
growth, then we might expect that in an earlier period they should
have been able to sustain a rate of income growth greater than the
rate of population growth since the autonomous rate of population
growth was lower in earlier periods. But, if that were the case,
176
then the history of such countries should have been that of growing
per capita income up to some point after which the growth should
have stopped and a reversal of the trend should have set in. In
fact, the evidence does not seem to suggest that this has generally
been the case. It is certainly not clear that per capita incomes in
the low income countries of the world are for the most part lower
today than they were in the pre-war period.
The conclusion we come to on the basis of these speculations is
that both on theoretical grounds and on historical grounds it would
seem difficult to maintain simultaneously the complete exogenous
population growth hypothesis and a non-gradualist take-off
hypothesis.
IV. INDUCED POPULATION GROWTH

Prior to the post-war advances in public health it seemed clear
to demographers that the level of consumption was a significant
determinant of the rate of population growth. The argument went
roughly as follows : In low income, tradition-bound countries
fertility rates were normally very high. The culture of these coun-
tries had to be such as to emphasize the virtue of fertility. Great
prestige is commonly attached to child bearing. Societies that did
not develop such cultural patterns were doomed to disappear in
view of the high mortality rates. Hence, societies that did survive
must have had built in within them a social and cultural structure
that enabled them to sustain very high fertility rates. This implies
cultural patterns in which there is no resistance to factors that
reduce mortality rates but in which there is considerable resistance
towards those elements that reduce fertility rates. As a consequence,
the initial impact of rising consumption levels was on the reduction
of mortality while the fertility rate within marriage remained roughly
constant.
The possible connexion between rising consumption levels and
falling mortality rates is easy to see. Rising consumption levels,
almost by definition, imply improvements in food consumption, in
shelter, in sanitation, in medical care, and so on. Clearly, on this
ground we would expect an improvement in mortality rates -
especially in those instances where the initial mortality rates were
exceedingly high. This, in part, explains the fact that the greatest
fall in mortality rates is usually at first in the lowest age group. But
not all consumption is private consumption. A considerable amount
of sanitation, public health facilities, and medical care facilities are
governmental matters. And with rising per capita incomes it is
177
surdy easier for governments to provide more of these facilities
than when incomes are stationary or falling.
In addition to the mortality effect it is conceivable that to a
limited extent increases in per capita income in low income countries
may induce an increase in the fertility rate. This may happen
indirectly by improving the health of mothers and potential mothers
so that the number of live births increases for the same number of
conceptions. Second, there is probably an indirect effect in that
high incomes result in a reduction in the average age of marriage.
This, of course, does not exhaust the possibilities. But on the whole
it would appear that while rising fertility rates are possible their
magnitude and effect on population growth is likely to be smaller
than the long run impact of falling mortality rates on population
growth.
The impact of population growth on economic variables is at
least two-fold. First, there are the classical diminishing returns.
Some resources in backward economies are relatively fixed, and -
other things being equal - population growth will decrease the
amount of income obtainable per capita with increases in the labour
force. Diminishing returns may also hold even if capital grows at
the same rate as population since capital is not a perfect substitute
for natural resources.
The second impact on population growth is via the burden of
dependency. Since a significant impact of falling mortality rates
is on the very low age group the ratio of children to adults is likely
to increase (at first) as a result of falling mortality rates. 1 This in
turn is likely to increase the amount consumed out of income and
to decrease the savings rate accordingly.
Given the foregoing factors that increase population growth,
and the effect of population growth on savings and output, we have
the elements necessary for a Malthusian type model. The increased
rate of population growth induced by a per capita income rise leads
to increased difficulty in expanding output, and in a reduction in the
rate of savings and investment. But, of course, the mere statement
of these effects is not enough to establish a Malthusian type model
that would lead to a return to a previous level of per capita income
once there was a deviation from it. It is also necessary that the
magnitude of the effects be in the right ranges.
In a simple Malthusian type model an increase in per capita
income may be deemed to have two effects : On the one hand it
induces an increase in the rate of population growth, but on the
other hand, out of a higher income may come a higher rate of
1 We assume here that mortality rates are high to begin with.
178
savings and investment. For the Malthusian model to work it is
necessary that at some point, although not necessarily immediately,
the income-reducing effects of population growth be more significant
than the income-raising effects of the induced investment that may
result out of the increased per capita income. If, on the other
hand, the income reducing effects of population growth are trivial
and the induced investment is always positive then, of course,
gradualism will always work. Economies could then advance at
various rates and no special take-off to sustained growth would be
necessary. It is thus clear that the mere admission of a relationship
between changes in per capita income and the rate of population
growth is not sufficient for a take-off theory. It all depends on the
magnitudes of the parameters.
But let us assume for a minute that the population effect in our
theory is significant. Would this give us a theory of the take-off ?
It would appear that all that it could explain is the persistence of
self-sustained backwardness. In other words, and this is the im-
portant point, what we have here is a vehicle for explaining self-
sustained backwardness, but not one for the explanation of the
transition to self-sustained growth. By the very nature of demo-
graphic phenomena there is a limit to the magnitude of induced
population growth. There is a biologically determined upper limit
to the fertility rate and there is, at any time, a lower limit to the
mortality rate. Hence, beyond some point increases in per capita
income will lead to no further increases in the rate of population
growth. If somehow the rate of investment could get to be suffi-
ciently high, then it could overcome the growing population hurdle,
and at some point if the high rate of investment could sustain itself,
then self-sustained growth could be assured. The missing link,
however, still appears to be a properly worked out investment
function. The contribution that the population variable makes is
to help explain why low rates of per capita income persist. But
since there is an upper limit to population growth, we need better
understanding of the investment phenomena to explain the take-off.
We have left out of consideration the possible neo-Keynesian
effect of population growth. We argued that population growth
will have only a dampening effect on further income growth. How-
ever, it has been argued, especially in the 1930's, that population
growth stimulates investment. But this is true only if there is a
clear separation between investment and savings, and if the induce-
ment to invest is not limited by limited savings. Certainly one
gets the impression that in low income economies limited savings
are the consequence of high rates of consumption, and not the
1 79
consequence of low rates of investment ; by contrast, in the Keynes-
ian analysis of depression in advanced economies saving is low be-
cause investment is low and not because real income per capita
is low. For the most part an increase in demand does not come
about simply because there is an anticipation that there will be
more mouths to feed. Anticipated increases in demand come about
mostly because of the anticipation of more purchasing power which
in turn implies more income. Thus, it is anticipated increases in
income that we might expect to induce investment. Only to a very
limited degree would we expect the fact of population growth to
induce greater investment in a backward economy.
We have presented two views of the population factor: Popu-
lation growth as an autonomous variable, and as an induced variable.
In both views positive rates of population growth are a retarding
influence on per capita income growth. But in the former case
population was seen as an exogenously determined obstacle that is
there to begin with, whereas in the latter view population growth
can be viewed as an element that is induced to race against capital
growth and aggregate income growth. Now it has been argued
that in the post-war period, given the advances in public health,
etc., the 'exogenous obstacle' rather than the 'race' view may be
said to predominate. While this is probably true, the important
point to consider is that these two aspects of the phenomenon are
not independent of each other. To the extent that population
growth becomes autonomous, to that extent the 'induced race'
aspect becomes less important. But, in general, it seems to me
that the induced aspect does not disappear. In sum, we might say
that whereas countries that h ve developed earlier had to overcome
a population hurdle which to a great extent raced along with their
at•.empts at development, low income countries that develop today
find that the population-growth hurdle is already reasonably high
in the early stages, and that more than in the past they have to
strain to maintain their existing level of per capita income.
V. THE QUESTION OF FERTILITY DECLINE

I have refrained from discussing fertility decline because it usually
sets in in the later stages of development. It is not likely to occur
in the state of sustained backwardness, nor is it likely to be signi-
ficant in the early take-off period. There is, however, one possibility
worthy of consideration in connexion with the take-off. Demo-
graphers speak of the gap between the onset of sustained mortality
180
decline (as a consequence of economic betterment) and the begin-
ning of sustained secular fertility decline.• Now, from our viewpoint,
one of the interesting aspects is the belief that the length of the
demographic gap has become shorter and shorter. Thus, while the
length of the gap may have been about seventy years in countries
whose take-off was in the middle of the nineteenth century, it has
been reduced in some cases to no more than two or three decades
in countries whose take-off is in the twentieth century. These
notions are, of course, very rough and approximate because it is
exceedingly difficult to measure the beginning of a trend when it is
surrounded by considerable cyclical fluctuation. Nevertheless, this
view does suggest the possibility that the onset of fertility decline
may occur sometime within the take-off period, if we view the
take-off as Rostow does, as taking approximately three decades.
Furthermore, it is possible that (at least in some cases) fertility
decline gives that extra push to sustained growth necessary for a
successful take-off. It is clearly very difficult to know whether, in
fact, this is so because so much depends on the relative magnitudes
of the various influences determining population growth, the impact
of population growth on income growth and investment and on the
factors that determine the rate of investment. It is worth noting
in this connexion that the study by Coale and Hoover suggests that
fertility decline may have a considerable impact on growth by
making available something like 40 per cent more savings per year
due to the smaller burden of dependency associated with falling
fertility rates. In addition, my own studies have suggested to me
that once fertility decline sets in it could be very rapid, and that
it is likely to change the burden of dependency in a significant
manner.z
Quite a few theories have been developed by demographers as
to why fertility decline takes place. This is not the place to go into
a detailed analysis of these sometimes conflicting theories. How-
ever, it may be useful if I try at this point to outline briefly a theory
of the connexions between fertility decline and development.
Fertility decline reflects the changing desire of parents with
1 We employ the concept of sustained secular fertility decline despite the fact
that in the post-war period fertility rates have risen in advanced countries. This
is not the place to try to explain that phenomenon. The general view, however,
is that a period of fertility decline does set in in the course of development, although
beyond some point there may be a reversal in the trend. Since we are not con-
cerned primarily with the demography of highly advanced countries., we shall
continue to use the phrase 'sustained fertility decline'.
a See the author's Economic Backwardness and Economic Growth, chapter 14.
See especially Ansley J. Coale and Edgar M. Hoover, Population Growth and
Economic Development in Low-Income Countries, Princeton University Press, Prince-
ton, New Jersey, 1958.
181
respect to children, and this changing desire is induced, in part,
by changing external circumstances. The economic changes may,
therefore, be viewed as contributing factors to such changing circum-
stances. It seems to me that to some extent fertility decline is
probably connected with the changing production functions that
are the consequences of economic development. Income growth
implies increasing productivity which in turn implies a higher degree
of specialization, and hence an increase in the variety of occupations
available. The effect of economic development is not only to in-
crease the degree of specialization but also to increase the size of
firms, the variety of firms, and the hierarchical structure within
firms. At the same time, more types of consumer goods and a
larger variety of capital goods are usually introduced into the
economy, which results in a large increase in the variety of distinct
job opportunities available. As this increase in the variety of job
opportunities is likely to be concentrated in the more urban, rather
than rural areas, the possibilities and advantages of economic mobility
grow with development. This implies that new occupations and
career patterns become desirable to various individuals. Further-
more, the occupations and career patterns available to individuals
are no longer those traditionally carried on by members of the family.
In sum, economic development creates a changing production
structure which in turn increases the opportunities for and incen-
tives to geographic, occupational, and social mobility.
Now the consequences of these effects is to create motives that
are conducive to fertility decline. For example, geographic mobility
weakens and eventually destroys dependence on the extended family
system that commonly predominates in the backward economy. The
nuclear family which gradually develops in the more urbanized
sectors faces long-run security problems for which early marriage
is a disadvantage. In the same vein, the new occupational oppor-
tunities and career patterns that become discernable create a positive
inducement for the sort of mobility that is most easily attained if
a person is single or if family size is small. Without extending this
argument too much one could readily see that the consequences of
development that we have mentioned are likely to instigate the sort
of demographic behaviour that reflects a more rational (i.e. non-
traditional) outlook towards family planning. Another side of the
picture is that economic development is associated usually with
increases in educational lev.el, both as a demand and supply pheno-
menon, which in turn enables members of the population to
behave in ways that are more and more responsive to economic
conditions.
In any event, it seems clear that populations in advanced countries
become relatively responsive to the economic environment in the
determination of their family size. It is this element of responsive-
ness that probably is associated with fertility decline when economic
conditions seem to warrant it that explains in part the increases in
fertility in periods of prosperity at the more advanced stages in the
process of development. If this view of the matter is correct then
it may be reasonable to suppose that the take-off period may en-
gender sufficient responsiveness at some juncture, which in turn
induces fertility decline and facilitates the take-off further.
VI. CONCLUSIONS
I have tried to suggest where population growth could fit into
a theory consistent with a take-off type hypothesis. The main
point is that the take-off hypothesis denies gradualism and prob-
ably implies a pre-take-off stage of sustained backwardness. The
population growth element enters as a factor that helps to explain
the relative high degree of stability that we may attach to the state
of self-sustained backwardness. Also, I have argued that while
population growth is an obstacle to development it is by no means
an insurmountable hurdle, and therefore, given a sufficient stimulus,
we may visualize rates of investment sufficiently high to overcome
this obstacle. But population growth is an obstacle to self-sustained
growth that cannot be surmounted by very small stimuli to growth,
or by stimuli whose effects are of very short duration, but with a
sufficient stimulus it could be surmounted. In addition we con-
sidered the possibility that the onset of fertility decline may occur
during the crucial two or three take-off decades. From that point
of view the early onset of fertility decline may help to sustain or to
hasten the transition to self-sustained growth.
We argued further that it was incorrect to consider population
growth entirely as an exogenous variable, just as it would be incor-
rect to look upon it entirely as an endogenous variable. Rather,
we argued that autonomous and induced population growth operated
simultaneously and that the magnitude of one bore in some respects
an inverse relation to the other. The obstacles to growth created by
both autonomous and induced population growth are probably
greater today than they have been in the past, but their maximum
magnitude is still sufficiently small so that it could be overcome by
a sufficiently large and sustained inducement to greater investment
rates.
Finally, an attempt was made to outline briefly a theory of
fertility decline and to suggest the possibility that there may in some
cases be a connexion between the onset of fertility decline and the
necessary minimal push required to enter a period of self-sustained
growth.
Chapter 11
TECHNICAL PROGRESS, THE PRODUC-

TION FUNCTION, AND DEVELOPMENT
BY
HARVEY LEIBENSTEIN
University of California
I. INTRODUCTION
T H.E neo-classical theory of price, production, and output did not
lead to the development of a theory of innovations. Apart from
Schumpeter's work, inventions and innovations have been matters
left outside of economic theory. In recent years there have been
some attempts to develop investment functions that incorporate
'technical progress', but for the most part, these have not been
widely accepted. The situation is still very much up in the air.
But, if we are to have a take-off type theory of development this
implies that at some point the induced rate of investment must be
accelerated and that this higher rate of investment must sustain
itself. But why should the rate of investment at a somewhat higher
level of per capita income be higher than at a lower level ? Tem-
porary exogenous events could explain occasional high investment
rates, but this would be just as true for backward as for less backward
and growing economies.
A major argument that is often put forward is connected with
the rate of savings. It is argued that at higher levels of per capita
income the subsistence requirements for most of the population are
met, and a higher rate of savings out of non-subsistence income
naturally occurs. While this may not be unreasonable and may be
a contributing factor, it is really a theory that depends on the savings
bottleneck as a deterrent to high rates of investment. In other
words, if this were the only factor involved, it would then imply that
sufficient investment inducements always exist irrespective of the
stage of development that the country is in, and that the problem
would be solved if only there were enough savings. In this paper
I want to take the opposite viewpoint. I want to consider part of
a model in which the inducement to invest is the crucial bottleneck
to overcome. In particular, I want to suggest a type of production
I8S
function and some generalizations about inventions and innovations
which support the argument that at some stage in the development
process there will exist effective inducements for relatively high
levels of investment that do not exist in the pre-take-off stage.
There is very much more to the problem of investment deter-
mination than the points made in this paper. What follows does
not pretend to be a theory of investment. It is only part of the
picture. I simply want to sketch some notions about the nature of
the production function and the nature of technical progress that
would support the type of investment functions under which low
rates of investment would exist in the pre-take-off stage and high
rates afterwards. 1
At the outset it may be well to begin with a few general state-
ments that could be made about economic development with which
very few would quarrel. For instance: (1) the technological inven-
tions of the last few centuries are the prime factors that make it
possible for a country to shift from low levels of income per capita
to high levels of income per head. (2) Capital accumulation is not
enough. At low levels of technical knowledge there are severe
limits to the extent to which output per man could be increased by
mere capital accumulation. (3) It is only because of the vast increases
in technical knowledge, especially with respect to the utilization of
non-animal energy sources, that we are able to increase output per
man considerably. The question to be answered is this: In view
of the possibilities available today via the utilization of modern pro-
duction techniques, why do low income countries in many of their
production processes employ such primitive techniques of pro-
duction ? The obvious and perhaps somewhat superficial answer
that we have all learned to give to this question is a lack of capital
accumulation, or at least a lack of capital accumulation at a sufficient
rate so as to increase, considerably, capital per worker. While this
may be true, I believe that it is a somewhat unsatisfactory answer.
The argument appears to depend very much (indeed, too much)
on changes in the propensity to save within a rather narrow range.
Suppose that the rate of population growth is 2 per cent and the
capital output ratio is 3 : 1. It is quite common for an economy
with a low rate of per capita income to have a net savings rate of
around 6 per cent. If its net savings are 7! per cent then per capita
income will grow at ! per cent rate per year. Does the answer
1 Whether my theory is correct or not is an empirical question which remains
to be considered at a later time. But there may, nevertheless, be some value in
trying to present such a theory at this juncture in a bold and simplified fashion,
if only perhaps to enable us to focus our attention and discussion on the relation
between technical progress, the production function, and economic development.
186
Leibenstein- Technical Progress and Development
really lie in the belief that such economies can manage to save 6 per
cent but simply cannot handle 7! per cent? It depends too much
on arithmetic - too much on the propensity to consume. In other
words. I feel that a greater part of the burden of the answer should
lie on the inducement to invest rather than on the propensity to
save. There is, of course, much more to the inducement to invest
than those elements of it connected with technical progress. How-
ever, I suspect that a part of the argument may lie in the nature of
technical progress and the impact of technical progress on produc-
tion functions. What follows is a sketch of the type of production
function that is somewhat different from that commonly found in
the literature, but which is consistent with the take-off hypothesis.
II. THE SHAPE OF THE PRODUCTION FUNCTION

The conventional textbook version of the production function
has at least these three characteristics : ( 1) continuity, (2) the
assumption that the firm knows all of the alternative production
processes available, and (3) a sharp distinction between a shift of
the production function and a movement along a given production
function. This last distinction often appears to be all that conven-
tional theory has to say about technical progress. Namely, technical
progress involves a shift in the production function. Thus, if we
use isoquants to denote our production function then technical
progress will involve a shift to the left from one set of isoquants to
another. All that is usually said about the nature of the shifts is
that it is of such a kind that some combinations of the factors will
produce a greater output than was produced by these same combina-
tions before the shift took place. But almost nothing is suggested
about the nature and locus of such shifts. The basic hypothesis
of the argument that follows is with respect to the locus of such
shifts. In addition, I want to argue that discontinuities are also
likely to play an important part in the production functions of many,
although not necessarily all, commodities.
The type of production function that I want to propose is de-
picted by the isoquant in the figure below.
In Fig. 1 the curve marked Q is an isoquant depicting alternate
combinations of capital and labour necessary to produce a given
quantity of output Q. The line marked E 1 is a given expenditure
(or budget) line assuming that the prices for capital and labour units
are given. E 2 is another such expenditure line that reflects the fact
that the wage rate is here considerably higher than it is at E 1 •
187
Consider the shape of the isoquant. There are two facts to be
observed. First, it is drawn in such a way as to reflect discontinuous
rather than a continuous range of alternatives. Only the points a,
b, c, d, and e represent different distinct techniques, while points in
between a and b simply reflect the fact that a certain proportion of
the output will be produced by the use of technique a and another
proportion will employ technique b. The second fact to observe
is that technological alternatives are available when the capital-
labour ratio is low, and relatively many are available when the
capital-labour ratio is high. That is to say, as we move upward
along the isoquant in the direction of the arrow the new alternative
0 Units of labour
FIG. 1.
techniques available are closer and closer together. Another way

of looking at it is to say that the greatest discontinuities in production
exist where the amount of capital per man is least.
To see what is involved in our diagram let us examine its impli-
cations. If the wage is low, let us say at W1 , and the expenditure line
is E" then the technique used will be technique a, as shown in the
figure - the technique determined by the point of tangency between
the isoquant and the expenditure line. Suppose now that the wage
were slightly higher. This will mean a slight shift in the slope of the
line E1 • However, the point of tangency will still be exactly the same
as it was before. In other words, small changes in wages do not imply
any change in technique. Only a very large change in the wage of
the kind that is reflected by a shift from the slope of E 1 to the slope
of Ez will lead to a shift in technique from a to b. In general,
where discontinuities in technique are considerable, it will take a
188
considerable change in the relative wage to capital costs before we
can induce firms to shift from one production technique to another.
On the other hand, suppose we begin with a relatively high wage
rate. Then the point of tangency of the isoquant will, let us say,
be at point c. We will then be operating within an area on the
isoquant for which slight changes in wages will lead to shifts in
technique. 1
What are the overall implications of all this ? Increases in wage
rates can only be sustained, in the long run, if there are increases
in per capita output. But increases in per capita output require
increases in productivity per man, which in turn implies shifting
from lower techniques to higher ones. But the extent to which
such shifts take place will depend on the sensitivity of entrepreneurs
to changing economic conditions. And this last in turn depends,
in part, on the nature of the production function. If the production
function is as illustrated, then we see that small anticipated changes
in wages will not lead to changes in technique necessary to sustain
the support of these higher wages, if the initial level of per capita
output is low. On the other hand, small anticipated changes in
wages will induce the adoption of new techniques when the level
of output per man is relatively high. Thus, in the pre-take-off
stage small stimulants to growth will not stimulate permanent shifts
in technique and hence, will not stimulate development. Only a
relatively large and fairly sustained stimulant can get entrepreneurs
to a point on their production functions where they are quite ready
to shift from lower techniques to higher ones.
We can also connect this particular type of production function
with another characteristic of economic backwardness - namely
that of structural underemployment. In recent years several writers
have argued that structural underemployment (and disguised unem-
ployment) of the kind usually found in low income countries can
be explained by discontinuities in the production function. Now,
it is usually observed that this type of unemployment exists in a
much lesser degree in advanced economies than in backward ones.
Furthermore, within a given economy it is usually more typical of
the more backward sectors such as the agricultural sector. If the
discontinuity argument is correct, then this would suggest that such
discontinuities occur to a lesser extent and are less important in
well advanced economies. But it is precisely such more advanced
economies which operate on points on their production function at
which the capital-labour ratio is higher.
1 All wages and capital input prices are assumed to be relative to each other
and do not reflect only absolute money wages or capital input money prices.
189
III. THE FIRM, WAGE INCREASES, AND RELATIVE

FACTOR PRICES
In discussing the diagram in the previous section of the paper
it may have appeared that I assumed that the wage increase takes
place exogenously. This is not quite what I have in mind. Rather,
what I do have in mind is a dynamic process in which entrepreneurs
anticipate increases in output if such increases are warranted by
past experience. Now, the main point is that such increases will
be warranted if the subsequent events following the increase are of
a type that the increase can be fulfilled. Indirectly, such anticipated
increases in output will also result in increases in real wages. In
other words, we raise the question whether the initial anticipations
are consistent with other possibilities in the economy. They will
be consistent if production functions are such so that output can
be increased. To be somewhat more specific, in the successful case,
individual firms will anticipate an increase in output, this in turn
will imply an increase in demand for labour. But this increased
demand for labour will raise the wage rate, which in turn will lead
to the inducement to increase capital per man (i.e. substitute capital
for labour) and hence, productivity per man. This, in turn, leads
to the greater output out of which the higher wage rate can be paid.
In such a dynamic process, at whatever point we break into it, the
anticipated increase in output (based on past experience of such
increases in output) will turn out to be self-fulfilling. The main
point of the argument attempted in the previous section is that
where there do not exist any more capital intensive techniques in
the neighbourhood of the existing technique the sequence breaks
down because it becomes impossible to increase the productivity
per man out of which increased wages must come in the long run.
If there is underemployment, then, of course, additional diffi-
culties may arise. Namely, for some types of labour the increase in
output and the subsequent increased demand in the labour force
will not result in an increased wage. In such industries we have
another reason why the successful sequence suggested in the last
paragraph would break down. However, the labour that is unem-
ployed is not likely to be substitutable for all types of labour, and
hence, while this may be true for some industries, it would not be
true for all industries. Even in the same industry it need not be
true for all types of labour. Thus, while we recognize the under-
employment deterrent to capital accumulation, it is, of course, not
the only deterrent, and the present paper attempts to emphasize
190
Leibenstein - Technical Progress and Development
those deterrents that may exist in view of the nature of the production
function.
It is important to observe that in considering the consequence
of a wage rise I am not concerned with absolute increases in the
wage rate, but rather with a change in the relative price between
labour inputs and capital inputs. Now, it has been argued that an
increase in wages will not necessarily change the relative price of
labour and capital. The point made is that both capital goods and
consumption goods require labour inputs, and hence, when wages
rise, the price of capital will rise proportionately to the increase in
labour if we assume a two-factor world in which capital goods are
made entirely out of labour, and in which we consider only com-
parative equilibrium states. But, this is not the way I wish to look
at the problem in this paper. We need not assume, strictly speak-
ing, a two-factor world. Our analysis is not one of comparative
statics in which only alternative equilibrium states are considered.
To begin with, there is an interest cost component in capital goods,
and for this reason, the cost of capital inputs may not rise in the
same proportion as the cost of labour inputs as the consequence
of a wage increase. 1 In addition, we may assume that there exists
at any time a stock of capital goods, and that when the price of
labour goes up this only increases the cost of the additions to capital,
but not necessarily the cost of the existing stock of capital. Con-
sider the following possibility : suppose that the ratio of capital to
labour in the production of consumption goods industries is one
to one ; but suppose that the ratio of capital to labour in the pro-
duction of capital goods is three to one. Now, in this case a rise in
wages will obviously affect the cost in consumer goods for the given
technique to a larger extent than it will increase the cost of capital
goods. Therefore, there will be an inducement to substitute capital
for labour if such substitutions are possible. Similarly, bowing
somewhat in the direction of realism, we should assume the existence
of other stocks such as land, which are used in different proportions
in producing capital and consumer goods, so that a change in the
price of labour can result in an increase in the relative price of
labour to capital. These remarks are in conformity with the general
spirit of this paper - which is not to present results that prove the
case, but rather to point to some possibilities that I believe are worth
considering.
1 Cf. Joan Robinson, The Accumulation of Capital, London 1958, chapters
10-12.
The Economics of Take-off into Sustained GrO'Wth
IV. TECHNICAL PROGRESS AND THE PRODUCTION

FUNCTION
Why should the production function have the shape indicated
above ? We have already suggested one piece of evidence based
on underemployment. I want to consider now the following ques-
tion : Where on the production function is the likely locus of
invention? We may look upon a production function as the end
result of all of the inventions that have been made in the past. With
this in mind, let us consider how inventions determine shifts in the
production function, and the relation between the new production
function after the invention and the old one prior to the invention.
What will the shift in the production function as a consequence
of an invention look like ? Some textbooks illustrate such an event
by a shift of all points of the isoquant to the left. For example, in
Fig. 2 below this is illustrated by the shift from Q to Q'. But in
fact, I suspect, this is not what is likely to happen. There is no
reason why we should anticipate that the improvement in, say, a
given type of machine should shift all the points on Q to a new set
of points on Q'. A given type of machine may not be used at low
wage rates at all, nor perhaps, will it be used at very high wage rates.
Suppose there is an improvement in such a machine. Clearly
such an improvement will lead to the machine being used at the
same wage rates as previously and perhaps at some slightly lower
wage rates than before. If our production function is discontinuous
and the particular technological alternative for which this machine
is utilized is represented by a point on it, then that particular point
will be shifted to the left as a consequence of the improvement.
Similarly, those segments of the curve involving the utilization of
the machine will also move to the left. There is no reason for the
entire curve necessarily to do so. This is the first aspect of my
argument. Namely, that in many cases the consequence of an
innovation is for only a small portion
of the production function to shift
rather than for the entire function to
do so.
Next we want to consider at what
points on an isoquant inventions are
most likely to take place. We should
distinguish between two types of
Units of labour inventions : those that are of a
F10. 2. spectacular sort and result in great
19:2
potential shifts in the production function, and those that are
improvements in machines, equipment, implements or other aspects
of the production process, which are relatively small and which
occur frequently - in some cases almost on a day-to-day basis.
Inventions of the spectacular type may be of great importance
not only to economies in which the capital-labour ratio is high,
but also to those in which the capital-labour ratio is low. Such spec-
tacular innovations are, in a sense, historical accidents. We cannot
possibly say much that is of a systematic nature about them. The
remarks that follow are limited, for the most part, to the latter
variety of inventions - those that involve small improvements which
occur almost continuously in an advanced economy, and which can
occur to some extent in a backward economy. Such inventions are
easier to achieve when the processes involved are simple rather
than complex. Indeed, among the most important means of affect-
ing productive efficiency are specialization, standardization, and
simplification of processes and commodities. But specialized and
standardized processes are more likely to be employed at the higher
regions (i.e. higher capital-labour ratios) of the production isoquants.
Standardization and specialization usually imply a specialized type
of capital good, which is efficient precisely because it is labour
saving. Hence, it occurs at those points at which the capital-labour
ratio is high. Frequently the most efficient types of machines and
devices are those that substitute non-human mechanical energy for
human or animal energy. But in such cases also this is likely to
occur where the capital-labour ratio is high. Further, inventions
and innovations are likely to take place where the process is suffi-
ciently simplified so that it becomes easy to see the next potential
improvement - and again, this usually means at the higher points
on the curve. These ideas are illustrated in Fig. 3. The three
isoquants have a common segment at the low capital-output ratios,
at which no inventions take place, and branch out at the higher
capital-labour ratios at which inventions do take place.
Thus Q is the initial isoquant, Q' is the isoquant that results
as a consequence of an innovation on Q, and Q" is the isoquant
resulting from an innovation on Q'. The main notion is that in
the state of relative backwardness few techniques are known. As
the country does develop it shifts to higher capital-labour ratios,
and the new techniques, as they are discovered, become incorporated
into the ever-changing production functions (mostly) at the higher
capital-labour ratios.
The implications of this thesis are two-fold. First, it contains
an argument for a production function in which the greatest
1 93
discontinuities occur at the points where the capital-labour ratio are
lowest. Second, it enables us to illustrate the possibility of inven-
tions taking place, or of new production processes becoming avail-
able, without their being used in the economy.
Let us return to Fig. 3. Suppose that the wage is low so that
the budget line is E~> then we could readily see that it is quite pos-
sible for a series of changes to take place in the upper portions of
the production isoquant without in any way producing new points
of tangency between the isoquant and the budget line. By the same
token, if the wage were initially a higher one and the point of tangency
with the isoquant were also higher, then each invention would have
Q"
Units of labour
FIG. 3.
produced a new point of tangency, which in turn implies a new

technique being adopted. In other words, at the relatively high
wage, technical progress would be turned into practical innovations
whereas at the low wage, it has no influence whatsoever.
How does all of this affect the rate of investment ? The basic
argument is that (1) the shape of our production function, and (2)
the relationship between inventions and the production function,
create a situation in which there is greater inducement to adopt
inventions at high capital-labour ratios than at low. Let us look
at the low wage rates situation first. Suppose, for a moment, that
all commodities have the sort of production functions that we have
194
described. Under such circumstances small changes in wage rates
will not lead to the adoption of new techniques. For any given
commodity the same technique will be employed. This means that
the capital-labour ratio will be the same. This does not necessarily
mean that no net investment will take place. But the net investment
that does take place will be of the 'capital widening' variety rather
than the capital deepening type. It is even possible under these
circumstances for per capita output to increase, up to a point, by
increasing the degree to which the labour force is employed. But
per capita output per man employed will remain almost the same.
In any event, although per capita output can be increased, there
are very strict limits to the extent to which this can be done without
shifting to more capital-using techniques, and without taking ad-
vantage of the technical progress· that takes place. Quite clearly,
if we are to expect sustained growth to occur then these last two
types of investment must also occur. However, at high wage
levels, firms will be induced to substitute capital for labour as
wages rise, thus increasing output per man. In addition, they
will also be induced to take advantage of the technical progress
that occurs.
Let us look at the matter from the point of view of a single firm
in an economy in which wages are rising. To the individual firm,
taking advantage of some types of inventions is a cost-reducing
procedure. The firm that does this first has a slight edge on its
competitors. We can visualize a Schumpeterian process taking
place in which the initial cost-reducing innovator is pursued by a
host of followers who adopt the same new technique in order to
remain in competition. There are two things to observe here. First,
such innovations will increase output per man. Second, they may
decrease the useful life of capital goods through the process of
obsolescence. In either event, one can readily see that we would
have a greater rate of investment in this situation as against the one
in which taking advantage of technical progress is not possible. In
addition, we might keep in mind the possibility that technical pro-
gress, by decreasing costs, increases the marginal productivity of
capital, and hence, we would expect it to increase the rate of invest-
ment and savings accordingly.
Not only does technical progress increase investment in the
industry in which it occurs, but it is likely to increase investment
in at least some industries that are complementary to it. The effects
of technical progress are often transmitted from the initial indus-
tries to related industries - for example, to those industries that
use the outputs of the technically advancing industry. In this case
1 95
the cost reduction that occurs in the first industry results in a further
cost reduction of a lesser degree in the second industry. If cost
and price are reduced 50 per cent in industry A and industry B
uses 50 per cent of industry A, then costs per unit in B may be
reduced by 25 per cent. This cost-reducing procedure may, in
turn, expand the demand for the commodity and increase output.
Whether, in fact, this will or will not happen in particular cases will
depend on a variety of circumstances. What is important for our
purposes is that in such instances we have at least situations that
can lend themselves to the creation of further investment oppor-
tunities.
V'. KNOWLEDGE, SCALE EFFECTS, AND

COMPLEMENTARITIES
In the usual conception of the production function it is assumed
that the firm is aware of all of the technical alternatives that are
available. In fact, of course, this is unlikely to be the case. How-
ever, our argument will not be based simply on the point that the
existing theory assumes perfect knowledge. What is important is
not that entrepreneurs have imperfect knowledge of production
alternatives, but that this knowledge is likely to be different for dif-
ferent segments of the production function in use - i.e. for different
capital-labour ratios. I will try to argue that at low capital-labour
ratios relatively fewer technological alternatives are known than at
high capital-labour ratios. By 'known' I mean known in sufficient
detail to enable the firm to shift successfully and with ease from one
production technique to another.
The technique that a firm knows best will, of course, be the
technique that is currently being employed. And the longer the
period that a certain technique is used the greater the degree to
which that technique is known, and probably the greater the dis-
inclination to shift to other techniques, other things equal. This
is especially likely to be true if there are no alternative techniques
in the neighbourhood of the point that the firm is on. In other
words, if there were quite a few technique alternatives in the neigh-
bourhood of the capital-labour ratio at which the firm is working,
then there is a greater chance of becoming acquainted with those
alternatives and a greater inducement to discover the exact nature
of such alternatives, than if there are very few alternatives in the
neighbourhood.
In addition, the extent to which alternative neighbouring points
on a production function are known is likely to depend on the rate
196
Leibenstein - Technical Progress and Development
of change. The greater the rate of change, the greater the interest
in discovering alternative production techniques. Clearly, a high
rate of change already implies that firms are shifting from one
technique to another, which in turn, leads to greater knowledge
about alternative techniques. We have already argued that at the
low capital-labour ratio there is likely to be little change in tech-
nique and hence, little effective knowledge of alternative techniques
that might foster change, while the reverse is likely to be true at
the high capital-labour ratios.
The number of 'employable' points on a production function
may also be determined by institutional factors. Educational levels
are likely to be lower at lower capital-output ratios, and the insti-
tutional factors surrounding labour mobility, such as the existence
of a caste system, are also likely to reduce the number of technologtcal
alternatives that the firm feels are really available to it. I do not
intend to go into detail in this matter. The institutional factor is
probably much too difficult to analyse in any event. I mention it
simply as an element that probably is in support of our general
argument.
There are two more elements which are of great importance
and which will often inhibit an under-developed country from
readily adopting new techniques of production. These are the scale
of plant and the problem of complementary inputs. A great many
capital goods, especially of the more capital intensive variety, are
economically employable only where the scale of plant and market
is reasonably large. It is usually the case that the size variety of
plants is likely to be larger in an advanced economy than in a back-
ward economy. In the backward economy there may be many
industries in which plants are so small that many types of capital
goods cannot be employed and new inventions adopted, even if a
consideration of the relative wage rate - apart from scale consider-
ations capital cost factors were such as to favour the adoption
of new techniques. Of course, firm growth is not precluded as a
possibility, but in a world of uncertainty there are limits to which
a small firm can grow in any period, and hence, there are limits to
which the small firm and plant can adopt techniques that are more
suitable for a much larger plant size. 1 Now, let us refer back to our
previous successful dynamic sequence that involved the gradual
adoption of more and more capital intensive techniques. It would
appear, clearly, that the scale element would be one of the factors
1 On the limits to the growth rate of a small firm, see my Economic Theory and
Organizational Analysis, Harper & Brothers, New York, 1960, chapters 16, 18,
and 19.
1 97
that would cause such a dynamic sequence to break down. In
referring to the scale element we are obviously talking, at the same
time, about indivisibilities and the notion that inventions may be
of a type to increase such indivisibilities. For one of the reasons
that firms are small in a backward economy is that where the capital-
labour ratio is low, techniques are available in which small firms
could operate in competition successfully. Such techniques cease
to be available, in many cases, where the capital-labour ratio is
relatively high. But it is precisely such indivisibilities that make it
difficult for the small firm to grow and increase its output if the
stimuli to growth are relatively small rather than large.
Complementarities in the production process play a similar role
to that of scale. In many capital intensive techniques the type of
raw materials, spare parts, maintenance equipment, and labour
skills may be different and more specialized than those required for
production techniques in which capital intensity is low. A backward
economy may not produce all these complementary elements for all
industries. Some of these complementary elements may be import-
able from abroad, but others may have to be produced at home if
firms are to be induced to adopt more capital intensive techniques.
It is obviously easier for more advanced economies to produce the
complementary inputs than for a backward economy in which labour
skills, entrepreneurial capacities, and engineering skills are limited.
I do not want to work this argument too hard, but I merely mention
it in order to suggest that the differential capacities of the backward
as against the advanced economy to provide complementary inputs
may serve as an additional deterrent to the adoption of such inputs.
But it is important to note that the lack of such complementary
inputs will reflect itself both in the nature of the production function
and in the nature of technological progress. With respect to the
production function, clearly, any production technique that cannot
be adopted because of the lack of complementary inputs will not
appear as a point on the production function. By the same token,
improvements in techniques and inventions may require not only
intellectual capacities, but also the necessary complementary inputs
in order to make intellectual conceptions into realities. Hence,
once again, the sort of innovations that can exist will, for this
reason, not be created in the backward economy where they are
lacking.
Before closing it is important to note that the argument pre-
sented does not depend on the notion that all production functions
are of the kind that have been described, or that the locus of inven-
tions and innovations is always in the neighbourhood that we have
198
Leihenstein- Technical Progress and Development
suggested. It depends only on the idea that there are likely t9 be
quite a few production functions of this type so that the overall
influence is in the direction suggested.
VI. CONCLUSIONS
Sustained economic growth (in the per capita income sense)
requires that the firms in the economy shift periodically (and almost
continuously) towards the choice of production techniques that
yield greater and greater outputs per man. Whether or not firms
are motivated ( 1) to move along the production function towards
higher capital-labour ratios, and (2) to take advantage of the inven-
tions that take place from time to time, will depend on, among
other things, (a) the wage rate, (b) the nature of the production
function, and (c) the locus of inventions. But there are circum-
stances in which, even if wage rates tend to rise, a shift towards new
techniques will not take place. I presented the outline of a model
that shows why the inducements to adopt techniques that increase
output per man would exist more readily at high incomes per head
than at low. The model suggests that one of the potential obstacles
to growth faced by a low income country may lie in the nature of
some of the production functions, in the locus of inventions and
technical progress, and in the degree of knowledge that entrepreneurs
may have about such inventions.
On the shape of the production function it was argued that
there are considerable indivisibilities and that these indivisibilities
are likely to be more significant at low capital-labour ratios than at
high ; that for a given segment around a point on the production
function there will be more distinct techniques available at the
higher capital-labour ratios than at the lower ones. It was also
argued that this is in part due to the historical locus of ' normal'
inventions and production improvements which, in turn, depend
on the points on the production function at which there is likely
to be a greater degree of specialization and standardization. In
other words, it was suggested that there is likely to be a greater
incidence of invention at those points where standardization and
specialization become economically more feasible. Finally, it was
suggested that the firm does not know all of the technical alternatives
on its production function. It could only shift easily to those alter-
natives that it knows. And the nature of the situation is such that
it is likely to know more alternatives where the capital-labour ratio
is high than where it is low. The small scale of plant in a backward
199
economy, and the lack of some of the complementary inputs neces-
sary for production were mentioned as additional deterrents to the
adoption of new production techniques. It was suggested that both
of these elements are, in turn, related to indivisibilities in the
production function and to the locus of technological progress. The
point of these suggestions (if they are correct) is that they are con-
sistent with higher sustained rates of investment at the higher
capital-labour ratios.
200
Chapter 12
AGRARIAN STRUCTURE AND TAKE-OFF

BY
MOGENS BOSERUP
I. INTRODUCTION
I HAVE been asked to deal with agricultural developments in relation
to the take-off into sustained growth. This theme is a vast one
and must be narrowed down considerably if it is to be at all manage-
able within a short paper. Accordingly, I have chosen to deal
primarily with the problem of agrarian reform, by which I mean
that process in which the social structure of agriculture, with regard
to property, labour, and types of enterprise, changes from feudal
or other pre-capitalist forms to modern ones. The importance of
this transformation for technological progress in agriculture, and
hence for the take-off, will, I hope, become clear as we proceed.
A few general reflections may first be offered, before the tnore
particular problems of the agrarian structure are taken up in Sec-
tions II and III below.
There is undoubtedly a sense in which it is true to say that
improvements in the productivity of agricultural labour govern
economic progress generally. If we consider Europe's economic
history in a very broad sweep, it seems obvious that the long period
of economic and cultural advance in the late middle ages -say,
from A.D. 1000 onwards - would be unthinkable without the funda-
mental innovations in agricultural techniques which had begun to
spread in the preceding centuries - the three-field system, the
wheel-plough, the horse-collar, and the horse-shoe being perhaps
the most important among them. Likewise, it is a commonplace
that there could not have been a second period of secular growth
as that beginning in the eighteenth century without the second
major revolution of agricultural procedures, the most prominent
feature of which was the supersession of the three-field system by
new systems of crop rotation.
But such genet alizations are rather too sweeping to be of much
interest. They are in the nature of 'comparative historical statics'
which evade the questions of causation that arise when we try to
201
understand the actual process in particular countries or regions
within more narrowly defined periods. We are then interested to
know how the processes were set off, from where the stimulus
came ; in short, we want to establish some hierarchical order among
the many interacting causes of economic progress. More particu-
larly, we want to know by what kinds of stimuli agriculture was
made to fulfil its various roles in economic development. These
roles may be schematically listed as five in number, namely (1)
to provide a marketable surplus of food for the towns, (2) to create
rural markets for industrial goods, (3) to secure a flow of surplus
labour for an expanding urban sector, (4) to provide real finance
and (in some cases) entrepreneurship for industrial growth and (5)
to provide export earnings.
In a first go, we may ask two questions about the historically
observed relationships between agricultural growth and take-off.
I cannot pretend to give a conclusive answer to either of them, but
still it may be useful to state them and to add a few reflections.
The first question is this : Are there examples of successful take-
off without a preceding or concurrent expansion of agricultural output
and productivity ?
The answer would have to be in the negative, it seems. In
other words, historical evidence suggests that a low elasticity of
supply in agriculture cannot be made good by imports of food,
except at a cost in the form of worsened terms of trade which would
in itself preclude industrial growth. There seem, in fact, to be only
three clear examples where a period of rapid economic growth
coincided with increasing reliance on food imports. These are
Holland in the seventeenth, 1 Britain in the nineteenth, and Japan
in the twentieth century. In all three cases the conditions for
foreign trade (i.e. for exports of manufactures) were exceptionally
favourable for the country in question, especially in comparison
with the present position of the under-developed countries. The
main thing to note is, however, that in both Britain and Japan the
reliance on food imports came at a relatively late stage, after the
period usually described as that of take-off.
This empirical rule seems to find some further confirmation if
we ask a complementary question : are there examples of a seem-
ingly promising beginning of industrialization and urban growth
1 The Dutch example struck contemporary observers as both admirable and
exceptional. For instance Cantillon: 'The Dutch exchange their labour . . .
with the foreigners generally against the produce of the land. • . . But all these
advantages are refinements and accidental cases which I here consider only in
passing.' (Essai sur la nature du commerce en genbal, quoted from I.N .E. D. edition,
Paris, 1952, p. 47.) In the same vein, Quesnay admitted the possibility of a
Royaume Commerfant as existing, at best, only for small countries.
202
Boserup- Agrarian Structure and Take-off
being arrested before it could lead up to a successful take-off,
and where this can be plausibly ascribed, at least for a major part,
to a failure of agriculture to follow the lead given by the urban
sectors ? India towards the end of the nineteenth and in the begin-
ning of the twentieth century (say, from 1880 onwards) can perhaps
be seen as an example of such a constellation. There was no dearth
of entrepreneurial initiative ; an urban bourgeoisie with a 'Western'
outlook was beginning to develop ; and shortage of foreign capital
could not have been a major limiting factor. Also, transport and
communications had improved explosively by the construction of
railways in the preceding decades. Without neglecting other im-
portant causes it seems reasonable to suggest that a main obstacle
preventing the beginning of industrialization in India from leading
into a period of cumulative growth was an insufficient expansion
of rural markets for industrial goods, reflecting in its turn a highly
inelastic supply of agricultural output. Mexico is perhaps another
example : there was a considerable growth of industry in the first
decade of the present century, followed, it seems, by relapse into
stagnation. More sustained growth came about only after the
problem of land reform had begun to be tackled in the inter-war
period.
The second question is this : Are there examples of a successful
take-off which could be said to have been carried by agriculture ? In
other words, can agriculture be a 'leading' sector? 1
AJ:, long as we think of agriculture as the sector supplying basic
foods it is obvious that this can be the case only if the expansion
of agriculture arises from the pull of foreign demand. The examples
that most readily come to mind are those of Russian and United
States grain exports and of Danish exports of animal products.
Economic history suggests, however, that even in cases where large
new export possibilities open up, all that can be expected from
agriculture is an initial stimulus, giving the ignition, as it were, to
an all-round growth for which the general conditions were already
present. At least, it is difficult to think of examples of countries
where agricultural productivity (per man, not per unit of land)
reached a high level, judged by the standards of the time, while the
share of total manpower engaged in agriculture continued to be also
relatively high.
Here again, we can ask a complementary question : Can we
think of cases where agricultural expansion appears to have been
1 The concept of 'leading' sector, or sector of 'primary growth' is taken in the
sense suggested by Professor Rostow (The Process of Econ&mic Growth, 2nd edition,
1960, p. 261 ff.).
203
frustrated by the failure of the urban sectors to expand pari passu ?
In other words, have we seen an agriculture with a high potential
elasticity of supply being held back by a failure of urban demand
to expand ? (Admittedly, this kind of question is suspicious and
perhaps not quite meaningful ; it easily leads into fruitless specula-
tions of 'conditional history', asking what might have happened,
if only . . .)
The examples that come to mind are in the nature of rather
short-lived episodes, governed by special conditions and thus of
little interest for the problem of the general conditions for a take-
off. There was, for instance, the 'scissors crisis' in the USSR in
the early 'twenties, when Russian agriculture was recovering its
productive capacity while industry was not yet ready to deliver the
quid pro quo. Or, to take another example, the failure of Polish
agricultural production to expand in the post-war period (or its
tendency to recoil into self-sufficiency) may have to be explained
largely by a lack of incentive goods from industry.
More pertinent to the problem of take-off is the case where
prolonged periods of rapid and sustained increase in agricultural
exports failed to give the ignition to all-round progress. The
standard example is, of course, the export boom of some countries
of South-East Asia starting in the decades after the opening of the
Suez Canal. The rates of expansion were high by any standard.
For instance, the value of Burma's exports increased fairly regularly
by some 5 per cent annually in the three decades after 1870, and
similar rates were registered in Thailand and Indonesia. 1 But
nothing resulted which could reasonably be described as a take-
off. In trying to account for this fact it is important to avoid the
pitfalls of over-simplification and monocausal analysis. Some points
may be briefly mentioned. In so far as the export expansion was
in the traditional lines of agricultural production - say, the rice
exports of Burma and Thailand - it has been pointed out z that
this required only the expansion of the cultivated area, without any
changes in the methods used in subsistence agriculture ; thus, no
important technical reorientation was involved. And as regards the
new industrial crops introduced by foreign plantation companies,
as in Ceylon, Malaya, and Indonesia, we have at least three im-
portant factors to help explain why no genuine take-off could
ensue : first, no high labour skill was required, and the labour
attracted largely consisted of immigrants who remained aloof from
1 See H. Myint, 'The "Classical" Theory of International Trade and the
Underdeveloped Countries', in The EcmwmicJournal, June 1958.
a Ibid.
Boserup -Agrarian Structure and Take-off
the indigenous subsistence sector of agriculture. Secondly - a
point stressed by Maurice Bye 1 - these foreign enterprises were
strictly 'capital-autonomous', so that no saving could flow from
them to other urban activities. Thirdly, the 'linkage effect', both
forward and backward, in terms of inter-industry relations, was
weak. 2 Thus, the causes for the lack of over-all growth in the
South-East Asian export economies were rather different from the
case of India where, as just mentioned, industrial growth appears
to have been thwarted by the failure of agriculture to expand. How-
ever, the two cases have this in common that the immobility of the
subsistence sector of agriculture can be seen as the root trouble.
This rapid and necessarily superficial review of historical evi-
dence in various regions and epochs suggests - not surprisingly -
that in processes of economic growth agriculture tends to be lagging
behind, to be the limiting sector. In some vague sense, agricultural
growth appears usually to have been a secondary, derived adaptation
to what happened in the urban sectors.J In the normal course of
events, new things do not originate in the agricultural milieu : a
pull or a push from outside seems to be needed, be it the pull of
foreign demand, the opening of new transport systems, the appear-
ance of new consumer goods to tempt the subsistence peasant 4
or the drain of manpower away from agriculture.
In other words, it is reasonable to presume that as the general
rule agriculture will exhibit a low supply elasticity which tends to
act as a brake on economic growth. This has in fact been a principal
theme in thinking about economic growth all through. It was basic
to the physiocratic doctrine, most clearly put, perhaps, in this
dictum by Turgot : 'What the agriculturist's industry causes the
earth to produce beyond his personal wants is the only fund for the
salaries which all the other members of the society receive'.s It
turned up again, with a somewhat different motivation and a rather
more pessimistic slant, in Ricardo's long-term view of economic
development, and the modern development literature often operates
1 'Le Rale du capital dans le developpement konomique ', in Economie
Appliquee, 1958, No.3.
a On these concepts, see Albert 0. Hirschman, The Strategy of Economic
Development, Yale University Press, 1959, ch. 6.
a For instance, the sequence by which the new methods of crop rotation during
and after the eighteenth century were propagated to various parts of Europe was
closely related to the degree of urban development. ' Flanders . . . with Brabant
was really the cradle of the reforms of cultivation. But • • . the influence from
the Netherlands reached France not directly but only by the detour over Great
Britain.' (Marc Bloch, Les Caracteres origirulUX de l'histlllre rurale fran;aise, Paris,
1931, p. 220.)
4 This possibility of provoking improvements in agriculture was mentioned by
Malthus.
s Rijlexions, etc., para. S.
205
with models in which the supply elasticity of agriculture is assumed
to be very low or even zero, and the pace of investment, and hence
of progress, is seen to depend primarily upon the gap between the
output of basic food and the necessary consumption of it by its
producers.• The same idea naturally underlies much of the plan-
ning in under-developed countries where food shortage is hovering.
If it were to be put in a nutshell, the planning procedure in India
could be said to consist in making a bold guess at the rate at which
the output of foodgrains can be stepped up, and then to let all the
rest of the plan follow from this guess. There is something almost
physiocratic about this procedure. But then there is also a striking
analogy between the present Indian situation and that of eighteenth-
century France : the idea of and quest for economic progress among
the intelligentsia, and on the other hand a desperately immobile
and tradition-bound agriculture.
If a low supply elasticity is thus a characteristic feature of agri-
culture, this has to do, of course, with the fact that production is
tied to the land, most of which, in the normal case, is already occu-
pied. In saying this, I am not suggesting that the difficulty lies in
the scarcity of land as such. 2 But the fact that the agricultural
enterprise is tied to a particular piece of land implies that innova-
tion cannot be introduced by the normal process of competition in
which new and more efficient enterprises grow up side by side with
the traditional enterprises, pricing them out of the market. The
old enterprise has, so to say, to be conquered from within - or to
be smashed by other and often more brutal methods than simple
competition. In other words the traditional cultivator of the soil
must be either changed in his whole outlook - which is never easy
- or else he must be removed, be it by eviction or by emancipation.
I suppose that the very reason why we want at this conference
to raise the question specifically about agriculture's role in the
take-off- rather than that of industry, transport, or trade- is
this presumption of a peculiar inertness in agriculture. The implica-
tion is that the reform of the agrarian structure is an essential pre-
condition for that increase of labour productivity in agriculture and
1 See, for instance, James Duesenberry in The American Economic Review, May
1952, p. 558 ff. ; M. Kalecki, 'El problema del financiamento del desarrollo eco-
n6mico', in El Trimestre Economico, Oct.-Dec. 1954; N. Kaldor, 'Crescimento,
Equilibrio e Desequilibrio', in Revista Brasiliera de Econ6mia, March 1957; M.
Dobb, An Essay on Economic Growth and Planning, London, 1960, p. 29.
2 Even in the densely populated countries of Asia, the purely physical possi-
bilities of raising output per unit of land by the application of already known tech-
niques are very great. On the point that land resources are ceasing to be the
critical factor for agricultural progress, see Th. w. Schultz, 'A New Era for Agri-
culture in Economic Growth', in The Indian Journal of Agricultural Economics,
Dec. 1959.
206
of its marketable output without which a take-off into sustained,
overall growth is not possible. Accordingly, the remaining parts
of this paper are devoted to a more detailed discussion of agrarian
reform as it relates to changes in technology and to the take-off.
It must be noted that the term 'reform' is here taken in a wide sense,
including benevolent legislation as well as unorganized and brutal
change of old structures by enclosures and other forms of eviction.
First the rather variegated experience of the leading European
countries is considered and an attempt is made to distinguish some
main patterns. Next, this European experience is compared and
contrasted with the present agrarian problems in the under-developed
world, for which the region of South Asia is taken as the frame of
reference. The discussion is limited throughout to the problems of
take-off in countries of old settlement. This means leaving aside
the U.S.A., Australia, and other countries where the problem of
superseding an age-old structure of sedentary agriculture did not
arise. Likewise, the modern plantation economy is left aside since,
in the normal case, it is not confronted with a problem of insufficient
elasticity of supply.
III. THE EUROPEAN PRECEDENT

As already hinted, the take-off periods in the European countries
were in all cases also periods of advance in agriculture. It is more
difficult to be explicit about the several decades preceding the
take-off. 1 In England, it is clear enough that agriculture had
made big strides already in the first half of the eighteenth century.
In France there was probably some improvement in the first half
of the nineteenth century, although it may have been fairly slow
until the 'thirties. 2 Within the region which was later to become
the German Reich there were at least some parts where agriculture
made notable progress already before the middle of the century,
from when on the progress became general and very marked.
1 For the purpose of the following discussion, I am accepting, without further
discussion, that take-off periods of markedly accelerated growth can be discerned,
and that their dates correspond, at least roughly, to those given in The Process of
Economic Growth, op. cit. chapter 12.
• Among the causes of the growth in agricultural output in France from the
1830's See mentions the improvement of communications (especially canals), the
return of the 'legitimist' landowners after 1830, and the beginning of modern
industry, which, by choking rural industries, forced the peasants to concentrate
their efforts on agriculture. (Henri See, Histoire economique de Ia France, Paris,
1941). However, our ideas of the secular trends in agricultural productivity in
the eighteenth and nineteenth centuries may have to be revised in the light of the
new data presented by Professor Marczewski (see pp. 134-5 of this volume).
207
Finally, in Russia (to mention only these four major countries)
agricultural progress can probably not be dated earlier than around
1880 ; for that country it is perhaps particularly difficult to speak
of a pre-take-off period distinguishable from the take-off itself.
Anyway, such progress as there was, whether before or during
the take-off, came about by the gradual propagation of the tech-
nical innovations which had begun in England in the eighteenth
century, to which were added some new inventions, notably the use
of artificial fertilizer as from the middle of the nineteenth century.
Among the conditions which made possible this progress two stand
out as being of decisive importance : the improvements in transport
systems and the institutional changes within agriculture itself. We
shall deal with only the latter of these two factors.
At first sight, the scope and content of the agarian reform move-
ments and measures in Europe in the eighteenth and the nineteenth
centuries are of a confusing variety. To bring some order and help
to make meaningful distinctions of the main types, it may be useful
first to recall the common theme which lies behind these variations.
The transformations of the agarian structures which took place
since the eighteenth century can be seen as the continuation of a
century-long process towards clearness and exclusiveness of titles
in land. The three disputants were the village community as a body,
the actual cultivators, and the tribute-receiving 'overlord' or 'seigneur'
(a role sometimes taken by the State). Each of these had some
kind of right in the land in the old tenure system, not only in Europe,
but, it seems, in practically all the world's regions of old settlement.
With the conspicuous exception of the Russian mir, the right of
the village community in the village land proper (as exerted in
periodical redistributions of village land among the villagers) dis-
appeared already in the early middle ages, but elements of communal
property continued to exist, notably in the form of common grazing
rights, both on the pastures and on the arable land. The continuing
dispute between the other two contenders, the cultivating peasant
and the 'seigneur' had by the eighteenth century resulted in widely
diverging patterns of agricultural enterprise in the various countries
(and parts of countries) and the forms and purposes of the reforms
in the following period varied accordingly. Nevertheless, in an
important sense the main theme and direction of these changes
were everywhere the same : towards the establishment of clear and
exclusive rights in land, and towards the elimination of labour
relations not based on free contract, and of remnants of payment
in kind.
Now let us place ourselves at the time before the take-off in
208
the various countries 1 and try to make a broad classification of the
agrarian structures into a few main types and see what generaliza-
tions can be ventured about their relative propitiousness for prepar-
ing or supporting the take-off.
We can distinguish four main patterns or 'ideal types', to be
shortly designated by the country or region where they predominated
and characterized (a) by the particular fate of the cultivator, i.e.
the actual tiller, and (b) by the kind of person who takes care of the
entrepreneurial function :
1. The 'British' type, where the cultivator had been (or was
being) evicted - and reintegrated as a wage labourer ; and
where the entrepreneur was the capitalist tenant.
2. The 'Eastern' type, where the cultivator had become a serf,
and the entrepreneur was identical with the 'seigneur'.
3. The 'French' type, where the peasant-owner predominated,
i.e. where the functions of cultivator and entrepreneur were
not separated.
4. The 'Mediterranean' type, where the cultivator is a share-
cropper, and where there really is no person who can reason-
ably be described as an entrepreneur.
As usual with such groupings, due apologies for oversimplifica-
tion and formalism must be offered. The above classification ignores
some intermediate types, and the naming by geographical areas is
no more than a broad indication. Note also that often it is is not
possible to allocate a given country as a whole to any of the above
types. For instance, in Germany three broad regions can be readily
distinguished- North-west, East, and South- for which agri-
cultural enterprises of types (1), (2), and (3), respectively, are
characteristic.
Each of these four types must now be further considered, with
special regard to whether they are more or less auspicious for suc-
cessful take-off.
1. The 'British' Type. The great technical advantage of this
kind of agricultural enterprise is two-fold. The preceding enclosures
and evictions had solved the problem of land fragmentation, of
common pasture and of strip cultivation, thus opening the way for
a beginning of mechanization and for experimentation with new
rotation plans undisturbed by communal pasture rights ; and
secondly, the entrepreneur- the large-scale tenant- was likely
to be educated and selected for competence, hence credit-worthy.
While England is, of course, the classical land of the large
1 Say, around 1750 in England, around 1830-40 in France and Germany,
and
1860 in Russia.
capitalist tenant holding, more or less similar agricultural enter-
prises had developed in parts of Northern France, in North-west
Germany (out of the so-called 'Meiergiiter' 1 and in parts of Northern
Italy). 2 The geographical localization of this form of agriculture
may have had something to do with topography (flat and open ter-
rain). But more important is that these were regions where a
commercial agriculture had appeared at an early stage, and where
tenants paying rent in money could prosper and add to the area
of the cultivator-holding, especially during the monetary deprecia-
tion of the sixteenth century. These were also the regions where
urban development appeared at an early time and became rapid -
as compared with other parts of Europe - as from the end of the
eighteenth and the beginning of the nineteenth century. The
connexion, in these regions, between urbanization and industrial-
ization on the one hand, and the agrarian structure on the other,
is of course one of mutual causation, though one would think that
the line of causation from urban development to the agrarian struc-
ture must have been stronger than the other way round. In any
case, it would not be plausible to explain the location and the
timing of take-offs in these particular regions as determined
primarily by the favourable agrarian structure. All we can say is
that not only in Britain (as is generally acknowledged) but also in
France and Germany the existence of such fairly big and market-
oriented agricultural units helped to bring about the needed expan-
sion of agricultural output.
2. The Eastern Type is that found primarily in Germany east
of the Elbe and, more sporadically and in less pure forms, in parts
of pre-revolutionary Russia.J This, to use the terminology of G. F.
Knapp, is the Gutsherrschaft as opposed to the Grundherrschaft. The
special feature of the agrarian structure in regions where Gutsherr-
schaft prevails is that a large part of the land has come to be ex-
ploited directly by the 'seigneur' as his 'demesne',4 the cultivation
of these large-scale enterprises being done by servile labour. In
Germany, the abolition of serfdom took place in the decades pre-
1 On the development of the Meiergiiter, see, for instance, Henri See, Esquisse
d'une histoire du regime agraire en Europe aux XVIII• et XIX• siecles, Paris, 1921.
2 'In Piedmont . . . where agriculture had made big progress at the end of
the eighteenth century, we see the peasant expropriated and reduced to a prole-
tarian condition; speculators have grabbed the land.' Ibid. p. 197.
3 I am indebted to Professor Gerschenkron for criticism of the text on this
point in an earlier version of this paper.
4 In some parts of Germany east of the Elbe the landed property of the big
landowners had already from the time of colonization been coherent areas apt for
large-scale enterprise. In other parts of that region, such as Mecklenburg and
Holstein, there was a lively enclosure movement after the Thirty Years War and in
the eighteenth century.
210
ceding the take-off, 1 in Russia the effective abolition of serfdom
and the take-off were perhaps more nearly concurrent in time,
but in both cases the emancipation of the serfs was obviously a
sine qua non for economic development, required both for stimulat-
ing agricultural productivity and for the release of manpower for
the urban sectors. But if serfdom, as long as it persisted, was an
almost absolute obstacle to a successful take-off, from another
point of view this 'Eastern' pattern was not an unfavourable starting-
point, once the particular obstacle of serfdom had been removed,
because there was the possibility of conversion to a fairly productive
form of enterprise : the large 'seigneurial' cultivating unit could
continue, now with free labour. The productive advantages are
apparent if the comparison is with the 'French' system of peasant-
owners (to be discussed below) but it compares unfavourably with
the 'British' type. The big cultivating unit in the East continued
to be a relatively extensive form of agriculture, largely based on
monoculture of grain, the rationalization of the lay-out of the land
(the degree of consolidation) was less complete than in Britain, and
the old rights of common pasture often failed to be eliminated.z
The big agricultural enterprises of the 'Eastern' type played
also a more direct role in the beginning industrialization. The
big manorial estate was the first kind of large-scale enterprise
based on wage-labour (apart from some mines), and it played
a fairly important role in first creating a labour force amenable
to the work discipline of modern industry. The phenomenon
of the 'seigneur' turning into an industrialist (as a side-line) was
also more frequent in Germany and Russia than in other European
countries where far less of the landed property of the 'seigneur'
had been under direct cultivation.
3. The 'French' Type. While the two types just dealt with, the
capitalist tenant and the big 'seigneurial' enterprise, stand out with
fairly clear contours and can be rather precisely localized, the third
kind of agricultural enterprise was more diffusely spread over many
parts of Europe. This is the peasant-owner, i.e. the small family
holding on land owned by the cultivator, with little or no use of
wage-labour. The classical lands of this kind of agriculture are
France (outside those regions where big tenant farms are frequent,
as mentioned above) and, in addition, Southern Germany.
1 The abolition of serfdom in Gennany began in 1808 but was carried to its
conclusion only in 1848.
a To avoid misinterpretation, it must be mentioned in passing that the big
'seigneurial' enterprise was not always so relatively productive as in the examples
given here. There is, for instance, the large-scale latifundia enterprise in some
parts of the South Italian mainland with its very extensive methods of cultivation.
211
With respect to its propitiousness for economic advance, this
form of agriculture is intermediate between the first two and the
share-cropper variant (considered below). It can perhaps be said
to be a characteristic feature of French agriculture that during the
century or so preceding the take-off no very important change
took place in its social structure. Already under the ancien regime,
a middle layer of peasant cultivators had developed with fairly clear
and secure property rights in the land they occupied, although they
still carried the burden (or perhaps one should say the 'nuisance')
of multifarious feudal dues and obligations. They were further
strengthened by the abolition of these obligations in 1789, but this
was, on the whole, a less incisive reform than is sometimes sup-
posed.1 This high degree of continuity in the social structure of
French agriculture also meant that there was no occasion for a
wholesale sweeping away of the remnants of the old system of land
rights - the communal rights in land - in so far as they repre-
sented petty vested interests of this middle layer of peasants. The
abolition of common pastures was attempted in the French Revolu-
tion but had to be given up under pressure from the peasants who
clung tenaciously to their old grazing rights, and only slowly was
the incidence of vaine pature and other communal rights reduced
in the course of the nineteenth century. Likewise, the consolidation
of land into a lay-out suited to modern farming methods made slow
progress in the regions dominated by peasant-owners.
In short, the peasant-owner type of agricultural enterprise is
unlikely to show technical progressiveness ; it has little capital and
is not strongly oriented towards the market; and the entrepreneur,
if one can use that word, sits on his holding by virtue of birth,
more or less deeply embedded in a traditional way of life and work.
On the European Continent, in the first half of the nineteenth cen-
tury, there was nothing comparable to the 'book-farmer' who
emerged already around 1830 or so in the United States. It seems
broadly true to say that where the peasant-owner predominated in
Europe, the economy at large was somewhat slow to develop. 2
It must be remembered that we have nineteenth-century condi-
tions in view. If we were concerned with present-day European
agriculture, the view of the propensity for innovation in an agri-
' It will be understood that we are not speaking of those peasants who worked,
as share-croppers or other kinds of tenants, on the land owned by the 'seigneur •.
It may be added that only very little of this land was under direct cultivation by
the 'seigneur'.
• The predominance of the peasant-owner can perhaps help to explain the
relative lack of 'progressiveness' in the French economy in the nineteenth century
stressed by F. Perroux. (Les Mesures des progres economiques et l'idee d'economie
progressive, I.S.E.A., Paris, 1956, p. 8 ff.)
212
culture dominated by peasant-owners would have to be modified.
With more education, better transport, and other kinds of com-
munication, traditionalism and isolation in the rural milieu has
become less pronounced.
Already in the second half of the nineteenth century, the peasant-
owner system proved more compatible with rapid expansion of
output in those places (among them Denmark) where the holdings
were reasonably large, where subdivisions - of the cultivating as
well as of the owner unit- were effectively prevented from an
early time, and where a number of large-scale units were evenly
spread over the countries so that their modern methods could be
emulated by the smaller holdings.
4. The 'Mediterranean' Type. We are left with the fourth and
least progressive type - that of share-cropping, as found chiefly in
parts of Southern Europe, especially South and Central Italy, Spain,
Southern France. The main characteristics are the dwarfish size
and the utter instability of the cultivating unit. The lack of incentive
for improvement in the share-cropping system-as with any other
tribute or tax proportional to gross output - is too well known to
need elaboration. In the typical case, the share-cropping contract
creates an ephemeral economic unit, based on a year-to-year agree-
ment which gives the share-cropper no reason to look beyond the
next harvest. Only in a Pickwickian sense can he be regarded as
an entrepreneur.
The regions of Europe where share-cropping is widespread are
so closely co-terminous with those which knew no genuine take-off
as to suggest a causal connexion. It does seem that where relations
between 'seigneur' and cultivator had developed into share-cropping
arrangements agriculture was caught in a cul de sac from which there
was no easy way to progress, except of course by a major change
in property relations coming from outside. 1 The thing is that
while the individual share-cropping contract is at short notice and
highly unstable, share-cropping as a system is essentially stable,
unalterable. Two main reasons for this stability can be distin-
guished. First, where share-cropping predominates, the titles to
land are usually well established. There is no doubt that the owner
is the owner ; the share-cropper has not the partial- though pre-
carious and controversial - right in the land which is characteristic
of many other forms of tenancy and creates a labile position from
which there is the possibility of moving to a reformulation of land
1 In the American South, after the Civil War, the slave plantation gave way
to share-cropping rather than to plantation enterprise with free labour- and then
a long period of stagnation followed.
213
titles, be it through eviction of the tenant by an owner bent on
improved cultivation in larger units, or by the tenant gaining a
secured position, more or less close to actual ownership. Secondly,
in the climatic and social situation usually prevailing in these regions,
both parties to the share-cropping arrangement have some good
reasons to prefer this form of tenure to either wage-labour or a
fixed rent (in kind or money). 1 In a sense, share-cropping is there-
fore well adapted to the need in those regions and hence difficult
to get rid of, except by major reforms. It is a kind of static symbiosis
of exploiter and exploited, more or less immune to progress, even
if there is a pull from outside, such as growing demand from nearby
towns.
Thus the social structure that had become typical of Southern
European agriculture was both highly disincentive, leaving no room
for entrepreneurial initiative, and persistent. This is clearly part
of the explanation why there was no period of agricultural progress
in the nineteenth century comparable to that of most other European
countries. But the agrarian structure can be seen not only as the
cause, but also as the effect of the lack of progress in productivity,
in so far as the latter was determined by some hard facts of nature.
It must not be forgotten that, for reasons of climate, Southern
Europe remained unafft::cted by both of the major technical revolu-
tions in agriculture mentioned above - the spread of the three-
field system in the eighth to ninth centuries 2 and the transition to
modern crop rotations as from the eighteenth century. Thus,
technical progress would have required inventions and innovations
emanating from within the region itself, rather than the mere emula-
tion of procedures in other countries, and this was scarcely to be
expected with a social set-up as that just described. Clearly, there
was a vicious circle which could not be b.roken merely by the enact-
ment of bourgeois rules of property in land.J
' The advantage of share-cropping over wage-labour is that it saves the social
status of the cultivator and relieves the owner of the cost and trouble of super-
vision. The advantage over fixed rent lies in the sharing of the risk of crop failure.
• 'Since the spring sowing, which was the chief novelty of the three-field
system, was unprofitable in the south because of the scarcity of summer rains, the
three-field system did not spread below the Alps and Loire. For obvious reasons
of climate the agricultural revolution of the eighth century was confined to Northern
Europe.' (Lynn White, Jr., 'Technology and Invention in the Middle Ages',
in Speculum, April1940, here quoted from reprint in A. F. Havighurst (ed.), The
Pirenne Thesis. Analysis, Criticism and Revision, Boston, 1958, p. 79 ff.)
3 In a way, Southern Italy had its bourgeois agrarian revolution all right. By
legislation in 1808 and 1812 the principle of clear and exclusive individual property
in land was established and feudal dues were abolished. The point is that in the
prevailing conditions these reforms did not give vent to progress. 'The majority of
the oppressive dues hitherto claimed from the peasant as a seignorial right could
for long decades continue to be extorted by way of free contract' (F. Voechting,
Die italienische Siidfrage, Berlin, 1951, p. 69).
214
Boserup - Agrarian Structure and Take-off
The above review of a number of 'ideal types', schematic as it
necessarily is, does seem to suggest a rather narrow association
between the social structure of agriculture before the take-off and
the relative successfulness of the take-off as judged by the degree
of development reached, say, by the time of the First World War.
Note, however, that this correlation comes out more sharply when
we consider particular parts of countries rather than countries as
a whole. 1
One more general feature must be pointed out which is relevant
for the following discussion. It was seen that in Europe widely
varying agrarian structures emerged from the social transformation
of agriculture which took place (broadly) in the pre-take-off
periods. The transformations or reforms followed a general pattern
in what they abolished, or tried to abolish : serfdom, communal
rights, uncertainty of titles in land, rent in kind, and purely feudal
dues. But they gave widely differing answers to the question of
who among the old contenders should be the owner of land. The
idea that the owner-holding and the cultivator-holding ought to be
co-terminous, i.e. the ideal of the free peasant-owner was not a
leading theme in the European transformation, 2 although the actual
result may have been, in some countries or regions, to widen the
scope for this particular kind of agricultural enterprise. The rather
varied experience of Europe in the nineteenth century also sug-
gests that from the point of view of progress in agricultural produc-
tivity the type of entrepreneur (and the size of cultivator-holding)
that emerges is more important than the question of the size of
owner-holdings. By contrast, in South Asia at the present time,
the slogan of 'land to the tiller' is in the centre of the question of
agrarian reform. The implications of this for the prospects of
successful take-off in that region will be considered below.
1 In France, for instance, where the peasant-owner generally predominates, the
capitalist tenant is found in some of the most developed regions and, on the other
hand, share-cropping is rather frequent in the backward parts of the Centre and
the South.
The island of Corsica can be mentioned as a particularly striking, though
extreme, example of the close association between agrarian structure and economic
levels. Corsica is the most backward part of France as regards general economic
development. At the same time, pre-capitalist forms of land ownership and land
utilization, and indeed of village life generally, were there preserved intact until
very recently. For an illuminating description, see Isac Chiva, 'Causes socio-
logiques du sous-developpement regional: l'exemple corse', in Cahiers lnter-
nationaux de Sociologie, vol. XXIV 1958, p. 141 ff.
• This may be less true of the agrarian reforms in Eastern Europe after the
First World War. These more recent reforms are, however, outside the scope of
the present discussion.
215
IV. THE SOUTH ASIAN CONTRAST

Let us turn to the problems of under-developed countries now
trying to pass into the stage of take-off and ask how the agricultural
prospects, as influenced especially by the social structure of agri-
culture, compare with the position of European countries before
their take-off as sketched briefly in the preceding pages. The
region of South Asia is here chosen as the frame of reference.
The difference between Asia now and Europe one hundred years
ago is of course tremendous and it might be thought that the ele-
ments of similarity are not sufficient to make such a comparison
meaningful. I believe, however, that it can at least be a useful
artifice helping to bring the special conditions of South Asia into
sharper relief. Anticipating the conclusion, it can be said that in
South Asia change in the social structure of agriculture is both more
badly needed and less easy of achievement than it was in Europe.
To begin with, it can be asked whether the countries of South
Asia have had a period of 'preparatory' development in the shape
of technical advance in agriculture and institutional changes favour-
ing such advance, more or less comparable to what happened on the
European Continent in the first half of the nineteenth century and
in England about a century earlier.
The answer must be yes - and no. Over the last half-century
or so there has undoubtedly been some advance towards diversifica-
tion of agricultural production, not only by increased output of
industrial raw materials from agriculture, but also of foods, notably
sugar and some other basic foods beyond the traditional grains :
tapioca, maize, bananas, etc., 1 and the area under effective irrigation
increased more or less regularly. This expansion-cum-diversifica-
tion was probably not much more than needed to match the increase
in population, but the fact that output per head failed to increase
much is not so important from our present point of view. It is
more important to note that this expansion - as far as it went -
was not associated with any major re-orientation in protection tech-
niques and that the institutional structure of agriculture remained
largely unaffected.
This remains true also when the post-war legislation is taken
into account. The policy of agrarian reform in South Asia in the
last decade or so has been hesitant and not very deep-going. Most
of the measures have aimed at providing social justice rather than
1 Needless to say, nothing is firmly known. Lon!l time-series for the harvest
of the traditional grains are either non-existent or d1sputable ; and some of the
products which have expanded relatively escape statistical measurement.
216
stimulating efficiency, and some of them have even been complained
of as having adverse effects on efficiency. 1 On the whole, the pattern
of tenancy has not been changed much, and sometimes the tendency
has even been to change from more secure forms of tenancy to
share-cropping. By and large, then, there has been very little
change towards more rational units of cultivating-holdings or more
progressive types of agricultural entrepreneur.
These few hints about the agrarian structure must suffice here.
& regards the increase in agricultural production needed for a
successful take-off, it is of quite another order of magnitude than
the actual performance of the European countries during their
take-off: Population increases more rapidly ; the level of nutrition
at the start is lower than it was in mid-nineteenth-century Europe
and the claim for improvement in standards of living during the
take-off itself is more vociferous and compelling.z Such rates of
increase require investment and increased investment in agri-
culture in turn depends, on almost every point, upon institutional
changes. Increased production of fodder depends upon the elimina-
tion of common grazing rights, both on waste land and on the arable ;
the consolidation of plots is a pre-condition for the rational utilization
of irrigation facilities which in turn is a pre-condition for the effective
use of fertilizer and of improved seeds; finally, all these technical
improvements- fertilizer, selected seeds, fodder cultivation, etc.
- require more alert and market-oriented agriculturists, and to say
this is to raise the whole question of systems of tenure and size of
cuhivator-holdings.3 It is perhaps not superfluous to stress this,
although it may sound elementary and obvious. There is a growing
awareness in recent years that the purely physical potential for
1 In very brief summary the reform measures are as follows : The most con-
spicuous single post-war measure of agrarian reform in South Asia was the aboli-
tion of the zamindar regime in parts of India. This was in some ways comparable
to the 1789 reform in France, both in what it did and in what it did not achieve.
The abolition of the 'seigneurial' rights of the zamindari had importsnt effects on
the power constellation in Indian society at large, but its effect on the conditions
for agricultural production were very limited. More recently, legal ceilings have
been put on land ownership, but this is not believed to have been very effective
and it is in any case a measure of social policy, not of rationalization. In other
countries of South Asia there has been some re-distribution of land from big land-
owners, but the total area affected is not very large. In addition, both India and
the ·other countries have attempted to regulate by law the relations between land-
lords and tenants, but these measures have proved difficult to enforce, and they
have been answered by waves of illegal evictions.
a To mention only one {admittedly extreme) example: the third Indian Five-
Year Plan asks for an annual increase in agricultural output of 6-7 per cent.
a Take the problem of excess cows in India as an example. There is some
reason to believe that the rules regarding common pasture are more important as
a barrier to the elimination of this highly wasteful system than is religion. If the
individual peasant were to bear the cost of keeping these animals alive, their
number would scarcely fail to decline.
increased agricultural output in South Asia (and many other under-
developed regions) is immense, but it is not always appreciated
what the realization of these potentialities implies in terms of change
in the social structure. 1 For instance, it is difficult to agree with
W. A. Lewis when he says that 'the present institutional framework
in most underdeveloped countries (but not all) is quite adequate
for an enormous advance in productivity by means of the intro-
duction of improved technology'. z
Nor is it convincing to argue, as is sometimes done in South
Asia, that the Japanese example demonstrates the possibility of
raising output very considerably within an agrarian structure based
on tiny units, worked under conditions of insecure tenure. To
take this view is to forget that the period of intensification of Japanese
agriculture accompanying the take-off was preceded by the sweep-
ing agrarian reform of the Meiji regime. Payments in kind to
feudal overlords, which had been much more oppressive and dis-
incentive than those paid by Indian peasants to the zamindari, were
transformed overnight into fixed money taxes, and these were
alleviated by subsequent inflation. Thus, the majority of the
Japanese cultivators got both the incentive and the means to invest,
and this provided a basis for the long period of rising output. It
is true that the Meiji reform was far from eliminating all forms of
disincentive tenure in Japan: similar to what happened in France
after 1789 and in India after the zamindar reform, it left a large
minority of tenants with short and insecure tenures, mainly share-
cropping arrangements - a system which continued right up to
the reform after the Second World War. However, the Japanese
share-croppers had such tiny holdings - only a fraction of those of
share-croppers in other Asian countries - that they could avoid
starvation only by cultivating very intensively, despite the generally
disincentive tenure system. For a large part of Japanese agriculture
it can be said, therefore, that further intensification was achieved
under the threat of starvation. It is scarcely possible (or desirable)
to follow this path at the present time in the other countries.
Let us now proceed on the assumption that there is need for a
thorough transformation of the social structure of South Asian
agriculture and ask about the special conditions and difficulties
encountered there.
In a very general sense, the problems are of the same nature as
1 Thus, in discussions of comparative agricultural prospects in China and South
Asia it is often not sufficiently appreciated that the Chinese have solved, by one
stroke, all questions of consolidation and other problems of the lay-out of land aris-
ing from the age-old ties binding men to particular plots of land.
.. The Theory of Economic Growth, London, 1955, p. 136.
218
those which European agriculture had to tackle. But the particular
conditions in South Asia are such as to exacerbate the difficulties
of formulating and implementing reform policies : of the four
broad types of agricultural enterprise found in Europe, the first
two - which are also those most propitious for a take-off- hardly
exist in South Asia where the agricultural units are analogous to
either the 'French' type of peasant-owner or the 'Mediterranean'
type, that of the share-cropper. With the possible exception of
Burma, the large-scale tenant enterprise is almost non-existent, nor
is there much of direct cultivation by big landowners. Thus, there
are very few large-scale enterprises which could serve as models for
emulation by the small.
It is true that there is less of serfdom or comparable kinds of
bonded labour than there was in Europe, but then share-cropping
is a pervasive feature in Asia and, as already hinted, it may prove
to be a more intractable problem. In Europe serfdom fell away
without much resistance ; the abolition of it was in the interest of
both parties and opened the way for more efficient methods of
production. But share-cropping, perhaps the most serious single
obstacle to progress in South Asian agriculture, cannot be just abol-
ished by fiat. Barring a wholesale change in land property and
organization of rural labour, as that carried out in China, it would
seem that the elimination of share-cropping can come only as the
result of commercialization and modernization of agriculture, not
the other way round.
It seems misleading, or at least insufficient, to regard the wide-
spread use of share-cropping as simply a result of population pressure
against scarce resources. It is closely tied in with come characteristic
attitudes to work and leisure: the landless agriculturist much prefers
to take even a tiny bit of land on crop-share, if he can thereby avoid
losing social status by becoming a wage labourer, and the land-
owning peasant prefers to avoid even supervisory work. This
question of attitudes to work leads us on to the more general ques-
tion of rural unemployment and under-employment which has an
important bearing on agricultural policy.
It is often taken as almost axiomatic that there is a huge amount
of under-employment in South Asian agriculture, and this might
be thought to be the most striking contrast to the European situation
in the nineteenth century, and to be the chief barrier to agricultural
progress in Asia now. I should like to argue that this view is exag-
gerated and misleading in several ways. To put it very crudely :
it is perhaps the prevalent ideas about under-employment that stand
in the way of progress, rather than under-employment itself, Space
219
does not permit a full argumentation ; a few hints must suffice.
Let us first be clear as to what we are talking about. It is not
to be denied that the labour force attached to agriculture in South
Asia (and most other under-developed countries) is far from being
fully utilized, as judged by the standards of more advanced coun-
tries. The question is of the amount of unemployment or under-
employment in the more precise meaning of an excess supply of
labour which would be readily forthcoming, at the going rate of
remuneration, once the demand for labour were increased.
First consider unemployment among hired agricultural labourers.
This is almost wholly of a seasonal kind. In the busy seasons the
more usual situation in nearly all parts of South Asia is rather one
of shortage of labour. Even the seasonal unemployment of hired
labour seems to be rather limited, as far as can be judged by the
somewhat sporadic statistics available. 1 The actual under-utilization
of labour seems to be concentrated far more on the masses of small
peasants and tenants, but on closer inspection it seems very doubtful
if this under-utilization of potential labour time can meaningfully
be regarded as an available over-supply of labour. The fact is that
in several ways, not to be detailed here, the social structure and the
attitudes to work have been adapted to a low work performance.
It is true, on the other hand, that there is normally a considerable
pressure of over-supply of tenants in the market for leases of land,
but this must be seen as primarily the result of the preference for
the independent status as a cultivator rather than the debasing one
of a wage-labourer. Thus, the over-supply on the market for leases,
resulting in share-cropping of tiny plots of land, may well go together
with shortage of labour for hire.
If this is broadly correct, some consequences follow for the
possibilities of employment policies - especially for the scope for
mobilizing a supposed 'savings reserve' in the Nurksean sense.
This must here be left aside as not belonging to our main theme
which is that of agricultural expansion. Let us again compare with
the situation in Europe in the first half of the nineteenth century.
The agricultural innovations which were then spreading - fodder
crops, sugar, potatoes, increased livestock- all contributed to re-
duce the seasonality of agricultural work, which must have been
very pronounced before these innovations were introduced. In the
climatic conditions of South Asia, the scope for raising labour pro-
ductivity (taken as output per man and year) through intensification
1 All-Indian Agricultural Labour Enquiry 1950/51, New Delhi, 1955. On the
face of it, this report shows fairly high rates of unemployment, hut the stlfndard
of' full employment' adopted is that of 365 working days in the year.
220
of the cropping pattern must be even larger (where the problem of
irrigation can be solved) than it was in Europe. Indeed, the reduc-
tion of the seasonality of agricultural work seems to be one of the
chief means by which the problem of food shortage can be solved
without running up against the barrier of seasonal shortages of
manpower. However, for the reasons just hinted at- the structure
of the agricultural enterprise and the deeply imbedded attitudes to
work - the institutional resistance to the realization of these potenti-
alities is far stronger than it was in the pre-take-off period in
Europe.
Likewise, the over-supply of bidders in the market for leases of
land makes it difficult to implement even modest structural reforms
such as the laws regulating tenure contracts (maximum rent and
security of tenancy), because such rules can easily be evaded by
recourse to the traditional, oral and informal share-cropping arrange-
ment, which can be camouflaged as wage-labour, if need be. As
already mentioned, the attempts to reform tenure systems some-
times result in the relapse into forms of tenure even more insecure
than those it was intended to improve. 1
To this must be added an important difference between South
Asia now and Europe then. Even if the view of the true amount of
over-supply of labour intimated above is correct, the widespread
belief that there is a huge surplus of manpower is in itself a force
tending to prevent the rationalization of the agrarian structure.
Such susceptibilities did not exist in Europe,Z but in South Asia
today (and in under-developed countries generally) the fears of
aggravating the employment situation often stand in the way of the
formulation and pursuance of clear goals for structural reform and
technical change in agriculture. This general statement can be
specified under three heads:
(a) The agrarian reform measures actually undertaken or con-
templated are coloured by a fear of doing anything that has
the smell of eviction. This is in sharp contrast with the social
transformation in European agriculture which was a brutal
affair and largely took the form, not of benevolent legislation
1 In India, the shift of power from the big landlords (the zamindari) to the
peasant middle class is believed to have been accompanied by an increase in the
incidence of share-cropping. In Ceylon, it was found that settlers given land in
the new settlement schemes on waste land leased part of their land out on crop-
share.
• Sometimes the exact opposite was true, i.e. agrarian reform was hastened by
labour shortage. For instance, in Russia and Germany, the pressure for the
abolition of serfdom resulted in part from the shortage of labour for non-agricul-
tural pursuits. In turn, the shortage of labour available for work on the' seigneurial'
estate after the 1861 reform gave a push to rationalization.
221
but of forcible eviction, riding rough-shod over the estab-
lished right of small people. Even the emancipation from
serfdom was often, under one aspect, a kind of eviction. 1
(b) The prevailing ideas of a large surplus of labour also tend
to push into the background the question of consolidation of
holdings. The reasoning - more or less explicit - seems
to be that increase in labour productivity is not interesting
in itself, and may indeed be socially undesirable, unless it is
accompanied by a much increased productivity of the scarce
factor, land. By contrast, in Europe the elimination of strip
cultivation and fragmentation was seen as a way of avoiding
the waste of labour.
(c) The idea that it is not really necessary, or even desirable,
to save labour also creates a luke-warm or even hostile atti-
tude to mechanization in agriculture, even where it could
also help to increase output per unit of land, for instance by
shortening the time required for vital operations, such as
sowing and harvesting. Also, this attitude is apt to dis-
courage research and experimentation for finding new
methods of mechanization adapted to the particular condi-
tions of South Asia.z
In summary, it can be said that the chief difficulty in changing

the agrarian structure in South Asia - and the chief contrast to
the European (and Japanese) experience- is that the aim of pro-
tecting the economically weak tends to come into. conflict with the
aim of rationalizing the productive structure of agriculture. In fact,
it is an outstanding feature of the agrarian reform policies carried
out so far that they tend to become biased in the direction of social
policy rather than of policies for the promotion of efficiency.
The results, mentioned above, of the fear of adding to the em-
ployment problem is only one example of this dilemma. Another
example is that of the ceilings on land holdings, the most important
recent attempt at agrarian reform in India, which is not even pre-
tended to be a step towards higher efficiency in production. One
need only compare this with the process of eviction, by which
agricultural progress in Britain was prepared, to see the contrast in
basic conditions. A further example is the lack of measures for
1 The emancipation of serfs implied not only their freeing from the tie to the
land, but also the loss of the right to work this land. In the shorter perspective,
the position of the East German Erbuntertan was hardly improved by his trans-
formation into a free agricultural wage labourer. In Russia, before the abolition
of serfdom, the freeing of serfs by the nobles was more frequent in times of famine
when they tended to become an economic burden ; an ukas of 1782 forbade the
freeing of serfs against their will (H. See, Esquisse, etc. op. cit. p. 179).
2 For instance, the problem of mechanization of work in wet rice fields.
222
consolidation of holdings and for the elimination of common pasture
rights. These are problems which cannot easily be solved without
hurting small vested interests, and knowing what stubborn resist-
ance was put up in some European countries where the peasant was
strong, for instance in France, we should not be surprised that so
little progress has been achieved in Asia.
Of course, this conflict between the two aims of agrarian reform
-justice and efficiency - is only one aspect of the difficulties of
formulating an economic policy apt to facilitate a take-off in the
now underdeveloped countries. As has so often been pointed out,
the quest for development, i.e. for rationalization of production,
arises more or less simultaneously with the quest for welfare policies,
and these two aims tend to dictate different solutions.
Looking at the agrarian problem from a slightly different angle,
we can sum up by saying that the policies of agrarian reform in
South Asia, as hitherto carried out, do not reflect a clear decision as
to what kind of entrepreneur - big or small, owner or tenant,
private or co-operative - is to be the vehicle of the hoped-for
agricultural progress. However, in actual fact- and barring a
solution on Chinese lines - there does not seem to be a wide range
of choice left open. Among the types of entrepreneur mentioned
above as having dominated in various parts of Europe during the
take-offs, the first two - the 'British' and the 'Eastern' types -
are not likely to become important in South Asian agriculture. There
is little precedence of either the large-scale capitalist tenant holding
or of the 'seigneurial' estate under direct cultivation, and a policy
to promote such kinds of large agricultural units would be highly
unpopular with the politically strong middle-layer of peasants. Since
nobody would suggest that share-croppers and other small tenants
could become an element of agricultural progress, we seem to be
left with the peasant-owner.
What then, we may finally ask, is the chance of progress, suffi-
ciently rapid to carry a take-off, under the auspices of the peasant-
owner ? Against the background of European experience, the chance
might not be rated very high. But before jumping to a pessimistic
conclusion, there are at least two considerations we must take into
account. First, the idea of the immobile 'Asian peasant', unrespon-
sive to market signals, is perhaps an over-simplification. The
economic history of South Asia, especially in Burma and Indonesia,
provides some quite striking examples of how new profitable oppor-
tunities, with new crops and new markets, were quickly seized by
the peasants. Secondly, there is the new factor of Community
Development which, from one point of view, can be seen as an attempt
223
to make up for the lack of an adequate type of entrepreneur in agri-
culture. Community Development has perhaps not yet had a fair
chance to show how effective it can be in stimulating initiative among
otherwise tradition-bound peasants.
But even if a rather optimistic view is taken of the degree of
dynamism of which peasant agriculture may prove capable if aided
by official efforts of Community Development and the like, the
question is how rapidly the needed change in attitudes can be effected.
Will it take a decade - or a couple of generations ? This question
has an important bearing on the very idea of a take-off. It is the
essence of the Rostow hypothesis of the take-off that to arrive at
sustained growth a country must pass through a fairly short period
- a couple of decades - of distinctly accelerated growth. If this
view is accepted, it can be argued that the change in peasant agri-
culture, even on favourable assumptions, would be too slow to effect
the needed break-through (unless, of course, the food problem were
solved by continuous and massive foreign assistance). The corollary
would then be that the agrarian structure needs an overhaul as
thorough as that made in China, where the manager has been substi-
tuted for the small peasant or share-cropper, and the whole lay-out
of the village land has been changed. But it is also possible to argue
that the now underdeveloped countries need not necessarily pass
though a distinctive 'take-off' period, but can more gradually and
slowly creep into the stage of sustained growth. I wanted only to
state this problem, not to attempt to give an answer to it.
Chapter 13
AGRICULTURE AND ECONOMIC

DEVELOPMENT
BY
0. G. de BULHOES
Brazilian Institute of Economics
I. THE EMERGENCE OF MERCANTILISM

IT is often said that 'history repeats itself' and we are certainly
seeing today in many Latin-American countries the resurgence of
ideas and events experienced before in France and England during
the sixteenth and seventeenth centuries.
A few months ago industrialists from the State of Sao Paulo
asked the Federal Government to forbid the export of wool so
that the domestic market would not be left without such an important
raw material. Their request was granted in the same manner as
during the reign of Queen Elizabeth.
If the attitude of these industrialists had been formed only by
profit-making motives, and if the government had agreed out of
weakness, we should have had just one more example of pressure
groups at work. It happens, however, that their reasons were
ideological ones. There was a sincere conviction that such a measure
was in the best national interest, a conviction based on the premise
that the development of a country is maintained by industry rather
than by the export of primary products. This is a repetition of the
economic view which prevailed during mercantilism, when special
importance was given to manufactured products, because the export
of such goods enables a country to obtain more money per unit
exported.
II. THE LIMITATIONS OF AGRICULTURE

The following opinion, given by Hans Singer of the United
Nations, expresses in modern context the same ideas that were
operative during the sixteenth and seventeenth centuries :
'If we apply the principle of O{'portunity costs to investments
in food products and raw matenals exported to industrialized
aas
countries, we shall see that these are less profitable than the
normal results of other investments. The Ceylon tea plantations,
the Iranian oil wells, the Chilean copper mines and the Gold
Coast cocoanut plantations can be more productive than agri-
culture in all those countries ; but they can also be less productive
than the industries that could be developed there.' 1
Professor Myrdal corroborated this idea in his recent lectures in
Cairo. From a more practical viewpoint we have the testimony of
Professor Oskar Lange, who, when speaking in Rio, at the invitation
of the Getulio Vargas Foundation, stated that the great industrial
expansion in Poland in the last few years has been effected without
paying attention to agriculture.
Other modern authors, however, like Rostow, pay great attention
to agriculture. But Rostow himself makes high productivity de-
pendent upon the development of certain industries. In his opinion,
agriculture is an initial but not a sufficient condition for development.
He thinks that primary products by themselves do not lead directly
to progress. It is indispensable to call on industries of 'high pro-
ductivity'.
Professor W. Nicholls, who in April of this year submitted to
your Association an interesting paper, 2 although emphasizing agri-
culture as being extremely important, says that 'industry creates an
intellectual surrounding which does not attach itself to tradition as
much as agriculture does, thus developing a managerial class'. In
other words, the entrepreneurial mentality cannot be found in
agriculture.
There are, as you can see, two points to be considered : the
insufficient productivity in the primary production, and the lack
of a managerial mentality in the sectors of this production.
We shall try to prove that these two statements result from
partial observations, and although true in some cases, they do not
apply in others. For this reason we shall attempt to propose a more
general explanation.
First, we must not relate the development of a country or even
that of a region to a quick expansion. The image of the take-off
is a happy one to show the initial movement of the economic develop-
ment. However, it is important to consider this tendency com-
patible with expansion and contraction taking place within a shorter
or longer period with no need for spectacular speeds.
What experience proves to be indispensable is the establishment
of an initial propelling source which can be either agricultural or
1Revista Brasileira de Economia, setembro de 1950.
2'The Place of Agriculture in Economic Development', Round Table on
Economic Development, held at Gamagori, Japan, April 1960.
226
Bulhoes - Agriculture and Economic Development
industrial. The main thing is efficient production capable of pro-
viding resources for re-investments. There must be a proper
technique to produce means of saving, and at the same time there
must be wisdom in using these savings.
Ill. SPECIALIZED PRODUCTION AS AN ELEMENT

OF ECONOMIC DEVELOPMENT
Under paragraph II we transcribed an opinion by Hans Singer
who ascertains the probable advantage of industrial production
against that of the raw materials in the Gold Coast, Ceylon, etc.
We would agree if Mr. Singer had said that those countries might
make more progress if they diversified their production, rather than
insisting on expanding one specialized product. Investing in a new
activity can be more productive than the additional investments in
an already very highly developed product. But to state that the
country would have been in a more advantageous position had it
created a certain number of industries instead of those of tea or
cocoanut is, in fact, to forget the principle of opportunity cost.
The same could be said of the 'Paulistas '. If they had invested
in activities other than coffee plantation they could hardly have
achieved the progress they did. However, this does not mean that
once a certain specialized production level is achieved it is still
advantageous to go on expanding even though the cost remains
constant. The elasticity of supply may not be met by a correspon-
ding elasticity of demand.
We Brazilians are aware of the lack of elasticity in coffee demand,
since on previous occasions, big price decreases failed to reflect
an increase in demand. On the other hand, we must confess that
the phenomenon was not studied properly, because the Brazilians
adopt the alternative of 'increasing the value' of coffee. This bitter
experience is making us understand that low elasticity is not exactly
a synonym of zero elasticity and that the relative excess of con-
sumption in a very important consuming country is far from being
an obstacle to the increase of sales in other countries.
Needless to say, the fall in prices, even in the case of products
of inelastic demand, does not mean necessarily a loss for a producer,
since this is the alternative of the increase in productivity in the
form of cost reduction. To produce the same quantity of a certain
product in a shorter time or reduced area of land are different means
of cost reduction.
As we have seen, the high productivity of a specialized product
227
is limited in its possibility of expansion. An increase in the per
capita income can only be achieved if production is diversified,
especially in countries with rapidly increasing populations. Thus
the specialized product, no matter whether it be agricultural or
industrial, will not be able to ensure by itself the progress of a
country. The Paulistas would not have sustained their progress,
had they restricted themselves to coffee production ; nor could the
English have raised their standard of living so considerably had they
confined themselves to the production of cloth.
It is not true to say that agriculture is insufficient to sustain
continued progress because its productivity is lower than that of
industry. The problem of development cannot be solved, if exam-
ined from this standpoint. What must be said is that although high
productivity may be obtained in one field or another, whether
agricultural or industrial, it is indispensable to diversify production,
while, at the same time, it is impossible to do this in a satisfactory
manner, unless there is a highly efficient specialized production,
capable of providing resources for diversification. Thus, instead
of saying that agricultural productivity is a, pre-condition for de-
velopment whereas industry is a condition for development, it
would be better to think that a highly efficient specialized produc-
tion is a pre-condition for development, and that development will
only be maintained if there is production diversification, in addition
to the specialized product.
From what has been explained in the previous paragraphs, we
can draw the conclusion that the development problem is related
to the initial exploitation of a highly efficient product, capable of
supplying savings for investments in a variety of products. There-
fore, it is not a question of what comes first, whether agriculture or
industry. The pre-condition is based on the existence of a product
that can bring resources to the region, which, if properly invested
in other activities, will ensure the progress of that region. The
following excerpt from Professor Kindleberg's book is self-ex-
planatory:
'The growth process is not sufficiently understood. It is not
clear, for example, why economic growth began in Britain, con-
tinued rapidly, and ultimately stopped; or why, in some countries,
it has never begun as a continuous self-reinforcing process. Brazil,
for example, has had separate booms in sugar, rubber, cotton,
and coffee, each of which under different conditions might have
been expected to lead to a 'natural' process of economic growth.
However many times tl1e plane went down the runway, it had
not, prior to World War II, effected a take-off.' 1
I Charles Kindleberg, International Economics, p. 375.
228
In fact, Brazil had several opportunities to start on a 'natural'
process of economic growth. However, not all the opportunities
developed into diversified production. It is interesting to compare
two specialized products : rubber and coffee. The interest of this
comparison lies in the fact that both appeared more or less at the
same time and in two different regions of the country : the first in
the Amazon and the second in the State of Sao Paulo. Both sup-
plied more or less the same amount of foreign currency gained from
the additional exports. The results, however, were entirely different.
In the case of the Amazons the profits obtained through the rubber
monopoly, either because the period was not long enough, or be-
cause of the natural difficulties of the region, did not allow a diversi-
fication of production. In the case of the State of Sao Paulo, the
monopoly period was not only a little longer, but, above all, its
production required organization and overhead capital. These addi-
tional requisites gave rise to the creation of organizations which
facilitated the diversification of production, thus consolidating the
profits of the specialized product. This is proved to be true by the
fact that in 1930, before the Second World War, when the first crisis
which affected coffee production took place, the State of Sao Paulo
was already on a very high economic level, in spite of the tremendous
hardships arising from the big fall in the price of coffee.
Let us examine, therefore, the production of coffee in the State of
Sao Paulo, which is an instructive example and one not often quoted.
IV. AN AGRICULTURAL TAKE-OFF

Precisely a century ago the coffee exported by the port of Santos
represented a little more than 10 per cent of Brazilian exports. Ten
years later, in 1870, this percentage had gone up to 16 per cent,
and later increased to 25 per cent. In 1890 it had already reached
half of the total exports. In thirty years the bulk of the exports
had been multiplied by ten: from 250,000 or 300,000 bags a year,
it had gone up to a total varying from 2, 700,000 to 3,000,000 bags.
At the beginning of the twentieth century the level of exports was
from 7,000,000 to 10,000,000 bags. In forty years the production
of Sao Paulo had increased forty times.
The whole infra-structure of the production must have gone
through great changes in order to produce such a rapid growth. In fact,
evidence shows a great capacity for development among the farmers :
'The development of coffee in the surroundings of Campinas
made it difficult for the product to be transported by animals
229
The Ec01Wmics of Take-off into Sustained Growth
from a distance of more than 200 kilometers to the port of Santos,
which also needed to be equipped to handle a growing tonnage.
A little before 1860 an estimate was made of the loss of 500,000
arrobas of products because of the absence of adequate means of
transportation.
'The construction of a railroad between Santos and Jundiai
was entrusted to an English company. But before it was inaugur-
ated in 1867, the need was felt to extend the railroad farther into
the interior, and the principal farmers from Campinas, Rio Claro,
Limeira and Araras got together and organized the Cia Paulista
de Estrada de Ferro. At the end of 1868 a capital of 5,000 cantos
was subscribed. In 1872, the train between J undiai and Campinas
started to operate. A second company was created by farmers :
The Mogiana.' 1
If we recall that the annual value of exports was around 10,000
contos, we can understand the enormous financial importance of
undertaking the construction of these two railroads.
The investments made were so large that in 1883 the following
testimony of a visitor was recorded :
' Railroads are the main sources of wealth and it is only with
their help that production has reached the level it has today.
Thus, in the province of Sao Paulo there are in operation the
Northern Railroad (Rio-S. Paulo) ; the S. Paulo Railway (Santos-
S. Paulo); the Cia Paulista (S. Paulo-Jundiai-Campinas-Rio
Claro); the Cia Mogiana; the Cia Sorocabana; the Cia Ituana,
connecting Itu-J undiai.' 2
Between 1867 and 1900, the net of railroads increased from 139
kilometres to 3,313 kilometres. In the meantime, a group of
Brazilian investors created a company to improve the port of Santos.
In 1901 a Canadian company started to supply hydro-electric energy.
Supported by the railroads, the supply of electric energy, and immi-
gration, the 'Paulistas' not only increased coffee production, but
also effected a diversification of production in agriculture and
industry. From 1900 to 1910, industrial production increased by
70 thousand cantos to 189 thousand contos. Recalling that coffee
exports were from 1901 to 1905, an average of 267 thousand cantos,
and, from 1906 to 1910, an average of 326 thousand contos, we shall
see that the value of the industrial production of 189 thousand
contos, in 1910, was already very important. During the ten-year
period that followed, industrial production reached the same level
of value as the coffee exports.
1 Pionniers et planteurs de Siio Paulo, Pierre Monbeg.
• Estado de Sao Paulo, 4• centendrio de S. Paulo, Banco do Brasil.
230
In the State of Sao Paulo a remarkable increment in the actual
income per capita was registered between 1901 and 1912, remarkable
because this was a period in which the government decided to raise
the value of its national currency. During this period, the exports
of the port of Santos increased from the average value of 7 ·4 million
pounds sterling in 1901-3 to 9·7 million pounds sterling in 1910-12,
while the population of the state increased from 2 million to 3 million
inhabitants. If the income had been limited to this total we would
have had an increase in per capita income corresponding to 4·7 per
cent per year. However, we must add to this total the receipts
collected from other agricultural and industrial products, which,
between 1901 and 1912, show an increase from 70 thousand contos
to 254 thousand contos. The increase in the actual income per
capita must have been higher than 4·7 per cent per year, which in
itself is significant.
In the light of this data I believe that we can consider the State
of Sao Paulo as one of the most convincing cases of agricultural
take-off.
Many other examples of diversification of production which are
even more closely related to agriculture than in the case of the
State of Sao Paulo could be mentioned. The cases of Denmark,
New Zealand, Australia, and Argentina are well known. The case
of ancient Greece is a good illustration.
'What did the Athenians do with their poor country ? We
know that they did the things which made Athens "the education
of Hellas ". When the pastures of Attica dried up and her plough-
lands wasted away, her people turned from stock-breeding and
grain growing - the staple pursuits of Greece in that age - to
devices which were peculiarly their own : olive-cultivation and
the exploitation of the subsoil. The gracious tree of Athena not
only keeps alive but flourishes on the bare rock. Yet man cannot
live by olive oil alone. To make a living from his olive groves the
Athenian must exchange his Attic oil for Scythian grain. To
place his oil on the Scythian market he must pack it in jars and
ship it overseas- activities which called into existence the Attic
potteries and the Attic merchant marine, and also, since trade
requires currency, the Attic Silver-Mines.' 1
V. PREJUDICE AND A PRIORI JUDGMENT

It is customary to talk about the retrograde attitude of farmers.
But if one visits a village, whose inhabitants do artisan work, one
1 Arnold J. Toynbee, A Study of History, p. 90.
2JI
Tk Economics of Take-off into Sustained Growth
can also see the most primitive methods. The same applies to
fishermen. The old methods are not just typical of farmers, but are
common to any field of activity where people are indifferent to new
techniques. But the retrograde attitude is a more complex problem.
Even though new technique is accepted, people may be so influenced
by prejudice that they may remain backward.
The relationships which are often established between the
stabilization of money and economic stagnation, between poverty
and agricultural production, between colonialism and the export of
raw materials, between wealth and heavy industry, represent a series
of half-truths which can very easily be changed into prejudice which
is so harmful to good economic judgment.
One of the Brazilian regions which was making satisfactory
progress is about to become victim of this bias. It is a fact that
Brazil for several years adopted an exchange policy by which the
currency was overvalued. This measure had the purpose of facilita-
ting the import of equipment, raw materials and fuel, so as to foster
the country's industrialization.
This was a measure that could be carried out because coffee
was the main source of foreign currency and its price could be
sustained at high levels in foreign markets. But the main effect of
this policy was to increase competition with the Brazilian coffee
producers and to reduce other Brazilian exports, including those of
Rio Grande do Sul, the progress of which depends mostly on the
export of meat, wool, rice, and various other products of its diversi-
fied activities.
The realization of the destructive power of the above mentioned
prejudice has another aspect in the case of Rio Grande do Sul.
Because we have little fuel and many waterfalls, our engineers
placed more emphasis on the construction of hydro-electric power
plants and neglected the thermo-electric plants, especially since
fuel imports were considered to be the reason for the lack of stability
in the balance of payments. 1 Rio Grande do Sul, however, is a
state that does not have many waterfalls, but it has coal, although of
inferior quality. Since little attention was paid to the thermo-
electric plants, and there was much concern with fuel import, Rio
Grande do Sul, instead of expanding the thermo-electric energy,
developed a large-scale campaign for utilization of its coal, for rail-
road and maritime transportation. But this campaign was soon
proved to be fruitless, because with the policy of the artificial ex-
ternal increase in the cruzeiro value, mentioned in the previous
paragraph, the use of fuel oil was found to be so convenient that
1 Conselho Nacional de Economia : Testimony of John Cotrin, May 1960.
232
BulhOes - Agriculture and Economic Development
Rio Grande do Sul decided to build thermo-electric power plants
using fuel oil.
There are also the cases of a priori judgment. Frequently the
poverty of a country is pre-judged in the light of the high percentage
of its agricultural income. There are several reasons why I say
this is an a priori judgment : first, because a country such as Den-
mark, which shows a much higher percentage of the agricultural
product than other countries do, in relation to the total national
product, nevertheless cannot be considered a poor country ; second,
because the percentage of agricultural production can include a
considerable share of exports, which are balanced by imported
equipment and raw materials. In this case, the exports' share of
the agricultural production is in fact, an 'indirect' production of
equipment. If we deduct the exports from the Brazilian agricultural
production, we shall find that this production is not even 20 per cent
of the national production. It is a similar percentage to that of
Denmark. In other words, a part of the Brazilian agricultural
production signifies in fact a production of equipment in the United
States, France, Germany, and Japan. But greater still is the illusion
as to the significance of agriculture, considering its small percentage
in relation to the total product. The small proportion of the agri-
cultural product in comparison with the national product in countries
like the United States, where the percentage is only 5 per cent, give
rise to serious mistakes in interpretation.
On this subject, it must be said that the quick decrease in the
proportion of the agricultural product, as compared with the national
product, comes mostly from the considerable increase in services.
A great part of these services are related to the agricultural product.
We should transcribe the following words by Professor Theodore
Schultz:
'There are two major differences between industry and agri-
culture with regard to technology. First, the basic and applied
research in the sciences that contributes to the advances in agri-
cultural technology is not done by the firm (farm) but by public
agencies, namely, the state agricultural experiment stations and
the U.S. Department of Agriculture. In Industry most of this
research is done by the firm and, since it is costly, only large
corporations can afford to engage in it. In agriculture, by contrast,
the necessary research has been not only institutionalized but
socialized. The small family-type farm is obviously in no position
to finance, organize and conduct the highly complicated, costly
studies entailed in agricultural chemistry, plant and animal breed-
ing, feeding, agronomy, and the many other applied sciences that
enter into farm technology. It is, therefore, appropriate that the
233
The Economics of Talu-off into Sustained Growth
cost be borne by society as a whole, through the agency of the
government. Since the research is done by public agencies, the re-
sults are and should be available to any and all producers. Any
discoveries improving the technology, therefore, do not become
the property of a particular group of farmers.' 1
Without taking into account the value of these researches nor
the services of technical assistance but only those of the conserva-
tion of agriculture resources, the United States spend close to one
billion dollars a year. These are data which show the lack of con-
sistency of those who disregard the connexion between services and
agricultural activities. In other words, the value of the agricultural
product does not convey all the importance of agriculture in the
total national product.
It should further be pointed out that the small percentage of
farming is far from being insignificant in relation to other produc-
tion as it is generally assumed, especially when one thinks of the
oil and automobile production. The following explanation of the
national product in the United States places the problem in its due
perspective :
National Income by Industry
(millions of dollars)
1956 1958
Agriculture, forestry, and fisheries 16,087 18,971
Mining 6,243 5,302
Contract construction 19,515 19,879
Manufacturing :
Food and kindred products 8,799 9,093
Textile-mill products 4,382 3,940
Chemicals and allied products 7,739 7,967
Products of petroleum and coal 4,344 3,828
Primary metal industries 10,891 8,964
Machinery 12,182 10,634
Electrical machinery 7,521 8,953
Automobiles 7,227 5,927
Neither the oil, nor the automobile nor the machine industry,
separately, equal the value of farming.
The breakdown of the national product in the United States
shows the extraordinary diversification of its production. None of
the different items which contribute to the formation of the national
product stand out very conspicuously. It is exactly in this point,
perhaps, that we can distinguish with greater precision a developed
1 Agriculturl in an Unstabk Economy, p. 75.
234
BulhOes - Agriculture and Economic Development
country from one in the process of development. In the first, the
national product breaks down in various items of equal impor-
tance. In the second, there are one or two specialized products
which in value stand out distinctly from the others.
The diversification of production in countries like New Zealand,
Australia, Denmark centres around agricultural productions. In
Brazil, however, save in a few regions, the diversification will com-
prise activities other than those of farming. The Viscount of Cain!
predicted such a diversification. At the very beginning of the
nineteenth century, right after the publication of the Wealth of
Nations, this prominent Brazilian hastened to tell both Brazilian
and Portuguese about such an important work. And concerning
Adam Smith's criticism of the physiocrats, the Viscount of Cain!,
emphasizing his views, brilliantly conveyed his ideas with the
following remarks : 1
'Adam Smith criticized the French economists who urged the
promotion of agriculture to a rather excessive degree, proposing
that manufactured goods and marketing be curtailed, treating
them as an industry of inferior and secondary importance. . . .
Any sensible person cannot help feeling happy at seeing well
cultivated fields. The whole matter consists in providing better
ways of promoting agriculture along the lines in the proportions
which are most suitable to each country and in a balanced pro-
portion to the other industries.'
VI. SPECIALIZED PRIMARY PRODUCTS AND THEIR

MARKETING PROBLEMS
We stated earlier that there may be limits to the expansion of
a specialized primary product. What we have seen, however, is
the transfer of the factors of production to other activities to the
detriment of specialized production, under the false assumption
that such production yields inferior productivity. The governmental
measures taken in many countries are a reflection of these ideas,
intensified and made general by ideologies which associate primary
products with colonialism. But above these prejudices there are
facts of unquestioned economic validity, namely wide price fluctua-
tions to which primary commodities are subject. This explains why
the governments of Latin American countries have favoured with
greater enthusiasm the establishment of industries to replace im-
ports rather than the improvement in the efficiency of the enterprises
1 Economia e politica economica, 0. G. de Bulhaes.
235
which may increase the exports of raw materials or agriculture
commodities.
Therefore, besides the false notion about agricultural versus
industrial productivity, and the related political preconcepts, there
is the fact of the wide fluctuation of prices of primary products,
whether in the domestic market or international market.
In the industrial production there is the possibility of adjusting
the supply with reasonable precision. The scale of production is
estimated according to the demand. If for any reason there is a
contraction in demand, production is immediately reduced to increase
again when demand recovers. In agriculture, however, there is the
climatic factor. It is an uncertain element which brings quite
complex results when it concerns durable plantations, that is crops
which take several years to mature. Even if there is no consumption
contraction there may be an over-production. The trees already
planted continue to produce and sometimes by force of the climatic
conditions bear fruit with redoubled productivity. We remain,
therefore, in the presence of opposing tendencies which get together
to force prices down. There is static consumption coupled with
increasing production.
Storage is the advisable measure : since one cannot control the
production at the source, one controls the supply in the commercial-
ization phase. When the product becomes scarce, the warehouses
supply the reserves which they have available ; when the production
is overabundant, the warehouses get into the market and buy the
surplus.
We have said that the warehouses 'get into the market and buy
the surplus', but at what price ? Here is the problem.
The storage measure has been subordinated to the policy of
price maintenance which results in catastrophe. Instead of accumu-
lating stocks to control supply, when one has in mind price mainten-
ance, the stocks turn out to be evidence of induced overproduction.
The purpose of storage is to avoid the intensity of price fluctuations
and is not in any way a means of price stabilization.
The problem becomes more serious in the international sphere,
especially with countries the exports of which are almost wholly
dependent upon one or two products ; this is not only on account of
competition, but also because the fall in the export receipts may
influence the value of the country's currency in the exchange market,
which in turn, depending on the circumstances, may force down
even further prices of commodities in the international markets.
Many have been the attempts at international co-operation in
price stabilization of primary goods. Even though the interests of
236
BulhOes - Agriculture and Ecorwmic Development
producers and consumers are in principle opposed, we have reached
a stage of comprehension which allows a universal understanding
among producers and consumers.
Price stabilization, however, is so difficult that not even the pro-
ducers themselves can come to an agreement. Price stability is
difficult not only because of administration problems. Under-
standing among producers is always possible, but the price which
is established tends to be above the cost of production of marginal
producers. Any improvement in productivity changes the minimum
price into a very profitable sale price. And from this moment on,
it is impossible to avoid over-production.
The guarantee of the sale price of a product is only compatible
with the prevalence of rising costs. In this case there would not
be expansion from the part of existing producers nor would there
be incentive to new producers. But it is precisely in countries in
the development state that improvements in production most fre-
quently occur. In this case, the stability of prices may turn out
to be a strong stimulus to over-production.
I believe this is the cause of repeated failures in the attempts
made or the frequent filings of recommendations concerning price
stability of agricultural products, including that of Bretton Woods ;
at that conference the International Monetary Fund and the Inter-
national Bank were established.
In the conference in question, it was recommended to the par-
ticipating governments that, besides putting into effect the financial
measures discussed in the conference, they should try to come to
an agreement as soon as possible as to the means of:
1 - reducing obstacles to international trade and promoting
through other means mutually advantageous commercial and
international relations ;
2 - promoting a balanced trade of raw materials at equitable
prices both to producer and consumer.
The fact that stands out is that in one way or another all the
recommendations urged by the conference were carried out by the
participating governments, except the clause relating to the promo-
tion of a 'balanced trade of raw materials at equitable prices both to
consumer and to producer'.
We may be sure that public opinion in the countries which buy
raw materials is in a condition to realize the unfair profit that con-
sumers make when it sees a remarkable reduction in the prices
of raw materials without this causing in its turn a drop in the prices
of manufactured goods that are exported. On the other hand, the
exporting countries know how illusory is the extra profit of a sharp
237
increase in price of primary products. The problem of fluctuation
of exchange receipts as a consequence of prices fluctuation of primary
products is, therefore, well understood, both in developed and
underdeveloped countries. Consequently, if a satisfactory result
has not been attained, it is due to the idea of stabilizing receipts
through prices stabilization. It is on this point that one finds the
obstacle to the solution. It would be preferable to think of a partial
stabilization of receipts without price stabilization.
Let us suppose that the price of coffee is 40 cents per pound.
The idea, however, is not to fix the price, but to ensure receipts in
foreign currency. If the price goes down, say to 30 cents, which
will benefit the consumers and be a hardship to the producer
countries, a consumption tax would be imposed on coffee, corres-
ponding, let us say, to 30 per cent of the difference between 40 cents
and the new price. The yield of the tax would be turned over to
the International Bank to be applied in the countries which export
raw materials, the price of which have fallen below the level estab-
lished.
This would be an economic agreement based upon the principle
of the reciprocity of interest. Whoever benefits from a decrease
in price ran afford to bear a tax assessment that will take away part
of the surplus obtained. No one is asking him to pay more. In turn,
the producers must content themselves with less income because
something has affected their production. But the formation of social
capital must not suffer as a result. Consequently, the countries
involved must be able to obtain loans, without interest, to carry on
their investment programme. Once the debt is paid, the amount
is returned to the Treasury of the importing countries. Thus, the
cycle of operation is complete.
VII. CONCLUSION
These considerations, if correct, show that primary products
in several countries which are in the development stage, offer a
high degree of productivity. I think that what Professor Haberler
said on this subject in a lecture delivered in Rio and later in Cairo
is correct:
'a high commercial level, with a concentrated number of goods,
is still preferable to a limited level of commercial activity, although
diversified'.
Brazil could be richer if besides coffee and cocoanut other pro-
ducts were exported in larger quantity. But, in order to diversify
2J8
Brazil should not neglect the large economic value of the coffee and
cocoanut production, since a great part of its economic development
is due to these two products, of which it has been the supplier of
the world market.
We have been able to progress because we have understood
how to diversify our production with the results of the specialized
products. The State of Sao Paulo, in 1960, is an important indus-
trial centre because the 'Paulistas' have shown their ability in
re-investing the gain from coffee production in a variety of economic
activities. Usually specialized production in agriculture requires
organization and overhead capital. These requisites facilitate the
diversification of production. The production of rubber in the
Amazon being morP- a trade of collecting wild things than of organ-
ized production is less favourable to reinvestment.
It is sometimes said that rich countries are those which have
in their soils energy resources, especially those of coal and petroleum.
The intelligence of those men who dedicate themselves to research
can overcome the lack of these elements. The world is full of
examples.
A Brazilian writer, Viana Moog, in a book called Pioneiros e
bandeirantes, tries to follow the development of the United States and
Brazil. He shows the enormous natural advantages of the soil of
the United States. He mentions other conditions less convincingly.
But, at a certain point, he shows a series of extraordinary and exceed-
inglyingenious inventions in the United States, which reveal not only a
sharp initiative, but also a tremendous ability to be made applicable
to production. Fortunately in Brazil we have evidence of high initiative
and of a fair capacity to invention, as demonstrated by the great
progress we have achieved in civil engineering. We lack, never-
theless, a more adequate education in understanding better the great
economic and social problems. We must understand the facts so
as not to let ourselves be dominated by prejudice, the effects of
which were outlined in Section IV. Therefore, it is necessary to
disseminate a minimum of principles to facilitate economic under-
standing, in order that we may be able to witness the miracle men-
tioned in the Biblical story, so beautifully recalled by Toynbee,
when he refers to the power of the people of Israel at the time of
Solomon, because the King instead of asking for riches prayed
God to give him as divine gift the capacity of understanding.
12 239
Chapter 14
CAP~ TAL FORMATION IN THE TAKE-OFF

BY
A. K. CAIRNCROSS
University of Glasgow
I. THE ISSUES
THE wise men who invited me to introduce a discussion on capital
formation and its contribution to take-off have shown a flattering
confidence in my gamesmanship. This fourteenth session of the
conference has the misfortune to relate to a subject that is by no
means foreign to the preceding twelve and overlaps with the re-
maining two. Of necessity, however, it has been prepared in ignor-
ance of their contents. I can, therefore, neither avail myself of the
fruits of my colleagues' researches nor refrain from trespassing on
ground already covered or about to be covered. I must plead guilty
in advance to the charge of not knowing what we have been talking
about. I plead guilty also to the more serious charge of not know-
ing what we are talking about. The concepts of capital formation
and take-off are not self-explanatory and are capable of very different
interpretations. In the time at my disposal, however, I must accept
them in all their haziness, abstain from anything more than an
interrogatory aside, and plunge almost at once into the issues of
substance, hoping that the discussion will not be prevented by any
shortage of working capital from taking off into sustained growth.
II. THE RELATION OF CAPITAL FORMATION

TO TAKE-OFF
Any attempt to generalize on the relationship between capital
formation and take-off suffers from five principal handicaps.
First of all, the apparatus of thought and analysis which econom-
ists have devised for studying capital accumulation in advanced
countries is not necessarily applicable. Many of the models that
seek to relate capital formation to economic progress do so in order
to show how difficult it is to move steadily along a continuous path
240
Cairncross- Capital Formation in the Take-off
of growth. But while it may be interesting to be reminded that
there is a certain connexion between the amount of alcohol con-
sumed and the unsteadiness of our subsequent movements, this
reminder does not help us to learn how to walk. We cannot assume
that capital plays the same part at the outset of industrialization as
it does once industry is well established or in countries that are
already fully industrialized. There is, for example, more discon-
tinuity in the early stages than there is later on and this discontinuity
cannot be analysed in purely economic terms. Social change is
interwoven with economic change and may dominate both the
process of capital accumulation and the process of innovation that
lies at the root of economic progress. 1 In any society, growth can
never be a purely quantitative affair but is necessarily accom-
panied by changes in techniques, attitudes and institutions. In
the emergence of an industrial society, these changes are of peculiar
importance. They are not only the source of the more measurable
indications of growth but must find a place in any explanation of
how development begins. Thus it is not possible to analyse the
take-off in the same terms as sustained industrial growth.
Next, there is the absence of reliable data. Such indications as
exist of the movement of savings and capital formation in the early
stages of growth are usually fragmentary and not such as to permit
of confident generalization. In particular, data on investment in
griculture, by far the most important activity in pre-industrial
countries, is inevitably defective. In such countries, the problem
of measuring capital formation is aggravated by the more limited
role of the market and the consequent difficulty of imputing values
to the assets that are created. Many of these assets are, in any
event, intangible and consist in the acquisition of education, skill
and experience, the building up of commercial links and familiarity
with market opportunities, the establishment of standards of con-
duct, the improvement of public services, and so on. Expenditure
on physical assets may in these circumstances neither reflect the
true input of services tending to raise future productivity nor the
true contribution of those services to the wealth of the community.
Even if the conceptual problems could be overcome, the difficulty
1 Cf. S. H. Frankel, The Economic Impact 011 Under-developed Societiu (Oxford,
1953). 'The great growth of capital in the eighteenth and nineteenth centuries in
Europe was due • • . to the emergence of new types of social activity. "Saving-"
was not a mechanical act but the result of new attitudes in social behaviour. To
repair and maintain ; to think of tomorrow not only of today ; to educate and train
one's children ; to prepare oneself for new activities; to acquire new skills; to
search out new contacts ; to widen the horizon of individual experience ; to invent,
to improve, to question the "dead hand of custom", and the heritage of the past -
in all these . . . lay the causes of capital accumulation' (pp. 69-70).
2-f.I
remains of assembling continuous statistical series for capital, em-
ployment, output, and so on, for countries undergoing industrial-
ization. There is an increasing margin of error in such data the
further back in time they are carried ; and if use is made of con-
temporary estimates for countries that have not yet taken-off, there
are again large margins of uncertainty attending their use.
There is also a danger in generalizing from the experience of
the countries that have already undergone industrialization to those
that have not, unless we have reason to believe that the process of
economic growth follows a constant pattern and does not itself
develop. The very fact that they are not the first in the field condi-
tions the direction that development takes. in the late-comers. The
investment opportunities open to them are wider in some directions
and more restricted in others. They can make use of foreign
techniques, foreign technicians, foreign capital, and foreign equip-
ment in ways not open to the pioneers in industrialization. On the
other hand, foreign markets confront them with a different range
of choices ; they are much less likely than European countries were
to find outlets abroad for their industrial products. The minimum
scale on which investment projects have to be conceived ; the degree
to which it is necessary to rely on foreign co-operation ; the balance
between home and foreign markets ; the possibilities of state inter-
vention ; all of these have changed over the past century and all
of them affect the process of capital formation.
Moreover, there are important differences in the economic con-
ditions of present-day underdeveloped countries and the conditions
ruling in nearly all the countries that industrialized themselves
during the nineteenth century. The latter, with the exception of
Japan, were all, by the standards of the time, rich countries; the
former, by the standards of today, are almost without exception
poor countries. Development poses different problems for rich
and poor and nowhere so strikingly as in the matter of finance. The
problem of generating adequate savings hardly troubled European
countries as industrialization proceeded. Although marginal amounts
were borrowed abroad, and total intra-European investment reached
a substantial total, domestic savings financed all but a relatively
small proportion of investment in each country. This was true
also in the United States where foreign investment did, however,
play a key role in the capital market. In other non-European
countries, such as Canada and Australia, the magnitude of capital
requirements was indeed beyond the resources of local savings ;
but the circumstances of those newly settled countries, given their
investment opportunities and the average income which they already
242
enjoyed, were quite unlike those of all but a very few of the under-
developed countries of the present day.
There is a further difficulty in applying a stage analysis based
on the circumstances of last century to the wide range of under-
developed economies of today. Apart from Japan, nearly all the
industrialized countries were industrialized after they had been
equipped with the main institutions of capitalist society. The sub-
sistence sector occupied a much smaller place in the economy than
it now does throughout Mrica and much of Asia. Trade was highly
developed ; and when industrialization began, the heavy capital
requirements of urbanization coincided with those of an expanding
industrial structure. But in many countries where the market still
plays an almost peripheral role, urbanization is well advanced and
there are large foreign-controlled and capital-intensive enterprises
already established. In such so-called 'dual economies', capital
accumulation cannot be expected to trace the same path as it did in
Europe and North America.
With this point, we return to an initial query. To speak of
take-off in relation to underdeveloped countries begs a major
question. It appears to imply a power to compress within a com-
paratively short period of years a transition from one type of economy
to another. We are invited to contrast the role of capital in one
phase with its role in the succeeding phase of transition. But there
may be no such contrast - only a gradual and almost imperceptible
quickening of the process of change. If so, there may still be a
change in some industry or area, some institution or relationship,
that marks a decisive break with the past. But there is then no
obvious reason why the change should be one involving the scale
of capital formation. On one view of 'take-off' capital occupies a
central role that it need not occupy on another interpretation.
III. THE CAUSAL INTERCONNEXION BETWEEN

CAPITAL FORMATION AND GROWTH
This supposed central role of capital formation is one of the
principal issues on which the remainder of this paper concentrates.
I shall begin by examining the causal interconnexion between capital
formation and economic growth ; pass to the rise in savings that
is a prerequisite of sustained growth ; comment briefly on changes
in the capital-output ratio in the course of industrialization ; and
deal finally with the growth of a capital market. In each of these
sections I cannot hope to do more than outline a point of view.
243
I start from the issue of causation. There is general agreement
that, in all countries, the processes of economic growth and capital
accumulation are closely interconnected. It was in terms of this
interconnexion that the earliest theories of economic development
were formulated ; and in the work of modern economists, output
is still assumed to be limited by capital, whether there is abundant
labour or not. A high rate of capital formation usually accompanies
a rapid growth in productivity and income ; but the causal relation-
ship between. the two is complex and does not permit of any facile
assumption that more capital formation will of itself bring about a
corresponding acceleration in the growth of production.
In industrial countries this is only too obvious. Capital forma-
tion may assume forms, such as house-building or an addition to
liquid stocks, that are unlikely to add very perceptibly to produc-
tivity although they may yield a sufficient return to make them
worthwhile. If all capital formation were of this character, or
represented an enlargement of the capital stock with assets broadly
similar to those already in existence, it would be hard to account
for the rates of growth actually recorded. A moment's reflection
will show that even an average return of 10 per cent to capital in a
country saving 10 per cent of its income annually would raise
income by no more than 1 per cent per annum. 1 Similarly, efforts
to impute the recorded expansion in industrial production to the
additional labour and capital contributing to it invariably leave a
large unexplained residue. 2 It is necessary, therefore, to take account
of other influences, such as technical progress and improvements
in social and economic organization, which may operate through
investment, or independently of it, so as to raise the level of pro-
duction. These influences, if they take effect uniformly throughout
the economy in competitive conditions, will tend to swell the national
income without raising the average return to capital, the extra output
slipping through to the consumer, the wage-earner or the government.
How far it is correct to attribute an expansion in output to high
investment, when high investment is only one of the factors at work,
is necessarily debatable. It would certainly be legitimate if capital
formation was lagging behind, and finance could be identified as
a bottleneck in the process of expansion. It might also happen that
1 This point is developed in my 'Reflections on the Growth of Capital and
Income', Scottish Journal of Political Economy, June 1959. See also the comments
by E. Lundberg, 'The Profitability of Investment', Economic Journal, December
1959.
a See, for example, W. B. Reddaway and A. D. Smith, 'Progress in British
Manufacturing Industries in the Period 1948-54', Economic Journal, March 1960,
and 0. Aukrust, 'Investment and Economic Growth', Productivity Measurement
Review, February 1959.
the rate of technical advance was itself controlled by the scale of
investment, not merely because capital formation was the means
by which new techniques were adopted but also because high invest-
ment created an atmosphere favourable to experimentation and
innovation. There is undoubtedly some tendency for all the symp-
toms of rapid growth to show themselves simultaneously. But
there is no invariable dependence of growth on a high rate of capital
formation and it is easy to imagine circumstances in which efforts
to increase capital formation may actually slow down the progress
of the economy.1
Moreover there is some justification for turning the causal rela-
tionship the other way round. If income is growing fast, investment
opportunities are likely to be expanding even faster, so that the
growth in income draws capital accumulation along behind it. The
biggest influence on capital formation is market opportunity, and
many types of capital accumulation are likely to be embarked on
only when income is booming. If capital formation does not res-
pond, its failure to do so will certainly act as a drag on the expansion
in output. But there is no reason why it should bring it to a halt,
and, given a re-arrangement of the investment pattern, income might
grow a long way before the shortage of capital became acute. In
the meantime the rapid growth in income, particularly if it were
accompanied by high profits, would be likely to generate additional
savings and so mitigate any symptoms of capital shortage that
manifested themselves.
All this presupposes that a spurt in income could precede an
acceleration of investment, and that capital formation is subordinate
to other elements in the process of growth. These suppositions are
not altogether extravagant. Technical progress does not always
involve high net investment ; indeed it may permit of a reduction
in the stock of capital or an expansion in output without any com-
parable investment. A change in the pattern of investment could
also, by enforcing the continued use or over-loading of old types
of plant, make possible a far more rapid construction of those newer
types which bear the fruits of technical progress in greatest abundance.
Attempts are sometimes made to settle the issue by citing the
apparent constancy of the capital-income ratio and deducing from
this the 'neutrality' of technical progress. But the capital-income
ratio is affected by many things other than technical progress : the
distribution of consumers' expenditure between capital-intensive
and labour-intensive products ; indivisibilities in past investment
- for example, in the transport and communications network;
1 The ground-nuts scheme in Tanganyika is an extreme example.
245
changes in the pattern of trade ; investment in social assets such as
roads, schools, and hospitals to which no income is imputed ; and
so on. Even if these influences, too, are neutral and if the capital-
income ratio does remain constant - and neither of these assump-
tions seems well-founded - the fact that capital and income grow
at the same rate tells us nothing about the causes of growth in either.
There is no reason at all why one should rule out the suggestion
that the same circumstances that favour rapid growth of income are
also favourable to a rapid growth of investment.
This may seem a rather arid and irrelevant issue : arid, because
if capital requirements must keep pace with the growth of income
that is all we need to know for practical purposes ; irrelevant,
because the issue relates to experiences in industrial rather than
pre-industrial countries. But when it is so commonly urged that
countries will be able to take-off if only they are provided with
sufficient capital from outside, the issue seems neither arid nor
irrelevant. For this thesis assumes the very causal relationship
that is in dispute.
My own inclination is to think of this issue in terms of an indi-
vidual firm and ask myself how often the sudden acquisition of
additional finance has enabled a firm to take-off. There are un-
doubtedly some examples : among small firms particularly, access
to finance is limited, and additional funds, without any change in
their cost, would accelerate expansion. But the fact that turnover
and capacity tend to keep pace with one another provides no clue
whatever to the importance of finance as a bottleneck. Observation
suggests that expansion goes with market opportunity and efficient
management, and that where these are present financial obstacles
can usually be overcome.
The parallel between individual firms and entire economies is
not likely to be exact and may, indeed, be misleading. Market
opportunities can be created and are to some extent dependent on
government plans and policies ; efficient management is often the
fruit of experience and contacts, and may thrive on active encourage-
ment to invest. Above all, the complementarities are different. All
investment is a reaction to some real or fancied disequilibrium :
it is a step toward restoring balance with complementary forms of
capital. But in a firm surrounded by other industrial firms, the
most frequent lack of balance to which its investment responds is
within the firm itself or within the industry or industries of which
it forms part. In an underdeveloped country, one firm's investment
is more closely bound up with the investment of other firms and of
the public authorities ; their actions overflow more readily so as to
246
affect other investment decisions. Even when each firm regarded
itself as in balance, therefore, there might be scope for productive
investment involving them all, and the absence of adequate finance
might be the decisive factor in preventing investment and growth.
This line of argument, which would carry us into a discussion of
balanced growth and of 'social overheads' need not be pursued here.
It may also be true, as Albert Hirschman has argued in The
Strategy of Economic Development, that the best way of securing a
more rapid penetration of the economy with new ideas and values
may be heavy investment in some ultra-modern type of plant such
as a steel-works. All that one can say about this is that it has not
always worked. The railway was, in its day, as modern as the
sputnik ; but there are many countries that have had a good railway
system for nearly a century and are still struggling to 'take-off'.
Whatever one may think of investment as a fast breeder, we
need have no reservations about the scale on which investment
becomes necessary as development proceeds. The switch from an
agricultural, village economy to an industrial, urbanized economy
probably involves heavier capital expenditure in relation to income
available during the process of transformation than in the subsequent
period of growing productivity. But once the switch is in progress,
why should it be halted ? Is it not self-financing? Or if it is not, what
is the mechanism by which a financial bottleneck makes itself felt ?
This is an issue which is rarely discussed because it is so often
taken for granted that output and capital are functionally related so
that a shortage of capital can be identified with a shortage of capacity.
But there are different types of capacity, and the symptoms of
shortage do not make themselves felt uniformly throughout an
economy. It is necessary also to show why a physical shortage should
persist in the face of a correspondingly remunerative return on
additional investment.
The mechanism that most economists seem to have in mind is
one involving a two-sector model in which productivity is markedly
higher in industry than in agriculture but labour can move out of
agriculture into industry only at the rate permitted by the growth
in industrial capacity. 1 This in turn is taken to be limited by the
rate of profit either because industry is assumed to be completely
self-financing or because outside finance is likely to bear a fixed
relationship to reinvestment of profit.
This analysis does not strike me as altogether satisfactory. It
is difficult to see why manufacturing industry should fail to grow
1 See, for example, H. W. Singer, 'The Mechanics of Economic Development',
Indian Economic Review, August 1952.
rapidly if all that holds it back is lack of capital. Its capital require-
ments are usually relatively modest, and unless the capital market
is highly imperfect, they are likely to take precedence over the
requirements of housing, public utilities, roads, etc. in conditions
of capital shortage. It is, however, conceivable that industrial ex-
pansion may be seriously slowed down by bottlenecks in those
complementary types of asset in which a general shortage of capital
is likely to manifest itself.
There is some evidence that these bottlenecks do appear and
put a brake on industrial development. There is commonly, for
example, a physical shortage of housing as evidenced by slums and
overcrowding : though it is not altogether clear how far this slows
down industrialization nor whether the deterioration in housing
standards is in relation to previous rural standards or merely in
relation to the standards of later and richer generations. A more
direct connexion can be traced through congestion of transport and
overloading of the power network. Sometimes these effects are
put down to failure to raise charges in the face of inflation ; but
it is more likely that the inflation itself is brought on by the short-
age of capital and that inflation, combined with power shortages,
railway congestion, and overcrowding, is largely the outcome of
an inequality between the rate of growth of income and capital.
Savings fail to keep pace with investment requirements.
IV. SAVING AND TAKE-OFF

This brings us to the second issue : what is the role of saving
in the take-off? How are additional savings generated and is there
a discontinuous shift in the ratio of savings to income either before
or after take-off ? Is it a necessary condition, as Rostow suggests,
that 'the proportion of net investment to national income . . . rises
from, say, 5 per cent to over 10 per cent . . . yielding a distinct
rise in real output per capita' ? 1 Perhaps Arthur Lewis was being
a little too dramatic when he suggested that : 'The central problem
in the theory of economic growth is to understand the process by
which a community is converted from being a 5 per cent to a .12 per
cent saver - with all the changes in attitudes, in institutions and in
techniques which accompany this conversion'. 2. But it is evident
that some increase in the savings-ratio must form part of the pro-
cess of growth.
We can demonstrate this most readily by assuming that the
1 W. W. Rostow, The Stages of Economic Growth, Cambridge, 1960, p. 37.
2 W. A. Lewis, The Theory of Economic Growth, London, 1955, p. 226.
248
capital-output ratio remains unchanged or that it moves gradually
to a lower level below which it cannot fall. This implies that the
rate of growth of capital and income must be equal to one another
and that if there is an acceleration in the one there must sooner or
later be a similar acceleration in the other. But the rate of growth
of capital is the savings-ratio divided by the capital-output ratio.
Hence the more rapid growth in income can only be sustained if
the savings-ratio rises proportionately, or if the capital-output ratio
falls proportionately, or if there is some combination of changes in
the two ratios that produces a similar result.
It is remarkably difficult to trace either process in the statistical
record of industrial countries. As far back as the figures go for the
United States and the United Kingdom, for example, the savings-
ratio appears to be remarkably constant, and there is also little
indication of any consistent decrease in the capital-output ratio.
But the record does not cover in any adequate way the period of
take-off and so does not relate to any sudden acceleration in .the
rate of economic growth. For Sweden there are indications of a
spurt in the savings-ratio (or rather, in the ratio of gross domestic
fixed capital formation to gross national product) from about 1900
onwards. But the curious feature of the Swedish figures is that,
although industrialization was already in full swing and production
rising rapidly long before 1900, gross investment up to the middle
'nineties fluctuated around 9 or 10 per cent of gross national product
so that net investment (including capital imports) remained as low
as S-6 per cent of net national income. 1 For Norway, the figures
indicate a progressive fall in the savings-ratio from 7 per cent around
1870 to 1-2 per cent at the turn of the century, followed by a rise
to 11 per cent in the 'thirties and 20 per cent in the post-war period.z
These figures do not appear very plausible but serve as a re-
minder of the difficulty in obtaining empirical verification to which
I have already referred. So far as they go, they imply that a rise
in the savings-ratio follows rather than precedes the take-off. This
is quite conceivable : the first steps in industrialization may not
put any great strain on the supply of capital if they are confined to
factory production in the less capital-intensive industries. The
British cotton textile industry became one of the largest export
industries by 1800 on the strength of a total investment of less
1 0. Johannsson, 'Economic Structure and Growth in Sweden, 1861-1953'
(paper presented to the Sixth European Conference of the International Association
for Research in Income and Wealth, 1959), pp. 23-4.
a J. Bjerke, 'Some Aspects of Long-term Economic Growth of Norway since
1864' (paper presented to the Sixth European Conference of the International
Association for Research in Income and Wealth, 1959), p. 64.
249
Tire Economics of Take-off into Sustained Growth
than £10 m. (roughly equivalent to the national income for a fort-
night). Even in the 1870's, when the industry employed half a
million workers, the capital employed was of the order of £100 m.
- about 1 per cent of the national reproducible capital and no
more than had been invested abroad in a single year (1872). Yet
I should be sceptical of any suggestion that either in Britain or in
Scandinavia, it was only manufacturing industry that needed capital
or that there was a marked lag in the savings-ratio behind industrial
development. It is true that the major capital requirements usually
come only with urbanization. 1 But there is plenty of evidence that,
even before urbanization, transport was making heavy demands on
capital in eighteenth-century Britain and in nineteenth-century
Scandinavia. There are also symptoms of a widening and deepening
of the channels along which capital flowed before industrialization
took hold in Britain. The rate of interest was falling, investment
intermediaries were growing and the capital market was better or-
ganized.2 There seems no reason to doubt that there was a
genuine rise in thrift.
It is usual to assume that, before take-off, the savings-ratio is
likely to be about 5 per cent. This assumption is usually supported
by doubtful figures for a variety of countries, reinforced by 'partially
subjective judgment' .3 But why 5 per cent rather than nil ? If
countries save 5 per cent of their income in static conditions, why
should it seem difficult for them to save a further 5 per cent when
there are genuine reasons for accumulation ?
Let us imagine a country in which population and the standard
of living, although fluctuating from one generation to another,
remain within narrow limits over the centuries. Parallel to the
Malthusian checks on population there would be a set of checks
on the growth of capital. War and fire would destroy, and fashion
1 In a recent paper on 'The Economics of Housing and Urban Development'
(Journal of the Royal Statistical Society, 1959) Mr. P. A. Stone shows that, of the
capital cost of constructing a town for housing 80,000 persons, only £11·2 m. out
of £85·3 m. would be required for factories (p. 466). This figure, however, is for
light industry only and omits the cost of plant and machinery.
2 See, for example, G. S. L. Tucker, Progress and Profits in British Economic
Thought, Cambridge, 1959, T. S. Ashton, Economic Fluctuations in England 1700-
1800, Oxford, 1959, and L. S. Pressnell, 'The Rate of Interest in the Eighteenth
Century' in Studies in the Industrial Revolution: Presented to T. S. Ashton (Ed.
L. S. Pressnell), London, 1960.
3 See, for example, Rostow, op. cit. pp. 43-5. The lowest figures, cited from
the Office of Intelligence [sic] Research of the Department of State appear to show
gross investment as low as 5 per cent of gross national product in Ceylon and
Afghanistan. On the other hand, Burma is credited with a ratio of net capital
formation to net domestic product of over 7 per cent in 1938 plus net capital
exports equal to 11·5 per cent of net domestic product. Mexico, which- unlike
Burma- is presumed to have taken-off, had a ratio of net capital formation to net
domestic product of only 7·2 per cent in 1950.
250
would corrode, any fixed assets, and ceremony would draw on current
stocks, so that the need for thrift would never quite die out. The
horizon of human life has rarely been so circumscribed, or the
passion for self-perpetuation so feeble, that all inclination to build
for posterity vanished. There has always been, in pre-industrial
societies, some slack in the use of resources and no complete atrophy
of the will to accumulate.
If, therefore, we seek to explain the more rapid growth of capital
there is no need to present the change in savings habits in semi-
miraculous terms. It is reasonable to assume that it has its origin
in a new perception of the utility of capital accumulation and a new
willingness to accord it priority over other, non-productive, uses of
resources. The pre-conditions of a successful take-off imply a
transformation in both respects.
There may, for example, have been heavy expenditure by the
government and the richer classes for non-economic purposes -
notably defence, religion, monuments, and display. Most countries
that have staged a successful take-off have enjoyed an antecedent
period of domestic peace which prevented the periodic destruction
of physical assets and gave greater security to investment. The
comparative freedom of the nineteenth century from war must have
contributed to ease the financial problems of economic development,
particularly in the newer countries, permitted a record rate of
expansion of international trade, and encouraged a more rapid
change-over from agriculture to industry.
The development of a more secular temper can also, Calvinism
and the Quakers notwithstanding, speed up capital accumulation
either by diverting expenditure from religious endowments or, still
more, by removing inhibitions limiting economic endeavour. No
Scotsman, contrasting the atmosphere in which Adam Smith was
writing (can it have been before take-off ?) with the atmosphere of
a century earlier, can fail to be conscious that in this lay the biggest
transformation of all. Similarly, anyone who looks at the pyramids,
cathedrals, and pagodas that other civilizations have bequeathed,
can hardly regard the construction of railways, dams, and power
stations as imposing an unprecedented burden on a poor com-
munity. If capital assets are the limiting factor and yield the full
dividend that development brings, they can be had if they are badly
enough wanted - not necessarily without social upheaval and cer-
tainly not without tribulation.
Where there is a large outlay on ceremony and display, the
scope for greater thrift is correspondingly enlarged: a more puri-
tanical attitude can release resources for investment opportunities
251
that either did not previously exist or were only vaguely realized.
Once there is a more widespread awareness of the possibilities of
development, moreover, new resources are automatically created in
the form of human time and effort. In most countries, as is apparent
in war-time, the supply of labour is by no means completely inelastic.
It is not even indispensable that most of the fruits of the additional
effort should accrue to consumption. In agriculture, particularly
where there is scope for capital creation through land clearance and
reclamation, and where the occupier enjoys security of tenure, extra
effort on the part of the cultivator may result in a higher rate of
savings and investment which is rarely adequately reflected in the
official statistics. This form of capital creation may well be acceler-
ated when population is rising and when new techniques are being
introduced : a more rapid increase in income then becomes almost
automatically associated with an increase in the savings-ratio.
Similar and more familiar examples of self-finance on an in-
creasing scale are provided by the individual landlord who sets out
to improve his estate instead of spending all his rents and by the
entrepreneur who ploughs back his profits into an expanding business.
The importance of these tendencies, which have their origin in a
high expected rate of return, is discussed below in relation to the
supplementary role of the capital market in providing capital for
purposes that are beyond the scope of self-finance or for which self-
finance is insufficient.
We must also take account of the way in which the benefits of
a higher income are divided between different social groups. It is
possible that the main beneficiaries are more given to saving than
the rest of the community, although this is a proposition that is
usually supported by assertion rather than by evidence. The usual
assumption that wage-incomes form a diminishing fraction of total
income is, so far as I am aware, quite unsubstantiated. There are
other possible mechanisms that might operate so as to increase the
savings-coefficient. For example, an acceleration of growth is likely
to increase the revenue of the central government almost auto-
matically, through taxation, so that its power to save is simultaneously
improved. The fact that it may apply this revenue to education,
health services, and so on, rather than to the creation of physical
assets, does not detract from but illustrates this enhanced power
to meet capital requirements. Again, if capital is very unevenly
distributed - as is usually true in pre-industrial countries - the
immediate effect of higher investment may be to aggravate this
inequality, and this, too, may give rise to a higher rate of saving.
A third possible mechanism lies in the creation of business cor-
252
porations which set aside some part of their revenue for expansion.
These corporations may save less than privately-owned businesses
of the same size ; but, since they draw on savings that would not
normally find their way into industry and commerce, they expand
the base on which profits are earned and reinvested, and so are
likely to raise the general level of savings.
V. CAPITAL-OUTPUT RATIOS
There is no need to lay all the stress, however, on the need for
a higher savings-ratio. The alternative possibility of a falling
capital-output ratio must also be considered.
We know very little about the magnitude of capital-output ratios
in pre-industrial societies. Estimates varying between 6 and 1·5
have been used, not always on the same basis. 1 We also do not know,
with any certainty, whether the capital-output ratio falls or rises or
remains constant after the take-off. I propose, therefore, to confine
myself to a few rather speculative observations.
First of all, it is natural to ask whether we are any less in the
dark about the incremental capital-output ratio -which seems to
many people the relevant one - than about the ratio of the stock
of capital to the flow of current output. Recent data, on the whole,
suggest a tendency for the incremental ratio to rise progressively.z
In the U.S.S.R. this tendency is not so much an observed fact as
an article of religion. Yet one may be pardoned for hesitating to
accept any such trend, to which the counterpart is likely to be a
consistently rising capital-output ratio, as a universal phenomenon.
It is, after all, still a widely accepted view that the capital-output
ratio tends to remain constant.
There is, of course, no necessary inconsistency between a rising
incremental ratio and a constant average ratio. The price of capital
goods tends to rise in relation to the price of consumption goods in
any economy where the building industry is the principal source
of capital goods. This turns the terms of trade, so to speak, against
saving and requires the use of a rising proportion of real resources
in order to maintain a constant ratio of capital to output. Whether
1 See, for example, J, Tinbergen, Design for Development, I.B.R.D., p. 74,
1957, and G. M. Meier and R. E. Baldwin, Economic Development, New York,
1957, p. 340, for estimates within this wide range.
a For example, the estimates of the Economic Commission for Latin America
suggest that investment rose faster than consumption in the 'fifties (Economic Survey
of Latin America, 1957, p. 83). For other countries the evidence for post-war
years points in the same direction.
253
this tendency would be very perceptible at an early stage of develop-
ment, with only a slow rate of improvement of productivity and
considerable imports of machinery of progressively better design,
is, however, very doubtful.
Second, we have to distinguish between the capital-output ratio
for the entire economy including agriculture and the ratio of capital
to output in the sectors in which current investment is likely to be
concentrated. When land is included in capital, and agricultural
TABLE 1
STRUCTURE OF NATIONAL WEALTH OF UNITED KINGDOM,
1800-1927
1800 1832 1885 1912 1927

(Percentages)
Land 55·0 51·6 16·6 5·7 4·0

Reproducible capital 45·0 48·4 83·4 94·3 96·0
100·0 100·0 100·0 100·0 100·0
Reproducible capital
Buildings 30·7 27·7 24·2 22·6 23·0
Farm capital 19·3 18·1 5·7 2·2 2·4
Net foreign assets - 9·7 19·3 29·1 7·9
Railways - - 11·6 8·1 4·8
Industrial and commercial 46·2 41-1 33·0 29·5 49·1
capital
Public property 3·8 3·3 6·3 8·4 12·8
100·0 100·0 100·0 100·0 100·0
Reproducible as proportion of 2·9 3·5 7·7 6·0 4·2
national income
Land and reproducible capital as 6·4 7·2 9·2 6·4 4·4
proportion of national income
Source: Estimates by Phyllis Deane and W. A. Cole, amended by S. Kuznets.
output in total output - as seems proper in an economy where

agriculture is the main activity - the average capital-output ratio
is bound to be fairly high, particularly if land itself has a scarcity
value. On the other hand, there may be a much lower capital-
output ratio in the rest of the economy where the main expansion
is likely to occur. It would then be possible to have a low but rising
incremental capital-output ratio in spite of a high average capital-
output ratio. That this is not altogether fanciful may be shown
from estimates for the United Kingdom made by Miss Phyllis Deane
254
and Mr. W. A. Cole. These estimates have been used by Professor
Kuznets to yield ratios of capital to national income that remain
at 6·4 between 1800 and 1912 when land is included, but rise from
2·9 to 6·0 when land is excluded, from capital. (See Table 1.)
Thirdly, unless we have data covering a long period of time we
must always be on our guard against interpreting the level of invest-
ment as a measure of capital requirements. The recorded level
may be quite compatible with a progressive overhauling of arrears
of investment and the restoration of a more normal relationship
between capital and output or it may conceal a growing lag of
capital accumulation behind long-term norms. The figures for
post-war years may prove to be somewhat inflated just as the figures
for the inter-war years indicated a disinclination to maintain previous
ratios of capital to output.
TABLE 2
REPRODUCIBLE CAPITAL OF THE UNITED STATES, 1805-1948
Non-Farm Non-Agri- Agri-

Resi- cultural Govt.
In- dential Business culture Consumers' Net
ven- Dursbles Foreign
tories Structure and Equipment only Assets
(percentages)
1805 27·6 17·3 13·8 41-4 H 6·9 -10·4
1850 27·4 19·3 27·5 19·3 2-9 7·2 -3-6
1900 17·4 27·9 31·9 7·9 5·6 10·5 - 1·2
1948 12·4 26·9 24·5 5·4 11·8 12·8 + 6·2
Source: R. W. Goldsmith, The Growth of Reproducible Wealth of the U.S.A.
from 1805 to 1950, p. 306.
Fourthly, apart from the special case of agriculture- and the

equally important possibility of foreign lending and borrowing -
there are wide variations between the different sectors of an economy
in the demands which they make on capital. It is very material,
therefore, how these sectors expand in relation to one another, and
whether there are possibilities of using capital more economically
in the more capital-intensive sectors. For example, the capital-
output ratio in manufacturing is usually relatively low while the
ratio in transport and public utilities is often extremely high. (See
Table 3.) If manufacturing is able to make some headway before
investment in 'social overheads' becomes heavy, the pressure on
capital will be very much less than in the opposite situation.
The usual presumption is that there has to be heavy initial outlay
on transport, power, and other public utilities but that after a success-
ful take-off manufacturing expands more rapidly than those highly
255
capital-intensive activities which, because of indivisibilities of various
kinds, are subject to increasing returns. There may be some tendency
of this kind : in Canada, for example, the capital-output ratio is
said to have fallen from 3 in the late 'twenties to 2! in the mid-'fifties.I
If, such a tendency does exist, it would imply a particularly severe
pressure on capital at the outset, followed by a gradual relaxation
at a later stage. But the evidence is fragmentary and Canada is far
from typical.
My own view of the most probable course of events is as follows.
The capital-output ratio is normally low at the outset, if the value
TABLE 3
U.S. AND CANADA: INDUSTRIAL DISTRIBUTION OF CAPITAL
(EXCLUDING HousiNG)
United States, 1939 Canada, 1950

Fixed Capital- Fixed Capital-
Capital Output Capital Output
% Ratio % Ratio
Agriculture 12·2 1·35 10·8 1·62
Resource industries 16·5 2·09 15·2 3·94
Primary manufacturing 5·9 0·38 8·7 2·53
Secondary manufacturing 27·9 0·55 18·1 1·69
Transport, storage, and 23·7 2·55 32·2 8·15
communication
Trades, services, and con- 13·8 0·34 15·0 1·04
struction
Total fixed capital 100·0 100·0
Source : W. C. Hood and A. Scott, Output, Labour and Capital in the Canadian
Economy, p. 266.
of land is excluded from capital while agricultural output is included

in the denominator. At this stage stocks are a large proportion of
total capital and what happens when development speeds up may
be of very great importance. Industry is, ex hypothesi, limited in
scope so that the capital-output ratio in industry is, to begin with,
largely irrelevant. Investment in residential housing tends to lag
or to proceed on a do-it-yourself basis, especially in countries where
the climate is not exacting. The most obvious bulge in capital
requirements is in public utilities of all kinds, and in government
building ; but if development gets under way, the bulge becomes
1 W. C. Hood and A. Scott, Output, Labour and Capital in the Canadian
Economy, p. 266.
Cairncross- Capital Formation in the Take-off·
less bulge-like and investment in public utilities increases progress-
ively. Some increase in non-agricultural investment per unit of total
output is likely to occur in at least the early stages of industrialization.
All this abstracts from foreign investment. But of course it is
traditionally foreign investors who supply much of the capital
required for public utilities and other capital intensive activities such
as mining, metals, and those branches of agriculture that have long
periods of gestation. If the capital-output ratio increases, it is
usually in the very directions in which it is possible to seek relief
by borrowing abroad on comparatively favourable terms.
VI. CAPITAL MARKETS

I turn finally to the emergence or growth of the capital-market.
Very little has been written in any organized way on the develop-
ment of the capital-market in the early stages of industrialization.
There is a tendency for sweeping generalizations to be put forward
embracing the quite different experience of different countries and
merging the finance of industry with the financing of other, more
capital-intensive, activities. Financial intermediaries other than
the banks are largely ignored. But the banks did not play quite
the same part in British development as they did on the continent.
Bank advances were also of more limited importance than seems to
be generally assumed ; commercial credit, bills of exchange, annuity
bonds, mortgages, etc., were all important long before the growth
of modern industry. The development of the new issue market in
the nineteenth century has hardly begun to be studied ; and about
the local markets in which long-term capital was provided through
solicitors and other intermediaries in the early days of industrializa-
tion we are also very much in ignorance.
The role of the capital market seems to me to be given an inade-
quate place in some theories of economic development that go near
to identifying profits with savings. Professor Lewis, for example,
regards the growth of profits as the main prerequisite of a higher
savings-ratio and links the growth of profits with the rise of a class
interested in making and accumulating money. The same idea
underlies Mr. K.aldor's model of economic growth in which the
whole of the return to capital is automatically re-invested while the
whole of labour's income is spent. In such a model the rate of
profit is equal to the rate of growth of the economy so that any spurt
in growth finds its explanation in a discontinuous increase in the
rate of profit.
257
The Economics of Tak£-off into Sustained Growth
It is not clear to me how the theories of this kind treat debt and
rent. If we take British history as a guide, a large part of the net
worth of the wealthier classes in the eighteenth century consisted
of bonds and land. Land alone formed over half the national capital
until nearly the middle of the nineteenth century and the national
debt was as large in 1825 as the entire stock of capital assets other
than land. I see no reason to doubt that most of the savings of the
country came from the landowners and rentiers who owned these
assets ; and the more anyone insists that they were not interested
in undertaking real investment themselves the more he is driven
to lay stress on the function of the capital market in transferring
the use of those savings to successful entrepreneurs either in industry
or in commerce.
The evidence that they undertook little or no real investment is
far from convincing. Landowners were at least as conspicuous as
any other social class in increasing their outlay on 'improvements'.
Profit made from trade was already a substantial element in national
income and seems to have been re-invested, almost indifferently, in
land or in other undertakings. What is true is that industrial ex-
pansion, like agricultural improvement, was largely self-financing.
But we should not be misled by this. Most of the savings of the
country, as the nineteenth century proceeded, passed through the
capital market and were not re-invested automatically. We need
only think of the public utilities, of government borrowing, of
housing and, most clearly of all, of foreign investment, to appre-
ciate this point. Of the total capital of the country round about
1870 industry and commerce probably accounted for no more than
the railways and the tenant-farmers together, or than residential
housing by itself. In 1914 Britain had more invested abroad than
in the whole of her industry and commerce. Ownership of capital
may have been highly concentrated, but it was not concentrated in
the hands of industrialists.
There is, of course, no question but that, as industrialization
proceeds, profits become an increasing and land rent a diminishing
proportion of the national income. This is a natural consequence
of the change-over from agriculture to industry that attends a rising
standard of living and the greater proportionate expansion in in-
dustry. There is no need also to dispute that industrial enterprises
are more given to the ploughing back of income than agricultural
enterprises. This is a reflection of the greater investment oppor-
tunities that confront them. Neither proposition, however, implies
that landlords are bound to be slow in moving into industrial invest-
ment when they see profitable opportunities of doing so : or that
258
industry will generate sufficient excess savings to take care of the
large non-industrial requirements of capital in a society in process
of industrialization and urbanization. These capital requirements
can be met only by government agencies out of taxation or from the
mass of investors and investment intermediaries through the capital
market or out of foreign borrowing.
Which of the first two sources is used depends upon the extent
to which a capital market has already developed, while the use of
the third depends upon access to an international capital market
and readiness to take advantage of that access. In the comparatively
rich countries that were industrialized in the nineteenth century,
an active bond market, chiefly in government debt, had been in
existence before the take-off, and banks and other financial inter-
mediaries were already lending considerable sums to commerce and
industry. Even so, the large investments in transport that were
necessary frequently involved government finance or government
guarantees. This was less true in Britain than elsewhere - canals
and railways were financed privately - but even in Britain the
government's contribution was far from negligible. 1 It was perhaps
unusual for governments to use revenue surpluses for capital forma-
tion but the funds which they raised (for example, for railway-
building) had no fixed relationship with the level of private profits,
especially if profits are so defined as to exclude land rent.
The development of the capital market on anything more than
a purely local basis told, almost inevitably, in favour of the large
borrower, and it was the large borrower who, almost inevitably,
had recourse to the capital market. The large borrower of a century
ago was generally one seeking to finance some form of public utility
and unable to raise funds on the necessary scale through private
channels. At the same time the private investor looking for a readily
marketable form of investment was drawn to large issues either by
governments or by public utilities. This meant that the international
capital market which dealt in such issues was more fully developed
than the domestic capital market : all the more because limited
liability joint-stock companies were a comparatively late innovation
and because the small industrialist had usually little need of outside,
long-term finance.z It is not surprising, therefore, that in the early
stages of industrialization capital overflowed national boundaries
1 See, for example, Henry Hamilton, 'Economic Growth in Scotland, 1720-
1770', Scottish JOUT7Ull of Political Economy, June 1959, for the part played by the
government in road-building.
2 Even an institution like the Credit Mobilier confined its operations largely
to public utilities and to a few of the more capital-intensive large-scale under-
takings in industry.
259
and that the capital requirements of the railways and other large
borrowers were frequently met from abroad. The pressure of capital
requirements in the initial stages tended also to be comparatively
severe and made itself felt in the most sensitive area. The com-
bination of these two circumstances accounts for the common pheno-
menon of foreign borrowing during, or soon after, the take-off: a
phenomenon particularly evident in the new countries of the Western
Hemisphere and Australasia but visible also in Europe.
VII. SOME NEGLECTED ISSUES

I am conscious of having dealt very selectively with the issues
that we might discuss. In particular, I have set entirely on one side
issues of policy such as dominate most discussions about capital
formation in underdeveloped countries. I have not suggested how
the rate of capital formation might be speeded up nor what results
might follow. A good deal of what I have had to say has been about
the experience of countries that are now industrialized and I have
used comparatively little data for countries seeking to take-off.
Finally, I have said nothing at all about the social impact of capital
accumulation : the tensions, the distress, the erratic fluctuations in
employment that accompanied the emergence of industrial society.
But since my function is to initiate, not exhaust, the discussion I
am well content to leave you to demonstrate how much I have left
unsaid.
Chapter 15
SOCIAL OVERHEAD CAPITAL AND

ECONOMIC GROWTH
BY
PAUL H. COOTNER
Massachusetts Institute of Technology
I. INTRODUCTION
THE purpose of this paper is to re-examine some of the theoretical
and empirical implications of existing ideas about the role of social
overhead capital in the process of economic growth. In the course
of this inquiry these ideas are found wanting in several important
respects, and as a result, I have formulated some new hypotheses
which are more general in scope and better able to explain the limited
data available.
Part II is both a summary and a reinterpretation of current theory.
In making this re-examination, I choose to emphasize the often
implicit assumption that entrepreneurs base all of their investment
planning upon neutral expectations -upon the belief that present
prices and demands will persist indefinitely. This is a crucial
assumption, and once we modify it to permit more realistic expecta-
tional hypotheses and less extreme attitudes toward risk, there is
much less reason for creating a peculiar role for social overhead
capital in economic development.
Part III confronts the current theory with some historical data
about the pattern of investment in social overhead capital. While
it is difficult to construct any conclusive test of the validity of a
historical hypothesis, I conclude that the weight of evidence denies
any special role for social overhead capital in economic development,
particularly if one thinks of development in terms of the growth of
the manufacturing sector.
In Part IV I propose an alternative model for analysing invest-
ment both in those industries which are generally considered to
comprise social overhead capital and in the 'directly-productive'
sectors as well. While I cannot think of any definitive tests that
would either prove or disprove my hypothesis, it is capable of
explaining a wider range of acts about investment in the nineteenth
261
and twentieth centuries than current theory about social overhead.
Finally, Part V concludes with a survey of some of the implications
of this study for the theory of the take-off.
II. THE DEFINITION OF SOCIAL OVERHEAD CAPITAL

There are three essential elements involved in the usual defini-
tion of social overhead capital. First, it is postulated this group of
industries produces services which are essential to, and prerequisite
for, initiation of an industrial expansion. Second, these services
must be rigidly immobile, so that the capacity for producing them
must be constructed within the country to be developed. Finally,
these investments are characterized by such properties as important
economies of scale, long periods of gestation and exceptional dura-
bility.1 These are the bare bones of the concept. We must now
see how they articulate within the bounds of the theory.
It is now generally established that under the normal static
assumptions, only technological external economies and diseconomies
interfere with the operation of the classical equilibrium model. In
recent years, however, a number of theorists have tried to demon-
strate that if we shift to a dynamic view of the world, pecuniary
external economies can also result in a less-than-optional allocation
of economic resources and a pace of economic charge less than that
which would occur if these economies were internal to investing
firms. 2
The argument is presented most clearly and succinctly by
Scitovsky. Assume that for some reason,
'Investment in Industry A will cheapen its product; [thenl
if this is used as a factor in Industry B, the latter's profits will
rise. • . . The profits of Industry B, created by the lower price
of factor A, call for investment and expansion in Industry B, one
result of which will be an increase in Industry B's demand for
Industry A's product . . . equilibrium is reached only when
successive doses of investment and expansion in the two industries
have led to the simultaneous elimination of profits in both. It is
1 These are essentially the same points made by Paul Rosenstein-Rodan, 'Notes
on the Theory of the Big Push ', unpublished memorandum for the Center for
International Studies, Cambridge, 1957.
a P. N. Rosenstein-Rodan, 'Problems of Industrialization in Eastern and South-
Eastern Europe', Economic Journal, June-September 1943; R. Nurkse, Problems
of Capital Formation in Underdeveloped Countries, Blackwell, Oxford, 1953 ;
T. Scitovsky, 'Two Concepts of External Economies', Journal of Political Economy,
April1954, and H. Chenery, 'Interdependence of Investment Decisions' in TM
AUocation of Economic Resources, Essays in honour of Bernard F. Haley, edited by
Moses Abramovitz.
a6a
Cootner - Social Overhead Capital and Economic Growth
only at this stage, where equilibrium has been established, that
the conclusions of equilibrium theory become applicable. . . . We
can conclude, therefore, that when an investment gives rise to
pecuniary external economies, its private profitability understates
its social desirability.' 1
The justification for this argument turns on the cloudiness of
foresight. If investors in A could only foresee perfectly the effect
of their price reduction on the demand of B, as they would in the
classical model, the adjustment could take place instantaneously.
In this case, it is assumed that investors choose to use only current
prices in making their investment decisions, and so the initial scale
of the investment plan will be too small. Since investment on a
larger scale would have been profitable, the sum total of output
with the given resources will prove to be less than if the plans had
been fully co-ordinated, even if a second or third round of investment
finally restores equilibrium. Furthermore, this outcome does not
depend upon the existence of economies of scale or decreasing costs
in Industry A. If A were a decreasing cost industry, then any
investment in it would reduce costs and set off the chain of events.
The same result would be achieved, however, if A were a constant
cost industry which had just experienced a technological change,
or if there had been some exogenous change in factor proportions
due, say, to a sudden influx of immigrants.
There is some question whether it is appropriate to continue to
refer to this interaction between firms as pecuniary economies once
we shift to the dynamic case. The mal-allocation of resources,
relative to the static equilibrium case, that takes place results from
either imperfect foresight about future events or an aversion to
taking risks based on investments which might or might not take
place in the future. If we think of these imperfections and risks
as being costs of investment in a dynamic world, then investments
in Industry B should be considered to create technological external
economies in Industry A by reducing the real costs of investment
in A. No matter what you call these economies, however, it is
clear that introducing uncertainty about the future into an economy
widens the range of circumstances which will reduce its rate of
growth below that which would have resulted from co-ordinated
planning. While I feel that these economies are really of the tech-
nological variety, I will continue to refer to them as pecuniary
economies in this paper to distinguish them from economies which
are technological under static conditions.
1 Scitovsky, op. cit. p. 168. While equilibirum will eventually be established,
ceteris paribus, allocation will be less than optimal if time-preference is positive.
263
Taking for granted the rather extreme assumptions about the
nature of entrepreneurs' attitudes toward future events, what are
the factors which exaggerate the divergence between private and
social desirability ? First, the secondary effects of an investment
will be greater, the more important is the output of Industry A in
the production of other industries, i.e. the larger is the proportion
which the value of A bears to the sum of the inputs into the industries
which use A. The larger these secondary effects, the greater will
be the shortfall of the original plan. Second, the divergency between
private and social welfare will be greater, the greater are any internal
economies of scale in Industry A. This is because each of the
successive rounds of investment will consist of small, high-cost
units rather than a single, larger-scale unit utilizing more of the
economies of size. Third, given the existence of these economies,
the greater the durability of the investment in A, the greater is the
cost of unco-ordinated investment because the high-cost unit will
be perpetrated over a longer period of time. 1
Even if there are no economies of scale, however, other obstacles
to the adjustment process will heighten the impact of pecuniary
economies. A long period of construction, or a continuing growth
in demand, will prolong or prevent the establishment of the equilib-
rium capital stock. Looked at from this point of view, it is clear
that all of the characteristics attributed to social overhead investment
would tend to interfere with optimum growth. The economies of
scale within the overhead industries would create external economies
for all of their customers, and the durability and gestation period
of the investments would tend to exacerbate and prolong the effects
of the errors.
Furthermore, 'immobility' of social overhead capital also plays
a role. Assume a situation in which a commodity A would be
produced on a scale of 1000 units if all reverberatory effects could
be taken into account, but only on a scale of 800 units if based on
current demand. Assume further, that a 900 unit plant is the mini-
mum size that would be economic under present prices. In such
a case, based on our previous assumption of perfect lack of foresight,
the plant would not be built. If the product could be imported,
however, the using industries could continue to produce and the
social loss would be measured by the difference between the value
of output with imports and the value of output given perfect co-
ordination of investment. If, on the other hand, commodity A
1 Once constructed, the operating costs of the small plants may be low enough
to make it more economical to run them than to replace them with new and larger
units, but even if they are replaced, the idle units will be monuments to the inefficient
use of capital.
could not move in trade, and there were no substitutes for it, none
of the domestic using industries could operate and the entire final
product would have to be imported. There would be no domestic
industry at all, and the social cost would be the total difference
between the level of consumption of the imports and the level of
domestic consumption if the fully co-ordinated investment had
taken place.
Thus we see how these three elements of the theory articulate.
Pecuniary external economies result in the understatement of current
opportunities for profit. This is true even under conditions of
constant cost, but if economies of scale exist as well, some com-
modities will not be produced at all. If these commodities cannot
be imported either, then they cannot be used at all. If, in addition,
they are essential to the production of all other goods, i.e., there
are no substitutes for them, then nothing will be produced domesti-
cally.1 Lying behind all this, however, is the assumption, not
always stated clearly, that entrepreneurs have neutral expectations:
they always expect the present to persist into the future.
The central element of this whole argument about dynamic
external economies is imperfect foresight. If foresight were perfect,
pecuniary external economies would pose no problem whatsoever
and the Marshallian formulations would hold no matter how fast
the rate of growth or how large the investment. Once we permit
imperfect foresight into our model, however, it is equally clear that
the more today's decisions are affected by the future, the less satis-
factory will be the approach of the economy's actual performance
to the ideal. Only in the extreme situation of no foresight would the
arguments about the vital role of social overhead capital hold full force.
Even with imperfect foresight, some of the reverberatory effects
can be foreseen and allowed for in drawing up investment plans.
Industries with economies of scale will be willing to construct plants
which will not earn a profit at current prices and levels of demand.
Indeed, as Chenery, Manne, and I 2 have shown, in a growing
economy industries subject to economies of scale will always have
1 In addition, social overhead possesses some properties which tend to reduu
the risks of investment relative to those in other industries. For example, the
services of social overhead are generally quite non-specific, so that if some antici-
pated demand does not measure up to expectations, the product can be put to
some other use. If an aluminium plant shuts down, the electricity it used can be
sold to residential consumers or other industries. Machines for stamping Chevrolet
bodies, on the other hand, are not easily converted to producing Convairs.
a The pathbreaking article is Chenery's, 'Overcapacity and the Acceleration
Principle', Econometrica, 1952; A. S. Manne 'Capacity Expansion and Proba-
bilistic Growth', unpublished Cowles Commission discussion paper, and P. H.
Cootner, 'Investment, The Acceleration and the Rate of Interest', unpublished
paper presented at the Summer 1958 meetings of the Econometric Society have
elaborated the point for the case of uncertainty.
:z.6s
an optimum level of capacity greater than current output. Even
in industries furnishing immobile services for which there are no
substitutes the obstacles will not necessarily be insurmountable.
Power plants can be built in anticipation of aluminium smelters, or
steel mills can be built under the assumption that railroad entre-
preneurs will see, and seize, this opportunity for profit.
This does not mean that imperfect foresight is sufficient to
overcome all of the obstacles to optimum investment which are
posed by the technological characteristics of social overhead capital.
It does make it possible, however, for a country without social
overhead to develop it under conditions of private initiative, with-
out the necessity for a massive, exogenous, input of capital. It
offers a somewhat more optimistic picture of the potential for growth
and a more flexible framework for explaining difference in national
patterns of growth. Finally, by stressing the role of foresight, we
will be able to explain certain patterns of behaviour in investment
in different items of social overhead capital which are inexplicable
if we treat all such investment as falling into a single category.
Risk, Foresight, and Growth

In order to focus on the differences between my approach and
the more traditional argument, let me assume that entrepreneurs
do indeed forecast the future and that their mean expectations about
the future are always correct. On the other hand, I will also want
to assume that these forecasts are subject to some variance, and that
entrepreneurs are risk-averters. Then if they will take no risks at
all, we have the special case of the traditional approach. If their
aversion to risk is zero, we have the standard neo-classical solution
and social overhead capital poses no problem whatsoever. For any
intermediate attitude toward risk, there will be an intermediate
result - neither disaster nor perfection.
To emphasize the issues at hand, moreover, let us specify the
form of the risk function. The only kind of risks we will consider
are those related to pecuniary external economies - the proportion
of total expected revenues which depend upon some future be-
haviour on the part of others. The riskiness of a venture will be
a monotonically increasing function of that ratio, but will give no
weight to other kinds of risk such as the likelihood of drilling a dry
well, or of not finding ore, or of having a plant destroyed in a natural
disaster. In short, we are restricting ourselves solely to those risks
which arise because private activities are not co-ordinated.
It should be noted that these risk premiums are precisely related
266
Cootner- Social Overhead Capital and Economic GroztJth
to the kinds of effects that are presumed to be important in the
standard theory, although they necessarily imply one particular
weighting system. On the other hand, once we attack the problem
in this manner, there is no reason to restrict ourselves to the kinds
of investment that are usually considered to be social overhead
capital. A steel plant or a chemical process plant could equally
well be exposed to many of the same external economies situations
affecting investment in railroads, except for the immobility aspect. 1
In this sense, this approach is broader than the older formulation.
In another sense, however, it is narrower in scope. There is no
need in the new formulation to treat all investments in an industry
identically. Instead of lumping all railroad investment in social
overhead capital, we can treat the construction of transcontinental
railroads separately from investment which involves short spur lines
to serve additional plants at lower cost, or double tracking, or new
equipment. A new farm in a settled area need not be treated as
identical with a farm on the frontier which depends on the con-
struction of a railroad to be profitable. Expanding transmission
voltage on a power line to meet increasing demands need not be
equated to utilizing a new hydro-electric site. Once we eliminate
the absolute need for all social overhead to be completed prior to
industrialization, this kind of capital shades into all other sectors,
and permits us to distinguish among investments within a social
overhead industry.
Now we have two different concepts to choose from. The basis
of this choice must be comparative advantage in explaining the
data. Therefore before we proceed, we will turn to an examination
of some of the empirical data about social overhead capital which
must be explained by any theory.
III. THE EMPIRICAL BACKGROUND

One characteristic of social overhead investment that any theory
must explain is the fact that investment in social overhead capital
tends to come in long cycles of similar length in both developed and
underdeveloped countries. Second, it must explain why the cycles
in developed countries (and in developed regions of undeveloped
countries) are all simultaneous, while the cycles in undeveloped
areas are similarly simultaneous but out of phase. 2 Third, it must
1 See, e.g., Frederick T. Moore, 'Economies of Scale: Some Statistical Evi-
dence', Quarterly Journal of Economics, LXXIII (1959), pp. 232-45.
• I.e. peaks in developed countries coincide with troughs in undeveloped
countries.
be explained why these investments in the developed areas have
usually been immediately profitable under private initiative while
those in undeveloped areas frequently require government aid of
one sort or another. Finally, it must explain why some countries
with little or no initial endowment of social overhead capital simul-
taneously build such a stock of utilities and develop, while other
countries with more overhead capital grow less rapidly or not at all.
It may seem to some of you that I err in thinking that data on
cycles, whether long or short, have anything at all to do with a
theory of social overhead capital that relates to economic develop-
ment. The main point about these cycles, however, is that each
of the cycles in undeveloped countries was in fact the process of
bringing social overhead capital to a previously unsettled area.
Even after an area like the United States was considered to be on its
way to full industrial development, its frontier areas were still being
explored. Since the arguments concerning social overhead have no
bearing on national boundaries there is no reason for excluding these
surges of investment from consideration. The cycles in the developed
areas are our control group : the base against which we can measure
the effect of social overhead on development. Furthermore, as we
shall see later, these cycles will be useful in understanding the
relationship of social overhead capital to the 'take-off' as opposed
to economic growth in general.
First let us look at the strange cyclical behaviour of railroad
construction, the item which first drew my attention to this subject
matter. 1 Transport investment in the nineteenth century in the
U.S.- railroads after 1830 and canals and turnpikes before that-
took place in huge cycles of large amplitude and 18 to 20 years
duration, with peaks in 1813, 1836, 1854, 1872, and 1910. 2
These cycles coincide with similar cycles in building construc-
tion, immigration and land sales J and are associated with the big
surges which opened up the American West. Their existence is
well known, and there are several theories of causation, which stress
innovations in transport and the role of immigration. 4
Nor were these cycles confined to the United States. In the
1 Most of the references to the behaviour of railway construction, especially in
the U.S., are drawn from Cootner, 'Transport Innovation .. .'.
• The railroad data are from U.S. Bureau of the Census, Historical Statistics,
1789-1945, p. 200. For the canal data, see George R. Taylor, The Transportation
Revolution, 1815-1860.
J The land sales data are from Smith and Cole, Fluctuations in American Busi-
ness, 179o-1860. The building data are from Historical Statistics, p. 173; W. H.
Newman, The Building Industry and Business Cycles. The immigration data are
also from Historical Statistics, p. 37.
4 Prominent among these theories are those of W. Isard, 'Transport Develop-
ment and Building Cycles', Quarterly Journal of Economics, November 1942.
268
Cootner- Social Overhead Capital and Economic Growth
1850's and 1870's in Canada there were similar surges into the
frontier. Argentina's railroad network was established in the course
of two long cycles peaking in 1892 and about 1912. 1 Australia and
Russia were also participants in these waves of railway construction
associated with the movement into new areas. 2 Furthermore, in
all of these countries the cyclical waves came in unison. The peaks
and troughs in these countries coincided roughly and the period of
fluctuation was about the same. Since in each of these countries,
with the possible exception of Russia, these bursts of investment
have been associated with the making of the nation, they have all
been the subject of considerable historical interest. Only rarely,
however, have they been seen as other than isolated national events.J
Even less completely studied have been the cycles of similar
length and magnitude in the same components of gross investment
on the European Continent. We can find striking evidence of such
waves of spending in Cairncross' data on British investment in
housing, shipping, and railways. These cycles, like those in America,
associate transport investment with building, but there is, of course,
no association with immigration, or even with innovation in any
but the most empty definitions of that term. The dissimilarities
are even greater than lack of a common explanation, for while the
cycles share a common period and similar magnitude they are almost
precisely out-of-phase. The British peaks came in 1807, 1825, 1846,
1863, 1882, and 1900.•
In fact, their relationship with the U.S. cycle is in almost every
sense a negative one. The cycle in developed countries occurs when
emigration ceases, when foreign investment stops, when the prices
1 Unpublished manuscript by Charles A. Cooper. Data largely drawn from
official sources.
2 Lyaschenko, History of the National Economy of Russia to the 1917 Revolution,
p. 502.
3 Professor Schumpeter's work is, of course, the pioneering attempt to inter-
pret these events in an unified manner. Professor Rostow has also utilized them
in his analyses.
4 The first three cycle peaks are selected from the data in Gayer, Rostow, and
Schwartz, The Growth and Fluctuation of the British Economy 1790-1850. The
last two from Caimcross, Home and Foreign Investment, 1870--1913. The 1860's
data is taken from Rostow, Essays in the British Economy of the Nineteenth Century.
The data for other European countries are not inconsistent with this behaviour,
but are too fragmentary to be conclusive. Although the French were among the
first to experiment with railway construction in the 1820's they had only built
360 miles by 1842. In the next ten years, however, 1800 miles were completed.
The early years of the Empire were marked by consolidation of existing lines.
After the Crimean War, construction revived in the late 'fifties and 'sixties. Prussia
also had a slow start in railway construction before 1844 but had a sharp boom in
the next four years and a diminished growth in the 1850's. Unfortunately, the
detailed data necessary for comparing construction in developed and undeveloped
areas in those countries are not available to me. Clapham, Economic Development
of France and Germany 1815-1914, Chapter VII ; Dunham, The Industrial Revolu-
tion in France 1815-1848, Chapter IV.
269
of imports fall. Where the relationship has been observed, it has
been ascribed to the search of unemployed capital for profitable
uses at home. That this was true cannot be denied, but it holds
little explanatory power for the repeated re-enactment of these
surges and withdrawals of British capital across the sea.
When British capital flowed to America it was not so much
'pushed' as 'pulled'. These were the periods of American ex-
pansion into the West and returns were high. It was the positive
attraction of great profits that drew foreign capital at the same time
that Americans were investing their own savings in railroads and
wheat and cotton farms. When capital flowed back to the U.K.
it was because rates of return had falien in the U.S. below the levels
that could be earned at home. Domestic returns were generally
lower than those which could be earned overseas in prosperous
times, but higher than those which could be earned when times
were bad. The domestic investments of the British were in settled,
populated areas and in such things as homes, blast furnaces and
cotton textile plants. But even industrial plants needed the services
of transport, communications, and power, so that domestic U.K.
investment also flowed into social overhead capital. 1
It is this fact- the association of S.O.C. investment with the
flow of funds into the final products demanded by the world economy
-- that holds the key to an understanding of these phenomena. In
looking, for example, at regional U.S. data on railroad construction
we find that the railroads of New England and Old England alike,
although enjoying an early, quickening pace of construction in the
1830's did not reach their full crescendo until the 1840's. Yet this
clear cycle of the 'forties does not appear at all in the aggregate
U.S. data because the behaviour of investment in the country is
dominated by the wave of railway construction in the agricultural
areas in the 'thirties and the deep depression in these same areas
in the 'forties. The same asymmetric behaviour holds in the coal
and iron regions of eastern Pennsylvania. In the 1850's there was
a sharp decline in construction in those areas while the agricultural
U.S. surged forward again.z
If we classify the railroads, not by political division but by the
sort of traffic they served, the basis of these differences becomes
clear.J Coal, iron, and textiles formed the basis of the growth of the
' Rostow, op. cit.
2 A very striking case of interregional differences in Great Britain is discussed
by H. Richards and P. Lewis, 'House building in the South Wales Coalfield, 1851-
1913', The Manchester School, XXIV (1956), pp. 289-300.
3 This classification by type of freight is documented in considerable detail in
Cootner, op. cit.
'twenties and the 'forties in the already settled areas, whether they
were located in the U.S. or in the U.K. Similar, sectional data on
new mileage suggest that industrial northern Italy built most of its
railroads in that decade.
While most of the British railroad investment was completed
during the American Civil War, the regional pattern of investment
continues within the bounds of the U.S. during the rest of the
nineteenth century. The big surges across the continent are inter-
spersed with large expenditures on double-tracking, replacing iron
rails with steel, new rolling stock, and new signalling and braking
devices in the settled industrial areas. Even without a detailed
look at the regional expenditures, the shadow of these shifts in rail-
road construction can be seen by comparing the data on miles of
new railroad with the figures on gross investment compiled by
Melville Ulmer. 1 A huge surge in intensive investment in the
developed areas of the country in the 1880's (now a much larger
proportion of the total) is reflected in the gross investment data
without any evidence in the mileage figures. Equally striking is the
manner in which the amplitude of the building cycle dwindles as
the developed areas of the U.S. approach in size the underdeveloped
areas. So striking is the stability that two recent authors have
denied that there was such a cycle after 1885. 2 Much of this stability
arises from the differences in the phasing of residential investment
(much of it related to the expansion into the west) and the non-
residential building outlays in the industrial East.
Any useful concept of social overhead capital must be capable
of explaining why this investment in social overhead came in cycles
the way it did, and why those cycles were of different phase in the
U.K. and in the primary-producing countries. It is easy to find
at least one reason for such a cyclical manner. Since many items
of social overhead capital typically have economies of scale, we
might expect that once a set of such utilities was built in a certain
geographical area, it might require a considerable period of time
to exhaust all of the economies. Thus, a railroad from Chicago to
Kansas City, with all the attendant feeder lines, homes for new
immigrants, utilities and farm investment might take ten years to
complete. Once this framework was completed, however, it might
be possible to increase farm output substantially for the following
ten years with only relatively minor additional investment. If this
were then followed by another burst of investment to open up yet
1 Capital in Transportation, Communication and Public Utilities (1959), pp. 255-93,
esp. pp. 256 and 268.
• Miles Colean and Robinson Newcomb, Stabilizing Construction.
K2 271
another geographical area, it would be possible for the cycles to
continue indefinitely.
This explanation is very reasonable indeed for a single country.
Are we to explain on grounds of chance, however, the simultaneous
expansions in such different countries as Canada, Argentina, Russia,
and the United States ? It would probably stretch our intuitions
about probability to do so: nor is it necessary. The similarity of
the investment in final product in all of these countries gives clear
evidence of the common stimulus. In all of the countries, rising
prices of primary products had created conditions which encouraged
the expansion of such capacity. In the framework of traditional
theory about S.O.C., the growth of demand reached a point where
---U.K. New construction (Calrncross)
--------U.K. Railway miles added
--U.S. Dollar value of building/Ci!plti!

(f9f3 prices)
1830 18~ 1850 1860 1870 1880 1890 1900 1910 1920 1930
co-ordinated investment could justify the development of new lands.

Those countries which had the resources for expanding their capacity
in raw materials and which could accumulate the necessary capital
for the development of the required social overhead were able to
supply the necessary final product and prosper.
Unfortunately for the traditional theory, the evidence indicates
that few of the countries which succeeded to the challenge in that
period made any serious attempt at co-ordination of investment.
While many railroads were subsidized or government-owned in
those expansions, the mileage of roads receiving aid was generally
a small percentage of the total constructed. 1 Even that aid, more-
over, wa& administered in a very haphazard way. It was generally
1 The evidence on government aid is summarized in Cootner, op. cit. All
genersl works on rsilroad history treat this subject and certain books and articles
are largely devoted to it. See, e.g., C. Goodrich and H. Segal, 'Baltimore's Aid to
Railroads', Journal of Economic History (1953), pp. 2-35.
272
given whenever political, rather than economic, pressures favoured
it. and at the urging of private entrepreneurs. Frequently the
motives for aid were quite parochial, and involved the rival am-
bitions of two entrepots for the trade of the hinterland. Furthermore,
the role of government aid in those countries which did not benefit
from rapid growth in the nineteenth century was frequently just
as great as in those countries that did. At least in the United States
and Argentina there is more evidence of railroad projects under-
taken before their time than there is of railroads which would have
been manifestly profitable, but which were not built. 1 In particular,
those railroads which had large governmental aid were frequently
the least profitable even in the long run after every conceivable
allowance for reverberatory effects to work themselves out. To be
fair, it must be admitted that government aid often was siphoned
off into private pockets, but to counter-balance this a reasonable
rate of time-discount would have ruled out certain projects which
did achieve a normal rate of return, but only after a long period.
Up until now, we have been discussing the investment in social
overhead capital in developing areas whose expansion was concen-
trated in the agricultural and mining industries. If we turn our
attention to those areas which were marked by expanding output
of manufactured products, the facts are even less susceptible of
explanation in terms of traditional social overhead theory. The
amount of government aid to railroads built in the U.K. and the
industrial regions of the U.S. was negligible. Furthermore the vast
majority of these roads were almost immediately profitable, neither
more nor less so than most other investment undertaken at that
time. Most of these rail lines were quite short and exhibited few
economies of scale. They did not generally take more than two or
three years to build, and were frequently opened to intermediate
points before they were completed. Some of this type of investment
involved 'capital deepening' of old roads which had originally been
built into agricultural areas, but many railroads merely replaced
turnpikes or canals in areas that had been industrial for some time.
Where the manufacturing expansion did follow in areas which had
originally been opened to agricultural uses, the lag was generally
some ten or twenty years. The mid-western U.S. steel expansion,
for example, followed the initial railway expansion into the area by
at least twenty years.
1 For the data on Argentine railroad profits I am much indebted to an un-
published paper by Charles A. Cooper. The profits (or lack thereof) of American
railroads is well documented in the various issues of Henry V. Poor, Manual of
the Railroads of the U.S., and in his earlier work, History of the Railroads and
Canals of the U.S. (1860).
273
As far as this alternation of investment is concerned the tradi-
tional theory of social overhead capital does offer us one insight.
It would lead us to expect to find waves of expansion on social
overhead to be accompanied by slow rates of growth of final output,
followed by a rapid growth in 'directly productive investment' and
gross national product. This is because an economy must make
a large investment in these 'utility' investments with their high
capital-output ratios, before the more productive investments can
take place. In this period for which we have data for the United
States, something like this in fact takes place. Long cycles in
investment in the transport, power and communications industries
- indeed in all construction, including housing - show peaks at
the troughs in the rate of growth of gross output, and vice versa,
in the nineteenth century. The same holds true for the relation
between investment in social overhead and individual industry rates
of growth.I
This correspondence between predicted and observed behaviour
is somewhat superficial, however. For one thing, the traditional
theory would expect that social overhead investment in an area
should result in a rapid growth of industry in that area. In general,
however, that is not what happened. The rapid growth of social
overhead capital in the West resulted in a rapid rate of industrial
grov.1:h in the East. The effect of the social overhead investment
on manufacturing did not work through the lower cost of social
overhead services to industry, but through reducing the costs of
inputs into manufacturing by aiding in an expansion of the supply
of those inputs.z The relationship we find between investment in
social overhead and the growth in output is an accident of the fact
the United States in the last quarter of the nineteenth century was
a mixture of industrialized and underdeveloped regions.
This becomes clear if we follow the picture into the twentieth
century. In the first of the long cycles we see the rate of growth of
output peaking around 1900, preceded by one peak in railway
investment in 1892 and followed by one in 1910. Investment in
street railways, much more related to urban industrial growth, peaks
1 For the gross figures on cycle peaks and troughs for GNP and utility invest-
ment see Ulmer, op. cit. pp. 134-5. For the industry dats, see Bums, Production
Trends in the U.S. since 1870, Chapter V.
2 It would not require an excessively broad interpretation of the terminology
to credit this impetus to manufacturing to the investment in social overhead capital.
It does, ho\"ever, contradict the traditional theory that domestic, i.e. local invest-
ment in social overhead capital is necessary for the expansion of local manufacturing.
The effect of railway investment in undeveloped areas on manufacturing costs in
developed areas contradicts the assumption of the immobility of social overhead
services in the same way that trade can equalize factor prices even if the factors
themselves do not move in trade.
274
in 1903, while telephone and telegraph communication reaches a
plateau in 1903 and holds that level until 1909 before dipping
slightly. 1 Housing reached a peak midway between the two extremes
- in 1905. Electric utilities, which are more widely in demand, also
peak in 1910.
By the end of World War I the United States is a much more
distinctively industrial country and for the first time its wave of
investment in social overhead coincides with the peak rate of growth
of output, as well as with a similar wave of investment in the U.K.
In contrast, investment in agriculture in the U.S. and in social
overhead capital in Canada which predominantly remained a primary
producing country was reaching its trough at precisely the point
that investment in social overhead was peaking in the industrial
countries. The U.S. had made its transition: Canada had not.
It would be nice if we could compare this experience with the
data for more countries. Unfortunately, in the current state of
statistics, that is not possible. However, the point is an important
one, for if true it suggests that the real advantages of building social
overhead capital in an undeveloped country may accme not to that
country but to the users of its products. A country which desires
to stimulate growth might be better advised to encourage the con-
struction of social overhead capital in other countries. 2 By creating
an enlarged supply of some important input, it may create condi-
tions favourable to private l!nco-ordinated investment in manu-
facturing-cum-overhead in its own country. This is by no means
a certainty, but it is a possibility which arises from the mobility
of products produced with the services of foreign social overhead
capital, and from the diminished risk associated with investment in
social overhead for the expansion of industrial, as opposed to primary
goods, capacity.
The final empirical test I suggested at the beginning of this
session was the comparison of the economic growth of countries of
world economic history is, unfortunately, not sufficiently wide to
offer any definitive evidence on this point. Yet I think it is easy
to point out that at best social overhead is a necessary, and certainly
not a sufficient, condition for self-sustaining economic growth. Cer-
tainly in 1845 the south-eastern U.S. was better equipped with
social overhead than was the 'old Midwest' (Ohio, Indiana, and
Illinois), the trans-Mississippi area. Yet, looking backwards we
know that it was the frontier areas that were destined to grow.
1 Taking deviations from trend 1903 is clearly the peak.
• In a stimulating book, Douglass North has argued that this pattern developed
in the southern U.S., The Economic Growth of the U.S. 1790 to 1860 (1961).
275
British capital flowed to India in large quantities for investment in
social overhead capital in the 1850-73 period just as it flowed to the
U.S., Canada, and Australia, yet the latter countries grew and
prospered while India stagnated. Even traditionally backward
southern Italy did not suffer from a comparative disadvantage in
transport facilities compared to the more progressive north during
the latter part of the nineteenth century. 1
There can certainly be a great deal of argument about what
level of social overhead capital stock is considered sufficient for
the initiation of self-sustaining economic growth, and I would be
willing to accept anyone's objective statement of what that level is.
Yet one hunts in vain in the literature for a definition which is more
meaningful than 'the required amount is the amount required'.
Present-day India has the same railway mileage per square mile
that the U.S. had in 1875 and a substantial mileage of good highways
as well, yet the U.S. in 1875 was well on her way to industrial
supremacy, and most of us are much less sanguine about India.
Electric power consumption in India is low today, but was non-
existent in the U.S. as of 1875. The same is true of most communi-
cations facilities. I will not deny that these things are all more
important in present-day production functions. The only point I
wish to make is that current theory offers us no guide-posts for
making it meaningful.
IV. AN ALTERNATIVE HYPOTHE:il:i

In this section I will raise, somewhat tentatively, an alternative
hypothesis to explain the events of history. It is an heuristic model
- rather intuitive and not completely worked out - but it has a
certain correspondence with the facts.
First, let us recall my concept of the way in which pecuniary
external economies affect the process of economic growth. Assuming
that entrepreneurs perceive the future correctly, on the average,
they will still not wish to act on the assumption that their expecta-
tions will come to pass. The future is not certain, only probable,
and men will not want to take all the risks implicit in their forecasts.
So far all we have said is that risky investment will require a
risk premium and that risk premium will reduce the scale of private,
unco-ordinated investment. The important conclusion, however, is
1 R. S. Eckaus, 'The Development of Regional Economic Differentials in
Italy: North and South at the Time of Unification', Center for International Studies
(1960) hectographed.
that the size of that risk premium is a function of the amount of the
returns from the investment that must be derived from economies
which are initially at least external to the original decision to invest.
This functional relationship implies that risk is a function of the
unknowable and uncontrollable and that the size of the premium
is not determined by general nameless anxieties but by specific
elements outside the control of the business planner.
Like the situation postulated by Chenery and Rodan, co-ordina-
tion of plans would, under these conditions, provide a higher level
of output at a given cost, or a lower level of costs for a given output.
In this case, however, the advantage stems from the reduction of
risk rather than from the correction of poor foresight. In this area
we have little basis on which to choose between the two hypotheses,
although I think that as we develop the model further, the uncertainty
variant will have a little better explanatory power.
Let us look now at some of the dynamic implications of the
hypothesis. For simplicity let us postulate an economy with only
three sectors. Sector A includes that complex of activities in which
the expansion of capacity involves 'substantial' interrelation effects.
This means that some investments in the complex exhibit substantial
economies of scale, have long gestation periods, and are quite durable.
The associated 'using' industries in this complex, therefore, show
substantial pecuniary external economies. Sectors B and C include
those activities in which 'substantially all' economies are internal.
Sectors A and B produce goods which are perfect substitutes for
one another and which are inputs into Sector C. Finally, assume
that Sector C produces at constant cost and Sector B at increasing
cost. Sector A, as suggested earlier, exhibits economies of scale in
the relevant range and hence produces at long-run declining cost, but
there is no necessity to specify the shape of short-run marginal cost.
Now if the 'true', or co-ordinated, rate of return in a marginal
investment were the same in all three sectors, there would be
no investment in Sector A because of the risk associated with
the investment. As demand increases in this economy, Sectors Band
C would be the recipients of the additional investment to increase
capacity since the actual rate of return to investments in those
sectors would be greater than the risk-adjusted rate of return in
Sector A. Assuming perfect competition so that prices and costs
are equal, the increasing investment in Sector B will tend to raise
prices in that sector and in the competing Sector A as well. Since
Sector B only produces part of the inputs into Sector C, prices in
the latter sector will rise but more slowly.
As these price rises take place, the current rate of return rises
277
in Sector A, and with it, the risk-adjusted rate of return. Initially,
these increased returns will not result in an expansion of the supply
of A, because after adjustment for risk, returns are still below those
in other sectors. Since competition holds the rates of return in the
other sectors to minimal levels, there will eventually come a point
where investment in A finally seems more profitable than continued
investment in B.
When investment in A begins, it will not be undertaken on the
ideal scale because of the perceived risk that the necessary ancillary
investments will not take place. But since we assumed that the mean
expectations of entrepreneurs were indeed correct, these ancillary
investments will be made. As more of these investments are moved
from uncertain possibilities to actualities, the risk associated with
investment in Sector A will be reduced. It will be some time before
the incentive to invest in A will be wiped out by new investment in
that sector. This will be particularly true if investments in A have
long periods of gestation so that current returns and prices in that
sector can continue to rise even after investment begins. Investment
wiil continue to take place until all the reverberatory effects work
themselves out and the 'true' rate of return, now equivalent to the
risk-adjusted rate, is equal to that in Sectors B and C. As this
investment takes place, costs in A will fall, depressing prices in A,
B, and to a iesser extent, C.
The result is an alternating cycle in investment in A, on the
one hand, and B and C, on the other. Coinciding with that cycle
will be a similar cycle in relative prices and observed average profits.
Furthermore, the cycle is likely to repeat itself indefinitely, though
without any particular implications for the length of the fluctuations.
Now let us try to put some flesh on the bare bones of our alpha-
betical sectors. I would like to think of Sector C as representing,
for the most part, manufacturing industry. As I suggested before,
it may set:m more useful at times to recognize that manufacturing
industry can exhibit economies of scale that are quite important to
the industry of any given country, but these are usually quite smail
relative to the world economy and it is this arena which is of interest
to us right now. Sector B I would like to think of as the group of
primary-products producing activities operating from mineral de-
posits that have already been developed and land that has already
been settled. Expanding the output of copper from an existing
mine, or the output of wheat from an existing farm is assumed to
be an increasing cost activity and involves a minimum of secondary
effects. Again, there are undoubtedly exceptions, but I will stand
on the generalization.
Sector A is also largely a primary-producing activity, but involves
substantial additions to capacity. Behind the formulations of this
sector lies the implicit assumption that discovery and exploitation
activity is sufficiently well organized that when new low-cost sources
of primary products are found, they will, for the most part, be
found in areas which are not intensely developed economically. In
a way, this is a tautology in a rationally-run economy: if an area
were fully developed, its resources would be used up to the same
margin as similar resources all over the world. 1 At any rate, if it is
empirically true that the expansion of raw material supplies at
anything other than increasing cost requires the development of
new areas, such an investment will be of the type I have relegated
to Sector A.
The development of these new resources will require the import
of labour into the new area, and the construction of new houses,
schools, churches, and recreational facilities to go with the workers. 2
Industrial forms of social overhead capital will have to be built
as well - transport networks, power and communication systems.
All this is just as in the existing theory. From our point of view,
however, there is no reason why social overhead characteristics
cannot be associated with manufacturing investment as well. Nor
is there any reason to suppose that it will be an insuperable obstacle
to the development of the new area. It is true that co-ordinated
investment would justify the development of the new area somewhat
sooner than would private incentive, but the area is not doomed to
stagnation without a burst of investment in social overhead. Further-
more, while co-ordination of investment would speed the develop-
ment of any given area, this improvement will only take place at the
expense of the other new areas which are suitable for the expansion.
Let us look at some of the differing simplifications of this model
and the more traditional approach. First, there is no implication
of any special role for the transportation, power, or communications
industry as a prerequisite for economic development in the model
I have presented here. Social overhead capital is a customary part
of expansions in any of the sectors I hypothesized, but there is no
reason to single out any particular part of those investments for
special significance. All of the investments are interrelated and
1 For a fuller discussion of the implications of various theories and hypotheses

about natural resources scarcity and the techniques available to an economy for
avoiding the effects of limited resource availability, see Harold Barnett, The Eco-
nomics of Natural Resource Scarcity (to be published by John Hopkins University
Press for Resources for the Future).
' Note that in this model, housing is directly tied to investment in social over-
head capital, unlike the more usual theoretical treatment.
279
subject to the same risks : the new farms or mines as much as the
railroads.
Second, a pattern of alternating investment is an essential part
of my model (though not necessarily a cyclical pattern of constant
period). On the other hand, it seems out-of-place in a hypothesis
which assumes that there are obstacles to establishing a stock of
overhead capital, but that once established this stock will permit
continuing economic growth.
Third, my model suggests that social overhead capital investment
will be almost immediately profitable under private initiative if it is
associated with urban and industrial investment, and init1ally shows
only small profits or actual losses if it is associated with extensive
investment in new areas. It is only the latter type where investment
decisions are likely to be affected to a considerable degree by sub-
stantial amounts of aid.
Finally, it suggests why some countries with substantial social
overhead capital may not show as much growth as other areas with
little. The social overhead is only a means to an end. Subsidized
overhead capital may benefit one country or industry at the expense
of another, but a railroad with little to carry is not of much aid to
industrialization.
In addition, there are two points which are suggested in my
model and are capable of statistical test which are not covered in
the existing theory of social overhead capital. One, I would expect
to find alternative cycles in relative prices of industrial and primary
products which correspond to the cycles in social overhead capital
and other investment. Two, I would expect to find the periods of
investment in raw material capacity marked by generally higher
rates of profit and more buoyant prices in both industrial and
primary-producing sectors than in the periods marked by industrial
investment. A thorough check of these hypotheses would require
a paper of its own, but Professor Rostow's work on the British
economy and my own on the American tend to confirm these
hypotheses. 1
V. THE IMPLICATIONS
Nothing in this paper contradicts the line of argument developed
by the path-breaking theorists who first emphasized the importance
1 The cycles peaking in the 1820's, 1840's, and early 1880's in both the U.S.
and Britain were considered to be periods of low profitability, and the latter two
periods were the subject of contemporary legislative investigation. Things were
bad in England in the 1860's, but the U.S. was going through the Civil War.
Much the same evidence applies to prices in the alternate cycles. Rostow, The
British Economy, and Cootner, op. cit.
280
of pecuniary external economies in inhibiting economic growth.
Instead, what it does is widen the concept of pecuniary external
economies to include all situations in which imperfect knowledge of the
future reduces the scale of investment and the responsiveness of the
economic process to the signals of a price system under private enter-
prise. I hope it is clear that the concept adds to, rather than reduces,
the scope of the arguments presented by the pioneers in this area.
On this specific point of relationship of social overhead capital
to these growth-inhibiting characteristics, the verdict of this paper
is more ambiguous. I have argued that social overhead capital is
the wrong concept. If it is defined in terms of sectors which we
normally call 'industries', I have argued that it is a clumsy concept.
Such a definition includes much investment outlay which does not
exhibit substantial economies of scale. If it is defined so as to
include only the sectors with economies of scale, it omits a large
amount of investment outlays which have almost identical charac-
teristics and effects. In either event, I find little evidence of great
force to suggest that there is a necessity for social overhead capital
to precede growth or for investment in social overhead capital to
be delayed until markets were assured.
If the conclusions of this paper hold true, they do suggest some
implications about the nature of the factors leading to self-sustaining
growth. The risk premiums that individual investors will demand
in undertaking investments with returns heavily weighted in the
future and largely dependent on the independent investment de-
cisions of others are larger than would be necessary if these decisions
were co-ordinated and the future assured. Even without centralized
planning, however, the results of private initiative would be much
closer to the social optimum if only each investor were secure in
the belief that all of these uncertain events would indeed come to
pass. It is a form of self-fulfilling prophecy : if each investor acts
on the assumption that all these projects will be undertaken, then
they will, in fact, be undertaken.
It is clear that one of the factors which would be most conducive
to this set of expectations is the fact of past growth itself. If,
initially, investors fail to act on new expansion projects until their
profitability is assured on the basis of current demand with a mini-
mum of expectations about the future, the reverberatory effects will
yield very large windfall gains. That is, as the classical equilibrium
works itself out, the economies which were formerly external will
be captured by the firms involved. Unless this example is set in
a culture singularly unreceptive to the spur of economic gain, it
should encourage some emulation.
281
Initially, the secondary effects should be slow to work themselves
out, and the slowness and uncertainty will undoubtedly inhibit
imitation. As the number and the resources of the entrepreneurial
class grows, it will not only increase the number of potential risk-
takers, but in line with the self-fulfilling aspects of the situation, it
will increase the speed with which the external economies are internal-
ized and it will reduce the risk of failure.
The burgeoning confidence and optimism produced by these
successes is a delicate flower, one that is especially sensitive to
drought. This may be a drought of profits due to the efforts of the
central government to restrict the profitability of the investments
with the scale economies, or due to the unsettling effects of revolu-
tion and disorder. It may be due to too much government or too
little. 1 But it would seem likely that, at some point, self-sustaining
growth will ensue.
In the kind of world I have portrayed, nothing succeeds like
success. Even aside from the success of a group of related invest-
ments, a strong growth trend reduces the risk of failure. Assume
an entrepreneur is interested in building a railroad into the frontier.
Assume further that the road is not justifiable on the basis of current
demand but on the other hand would be profitable if all other
economic units proceeded on the assumption that the railroad would
be built. In the absence of the railroad, less efficient transport
would still make it possible for some slower rate of growth to take
place. Now, the faster this rate of growth sans railroad, the more
willing will be the entrepreneur to start construction prior to the
development of sufficient current demand. In other words, the
faster this basic rate of growth, the less risky will be the enterprise
and the closer will private investment approximate the social opti-
mum. If a nation, therefore, is a low-cost supplier of Commodity A
which is subject to a secularly growing demand, it will be even more
encouraged to expand the production of B which is subject to external
economies than a country with similar resources but which does not
produce A. This is because if the risky investment in B fails, it
may be salvaged by the expansion due to the growth in A, while the
country which depends on B alone faces greater possibilities of loss.
In one sense, this reflects the more general proposition that diversi-
fication reduces variance of return. 2
I think that this sort of phenomenon may explain some of the
1 I would like to emphasize that even if government action should impede this
development, it may be desirable if a social choice decides that the slowness of the
private path cannot be tolerated and must be replaced by government action.
3 If, as we assumed, the diversification involves a probability distribution of
return with a variance l"qual to or less than that of the original investment.
z8z
differentials in the rate of economic growth in countries with similar
endowments of social overhead capital. Most of the major surges
of extensive investment in the nineteenth century were based on
the needs of the rapidly-industrializing countries for new sources
of food products and textile raw materials. In view of the major
land areas and the small resident populations it was fairly clear, to
those who took the long view, that the American prairies and the
Argentine pampas and the Southern U.S. Black Belt were going to
be needed as sources of future supplies. If it in fact turned out
that the 1850's were too early for railroads to Iowa or farm machinery
plants in the Mid-West, then one would just wait until the 1870's,
painful as that might be. Sooner or later, these resources were
going to be needed. The land was there and the railroad gave assur-
ance that the supplies could be furnished cheaply. Not only social
overhead, but manufacturing investment as well, must have bene-
fited from this outlook.x
In contrast, the more densely populated areas offered little of
this kind of insurance. It must have been hard to envision any
substantial exportable surplus of grain from India or Indonesia.
Even if expansion did take place in those areas it would be un-
likely to take place in the form of large-scale immigration with
its accompanying growth in local demand. In the same fashion
that one can predict today that Mrica is more likely to be a major
supplier of such future raw materials than is South-east Asia, it
must have been possible to make the same kind of forecast 100
years ago.
I think the problems of countries like Egypt and India can be
seen more clearly if we look at their nineteenth-century economic
history. The golden decade for each of them was the 1860's and
the reason was the same in both cases. The American Civil War
had halted the export of much of the South's cotton. With that
supply cut off, and only with that supply cut off, Egypt and India
prospered and received substantial investments designed to increase
their supplies. When the war ended, however, the South regained
its dominant position although it never became quite the exclusive
supplier it had been. For all three areas excessive supplies of this
basic material depressed the rate of expansion for many years to
come. Growth in these regions was aborted despite the investment
in Egypt and India in the 'sixties and the prosperous condition of
1 The assured future does not have to depend solely on agricultural supplies.
Large convenient supplies of iron ore and coal may assure a region of its eventual
development as an iron and steel centre in much the same way. Similarly, invest-
ment in market-oriented products will be encouraged by any good potential market,
no matter what the source of its income.
283
the pre-war South. The risk associated with investment in these
areas was higher than elsewhere.
It is at this point, finally, that I think the relationship of all this
to the take-off may appear. In my model of the world, industrial
and economic growth will tend to come to those areas which have
some major products to sell in world markets no matter what the
source of their comparative advantage. If this is true, it tends to
support Professor Rostow's theory about the importance of leading
sectors. Indeed, it seems almost inevitable that the 'take-off' should,
as a practical matter, be dated during one of the surges of investment
that we have described. On the other hand, it places social overhead
capital in a somewhat subsidiary role.
Nothing I have said should be taken to imply that nations cannot
stimulate their rate of growth by intelligent programmes of subsidy
and aid, particularly if entrepreneurs, unlike those in my model,
have erroneous views about the future. What it does imply is that
it would be a better strategy to alternate in encouraging different
sectors as world incentives change than to concentrate on a single-
minded attempt to improve social overhead capital or subsidize
manufacturing industry.
There is one other, perhaps empirically verifiable, implication of
the theory for comparative growth. In a culture with a low level of
risk-aversion 1 imperfect foresight should pose less of an obstacle
than in a society with a great distaste for risk. Traditional societies
would probably fall in the latter class, and societies that tolerated
change, in the former ;2 but if we could derive the supply curve of
risk-taking we could have an objective way of distinguishing the
characteristic that distinguishes receptiveness to growth.
I have found that the development of this paper has led me far
from where I thought I would end when I first began. Still, looking
back it is not too surprising to find that risk-aversion is an important
factor in dynamic economies. If, in addition, we can link risk to
certain other objective criteria such as economies of scale and periods
of gestation we may yet be able to assimilate this intractable concept
into a theory of economic behaviour.
1 'Risk-loving', however, would not be desirable.
• It may be that the Protestant Ethic, by preaching predestination, tended to
reduce anxiety about the future and hence reduce risk-aversion. However, the
establishment of such a relationship, if it exists, would require a broader, inter-
disciplinary, attack than I can bring to bear.
a84
Chapter 16
FOREIGN CAPITAL AND TAKE-OFF

BY
KENNETH BERRILL
Cambridge University
I. INTRODUCTORY
THERE is a strong temptation to begin any paper on Take-off
with a section debating the whole concept, but that temptation I
will resist. The discussion of 'Foreign Capital and Foreign Ex-
change in Take-off' is planned for the end of the ten-day conference
and by the time this is reached the preliminary ground of whether
take-off is an historically valid generalization will have been ploughed
over and harrowed down to a fine tilth. So, for the purposes of this
paper, I will plunge in with two assumptions: (i) that in the history
of most advanced economies we can identify two or three decades
in which some sectors strategic to further growth and industrializa-
tion grew with new pace and with new firmness; and (ii) that
these take-off periods are roughly those suggested in Rostow's
Economic Journal article of March 1956. Accepting the take-off
proposition uncritically for the moment, then, what can we say
about the part played by foreign capital in the process ?
Inevitably, the first comment to be made is on the weakness of
the statistics. It would be unrealistic to expect a country which
had only advanced as far as take-off to have good statistics but
they are better in some fields than in others. Foreign trade figures
are often relatively good and foreign capital figures usually bad. If
capital movements are calculated as a residual in the balance of
payments the range of error, especially in the invisibles, is depressing.
If calculated directly by types of asset the difficulties are almost as
great. Long-term debt fluctuates continuously in value and it is
hard to know just what the foreigner paid for it. Short-term debt
leaves little evidence behind, especially trade credits. There may
be useful figures on foreign holdings of government debt and public
utilities and very little on direct investment in companies. Even
the holdings of government and public utility debt by foreigners
may be very doubtful. For example, the U.S. take-off just before
285
The Economics of Take-off into S-uStained Growth
the Civil War is usually said to have depended heavily on foreign
capital, especially on British investment in U.S. railways. Yet one
expert in the field has recently argued that the British were dis-
investing in U.S. rails 1840-60. 1 So the usual reservations about
how little we really know in quantitative terms about take-off must
certainly be made about foreign capital. But given that our general-
izations must be rather impressionistic what are the main comments
and questions which arise ?
II. FOREIGN CAPITAL A MINOR PART OF ALL CAPITAL

The first characteristic which strikes the observer is that in terms
of quantity foreign capital is very much the minor part of capital
supply during the two or three decades of take-off. On average
over this period the foreigner usually supplied less than 20 per cent
of the necessary savings and sometimes very much less. Possibly
the only exception to this rule was Canada. The volume of foreign
investment in Canada 1905-13 was unprecedented. It doubled in
about seven years and reached a peak of £100m. a year around 1912.
For this short span the foreigner was supplying around a half of
the total capital formation. But even in Canada when the full sweep
of the Rostowian take-off period, 1890--1914, is included, the pro-
portion of capital accumulation supplied by the foreigner drops to
about a quarter.
This historical fact, that the great bulk of the savings needed for
growth and industrialization were generated inside each country,
has long ceased to surprise anyone. Indeed some have gone further
and promoted it to a law of the Medes and Persians which has to
apply in the past, present, and future. It is used to justify the
principle of the International Bank that when they support a project
the domestic expenditure should be covered by local savings and
external loans be enough for only the foreign exchange component.
Quantitatively, then, foreign capital was of only minor import-
ance in capital formation during take-off but can we leave it at that
or is it qualitatively of much more importance than it appears
statistically ? This is a version of a question which arises when
considering the general importance of capital in the take-off. As
originally presented, the two basic ingredients for take-off were a
rise in the rate of net investment from under 5 per cent to over
10 per cent and the spread of the habit of innovations through
1 John J. Madden, 'British Investment in the United States, 1860-80.' Con-
ference on Research and Wealth, September 1957.
286
Berrill- Foreign Capital and Take-off
important parts of the economy. Some recent discussions have
tended to play down the part played by capital because statistical
studies of the take-off suggest that the percentage of the national
income invested was seldom as high as 10 per cent net and that
there is little sign of the sharp rise in the proportion invested which
the original formulation suggested.
Such statistical averages demonstrate little, for it is so often the
direction and the yield of investment which matters and not the
quantity. A sharp reduction in transport costs, the expansion of an
industry with a large market, can produce economies of scale and
yields from investment which are revolutionary compared with the
same amount of investment in traditional lines.
Similarly foreign investment may be small in proportion to the
total capital being accumulated, but is particularly likely to go into
new fields rather than into the traditional agricultural and urban
construction sectors. It can therefore perform a task out of all
proportion to its size. It may well bring in new ideas, technicians,
machinery from abroad. It can provide the links to foreign markets
and the knowledge of foreign tastes. Since the most common form
of foreign lending is government bonds or government guaranteed
bonds for public utilities, it is a way in which the state can get
development funds in a convenient and painless form. Convenient
because it is in foreign exchange and such development is bound
to mean both increased imports of capital goods and pressure to
import more consumer goods. Painless because the alternative is
to try and raise more development funds from local taxes or on the
local capital market. Increased taxes pose their political problems,
borrowing more heavily on the local capital market has economic
ones, and neither will yield foreign exchange. This tremendous
convenience of foreign borrowing is its greatest danger, for the
repayment problems become severe if new loans dry up and foreign
exchange earnings fall in a slump.
III. THE VALUE OF FOREIGN LENDING IN TAKE-OFF

These last sentences have emphasized in a general way the value
of foreign lending to a country during take-off. But this is a priori
reasoning, it has yet to be shown whether it did play such a vital
role in take-off, whether fast growth was particularly correlated with
capital import. However, before we look in mere detail at the part
foreign capital actually played, it is worth while to remember that,
as with so many economic variables, its effect can be helpful or
287
harmful to economic growth depending on the other factors at work
(e.g. the effect of a rapid increase in population). It is true that
three-quarters of the foreign investment before 1914 went to coun-
tries which industrialized (Western Europe, Russia, Japan, U.S.A.,
Canada, Australia, etc.) and only about a quarter to countries which
remained poor (India, Egypt, Latin America, Black Africa, China).
In these backward countries most of that quarter went in loans to
governments for railways and harbours rather than direct invest-
ment in production. But even so it can be argued that in some
important cases foreign capital in the form of direct investment,
small though it was in relation to the total of foreign investment,
served to hinder development rather than help it.
Typically in these cases the foreign capital set up export enclaves
(small initial investment in mines and plantations built up by
ploughed back profits). Output increased, often spectacularly,
foreign skills and foreign markets were utilized in new ways, tax
yields were raised which formed a possible development potential.
But the countries remained poor. The reasons, as we know, are
many and various, particularly the stubborn inefficiency of the rest
of the economy. But is it fair to argue that an important ingredient
in the continued backwardness was the very existence of the export
enclave ? In many instances a good case can be made out that it
was. 1 The enclave is anxious to buy the most convenient and
cheap goods from anywhere in the world and is earning the foreign
exchange to pay for them. They bring pressure to bear on the
government to allow free entry and, for a while at least, receive
considerable local support. This is because a powerful section
of the local bourgeoisie makes its living by supplying the enclave
and the urban middle class, often with imported goods for which it
has the agency. The result is an enclave development which 'leaks
abroad' to a much greater extent than one might imagine from the
mere fact that the capital is foreign owned, indeed it may well be
ploughing back its profits continuously.
The classic case of enclaves and comprador society is usually
given as the Chinese Treaty Ports but there are many others. Until
the end of the nineteenth century the expansion of South Mrica's
diamond and gold fields had a small effect on the rest of the economy.
Even much of the food was imported from Australia. The Ceylon
plantations imported both food and labour, while the twentieth-
century expansion of oil in Iran provided so much foreign exchange
1 See S. H. Frankel, Economic Impact on Under-Developed Societies, Oxford,
1956, and H. W. Singer, 'The Distribution of Gains between Lending and Borrow-
ing Countries', A.E.R. May 1950.
that not until the Abadan crisis and the restriction of imports did
local manufacturers receive much stimulus.
This digression away from foreign capital and take-off to foreign
capital and backwardness was made in order to be fair on the role
of overseas investment. It can and did inhibit growth in some
cases but this was very much the minor part of the story. There
is no doubt that the weight of the evidence is against the Marxist
viewpoint that this was its main function. 1
IV. UNASSISTED TAKE-OFF: THE BRITISH CASE

With that digression let us return to the take-off. We said that
in all cases foreign capital was quantitatively much the smaller part
of capital formation, but within this fraction there are very wide
variations from case to case in the importance of investment from
overseas.
The extreme case of 'go it alone' was probably Britain which
is hardly surprising considering that there was no more advanced
country from whom she could borrow. The early eighteenth cen-
tury had seen a certain amount of Dutch investment in Britain,
especially in government stock, but this probably was repatriated
in the later eighteenth century, though the facts are obscure.z
For the take-off period itself (say 1790-1810) the best guess is
that she was exporting rather than importing capital. She was
lending money to European allies in the Napoleonic Wars to bolster
their war effort and at the same time some private European funk
money was coming from France. Much of the debts to governments
were defaulted yet Imlah estimates that in 1810 she was a net creditor
in foreign investments though to the insignificant tune of £10 m.
So we can say that Britain did not need foreign capital to assist
her take-off. Britain's ability to do this needs some explaining. It
is significant that she was able to earn foreign exchange without
difficulty - her take-off was based on a faster expansion of exports
than of any other market. Secondly, there was no great overhead
capital involved in the process - canals used little compared to the
railways of the 1840's.J Thirdly, there was no need to import much
foreign machinery, technicians, or get foreigners to supply links to
outside markets. Finally, the British banking system and capital
1 See Paul A. Baran, The Political Economy of Growth, London, 1957, for a
modem statement of the Marxist position.
a C. Wilson and A. Carter, 'Dutch Investment in eighteenth-century England',
Economic History Review, April 1960.
J P. Deane and M. Cole, The Course of British Economic Growth (forthcoming).
289
market had been improving rapidly before 1790, and the modest
amount of capital needed for bulky projects could as well be raised
in London as anywhere.
Britain could and did take-off without foreign capital, indeed
she probably lent abroad to a small extent in the process. Nor was
she alone in this. France is said to have taken off 1830-60. She
was importing a certain amount of British and Belgium private
capital in the late 1830's for her first railway lines and for textile
plant, but by the 1850's before the end of take-off France was join-
ing Britain as a lender in world markets. Similarly Germany, whose
take-off dates are given as 1850-73, borrowed a little during her early
railway construction of the 1840's but that was before take-off and
also a little private direct investment by foreign entrepreneurs. But
in the 1850-73 period she provided all the capital accumulation
from her own funds and indeed by the end of the period Hamburg
was beginning to lend to overseas markets.
V. THE CASE OF JAPAN

Britain, France, Germany can be said not to have needed out-
side loans in order to become industrialized, but what of late-
comers ? There are large variations. Let us continue by looking
at countries which borrowed relatively little. Finland is one case
in point and Japan another.
Japan's take-off dates are uncertain in the Rostow article. Should
they be 1878-1900 or 1890-1914? If we take it as 1878-1900 then
Japan is another country which took-off without outside finance.
This was partly due to her low credit standing in world markets
and partly because her government was suspicious of foreign domin-
ance arising from borrowing (e.g. Turkey and Egypt). In 1868
the new Meiji government had to pay 15 per cent for a small three-
year loan from the Oriental Banking Corporation. In 1870 they
could borrow £1 m. for thirteen years at 9 per cent for the first
short railway, but beyond this she raised almcst nothing. The
1870's with rebellions and inflation did little to help her credit
worthiness and she entered take-off in 1878 with 6 per cent of her
national debt held abroad. 1 She finished take-off in 1900 with
0 per cent of her national debt held abroad and there was no pri-
vate investment of any size either way. Increased exports, par-
ticularly of silk and specie, had provided the foreign exchange for
increased imports.
t G. Ranis, 'Financing Japan's Economic Development', Economic History
Rftnew, 1959.
If we accept the 1890-1914 period for Japanese take-off this
picture of Japan doing without foreign loans needs some modifica-
tion, but not very much.
Early in the new century conditions were changing. The
Japanese fears of foreign dominance from government borrowing
were being tempered by their growing strength and independence
and on the other side the credit status of Japan rose greatly with
her victory over the Chinese in 1895, her adoption of the gold
standard, the Anglo-Japanese Agreement of 1902, and so on.
So after 1903 she joined in the very great amount of international
lending which led up to the Wall Street crash of 1907. The bulk
of the loans were government bonds and went to pay for the war
with Russia, but some of it went to electricity projects, railways,
and banks. By 1907 Japan had in a very short time reached a stage
when half her national debt was held abroad. But that was the end
of the spending spree. Between 1907 and 1914 enough was bor-
rowed to pay the interest on the outstanding debt and leave a little
over.
Foreign investment in Japan, then, was not an important cause
of take-off. It comes very late, it is restricted to a short burst of
years and a lot of it was concerned with war expenditure rather
than capital formation. If we assumed that all of it did go to capital,
the foreign borrowing supplied only about one-seventh of Japan's
savings 1900-14 1 and very much less over the 1890-1914 take-off
period.
VI. SOME CASES OF ASSISTED TAKE-OFF

Foreign capital can be said to have played virtually no part in
the take-off of Britain, France, Germany, Finland, and Japan. On
the other hand, the absence of foreign capital is by no means the
same as an absence of foreign technicians and machinery as we
well know in the Japanese case. But these countries are at one
end of the spectrum; let us look at the other end, at, say, Canada
and New Zealand.
The Canadian take-off dates are given by Rostow as 1896-1914.
Before the start of take-off in 1896 Canada had not proved a very
attractive field for foreign investment. There had been a certain
amount in canals in the 1840's and another burst of British invest-
ment in the boom around 1870 which saw a few short railways
constructed, but the low prices for primary products 1873-96 made
Canada once again unattractive and both capital and immigrants
1 Nural Islam, Foreign Capital and Economic Development, Vermont, 1960.
291
very much preferred the U.S.A. But by 1896 when prices began
to be more attractive Canada was ready for the great surge forward
of her primary industries. The reasons were partly technical (90-day
wheat and the Sulphite Pulp process in timber) and partly the
possibilities of her soil and her minerals (gold, silver, coal). But
with population and resources spread out so thinly over a vast area,
railways were quite crucial, and yet they would have to be pushed
through in advance of demand and would scarcely pay their way
for many years. In fact they were still not earning enough to pay
the interest on their borrowed capital by the end of World War I
but they had played their part in development magnificently.
To build her railways Canada imported capital on an enormous
scale. By 1913 capital import totalled £600 m. and had reached a rate
of £100 m. a year in 1911-13. This was quite unprecedented in
world experience. Some features are worth comment. The first is
the strength of market tradition in the type of investment. The
British, who supplied three-quarters of the capital, were safe-seeking
investors buying government and railway bonds inside the Empire
where default was unthinkable. Only 10 per cent of the British
investment was directly into production ventures. The U.S. in-
vestor, on the other hand, put his money very largely into produc-
tion, particularly into agriculture and metals, with box-cars of solid
agricultural capital coming up over the border accompanying the
migrant farmers. It is interesting to see that even with this fast
expanding market, protected by a tariff, there was the usual reluc-
tance of foreign manufacturers to come and set up plants or of foreign
investors to put their money in local manufacturing companies.
Only about 5 per cent of this huge investment went in this direction,
into textiles, boot and shoe, machinery manufactures.
The second comment is that this huge volume of borrowing
did not turn out to be a 'boom and bust', i.e. over borrowing fol-
lowed by default when primary prices fall and loans dry up. The
Canadian economy was able to go on borrowing abroad right through
till the 1930's with each year new borrowings greater than the service
charge so their old loans were not too much of a burden on the
balance of payments. In 1913 60 per cent of her government debt
was held abroad and debt service had reached 25 per cent of her
export earnings, so the importance of this continued flow of new
borrowing is obvious. Canada was fortunate in that World War I
kept primary prices high and encouraged the growth of her manu-
factures. Had there been no war the expansion would almost
certainly have slowed down for a while and she would have had a
hard time collecting the taxes to service the debt.
292
The third comment is that even in this outstanding case of
take-off based on imported capital the foreign lender did not initiate
the expansion but joined in long after the expansion was under way
and when prospects had looked bright for quite a while. If take-off
starts in 1896 with rising primary prices it is not till 1905 that
Canada is importing capital on any scale and then mainly from
Britain. Not till 1908 does the American investor start putting big
money in Canadian primaries and manufactures. So much for the
dynamic entrepreneur of the more advanced economy.
VII. THE CASE OF THE UNITED STATES

We can interpolate here the remark that the same point about
the lateness of the foreigner could be made about the part played
by foreign investment in the take-off of the U.S.A. If this is taken
as Rostow dates it, 1843-60, there is little doubt that railways
played a vital part- some 27,000 miles of railway were built in
these two decades. There is also very little doubt that foreign
investment helped a lot here as in Canadian railways but via a very
different class of investor and different type of share. This was not
so much safety-seeking capital going to a country where government
default was unthinkable. The state defaults of the 1830's had left
more than a nasty taste in British mouths. This was largely British
iron-masters sending rails for the new U.S. lines and taking com-
pany bonds in exchange to keep their mills rolling. We might view
this as the ultimate in tied loans or in providing the foreign exchange
component of a project, but it serves to remind us that not all bonds
sales were of the open market type. The U.S. take-off then was,
like the Canadian, based on railroads, and there was some important
proportion of the capital for the railroads supplied from overseas,
also like the Canadian case the foreigner comes in rather late in
the day.
As we said above, statistics on U.S. import of capital before
1860 are very weak, but a 'best guess' might put her foreign debt
at some £25 m. in 1838, £40 m. in 1853, and £100 m. in 1861.
The early 1840's saw very little import of foreign capital. The
British were in no mood yet to forget the defaults of the 1830's,
and their own Second Railway Mania of the mid 1840's was keeping
them busy. Capital imports pick up in the late 1840's and become
quite large in the 1850's. As with the Canadian case (and possibly
the Japanese) the foreign investor comes in late in the take-off
period. But the foreign borrowings late in take-off were modest
293
compared with the amount of foreign borrowing after the Civil
War when the U.S.A. was, presumably, marching to maturity. In
the years 1871-4 she imported something like £100m. from Britain
alone.
VIII. AUSTRALIA AND NEW ZEALAND

We may have doubts whether we can fix take-off decades for
countries such as U.S.A., Canada, Australia, and New Zealand
which seem to have fast growth 'built-in' to them from a very early
date- even if they have periods of decades when they have to
digest the excesses of their previous expansion. But if we stick to
the rule announced at the start of this paper and not question the
take-off concept then there is little doubt that Australia and New
Zealand, like Canada, must be said to have taken-off in 1896-1914,
It is worthwhile looking at their experience for a moment or two
because it enables us to weave in another strand, the role of the banks.
New Zealand was a country which borrowed heavily abror.d for
its development, with the usual accent on railways, harbours, and
roads, plus a little immigration, loans, and technical aid to farmers.
Like Canada it could usually sell its government bonds in London
at a yield of 5-! to 6 per cent, and, being in the Empire, it satisfied
the British investor by undertaking to accumulate funds in London
with the Crown Agents to meet the service charges. But it had a
special fillip with the gold rush of 1863 which doubled the white
population in seven years and quintupled the exports in ten. 1 This
Eldorado borrowed heavily up till 1880 right through the slackest
period of U.K. foreign investment. Public debt rose 3! times in
10 years and 95 per cent of the increase was sold abroad, nearly
all in London. This was dangerous, but it provided 1300 miles of
much needed railway. Even more dangerous was short-term
borrowing by New Zealand banks competing for deposits in London
at high interest rates. Banking in New Zealand and Australia
developed on a highly competitive basis particularly because good
profits could be made from handling the output of the gold mines.
There was keen competition to make advances especially for mort-
gages on fast rising land values. Borrowing short and lending long
on this basis was safe only while land values kept rising and the
depositors did not want their money back. The boom broke in
1879 and land values fell 50 per cent.
From the gold rush of 1863 to the crash of 1879, New Zealand
borrowed heavily abroad, and it played a big part in providing the
1 C. G. F. Simkin, The Instability of a Dependent Economy, O.U.P. 1951.
294
basic railway and harbour system. But the burden was heavy in
the lean years after 1880. Debt service was 14 per cent of export
earnings and there were not many years when new borrowing was
big enough to cover it.
As with Canada the 1880's and early 1890's were a lean time for
New Zealand with the stage being set for fast expansion after 1896
when prices rose. In this case the innovation was the refrigerator
ship with its revolutionary effect on the meat and dairy industry.
As usual it took ten years (1884-94) to get over the teething troubles
and be ready for the really large expansion. The government helped
this expansion in many ways including borrowing abroad for rail-
ways, etc., but as with the Canadian and Japanese case there is very
little foreign borrowing till after 1903 and no heavy borrowing till
after 1907. Once again the timing of take-off and foreign borrowing
is not very close.
Australia had a very similar experience to New Zealand though
on a larger scale : the gold rush, the competitive banking, the high
rate of interest for London deposits, mortgages on rising land values,
etc., but the timing is a little different. New Zealand crashed in
1879 and was in the doldrums in the 1880's. Australia through the
1880's worked up to the Melbourne Land Boom extraordinary.
There was the usual state borrowing for railways which was soundly
enough based, but the bank borrowing was mad. When the 1890
Argentine Baring crisis tightened the London market the Australian
banking structure collapsed and of 32 banks only 10 survived. In
the 1890's the credit rating of Australia was so damaged that the
states could not borrow money in London to finish railway lines.
When the recovery comes- rather late, 1900 and not 1896-
the foreign borrowing revives and the British put another £60 m.
in government stock before 1914 and another £18 m. in direct
investment. But as with the other cases we have looked at, it does
not come much before 1903. Also as with the U.S.A. the really
heavy foreign investment is after take-off. In this case it is the 1920's
with £225 m. borrowed abroad most of which, as in the U.S.A.,
went into yet more public utilities.
IX. THE SCANDINAVIAN COUNTRIES

Turning nearer home, Sweden is a country whose take-off is
said to have depended rather more than most on foreign capital
and a better case can be made out in this instance than for many
others. Sweden is said to have taken-off 1868-90 and she was.
295
heavy borrower throughout this period. But it is also fair to add
that she was a borrower right through from 1860 to 1914 except for
a few years in the early 1890's. Most of the borrowing as usual was
government and municipal bonds, and it is interesting to speculate
why the credit rating of the poor Scandinavian countries should have
stood so high. From 1860 to 1875 she was able to borrow easily in
London. Mter 1875 when the pace quickens she moves to the
Paris market for her bond issues, while a little later her banks are
accepting large deposits in Hamburg and making modernization
loans to agriculture and for urban building. For half a century
then, 1860-1914, the major part of Sweden's state and municipal
debt was floated abroad and mostly spent on railways. But here,
as in other cases, it is hard to find any close connexion between
timing of take-off and the quickening of the growth of output and
the amount of capital from abroad.
In the case of Norway, too, the state used its surprisingly high
credit rating to sell bearer bonds abroad in the 1850's and 60's
before take-off. The proceeds were mostly used at this time for
the modernization of agriculture. Take-off is a little later than
Sweden, say 1875-1900, and is accompanied by much heavy govern-
ment borrowing abroad for railway construction. By 1880 over
half the national debt was foreign owned. The process continued
right on past the end of take-off with borrowing for more railways
and for hydro-electric schemes, and by 1909 three-quarters of the
hydro capital was foreign owned (French and Swedish), two-thirds
of the mining capital and one-third of the pulp and paper (British)
besides the foreign holdings of state debt.
If, in Scandinavia, Norway borrows a great deal for her take-off
and Sweden rather less, Denmark borrows less still and Finland
almost none. The Danish borrowing, like the Swedish, is not a
feature of the early part of take-off but the latter. If we take the
Danish take-off as coincident with the Swedish (1868-90) the first
part of this period sees prices for Denmark's agricultural products
high (pre-1875). In this first part of take-off Denmark is a net
lender abroad despite her programme of building railways, ports,
and ferries. Mter 1875 she is less well off, and after 1883 a heavy
borrower on overseas markets. 1 Again there is very little close
relationship between borrowing and the timing of growth.
These thumbnail sketches of foreign investment and take-off are
becoming tedious and a halt must be called, with perhaps a word
or two on Russia, who was one of the heaviest borrowers on inter-
national markets before 1914. Yet once again it is not highly corre-
1 A. J. Youngson, Possibilities of Economic Progress, C.U.P. 1959.
296
lated with take-off which is dated 1890-1914. 1 Mter 1860 the
government was encouraging capital import for railway building
with land grants and a guarantee of interest rates. Borrowing was
heavy whenever a world boom made the conditions propitious, e.g.
1868/72 and some 14,000 miles of track were opened 1860-80.
Borrowing then was heavy prior to take-off though it was heavier
still after 1890, particularly in the Paris market. By 1914 half the
national debt was foreign held, besides heavy foreign investment
in oil, coal, steel, etc.
X. SOME GENERAL COMMENTS

Perhaps we should now recapitulate the part played by foreign
capital in past take-offs into industrialization as suggested by this
rapid survey.
First, quite a number of countries succeeded in doing without
foreign capital to any appreciable extent, in fact they became capital
exporters almost before take-off was over. Secondly, even where
capital was imported it was a minor part of total savings. Thirdly,
the timing of the capital import is not highly correlated with take-
off. It extends both before and after. During take-off it is often
concentrated in the latter years of the period when the quickening
momentum of those particular decades has shown its hand. The
volume of investment after take-off is often the peak in quantity.
Fourthly, most capital imports were bond issues by public authori-
ties or supported by public authorities, and the usual use of the
funds was the creation of public utilities. Fifthly, there was often
a considerable effect on the banking system of the borrowing country
which found its deposits increased from abroad and thus increased
its local lending. The short-run effect of this was increased prices
and the pulling in of imports. Sixth, the advanced lending country
could usually offset its own temporary balance of payment problems
by raising its interest rate to attract short-term funds. The borrower
was much less able to attract the funds it needed in time of trouble,
and capital exports depended very much in the short term on con-
ditions in the lending countries. Seventh, countries which bor-
rowed heavily built up a heavy service charge in proportion to their
foreign exchange earnings and their tax revenues. They were very
reliant on continued borrowing or on continued good markets for
their exports if the strain of debt service was to be tolerable.
1 With the usual dissenters, V. K. Yatsunsky has claimed that the Russian
Industrial Revolution was complete by the early 1880's.
297
Perhaps the surprising thing about international lending pre-
1914 is that default was comparatively rare. The possible explana-
tions are many. Probably the basic reason was that most investment
was 'in success'. The major borrowers were growing fast and
could carry the load. There is the usual reinforcing factor that
while they continued to pay and to grow their credit rating remained
high and they could probably borrow more to cover the debt service,
if need be. The fact that so much lending was fixed interest and
not equity meant that the burden of repayment as the economy
grew was likely to diminish and would also be eased by inflation
of the 1914-20 type. Beyond this, there were certain other short-
run relationships which probably helped. When the slump hit the
export earnings of primary producers the import contraction was
likely to be almost as severe. This was partly because of the fall
in incomes of exporters and partly because the absence of trade
unions meant that other incomes and prices could be pushed down.
Also, the fall in foreign exchange reserves via its effect on bank
liquidity meant a contraction of loans. All this is not to imply that
there were no defaults, the century is studded with them. But,
considering the waves of great optimism and pessimism about the
future of different economies which swept over investors, the wonder
is that there were not more.
When we compare foreign investment today with that of a
century ago perhaps the biggest difference is the small amount of
bond issues. Inflation plus economic growth, have greatly reduced
the status of bonds compared to equities everywhere. On top of
this, the international defaults of the 1930's and the rapid change
in the character of national governments in backward areas in the
1950's makes foreign bonds a poor market. There are exceptions,
of course, and the biggest supplier of foreign fixed interest loans,
the International Bank, is under-lent, in the sense that it has never
pushed to the limits its bond issues and loan making.
This shortage of the traditional fixed interest lending has accom-
panied a rapidly changing attitude towards foreign capital on the
part of the borrowers who are trying to industrialize. A decade or
so ago the emphasis was on the inhibitory effects of borrowing from
abroad - particularly of foreign equity investment which took over-
seas the fruits of growth, interfered in local politics, etc. The
policy was to buy out the foreigner, to tax, to restrict the repatriation
of dividends, etc. Now the emphasis has swung to the other ex-
treme. Capital already invested may still be under pressure,
especially by export taxes, but the drive to attract new capital is
fierce. The world is full of travelling finance ministers trying to
298
raise a few million on fixed interest and prepared to pay rates which
they would not dream of paying for government debt sold on the
home market. The annual budget is an exercise in outbidding other
countries for new private capital by mounting tax concessions,
followed by advertising campaigns to tell the foreign investor of the
new opportunities. Government contracts, too, are a competitive
tender not only in terms of price but in short-term loan finance.
The change in attitude to foreign investment has come because
the pressure to industrialize is so universal that it has overcome
other scruples. There is no need to discuss the reason for the
pressure (prestige, power, rising labour force, the desire for higher
incomes, etc.) but it is worth looking at the reason why this should
so universally produce a desire to import capital. It is a combina-
tion of shortage of savings and shortage of foreign exchange, as
well as the need for foreign knowledge on techniques, links to foreign
markets, etc., which can hardly be bought for foreign exchange but
can be attracted on an equity basis even if that equity has a limited
horizon.
The shortage of savings needs little comment. If a country is
pushing hard to industrialize, urbanize and introduce welfare ser-
vices all at the same time, it is liable to be short of many things.
But it is striking that countries with income per capita a very long
way apart only manage to save a similar percentage of their income
and believe it to be impossible to save more. The shortage of
savings, then, is as much an administrative tax political problem
as anything else, but that makes it no less real.
The explanation of the shortage of foreign exchange is equally
obvious, but it is interesting that countries with small proportions
of foreign trade to national income envy those with a high propor-
tion and vice versa. Countries like India with a small proportion
believe that they are bound to be short of exchange because any
acceptable development programme or indeed any shortfall in
agricultural output produces a very large proportionate strain on
the balance of payments. No likely rate of expansion of traditional
or even new exports is going to ease this position. So there seems
to be the prospect that large foreign borrowing is needed for a long
time to come until import substitutes allow a tapering off of new
loans and the repayment of the old. The only thing to do is to
plan on this assumption and hope.
The country with a heavy foreign trade, on the other hand, has
its own worries. Its heavy foreign trade does not mean that the
government can float large issues abroad or could raise the taxes
to service them even if it did. Its foreign earnings are heavy but
299
far from reliable. When they fall the effect on the national income
is heavy, as it is on tax receipts, private investment, and so on. One
can see why the autarchic position of the small foreign trade country
has its attractions for the planners in the export economy. This
is particularly the case because public opinion will not allow the
variation in external markets to have the same forceful effect in-
ternally as they had a century ago. Wages cannot be cut back, and
government programmes must be maintained, if not expanded.
The government which tries to meet these demands is soon in
trouble. If it could adjust its foreign borrowing cyclically to varia-
tions in export earnings it would not be too bad, but this is seldom
possible both because borrowing is not that controllable and because
of the strong pressure to increase government spending especially
when export earnings fall.
There are great difficulties in trying to ignore the fall in export
earnings and pushing ahead hard at home by borrowing from the
banks and restricting imports to essentials. The absorption of scarce
administrative talent to prevent economic forces from working is
a heavy cost to a backward country. Even more heavy is the cost
of a breakdown of public and civil service morality when bribery
becomes so profitable and salaries lag behind prices. Even a police
state does not usually succeed in controlling the pressures ; prices
rise, imports are smuggled, foreign and domestic capital leaks out,
and devaluation is in prospect. This harms the credit rating and
puts the country at a great disadvantage in the struggle for foreign
capital.
All this sounds less than encouraging, but from another view-
point the increase in output in all countries advanced and backward
is remarkable, international trade is expanding with it and despite
the difficulties capital does flow and defaults are rare. If only one
could put a brake for a while on the increase in population, the
present situation of take-off, including international lending and
foreign exchange, would be very much more satisfactory than a
century ago.
JOO
REPORT ON THE PROCEEDINGS
SUMMARY RECORD OF THE DEBATE

BY
D. C. HAGUE
FIRST SESSION
THE DISCUSSION OF THE PAPER
BY PROFESSOR ROSTOW
Mr. Berrill introduced the discussion by suggesting to participants
that they should concentrate on the main theme of Professor Rostow's
paper - the concept of leading sectors in take-off. This meant leaving
until another day aspects such as population, agriculture, etc., and leaving
until Professor Kuznets' paper the question whether take-off was a
distinct stage of growth.
Perhaps the first basic question in the analysis of take-off was whether
we should expect to find common patterns in the experience of different
countries. Had Professor Habakkuk been able to be present, he might
well have argued that with only a couple of dozen industrialized countries
to consider, each could, and should, be treated as a separate case study.
But whether one's objective was to explain the past or to help under-
developed countries in the future, the need for generalizations and models
was strong.
The second question was on the type of model to be employed. Must
we restrict ourselves to variables which are statistically measurable and
empirically testable? Our data for the past were so weak that, even in fields
such as population change, we could not demonstrate exactly what hap-
pened. On social structure and motivation, statistics could never be good.
The third question was the units in which the growth process and
take-off could best be studied. Should it be in terms of national aggre-
gates and averages, or in some other way? Mr. Berrill felt strongly that
in an early period of industrialization such as take-off, national averages
meant very little. The statistics for sectors like small-scale agriculture
were bound to be poor, yet they played a most important part in any
national average. But more important than any statistical problems was
the fact that the economy at this stage was not integrated as a national
unit, and did not grow as one. Growth had to be studied industry by
industry, region by region, and in terms of the links between them, not
by looking at changes in average national statistics.
This led to the fourth and main question for discussion. Was the
JOI
concept of leading sectors the most fruitful way of studying take-off in
these disaggregated terms ? It meant substantiating the belief that the
key process was growth in small but strategic parts of the economy which
continually pulled the whole system into sustained expansion. Perhaps
the important problems involved in the leading sector concept were :
(1) What makes a leading sector spring into fast growth- is it markets.
technical change, transport improvements ? (2) How do small leading
sectors pull up the rest of the economy ? Does it require some combina-
tion of their continued expansion, their weight, and the readiness to
react of the rest of the economy? (3) How does growth become built-in?
Does one need a series of leading sectors, one after the other, to enable
sufficient momentum to be generated? (4) What is the role of the de-
celeration of a sector in Professor Rostow's model? Does the slowing
down depend on markets, technology, or entrepreneurs? This again
made it necessary to look at particular sectors. We also needed to know
how far growth became built-in at a certain stage and whether there
really was such a thing as apart from the limitations of the market.
Dr. Singer said he would try to keep to the question of leading sectors,
although other aspects of Professor Rostow's paper should also be ex-
amined, e.g. his views on capital formation and the role of agriculture.
When one was considering the timing of a take-off and its location, a
problem arose from the fact that Professor Rostow tried to do two things
at once. First, he tried to show the 'coming in' of the leading sector
at a particular point of time. This was something which one could date
precisely within a relatively narrow time-span of, say, ten or fifteen years.
Second, however, Professor Rostow wanted to show how the impact of
the leading sector spread, and the spreading of such an impact was hard
to pin down in time. One needed to take a longer period, and even then
there were all kinds of difficulties. An economy which had a leading
sector but was unable to generalize and continue progress automatically
obtained a windfall, as, for example, Iraq had done with oil, but did not
achieve self-sustaining growth. On the other hand, an economy might
possess all the necessary conditions required for progress to become
general but be waiting fruitlessly for a leading sector to appear. The
theory had to apply to this too.
Perhaps the solution was to try to find a criterion which showed one
the capacity of an economy for self-sustained progress, and to make this
criterion one similar to the leading sector - one which could be dated
fairly precisely. He thought that this particular criterion emerged when
the creation of new investment opportunities exceeded the actual rate
of investment and, therefore, the inducement to invest was growing
over time.
The problem was that we were dealing with two points of time. One
was where a leading sector in Rostow's sense emerged; the other was
where one had this 'surplus' of investment opportunities. A major
difficulty was that the two moments of time need not coincide.
Dr. Singer also raised the question of actual planning. He thought
302
Hague- Sum'I1Ulry Record of the Debate
that Professor Rostow was arguing against the kind of programming
approach used by the World Bank missions and by the governments of
underdeveloped countries. Here one had a team of experts or civil
servants, each man thinking his own field more important than the others,
and the programme emerged from the clash of ideas between the mem-
bers of the team or the politicians concerned. With his concept of leading
sectors, Professor Rostow seemed to be trying to get away from this
kind of idea by concentrating on an individual sector, but Dr. Singer
became confused when, on page 7 of his paper, Professor Rostow said
that growth must be viewed 'in terms of clusters of sectors, linked ...
by the Leontief chain '. We seemed therefore to be back to the usual
approach and to the general line of argument underlying Professor
Nurkse's balanced economic development.
If one took the case of Ethiopia, this was a traditional society and the
most likely leading sector was cattle export. If such a leading sector were
to develop, one could either call it foreign trade or cattle rearing. What
was necessary to make such a leading sector develop ? First, it would
be necessary to eliminate disease among cattle, which in turn would
require a new attitude among farmers. It would also be necessary to do
a lot to improve the transport of cattle. Refrigeration would be necessary,
and this would need power. One would also have to break the vicious
circle of cattle grazing and soil erosion. If it proved possible to solve
all these problems, their solution would have changed so many attitudes
that cattle-rearing would probably no longer be the key thing, and
industries producing substitutes for imports might well have become
important. So, both on the grounds of what Professor Rostow said .in
his paper and on operational grounds, Professor Singer doubted the value
of the concept of leading sectors.
Professor Gerschenkron thought that we must be careful to make a
distinction between the study of growth as it had happened and growth
as it should happen. The discussion was liable to run into confusion
unless this were done. Because growth had happened in a particular
way in the past, it did not follow either that it would happen in the same
way in the future, or that it should do.
Professor Cairncross doubted whether one could treat a country which
was operating at the frontiers of technological development in the same
way as a country that could borrow technology from others. If a country
was applying its own technological discoveries, then its progress would
be uneven because technological change took place in a random way.
On the other hand, if a country in a traditional state suddenly awakened
to the possibility of rapid development, why should there be only one
leading sector affected by this desire for growth ? There might well be
development over a broad range of the economy.
Professor Hoffmann thought it was both possible and necessary to split
up the continuous process of economic life into phases and stages. His-
torians tried to do this and he felt that economists should try to do it
too. This was particularly important if one was discussing the beginning
303
of industrialization. Max Weber had spoken of the 'ideal type' in trying
to find ways of discovering similar characteristics from all periods. There
was also his idea of a break in the historical process. He was not saying
that Max Weber need necessarily be accepted as right, but, unless we
had some criteria for characterizing various phases in a process, we should
be able to make no comparisons at all.
Professor Boudeville tried to reconcile the divergent points of view in
what he called a neo-Rostowian way.
First, the study of growth could not be purely a study of aggregates ;
one had to consider many separate sectors. The model used also had to
be different at different stages of growth. Before the take-off period (e.g.
in Ethiopia), a Leontief analysis would be useless. In Brazil it could be
usefully combined with Professor Rostow's theory.
Second, such a combination was possible through the backward and
lateral effects (the 'Polarization' effects of Fran~ois Perroux) which could
be described by sectors.
Thirdly, these links between activity and investment were most con-
spicuous in recent economic development. They were slower and less
apparent in the pioneering economies of the nineteenth century.
Finally, provided one admitted that economic systems which differed
in structure had different processes of growth, Professor Rostow's stages
of development seemed highly instructive.
Professor Marczewski referred to his statistical analysis of the growth
of France since 1788. So far forty-two industries had been covered,
accounting for about 68 per cent of industrial products. Graphs had
been compiled for each industry showing the average annual rate of
growth in each decade. The question was how to obtain a synthetic
rate of growth for the whole economy. A weighted chain average had
been calculated with weights equal to the average value added for each
industry for two successive decades. Later, however, this had been
compared with an unweighted average. It was found that in most cases
the weighted average was less than the unweighted, but that there was a
variable relation between the two from period to period. It had, there-
fore, proved possible to build up a typology with three variables - the
unweighted average, the weighted average, and the ratio of the two.
One then got six kinds of growth. When the unweighted average was
much greater than the weighted average one found that growth was
rapid in some small industries, presumably the newer ones. This he
called extensive growth. Where the weighted average, the unweighted
average, and the ratio between the two were growing, he spoke of in-
tensive growth. Where the weighted average and the unweighted aver-
age were both growing, but the ratio between the two was falling, growth
could be called intensive and extensive, with both the old and the new
industries developing. Other possibilities were intensive partial growth and
an ageing of the industrial structure. Finally, one would tend to get a
slowing down of the rate of growth through the decline of old industries,
despite the creation of new ones. This he.called delayed extensive growth.
304
Hague- Summary Record of the Debate
Having applied this analysis to the last 150 years in France, he had
found that it was possible to distinguish a number of cycles. These
always started with extensive growth, proceeding through intensive growth
to an ageing of the industrial structure and the ultimate appearance of
new extensive growth. In view of these results, he wondered whether
one could speak of take-off or of leading sectors. It seemed as though
the leading sectors might always comprise new industries which were
growing rapidly, but were too small to drag the rest of the economy
along with them. Or would the leading sector be a large industry with
a moderate rate of growth but an enormous weight in the economy ?
He knew that we needed to look at links between industries, but, given
our present historical data, it was hard to talk of leading sectors at all
without being to some extent arbitrary.
Professor Hoffmann suggested we should eliminate the idea of a lead-
ing sector because in most countries which were industrializing there
was no complex structure of horizontal and vertical relations. In a very
primitive economy, if a new factory were built this would lead to no
further developments because this complex horizontal and vertical struc-
ture was missing. We should only speak of a leading sector when this
structure was nearly complete.
Professor Landes asked Professor Marczewski whether he had year
to year figures or only figures for particular points of time.
Professor Marczewski replied that there were continuous ten-yearly
figures from 1895 and that from 1788 to 1825 there were figures for
1781-90, 1803-12 and 1825-34.
Professor Landes said that by using ten-yearly intervals. the French
analysis might be missing changes in the rate of growth when take-off
took place.
Professor Marczewski insisted that his analysis had only eliminated
short-term fluctuations, including the classical cycle.
Professor Gerschenkron said that if studying in Italy one had not pro-
ceeded on a year-to-year basis but had used ten-yearly figures, this would
have eliminated almost all the big changes in the rate of growth. He
did not know whether the position in France was the same, but it was
clear that in some countries these gaps in the statistics could be very
important indeed.
Professor Rostow said that so far as the dating of take-off was con-
cerned he would reply to Dr. Singer like this. In order to date take-off
one must not only establish the existence of a leading sector, and the
fact that the economy would respond to what he called its spreading
effects, one also wanted evidence that when the original leading sectors
suffered from deceleration, the economy would generate new ones. This
was how he put Dr. Singer's point about the need to generate new invest-
ment opportunities. This was necessary in order to distinguish take-off
from abortive surges. Beyond that, there were only two practical prob-
lems. One was the question of these abortive spurts and was easily dealt
with. The other was what he called the problem of the preceding decade.
3°5
Probably in Germany, Russia, and France one could put back the
dates of take-off ten years before those he had given, but this was something
which we should come to in the various country papers. On Dr. Singer's
questions about the operational significance of his theory for Ethiopia,
he would just like to say that Ethiopia appeared to be a rather less promising
version of Australia, Uruguay, and Argentina. Evolution there had taken
place through the meat industry. If Ethiopia did succeed in growing,
then probably the development of cattle raising would bring with it other
industries, especially those producing import substitutes.
Professor Hoffmann and he were now committed to saying that stage
analysis was useful. Obviously his own criteria were not the only pos-
sible ones. Aside from Hoffmann's studies, there was the work done
by Colin Clark on the effects of growth on the structure of the labour
force ; the recent paper by Professor Kuznets had gone far beyond
Clark's, and both were very important. He would say what he wanted
to say about Professor Marczewski's comments when the Round Table
discussed France, but he would comment here that the suggestion about
using weighted and unweighted averages might have a family relation to
the part of his own paper where he said that sustained growth required
something like a repetition of the take-off process. He wondered whether
the idea that economic history represented a series of leading sectors,
one taking over where the other left off, fitted the Marczewski figures.
Professor Hoffmann had said that it was no use trying to stimulate
a take-off if the horizontal and vertical links in society were not there.
This observation related to what he himself called the 'spreading effects'
which represented a response by society to the interconnexions which
made up economic life.
Basically, the need during the Round Table was to unify growth
analysis in the sense of showing how functional and sectoral phenomena
related to each other and to growth as a whole. He had been turning
towards the idea of take-off as a kind of investment multiplier. Professor
Solow had suggested that the idea of a kind of accelerator might be better.
The point was that somehow or other the time was reached where im-
pulses had wider-ranging effects.
Mr. Berrill's defence of sectoral versus aggregate analysis was based
on the fact that we had sectoral information but that aggregate informa-
tion was not available. We also knew that the process of industrialization
began in narrow sectors and regions. Professor Rostow suggested that
rather like the price theorists in the nineteenth century we had two
theories. The nineteenth-century price theories had dealt with the general
price level through the quantity equation, but with individual prices
through supply and demand. Similarly, in the field of growth, one
definition ran in terms of the required increase in output per head. It
was aggregative and looked at investment, production, and the capital-
output ratio. The other definition was in terms of the progressive spread-
ing and application of new techniques, and was, in essence, sectoral.
His answer to Mr. Berrill was that this conference would make a major
J06
Hague - Summary Record of the Debate
contribution if it could make progress towards unifying and relating these
two definitions of growth.
Professor Delivanis noted that he agreed with Professor Rostow on
the impossibility of getting a successful take-off without satisfactory
foreign exchange reserves, ample receipts from abroad, and substantial
investment in external economies. He thought that perhaps Professor
Rostow was moving back a little to the ideas of List who had set out the
stages of growth without being able to identify them statistically. As
for take-off, it obviously did exist, but one could only see whether it had
happened ex post. There were also big difficulties because of political,
social, and economic differences. Professor Delivanis wondered whether
one could only have one take-off or whether it were possible to have
two, as had happened in the case of Russia.
Professor Landes asked whether Professor Rostow could clear up the
distinction between take-off and more traditional notions; for example,
was take-off equivalent to an industrial revolution ? Were Professor
Rostow's 'backward linkages' the equivalent of Marshallian-derived
demand and were his forward linkages the equivalent of bottlenecks and
similar incentives to investment? Was there any difference between
Professor Rostow's periodic surges of innovation and the ideas of Pro-
fessor Schumpeter ? Finally, was there any very significant difference
between Professor Rostow's five stages of development and the traditional
tripartite classification of an economy before industrialization, during
industrialization, and afterwards ?
Professor Cairncross thought it important to ask why some impulses
had more far-ranging effects than others. If an impulse was a techno-
logical one, the answer must be in technological terms rather than in
terms of particular industries or sectors. But technological change was
itself the expression of more general influences, such as the growth of
knowledge, the spread of empiricism, and the level of education. Was
it right to lay emphasis on the industrial changes in which these influences
manifested themselves rather than on the influences themselves ?
As for the use of sectoral rather than aggregate analysis, he saw
no opposition between the two. If one wanted to see the overflow of
new impulses outside their original breeding ground, the only possible
way of studying this overflow was to go outside the original sector.
Similarly, one sector must affect the whole economy.
Turning to the problem of abortive changes, Professor Cairncross
pointed out that there were instrument makers during the Middle Ages
yet no industrial revolution. This was an abortive movement in tech-
nology which was not cumulative because there was no systematic theory
lying behind engineering and no succession of advances. What was
required was something which created such a succession of advances.
Miss Deane went on from what Professor Cairncross had said to ask
what it was that made a leading sector lead. If one took British cotton,
was it a leading sector in the U.K. before the end of the eighteenth cen-
tury ? The answer was probably no, in the strict sense, and yet in one
307
respect it was yes. Cotton's growth had led to a 'demonstration effect'
by showing the possibilities of this kind of technical change. It provided
an obvious example to the wool and linen industries and in that sense
was much more a leader than, say, the iron industry. The direct response
which cotton had evoked in the woollen and linen industries meant that
it had a much greater effect in carrying the economy forward than mere
input-output analysis might suggest.
Professor Neumark wondered whether Professor Rostow wanted to
type the past or whether he was trying to derive a general theory of
development from historical observation. He thought that the aim was
the second. For example, on page 20 of his paper, Professor Rostow
said that there was 'no single set of linkages that logic or historical ex-
perience decrees as universal'. He also said that 'any serious analysis
of growth cannot be confined to its economic element'. Mere descrip-
tion of take-off had a purely historical significance and did not provide
anything which added to our understanding of the present-day under-
developed areas. Were conditions of take-off necessary and sufficient
for subsequent economic growth, or were they only necessary but not
sufficient ?
It seemed to him that economic evolution in the nineteenth century
was very different from development today, particularly in the technical
and socio-political framework in which it took place. One could imagine
a nineteenth-century situation where government intervention encouraged
development but another one where it even stopped take-off. Govern-
ments nowadays were much more likely to encourage growth, and could
probably achieve take-off by their own actions. He therefore wondered
whether Professor Rostow's ideas could be applied to present-day under-
developed areas.
Dr. Singer was worried that Professor Rostow defended his use of
sectors by saying that' spreading capacity' was also sectoral. This seemed
to go back on a statement on page 20 of his paper where Professor Rostow
said that 'the propensities appear more important than the yields'. Both
Professors Rostow and Kuznets leaned backwards to say that economic
progress was not automatic. In a sense this was true, as the abortive
examples showed. It was also true that progress was not automatic in
the sense that it did not drop like manna from heaven, but needed insti-
tutions to encourage it. Yet, in a sense, it was automatic. We knew that
if we wanted to bake bread, a modern oven would bake it. Similarly,
in a Western economy technical progress would take place and such a
society would regularly spend 2 or 3 per cent of its national income on
research and development. So, although one could not predict where
the developments would take place, one could act on the confident
assumption that such developments would occur. The law of large
numbers guaranteed a certain rate of technical progress. It was, therefore,
a bar to true understanding if one talked of the creation of new production
functions as something external. That also was a sectoral phenomenon.
On the question of abortive changes, Professor Tawney had asked
308
why the men who could make mechanical chess players in the Middle
Ages had not been able to create an industrial revolution. The general
economic answer was that they had not grasped the links between me-
chanical ingenuity and economic growth. It followed that the capacity
for spreading the effects of given inventions was an important general
propensity.
Mr. Berrill said he wanted to make it clear that he was not suggesting
that one should ignore the whole economy. All he was saying was that,
if one looked at very broad sectors, one might miss important things.
Some parts of the economy did not mature while the leading sectors did.
The next point was the way in which the leading sectors pulled the
rest of the economy up. It was a question of the weight of the leading
sector. Some were so strong that they would pull the economy with
them fairly easily. Others were weaker so that the pull must be bigger
and for a longer period in order to have the required administration effect.
Mr. Berrill did not believe that growth depended on modern science
and gave two examples. The technical problems overcome in the silk
industry were very great and the rate of growth achieved was high.
Nevertheless, even though this development took place over quite a
long period, there were never any spreading effects. A second point was
that advances in the cotton and iron industries were a result of empirical
discoveries and not 'the application of science'. Modern science only
began to have any effects in the mid-nineteenth century and he did not
think that the absence of modern science was an important factor holding
back economic growth.
Mr. Mathur said that he tended to look at historical studies of take-off
to discover how the past experience of advanced countries could help the
underdeveloped countries at present. For planning purposes, the idea
of the take-off itself entailed having some notion of what one was aiming
at. For instance, one aim in India was to double the standard of living
in twenty-seven years. But a wider target could be aimed at and he,
among other economists who had attended a seminar in economic de-
velopment organized in India by the International Economic Association
five years ago, had begun to think along the lines of achieving a steady
growth equilibrium with the most superior technology. Whether one
analysed the golden-age type of steady growth described by Mrs. Robinson,
or took the dynamic input-output approach of Leontief, one came to the
same conclusion. The requirement was to have physical capital per man
in form and amount appropriate to the rate of growth of population and
the rate of shift of the production function. The level and rate of rise
of real wages could be deduced from these.
The theory of long-term planning was concerned with indicating paths
for attaining the capital requirements of the steady-growth state at full
employment, starting from an initial situation in which equipment per
man was deficient. A study of the development of other countries was
helpful in suggesting various possibilities, for instance the type of goods
which were to be emphasized at various stages of development. Thus
309
heavy investment could be a leading sector in the early phases, when a
corresponding increase in food production would be required. Some
sectors would grow at faster rates than others, though balanced growth
was the ultimate objective. To analyse the growth path and the linking
of processes for it, he suggested that one should use a Neumann type of
process analysis rather than the Leontief type, as the choice of techniques,
which was the basis of the problem, was ruled out in the latter.
Professor Gerschenkron thought we should be clear on the purpose for
which we used the idea of a leading sector. If one were talking about
innovation, Schumpeter had shown that the important things were the
individual firm and entrepreneur. For Schumpeter, these would repre-
sent the leading sector. For others, the leading sector would be some
part of the textile industry or of the cotton industry, for example, cotton
spinning. Yet others would be interested in a rather bigger aggregate,
which would lead them to an idea like the ' development block' of Pro-
fessor Dahmen, who held that, unless such blocks existed and were
properly adjusted within themselves, growth could not take place.
What we required was a clarification of why we needed the concept
of a leading sector. We should try to discover from the empirical material
which was the most appropriate sector of the economy. Purely dogmatic
assertions about what that sector was, or about sectoral versus aggregate
problems, were not sufficient.
Professor Kuznets said that, as he saw it, there were two ways in which
one could define leading sectors ; first, one could judge them by their
effect; second, one could judge them by their cause. He often got the
impression that a leading sector was being defined as such because it was
caused by some exogenous factor. The stimuli producing such a leading
sector might be technological change, the discovery of new resources,
changes in demand in other countries, and the like. The only justification
for this approach was that it simplified the problem. But if one had many
industries the 'leading in' process was an effect and not a cause. For
example, if agricultural development created an expanding market and
technological advance, the opportunity would be created for building up,
say, a textile industry. Was the latter then a leading sector or was this
induced growth ? Must a leading sector be autonomous or could it be
induced from elsewhere ?
Big problems arose because of the variety of effects. One could say
that because a sector was growing rapidly it was a leading sector, but an
unweighted percentage rate of growth might be of limited interest because
its weight might be very small. Therefore, secondly, one might try using
the direct weight based on the contribution of the industry. If, say,
20 per cent of all growth was caused by a particular industry over a period,
this gave one an aggregative weight for the importance of that industry.
Third, one might use input-output analysis to show that the sector was
not very important in itself, but led to growth in other sectors. Fourth,
one might take the influence of the demonstration effect, in Miss Deane's
sense. The leading sector was acting as a sort of school for entrepreneurs,
JIO
showing them how to advance. Finally, one might take the effects of the
leading sector on the political structure, education, etc., and these might
be great and lasting even if the industry had small weight in the economy.
One could therefore have a variety of definitions of a leading sector
and, when one came to apply the concept, one would find that the times
at which an industry represented a leading sector in different countries
were quite different. One would also get a different time according to
the definition one used. What was necessary was to specify these differ-
ences, because each specific definition indicated a particular and valuable
link between the leading sector and the aggregate of the economy.
Professor Robinson suggested that there were two quite distinct ranges
of interest in the questions of take-off. First of all, there were the peda-
gogic interests of economic historians who might feel that they could
interpret history better in terms of the idea of take-off. Second, there
were those, including himself, who wanted the idea to be of operational
and prognostic interest. Could we learn from early development in order
to help the modern underdeveloped areas ?
He would therefore like to ask Professor Rostow whether one could
take the U.K., U.S.A., France, and Germany and learn from their ex-
perience. Or was their situation at the take-off period so different from
that in modern underdeveloped areas that one could not do this ? He
saw two difficulties. On the one hand, some countries were technological
leaders while others were the followers. The leaders were obviously
using their own technological development, which limited the available
range of possible technologies. They had to look to current technological
development and research for achieving sustained growth. To discover
how such countries could sustain progress one had to ask what the contri-
bution of research might be. On the other hand, if one looked at the
modern underdeveloped countries there was a valuable stock of 'unused'
techniques which they could progressively apply. Was growth easier or
more difficult for the second type of country than the first ?
His second question was whether one should distinguish between
unassisted and assisted take-off. Could one argue from the unassisted
take-off of the now-advanced countries to the assisted take-off of modern
underdeveloped areas, or was the problem fundamentally different ?
Finally, he wondered what was the unit of take-off. Was it the country?
Even with the sectoral approach we tended to talk of take-off in the U.K.,
France, and other countries; but did the U.K. take-off as a whole? He
felt that there had really been regional development in Lancashire, York-
shire, and the North of England more generally, which had gradually
spread to the South East.
Professor Rostow said he would like to link what Professor Delivanis
and what Professor Landes had said. He did not think of his idea of
stages as a theory of growth in the normal sense, but there was a com-
ponent in it which gave continuity, i.e. a disaggregated, dynamic theory
of production. He had tried to set up a framework where one could
relax the conditions of classical economics. In order to do so, one had
311
to be able to bring in, on the side of demand, changes in population,
income, and tastes; on the side of supply, changes in techniques, the
supply of natural resources, and in the quality of entrepreneurship. When
one relaxed the framework of the Marshallian short period and went
beyond once-over changes in long-period variables, one reached the idea,
for any moment of time, of optimum sectoral capacity, of which the first
derivative was an optimum pattern of investment. There were several
links between the framework and the concept of stages, which arose
from a study of the empirical facts. The first of these was the fact of
deceleration to which he had been brought by the early work of Professor
Kuznets. The second was backward and lateral linkages which led to a
vision of how growth had proceeded. There were also forward linkages,
forming a component of the engine which drove aggregate growth forward
at a relatively steady rate.
The notion of take-off brought one back to the old-fashioned view
of the industrial revolution, as Professor Landes had suggested, but that
view had been a literary concept and he felt one could go beyond it. In
reply to Professor Landes' other questions, Professor Rostow said that
bottlenecks might induce forward linkages, but forward linkage took other
forms as well, e.g. the provision of technology applicable to other indus-
tries, the cutting of cost to other industries, etc.' These linkages helped
to explain how the economy proceeded to grow when the rate of growth
of any single cluster of sectors (grouped around a leading sector) fell off.
So far as Schumpeter was concerned, he had first studied the work of
Schumpeter in the context of the Kondratieff; but Schumpeter's was
not a growth but a cyclical model. The cycle was the instrument of
growth in Schumpeter's model, but the technological drama of economic
history as it related to growth, did not come out clearly.
In reply to Professor Cairncross, Professor Rostow said that he had
dealt in a paper for the 1960 Stockholm Conference in economic history
with the dynamics of traditional societies. He had explained that the
basic change was from a situation where one had sporadic inventions and
innovations to a situation where one had a flow of them. In a traditional
society one often got all the preconditions for take-off, except for a more
or less regular flow into the economy of new production functions. Behind
this gap in the traditional society was a lack of the Newtonian outlook.
He was not suggesting that practical men ever read Newton, but, never-
theless, Newton's ideas did spread, giving a widespread realization that
the physical world was understandable in terms of a few fixed laws, and,
therefore, capable of systematic manipulation. One also, of course,
needed a commercial setting in which inventions became profitable and
were actually absorbed into the capital stock. One should not under-
estimate the impact of the scientific attitude on practical gadgeteers.
To Professor Neumark he said that he thought it was not possible to
produce a theory of growth. There were many motivations lying behind
what happened in an economy and unfortunately we had no general
theory of man's motivation. He therefore looked at growth as a bio-
JI2
logical process and wanted to arrange patterns of growth so that the
similarities and differences could be set out. He thought there was a
regular sequence of problems to be solved in the growth process, but a
wide range of solutions. He thought that societies in the traditional stage
which sought to move forward, had similar problems to solve, and would
therefore like to be specific about what these problems were and the kind
of solutions to them that history could provide.
As for how far the underdeveloped areas were like the economies of
the nineteenth century, he thought that the biggest difference was that
the backlog of technological possibilities now available was bigger, but
this was not a new phenomenon. The U.S.A. had had a bigger backlog
than the U.K., Japan than the U.S.A., and so on. It was merely the
scale of the phenomenon that was bigger. But this worked both ways.
The development of public health saved many lives so that the under-
developed areas were able to apply one branch of the backlog and thereby
produced big increases in population - bigger than in the nineteenth
century. This seemed to be the major difference. There was therefore
the need to spread improved agricultural productivity to cope with this
problem more rapidly than in the past.
As for assisted versus unassisted take-off, this depended on the degree
of intervention. The government had played an important role in the
development of North American railroads; and the Land Grant colleges
had helped to spread techniques. The state played a progressively more
important role in France, Germany, Japan, and Russia. The techniques
of planning were different in India, but not fundamentally so.
On the question of what use the analysis was, Professor Rostow said
that others would have to judge. He thought that, first, it might help to
defeat Myrdal, Singer, and all those who held up as the dominating image
of the contemporary world a situation where the richer countries were
becoming progressively richer relatively to the poor ones. The funda-
mental distinction was not between the rich and the poor, but between
stagnant and regularly growing economies. He also wanted to break the
strangle-hold of analysis in terms of relative national income figures,
which led to frustration. If one compared what was happening inter-
nationally with what was happening within a society, one had a false
analogy. It was not a question of how one's income compared with that
of someone else, but of whether one was growing richer. The immediate
task was not income equalization, it was growth. Put this way, the goal
of take-off was an obtainable one in a man's lifetime, and a proper focus
for individual and national energies. Second, he hoped that his analysis
might pose a range of problems that were almost universal in a particular
stage of history. Beyond this, it might help one to look at other solutions
to a problem, although each problem was unique. Perhaps the final
virtue was a negative one. It showed that every case had to be unique.
Each country had to make its own model and find its own values. It was
a matter of posing questions - of identifying a universal sequence of
problems - rather than giving answers.
313
On page 10 he had shown how far progress was not automatic. It
was unlikely that there would be periods of stagnation which lasted very
long, but one had to remember that there had been considerable periods
of stagnation in the past, for example, the 1930's.
To Professor Kuznets and his question whether leading sectors were
cause or effect. Professor Rostow said that this distinction related to
whether the leading sector was induced from the side of supply or demand.
One could say that in some cases new production functions were the
proximate causes of the emergence of a leading sector, while in other
cases new leading sectors developed as a result of the income elasticity of
demand for new products, with rising levels of real income. But, so far
as he had a general notion, he thought the two types of case tended to
merge ; that is, new technology itself was mainly induced.
For example, the development of textile machinery in the eighteenth
century was mainly induced by the evidently high price and income
elasticity of demand for cotton textiles in Britain ; the steam engine was
translated into a railway to permit cheaper movements of cotton and
wheat. In our own time, the motor-car was the joint product of techno-
logical development and the income elasticity of demand.
He would underline his definition of a leading sector by saying that
it was required not only to have high momentum, but also to have scale
effects and to spread these over a large field, both directly via inputs
and indirectly. This was not a definition which could be easily and
directly linked with formal statistics (notably the spreading effects), but
it embraced the first three of Professor Kuznets' specifications. As for
how one went about dealing with the statistical question, this was morr
difficult in theory than in practice. He doubted whether it was hard to
say within about ten years when the leading sectors began to be important.
For example, one could certainly say that the cotton industry in the U.K.
became important between 1780 and 1790. Railways presented a prob-
lem, but not too big a one. This brought him back to the problem of
'the preceding decade'. He had definite reasons for his own sets of
dates, but these were debatable. But, if one could narrow down the
problem of timing to within a decade, that was surely enough.
As for Professor Robinson's question about regional development as
distinct from development in a whole country, he would say that the
proper criterion was the range of the spreading effects. Development
was clearly regional in Northern as distinct from Southern Italy, and
perhaps the same thing was true of Quebec as compared with Canada
as a whole, and of much of the South of the United States. With Britain,
he thought it was less true. London, for example, was involved in the
Industrial Revolution in the North and Midlands; although there were
certainly some agricultural counties where development was slow and the
spreading effects had been diluted.
SECOND SESSION
BY PROFESSOR KUZNETS
Professor Cairncross said that in all forms of growth there were elements
of continuity and elements of discontinuity. Even in the biological sense,
the discontinuous elements in growth were consistent with a fundamental
continuity, and this was true also of economic growth. The idea of
take-off seemed to him to over-dramatize the element of discontinuity.
It was also necessary to identify and reconcile the cumulative and self-
limiting factors at work in producing growth. In the take-off theory, it
was assumed that after an initial spurt the cumulative expansion levelled
off. This might be a fact, but it needed explanation. Again, in consider-
ing the usefulness of the idea of take-off, it was necessary to decide whether
the process was constant over time or itself developed. For many reasons
it seemed unlikely that the course of events today would be similar to
that followed a century or two ago.
Professor Kuznets and Professor Gerschenkron had both raised in
their papers the difficulty of distinguishing conditions of growth from
pre-conditions, and the period of take-off from the period of self-sustained
growth. Was it really possible to draw a sharp distinction on the basis
of statistical indicators ? One such index to which Professor Rostow
attached importance was the rate of saving. But was there any conclusive
evidence that this rate increased from 5 to 10 per cent of national income
during some limited period that one could describe as 'take-off' ?
Next, Professor Cairn cross asked how one could be sure that take-off
was a once-for-all and irreversible process. \Vas this something to be
thought of in international terms or in terms of the situation in individual
countries ? In individual countries there were false starts associated with
local circumstances. The factors at work included some that originated
abroad and others that were essentially national in scope, and the outcome
of this combination was bound to vary from country to country.
A stage approach to economic development was essentially descriptive
and could not be more than preliminary to a causal analysis. A succession
of events might first have to be studied from the point of view of sequence,
but it was necessary to move on later to causes. If an aircraft 'took off'
it needed a motor, and what one wanted to know were the motor forces
in economic growth.
For these reasons it was necessary to look at a long stretch of time in
the course of which attitudes, institutions, and values changed. These
changes were part of the process of growth and might not be fully reflected
in the statistics, while the new countries were still taking root. For
example, it was hard to believe that the take-off in Scotland, in any mean-
ingful sense, took place after Adam Smith. The sequence of events in
Scotland went back to 1707 when union with England opened up a new
market and brought in new ideas. This started first agricultural and then
31 5
industrial development. Yet the statistics would show that the develop-
ment in Scotland corresponding to that in England between 1750 and
1790 took place in the nineteenth century. If take-off was really something
irreversible, then in order to study it, one would have to look at a world-
wide process which had begun in the eighteenth century and was still
at work.
Professor Cipolla agreed with the view expressed by Professor Kuznets.
He said that an economic historian who had to consider cases of economic
growth and take-off before the seventeenth century could not rely on
percentages of growth, since there were too few statistics. Trying to
distinguish between 'ancient' and 'modern' growth, one was therefore
driven back to 'qualitative' criteria. He thought that the most relevant
of these criteria was that of the sources of energy used. All development
before the Industrial Revolution had used biological energy through the
exploitation of plants, animals, and men. The energy of wind and
waterfalls was used only in a complementary way. It was the Industrial
Revolution which began the large-scale exploitation of non-biological
energy, and all the great development of production connected with the
Industrial Revolution was based on the discovery and exploitation of this
new Eldorado of energy sources.
Professor Marczewski was interested in the reierence to biological and
other sources of energy. For example, various early periods of growth
in French metallurgy had ended because of shortages of wood. It was
only at the beginning of the nineteenth century that the switch to coal
had restarted growth in this industry.
Professor James said he wanted to give some general reflections. He
wondered whether it was true that the concept of take-off was merely a
question of definition, but the definition was banal. If, with Professor
Kuznets, one claimed that take-off was a period with very different charac-
teristics, one then had a sharp break in history and difficulties began.
Professor Cairncross. could not say when take-off had occurred in Scotland
and he thought that this was true of other countries, for example Russia,
where one might say that there had been several take-offs in a single
period. One would then surely have to abandon the idea. Nor was he
sure whether one could use the concept for a general study of growth in
order to make a clear distinction between an early and completely different
period and what had happened later.
Professor Hoffmann referred to page 42 of Professor Kuznets' paper
and asked what were the necessary conditions for growth in the modern
sense. Did they include a break in the social frame-work ? He also
thought any general theory would be useless if it tried to work with the
same assumptions for all different periods.
Dr. Singer wondered how far the causes of take-off were the same in
all countries. Professor Cairncross had said that one must look to some-
thing like the transfer of techniques between nations and now we were
reminded of the importance of the move from biological to fossil energy.
The problem of technical progress had been left unsolved in the first
316
session. In particular there was the question of whether countries could
leave out particular stages of growth. He understood Professor Rostow
to believe that the difference between the modern and the older under-
developed societies was only a difference of degree, but there was surely
a cumulative effect in that the existing stock of knowledge was growing
all the time. There was also the question of how to transfer knowledge
between countries. Indeed, the growth of the stock of knowledge was
self-limiting in the sense that the latest inventions were becoming less
and less suitable for underdeveloped areas. The stock became bigger,
but it also became less useful to the poorer countries.
When one looked at the question of the movement of capital between
countries, it became even harder to look back at history. He was not
sure whether it was now easier or more difficult for countries to achieve
take-off. Professor Rostow's doubts about planning were very important
for the underdeveloped countries, but it might well be that they would
learn sooner or later how to induce take-off artificially. Yet it also fol-
lowed that if one studied the historical experience of take-off one would
learn very little about how to transmit knowledge from one country to
another or how to predict what would happen in the future.
Professor Landes thought Professor Rostow was right in saying that
there was once a time when people thought that something had taken
place that deserved to be called the Industrial Revolution. Later his-
torians had attempted to modify this image and to emphasize the pro-
gressive and gradual nature of the process of industrial change. Professor
Clapham had been the outstanding exponent of this point of view. Now
Professor James had asked whether we could talk of a take-off. The
term, vivid as it was, implied a single operation, and perhaps for that
reason obscured the truth. Nevertheless, there was what one could call
an industrial revolution, and as Professor Cipolla had pointed out, this
was essentially a technical phenomenon, a 'package' of technical changes
comprising the discovery of new forms of energy, the substitution of
machines for human skills, and new methods of transportation, especially
in the metallurgical industries. There was also a concentration of pro-
duction in factories, a mode of production that established itself as a
system only in the late eighteenth century. This pattern of development
was easy for the scholar to handle in terms of nineteenth-century economic
history, but was perhaps less applicable to the experience of modern
underdeveloped areas.
One question, therefore, was whether one could define and demarcate
the 'package' of processes that liberated the nineteenth-century economies
from the old ceiling of productivity. Here a number of difficulties arose.
The statistics on hand did not always permit one to trace the timing of
these changes; the evidence left much to be desired. Again, the process
of development seemed to have become more complicated as time passed.
And yet, when one asked why a take-off should occur, the biggest mystery
was Britain itself. Britain had made the first break-through, but little
was known about why she had done so. Once this first break-through
31 7
was made, of course, the other countries faced a transformed world. They
found a situation which challenged them, and emulation became a ques-
tion of economic and political survival. From that point on, it was not
so much why as how these countries achieved their take-offs that interested
the historian.
On generalizations, Professor Landes said that there was no neat
pattern from one country to another. There were many countries where
take-off had been so slow as to belie our terminology. France, for example,
had experienced a slow and hesitant take-off ; yet she had taken off.
Perhaps revolution was a bad word, with its connotation of rapidity, but
in economic history it did denote a definite process.
Professor Boudeville asked three questions about empirical evidence
on the take-off. Professor Kuznets, on pages 29 and 30 of his paper, had
spoken in a stimulating way about differential rates of growth, secondary
effects, and input-output relations. What method could be used to
measure and give appropriate weight to these rates of growth ; first, in
considering direct growth ; second, in considering direct and indirect
growth (Leontief's backward effect); third, in considering direct, indirect
and polarization effects (Rostow's lateral and forward effects).
To be more precise, if one first considered direct growth only, the
answer seemed to be an easy one ; each rate had to be weighted propor-
tionally to the value of the production (v) of then sectors
vlo v2o v ..o
V V ... V V=Vlo+ V2o+ ... V,.o
Second, if one considered direct and indirect effects, was the answer
to weight each rate of growth proportionally to the column sums of an
inverted matrix (A 0 ) of the economy ? Should the weights be
Vlo Alo V2o Azo V,.o A,.o
Vo Ao' Vo Ao•··· Vo Ao Ao=Alo+A2o+ ... A,.o
Third, in considering direct, indirect, and polarization effects could
one use the vectorial presentation of polarization, linking laterally one
unit of activity in one sector with fractions of activity in other sectors
the creation of which were the consequence of the existence of the first ?
One could call : ;P; ... ;Pm the polarization coefficients around sector i.
He had to evaluate them in a study on Minas Gerais. One thus had for
sector i a polarization effect, V 1°A 1o ;(P; ...... ;Pm) relating to the direct
growth of the new sectors j ... m. But these sectors also had indirect
effects. Thus one obtained,
vlo Ala X (tP; A/ ...... iPm Ami)
with a feedback on V 1°A 1° which was modified because of the emergence
of the new sectors j ... m, and became V 1 1A 1 1 • The polarization effect
of sector i would thus be easy to trace historically backward by difference.
But as Professor Kuznets had said, this required us to specify from the
start which was the propulsive sector.
318
On page 29, Professor Kuznets also stated that neither the high rate
of growth of a particular sector nor its place in the interconnexion of
input-output relations is in itself evidence of leadership. Did Professor
Kuznets think that the empirical triangular form of input-output matrices
and their different hierarchy in underdeveloped countries (South Amer-
ica) and in mass consumption countries (Western Europe) pointed to
different possibilities in impact and leadership ? Moreover, would a
difference in technical structure account for the slow take-off of the
18th and 19th centuries polarizing Western economies and the rapid
growth of the twentieth-century underdeveloped and polarized countries ?
Professor Leibenstein felt that the discussion was concerned with not
one thing but several. First, there was Professor Rostow's scheme of
classification. Second, the scheme of classification suggested that growth
was brought in but did not say what the process of growth was. Finally.
there were remarks about what happened in history. He wondered which
of these three things we were concerned with ; or was it something else ?
Professor Solow said that everyone knew that there had been a time
before the factory system and the modern economy. Now we were in
the period after these had been developed. The process of the passage
of time was possibly more irreversible than anything else, and the im-
portant thing to realize was that when we looked back at a process that
had already occurred we were saying nothing analytical about it. When
we said that technology spread, we had to remember that a great deal of
capital formation was needed to allow this to happen and this point had
not been discussed. He thought we should remember that there were
some data about capital formation and that we could trace the process
in a rough way. If Professor Rostow had a theory about it, he was not
sure what that theory was.
But if one had a theory this should be tested and the most fruitful
way of doing so was to ask what events it excluded. He used to think
that the Rostow theory excluded the possibility of the move from a pre-
industrial to an industrial society taking place along a smooth trend.
What the paper by Miss Deane and Professor Habakkuk showed was
precisely that such a smooth trend had occurred in the U.K. He won-
dered whether the notion of take-off in this aggregate sense needed to be
excluded, though Professor Rostow would claim that there was more to
it and that leading sectors needed to be brought in. However, differential
rates of growth were inevitable and different sectors were bound to grow
at different rates. So we were now back to the point that the only thing
that the theory might say was that one could not have a smooth trend
with no breaks in it and all sectors growing equally fast. This did not
sound like a powerful theory.
Professor Solow was worried that a major requirement of sustained
growth was that old leading sectors should die and new leading sectors
take their place. To say that this replacement occurred was merely to
say that growth was happening.
Professor Cipolla thought the reason why theorists were so unhappy
31 9
was that it was so difficult to acquire the necessary facts that analysis was
almost impossible.
Professor Rostow noted that on page 41 of his paper Professor Kuznets
had said : 'All that is claimed here is that aggregative data for a number
of countries do not support Professor Rostow's distinction and character-
ization of the take-off stage. On the other hand, the fact that the
evidence is confined to aggregative data does not limit their bearing.
Economic growth is an aggregative process ; sectoral changes are inter-
related with aggregative changes, and can be properly weighted only
after they have been incorporated into the aggregative framework and
the absence of required aggregative changes severely limits the likelihood
of the implicit strategic sectoral changes.' Again, on page 28 of his
paper, Professor Kuznets said, 'But the reviewing of the empirical evi-
dence on this point holds little interest if I am correct in assuming that
the major distinctive characteristic of the take-off is a marked rise in
the rate of growth of per capita and hence of total income'.
Since Professor Kuznets took this view of the matter he could see
why Professor Kuznets had made his four attacks on the Rostow theory.
In, fact, the concept of take-off was not merely aggregative. The three
important concepts were first of all the 'coming in' effects of the leading
sector itself; second, the direct and indirect spreading effects of the
leading sector, and third, the rise in net investment. When he had first
discussed the rise of net investment from 5 to 10 per cent of national
income, he had said that pure 'Arthur Lewis' behaviour was not to be
expected because of differences in the rate of population increase, in the
1>cale of social overhead requirements, etc. He therefore did not expect
to find rigid behaviour of precisely this kind. What did the evidence
show? We had no evidence for Japan or Russia, and he would like to
see evidence on Britain. The figures for Germany from the 1850's
to the 1870's suggested a rise, but there was little or no aggregate
information which one could test for the pre-take-off and post-take-off
periods.
Nevertheless he expected a rise in investment for several reasons.
First, there was a high rate of ploughing back of profits and a high rate
of saving in the leading sector and those rapidly expanding sectors tied
to it. Second, there was a shift from a rural to an urban population
which meant greater possibilities for raising money through taxation and
high saving rates in the non-industrial urban middle class. Third, the
role of the government was likely to be important in this transitional
period and this also was likely to lead to a rise in savings.
What Professor Kuznets did not go into was sectoral analysis, and
it was impossible to make sense of either take-off or the pre-conditions
without it. The process of pre-conditioning varied from case to case and
the structure and history of the particular society determined how long
this process would last. It took a century from the Opium Wars to the
first five-year plans in China - a painful century of pre-conditioning.
Japan, on the other hand, had begun to take-off in the 1880's after a
320
relatively short, intensive pre-conditioning from 1868. One therefore
had to consider the historical heritage.
He would like to restate the functional tasks of the period of pre-
conditions. The first task was to build up social overhead capital (in-
cluding investment in education) and the amount required in social
overhead capital for turning a traditional into an industrial society would
vary. The second task was necessary shifting of resources above minimum
consumption from agriculture and the countryside into the towns. This
implied a need to increase agricultural production and to reorganize land
tenure and to divert rent flows into the more modern sector of the economy.
Finally, there was the need to generate the capacity to earn foreign
exchange. In a sense all these were types of capital formation and a
traditional society needed to expand all of them before it could indus-
trialize. In short, industrialization required prior expansion and struc-
tural change in non-industrial sectors. He would like to repeat that
take-off took place when the industrial sector became substantial and the
'spreading effects' important. This was not a mysterious or abstruse
process.
There was the problem of the preceding decade, where there was
some acceleration in industrial activity. This had happened in Russia
in the 1880's and in Germany in the 1840's. He found no difficulty over
this problem. In concrete cases, the application of the take-off criteria
yielded quite identifiable historical time intervals. As for the end of
take-off, he would date this as ocurring when new leading sectors had to
appear because the initial group of leading sectors had slowed down and
was incapable of carrying forward growth.
Professor Rostow said that he owed a lot to Professor Kuznets, but
one could not have a satisfactory analysis of growth unless one could
link aggregated and disaggregated analyses. The whole mechanism could
not be studied unless one went into sectoral analysis.
He also agreed with Professor Cipolla that the move to non-biological
energy was very important. His resistance to accepting this interpreta-
tion was that the new forms of energy could not be exploited without
widespread changes in technique, transcending energy. The use of coal
needed the steam engine and so on. He still thought that energy per
worker was a very important factor.
As for the relevance of his theory to modern conditions, he thought
that certain specific economic activities were typical of particular stages
of growth and that if a surge in activity took place when these activities
had been introduced take-off would occur. He thought it important
also to remember that some countries had not yet moved far forward
into the stage of pre-conditions, e.g. Central Africa. Nor was he sure
that take-off in India would be sustained, because of difficulties in agri-
cultural and foreign exchange flows. Nevertheless, he would guess that
India was in the take-off stage because there was a wide-spreading private
enterprise boom in the import-replacing sectors. He would, therefore,
concentrate in any assessment of take-off on sectoral patterns and did
321
not think one would then have much doubt on which were the periods
of acceleration. There was nothing mystical about his terms and the
important thing was to know what they meant and not merely make an
emotional judgment in favour of his terminology rather than that of
Professor Kuznets.
Mr. Berrill said he would like to take the concluding comments on
page 40 ff. of Professor Kuznets' paper and see how Professor Kuznets
differed from Professor Rostow. In doing this he would concentrate on
take-off. He was not surprised that there was no statistical support for
the idea of a sharp change in the rate of growth of national product.
As for the lack of a clear distinction between the pre-conditions and the
take-off, he did not expect such a clear-cut distinction in economic history.
He would remind participants that there was no clear distinction for a
human being between childhood and adolescence, or between adolescence
and adult life. Nevertheless if one went further backward and further
forward, there was a difference in quality between childhood, adolescence,
and adult life. Mr. Berrill agreed with the third point made by Professor
Kuznets because he thought that Professor Rostow did neglect the
importance of the degree of backwardness.
The crucial question was therefore whether in a short time one could
move to a situation where a rate of growth which was self-sustaining
could be achieved.
Mr. Mathur commented on page 34 of Professor Kuznets' paper
where for the take-off periods of various countries the capital-output
ratio figures ranging from 2·5 to 4 were mentioned to support the argu-
ment that there was no evidence for a 'net capital-output ratio of 3·5 to
1 '. He said that the figures produced by Professor Kuznets himself
were not significantly different from the one critized in Professor Rostow's
theory, and that it seemed that Professor Kuznets had taken the idea
of capital-output ratio of 3·5 too literally. He thought Professor Rostow
referred to this figure merely to give a general idea, an interpretation
particularly evident when Professor Rostow considered cases where the
capital-output ratio was undefinable in a strict sense. This was so, for
instance, when there was a long lag between the start of an investment
project and the beginning of production from it. He further pointed
out that Professor Kuznets had at another place mentioned the lack of
suitable data. The presentation of supporting data could not always
prove causal connexions nor could its absence be deemed to point against
a suggested hypothesis.
Mr. Mathur said investment in heavy industry and in social over-
heads could be stepped up, as in Japan, without inflationary consequences,
as long as supporting investment in agriculture was taking place. Balance
was required between the two sectors, and it did not seem that, in India
at least, enough investment in agriculture had taken place. If the pro-
portion between industrial and agricultural investment fell, agricultural
productivity would rapidly increase and provide food for the large demands
of the industrial sector. Finance was not a bottleneck for this investment
322
from a planning point of view, for deficit financing could be employed
provided an appropriate proportion of the funds were used for rapid
increase in agricultural output. It was the machinery of supplying these
funds to the peasants at low interest rates which was lacking so that
borrowing in India was largely from money-lenders, at interest rates
from 20 to 75 per cent per annum.
Thirdly, the increase in agricultural productivity could be obtained
without use of highly capital-intensive or scarce resource-using techniques,
as was demonstrated by Japan. During the last thirty years too much
attention had been paid by government agricultural stations in India to
mechanization but too little had been done about improving and popular-
izing agricultural techniques of low capital intensity.
Professor Kuznets, replying to Mr. Mathur, said he thought it would
be better if economists and economic historians produced ideas and
concepts which could be tested. He would expect that empirical dis-
putes could be settled from available data. If no data were available,
then there was no basis for any statement at all. Professor Rostow had
claimed that take-off had empirical characteristics and represented a
generalization based on a variety of cases. This implied that there was
both quantitative and qualitative evidence which could be checked by
others. Yet some statements, for example, those indicating when a
sector became large enough to be a leading sector, could not be tested
empirically at all. Everything depended on the performance of the
sector and could only be defined after the event. No testable evidence
had been put forward in Professor Rostow's paper and Professor Kuznets
therefore suggested that the idea of a leading sector remained an empty
box. As he had said in the first session, the aspects of leadership were
so many that in timing the emergence of a leading sector one would
have to say in respect of what particular magnitude the leading sector
was being judged. How big was it ? How fast was it growing ? How
could we judge it in all its various aspects ?
Professor Kuznets agreed that it was entrancing to create a system
in which there was interplay between well-known components in aggre-
gative economics, but its value depended on having a cutting edge, which
took us back to what it contained and relieved us of what it excluded.
Professor Rostow's scheme suggested an invariance which was attractive
when the developed part of the world confronted a large number of other
countries which wanted to develop. It was attractive, but did it mean
anything when we knew that the analysis of pre-conditions took us back
to the year 2000 B.c. ? Again, how did one know when one had sufficient
social capital to take-off? Did one know whether one had a unitary
market ? All he thought one could say was that there was some degree
of invariance among countries for some or all of these characteristics
suggested by Professor Rostow, but this hardly justified a hypothesis.
Professor Kuznets said he knew what modern economic growth was.
All he doubted was the existence of a sufficiently marked watershed
between the pre-conditions and the period after take-off. He would
323
have liked Professor Rostow to start with the concept of modern economic
growth and to think of the various countries which were growing as
members of a family experiencing various industrial revolutions and with
important links. The pattern of development took place at two levels.
First of all there was an international back-log of inventions and inno-
vations which had already been made and which were available to those
who wanted to use them. Second, within a nation one had the beginning
of modern economic growth taking place through a sequence of stages
which depended on the time at which the nation began to grow and its
historical background. While Professor Rostow's image was attractive,
there was at present too little foundation for us to assume that there was
a phase called take-off which could have enough empirical invariance
to be useful as a preliminary method of classification. The danger was
that, having set the classification, one would go around looking for em-
pirical evidence to prove that it was correct, or even worse to assume
that it was. Professor Rostow said he would agree with Professor Kuznets
on one point -when the latter said that he had not in his paper given
the empirical evidence which he had accumulated over the years for
supposing that particular sectors were leading sectors. He had merely
presented generalizations which resulted from the empirical evidence and
would therefore accept Professor Kuznets' reservation on this point. But
from his knowledge he believed the difficulty of testing lay in following
through the changes in related sectors caused by the emergence of a
leading sector. The direct effects were relatively easy to test, but it was
very difficult to trace the lateral effects. Take-off had been presented
as a preliminary hypothesis to be tested by his colleagues. All he would
claim was that there was a need to face up to the sectoral aspects of the
process as well as to aggregate growth.
THIRD SESSION
BY PROFESSOR NORTH
Professor Leibenstein said this was a straightforward paper which did
two things. First, it told the story of the expansion of U.S. manufactur-
ing in 1850-60. Second, it explained how this expansion took place.
He would accept the facts which Professor North gave and concentrate
mainly on the more or less classical scheme of analysis. Professor North
started with the notion that there was an observable expansion of invest-
ment in various industries and of consumer demand. The result was
an observable market expansion. Professor North now brought in from
outside new production functions via inventions, etc. All these factors
started the process of expansion which was continued via market expan-
sion through a growth of the industrial sector, in this case cotton textiles.
Professor North then concentrated on forward and backward linkages.
324
The basic process proceeded from the initial expansion in industry to
forward linkages and backward linkages, so that one got continued ex-
pansion in a wider field. Simultaneously, however, one needed an in-
crease in income per head which was the result of specialization and of
the localization of industrial activity. Higher income per head meant
that more labour-saving machinery was introduced.
On page 48 of his paper, Professor North had said that the 'sustained
development and spread of manufactures ultimately required that the
region's factor endowments should improve'. This was a crucial state-
ment, and he was not sure whether inventions and discoveries were
necessary merely to improve the expansion of the market. He wondered
whether improved factor endowments were necessary to keep the process
going - he was especially concerned with the quality of the work force
and of entrepreneurship. The basic question was which aspects of the
process were really essential. Did improvements come from outside the
system, or were they the results of increased income? To put it another
way, he wondered whether inventions and discoveries were necessary or
whether there would be expansion without them.
Professor BulhiJes pointed out that on page 51 of his paper Professor
North said that in the early period many cotton mills made their own
machinery. This assumed that fairly large profits were earned from
cotton textiles which could be put into other fields. He thought that
the paper would have been more convincing on this point if figures for
profit had been included to show how these fitted expansion. He thought
the inducement to install new machinery was not sufficient. What firms
really needed were the funds with which to do it.
Mr. Berrill made three points. First, Professor North implied that
the leading sector was not important until 1860, though he would have
thought it was of some importance twenty years before that. Second,
Mr. Berrill pointed to the old notion that while the home market was
important, one nevertheless needed foreign trade. In this case one was
trying to marry a regional home market with export to a specific agri·
cultural region. Finally, on labour he was never quite sure whether we
were being told that labour was cheap or dear in the United States. We
were often told that it was cheap, but often also that it was dear enough
to force mechanization. Professor North seemed to take the cheap
labour line, but perhaps he would like to comment on the views of
Professor Williamson who argued the other way.
Dr. Fischer found similarities between development in the U.S.A.
and in Continental Europe. The timing was the same and also some of the
processes. For example, there was the movement from domestic to
factory industry between 1830 and 1860 which had happened in the
U.S.A., France, and Germany. There was also the fact that the pressure
of English goods after 1815 had delayed development in Europe as well
as in America. Similarly in the U.S.A. the North-East was the key
centre and there was similar localization in Europe. It was also true
that the weight of tradition in these established centres was very strong.
325
This was very important in Europe where home industry developed into
the factory system in these manufacturing centres and then spread growth
to the surrounding agricultural regions. A growing market was also
important, as were falling transport costs and the quality of labour, but
he would say that this was important for agriculture as well as for industry
He would put particular emphasis on the quality of labour and enterprise
because without changing social attitudes economic growth could not be
self-sustaining. This was something that would be very important for
the underdeveloped areas today.
Professor Gerschenkron said that on cheap and expensive labour he
would say that in the U.S.A. a lot had depended on the expectations of
entrepreneurs. Labour-saving devices were only introduced where
businessmen felt sure that they could obtain cheap labour. In Boston,
tailoring had been mechanized only when cheap Irish labour was avail-
able. Entrepreneurs felt that it was only worth having to invest heavily
if there would afterwards be a new scale of activity ; this implied that a
great deal of labour would be necessary. As for which factors were
necessary and which were not, he would say that this concept was not
readily usable in historical analysis. One could only know what was
and what was not necessary if one included the factors in question in
model and then one could only interpret them hypothetically in the
spirit of that model. In addition, depending on one's definition of growth,
one tended to produce a tautology when one said that growth meritably
required various factors.
Professor Cairncross wanted to be clear what Professor Gerschenkron
was saying about mechanization in Boston. Brinley Thomas had argued
that Irish immigrants had been necessary to mechanization in Boston in
the middle of the nineteenth century. Yet one might suppose that
mechanization would be slowed down rather than accelerated by a plenti-
ful supply of cheap labour.
Professor Gerschenkron replied that he had argued that machinery would
not be introduced unless extra and cheap labour was available because a
constant output would not be sufficient to make mechanization worthwhile.
Professor Solow wondered whether what Professor Gerschenkron was
talking about was not the necessity of having an elastic supply of labour
rather than a supply of cheap labour.
Professor Kuznets suggested that if entrepreneurs expected the market
to expand they would introduce machinery even if labour was not short.
This was a crucial factor.
Professor Cairncross thought an important question was why the South
did not take off. Labour had been cheap in the South and yet, precisely
for that reason, no labour-saving devices had been installed. It was
true that the South was a long way from the main markets, but the
markets were there and, with the cheap labour which the South possessed,
one would have expected some competitive advantage.
Professor Marczewski said he did not know the historical sequence of
events in New England, but he wondered whether the answer to Professor
326
Gerschenkron was that cheap labour allowed industrialists to make big
profits and that this money was ploughed back into the industry. With
sufficient elasticity in the market, firms doing this would take the oppor-
tunity to install the most modern machinery available. This seemed a
more logical explanation of the willingness to mechanize in Boston.
Professor Robinson said that Keynes had argued that the high degree
of mechanization in the U.S.A. in the period under discussion occurred
because demand was running ahead of supply. It was not a function of
labour shortage so much as of the degree of control over inflation. He
wondered whether there was any truth in Professor Gerschenkron's con-
tention. Elastic supply of labour surely meant that one was less likely
to get mechanization.
Professor Rostow said that, as a point of fact, New England had reached
a heavy degree of capitalization in the textile industry because labour
was scarce and expensive. The original mills were as capital-intensive
as those in England because the labour force was made up of the respect-
able daughters of New Hampshire farmers, and it was therefore necessary
to make conditions acceptable to them. When the Irish arrived, the
industry was committed to a certain degree of mechanization and the
coming of a large amount of cheap labour was not sufficient to make them
move in the reverse direction. The arrival of the Irish merely meant
that the labour supply was more elastic. The origin of the capital intensity
was the initial relative labour shortage.
Professor Rostow said he was sometimes inclined to regard the take-off
of the North-East of the U.S.A. as a separate phenomenon. It was not
until the railway surge as far as Minneapolis in the 1850's that it was
possible to integrate the North-East and the Middle West. At an earlier
stage, most investment was in cotton acreage in the South while the North
and the Middle West were putting a great deal of capital into land, especi-
ally in Ohio, Indiana, Illinois, etc. Professor Rostow said he would put
more weight than Professor North did on the development of the railways.
Professor North spoke of their effects in widening the market, but he
would also stress their backward linkages. In the 1850's there was a big
increase in the output of pig iron, rails, etc., and the railways were im-
portant in causing this. Similarly, the rise in agriculture and industry
led to a development of shipping to export their produce, as well as stimu-
lating the production of farm machinery. He would, therefore, stress
more than Professor North did the industrial development centred
around the growth of textiles and later around railways, but he accepted,
of course, the importance of the widening of the market.
On the question of how the leading sector clusters were related to
the expansion of manufactures in general, Professor Rostow said that at
first new leading sectors would not dominate a weighted index for total
manufacturing output, but a wide range of manufacturing industry would
benefit from the derived growth effects of increasing population and
income per head. The linking of markets and the lateral effects of the
leading sectors could be seen in the figures of urbanization. In the 1850's
327
1500 miles of railways a year were being built, and this led to rapid ex-
pansion in iron, coal, and engineering.
Dr. Singer suggested that prima facie one would expect that the wage
rate would be irrelevant to mechanization because labour entered into
both the manufacture of machinery and its use. If the machinery was
made and used in the same country, it was a question of relative costs.
If, however, the machinery was imported, then the question would be
whether businessmen expected wages to rise relatively to income per
head in the future. On immigration, Dr. Singer said that there had been
no mention of the idea that heavy immigration meant that the U.S.
economy was saved the cost of a great deal of overhead investment in
bringing up and training labour until it was old enough to work. Because
of this saving in overhead capital, a greater amount of direct capital
formation might have been possible.
Professor Landes said that the question of cheap versus dear labour
was relevant to our understanding not only of American economic growth
but also of the relation of the enclosure movement to the British industrial
revolution. Our views on this had been greatly modified by the work
of people like Professor Chambers, who showed that the enclosure had
on balance absorbed rather than released manpower. The labour for
Britain's industrial revolution came from a rapid growth of population
in the countryside - more than agriculture could absorb - and ·from
Ireland. Yet it seemed that the important point so far as this discussion
was concerned was the relative factor costs at the time when the intro-
duction of machinery took place. This was more important than what
happened later when these new methods spread. The British example
showed that in the middle of the eighteenth century labour was getting
dearer, and that the textile industries were finding it hard to get more
manpower because the putting-out system was becoming over-extended
geographically. There was a series of legal efforts to improve the position
of the manufacturer by imposing penalties on workers who did not stick
to their tasks and deliver honest goods in the time promised. These
penalties grew heavier and heavier, and their very iteration and aggrava-
tion were proof that they were ineffectual.
Professor Bentzel found it hard to agree that the existence of cheap
labour was a positive factor in mechanization. He would rather explain
the situation by saying that technical development made capital cheaper,
and mechanization took place despite the cheapness of labour. Professor
North had already said that there was a great deal of innovation and it
was surely this which made capital cheaper relatively to labour and led
to the process of mechanization.
Professor Robinson was surprised how little Professor North had said
about population growth. There was a puzzle here. He wondered whether
population growth helped or hindered industrialization. If one considered
the provision of social overhead capital, what struck him was the external
economies of scale. These were partly the result of changes in technology
because of invention, but to a considerable extent they resulted from the
338
growth of the market. He wanted to ask which of these external economies
were a result of an increase in income per head and which the result of
the growth of the U.S. economy as a whole. Was it possible for the
experts to separate off these two factors ? His mind was brought back
to the posthumously published article by Rothbarth, showing that there
had been higher productivity in the U.S.A. than in the U.K. before the
American economy became as big as the British.
Professor Boudeville wanted to emphasize a point brought to light by
Professor North on pages 57-8 of his paper, dealing with the supply of
labour.
In a former paper, Professor North had emphasized the different
process of growth in Europe and in the U.S.A. Did he think there was
another fundamental difference between past U.S. growth and current
Latin American industrialization, due to the relative roles of immigration
and population growth ?
To be more precise, what had been the effect of the wage differential
between new immigrants and the existing domestic population? Was
the lower income received by U.S. immigrants a crucial fact for develop-
ment ? In Brazil today, one had to pay very high salaries to attract
foreign technicians. Did Professor North think growth was economically
and sociologically easier for the U.S.A. which could get immigrants from
countries where wages were low and labour reasonably well trained ?
Professor Kuznets said that in the early nineteenth century America
had had one of the highest birth rates in the world, but had also experi-
enced one of the earliest declines, the birth rate falling by 30 to 35 per
cent by 1840. The main reason was that people married later, and it
was important to note that this had taken place at a time when there was
little industrialization or urbanization, which one might have expected
to need in order to get what was now regarded as the modern response to
such things. The rates of immigration relatively to the resident popula-
tion were highest in the 1840's and 1850's. Professor Kuznets also
pointed out that there had been a huge amount of internal migration,
presumably the result of better opportunities in other parts of the country
and of the widening use of natural resources in the U.S.A. In these
circumstances and with the important proviso that the American labour
force was intelligent and able, population growth was definitely a major
factor in American development. Professor Gallman had shown that
capital formation between 1840 and 1860, mainly from domestic savings,
was also quite high. Gross domestic capital formation was probably
16 per cent of national income, which was almost certainly as high as in
the U.K. and perhaps higher than anywhere else. There was, therefore,
everything to gain from a population growth which shifted labour to new
parts of the country. Otherwise the growth of the U.S.A. at this period
would have been much slower.
Professor Robinson inquired whether Professor Kuznets meant that
returns to scale were such that a higher rate of increase in population
meant an even bigger increase of income.
329
Professor Kuznets replied that he thought this was so.
Professor Gudin returned to the puzzle of how mechanization could
have taken place where there was much cheap labour. Dr. Singer had
said that in spite of the use of machinery, the increase in the demand for
labour in the U.S.A. absorbed the surplus population. But this was a
macro-economic point; the entrepreneur was concerned with micro-
economic problems and looked at costs and prices. He had to choose
the relative quantities of labour and machinery which gave lowest costs.
Entrepreneurs making decisions were not the same people as economists
looking at what had happened years later.
Professor Gudin thought that Professor Bentzel had made an im-
portant point which he could elaborate from what he had seen in Brazil,
where bulldozers were used for road construction despite the existence
of cheap labour. The reason was that the productivity of machinery
was so very much greater than that of unmechanized labour. Further,
entrepreneurs were able to resort to machinery without causing unem-
ployment, labour being absorbed by the development of the country.
Professor Neumark thought one could get an interesting example of
the crucial issues if one looked at recent developments in West Germany.
In three or four years, from 1946 to 1949, the population of West Ger-
many rose from 40 to 50 million people. One would have expected lower
wages, etc., and not increased investment in labour-saving machinery.
Yet this was what had happened. Perhaps the explanation was that all
firms knew that this was a once-for-all immigration and therefore that
~ven if wages fell they would not remain low for long. As a matter of
fact, after a time, wages had risen considerably and the labour-saving
machinery proved worthwhile. Although this probably explained the
German case, it was difficult to see why American businessmen in the
middle of the nineteenth century would have expected the same thing.
Professor Cairncross said that in discussing the change from craft pro-
duction to machine production we must specify the kind of labour we
were talking about. Were we interested in the machine-minder or the
craftsman ? Perhaps some of the apparently inconsistent points in the
discussion about Boston resulted from treating labour as homogeneous.
Professor Gerschenkron had spoken of a free supply of labour and this
was correct if the bottle-neck was on one side. If in Boston craftsmen
had been short and machine-minders available in large quantities, then
Professor Gerschenkron's explanation could be correct. Dr. Singer had
suggested that, if the labour were dear, so would machinery be, but this
again depended on who made machines and who used them. In Boston,
the machinery was apparently used by the well-paid daughters of local
farmers, but it was not produced by them. In Britain, even at that time,
machinery was probably relatively more expensive than in the U.S.A.
Professor Gerschenkron thought that in Boston competition between
machine-minders and craftsmen was only part of the story. When the
Irish arrived, the daughters of farmers left the factories. This had been
a period of very great technological progress.
330
Professor Marczewski thought that we exaggerated the intelligence of
entrepreneurs who did not study macro-economics but worked out
whether they would be able to rely on a supply of cheap immigrant
labour or not. They would reason on a short-term basis. Professor
Marczewski thought that the kind of question they would ask would be
whether they had resources of capital available, whether the market was
growing, and what was the cost of labour as compared with machinery.
If the market was developing then it would clearly pay to invest, and
once entrepreneurs had decided to do so they would employ the latest
and best machines whatever the cost of labour.
Professor Cootner suggested that since the U.S.A. had been a low-cost
raw material producer of many industrial raw materials, this had meant
an increasing market for the U.S.A. in cotton and wheat. With a pre-
dictably-growing demand for these materials from Europe, and an in-
creasing population, the risk of investment was reduced, which in a sense
reduced capital cost. When industrialization did take place it did so in
the cheapest area- the North-East.
Professor North said he had found it hard to write his paper since he
had just finished a book on growth in the U.S.A. and had found it diffi-
cult to pull out this small part of his rather lengthy thesis. He thought
the heart of the issue was the inter-relation between the North and the
South and the West. Having had to leave out a lot, he had looked in
detail at growth in the North-East and at some of the broader arguments.
He thought that the question of labour costs was not very important
but that size of the market was the crucial influence. At the end of the
eighteenth century the future of the U.S.A. did not look very bright-
as indeed contemporary Englishmen had suggested. Only with the
Napoleonic wars was there a change, with the expansion of shipping
and of the re-export trade. In 1783 the Americans had been deprived
of the benefits of their comparative cost advantages by the British navi-
gation laws. However, after 1793, the Napoleonic wars had led to a big
expansion in the U.S.A. and by 1815 the North-East had become a centre
of development. When there was peace again, despite the restrictions
on trade imposed by Britain, the situation was different.
Cotton grew rapidly after 1815 and the South became a highly special-
ized area concentrating on the cotton trade. He hoped that this would
explain his emphasis on the market. Professor North said he would
answer two questions. First, why export expansion did or did not lead
tQ internal expansion, and second, why expansion led to increases in pro-
ductivity.
Export expansion was always important for growth. One could argue
that with a big country one could have trade between regions of that
country, and it was certainly true that for at least 150 years the expansion
in America had been a result of getting into bigger markets. He therefore
suggested that export expansion was a necessary but not a sufficient
condition for growth. But one also had changes which led to basic
improvements in the domestic sector and one therefore had to ask why
33 1
an increase in income from exports led to the expansion and diversifica-
tion of the domestic economy. This brought him back to the question
of the South. The South found that its income from cotton was increas-
ing, but there was no urbanization and little manufacturing. Capital was
put into the expansion of cotton acreage. The South also spent a lot of
its income on importing food from the West and manufactured com-
modities from the North-East. Why was it then that the South did
not take-off ?
The first answer was that the comparative advantage of the South in
cotton was so great. Even when cotton fell to six cents, as it did during
the most difficult periods, it was still not worth shifting into other acti-
vities. Second, there was the character of cotton as an export industry.
Cotton required much land and a great deal of labour - in this case
slave labour. There was therefore a very unequal income distribution,
with a few wealthy people who imported luxuries, and many very
poor people. This means that no supporting industry developed and
there were none of Professor Rostow's spreading effects. Cotton was
transported along the rivers so that there was little investment in social
overhead capital. Nor was there any special incentive to divert tax
money to investment in human capital via education. The wealthy
landowners sent their children away to schools in the North and there
was no incentive for the planter to set up a school system. In other
words, there were no incentives to improve the quality of the labour
force through education. Finally, developments in ocean transport had
brought a rapid fall in freight rates and meant that back-hauls were very
cheap. In order to avoid bringing their ships back empty, transport
companies were prepared to bring manufacturing goods into the South
at very low rates. This was yet another factor removing any incentive
for the South to develop its own industry. Professor North suggested
that all these elements takes together explained why the South did not
take-off.
On the question of how the growth of the market led to an increase
in productivity, Professor North said he thought that George Stigler's
argument, in his 1951 article, was the main explanation. Although Stigler
was concerned with a different issue, he had suggested that a firm would
begin on a small scale where it had to make its own machinery and train
its own labour. A bigger market would allow the breaking-down of
functions. Specific tasks could be undertaken by different firms or parts
of firms, and all these separate activities had different costs. Only with
splitting-up and specialization could increasing returns be achieved. It
was this process of specialization which had occurred in the North-East.
The Stigler argument seemed to fit the United States very well; although
he could not prove that productivity increased as a result, it nevertheless
seemed likely. In addition to this direct effect of specialization, one got
all its other attendant advantages.
Replying to specific points in the debate, Professor North said he
might already have answered Professor Leibenstein, and that the import-
332
Hagru - Summary Record of the Debate
ance of the export market was his main element. To Professor Bulhijes,
Professor North said that profits in textiles were very high because Boston
manufacturers, unlike many of the others, were very efficient and even
in bad times did quite well. In these circumstances, even the bigger
firms which grew up around Boston were able to develop considerably
by ploughing back their own funds ; but they nevertheless needed to
borrow a great deal. On the issue of cheap versus dear labour, Professor
North said that a major point was that immigration. was not important
until 1845 so that this debate could only refer to the period 1845-60.
In the early development with its quite elaborate method of labour
saving, we were talking of a period before the big wave of immigrants.
He would like to point out that, even after the immigrants had arrived
wage rates were higher than elsewhere. In a sense, too, we were dealing
with non-competing groups. The Irish were not mobile, so that their
wages tended to remain lower than the wages of other workers. Never-
theless, wages over the whole economy were not low. Another point
was the quality of the labour force. The United States was lucky in
having an educated labour force to begin with, and this had led to higher
productivity. Indeed, some Boston manufacturers were unhappy about
employing the Irish because of their low quality as workers.
Professor North said it was not altogether true that there was only
one big sector of growth in the U.S.A., even if one were only looking at
manufacturing. There were growing sectors to the West at Cincinnati,
Buffalo, Cleveland, etc. These sectors were widely spread, and it was
only in New England that manufacturing development was very concen-
trated. This brought us back to the question of how far growth was
automatic -if there ever was anything in growth which was automatic
Professor North suggested that growth depended on human capital and
that this could be well illustrated by the revival of a country like Germany
after the devastation of war. In the short run, a highly-skilled labour
force needed capital equipment to work with and, when the war ended,
not only was it a relatively simple task to replace all the capital that had
been destroyed, but, as rebuilding went on, the expansion of output
per man was enormous. Professor North said that on textiles he agreed
with Professor Rostow, but he did not regard the railway as being quite
so important as Professor Rostow did. The growth of specialization
within regions was already important before the railways were developed,
and before the Civil War the main r6le of the railways was in lowering
transport costs rather than in building up other industries. He did not
deny that backward and forward linkages were important, but this was
a question of degree and he would emphasize over-all demand much more.
Finally, in replying to Professor Robinson on the relation between popu-
lation growth and income per head, Professor North said he agreed with
Professor Kuznets. The U.S.A. was a classic case in the sense that as
other factors of production increased in number they could co-operate
progressively more efficiently with the large and valuable resources of the
country to give increasing returns. The growth of population was,
333
The Economics of Take-off into Sustained GrOfiJth
therefore, an unmitigated benefit and was crucial for his argument about
the importance of having growing markets.
FOURTH SESSION
BY PROFESSOR HABAKKUK AND MISS DEANE
Professor Hoffmann said that participants would know that he was
particularly interested in the economy of the U.K. so that he was pleased
to introduce this particular paper. Britain was also the first country to
experience take-off. He wanted to raise several questions because he had
no major criticisms. The paper answered Professor Rostow in the nega-
tive sense in that it said there was no evidence that many of the features
he looked for, particularly on timing, occurred in the British case. There
were, however, three special features. First of all, there was the direct
influence of the Napoleonic war because production of guns, etc. led
to the development of iron within the U.K. and to a demand for many
imported goods. The second feature was the inflation which resulted
from the war. This was a unique experience in that particular period,
and meant that absolute price figures became meaningless and that
relative price series had to be used. A major difficulty was that the dis-
persion of the price figures was very great and real output was therefore
hard to calculate. What had never been analysed was how far there was
a profit inflation which altered income distribution and the expectations
of entrepreneurs.
Third, there was the function of overseas trade in promoting progress
in the eighteenth century. Probably the effects of development in the
iron and cotton industries would still have been important even if there
had been no foreign trade, since these industries represented 10 per cent
of national income in that period and probably half of manufacturing
output. If, despite these special influences, cotton and iron would still
have been important, there must have been some broader results from
their demonstration effects on the rest of the economy. As for new pro-
duction functions, the paper showed not only how technical developments
were interconnected but also why specific developments took place at
this particular stage. These two authorities showed that there was no
competitive element from elsewhere in the world making innovation
necessary. So it was not clear why the new techniques became available
at this particular moment, and why the genesis of this new phase in the
economic progress of the U.K. and the world should have taken place
within a hundred years of the date at which it did happen.
Scholars like Max Weber had brought in religious and moral behaviour
as an explanation of why the U.K. was one of the first countries to ex-
perience take-off. Now, one had a large number of poor countries which
were themselves trying to develop, and he wondered if recent research
334
could give any new evidence on ethical and social factors which might
perhaps explain why there were greater or smaller lags between a spiritual
change and any consequent economic effects. Professor Hoffmann did
not want to glorify entrepreneurs, but he did think we needed to see the
whole background against which they operated. He also thought that
there were some similarities and many differences between the experiences
of various countries ; we had the same problem with the business cycle.
If all these common factors were compatible with a particular stage in
either the cycle or economic development, then one could talk of a phase
as Professor Rostow talked of take-off. Naturally, statistical tests had
to be applied to special and individual cases and one had to give the
theorist some freedom to characterize a particular period in the way
that he wanted to. Stufentheorie had· been very popular with German
economists at the end of the nineteenth century, but was now deservedly
out of date. It was necessary to test hypotheses and then to re-formulate
one's theory in order to give a better explanation of reality. For this
reason he wanted to see more testing of hypotheses than had so far been
done during the Conference.
Professor Delivanis wondered, first of all, how one should look at the
importance of inflation between 1780 and 1800. He did not know whether
the developments we were studying would have occurred in the U.K.
even without it. Second, he wondered about the effects of foreign trade.
He pointed out that before 1914 a war was not so spectacular a break
in foreign trade as it was now. Britain's trade with Europe was, however,
affected by the Napoleonic war and he asked whether, on balance, the
effect of foreign trade in this period had helped or hindered development
in Britain.
Dr. Fischer did not think that the influence of war was special to the
British case. The papers on Russia and Japan showed similar influences.
The Japanese had had the windfall gains from their victory in the Sino-
Japanese war. In Russia, one had the effects of losing a war in the Crimea,
which incited the government to new efforts to promote economic de-
velopment. Again, in Germany, the end of the 1870 war with France
had led to an unprecedented boom. Dr. Fischer stressed that in general
he did not believe that economic development was unaffected by political
events. As for the function of foreign trade, he did not think that Britain's
experience had been unique. For example, there was the similar situation
in Japan. He also thought that in the sixteenth and seventeenth centuries
foreign trade was already very important for the U.K. The depression
of the first half of the seventeenth century was mainly a result of falling
British exports to Europe.
Professor Landes said that this was really a negative paper, particularly
because a desire to show the weaknesses in Professor Rostow's theory led
the authors to ignore the real significance of what had gone on. He
noted that both businessmen and statesmen of the eighteenth century
were aware that great changes were taking place, changes far more im-
portant than the authors would allow. Professor Landes suggested first
MZ 335
that it was a mistake, in view of the small place of iron, and even manu-
facturing industry as a whole, in a largely agricultural economy, to expect
changes in this one sector, however revolutionary, to have a massive and
immediate impact on overall national income. Second, he wanted to
stress the qualitativ~ importance of these changes, which went well beyond
what the authors had said in the paper. For example, in iron there was
the whole development of puddling and rolling techniques, which indeed
applied to the metal industries in general. Similarly, there were new
machine tools and new precision methods, steam engines, etc., all of which
contributed to and were stimulated by the development of cotton manu-
facture. Indeed, one could say that a whole new system of production
based on the use of machines and mechanical power was being introduced.
He did not deny that there were very few factories at the beginning of
the process, but what had started on a small scale grew until it eventually
spread to the whole economy. The process appeared to have begun
almost accidentally in cotton, rather than wool, because cotton was a
more tractable material and the demand for cotton goods was more
elastic. So cotton boomed, and drew the rest of the economy with it.
Professor Landes agreed that the importance of foreign trade needed
stressing. The pressure of imports often promoted technical change and
compelled home industry to adopt foreign inventions or to develop its
own. And the need for imports often gave rise to industrial development
aimed at earning foreign exchange. Finally, the nature of technological
change was such that gains in productivity outstripped the growth of
home markets and so led to a campaign to create new ones. Professor
Habakkuk himself had noted how big a percentage of cotton goods was
exported by 1820, and the whole of British manufacturing prosperity
depended on this. It was clear that already by the early nineteenth cen-
tury there was a push by British industry to seek and gain new export
outlets.
Professor Landes also agreed that the agricultural revolution was
important. Clearly something had to be done to increase the food supply
to meet the needs of a growing population. But to say this was not to
account for it, as the experience of other countries had shown. An agri-
cultural revolution by itself would not make an industrial revolution ; it
simply helped to make one possible. The agricultural revolution in
Britain was a permissive factor, necessary but far from sufficient.
Finally, Professor Landes suggested that Professor Ashton might be
more correct on the dates (1760-1830) than Professor Rostow. Still, he
did not want to minimize the importance of the technical changes at the
end of the eighteenth century. They provided so much competitive
leverage that foreigners found it necessary to copy them almost from
the start. It was not just a question of profits but of survival.
Professor Kuznets said he would quarrel with Professor Landes about
the revolutionary technical changes at the end of the eighteenth century.
These were revolutionary in retrospect, but would not have appeared in
this light at the time. The crucial question was whether one regarded a
336
change as important when it was first introduced, and when people were
impressed by it, or at the date when the change actually became important
because of its weight in the economy. He also pointed out that the Con-
ference was discussing economic growth and not industrial development.
These were two different things which we must keep separate.
Professor North also found the emphasis of Professors Rostow and
Landes on industrialization a false emphasis, because he agreed with
Professor Kuznets that accelerated growth need not be the same thing.
At this stage in Britain's history there was not merely a narrow range
of development. It was all too easy to pick out the technical innovations
as the dramatic aspects of what had happened, but we needed a much
broader approach which would enable us to look at all aspects of change.
Professor Rostow pointed out that Professor Ashton now put much
more emphasis on the developments at the end of the eighteenth century
as a result of recent statistical findings. Professor Rostow went on to
say that in general he did not think one should worry that his was a
debatable paper. When one created a new vocabulary, as he had done,
this represented an act of aggression and it was natural for others to try
to deal with this by debate. He himself had been surprised by the jump
in British real national output about 1780. Before that date there had
been an annual increase of 0·9 per cent, which went up to 1·9 per cent.
It was true that the 1770's had been a decade of war, but then, so were
the 1790's. So far as the impact of this war was concerned, he thought
it had diverted investments into specific non-industrial channels on a
large scale. Agriculture had had to expand to replace imports. Ship-
ping and docks had had to be developed and the U.K. had granted big
loans and subsidies to her allies. The war had stimulated some branches
of the metal industries. And the development of the cotton gin had
been so radical an invention that cotton prices fell despite inflation~
Wool had also been stimulated but, on the whole, the war had not helped
the textile trades, or accelerated the take-off.
On changes in production functions, Professor Rostow said that the
six-fold increase in the rate of growth of cotton textiles over two decades
had raised them from 3 to 10 per cent of national product. This in itself
was a very sharp increase but one could not measure the total effects
merely by their direct impact. Miss Deane had taken the effects back
to the demands made by machinery production on iron ore, but the
effects of expansion in cotton had been much greater. For example,
Manchester had grown from 27,000 people in 1780 to 95,000 in 1800.
The population of Birmingham had risen from 30,000 to 73,000. Pro-
fessor Rostow said that we were indebted to Miss Deane for her orderly
statistics of capital formation. When these were disaggregated one found
that in the 1780's there was an extraordinary increase in the production
of bricks. This no doubt resulted from the canal boom, from the first
cotton factories, and from the associated urban building activity. When
the demand for bricks levelled off, ships and agriculture took over as
leading sectors. He would guess that savings in the U.K. rose sharply
337
from 1780 to 1800. There were not only private savings but taxes rose
too, as did government investment. The government was investing an
average of £5,000,000 in the 1790's and, if one added in other tax receipts,
was taking a very substantial part of the national income. He was open
to persuasion, but all the evidence he had, including that for the industrial
capital market, suggested a high marginal rate of saving. Professor
Rostow said he did not underestimate the importance of foreign trade.
He only wanted to insist that one should relate expanding markets to
something wider than their direct impact on particular industries. One
had to reach back to the direct and lateral effects of industrialization in
particular sectors.
Professor North was no doubt right that one had to look at all variables,
which meant that gradual changes in the movements of big aggregates
were important, but in transport, cotton, iron, steam engines, and the
development of the factory system, there had been real discontinuities.
Professor Rostow said he wanted to recall the concept of the propensity
to be surprised, which was once introduced into a debate on income
distribution. A very small shift in income distribution could be important
and powerful in its effects. Take-off- associated with a relatively few
sectors - could be expected to have only a marginal effect on aggregate
statistics. This must be so since any economy experiencing take-off
would give a heavy weight to agriculture in its output. A shift in the
proportion of cotton output to total industrial output from 3 to 10 per
cent was remarkable, as was the jump in real national product in Britain
around 1780. The problem was that we were looking at the process
of the diffusion of modern technology and he thought one ought to draw
the line between the initial successful attempts to start this process and
the point when their effects became sufficiently powerful to keep the
process regularly moving forward. Miss Deane and Professor Kuznets
had said that one should take a cross-section of the economy and look
at industries in terms of their current relative importance in that economy.
He, on the other hand, looked at the role of a particular sector of the
economy in determining future growth. This was also the issue between
him and Professor North. If one looked at British growth in this way,
one saw that, in the take-off period, the system was being developed so
as to become the basis for the whole future development of factory
industry, the railways, etc. What divided the protagonists was a respect-
ful and useful view, Professor North stressing the importance of the
current weight of a particular sector in the economy and he taking the
potentialities for growth which a particular sector was providing.
Professor Cairncross said that biological change was both continuous
and discontinuous ; birth, for example, was a discontinuity. The same
was true of economic change. The series of inventions required to pro-
duce the steam engine represented a major break in the process of develop-
ment ; yet they led to a series of applications which could be regarded
as continuous. There had been other technical advances both before and
after the steam engine, but none that played so decisive a role. The
338
fact of continuity was made clear in the paper where it was said that
even in 1860 many of the uses of the steam engine still lay in the future.
Yet there had also been the discontinuity that Professor Rostow implied
in the term take-off. Was this discontinuity not traceable to the inven-
tion of the steam engine ?
On population and agricultural development Professor Cairncross said
that the figures suggested that this preceded the growth of industry. If
one put all the stress on this sequence of events, the economist would
regard the picture presented to him as one where labour was temporarily
redundant. Yet labour was recognized as being scarce at this time and
he had never seen an intellectually satisfying reconciliation of this prob-
lem. Moreover, one could explain the industrial revolution in terms
of technical innovation leading to cost reductions, or items of market
expansion leading to technical innovation. But could there be any market
expansion without a preceding fall in cost ? Since the development of
the U.K. was the first case of take-off, one would have expected in this
case at least that there would have been a fall in costs. The stress in the
Conference seemed to have been on demand expansion leading to inno-
vation, and he wondered whether this was correct in the case of the U.K.
Mr. Berrill suggested that the correct answer was that there had been
a bit of each, although he himself would put the emphasis on increasing
demand partly as a result of a rise of the level of demand in European
agriculture. If one accepted this there was need to assume a prior fall
in costs. Mr. Berrill said he had found it very hard to follow Professor
Landes. The idea that British traders had to push sales had never been
part of the argument. The fact that some markets were better than others
meant that these better markets were particularly attractive, but business-
men would push their sales wherever they could. Replying to Professor
Cairncross, Mr. Berrill suggested that not even the invention of the
steam engine would by itself have been a big enough change to give the
breaking process that we were discussing. One point was that to develop
it one needed a machine-making industry and the development of cheap
construction, using Irish labour, etc. On the supply of labour he was
surprised to see in the paper that from 1840 there had been no control
over population growth through the level of output. He believed that
for rapid growth and mechanization one needed dear labour to begin
and then cheaper labour later on. He thought, for example, that the
development of mechanized weaving had been held back for a long time
by the hand-loom weavers accepting lower wages.
Professor Robinson thought that, in his discussion of the U.S.A., Pro-
fessor North had tried to stress the total growth of the market. He
wondered whether there was not a similar situation in the U.K., the
extension there being based mainly on exports. Professor Robinson
said he had been studying the changes in the ratio of exports to national
income in the U.K. over the period 1700 to 1800. If one looked at the
U.K. in 1700 one found that 8 per cent of output was exported, three-
fourths of this being textiles, mainly woollens. By 1740 exports represented
339
10 per cent of national income, and this percentage rose to 16 in 1800.
Exports of textiles had risen from 8 per cent of national income to 10 per
cent. It followed that there had been a big rise in exports, both absolutely
and relative to national income. This had helped the economy in two
ways. First, exports had occurred where productivity was highest. So,
by increasing the proportion of exports to national income, it had been
possible to increase the rate of growth of productivity. Secondly, the
increased exports had eased the task of general economic expansion and
one found a marked contrast with, for example, the position in India
today. Part of this added power to import had been used to bring in
agricultural goods like wheat which, in turn, allowed even more industrial
expansion. But only 30 per cent of this growth in exports was accounted
for by cotton. Up to 1800, exports of woollens were greater than those
of cotton goods and one-fourth of the growth in exports had been a growth
in woollen exports. It followed, of course, that much of the growth had
taken place outside the textile industry altogether - for example, in
metals and machinery.
Miss Deane replied to the discussion up to this point. She said that
the criticism that the paper represented a negative approach was correct.
It had been very much tied to the statistics but she was nevertheless
unable to read into these statistics any evidence of a decisive transforma-
tion in the economy over the period in question. It was true that there
had been crucial inventions in the metal and cotton industries which
determined the future pace and direction of development. What she
could not accept was that these made growth, either partial or aggregate,
inevitable or automatic. The main criterion in Professor Rostow's theory
was that take-off implied a regular flow of new production functions,
but she did not see why the developments we were discussing in the U.K.
had made any such production functions inevitable.
In reply to Professor Hoffmann and also Professor Delivanis, Miss
Deane said that she thought that the American war had been followed
by improved trading conditions after 1783. During the first ten years
of the French war the British economy had been helped by the difficulties
in which its European competitors found themselves. Later, however,
when the continental blockade became effective, she agreed that the
benefit to Britain had been much less marked. Miss Deane agreed with
Professor Hoffman that it was hard to estimate changes in the value of
money in an inflationary situation. As to whether there had been profit
inflation, she would say that this had been mainly in agriculture and
certainly had shifted the distribution of incomes in favour of agriculture.
Whether the cotton and iron industries would have become increasingly
important in any case she was uncertain, but she thought that that might
well be true also. The question was why new techniques developed
there and' then, and the answer was that there were bottlenecks to be
broken- for example, in cotton spinning. But it was anyone's guess
why these had been broken at that particular stage rather than earlier.
Finally, on whether there was any new evidence on Max Weber's 'spiritual
340
change', she did not have any grounds for believing that there was a big
difference in the rate of economic change as the result of this. To Pro-
fessor Delivanis, Miss Deane said that she did not think that inflation
had been important in bringing about technological change. These
changes would probably have occurred without inflation, and perhaps
even without foreign trade. Miss Deane agreed with Professor Landes
that foreign trade had developed Britain's markets ahead of her possi-
bilities for supplying them by the 1820's. She would be sorry to minimize
the importance of economic changes occurring in Britain at the end of
the eighteenth century, but these were not the only crucial events in
Britain's economic development, and both earlier and later changes were
significant.
Miss Deane noted that Professor Rostow had been surprised at the
growth in output per head estimated for the 1790's, but pointed out that
the figures in the paper gave the maximum spurts in output that could
be deduced from the statistics. If one looked at the two hundred years
from 1740, one found slowly increasing rates of growth up to 1850 and
then some slackening followed by a further period of increase. The
evidence for British growth over the long period suggested a continuous
process, and take-off around 1780 was by no means clear. On urbaniza-
tion, Miss Deane said she would expect that if there were big increases
in urbanization over two decades, large enough to have affected building,
the results of the increased building would have shown themselves in
the brick statistics. The fact that they did not, suggested that while the
urban population might have grown over this period, there had been
little extra building.
Professor Rostow interjected to say that he agreed that there had been
no extra building. He was only bringing in urbanization to show what
he referred to as lateral effects ; for example, the fact that people in
towns would save more than people in the country and so raise the
propensity to save.
Dr. Singer suggested that all the evidence was against this, for example,
in Japan. Many economists agreed that the effect might be quite the
opposite. This was therefore an open question.
Miss Deane said she agreed that savings had not risen much in Britain
at this stage, nor was there much investment by the government. Taxes
were high but most of the money raised went in fighting the war and in
subsidizing allies, not in investment.
Professor Rostow agreed with this but suggeststed that the war had
helped exports and therefore increased the profits of the export trade.
There had been a transfer of income within the British population, with
the commercial and manufacturing groups gaining through the increased
export trade.
Mr. Boserup was surprised to find on page 76 of the paper the sug-
gestion that, around 1800, industry, commerce, and transport should
already have accounted for no less than 45 per cent of the national capital
(excluding land}, and buildings for no more than some 30 per cent.
341
Dr. Singer suggested that if one was looking at the gradualism of
change the figures on pages 75 and 76 were not conclusive. These were
supposed to show that investment in the coal and iron industries and in
canals accounted for only a small part of the total increase in investment.
In fact, it was shown to represent 25 per cent of the total increase in
investment, a rise of roughly the size required by the view of Professor
Arthur Lewis, that savings would rise to 5 to 10 per cent of the national
income over a short period. In other words, there was an argument here
in favour of Lewis' thesis.
Professor Hoffmann suggested that the crucial question was how far
the percentage of investment going into fixed capital went into buildings.
In many countries buildings represented 50 per cent of the farmer's
capital- excluding land. It was therefore important to know whether
dwellings were included in farm capital.
Miss Deane replied that farm buildings were included in these figures.
Dr. Singer was not convinced by the evidence for the statement on
page 82 that it took one hundred years for the share of agriculture in the
national production to drop to near 10 per cent. He suggested that a
figure of 10 per cent was characteristic of very highly developed areas.
If one represented growth as depending on the rate at which population
moved out of agriculture, the British figures showed a very high fall in
the agricultural population in the early stages - by modern standards
the decline from 1801 was quite rapid. Nevertheless, there had been an
extremely big decline from 1750 when Britain had had roughly the maxi-
mum possible percentage of the population in agriculture. To Professor
Robinson, Dr. Singer suggested that one reason why exports were im-
portant as a leading sector was that they enabled a country to get away
from the only alternative, namely, what Professor Nurkse had called
'balanced growth'. For balanced growth implied an impossibly large-
scale and overall effort to develop. One possibility was that if one were
able to develop imports at an early stage in growth, by using them as a
way of encouraging growth, one could then induce development later on
by cutting these imports off.
Professor Landes felt that the discussion had been fruitful if only
because it was the nearest thing to direct conflict so far. But he thought
that to a large extent the apparent dispute came from difficulties of com-
munication ; different people emphasized different points. He did not
think it was accidental that industrialization was so long in coming, and
then happened so often in the modern period. There had been big
changes previously in many economies, not least the population increase
of the Middle Ages, which both caused and was caused by an increase
in food supply. But such responses took place within the old system
and under diminishing returns, techniques remaining essentially the same.
In the eighteenth century, however, something unique happened in that
industry responded to a challenge and made an apparently irreversible
technical break-through. He therefore thought that there was a discon-
tinuity here in a qualitative sense, and that the whole complex of inno-
342
vations, with the rise in productivity they caused, produced a much
bigger change than man had ever seen before. Eventually the alliance
of science and technique made possible systematic innovation and a
continued flow of productivity increases. Professor Landes suggested
that this qualitative change was a great event in human history. He
admitted that this was an ex post evaluation, but this did not invalidate
it. He did not feel handicapped as a historian in being able to look back
at the past and to interpret it. Besides, even at the time, many people
had thought that the changes we now called the industrial revolution
were altering the whole future of economic history. He agreed that
more accurate measurement and dating had left us with a more compli-
cated picture than we had suspected, and that overall change was gradual
rather than abrupt. Nevertheless, there was a decided change of pace in
the period after 1780. As for the international diffusion of this break with
the past, which took place over a period of several decades, the papers
presented made it clear that we were faced by a complex of changes
occurring at different rates in different places. One might generalize,
perhaps, by saying that the countries which followed were able to move
more quickly because they could look back on British experience. Pro-
fessor Landes concluded by saying that it was easy, or rather popular,
to make fun of Marx's system of stages of economic history, but there was
a great deal in it.
Professor Marczewski wondered whether Miss Deane thought one
could assign a fundamental role to the terms of trade between manu-
facturing and primary products, within the U.K. and with the rest of
the world. If she regarded this difference as important, had she tried
to measure it?
Miss Deane said that she did think that this was important, but she
had not tried to measure the terms of trade in this way as yet. The
difficulty with the trade statistics was that they were all at official values
and it was difficult to get accurate prices for the eighteenth century.
Miss Deane said that she did not quite understand what Dr. Singer had
said about the fall in the numbers employed in agriculture. Her own
point had been that the fall had been really rapid only after 1850.
Dr. Singer explained that his point was that between 1801 and 1911
the percentage of the population in agriculture had fallen from above
50 per cent to less than 10 per cent, while the total population was rising
at 1 per cent per annum. This was the kind of rapid movement which
only fast-growing countries like Mexico could achieve.
Miss Deane said that she wanted to assure Professor Landes that she
did not wish to deny that there had been an industrial revolution. But
if one concentrated too exclusively on the fourth quarter of the eighteenth
century, and failed to realize that the rise in output began in the 1740's,
one missed many interesting features of the industrial revolution itself.
343
FIFTH SESSION
DISCUSSION OF THE PAPERS
BY PROFESSOR HOFFMANN AND DR. FISCHER
Professor Gerschenkran first considered Dr. Fischer's paper. He
thought that it dealt accurately with the effects of government interven-
tion in many fields, such as patent law, education, the Customs Union,
and so on. Nevertheless he thought that Dr. Fischer overestimated the
role of the state and its potentialities. The government could not do as
much as Dr. Fischer claimed to educate the lower classes, especially into
such virtues as diligence, assiduity, and thrift. He thought it was more
sensible to say that the Craft Guilds had done that.
On the whole paper, Professor Gerschenkron thought that what was
said on the cumulative effect was both misleading and exaggerated. All
these positive things were done by the government, as well as other things
that were left over to Professor Hoffmann's paper. But it was still
doubtful whether one could fairly say that the activities of the state
could be called a strategic factor in industrialization. One had to take
account of all the things, in the period after 1870, which the government
did to thwart industrialization. All came out well because of the huge
momentum of the German economy, but we must remember this negative
contribution of the government. Professor Schumpeter liked to say that
the German government did all in its power to stifle industrialization,
and while Professor Gerschenkron did not think this was a completely
tenable view, there was more than a grain of truth in it. The main ques-
tion turned out to be what was a strategic factor. This put the proper
emphasis on other things, for example the role of the banks relatively to
that of the state. This led to the Hoffmann paper.
Professor Hoffmann was concerned with the period between the early
1830's and the early 1850's. He had many interesting points to make,
for example, on population, on the role of agriculture, on the relative
roles of consumption and investment, and so on. Nevertheless, Professor
Gerschenkron did not feel that a clear case had been made out for shifting
the date of the beginning of German industrialization forward to 1830.
However, his basic criticism was about the national income data.
He thought that since the data for the early 1800's were very unreliable
they had to be used with the very greatest caution. Indeed, perhaps they
should not be used at all for the moment, unless the derivation of each
figure- was given in detail. Even if we accepted the figures at current
prices, the process of deflation was very crude, and he did not think one
could use the figures at constant prices. To be able to do that, one needed
proper deflators, and he did not think that these existed yet. We should
get better figures one day, once price and cost-of-living indices had been
worked out for the specific purpose of using them as deflators. At the
moment, the national income figures only began to be really useful for
dates after what Professor Hoffmann regarded as the take-off period.
344
Nevertheless, the industrial figures were very useful, both for manu-
facturing and mining, and the thing that interested him was that the
index of industrial growth which Professor Hoffmann provided conflicted
with his own. The divergence might lie in the exclusion of machinery,
though he did not see how that could make so big a difference. He still
felt that it was the 1850's which showed the real kink in the curve of
manufacturing output. But, on the whole question of continuity and
discontinuity, he thought that this had been discussed so far in too
ontological a fashion ; participants were regarding each other as continuity
men or discontinuity men.
He agreed that sudden accelerations were important but felt that one
should look for these in industrial output and not in national income.
He regarded such sudden accelerations as manifestations of discontinuity.
Naturally, the historical concept of continuity was very different from
the mathematicians. This was how he himself thought and talked about
continuity and discontinuity. There was acceleration in the world, and
one could smooth this out and get continuity by using such statistical
devices as moving averages. But we could still find and deal with discrete
things. He thought that it was best to find some specific discontinuity
and study this to discover whether it was of particular interest. It would
be, if one found that other important things were typically connected
with the change in speed in the cases one had studied. By going over the
changes one found in such specific cases, one could organize one's ideas
and explain phenomena better.
So far as Professor Hoffmann's paper was concerned, he thought a
closer look at the 1850's was needed. He thought progress then was less
closely connected with the role of the government than with that of the
banks, whose activities he regarded as crucial. This might turn out to
be a more promising approach.
Professor Marczewski was struck by the analysis on page 114 of the
Hoffmann paper, where Professor Hoffmann used a particular method
to measure the growth of the social product. He assumed an investment
quota of 5 per cent and a capital-output ratio of 3·5. With a 1 per cent
growth rate for population, this gave an annual growth rate of real income
per head of 0·4 per cent. Professor Marczewski did not see what grounds
there were for these particular assumptions. The investment quota and
the capital-output ratio had varied greatly in the past, and Table 9 showed
similar variations for Germany. It would have been preferable for the
analysis of the early period to be based on the actual growth of output,
for the industrial output series was a very long one. This very indirect
method for the period up to 1850 led to serious problems of timing.
On page 106, one had a growth rate of 6·3 per cent for capital goods
output in the period 1834-60, compared with a rate of only 2 per cent
for consumer goods. The figure of 6·3 per cent, however, was based on
statistics for only a small number of industries which were greatly con-
cerned with the production of capital goods. Perhaps the argument should
be modified to allow for this. Professor Marczewski said he knew it
345
was impossible to break down the figures of final production, and so one
had to take the industries en bloc ; but perhaps the analysis could have
been made more precise.
Professor North said that he had been brought up to believe that the
government was very important in bringing U.S. growth, but as he had
worked in this field he had become more and more sceptical. We needed
first to know how growth was caused, and then to go on to show how
the government helped the things causing growth to happen. Could
Professor Fischer spell out how the interventions he was studying actually
led to growth ?
Professor Rostow suggested that if one started out with the idea that
a pre-conditioning process was needed, there were some very specific
jobs that had to be done. The way in which the jobs were carried out
would differ, however, as would the degree of difficulty. It was necessary
to find and train men; to build up social overhead capital ; to reform
the agricultural system ; and to begin to expand foreign trade. One
often found governments doing all these things, but one did not often
find a government actually building up the key industries, which was
also necessary. As he understood Dr. Fischer's paper, it asserted that
the government did nothing directly to raise industrial production, but
that it did engage actively in the pre-conditioning process for industrial-
ization.
Professor Rostow agreed with Professor North that the U.S. govern-
ment had done little in the way of giving direct support to industrial
growth. But it had helped indirectly. The Constitution provided a
legal framework for a national market ; the Federal Government assisted
the railroads and imposed tariffs. But as Professor Gerschenkron had
said, governments could also impede progress. The normal situation was
that whether or not the government should act to establish the pre-
conditions was always regarded as a very important question for debate
and that there was always a strong body of opinion which did not want
government action at all. We had to look at the role of government
not only in encouraging the direct industrialization of the country but
in the general preparation of the society for industrialization.
So far as Professor Hoffmann's paper was concerned, this led us back
to the question of the 'preceding decade'. Professor Rostow had no
strong objection to putting back German take-off to the 1830's, but had
not done so for several reasons. The acceleration in cotton came in the
1850's, though this was not very important for take-off in Germany.
The acceleration in shipping came only after 1845 and that in pig iron
in the 1850's. Coal had shown a steady rise, but he did not think the
railway system in the 1830's was big enough or integrated enough to
give substantial spreading effects. There was also the fact that political
revolution came in 1848. His judgment was tied to the way he defined
take-off as a phenomenon which depended on a certain combination of
the rate of growth and size of the sectors of the economy affected, since
those elements together helped to determine the spreading effects.
346
Professor Boudeville asked three questions of Professor Hoffmann.
First, on page 97 of his paper, Professor Hoffmann brought to light the
fact that the urbanization of a peasantry with a low birth rate might mean
lowering down the age of marriage through reduced social pressure and
an increase in birth rates. Were there current examples of this ?
Second, were there any figures on German urbanization before 1815?
Were there statistics of the population of all towns with more than
20,000 inhabitants ? This would be especially illuminating. Finally,
Professor Hoffmann pointed out that German take-off was more clear
cut than the British one. Did he think the take-off observed in a younger
country was likely to be always more obvious than that of the original
and older country? Would the dating of take-off become easier as time
went on because of the advantage of being a latecomer ?
Professor Bentzel thought that the changes in income distribution
caused by take-off were interesting. He was inclined to think that some
change in income distribution was necessary for the beginning, and
especially for the continuance, of take-off. He wondered if Professor
Hoffmann had any information about this.
Professor Gudin thought that in underdeveloped countries the use of
the index of industrialization as a measure of progress could easily lead
to wrong conclusions. For one thing, it was hard to find the right de-
flator; which was Brazil's greatest statistical problem. The use of the
index of the volume of industrial output in an underdeveloped country,
as suggested by Professor Gerschenkron, might induce error because the
rise in industrialization had often taken place at the expense of agri-
cultural output and exports. Also, the adoption of the Manoilesco policy
of high tariffs on industrial imports and high domestic prices led to a
rising percentage of industrial to other output. All these factors made
it unwise to use the index of industrialization.
Professor Neumark said that on page 109 of his paper, Professor Hoff-
mann contrasted the changes of technique in the cotton industry with
the pure rise in demand which he saw as the main feature stimulating the
steel industry. On what data was this based?
Turning to Dr. Fischer's paper, Professor Neumark saiu that on
page 84 it distinguished between the legislative, administrative, and entre-
preneurial functions of the government. In the second group Dr. Fischer
included fiscal policy, to which he returned on page 89. One reason why
Germany did not encourage industry during the whole of the nineteenth
century was that many fiscal measures were aimed, for political reasons,
at helping agriculture. He could not think of any example of fiscal policy
aimed at helping industry during the whole of that period.
Professor Neumark did not think enough attention had been devoted
to a remark made earlier by Professor Hoffmann about the connexion
between religious ideas with industrial growth. The role of religious
thought in economic development was not a subject that was popular
with modern economic historians. But though this was a controversial
question, he thought that if one wanted to learn about nineteenth-century
347
economic development in France and Germany it was necessary to ask
if one of the factors fostering take-off was not religious. Max Weber,
supported by many others, including Tawney and Laufenburger, had
said that among the religious and spiritual ideas which had contributed
to the rise of capitalism were those of puritanism. In many under-
developed countries today, one found strong non-Christian religious
elements that were hostile to development. He thought it very important
to give serious thought to the implications of this difference in religious
beliefs between the nineteenth-century developing countries and most
underdeveloped countries today.
A lot had been said about the 'demonstration effect' of early developers.
In a wider sense, the demonstration effect was linked with Perroux's idea
of the 'dominant economy'. Perhaps what List and his followers had
tried to do was to show competitors what happened if they followed the
U.K. The U.K. was not really hated; admiration for it represented a
demonstration effect.
Professor Landes said that on page 96 of Professor Hoffmann's paper
there was information about the death rate in Germany for the eighteenth
century which showed that it had already fallen to 25 per thousand.
He would like to ask whether Professor Hoffmann had figures for urban
and rural marriage rates. He also wondered whether there was any
information about the difference in the rate of population growth between
people of German and Polish origin. On page 103 there were figures for
gains in productivity in agriculture, but how much of this was in vegetable
products, or was the main gain on the non-vegetable side ? At the bottom
of page 111 there was a discussion of the mechanization of weaving which
stated that wages ultimately rose. Whose wages were these ? In Britain,
the mere threat of substitution of power looms for hand looms drove the
wages of hand-loom weavers down.
The role of the banks in supplying capital had been raised, and he
wondered how far merchant banks gave assistance before 1850. In the
U.K. the idea that the Industrial Revolution was paid for by self-financing
had turned out to be misleading. Considerable ploughing back did occur,
but there was also much short-term financing by the banks. In Germany,
he knew that Krupp had, on several 'Jccasions, borrowed large sums of
money from banks, including French firms. Much of this industrial
borrowing, though resting technically on short-term loans, consisted in
fact of revolving credits that ran almost indefinitely.
On Dr. Fischer's paper, Professor Landes agreed with Professor
Rostow that this was not an explanation of growth, but merely a study
of one aspect of it. It was not surprising that the state had played a
bigger role in Germany than in the U.K. As for its effects, apart from
the period after 1879 when the tariff probably retarded development, he
thought that on the whole the government had fostered growth. It was
hard to give a categorical judgment. To take an area like fiscal policy,
here the effects were both positive and negative. Much of fiscal policy
was aimed at helping landowners, and diverted capital to, or helped
348
retain capital in, a sector of lower return. Yet the tax base had been
established earlier to fit an agricultural society, and new forms of economic
activity therefore tended to escape paying their full share.
As for values, it was possible to separate those values conducive to
growth- thrift, diligence, rationality, etc. -from the religious context
with which they were associated in European history. Though Protestant-
ism had been associated with effective capitalism in European experience,
the numerous exceptions made it clear that the relationship was neither
compulsory nor general. To take only one example, the devoutly Catholic
textile manufacturers of Northern France had behaved precisely like
Calvinists out of the pages of Max Weber. There were also strong puritan
(with a small 'p ') elements in Russian behaviour since the Revolution,
and in Chinese behaviour during the last decade. Clearly the ethical
underpinning for these economic virtues could be of different sorts.
Mr. Boserup wanted to make a point on the timing of take-off in
Germany. Professor Gerschenkron had suggested that the importance
of early growth had been exaggerated. He was inclined to agree. On
page 103 he was startled by the figure of 213 per cent for the rise in the
output of animal foods in the period 181~-65. Taken with the data in
Graph 7, this implied a suspiciously high income elasticity of demand
for animal products.
Professor Aukrust supposed that one aim of the meeting was to agree
on a list of the necessary pre-conditions for accelerated growth. There
had been some discussion of the profits from foreign trade helping, and
he wondered if Germany was an instance when this had happened.
Mr. Berrill was surprised that on page 100 Professor Hoffmann should
say what he did about take-off leading to a high rate of population growth,
because the rate had been high throughout. He was also interested to
note that the agricultural-technical revolution came late in Germany, the
agricultural revolution accompanying industrial development rather than
springing from a spontaneous change. Mr. Berrill thought it notable
that the co-existence of large- and small-scale production, in weaving
for example, should have continued for so long. He particularly wondered
why the peasant was able to fare better than the large-scale farmer during
the period of agricultural development, since the paper by Mr. Boserup
on agriculture suggested that the small farmer was defeated early in most
countries.
Professor North was not satisfied with Professor Rostow's defence
of Dr. Fischer. It was necessary to be much more precise. Ideally, one
wanted to be able to show how government intervention in production
had increased growth, but there seemed to be no simple answer. Pro-
fessor Rostow's view was greatly affected by his ideas on the pre-conditions,
with the government removing anticipated obstacles. Economists from
underdeveloped countries were always asking how the government could
help in very precise ways today. Should it invest in railways, in hydro-
electricity, and so on. And it was almost impossible to say how the
government could help best at this moment. He was not saying that
349
government intervention did not contribute to growth, but he did not
think it was yet possible to say how it did contribute.
Professor Marczewski wondered about the deflation of the national
income series in Graph 7. On a more general point, while most members
of the Round Table were users of statistics, there were a few makers
as well, including himself. He thought it would be useful to know what
were the best methods to use in order to show rates of growth.
Professor Cairncross said he felt somewhat disconcerted by graphs
which showed more than the text did. Professor Hoffmann's text did
not proceed in terms of total industrial production, although it was shown
in Graph 3. Similarly, he had difficulty in tracing the course of capital
formation either in Graph 7 or in the text. The capital-output ratio figures
in Graph 7 did not begin until too late ; nor did those for the investment
ratio. One needed figures for the investment ratio giving a much longer
view before one could say whether take-off was in 1830, 1840, or 1850.
In the text a 2 per cent rate of growth in consumption was opposed to
one of 6 per cent in capital goods. He did not believe that there could
have been this 3 : 1 ratio which would have implied a very rapidly
rising savings ratio. Could Professor Hoffmann say more about the
savings ratio before 1850 ?
Professor Cairncross said that the economies studied thus far, the
U.K. and the U.S.A., had taken off via consumer goods, while modern
underdeveloped areas were supposed to have taken off via capital goods.
Was Germany an exception to the early cases, a transition to the newer
situation? Were capital goods in the lead? They appeared to be grow-
ing more rapidly in the critical period, but what had happened further
back?
There were several reflections in Dr. Fischer's paper on the role of
science. Germany in the nineteenth century was an instance of modern
science being applied in its modern form. When was science linked to
economic growth in this way? Was it early or late in the nineteenth
century?
Professor Solow wondered whether there really was any marked
evidence of acceleration in Graph 4, except in the case of coal and pig iron.
This acceleration in pig iron had happened in the years 1845-60, and
there had been a boom in 1850-7, so that one could say that the sharpest
acceleration for pig iron appeared to have been cyclical. If one allowed
for the fact that the early figures were unreliable, it was quite possible
that what the pig-iron graph really showed was not acceleration, but
stagnation in the 1840's followed by boom. He was not saying that there
had been no acceleration, but only that it was very easy to see what one
wanted to see in the graph.
Professor Delivanis thought that the nationalization of industries was
only beneficial for economic development when there was some special
factor present. In general, he did not think such industries were very
valuable for economic development. He also wondered whether it was
true that the German banks had been especially helpful to industrial
350
development in the period up to 1860. He knew that they had been
after 1870, but was not sure about the earlier period.
Professor Hoffmann regretted that it would not be possible to answer
all the speakers. The role of the banks was an old problem in German
economic history, and he thought that people tended to over-estimate it.
He agreed that after 1870 they had been enormously important in financing
industry, and also that they played a more important role than in the
U.K. or the U.S.A.; but he thought that the influence of the banking
system before 1850 had been very small.
Professor Hoffmann said that figures he had presented to the Corfu
Round Table of the lEA had shown that about 11 per cent of total savings
were handled by banking institutions in the broadest sense. Much of
the remaining savings went into public loans, etc. so that there was no
suggestion that the private banking system was dominant. This helped
to support what he had already said about the small role of the banking
system.
For the pre-conditions period, a new book by W. 0. Henderson had
studied Prussia in the late eighteenth century and gave an excellent answer.
He thought that the book showed that in the various parts of Germany
conditions were very different from those in the U.K. and France; but
Germany was much less unified, and it was very hard to give a precise
answer. Although there were some customs statistics which would give
some information, a great deal of research would be required before one
could say much with confidence about the pre-conditions period.
On national income statistics, Professor Hoffmann said that he had
calculated figures from 1850 to the present from fiscal statistics. Con-
sumption and savings figures gave similar results, as did the statistics of
incomes which were available. He had not so far faced the hard task
of trying to go back yet another 50 years, and though he had made some
rough extrapolations, he would not put much confidence in these. As
for deflation, he had been able to get some fairly good price statistics,
and had made his own estimates from firms' records. The results struck
him as quite good, and it was clear that there had been a long-run inflation
from 1815 to 1848. In the actual deflation, he had used the Laspeyre
method.
There seemed to be a difference of opinion between Professor Rostow
and himself on the timing of take-off. Professor Hoffmann said he had
looked on take-off as preparing for steady growth, and this was the reason
why he put the date earlier than did Professor Rostow. Replying to
Professor Marczewski, Professor Hoffmann said that his 5 per cent
investment quota was a matter of pure guesswork. There were fairly
reliable figures for the 1850's which put it at 7 per cent, and he therefore
thought that 5 per cent was a quite reasonable figure for the 1830's. As
for making the capital-output ratio 3·5, there had been no clear trend
between 1850 and 1873. He was not saying that the ratio had been
constant, because there were variations, but, as a rough estimate, 3·5
seemed very reasonable.
35 1
It would be quite possible to work out figures for capital formation
before 1850, but the farther one went back the more precarious the figures
became. He had already been criticized by Professor Kuznets for his
division between consumer and capital goods, so that here he gave the
division only for manufactured goods. For the whole economy, one
needed the investment quota.
The spreading effects of the railways were not great before 1848, but
the railways did unify the country by bringing the regions together for
the first time. This was important in providing unity, even though the
actual mileage of railways constructed was not very large. In reply to
Professor Boudeville, Professor Hoffmann said that figures were in
existence for the birth rate in urban and rural areas. However, he thought
that the importance of urbanization had been overstressed for the Ruhr
in the early stages. The concentration of population in the Ruhr had
started early, and labour had come in from Poland and East Germany.
To Professor Bentzel, Professor Hoffmann said that the income
distribution had become progressively less equal as growth had pro-
ceeded. The only figures he had were for the years since 1850, but he
thought that incomes must have been more equal in the 1830's and 1840's.
Professor Landes had asked a number of questions, and he would answer
as follows. There were figures for death rates in various parts of Germany
in the eighteenth century, as well as for urban marriage rates. The birth
rate in East Germany had been an important social factor, which had
remained important up to 1913. It was difficult to say whether Mr.
Boserup was right in having doubts about the figures for productivity in
animal and vegetable farming, but one had to remember that there had
been considerable substitution of animal for vegetable products.
Professor Hoffmann thought that it was important to remember that
the process of take-off was a sequence process. One had to look to see
how far one industry started it. He had come to the conclusion that the
textile industry started the process in Germany. First, it was simple
in the sense that both the capital and the labour it required were simple.
Second, the demand was there ; the first demand for textiles inevitably
came from well-fed agricultural areas. There was some element of neces-
sity in the nature of the industries which came early and late in the
industrialization process. Finally, he would like to repeat to Professor
Solow that the whole German take-off had been overlain by the cycle.
He nevertheless thought that if one eliminated the effects of the cycle
there was evidence of growth.
Dr. Fischer thought that the question of whether he had exaggerated
the r6le of the German government in take-off was less important than
the fact that he had raised the issue. Whether the government had
played a strategic r6le in Germany was very hard to say, but it certainly
had to play one in modern underdeveloped areas. We had seen that
r6le being played in Russia and Japan. One also had to allow for some
governmental obstruction to growth, but in Germany he thought the net
had been positive. He agreed with Professor Hoffmann that the r6le
35Z
of the banks before 1850 had been a very small one, since there had not
really been a banking system until then, only merchant bankers who often
were bankers and industrialists at the same time. But that was the same
situation as in Great Britain.
The crucial point had been raised by Professor North, who had asked
whether it was possible to say that government action had altered the
factors of production. The effects of such action were measurable today,
but not for these early periods. However, there must have been some
effect. The most obvious action was the setting up of the Customs Union,
which was not achieved by a single act, but took several decades (from
1818 to 1884) to create. Dr. Fischer said that he agreed with Professor
Rostow that the job of the government was to create the pre-conditions.
But the decisive thing about Germany was that one could not say whether
the government had done this when take-off began. Take-off could be
put at 1830 or 1850, but some of the pre-conditions such as a banking
system and a good market did not exist until1870. There, the pre-condi-
tions and the take-off could overlap ; and here the overlap was a long one.
Dr. Fischer said that, so far as Professor Neumark's comments were
concerned, fiscal policy had attempted to assist not only agriculture, but
small firms in general had been assisted relatively more than larger ones.
A great deal of economic growth had sprung from this. There had been
no general laws to assist industry, but particular measures to assist specific
firms. For example, up to the 1860's, under the Zollverein, most customs
duties in the import of machinery had been paid back in order to promote
manufacturing industries like textile mills, paper mills, or sugar beet
factories. Similarly, there had been tax privileges for some firms be-
fore 1840.
Dr. Fischer thought that the role of the merchant bankers before
1815 had been the same in Germany as in the U.K. and France. Local
banks were closely connected with small industrialists, and performed a
great deal of short-term financing. But we knew relatively little about
them, and more difficult research would be required. Even in the 1850's,
the few big banks counted for only a small part of the German economy.
Professor Cairncross was not easy to answer on the role of science.
The application of science had begun early in certain fields like sugar,
chemicals, and soda. In the 1820's Prussia established middle-range
technical schools, and other parts of Germany followed in the 1830's
with Polytechnic schools at Karlsruhe, Munich, Hanover, etc. The most
important contribution, however, did not begin until the 1880's, when
the main fields of application had become electricity and chemistry.
Dr. Fischer suggested that there had been several spurts in take-off
in Germany. The first spurt came in the period of the Napoleonic wars
when spinning was first mechanized. The second came in the 1830's,
when the Zollverein was inaugurated, the third in the 1850's when heavy
industry developed, and the fourth in the 1870's. It was hard to say
which of these was the crucial one, but he was inclined to agree with
Professor Hoffmann that it was the one in the 1830's which laid the
353
The Ecorwmics of Take-off into Sustained Growth
foundations for the spurts of the SO's and 70's. In the Napoleonic years
there were only erratic starts which often failed.
SIXTH SESSION
BY PROFESSOR MARCZEWSKI
Professor Landes said that he would like to express the gratitude of
all for Professor Marczewski's presentation, and even more for the work
embodied in his statistical tables. He knew how hard it was to get such
data and was almost overwhelmed by Professor Marczewski's contribu-
tion. Moreover, Professor Marczewski had prepared this remarkable
analysis under the disadvantage of having to work with still-incomplete
material. He would therefore confine his comments to bringing out
problems which Professor Marczewski might like to consider at a later
stage in his work. These comments were not intended as criticisms but
as questions and doubts, which might prove helpful to Professor Marczew-
ski's further investigations and so repay a little of the debt owed for the
windfall all had received in the paper.
Professor Landes said that he would speak essentially as a historian.
He had come to the material as one who had previously looked at French
economic history in terms of qualitative data and such traditional raw
quantitative data as, for example, statistics of production in various
industries. What the Marczewski figures now seemed to show was that
the timing of development was not the same as that suggested by this
earlier material. In particular he was struck by the rapidity of growth
in the early period, 1812 to 1844, all the more so because many French
economic historians assumed that growth was slowed by the long deflation
of the years 1820 to 1840. By way of contrast, Professor Marczewski's
figures (Table 4) showed a slowing down of growth in the 1850's and
1860's. This, too, was surprising, because the later period had been
traditionally looked upon as one of very rapid growth ; indeed the period
of France's most rapid growth, the years when she built her railroad
network, developed new financial institutions, retooled her industry to
meet British competition, and so on.
He had also been struck in Table 4 by the sustained high rate of
growth after 1870, especially between 1875 and 1884. Most of these
years (1875-8 and 1882-4) were ordinarily thought of as depressed. Was
the growth of these years a deceptive consequence of choosing the near
trough of 1875 as a base ? Professor Landes noted that this surprisingly
high rate of growth also appeared in Colin Clark's figures, which seemed
to point to a curious contrast between the historian's traditional picture
and that of the statisticians.
Professor Landes now wondered whether this meant that we must
now revise our views of French economic history or whether there were
354
questions we could ask about the accuracy of the figures themselves.
Professor Landes said that he had doubts about some of them. How
accurate, for example, could statistics of national product in the seven-
teenth and eighteenth centuries possibly be ? Then there were Professor
Marczewski's figures of yearly outputs of the silk, wool, and chemical
industries before 1850 ; no official statistics were available ; what were
they based on ? Again there were Professor Marczewski's striking figures
for agricultural growth rates in the eighteenth century. Yet to his know-
ledge there were no statistics at all for agricultural output, and historians
like Labrousse had been compelled to base their work on annual estimates
of the quality of the harvest- on impressions of year-to-year variations
of a standard crop year. Nor were there, to his knowledge, figures for
crop yields, and he wondered how Professor Marczewski had got his
results. Moreover, could one give figures for particular years when only
scattered information was available ? Was this done by some process of
extrapolation or interpolation ?
Professot Landes suggested that the choice of periods was also im-
portant, and that some tables were more informative than others for this
very reason. Table 4, with its decennial periods might be misleading
because it cut across the business cycle in an arbitrary and irregular
manner. Thus, a break at 1850 would probably have been more informa-
tive than one at 1845 or 1854. Perhaps the homogeneous periods in the
nineteenth century were 1815-50, 1850-73 and 1873-96.
Finally, Professor Landes wondered how Professor Marczewski had
corrected his statistics for the inherent bias arising out of the increasing
accuracy and completeness of information over time. In the beginning,
even official data were only guesses. As late as 1840, engineers in the
Direction des Mines noted that for tax reasons the figures of coal output
which the mines gave were too low, and that they themselves had to use
a multiplier on these returns. A fortiori it was hard to see how the figures
for coal output before 1820, when official statistics began, were obtained.
Professor Landes said that, having posed these questions, he would
proceed to some other comments. He thought that the role of the rail-
ways before 1850 had been understated by Professor Marczewski. As
a pure point of information, he wondered whether the figures for depenses
de premier establissement represented total expenses, or only the expenses
of the railway companies themselves, since the state had paid for the cost
of the road bed. Also, since the construction of railways was important
for the development of the iron and engineering industries, he would
himself put more emphasis on the indirect contribution through derived
demand. Professor Marczewski's figures showed that the increase in
mileage was important even before 1850, and some of the most important
metallurgical establishments in France had been built or expanded in
the 1830's and 1840's in response to the demand for rails and the like.
Thus Le Creusot's growth owed much to locomotive orders in the 1840's,
Another question was about urbanization before 1850. He thought
that figures like those in Table 6 were bound to give rather misleading
355
impressions because, in the early decades at least, industry was often
located in out-of-the-way areas in order to secure access to water power,
and these places were often technically rural, as they had less than 2000
inhabitants. Very few of the new, purely industrial factory centres-
Roubaix or Elbeuf, for example - could compare in population in the
early decades with the established administrative and commercial centres
of the Old Regime. They simply would not show in statistics for towns
of over 50,000 people.
Professor Landes said that he agreed with Professor Marczewski that
we were not dealing here with something easily separated out into some
kind of take-off period. On the other hand, he was not prepared to give
up the idea of acceleration ; growth was not so continuous as all that.
French economic history showed a stage of preparation in 1815 to 1848,
with the development of mechanized cotton spinning, coke smelting,
puddling and the use of rolling mills, steam engines, and so on. The
diffusion of these techniques had the effect one would expect from the
1840's, with the coming of the railway, and a period of even more rapid
growth ensued in the 1850's and 1860's, when the fruits of this prepara-
tion were reaped. The favourable political and monetary institutions of
the Second Empire were the expression of a new regime committed to
economic growth. Following this, he would expect a slowing down in
the 1870's and especially the 1880's, with a new spurt in the late 1890's.
Concerning this last, he would lay more emphasis on the introduction
of new iron ores in north-east France and an easier money market due to
new supplies of bullion.
Professor Landes did not believe that France had by any means taken
off by 1830. The government had made efforts even before 1789 to
introduce new techniques like spinning machinery and coke smelting,
but these had proved abortive. Similarly, the hothouse arrangements of
the Napoleonic period proved a disappointment. The years 1820-50
would seem more appropriate as the date of France's take-off. In this
regard, it was illuminating to make a comparison with Germany. France
had been in a much better position at the outset, but slower exploitation
of her potentialities had meant that Germany was ahead in railways by
the middle of the nineteenth century and in heavy industry by the
1860's.
Professor Gerschenkron asked for a more exact description of the
weights used by Professor Marczewski in arriving at his aggregate index.
Replying to the questions on statistical sources and methods, Professor
Marczewski said that two phases must be distinguished in the period
he had covered. First, there was the pre-statistical phase which covered
the whole of the eighteenth century and part of the nineteenth. The
series did not begin until 1810 to 1830, but from then on there were
statistics of physical production in many industries. There was admit-
tedly little material on finished products, but quite good data for primary
materials like cotton, steel, coal, etc. He agreed wholly with Professor
Landes that some of these statistics were only doubtfully accurate,
356
especially those for agriculture. But he did not think the errors were
large enough to throw doubt on the general orders of magnitude of the
figures he had produced.
Professor Landes had spoken of improvement in the statistics, but
this was not continuous. In some cases, the figures for the middle of
the nineteenth century were as good as those we had today, or even
better. In other cases, the quality of the figures really did improve over
time. It was therefore necessary to apply some correction, and the
difficulty was to determine how big a correction was necessary. However,
he thought that taking decennial averages helped to even out some of
the errors in so far as they were not systematic. On the other hand, the
use of a comprehensive system of co-ordinated accounts was helpful in
discovering systematic errors.
For the pre-statistical period, one could only use the estimates of
contemporary authors. Fortunately, there was a demonstration effect
here. The example of William Petty, Davenant, and Gregory King in
the U.K. was followed in France with a great deal of enthusiasm, and the
result was that there were a number of evaluations of the national product
in the eighteenth century. There was inevitably much vagueness, be-
cause the authors gave no precise statement of the methods they used,
and some merely copied each other. By taking great care, however, it
had been possible to arrive at eighteenth-century growth figures. Only
estimates of physical quantities had been used, and he had tried to extract
all such figures, where these referred to precise physical quantities. With
agricultural produce in the eighteenth century, it was impossible to base
one's statistics on the diverse figures of all the contemporary authors.
With grain production, for example, there were hundreds of very varied
guesses, and all one could do was to eliminate the highest and lowest
and try to strike an average of the remainder. This gave one a figure
for the growth of agricultural output towards the end of the eighteenth
century. In addition, one had some evidence on the increase in the
area of cultivated land. Again, the estimates of contemporary authors
were very varied, but they did give a good indication of the proportion
of land area devoted to each crop in each region. When combined with
the numerous estimates of crop returns this gave one another estimate
of the growth of agricultural output and one which was very close to the
results obtained from looking at the estimates of global output of contem-
porary authors. Nevertheless, Professor Marczewski would not put too
much weight on the eighteenth-century figures, though he thought that
the direct estimates for the nineteenth century could be accepted with a
great deal of faith for the industries that had been studied. The figures
for other industries had been arrived at from the estimates of contem-
porary authors of their share in total production at four or five dates in
the nineteenth century.
On the method of weighting that he had used, Professor Marczewski
said that from the physical output series he had taken out a physical
rate of growth for each industry. This was weighted by value added to
357
give a species of chain index - the mean of each rate of growth being
adjusted to values at current prices for the two decades in question. A
major difficulty in using a fixed system of weights was that there were
changes in the relative prices of different goods. Thus, it would be quite
false to use present prices to weight eighteenth-century quantity indices
when industrial goods which were now very cheap necessities had been
luxuries, extremely expensive in terms of agricultural goods.
Dr. Singer was troubled by the relation of the simple and the weighted
average in Tables 7 and 8, and the interpretation of changes in the rela-
tion between the two. A constant relation might mean either of two
things. The industries might be growing at different rates but the faster
growers might have only medium weights. Alternatively, all industries
might be growing at the same rate. The simple average therefore con-
cealed what was really going on, and he could get little of significance
from the ratio between the weighted and unweighted averages. Would
it not be possible to get more useful results by using some index of con-
centration such as the standard deviation, to show whether all growth
rates were similar or whether there was great disparity ? The idea of
take-off implied some concentration. For example, if at a given date
the ten most important industries represented 90 per cent of total value
added and then, some years later, only 50 per ce'nt, this was convincing
evidence of spreading effects.
Professor Solow thought that the unweighted average was always
tricky and dangerous to use, because its size depended very greatly on
how one divided up industries. The division of the economy into dif-
ferent sectors would give one a different average. For example, if one
had two industries, one growing at 10 per cent and the other at 2 per
cent, the unweighted average was 6 per cent. If one then got more
statistics, which enabled one to divide the faster-growing industry into
three sub-industries, each growing at 10 per cent, then the unweighted
average would rise to 8 per cent. Yet the only change was one of the
division of the industries. This was not true of weighted averages ; the
weighted average was a correct overall average. Professor Solow there-
fore thought it important not to emphasize the unweighted average when
one had the kind of spread there was in Professor Marczewski's 42 indus-
tries. Perhaps more sophistication was needed.
Professor Robinson was not sure how the figures in Table 4 were re-
lated to those in Table 8. The second column in Table 4 gave two sets
of figures, the one in brackets being the weighted figure. These weighted
figures were the same as those in Table 8, but the unweighted figures in
Table 8 differed from the unbracketed figures in Table 4. Why was this ?
Professor Marczewski replied that the figures in Table 4 (column 2)
related to the total output of industry and handicrafts. The industries
which there had been no time to study directly had been attached to the
ones studied directly in terms of value added ; figures resulting from the
estimates of contemporary authors. This was where the unbracketed
figure came from. They represented the rates of growth of the total
358
industrial product. The figures in brackets were those for the rate of
growth only of the industries that had been studied directly. The last
column but one in Table 4 gave the weight attached to each industry in
terms of its percentage share in total value added. For example, value
added in cotton manufactures (from 1781-90 to 1803-12) represented
8·21 per cent of total output. The final column gave the rate of growth
for each individual industry listed.
Table 8 merely represented an example of the conclusions which
could be derived from a comparison of the simple and the weighted
average. It was only proper to make such a comparison for the 42 indus-
tries studied in detail, though this was not enough for an historical state-
ment on the growth of the total industrial product. The inclusion of
residual industries not shown in Table 8 would modify the three para-
meters considered and this might lead to a change in the economic
interpretation of some periods.
Professor Marczewski agreed with Professors Solow and Singer that
the comparison of weighted and unweighted averages was not a very
sophisticated procedure and that it could be broadened by using other
measures such as the standard deviation. However, this was lengthy
work, and the aim had been to prepare something in time for the Round
Table meeting. But although, for this reason, he had used quick and
simple methods, he had always intended to carry his work considerably
farther.
Professor Rostow said that he wanted to express the excitement and
gratitude which all felt over Professor Marczewski's presentation. What-
ever doubts one might feel over the data where the sources were not
easily accessible, it was clear that French economic history, at least up
to 1850, and perhaps beyond, had moved into a new phase during the
morning's session.
On the main point of substance in the analysis of growth, the difference
between Professor Marczewski and himself was a simple one. In assessing
French evolution, Professor Rostow said that he had decided, as with
Germany and some other countries, that the development of a modern
textile industry for the home market alone did not have a sufficient scale
effect to act as a base for sustained growth. For textiles to serve that
function, the lift which foreign trade gave was also necessary. This was
an arbitrary judgment which led him to deny that the early nineteenth-
century cotton industries in France and Germany would have acted as
leading sectors in take-off. This had been reinforced by later experience.
China and India had both had cotton textile industries supplying the
home market but this market had not been sufficiently large to allow
take-off to occur. Only in England and New England had the develop-
ment of textiles been enough to pull an economy into take-off. There,
due to trade beyond the nation and beyond the region, the scale effects
were apparently sufficient.
This attitude had narrowed his choice in dating take-off to the period
when the whole railway complex had emerged in France and Germany,
359
including not only the railways themselves but also the enormous develop-
ments that these brought to the domestic market, and their spreading
effects back to coal, iron, and engineering. Before Professor Marczewski's
paper, only very partial data for France had been available, and within
the limits of this he had considered two possibilities. He had originally
accepted the same view as Professor Marczewski, and had dated take-off
in the 1850's and 1860's, when the development of the railway complex
had been a powerful force. But this left one with the problem of the
'preceding decades' of the 1840's and the 1830's. He wanted to state
the very limited considerations which had finally led him to decide that
the railway-induced take-off could be pushed back as far as the 1830's.
The building of railways had begun then, although the scale of building
was not enormous. More important, from what statistics there were,
and from qualitative data, he had sensed an acceleration in French iron
and coal in the 1830's. There had also been important development in
French heavy industry in the 1840's; there had been the foreign trade
surge in the 1830's, though he would not regard this as crucial. He would
therefore now put the initial date of French take-off in the 1830's, and
he thought it quite clear that after the boom of the 1850's France had
definitely taken off.
To summarise, Professor Rostow said that Professor Marczewski had
not shaken him in his view that the phase of imitation in textiles must
be excluded from what he thought of as the decisive transition. But he
would certainly re-examine with the greatest care the data for the whole
period 1830-70 in the light of Professor Marczewski's statistics, and
especially the disaggregated figures which lay beyond those presented
in the paper.
Professor Marczewski had also given us his vision of the subsequent
evolution of French economic history, in a sense up to the present. The
story we had been brought up on was that after 1870 there was a phase
of deceleration in France, because international growth was heavily centred
on steel, and there France suffered relatively to Germany and the U.S.A.
The late upsurge in the period 1890-1914 was often forgotten. He
wondered whether Professor Marczewski could say more about this.
Was it really true that the main leading sector in the pre-war decades
was in engineering ? He would have thought that there were several
more. There was the emergence of electricity as a new energy source ;
there was the expansion of chemicals ; there was the development of the
North-Eastern ores, which Professor Landes had mentioned. Finally,
since we had been taken into the post-war period, was not the surge in
post-war France clearly linked with the automobile boom in the widest
sense, including the production of sheet steel and oil refining, with the
growth of a modern textile industry based on chemicals, and with elec-
tronics ? He did not want to over-emphasize the later period, but would
like to raise some tentative general questions. Might it not, for example,
be helpful to try to group some of the sectors which were linked, by a
Leontief chain ? For example, the data in Table 4 would be much easier
360
to test if individual industries were linked in terms of such connexions.
This would give one a combined weight for the railway, engineering,
and automobile surges. The job of making the classification would be a
hard one because of the need to segregate portions of industrial output,
but such segregation was inevitable if we were to test the hypothesis that
growth was not sustained by rapid expansion in a single sector but by the
development of clusters of related sectors.
Professor Hoffmann noted that in Table 1 the percentage of gross
domestic produce going through the state was roughly constant. But
there must surely have been higher government spending during war.
He could not help feeling that the figure for the late eighteenth and early
nineteenth century was too low. He also wondered how far Professor
Marczeweski had been able to split government expenditures into con-
sumption and investment. If this were done, it would also be necessary
to exclude military expenditure, and he had found this important in his
own studies of Germany.
Professor Hoffmann wondered how the figures for value added were
arrived at in Table 4. The figures for the various branches of industry
must be estimated, since there had not been yearly censuses of manu-
factures. He wondered, too, how depreciation and net investment were
related in Table 2, especially at the beginning of the nineteenth century.
For the nineteenth century, one found that the relation of depreciation
to net investment was 1 : 2. If the capital stock had been low to begin
with, and one guessed that buildings represented 50 per cent of total
capital, then was not depreciation over-estimated relatively to national
income? For the modern economy was one where net investment was
about half of gross.
Professor Hoffmann was interested by the figures for income per head
in Table 10. If one assumed that the ratio between the total and the
employed population remained stable, then this figure represented the
rate of growth of labour productivity. It did not correspond to the figure
for Germany. There labour productivity had grown steadily from the
beginning of the nineteenth century. He also wondered whether Professor
Marczewski could not have given the amount of capital per man. If
one had that as well as labour productivity in value terms, then one had
the capital-output ratio. With labour productivity rising, as it had in
Germany, this enabled one to explain the stability or otherwise of the
capital-output ratio.
Professor North returned to the issue between Professors Rostow and
Marczewski over the relative significance of cotton and the railways for
accelerated growth. His own explanation for the U.S.A. had been like
Professor Marczewski's in the sense that he regarded cotton textiles as
more important in the development of U.S. manufacturing than the rail-
ways. Manufacturing in the U.S.A. was already well established by the
time that the railways became important. Professor Rostow's disagree-
ment with this raised a point of general significance.
He agreed with Professor Rostow that the fall in transport costs had
J6I
been important in the nineteenth century, but he did not agree with him
on backward and forward linkages. The railways obviously did have
backward and forward linkages, especially the backward ones to rails,
iron, and steel; so did textiles for that matter. But one other thing was
essential. One must specify that the derived demand must arise in the
same country. Professor Rostow had noted the big acceleration in textiles
in nineteenth-century India, and the fact that India had nevertheless
failed to take-off. But there had also been a rapid development of railways
in India, which, despite being Professor Rostow's favourite, had also failed
to initiate take-off. The point was that in India both textile equipment
and rails had had to be imported. It was not enough merely to establish
an industry in a country ; for take-off one needed to ensure that the derived
demands which it brought were concentrated within the same country.
Professor Aukrust was worried about the question of leading industries.
If one looked at Table 4, one was told that in the first three periods cotton
was important- the leading sector. Yet if one looked at the data for
1788-1812, one saw that the two branches of cotton accounted for only
17 per cent of value added in manufacturing. In the period 1812-35,
this percentage had fallen to 12! per cent and then rose to 13! per cent
in 1835-44. As a matter of simple arithmetic, if a leading sector was one
with a high rate of growth, surely the share of that sector in the economy
should rise. This had not happened with cotton in the periods in question.
On the broader problem, Professor Aukrust said that no one was
impressed by the mere fact that some industries were growing faster than
average. The real issue was the economic significance of this. As he
looked at Table 4 he was much more struck by the growing diversity in
the shares of the various industries than by anything in the shape of
leading industries.
Professor Cairncross asked in what direction the big rise in net invest-
ment in the period 1839-52 shown in Table 2 had gone. The rise appeared
to be almost a fourfold one in total net investment and a tenfold one in
investment in industry and commerce. The rise was very much bigger
than the parallel one in housing, and he had at first thought that the
railway boom might be the reason for it. However, the figures in Table 5
showed that the railways did not account for more than one-third of the
total rise for industry and commerce. Was the remainder accounted for ?
Professor Boudeville asked for qualifications about the French take-off
period. Professor Rostow looked for accelerations in the years 1835-44.
Professor Marczewski stressed that gross capital formation doubled from
6 per cent (1788-1839) to 11 per cent (1839-52). His figures would show
that between 1835 and 1844 (9 years) the rate of growth was 2 per
cent, being 1·5 per cent only from 1825 to 1834. One should indeed
discount the effect of Alsace-Lorraine's loss.
As for leading sectors, pig iron and steel should be stressed. The
rates of growth increased from 3·8 to 5·7 and from 3·6 to 4·5. The
weights increased from 0·8 and 1·9 to 1·0 and 5·6. Cotton slowed down,
although its weight increased. Would not employment data stress also
36a
Hague- Summary Recurd of the Debate
the chemical and paper industries? Would not all this point out to a
real take-off in 1750-60, interrupted for historical and political reasons ?
Would everyone agree that the second take-off came before the railway
boom?
Turning to Table 6, on the growth of population in towns of over
50,000, would the inclusion of towns between 50,000 and 20,000 give
one a very marked rise in the urban population in the years 1835-60?
Professor Marczewski replied to the debate. He st~essed what he had
already said about the work being far from finished. His team had so
far looked seriously only at the data for the growth of agriculture and of
part of industry. The growth of the service trades, of the remainder of
manufacturing, and of national income, consumption, and saving and the
changes in the distribution of national income would have to be studied
later ; all this would take a great deal of time. So he could only give
provisional answers to many ,questions. In two or three years' time he
hoped it would be possible to provide data for the national accounts in
input-output form, but this was not yet possible.
Replying to Professor Landes, Professor Marczewski said that the
depenses de premier etablissement in Table 5 were obtained from the
S.N.C.F., but that these figures had not yet been fully collated. Never-
theless, he could say that they did include the cost of the infra-structure
although, as Professor Landes had said, this was financed by the state
under the law of 1842. He agreed with Professors Landes and Boudeville
that his data for towns of over 50,000 gave only a very imperfect view
of the process of urbanization. He would even go so far as to suggest
that it would be useful to study the growth of towns of four or five
thousand. But he had not yet gone far in his analysis of urbanization.
The figures given in Table 6 were purely illustrative, but he hoped at a
later stage, especially in connexion with the study of consumption, to
look further into the question of urbanization, and he might then get
more precise results. The figures for Paris in the early nineteenth century
showed an extraordinary growth.
Professor Marczewski agreed with both Professors Landes and Rostow
that the period of the Second Empire was one of rapid growth, and above
all of an extraordinary transformation of social life in France. In charac-
terizing take-off, Professor Rostow emphasized qualitative factors and
therefore put take-off in the period of the July monarchy and at the
beginning of the Second Empire. The quantitative figures did, how-
ever, show a marked acceleration in growth already in 1800-40 and another
in about 1850-66.
As for the propagation effects of railways and cotton, he had here only
studied the progress of these industries themselves. He had looked at
the effect of the development of railways on industries like iron, but not
at the wider spreading effects, which one could not study without input-
output information. Yet the very rapid development of cotton, which
had grown at the rate of more than 5 per cent per annum at the begin-
ning of the nineteenth century, could not be neglected. Cotton had
363
considerable weight in the economy and led to the development of other
industries. For example, spinning and weaving were almost entirely
mechanized .by 1831, well before the other textile industries. As Miss
Deane had explained, there were demonstration effects on other textile
trades, but cotton had a much bigger effect on the economy than silk,
although silk itself had played a big part in the development of the town
of Lyons. He did not deny the substantial effects of the development of
railways in France, but this had ocurred after 1850. He thought that
his real difference with Professor Rostow was over the choice of criteria
for characterizing take-off.
Professor Landes had been surprised by the rapidity of growth in the
early nineteenth century. He had been equally surprised himself, but
this was what the figures showed. As for why traditional historians
had not caught this rapid growth, he thought the answer was that they
had, especially as it concerned the July monarchy. All the history books
in France pointed to the large-scale industrial development under Louis
Philippe. But there was less on the years 1800-30. The reason was
partly that historians had been forced to stick to qualitative data,
because of the lack of figures. Given the small weight of industry in
the whole economy at the beginning of the nineteenth century, this
minimal importance of industry could easily blind the historian to the
fundamental importance of its growth for the economic development of
the country. By the time of the Second Empire, however, industry was
much bigger, and growing rapidly. There was the spectacular growth
of railroads, and the movement towards urbanization which had trans-
formed Paris under Haussmann caught the imagination. The banks and
the banking system were also being developed. These were changes
which the historians could not possibly ignore.
Professor Landes had expressed some doubts over the time periods
chosen. The first task was to measure the rate of growth. This required
a constant period, and the simplest one for purposes of calculation was
one of ten years. He agreed with Professor Landes that it would be
interesting to re-work the figures taking five-year and one-year periods
which would enable one to study turning points and the cycle. All this
was in his proposed programme, but would not be completed easily or
quickly.
Professor Hoffmann had asked about state expenditure, and the
answer was that the figures in Table 1 were taken from the budgets.
This had been done rapidly, and he had not tried to split the figures into
categories. The next step would be to split the figures into payments
to persons and for material. He would also like to make it clear that
the statistics included nothing for the expenditure of local authorities.
The figures for capital formation were estimates made by the authors of
the time and were not strictly comparable with the figures for national
product. In calculating depreciation, he had tried to split up capital
into a few broad categories of fixed assets, and to apply what seemed to
be logical depreciation rates for each particular category.
364
Professor Hoffmann had put forward an argument about productivity
which assumed that there was a constant relation between the active and
the total population. This assumption was not correct for France. The
active population had not increased between 1851 and 1938, a fact which
was explained by the ageing of the population.
Professor Marczewski agreed with Professor Rostow about the role of
electricity, chemicals, and iron in the last two decades of the nineteenth
century. His tables showed a high rate of growth for both iron and
chemicals. He had not yet made any calculations for electricity, save as
part of the residual. The residual industries inevitably grew rapidly,
since he had taken as his starting point the industries actually in exist-
ence at the beginning of the nineteenth century. All the industries de-
veloping later were inevitably small, new and often rapidly growing ones.
This led to the important question of how to make the division into
sectors. He agreed that the division into groups of industries could affect
the numerical rate of growth although, theoretically, it should not change
the total of values added. This made it very important to study the
division carefully and make the correct one. He agreed with Professor
Rostow's point about grouping together linked industries and this was
one thing he intended to do. We all knew that the division into sectors
was important for all those who constructed input-output tables, be-
cause the problems of complementarity and substitution were involved.
Professor Cairncross had underlined the importance of capital forma-
tion in the industrial sector in the first half of the nineteenth century.
In estimating capital formation, one only had rather imprecise estimates
to work with, and it was hard to judge these, because their authors had
not explained precisely what methods they had used. For industry, the
main information had come from Stock Exchange figures for capitaliza-
tion. He acknowledged that these methods were very imprecise and
that they almost certainly exaggerated the growth of capital formation
in the early years of the development of the Stock Exchange. But he
thought that it was not unusual to find rapid increases in industrial capital
in the first half of the nineteenth century. He suspected that the growth of
the textile industry, and of the chemical industry, had been an important
reason for the big use of capital, but he had yet to make a detailed study.
Professor Boudeville had said that there had been much growth in
the paper, chemical, and metallurgical industries in the period 1835-44,
and he agreed. The chemical industry had exhibited a high growth rate
before 1845, but had not been shown in Table 4 for the periods before
1845 because it had too low a weight. Paper was not one of the industries
separated out from the residual, but its rate of growth had also been high.
Metallurgy had been mentioned in his paper and had a very respectable
rate of growth. However, it was not correct to suggest that the three
industries were as important as Professor Boudeville had suggested. The
textile trades had by far the biggest weight.
Professor Aukrust had suggested that the weights varied in an unusual
way. It was always possible that there might have been an error in the
J6S
computation, but apart from that, the part which an industry played in
the total value added was determined not only by the physical rate of
growth of the output of the industry but also by prices. It had to be
remembered that industrial prices had behaved very strangely, and that
although they had fallen twice during the century, they had not fallen
equally for all products. The textile industries had also been affected by
the U.S. civil war. There had been a big rise in the price of cotton, and
such price changes helped to explain apparent aberrations in the move-
ment of the proportions of value added in certain industries.
SEVENTH SESSION
THE DISCUSSION OF PROFESSOR TSURU'S PAPER
AND PROFESSOR DUPRIEZ'S EXPOSITION OF
BELGIUM'S TAKE-OFF
Professor Tsuru was unable to attend the conference, and Professor
Rostow presented the paper for him. Professor Rostow said that he would
like to warn participants that he was in no way qualified to replace Pro-
fessor Tsuru, particularly since he could only read the Japanese literature
in translation. He would first like to present his view of the timing of,
take-off in Japan. He had originally had some doubts as to whether the
period 1878 to 1885 was the pre-conditions or not, but had decided that
it was the pre-conditions period, with take-off accomplished by 1914.
He now thought that this dating should be pushed forward, with take-off
initiated by the marked expansion of the late 1880's.
In his paper, Professor Tsuru gave a condensed summary of what
had happened before 1868, with Japan's responses to the challenge of
the West. Even before the Opium wars and the opening of the ports
in the 1850's, there were signs of' endogenous strain'. Japanese society
showed many of the symptoms of a traditional society reaching the limits
of its powers of expansion. There was a problem of the balance between
population and land resources. There were signs of strain as the move-
ment on to new land failed to meet the increased demand for food, and
the failure to change agricultural techniques led to infanticide and unrest.
A second problem was the institutional framework. There was a system
of enforced residence at the Court by the feudal class. A type of Parkin-
son's Law increased the size of this court establishment and the cost was
borne on a regional basis.
Third, there was social strain, especially around the position of the
Samurai. During times of peace, this warrior group held an intermediate
position, close to that of the nobility, they often managed estates and were
particularly eager to acquire Western knowledge. Fourth, the limitations
of the transport system were keenly felt and the emergence of a national
grain market to deal with the court problems led to th{. growth of a
merchant class. This caused friction, with the merchants in the common
J66
pos1t1on of being the richest in society and yet being accorded little
formal social esteem. They nevertheless began to intermarry with the
low nobility, and this, plus the mingling of the Samurai and the sending
of their sons for education abroad, broke down the rigidity of the system.
With all this there was the threat from the West in the 1850's and
the Revolution of 1868 was an occasion when modernizing elements
succeeded in ousting the old regime and restoring the Emperor. The
remainder of the elite came, in painful stages, to accept modernization as
inevitable if problems of territorial independence and increasing social
strain were to be dealt with. So the national government took responsi-
bility for the pre-conditions with a policy of seeking knowledge of the
world, a simpler language, and so on.
Like Britain, but unlike the U.S.A. and Russia, Japan could establish
cheap transport because of the role of coastal shipping. Foreign trade
was expanded with the development of new export sectors like silk, and
by import substitution ; cotton textile production was expanded to re-
place British imports. In agriculture, the results of land reform were
remarkable, transferring rents to the state and giving it the resources
required to build up social capital. Feudal bondholders were forced by
inflation into a position where they either suffered hardship or moved
into the modern sector. The system of land reform also encouraged the
peasants to engage in more intensive agriculture. Finally, the state took
direct responsibility for developing industry. This list of actions which
the Japanese government took to bring about the necessary pre-conditions
was not unlike the agenda of an intelligent government in an under-
developed area today.
In the early 1880's, a cadre of private entrepreneurs emerged, with
the Samurai leading the way in industries like coal, armaments, and
shipping. There was also a joint-stock company boom and a great surge
in cotton textiles. This was why he would now date take-off in the
middle 1880's. Two major events during this phase were the ending of
the political struggle with the traditional classes in 1878 and the ending
of domestic inflation.
Nevertheless, Professor Rostow did not suggest that activity in estab-
lishing the pre-conditions ended then. Education, commerce, and foreign
trade continued to receive attention. But the structure of the economy
had oeen altered sufficiently for the first big industrial surge to take place.
Professor Fischer had suggested in conversation since the discussion on
Germany that a minimum degree of pre-conditioning was the basis for
take-off; but one might find, as take-off proceeded, that certain defici-
encies in the framework of the economy were beginning to have their
effect, and one might have to vary the effort devoted to the pre-conditioning
process as time went on. Much would depend on how long and intensive
the pre-conditioning process was. In contemporary India, for example,
the fate of the industrial sectors still hinged on the further development
of foreign trade and of agriculture.
Pr~fessor Rostow explained that this brought him to a major
367
difference with Professor Tsuru, similar, in a sense, to the controversy
over movement of real wages in the U.K. during the industrial revolution.
The issue was made explicit by the footnote to page 16 of his own paper,
and by statements on pages 148-9 in Professor Tsuru's. The question
was whether Japanese growth was built on stagnant real wages, or whether
increases in productivity were rapid enough to allow high savings con-
currently with a rise in popular consumption. Professor Tsuru and he
did agree that the crux of the issue lay in the course of agricultural pro-
ductivity and output and in the size and distribution of supplies of
textiles. It was so easy to indulge in abstract debates about rates of
consumption and investment, forgetting that food and clothing were the
main elements of consumption at the take-off stage.
Professor Rostow said he agreed that the commutation of rent pay-
ments gave no relief to tenants who sold out and also that the effects of
the land tax were mitigated by rises in productivity or by inflation, since
it was payable in kind. He thought it probable that there was a rise in
total agricultural output per family after the land reform. Though Pro-
fessor Tsuru did not discuss it, he thought that this was partly the
incentive effect of the new tax and rent burden. Incomes were also
supplemented by some workers moving into industry. Finally, it was
clear that there was a rise in the real incomes of peasants as early as the
1890's, so that the only question was of what happened in the interval
between land reform (in 1873) and 1890.
These were complex and difficult changes and had significantly dif-
ferent results in the various regions. In the U.K. it was a case of com-
paring changes in urban and rural standards of living in different regions.
In his paper (pp. 146-7) Professor Tsuru suggested that the essential
features of the problem were that the severest burden fell on the agricul-
tural sector, with increased productivity leading either to a bigger surplus
for landowners and merchants or to relatively lower agricultural prices.
Since there was no evidence, Professor Rostow was prepared to accept
this for the period 1873-90, but he did want to ask some questions. First,
did the statement refer to all peasants or only to tenants ? Second, with
the given tax and rent structure, why did food producers not benefit
from the inflation after 1873 ? Third, given the Okhawa figures for
real incomes in agriculture, how was the surplus over previous levels of
consumption tapped by landowners and by the state ? Fourth, he won-
dered how the figures for the real wages of peasants and industrial workers
were assembled. This would help in terms of the general debate.
Professor Rostow said he would not go beyond these general ques-
tions, and he thought that too much should not be made of them. Part
of the pace of industrialization in Japan depended on the ploughing
back into industry of a surplus over and above traditional standards.
The extent to which Japan succeeded in harmonizing the old traditional
society with the demands of new industrial processes should not be mini-
mized. Nevertheless he would refer participants back to the footnote on
page 16 of his own paper.
368
In Japan, the existence of cheap coastal shipping cut the bill for
social overhead capital so that some rise in popular consumption accom-
panied the early stages of Japanese industrialization. But he did not
want to be dogmatic about this- especially in Professor Tsuru's absence,
and this was the issue which Professor Tsuru regarded as very important.
Other important questions were the role of foreign trade ; the crucial
role of the joint stock companies ; and whether one could legitimately
describe as capitalism a process where the state played so important a
role. Professor Rostow said that he had put together certain supplement-
ary material relating to Japan. He would like to say that the main
criterion for his choice was simply the maximum number of tables that
could be made available in the time. He had tried to show which were
the most important sectors.
Mr. Berrill said that though he was not an expert on Japan he had
been interested at the lEA Round Table in Gamagori, to listen to the
views of Japanese scholars on the finance of net investment during take-
off. One question raised at Gamagori had been whether the Arthur
Lewis 10 per cent savings ratio had been reached. The consensus of
opinion had been that this had not been necessary in Japan because she
had been able to economize in investment, in transport, and in housing.
Investment had only shown a small rise, and the investment ratio had
remained low.
Turning to the role of the Japanese government, Mr. Berrill said
that it was true that one could look at the list of the things which the
Japanese government had been doing and say that they had been the
right things. But, if one asked how successful they were in doing these
things, the answer was rather unsuccessful. The Japanese government
had proceeded in a highly empirical style and there was hardly a plant
that it had set up which had not had to be subsidized for years, and
thankfully handed over to private enterprise as soon as this was possible.
One had to remember that what the government said it was doing was
not the same as what it did effectively.
Japan had also inherited a social structure which could advance
quickly. Beside the tradition of skilled handicrafts, Japan had the young
Samurai who were able to become good entrepreneurs. He was not
saying that the countries which had taken off had lacked these things,
but only that they were present in greater measure in Japan. The tradi-
tional handicraft industries had expanded alongside the more modern
industries right up to 1900, partly because of lower wages. It was always
possible for Japan to expand by pulling resources from small- to large-
scale industrj. Professor Robinson supported Mr. Berrill in his impres-
sion of the Gamagori meeting. The low Japanese investment ratio was
not only a result of a transport system that required little capital, but
also of the low investment per head in housing. This meant that an
abnormally high proportion of investment was productive. Another point
was that so much of Japan's development had been subservient to her
military ambitions, for example, the early growth of her steel industry.
369
As these resources became adequate for military needs, they were turned
over to private enterprise on very favourable terms. This gave private
enterprise an unusually favourable start.
Professor Robinson said that he had come away from Japan feeling
that the feudal compensation process had two sides. It had released
peasant agriculture from its obligations in the way that Professor Tsuru
had outlined. At the same time it had diverted a vigorous and energetic
military caste from its feudal limitations and put it into a situation in
which the low compensation payment encouraged a move into industry.
The incentive was that it was necessary to work successfully if poverty
were to be avoided.
On foreign trade, Professor Robinson said that Professor Nurkse had
tried to debunk foreign trade as a leading factor in Japan, and he thought
that Nurkse had done less than justice to Lockwood's caution on this
score. Lockwood's analysis was more favourable to the effect of foreign
trade on productivity and wealth and was based on statistics of produc-
tion, productivity, and foreign trade. The argument was that since
production had risen more than foreign trade, it was clear that the home
market was buoyant. However, the statistics were only for large firms
and it was quite possible that production as a whole had risen less and
not more than foreign trade.
The ratio of foreign trade to national income had been increasing
through the whole period of take-off, from 4 per cent in 1882 to 8 per
cent in 1892 and 11 per cent in 1902. So foreign trade had been favour-
able to take-off, making it easy for Japan to import machinery and food-
stuffs, with no problem of trying to sustain take-off against a declining
export ratio. He thought that Professor Tsuru was right to attach so
much importance to exports.
Dr. Singer thought that there was little difference between Tsuru and
Rostow on agricultural productivity. First, Professor Tsuru had pointed
out that falling agricultural prices had swallowed up the rise in pro-
ductivity. The internal terms of trade for farmers had been correspond-
ingly worsened, and it was quite possible for agricultural productivity
to rise while the standard of living fell. Another element noted by Pro-
fessor Tsuru was that productivity did improve, for instance, through
the better use of the labour of the family, but that there was no improve-
ment in the technology of agriculture as such. It was therefore important
to distinguish between productivity in the sense of basic techniques and
in the wider sense of the efficient use of the available resources.
Although Professor Rostow had suggested that there was no need to
be pessimistic about the need for a fall in farm standards of living as a
necessary symptom of take-off, Dr. Singer did not see that there was
any reason to be optimistic either. If net investment had to double then
this was bound to take resources from consumption. It was true that in
agriculture itself the capital-output ratio was low, so that the capital needs
of other sectors were not likely to starve agriculture of capital ; but though
investment in agriculture might be cheap it would not necessarily be
370
Hagtu - Summary Record of the Debate
easy. It would also always take time, since attitudes would have to be
changed.
Professor Delivanis thought that when Japanese economists spoke of
the modesty of investment in Japan during take-off they were not anxious
to mention the investments which had been made in countries which it
was hoped to develop as colonies or as dependent territories. He had
found a mentality in Japan like that in inter-war Germany, where the
commercial banks were allowed to operate at the expense of the central
bank, which often applied primitive measures of exchange control. He
had been impressed by the low income per head in Japan, which was
more like Southern Italy than the rest of Western Europe, both in terms
of income per head and the surplus of unskilled labour. This was accom-
panied by old-fashioned social legislation. The very bad roads in Japan
reminded one that the country relied on coastal shipping and the railways.
The intensity of agricultural production was interesting, but there was no
alternative.
Professor Gudin wondered what one could learn from Japan that
would assist development elsewhere. He thought one could learn little
because of the system of semi-slavery in Japan. Professor Gudin said
that no democratic country could resort to these methods, but he be-
lieved that the enormous progress of Japan could not be explained without
taking into consideration the existence of a real civilization before 1868.
Without this the country would not have been able to do what it did
in forty years. The fundamental qualities of the human element were
already there.
Professor Cairncross said he had understood that there had been a
rise in agricultural productivity after 1870 and this contradicted Professor
Tsuru who said, on page 140, ' It is doubtful if physical productivity per
land-area for any particular crop-product rose in any significant measure
before the decade of the 1890's'. He had understood that output per
acre had risen even if output per worker had not. The paper gave no
indication of the extent to which land reform led to the creation of financial
intermediaries. But it seemed to have had profound effects in the sense
that financial deals were made easier. For example there were statistics
on page 150 showing the big rise in the turnover of corporate shares rela-
tively to government bonds. There were no figures for the actual turn-
over in bonds ; did it also increase ?
Professor Cairncross suggested that, if one looked back over the last
200 years, the main reason why more savings were required now was to
finance investment in power and transport. Capital-output ratios did
not alter much except in these fields, and one reason why Japanese take-off
had required little capital might be that there had been no power and
transport revolution. Capital had not been needed by modem industry
until much later. But this raised a problem of definition. He had always
thought that for Professor Rostow, take-off implied that the break-through
to modem industrial methods using mechanical power and transport had
already been made. This was certainly not true of Japan in the 1880's.
371
Professor Ku:mets quoted estimates for capital formation in Japan in
the period since 1887, produced by Professor Henry Rosovsky of the
University of California. The proportion of net rational capital forma-
tion to NNP at current prices was 6·4 per cent for the period 1887-96.
This excluded military investment, which would raise the figure to
7·7 per cent. Mter this the ratio declined, but remained within the
range of 6-7 per cent up to 1914. During World War I it rose to 10 or
11 per cent. The gap between the figures with and without military
spending had widened, with the non-military figure still only about
11 per cent by World War II, but the inclusive figure about 20 per cent.
In general, then, it was true that net investment proportions, and there-
fore net saving proportions, were about 5 or 6 per cent during take-off
and did not rise to 10 per cent until1914.
On the general question of the relation between net capital formation
and consumption during take-off, he did not see why a rise in the savings
ratio from 5 to 10 per cent should impoverish consumers. Since con-
sumption represented 80 or 85 per cent of national income, the loss of
5 per cent would not put any serious pressure on consumption at a time
when income per head was rising. The only bad effects might be those
of the redistribution of income, and he saw no justification for Professor
Tsuru's remarks about the severe burden falling on the agricultural
sector.
Mr. Mathur, taking a view different from Professor Gudin's, felt that
underdeveloped countries could learn a lot from the Japanese take-off.
First, the low real wage rate in Japan during the take-off had made a
high rate of surplus possible. This had not, according to Professor
Tsuru, resulted in a fall in the peasant's standard of living, but only in
his not gaining from the take-off. Mr. Mathur was not suggesting that
a fall in living standards should take place, but he did think that it might
be possible to prevent the real wage from rising for two or three initial
five-year plans. For instance, even a fall in the standard of food-grains
consumption over the past forty years had been endured by the Indian
peasant without much complaint. Further, it would be sensible to keep
the real wage per man employed constant, while there was considerable
non-employment and a high rate of growth of population in order to
distribute the additional benefits more widely. The urban industrialist
could also count on the low and constant wage rate to assure him a large
surplus. Some plans of underdeveloped countries did not allow for
this, simply because they followed the lines of some Western countries
where real wages had risen as industrialization proceeded.
Professor Aukrust said that if a country had a net investment ratio of
6-7 per cent this implied an annual rise in the capital stock of some
3 per cent, if the capital-output ratio were 2. How, then, could one
explain the explosive growth of Japan ? He thought that one would have
to use the Solow-type analysis of the 'residual' which required one to pay
more attention to shifts in the production function brought about by
innovation. But this, in turn, implied that Japan had experienced big
372
technical changes, and as he had listened to Mr. Berrill he felt he had
got confirmation that these had taken place. Japan already possessed
the latent resource of an educated population, and once the international
isolation ended there was an explosive rise in output. This bore on
Professor Rostow's arguments, because once it was admitted that capital
was less crucial than human beings, one could have take-off without a
rise in investment. It was only natural that where one got this rapid
change in technology there would be induced investment, but one might
confuse cause and effect if one thought of investment as conditioning
take-off. The key factor might be a human response, with the rise in
investment following later.
Professor Kuznets stated that the annual overall rate of growth of
gross national product in constant prices in Japan between 1887 and
1940 had been between 4 and 5 per cent, with population growing at a
little over 1 per cent. Income per head had therefore risen at about
3 to 4 per cent per annum. The share of capital formation had risen
from 5-6 to 13-14 per cent. If these figures were correct, there had
been a big rise in consumption per head. Who had benefited ? The
agricultural population must have been a big percentage of the total,
since it still accounted for about 40 per cent now. He could not believe
that such a substantial rise in income per head could fail to have increased
the living standards of so big a proportion of the population. Moreover,
the rate of growth was as high as this from the very beginning and was
attained with a very low capital-output ratio, perhaps about 1·9. This
was possible because of a backlog of technical changes and an unusual
combination of capital and labour.
Professor Neumark thought that perhaps modern underdeveloped
areas could learn more from Japan than from the other countries studied
so far because, as was said on page 143, compared with other capitalistic
countries 'a generally inflationary trend is marked throughout the period
of industrial development in Japan '. The European countries had not
suffered marked inflation during the pre-conditions or take-off, and per-
haps Japan was more like modern underdeveloped countries. Wa<J the
lesson that it wa<J right to assist industrial development by allowing some
inflation through easy money and low interest rates ? The bigger role of
the government might lead in this direction too. Would Professor Rostow
accept this distinction ?
Dr. Fischer noted that Japan had no tariff unti11899. What happened
after that ? Was the tariff high or low ; and was Japan like Switzerland,
which had succeeded in developing with a very low one ?
Professor Robinson said that Professor Aukrust's point had already
been made by Professor Cairncross. The high capital-output ratios in
Europe were largely dictated by investment in public utilities and he
would guess that capital-output ratios in Eastern industry varied between
0·25 and 0·5. This anticipated the Cairncross paper on the role of capital
in take-off, and Japanese experience supported the conclusion that only
a part, say 25 per cent, of progress was a result of increased capital inputs.
373
The Economics of Take-of! into Sustained GrO'UJth
Professor Kuznets thought that differences between Europe and Japan
in the amount of investment devoted to non-industrial capital formation
were being exaggerated. Of total gross fixed capital formation in Japan,
housing took between 10 and 25 per cent between 1887 and 1906. Public
construction took about 30 per cent, and the share of the government in
non-military capital formation averaged about 40 per cent. Much of
this went into things like railways, schools, public utilities, and so on,
all of which usually had high capital-output ratios. He did not think
that the Japanese success in getting so high a rate of growth of output
from so little capital could be explained in terms of the physical composi-
tion of capital formation.
Professor Cairncross wondered what period the percentage breakdown
of fixed investment related to. He did not see how a 5 per cent savings
ratio could give one a growth rate of 4-5 per cent per annum.
Professor Kuznets replied that the share of the Japanese government
in fixed capital formation had been between 34 per cent and 49 per cent
from 1887-1936, even excluding military investment.
Professor Rostow explained that the Japanese railways were notably
small-scale and of short gestation period. They linked existing centres,
so that the return in ton-miles of traffic came rapidly. His own sense
of the situation was that, aside from the railways, Japan had put relatively
little capital into heavy industry ; it was to the labour intensity of agri-
culture and industry that one must look for the reasons for a take-off
so relatively cheap in capital. And this was most instructive for under-
developed areas. Japan had earned her foreign exchange from silk ex-
ports - a labour-intensive industry using modern methods of quality
control. Japan had also, as no other developed country had done, evolved
a dual industrial structure that had come down to very modern times -
even in complex fabricating industries. Components used in modern
factories were made in the villages by labour intensive methods.
Professor Rostow said that he would like to see more evidence on
Mr. Berrill's charges that the government had been inefficient in its
attempts to induce take-off. There was ample evidence that the initial
handling of the situation by the bureaucrats had been clumsy, but per-
haps their efforts had been more successful in other directions. They
had successfully eliminated internal barriers, and the spread of popular
education went fast and well. It was something of an achievement to
have handled the railway boom so soon after the escape from feudalism.
A remarkable thing was that the history of Japan, an island off Asia,
gave her the same sort of national unity that Britain developed standing
off a threatening Europe. This had happened in Japan without bloody
civil war and gave a national unity that allowed a prompt modernization
which China was denied.
On foreign trade, it might be worth distinguishing two effects. First,
a
the pure market argument la North where a large market provided
economies of scale. This had certainly happened in silk and textiles
generally. Second, the role of enlarged exports in providing necessary
374
imports of raw materials and machinery. The latter effect was particularly
important in Japan.
Turning to Mr. Mathur's points about agriculture in India, Professor
Rostow said that the difficulty might not be so much the lack of local
credits as the need to mobilize men with technical knowledge to go and
demonstrate new techniques in the villages, and especially to spend long
enough in each village to make some impact. He did not think peasants
would resist demonstrably good methods, but that when such big changes
were being suggested a convincing demonstration was necessary.
Professor Rostow said that he could quote cases where development
had been successful both with and withQut inflation in the country. In
some cases, inflation caused changes in income distribution which moved
capital into production. In other cases, these same income changes
could stimulate the kind of investment that was not conducive to growth.
He did not think that any systematic relationship could be discovered
between inflation and growth in its early phases.
Mr. Berrill commented that national unity was very much a twentieth-
century idea and not one from the nineteenth. Clans were very important
in Japan up to 1900, and while national unity had subsequently developed
the first take-off was not based on it.
Professor Dupriez gave an exposition of the Belgian take-off. He
stressed that he had no statistics with him but that the conclusions he
would present were nevertheless based on historical series that were more
complete than for many countries. This was largely because Belgium
had been lucky enough to have Puchet as head of the Belgian statistical
department. The many series for employment, industrial production, and
prices allowed one to go beyond a purely qualitative assessment of Belgian
take-off. Professor Dupriez said that he had analysed many of these
figures in his Mouvements economiques generaux and had found that they
often fitted a logistic curve ; though with shorter spans the exponential
fitted better. His views rested also on the work of some twenty or more
of his students who had, since 1930, studied industries like coal, coke,
zinc, textiles, and agriculture and, more recently, individual firms.
These studies had shown that behind the regular and general develop-
ment of the economy, particular industries developed more irregularly
and under the influence of fluctuations. The regular development of the
economy turned out to be a story of specific developments in particular
industries and firms at different moments. Taking the term take-off in a
commonsense way, it was hard to date it for Belgium. The central period
had been in the years 1835-48. In those years there was the sudden
development of heavy industries, complementary in a large degree, but
all heavy, and therefore in the primary and secondary stages of production.
This was a period of laissez-faire, and development took place through
medium-sized companies. Their entrepreneurs had some idea of what
to exploit, but their knowledge was by no means scientific.
Why did he date take-off in 1835-48? Professor Dupriez said that
in the earlier period the main developments had been in textiles, as in
375
the U.K. before, but under difficult conditions. During the continental
blockade spinning machines had been imported from Britain, but this
had been dangerous. Spinning and weaving had been mechanized, but
these were largely domestic industries located in Flanders and using
surplus agricultural labour in Malthusian surroundings. Weaving was
complementary to agriculture, but there were no backward linkages.
There was no agricultural machinery industry - only imports of machines
from England ; that industry had only been set up since 1945. So,
textile development was rather isolated, and there was no substantial
take-off.
The first coke ovens were built in 1829 to establish a metal industry,
and the first railway was built in 1835. Before that, thinking had been
in terms of charcoal and canals, but with the boom of the 1830's develop-
ment really began. Between 1848 and 1870 development was substantial.
A financial organization was developed under French influence, and local
financing took place early in Liege and Hainault. The number of firms
grew greatly in this period, and after 1870 Belgium was definitely an
industrial society.
The problem of take-off had little to do with population numbers.
Industry made up only a small portion of the general economy, so that
development became a question of developing the wage fund. In 1830
it was estimated that 30 per cent of the population was workless and
there was consequently a large work force to draw on. This raised the
question of the influence of industrialization on the welfare of labour.
Was there pauperization in the early period of industrialization ? He
thought that no one really knew. The first industrialization had reduced
the numbers in the workhouses and therefore probably improved their
condition. But it also destroyed some protected trades whose workers
presumably suffered. There was certainly pauperization in Flanders
where there was only a textile industry that had no lateral effects. There
was no pauperization in the industrial regions, but it was uncertain
whether the workers were better off in 1848. If one looked at social
conditions, industry had made a positive contribution. Belgium was the
only continental country not shaken by the 1848 revolution and this
implied that social conditions had improved. There was also no emigra-
tion from Belgium to the U.S.A. after 1848, and from 1850 wages began
to rise. This rise in real wages took place just as J. S. Mill was develop-
ing the wage fund theory for the last time. Professor Dupriez thought
the position could be made more precise by considering marriage rates.
Up to 1848 there was a strong negative correlation between the marriage
rate and com prices. The country as a whole was an agricultural one.
Industry only was in the take-off stage and represented only a small
proportion of the national output. The main shift from agriculture to
industry was between 1848 and 1870. From then on, there was a strong
positive correlation between the marriage rate and iron output.
Some British entrepreneurs brought capital into Belgium, but not
very much. They played a major role in starting industrialization, but
376
Hague - Summary &cord of the Debate
they were mainly craftsmen, and their main role was that of catalysts.
There were enough entrepreneurs within Belgium to continue expansion.
Liege, for example, had a long tradition of work in the metal industries.
But it was soon necessary to develop beyond the stage where the entre-
preneur was a strong man with little education, and an educational system
was developed.
Government intervention was not important to industrialization at
the beginning. The growth of Saint-Simonian influence helped to de-
velop financial institutions in the 1880's, and also secular expansion of
1850 to 1870. But most development was purely individual, except for
the railways ; the first railways were built by the government. After
1845, however, all new railways were private.
The real basis for development was coal, and all the rest carried
forward from it. The coal industry itself was operating under increasing
returns up to 1886. The iron industry was under the strain of necessary
change, because the use of coke ovens meant a move away from the forest
areas. A recent study had shown that up to the present Belgium had
been subjected to repeated changes in production functions in terms of
quantity of factor, type of factor, and quality of product. Zinc was also
very important and zinc smelting methods had been discovered at Liege.
The industry grew rapidly, and was making 60 per cent of the world's
zinc by 1870. Belgium had special advantages in entrepreneurship, tech-
niques and materials. Most glass production was not heavily capitalized,
but that of plate glass was.
Professor Dupriez said that he would like to have said more about
retardation, but would content himself with the comment that the funda-
mental reason was that there was always the need to change production
functions qualitatively. There was clear evidence of this in studies of
both industries and firms. Such obstacles to continued growth arose
every twenty or thirty years. As for factor costs, interest rates were high
at the beginning of take-off because they were considerably affected by
political factors, and stability was not great at that time. On the other
hand, Belgium had not relied on the Dutch to finance even though her
own financial system was not developed. But the marginal efficiency of
capital was high in the new industries, despite relatively unskilled entre-
preneurs. Profits were high in the new techniques in iron, glass, and zinc,
the last two of which held a large share of the world market. So self-
finance from high profits was the rule, and development depended on the
profit rate. The marginal efficiency of capital in agriculture was falling
and this also helped to move capital to industry. The corn laws were
maintained until 1850 and the government did not abandon agriculture
in favour of industry until after take-off had occurred.
The wage situation in Belgium was complicated. The general price
level was low, so that with the same purchasing power as elsewhere one
had lower nominal costs. It was not clear what was the origin of this,
but it had held before the industrial revolution, and had probably begun
in the eighteenth century. In the end wages settled at the level the coal
377
industry could afford. This meant that wages remained stable up to
1850 and led to a situation in Flanders which was clearly Malthusian.
In Liege the position was better, though wage levels were low except in
glass. The wage situation was critical during the whole of the take-off
period, but there was an improvement after 1850.
The developing industries in Belgium did give a number of external
economies. All were heavy industries, and they led to the growth of
machine-making industries near by and to the development of good com-
munications with Antwerp. Although there were big quantitative in-
creases in output from 1850, industry then began to develop into the later,
and less heavy processes, especially finished goods in iron and zinc. To
begin with, Belgian take-off had been based on coal, iron, and other heavy
industry. The great importance of the metal industries in Belgium today
was the legacy of this particular specialization during take-off.
EIGHTH SESSION
BY PROFESSOR GERSCHENKRON
Professor Kuznets said that in introducing the paper he would indicate
several interesting aspects of a study which combined many ideas and
facts. It dealt with the first two Russian industrial spurts before 1914.
Professor Gerschenkron had his own theory of backwardness, and analysed
and criticized both the Rostow thesis and aggregate measures of national
income. Professor Kuznets would like to suggest that the discussion
should concentrate on one or two of these sub-topics.
Professor Gerschenkron's account of the first spurt showed that the
industrial production had increased by as much as 8 per cent per annum
and, at a later stage, by 6 per cent. Professor Kuznets said that as a
convinced aggregationist he still wanted to know how big industry was
in pre-1914 Russia relative to the rest of the economy. He also wanted
to know what happened to the rest of the economy. In particular, what
happened in manufacturing itself to allow the withdrawal of government
support and tariffs and to allow self-perpetuating growth to begin. Dis-
cussion would be helped if Professor Gerschenkron could say a little
more on this.
Another intriguing point was the concept of the 'strain of backward-
ness'. Its effect on the character of take-off raised interesting questions.
Who felt the strain of backwardness, and what group caused it ? How
far was it 'the attraction of forwardness' rather than 'the strain of back-
wardness' ? Why was there a connexion between the current rate of
technical progress and the choice of industries, with the bias in Russia
especially in favour of capital goods ?
Dr. Fischer wondered how far the notion of the strain of backwardness
was a notion that had operational value, or at least allowed one to explain
378
and classify historical events. If one could measure the degree of back-
wardness one might be able to distinguish 'types of backwardness ', for
example, that of late nineteenth-century Russia and to compare this with
backwardness in some African areas today.
Professor Marczewski commented on the statement on page 154 of
Professor Gerschenkron's paper that 'during the years of industrial up-
surge in Russia the economic well-being of the Russian peasantry was
subject to extraordinary pressures '. The take-off must obviously have
been financed from agriculture for the excellent reason that there was
nowhere else whence finance could have come. But was there any
evidence that industrialization after 1880 meant a marked fall in the
standard of living of the peasantry ? The standard of living in Russia
was very low in the countryside in 1914 but this did not necessarily mean
that it had deteriorated during industrialization.
The abolition of serfdom in 1861 did not lead to a rise in the standard
of living of the serfs, since they had to pay for the land they now tilled,
and it probably led to some fall. But where was the evidence that this
fall went on after 1880 ? He thought that a rise of as much as 8 per cent
per annum of industrial product must have had a significant impact on.
the standard of living of the whole community in the 1890's, although he
agreed that the biggest improvement had been after 1907. Professor
Gerschenkron had written-off the peasant uprising as a sign of how bad
the situation in the country was, but such revolts had often occurred in
Russia in the eighteenth and nineteenth centuries and were of long standing.
Professor Marczewski thought that the effects of the strain of back-
wardness could already be discerned in the statement on page 152, 'The
more backward a country's economy, the more likely its industrialization
was to start discontinuously as a sudden great spurt proceeding at a
relatively high rate of growth of manufacturing output'. This was true
enough in Russia, but could one apply it as a general proposition for all
countries ? If factor endowments were sufficient to attract foreign capital
to allow the rapid introduction of imported technologies, backwardness
might have a positive effect. But this is not the general case in modem
undeveloped countries. Their situation was much more difficult than
was the situation of the modem developed countries on the eve of their
own industrialization. The discussion of the U.K. had shown that, as
the first industrial country, she was helped in industrial development by
the terms of trade between agriculture and industry. These were more
favourable for industrial products abroad than at home and therefore
foreign trade stimulated industrialization. This was not true for later
developers who were unable to compete with already industrialized
countries. They were obliged to pay for industrialization by exports of
raw materials and agricultural produce. Until 1914 and after, Russia
had been able to finance her imports of machinery by exports of wheat.
This was sold at rather low prices. The cost of this operation was very
high, but a country such as Russia, with her enormous resources and
her relatively small population, could afford it. Such a procedure was
379
not always possible for modern underdeveloped countries, especially for
those whose population was large relatively to the available resources.
Dr. Singer wanted to concentrate on the strain of backwardness.
Economists from Ricardo to Keynes had given many reasons why growth
could not be permanent in developed areas. Malthus. had worried over
population, Marx over the collapse of demand and Jevons over the ex-
haustion of resources. Keynes feared the vanishing of investment oppor-
tunities. Now we dismissed these fears, and discussed sustained and
automatic growth. More than this, we now gave the same list of reasons,
then given as reasons why developed areas could not sustain permanent
growth, as reasons why underdeveloped areas could not begin to grow
at all. So perhaps these fears had been exaggerated. But the same
problems still worried us, though now in a different context.
Professor Gerschenkron had said that the scheme which Professor
Rostow applied to underdeveloped areas only really applied to developed
areas, so that he was an opponent of the classical economists. Hirsch-
man's study of The Strategy of Development contained interesting com-
ments on backward and forward linkages. Although the links could go
from the raw material forwards or from the manufactured good back-
wards one got a different result in each case. A system which began
with the raw material was more permissive and vice versa. Professor
Gerschenkron's six points on pages 152-3 suggested that development
became more and more forced as one went down the scale of backward-
ness, and while Professor Rostow's scheme fitted the permissive cases
it did not fit the forced ones.
Professor Dupriez had been struck by several references in Professor
Gerschenkron's paper to the fact that in the first phases of industrializa-
tion there had been pressure on the agricultural dass, which was almost
pauperized. He did not question this as a fact, since something similar
had happened to Western Europe. But was it true that the pauperization
of the agricultural population was caused by the development of so small
an industrial sector ? In Western Europe, fifty or seventy years before,
pauperization had been the result of enclosures rather than industrializa-
tion. It was true that part of the population was taken out of agriculture,
and that, in the absence of technical progress in agriculture, food produc-
tion would have fallen, but he did not think that this process was at work
in Russia. The more likely thing was that labour had been withdrawn
from occupations other than the genuine agricultural sector and that the
marginal productivity of labour in agriculture must, at worst, have
remained constant.
A second hypothesis was that agriculture was operating at such a low
level of efficiency that it was only producing a subsistence standard of
life and that any withdrawal of population would cause a parallel fall in
agricultural output and lead to overall pauperization. This did not
sound very plausible. There had been much industrialization in the
Southern Ukraine, which was a wheat-producing area that exported a
great deal. So the hypothesis that food was short also fell down.
380
The third hypothesis was that pauperization was not the result of
Russian industrialization at all but of the world agricultural crisis. This
had resulted from the industrialization of the U.S.A. and the huge agri-
cultural output of the world's new areas, which lowered the relative price
of grain. But this implied that Russia alone of all the world's developing
countries experienced industrialization without any parallel change in
agricultural productivity.
Professor Dupriez said that many foreign entrepreneurs had moved
to Russia from countries like France, Belgium, and Germany. He
wondered how far the firms they established were directed by Russians
and how far by foreigners. The degree of leadership built up in Russia
would clearly be less if foreigners were the main industrial leaders than
if local leadership could be developed. He wondered whether one reason
for the slowing-down of industrial development in 1910, as compared
with 1890, might have been a result of such factors, and particularly a
slowing down of the inflow of foreign capital. A Belgian study showed
that while Russia offered good investment opportunities to foreign capital
in the 1890's, by 1910 there had been many failures and the return offered
to foreign capital was falling fast. Only one large Belgian concern in
Russia remained really successful.
Professor Bentzel found the six-point thesis set out on pages 152-3 very
strange, especially points 2, 3, and 4. He could not see why exactly the
opposite hypotheses were not set out. He knew little of economic history
but instead of point 4 he would say that 'the more backward an economy
was the greater the degree of hidden unemployment and the greater the
possibility of industrialization without a fall in agricultural 0 utput ".
Similarly, he would alter point 2 to say that the more backward an
economy was the less possible it was to put up big plants.
Professor North said that Dr. Singer had switched the rules of the
game from discussing case studies to discussing policy. As he under-
stood Professor Gerschenkron's six propositions there was nothing norma-
tive about them. The consequences of following them would be great
inefficiency, because the psychological response to backwardness was not
efficient. Was this list based on European experience, and would not the
consequences of following it today be most unfortunate ?
Professor Cootner thought the role of the government had probably
been continually overestimated. One could explain much the same
situation without recourse to the government policies which were sup-
posed to have assisted it. In both Japan and Russia there was a lag
between important political events and the economic effects which these
were supposed to have had. One had to import some vague explanation
of this lag. For example, on page 158, it was said that after the diplomatic
defeat at Berlin 'it took several years to draw the necessary inferences
and overcome the traditional aversion to industrialization'.
Similarly, there was the statement on page 166 that Russian grain
prices did not rise until after the peak of railroad construction was over.
Yet relative grain prices in Russia did rise in the 1890's despite the fall
381
in world prices, and this relative profitability set off much railway build-
ing. He was not saying that all this could have happened without the
assistance of the government; but the fact was that it was not until
favourable economic circumstances arose that the developments in ques-
tion took place. In Japan, too, there was little railway construction before
1880, and the first peak in rail building came sixteen or twenty years
after the incentive to build railways first arose.
The same kind of thing had occurred in the twentieth century. Rail-
way building in Russia and Argentina was possible because all over the
world resources were being channelled into wheat growing. Their
governments played an important role in channelling some of these
resources into railroad construction ; but the role of the government in
initiating industrialization had surely been overemphasized.
Professor Robinson suggested that it was easier to understand causes
if one were quite certain what had happened. Had Russia taken-off by
1907 or not ? If one looked at almost all developed countries one found
that they had experienced several spurts which could not be regarded
as take-offs. Had Russia really taken off at this stage ; or had she only
begun to industrialize? Was it only a temporary spurt, capable of re-
versal by Malthusian forces ? Professor Robinson doubted whether the
percentage of population in agriculture in rural Russia had reached levels
above those that India had reached at earlier stages. He doubted very
much whether take-off in Russia really had occurred by 1907.
Professor Rostow said that there was ample evidence to show that by
1914 there had already been sustained, widespread, and substantial
industrialization in Russia. As for the rate of growth criterion, it was
clear that this was not a unique standard of assessment. All would accept
that in Russia there was no satisfactory information about capital and
total output for the pre-conditions and the take-off. On the linking of
Czarist and Soviet experience, Professor Gerschenkron had teased him
about regarding the first five-year plan as take-off. He regarded the
process of Russian national growth as a continuous one. When Russia
had regained the 1918 level of activity in 1928, the capital stock had
been reinstated after the effects of war. Countries could come back after
a war to pick up where they left off, and do so quickly. By 1929 Russia
was well equipped both in terms of human beings and of technology
and he would regard the 1920's as a period when techniques were being
built up beyond the level inherited from Czarist times ; he thought that
the present Soviet view was fairly close to this.
Professor Gerschenkron had warned us to remember always how
arbitrary was the choice of our research topics, and how limited the
definitions we tied ourselves to using. Professor Gerschenkron had been
especially interested in the question of what accounted for the differences
in the framework which preceded and accompanied the passage to indus-
trialization in Europe. He had found the degree of backwardness to be
very important, but the generality with which these conclusions applied
had still to be tested.
Turning to the six criteria set out on pages 152-3 of Professor Gerschen-
kron's paper, Professor Rostow said that he did not think points 2 and 3
would apply in Japan, though he would like to see a comparison with
Germany. As for point 5, there were special institutional factors here
which applied in all countries. It would be interesting to make a com-
parison with Britain which was presumably the most permissive case.
Point 1 might or might not apply to Japan, and he thought the truth of
points 4 and 6 debatable. Professor Rostow thought that if one looked
at present-day underdeveloped countries the degree of backwardness
was even greater than in Russia. China exhibited elements of the Ger-
schenkron case, but was that a more acute strain of backwardness ? The
role of heavy industry in Russia had inevitably been affected by (a) the
scale of the railway system needed; (b) the military needs of the govern-
ment? and (c) the availability of coal and iron.
Professor Kuznets had asked about the strain of backwardness, wonder-
ing in what form it appeared, who felt it and whether it was really a
reflection of the ' attraction of forwardness '. The strain of backwardness
was a serious matter in a country that was colonized. If it were actually
occupied, then one had the extreme case, with the strain depending on
the character of the colonial power. In the intermediate case, one had
physical intrusion in China, and the threat of it in Japan. In Russia
there was a series of demonstrations of relative backwardness stretching
back into the eighteenth century. There was a spreading awareness that
a new set of ideas had been developed in the West, leading to a gap be-
tween Russian institutions and currently accepted ideas. There was also
military intrusion and diplomatic conflict. The Russians felt themselves
to be handicapped, and as one read the political dialogue in Russia right
up to 1917 one saw a mixture of attitudes. Some saw that the traditional
society was doomed but tried to defend it ; others thought it doomed
but were apathetic ; others thought it must be modernized ; while yet
others looked forward eagerly to a radically new type of society. This
kind of heart-searching had gone on outside Europe as well- in Japan
in the nineteenth century and in China over the whole period from the
Opium wars to 1949. The idea of the strain of backwardness was
interesting, but he was not sure that one would be able to find any pre-
cise relationship between Professor Gerschenkron's six factors and the
degree of backwardness, certainly not if one went beyond the limits of
time and space with which Professor Gerschenkron was concerned.
As for Dr. Singer's comments that his model was 'permissive', Pro-
fessor Rostow thought that if Dr. Singer re-read pages 9-11 of his
paper he would find no suggestion that growth was in any way automatic.
He did not think that the fact that there was continuity in the several
stages implied any automatic process in either pre-conditions or take-off.
In trying to organize patterns of history, and prescribe policy for under-
developed countries, we needed a less restrictive vocabulary than the
distinction between public and private enterprise, permissive and non-
permissive processes, etc. We could see that in the pre-conditions there
383
were some actions that could only be carried out by governments and
that in these fields the responsibility of the government did not end with
take-off. In agriculture, intervention was necessary for very special
reasons, such as the provision of fertilizers, roads, demonstrators, etc.,
but if one tried to violate the incentives of peasants or to intervene by
organizing communes, as in China, progress would be costly, inefficient,
and disturbed.
Professor Hayek's Road to Serfdom suggested that a degree of govern-
ment intervention in the economy would lead to progressively more and
more intervention. We needed more precision in what we meant by
intervention and non-intervention. Although preconditioning and take-
off might require a great deal of government intervention, there were
many instances of the government later abandoning its direct role in
industry. The role of the state in the growth process had not yet been
adequately explored or defined.
Professor Rostow said that there had been a substantial increase in
the use of fertilizers in Russia between the 1880's and 1914, new crops,
and an almost doubled grain harvest. But the rate of growth in agri-
cultural output was not high enough to satisfy the needs of the cities
and of exports as well as the desires of the peasant. There had been a
marked rise in the peasant's standard of living, but not a big enough
one to satisfy his wishes. The idea of a stagnant agriculture was not
realistic.
Professor Rostow said that Professor Gerschenkron had put forward
one of the few testable hypotheses about take-off. There were two billion
people in the world going through the same experiences, with similar
sequences of events. He thought that despite Professor Gerschenkron's
self-denying ordinances about time and space, we should keep coming
back to the Gerschenkron thesis.
Mr. Boserup thought that when discussing pauperization we were too
prone to talk of agriculture as a whole. Was there not a pronounced
polarization in agriculture in Japan and Russia? When Professor Tsuru
wrote of the peasant as Atlas carrying the burden, he was probably
thinking of the peasant as the tiller of the soil, and not necessarily of the
whole agricultural population. There might have been the same polar-
ization in Russia. The abolition of serfdom led to the commercialization
of the countryside, land-grabbing, etc. He agreed with Professor Kuznets
that if agricultural output in Japan had risen at the rates quoted, the
problem of pauperization disappeared ; but he found it hard to believe
that total output had, in fact, risen at these high rates.
Mr. Berrill raised three questions. First, he agreed with Professor
Robinson that it was doubtful whether Russia had really taken off by
1913. This was a clear example where a study of the aggregate data
said that the country had not taken off but a study of certain sectors
suggested that it had. Russia as a whole was a backward country if one
looked at criteria such as the percentage of the population in agriculture,
but the position is very different if one looked at the situation in oil, steel,
384
coal, railways, and other progressive sectors. With large textile towns,
an impressive railway network, with coal, sugar, oil, and steel it was hard
to imagine a relapse into the pre-take-off era. If the notion of take-off
had any meaning at all, Russia had gone far towards it.
Second, were the peasants hurt? Mr. Berrill said that this was a
difficult problem because it was a statistical one. Industrial growth had
certainly been a painful process in the sense that manufacturing goods
were relatively dear and supported by a tariff. There was also the
'dumping' of Russian agricultural produce at prices which were below
the farmers' costs of production. This did not prove that the peasants
were worse off either absolutely or relatively but it did mean that indus-
trialization meant very unfavourable terms of trade for the countryside.
Finally, Mr. Berrill found Professor Gerschenkron's ideas on back-
wardness interesting but not conclusive. He agreed that in the early
stages a country was tied down to its own base of resources, and he thought
this more important than the degree of backwardness.
Professor Gerschenkron summed up his position in the light of the
discussion. Professor Robinson had asked whether Russian development
by 1907 had become irreversible. He would remind Professor Robinson
of Wittgenstein's remark that anyone who asked a question was bound
to say what kind of answer he required. It was necessary to define terms
like reversible, irreversible and so on, and this was impossible. Even if
development had never been reversed, this did not mean that it was
irreversible.
Dr. Fischer had asked about the operational value of the concept of
the degree of backwardness. He would say that no precise answer was
possible because one could define the degree of backwardness in several
ways .. For example, one could define it in terms of output per head, or
GNP per head, or manufacturing output per head, or many other things.
One could also bring in other factors such as potential output per head
compared with that actually achieved. Then even the U.S.A. could be
called under-developed. This might seem discouraging and clumsy, but
it was true of nineteenth-century Europe at least that, whatever the
measures used, individual countries were fairly easy to arrange in order
of backwardness. Since one only wanted to be able to tackle a small
number of discreet cases, an ordinal ranking was not difficult. One could
then correlate this with changes in the industrial structure.
The question had been raised of how far industrialization imposed a
burden on the peasant. Russia was more backward than any other
country he had studied, and one was therefore entitled to ask whether
the burden of the peasantry was greater than elsewhere. The emanci-
pation of the serfs was especially important because of the way it was
done. The result of emancipation was that the Russian peasantry got
personal freedom but with qualification - and too little land. The
financial burdens on the peasants were greater than ever before. It was
not quite correct, as had been said, that this was a result of the fact that
they had to redeem their land. High quit rents had to be paid to the
JSs
landlords, and the redemption price was capitalized on these high rents.
The repayment schedule and high prices, however, meant that the peasant
virtually got the land free, paying the same sum as the quit rents to the
government.
Although in theory the peasant was given complete personal freedom,
this was not quite so because the reinforced village commune took over
where the landlord had left off. In a limited sense it was almost true
that the peasant was a serf vis-a-vis the village commune. His freedom
to move to the city was limited by the strengthening and legalization of
the commune through emancipation. In Britain, under enclosure, the
peasant could sell his land and leave. In Russia, he could not do so
unless he repaid a large part of the value of the land, which still belonged
to the commune. This was bad for future industrialization, which in
any case the government feared. Also, being a conservative body, the
commune was likely to keep the peasants conservative and the govern-
ment hoped that both industrialization and revolution would be held
back by the system of communes.
There was a high rate of growth of population, and with the peasant
confined inside the pinfold of the commune, his position was bound to
worsen. Only half the peasants had been serfs, but the remainder was
assimilated after the abolition with the result that in the end all were in
much the same position. There was a steady process of deterioration
and progress became impossible in a peasant economy. There was no
surplus for investment, and in an attempt to improve their lot, the peasants
used whatever surplus the commune had to buy more land from the nobility.
With public opinion favourable, there might have been a case for
trying to do something radical to improve the critical agricultural situa-
tion by the end of the 1870's ; there were not continual revolts, as Professor
Marczewski had suggested, but there were periodic ones. The develop-
ment of an intellectual ideology of revolt mirrored these peasant uprisings.
Mter the disaster of the Congress of Berlin, it was decided to leave
agriculture to its own devices and to concentrate on industrialization.
Peasant agriculture was put under great fiscal stress. It was not correct
to say that there had been no progress in agriculture. For example,
Professor Rostow was right that there had been a movement from animal
to grain farming, and also a move to the virgin lands of the south and
east. But this had been accompanied by the establishment of larger-
scale farms, partly manned by migratory labour and partly by the perma-
nent movement of peasants from the north and from central Russia.
Looking at it from the viewpoint of the peasantry as a whole, the decision
to industrialize was deplorable ; their whole position deteriorated, and
this was so certain as to leave no room for discussion.
It was unfortunate that there were no exact data to support this
view, but it was clear that food consumption per head was falling though
rapid industrialization was going on. There was a peculiarly strong
pressure to export - even though this might mean starvation, as indeed
it did during a series of famines. This could not be divorced from the
386
Hague- Summary Record of tM Debate
policy of the government, which was unusually successful in levying
taxation on the peasants and in taking their food stocks. Combined with
the predominance of the three-field system, which implied much fallow
land and low yields on the cultivated fields, this naturally led to a system
where the peasant had no reserves to meet times of famine. If one looked
at the number of horses available, there was a disastrous decline. There
was no rise in the number of peasants with 2 or 3 horses, and there was
a fall in the number of those with one.
The government felt the need to do something, and a Commission
set up to study the problem produced a many-volume study which set
out region by region the decline in the position of the peasantry; world
prices were low, and the terms of trade unfavourable to agriculture. But
Professor Gerschenkron did not think that one could fail to regard the
fiscal pressure on the peasantry as a partial reason for the disastrous
decline in agriculture. The wave of rebellions was largely caused by
industrialization and the way it was encouraged.
The basic question for the great spurt was, of course, the rate at
which national income had risen, and neither on this or on the import-
ance of industry relatively to the whole economy was there adequate
statistical information. Soviet figures always tended to minimize the
pre-1914 performance. The claim that in the Russia of the early twentieth
century industry was more important than agriculture was greatly exag-
gerated, but by 1914 industry probably represented 20 per cent of national
output, which was not to be sneezed at. Whether industry had taken off,
and would have sustained its growth had World War I not occurred, was
a different question that was hard to answer. Russian industry was not
truly born until 1885-1900, and a good deal of development of a slow
and gradual kind in the textile industry had gone before this- with
British help. So the base was not small, and had been extended by the
8 per cent per annum rise in manufacturing output. During this spurt
industries had been set up on a tremendous scale, and Professor Gerschen-
kron did not think that Mr. Berrill's argument about raw materials took
one very far. All cotton was imported to begin with, as indeed were
the materials for the industrial development of St. Petersburg. Thus,
all coal was imported, as was much iron ore, and even steel. It was
true that the developments in the Don Basin were based on local materials
and that it was an excellently located spot for such developments. It
was also true that the chemical and railway rolling-stock industries ex-
panded, not least with the construction of the Trans-Siberian railway.
When one recalled that Russia had not only built railways but improved
industry and agriculture at the rate she did, one saw that the small per-
centage of people occupied in industry was not an accurate index of its
importance. He did not want to detract from this effort, but industrial-
ization was inefficient in the sense that the burden on the peasants was
large. Cost per man in industry was also high, and the whole process
was carried out in unfavourable conditions with an inefficient bureaucracy
and bad management.
There was no doubt that foreign entrepreneurs were invaluable,
especially in the Don Basin where he thought it would have been difficult
to industrialize without them. On the other hand, despite numerous
studies, he could not assess the r6le of foreign capital in Russia with
absolute certainty. Still, one could take short cuts to a solution by making
fixed assumptions about the capital-output ratio, but it was surprising
how small the r6le of foreign capital had been in the overall development
of Russia. Most capital came from within Russia and a great deal of the
necessary funds came from commerce. Heavy industry had an enhanced
social status, and manufacturers would move from, say, soap manufacture
into steel.
After the depression of 1900, there had been a great advance. One
could not ignore the fact that Russian industry had moved far since
government help had assisted in building it up in the 1890's. It was
doubtful whether foreign capital and entrepreneurship would have come
into Russia at all had it not been for the efforts of the Russian government
in creating the environment in which they could operate so successfully.
Professor Gerschenkron thought that the effect of the tariff was negligible
when compared with the influence of the prices Russian governments
had paid for rails, rolling-stock, etc. and their success in keeping labour
relatively cheap. Yet things had been very different after 1905, with
industry appearing as a modernized, Western industry, and with the
government mainly concerned with ensuring monetary stability and
achieving budget surpluses.
The government had also resisted pressures to carry out military pro-
grammes. Yet, although the government was not willing to spend larger
sums on heavy industry or on railroads, and although there was a strong
cartelization movement, there seemed to have been strong technical pro-
gress. Cartelization brought order to a nascent industry, and technical
progress had temporarily offset the effects of monopoly which might
have become evident later. Similarly, while some industries did not
need the banks to supply capital, others used them very effectively. There
had been some suggestion that investment opportunities were diminish-
ing, but there was no evidence of this. A 6 per cent rate of growth was
very high, and in some fields the investment opportunities were enormous,
e.g. in public utilities. In many Russian cities gas had never been intro-
duced and electricity was installed instead. The Belgian influence was
strong here, and public utility companies were called ' Belgian com-
panies'. Russia was developing rapidly, and Professor Gerschenkron
gave it as his opinion that if the 1914 war had not occurred the growth
process would have continued.
The term 'strain of backwardness' was not his own but Professor
Kuznets ', though he had been very ready to borrow it. He was not sure
what was the difference between backwardness and forwardness. The
question was what made growth start. Professor Rostow would answer
that it did so because the pre-conditions were completed. When one
asked how this was known, the further answer was that growth had
J88
started ! He thought that Professor Rostow should avoid these inferences
backward from the occurrence of a fact to its having been conditioned
in the way that he thought it should have been. This was logically just
as bad as Professor Rostow's way of defining growth as a shift in the
production function, and then of arguing that there was no growth be-
cause there had been no shift in production functions. This merely
meant that there was no growth because there was no growth. Although
it was doubtless true that the merry-go-round was a means of transport,
it would not take one very far.
Professor Gerschenkron said that he would not like to categorize
what he had been developing for the last ten years as a theory, but he
had tried to distill out some preliminary generalizations of an empirical
kind. He wanted to sort out the material in an ordered way so that we
could discover whether deeper probing sustained the initial conclusions.
There was not simply one theory ; one could have a number of alternative
approaches. Essentially the situation on the eve of the great spurt was
that one had a backward country with many things going on outside it
but very little within it. He thought one could fairly describe this as a
situation of tension between what was and what could have been. It
was possible to define tension in terms of the profits which might have
been made, which made it clear why backwardness was hard to separate
from forwardness. Growth might fail to occur because there was some
institutional obstacle, or no source from which to borrow technological
knowledge. Perhaps profits were not high enough, and so on. His own
conclusion for Russia in 1885-1914, as described in his paper, was that
one had to look at the economy in two ways, otherwise one lost sight of
the character of the change. One could also see that there was a period
at the turn of the century when the two patterns of explanation co-
incided. After this, there was a change in the role of the government.
Instead of continuing its traditional task of attempting to press indus-
trialization, it behaved more passively.
Professor Gerschenkron said that he was disappointed by Professor
Rostow's failure, during the discussion, to speak of the concept of the
pre-conditions. The difference of opinion between them was important
if one wanted to see the process of change in a fairly specific way. He
never failed to be impressed by the difference in the pre-conditions from
case to case. It was important to look further than Professor Rostow had
done and to arrange the material in such a way as to enlarge the frame of
reference considerably.
This raised the question of how general we should try to be, how
much we knew of other countries, and how far we should look outside
Europe. He did not think that his own work on development in the
U.S.A. helped very much. The concept of graduated backwardness
depended greatly on having a backward agriculture and a backward
population, and this was difficult to sustain in a country which was born
free.
Nevertheless, he did not think that the concept was useless. He had
389
begun a study of Italian industrialization with five or six general ideas
based on his studies of other countries. He had first constructed an
index of industrial output and had found a spurt in 1896 to 1914. Although
in this period the rate of growth was high compared with that in other
countries, he had not thought it high enough. For Italy was very back-
ward and there was a large backlog of potential technological improvement
available to her on the basis of developments elsewhere. The question
was why his expectations had not been fulfilled. This had raised further
questions and had led to further research.
If one found that events did not justify one's hypotheses, one could
either discard or replace them. Alternatively, one could say, with Pro-
fessor Rostow, that the particular case did not fit the theory. But one
could also find deviations from the model and try to' systematize these.
This might give one a better model, which one could apply to further
countries. Professor Gerschenkron felt that this was a bad moment to
try to defend his own expectations about backwardness. The concept
had done most of what it could do for him, and he would have to move
beyond it. And, as Professor Bentzel had explained, it could be reversed.
Perhaps the time had come to look less at the advantages of backwardness,
and more at the disadvantages. He was convinced that one must separate
out periods where expectations of backwardness had their effect, and
discover whether there really was increasing backwardness. He thought
there were also cases where the maximum tension was missed, for example,
where the period of railway construction passed without setting off
industrialization. Or perhaps one missed the stage where the labour
force was still docile. So he wanted to divide up the time periods more
carefully, look for the modal points where advantages were at their
optimum, see what happened if such optimum periods were missed and
whether the result was increasing backwardness.
On the basic question of the usefulness of the analysis outside Europe,
he thought the essential lesson was that if one wanted to understand
development one had to accept the fact that though there was unity it
was only a unity in diversity. One had to be aware of the big differences
between the process of industrialization in the various countries. One
could then find both similarities and differences, but it was the latter that
were particularly creative. These differences were explicable ex post but
could not be predicted ex ante. If one then turned to areas where the type
of backwardness was very different, there were new questions to answer ;
but the process was instructive provided that one remembered that the
answers would be very different from those that one got in Europe, whose
backwardness was of a very different kind. How far it was useful to raise
such questions was a moot point, and if one went on to introduce factors
like the kind of political system this raised a new and different range of
problems.
390
NINTH SESSION
INTERIM SUMMING UP
Professor Landes stressed that he could only do his best to state the
position which he thought had been reached at that moment, in a con-
ference where the climate of opinion was still changing. The point of
departure had been Professor Rostow's Stages of Economic Growth, a
work which rested on a new vocabulary and therefore inevitably repre-
sented an act of aggression against an established discipline. Yet this
aspect of Professor Rostow's contribution was perhaps self-defeating, for
a number of reasons. First, it tended to divert attention from the sub-
stance of his analysis to the labels employed. Second, these vivid terms
concealed the traditional and accepted character of many of these ideas ;
thus, as Professor Rostow himself noted, take-off and industrial revolu-
tion meant much the same thing. Finally, a term like take-off was a
liability in itself, because it was a metaphor of uneven appositeness.
Nothing was so dangerous as a single, sharp image of a subtle, nuanced
phenomenon. No wonder that so much of the discussion had been
devoted to demolishing Professor Rostow's vocabulary.
Professor Rostow's system of stages was intended to be at once a
classification and a model of growth. From the taxonomic standpoint it
was a refinement of the traditional three-stage system and had its merits
and defects ; that is, it made it possible to grasp more easily the evolution
of a complex process, but at the price of some distortion and over-simpli-
fication. As a model, the system was intended to explain how technological
change at one or a few points of the economy diffused to the rest and
transformed it. The general feeling of the group was that the system,
qua model, left something to be desired. On the one hand it was far
from complete. It said comparatively little about the preparatory phase
of industrialization and hence did little to explain how and why take-offs
occurred ; it did even less to explain why take-offs differed as they did
from one economy to another. There was, on this point, some feeling
that more could be done to introduce non-economic considerations into
the system.
On the other hand, the model was not new. The heart of the system
was the analysis of technological diffusion via leading sectors and linkages.
This came very close to what Schumpeter had said about the role of
innovation and to what Marshall and others had said about derived
demand. Because the Rostow contribution was not wholly new, one's
first inclination was to ask, ' So what ?' Yet as the discussion had made
clear, Professor Rostow had performed a very valuable service by posing
a clear-cut debatable issue. For some, apparently, industrial revolutions
were not simply to be taken for granted, and the confrontation of the two
points of view had been very fruitful, as the changing tenor of the debate
had made clear.
Turning to more specific reactions, Professor Landes said he would
391
divide the many criticisms offered into two categories: (1) historical and
qualitative, and (2) statistical. On the first, he thought especially of the
papers and comments of Professors Gerschenkron, Kuznets, and North,
all of whom had stressed the inadequacy of Professor Rostow's analysis
and had offered empirical data to modify or fill in the schema. Thus
Professor Gerschenkron had stressed the implications of backwardness,
which did much to explain the diversity of national responses to the new
technology. And Professors North and Kuznets had emphasized the
need to look at the totality of the economy, to embrace industrial, agri-
cultural, and commercial sectors together. The notion of the leading
sector, they felt, tended to truncate the analysis, to say nothing of its
intrinsic weaknesses as an economic concept.
On these weaknesses, the discussion raised a number of points. First,
there was the general difficulty of distinguishing cause and effect in cases
of parallel variation. For example, as Miss Deane and Professor Habakkuk
had shown, a big rise in British foreign trade and the rapid development
of certain industrial sectors went hand in hand. Which was cause and
which effect ? Did analysis in terms of leading sectors put too much
emphasis on changes originating within industry, such as technological
innovation, and too little on outside stimuli like demand ? Second, and
related to the first point, there was the problem of separating out the
effects, direct and indirect, of growth in different sectors ; given the
inter-relatedness of economic activity, an attempt to sum the different
sectors separately might well yield a total greater than the whole.
In reply, Professor Rostow might agree that there were difficulties,
but these were no justification in themselves for discarding the concept.
The criticisms simply added new dimensions to the analysis. It would
be very useful, for example, to look at the different leading sectors in the
development of various economies and ask why the differences occurred.
Professor Gerschenkron had done something of the kind when he dis-
cussed the increasing importance of heavy industry in the historical
sequence of industrial revolutions and showed how it was related to the
concept of leading sectors. Similarly, in his earlier work Professor
Hoffman had distinguished between the roles played by consumers' and
producers' goods. Thus the strongest critics of leading sectors could not
avoid making use of similar concepts themselves.
The statistical criticisms had been sharper, and most of these had
come from Miss Deane and Professor Habakkuk, Professor Hoffman,
Professor Marczewski and, especially, from Professor Kuznets. They
had focused on the nature and validity of quantitative criteria of growth,
especially on measures of capital formation and output per head. Among
other things, the point was made that there did not seem to be any spurt
at all in the data for some countries. This attack on the Rostow schema
was not only more fundamental than the qualitative criticisms mentioned
above, but represented, in effect, the most revolutionary development of
the whole conference. It would appear that there was a clear conflict
between our aggregate statistics and the traditional interpretation of
392
economic history. New facts had now been introduced into the debate
and, whether he liked them or not, the economic historian could not
ignore them.
On the nature of these statistics, it was Professor Kuznets who had
made the vital point that many of the take-offs that had so far occurred
had done so before there were quantitative data which were adequate to
test theories about what had occurred. It was not only that too many
figures were missing. There was the problem of how to use what figures
there were to build further, and that problem was not solved by using
scanty data to make calculations to one or two decimal places. The snag
here was the irresistibility of statistics. All the warnings in the world
would not make us less enamoured of their pseudo-precision. For lack
of anything better, we were inclined to accept what figures there were,
good or bad, and to select those which supported our own contentions
and omit the others. Moreover, even when care was used in preparing
composite aggregate figures, the statistical techniques used could blur
the picture, since averages and extrapolations smoothed-out and levelled-
off the changes and trends we were looking for. He was not sure whether
greater sophistication in the statistical techniques used would improve
or worsen this, because he thought that the kind of figure we were using
was too refined for the sort of analysis we were attempting.
Professor Landes suggested that fundamental questions about the
validity of the statistical approach arose if, with the best figures available,
we found no evidence of any spurt. What then ? Several reactions were
possible. First, we might argue that economic growth was smooth,
except for cycles. Second, we might say that our statistics were still not
precise enough, and that we needed a battery of techniques to show
deviations from the trend, because what looked like small deviations to
us were more important than we thought. It was perhaps asking a great
deal that the small industrial sector that developed during the take-off
of what long remained a largely agricultural economy should have a big
immediate effect on aggregate growth rates. Third, we might infer, as
Professor Kuznets implied, that aggregate statistics concealed, rather than
revealed, what happened.
What did all this mean for our concept of the take-off? Was it no
longer a unique event in the development of an economy ? Perhaps
most participants would agree that a spurt did not happen just once in
the history of most economies ; that there were likely to be several spurts,
each of them based on clusters of innovations or of investment, and not
necessarily only in the industrial sector. Nevertheless, Professor Landes
argued, the Rostow kind of spurt was something special. It marked a
vital change in the quality of the economy ; the substitution of machines
for human skill, the wide use of inanimate power based on non-vegetable
fuel, the introduction of new, non-vegetable raw materials, especially in
chemicals ; above all, the transformation of the mode of production.
And it marked a quantitative landmark, for no combination of innovations
before or since had yielded comparable gains in productivity. Moreover,
393
if one added to this combination the changes in transport that accom-
panied the Industrial Revolution in 'follower countries', one had all the
difference between the pre-modern and the modern economy. To be
sure, these changes were not always abrupt, yet they were revolutionary
in their effects. Continuity and change were merely two aspects of the
same process.
Perhaps one of the most crucial questions was why take-off was so
different in different economies. Everyone agreed that differences in the
historical heritage were important, and Professor Kuznets had argued
that the stage system understressed these. Professor Gerschenkron's
emphasis on the role of backwardness was one way of looking at this.
Or, to take a concrete issue like Professor Rostow's point about doubling
the rate of net investment, here history showed two types of background,
with different consequences. There were those countries that were rich
and had learned to save even before their industrial revolution. Britain
was the most obvious case, but even the European countries and the
U.S.A. were relatively rich and thrifty on the eve of their industrial revolu-
tions by comparison with present-day underdeveloped countries. Small
wonder that in such cases there had been no very abrupt change in the
rate of net saving at the time of take-off. For countries today, the situa-
tion was very different, not least because of the size of the gap they had
to make up. It might well be necessary for them to double net invest-
ment, which would make them fit the Rostow model.
Pursuing this question of background, any definition of the pre-
conditions of take-off was likely to contain some element of tautology,
but then in a sense this was a shortcoming of all historical explanation.
Yet Professor Landes was not ready to abandon all hope of stating testable
prerequisites. We already had views on what factors made economies
operate most efficiently; why should it be much harder to say what were
the conditions that would prepare change and facilitate economic growth ?
Clearly, one could not stipulate a certain minimum level of prerequisites,
but one could say that the more nearly a country approached some kind
of theoretical optimum, the easier growth was likely to be. Deviations
from this optimum - and history was full of them - presumably had
their costs, just as deviations from economic rationality did. Perhaps the
term 'pre-conditions' was too absolute in its connotations, but growth
had to be preceded by a conditioning process of some kind, and this was
susceptible to scientific analysis.
In addition to heritage, many factors went to explain the varied char-
acter of the growth process in different countries. Professor Landes
noted that growth was not merely a process of industrialization, but that
historically industrialization and growth had gone hand in hand. There
were exceptions - a country like Denmark, for example, which had
followed its comparative advantage by developing agriculture. But these
were rare, and underdeveloped countries today were convinced that
industry was the key to wealth. Another source of differences in pattern
and rate of growth was timing. This was the kind of thing blurred by a
394
stage system, which could not give due consideration to changes in
technology, scale of production, nature of demand and the like, all of
which conditioned the possibilities and character of development. Nor
could a cover-all concept like ~backwardness' be used without great
caution. Professor Gerschenkron had noted the implications of 'degrees
of backwardness'. There were also the advantages and disadvantages of
lateness which compensated each other differently in each case.
Professor Landes said that he might sum this up by saying that the
discussions so far did not reveal a fundamental conflict, but rather a con-
frontation and rubbing-together of different points of view, all of which
would add to our knowledge of a complex and subtle phenomenon. The
very adjustments of opinion that had occurred in the course of debate
were the best evidence of the value of such give and take. He also had
a sense of the great opportunities before us, with the statistical work of
people like Miss Deane, Professor Marczewski, and Professor Kuznets as
leading examples of new ways in which we could add to the corpus of
historical knowledge. Finally, he was confirmed in his belief that know-
ledge of these earlier experiences was relevant to modern economies, not
only because of the similarities, but also because of the differences between
past and present. History was there to give us lessons in relative failure
and success, and to teach us the comparative costs of adjusting to a
changing but persistent and increasingly general problem.
PTofessor Kuznets said that while he had found both the papers and
the discussion enlightening, it was difficult to give a distillation of them,
and he would prefer to say something about the general framework in
which the results for separate countries could be viewed. He thought
that a major reason for differences of opinion in the meetings had been
an over-simple view of what we meant by smoothness. Smoothness did
not exclude the possibility of spurts ; nor was an aggregative approach
inconsistent with a sectoral one. There was nothing in the nature of the
statistical tools themselves that would limit the variety of the patterns
generated. The only question was how one should deal with the results
of economic experience, and the only fundamental requirement was that
there should be reasonably complete data about the changes which had
occurred. The presumed conflict between continuity and discontinuity
was not a real one.
Professor Kuznets was inclined to think of modern economic growth
as resulting from additions to the stock of knowledge - as a system of
extending the application of modern science to problems of production
and of human welfare. This stock of knowledge was 'trans-national',
and he would suggest that the characteristic of being self-sustained was
really one of modern growth as a whole. Growth was sustained because
knowledge was an open-ended resource, and social and intellectual condi-
tions were such that we had reasonable expectations of growing without
apparent limit.
In this connexion, he was impressed by the contrast between the
major technological improvements of the twentieth century and those
395
of the late eighteenth. The latter set of innovations was, at least in the
case of cotton and iron, the result of a long search through trial-and-error
experiment which could be dated to 50 or 100 years before the innovation.
The innovations had been generated by bottlenecks in the British economy
and were the result of sheer necessity. But this was not true, for example,
with the inventions of the late nineteenth century, of which one might
say that invention had been the mother of necessity! This rapid change
in technical and social inventiveness constituted the changing background
against which nations entering on modern economic growth had to be
viewed. Countries entering on growth in the twentieth century were
confronted with an entirely different and much wider set of development
opportunities.
While there were strong, self-sustaining elements in the growth of
knowledge as the base of modern economic growth at large the growth
of any one nation was much less self-sustaining. It accelerated and de-
celerated, and the concept of self-sustaining growth was much more
questionable if applied to it. Professor Kuznets asked therefore whether
the distinction between growth that was and was not self-sustained made
~uch sense in terms of a single nation. One could have irreversible
growth - growth which might sustain itself at a certain level of perform-
ance - but in most countries there was a continual struggle against
obstacles which the very development process itself threw up. He doubted
whether one could truthfully say that growth was self-sustaining. For
example, we know of no country which had entered on growth within
the time-span of our statistical observations, except for the communist
countries where the period of observation was too short, where growth
had not tended to slow down sooner or later. And this slowing down had
occurred against the background of a stock of knowledge which was
continuing to grow rapidly.
The second item in the general framework within which Professor
Kuznets viewed growth in individual countries was the distinctive heri-
tages of different countries. If one conceived of economic growth as
occurring over wide, multi-country areas, with complexes of epochal
inventions capable of spreading throughout the globe, the present age
was the first in world history when the current economic system had
been truly capable of affecting the whole world. This had not been true
of the earlier systems. Up to the present, the situation had been one
where the different parts of the world were in effective isolation from
each other. The transport system had been such that countries with
distinctive systems of behaviour and economics were virtually unac-
quainted with each other. Now, the Western modern economic system
was affecting countries across the world, which had very diverse historical
heritages simply because the world had been divided for so long into
these separate parts. We in the West knew very little of the behaviour
patterns and social structures of other parts of the world, and yet economic
growth was spreading to countries with quite dissimilar characteristics.
The differences were not only in natural resource endowments, but in
396
social institutions which had evolved independently and only recently
come into contact with modern economic systems. An understanding
of such differences in heritage was essential to seeing development in
different countries in proper perspective.
Professor Kuznets' third point was that any specific country had to
be looked at in terms of the timing of its entry into modern economic
growth, the state of knowledge at the time, and the country's own his-
torical heritage. All of these put each country in a particular relationship
with other countries, which might be leaders in the spreading process.
In applying these criteria, Professor Kuznets suggested that one had
to make a basic distinction between pioneer and follower nations. All
epochal innovations had been made first in one or two countries which
suggested that what we needed to do was not merely to compare the
development of particular countries, but also to study the ways in which
an epoch spread. At present we were trying to generalize from too little
experience. If one started with the pioneer nations, one could first ask
why they were pioneers. That might teach us a lot about the beginning
of modern economic growth. For the followers, the question to ask was
why they did follow and why the leader was first. One would then be
doing what Professor North had suggested, and tying-in the behaviour
of the follower with that of the leader in exploiting specific comparative
advantages. In this case, as the sequence of followers became longer,
one got a greater variety of linkages, and the range of comparative ad-
vantages and differential obstacles became wider and wider. It was
interesting to speculate whether, say, during World War I, one could
have forecast the very difficult social adjustments necessary in the Soviet
Union, and the high degree of state intervention this would imply. There
was a similar element in the story of imperial Germany, where the big
question was what made the process of adjustment there so different
from that in the U.K. and the U.S.A. One had a progression from a
mild form of government intervention in the U.K. and the U.S.A., to
increasingly strong intervention as Germany, Japan, Russia, and China
began to grow.
If one asked what all this meant in our discussion of the Rostow
approach, the broad answer lay in emphasizing the need for a more
specific characterization of modern economic growth. We needed to
know what was the minimum social accompaniment and technological
adjustment necessary if a country was to take advantage of the stock of
potential innovations available in the modern world as in the past. One
essential prerequisite was apparently a minimal literacy. Another was
the minimum scale of enterprise necessary for engineering reasons. A
third was that work should be allocated in terms of efficiency in per-
formance and not from family connexions. These illustrated the charac-
teristics on the basis of which one could define the prerequisites of
effective modern economic performance. One could then make a study
of growth in terms of the sequence in which these characteristics were
adopted. It might be possible to distinguish phases of growth which
397
were marked off by the degree to which they were adopted, though
Professor Kuznets was not sure that there would be enough similarity
to make a stage distinction useful.
For example, in the U.S.A. one would start with a set of historical
characteristics, like resources, men, skill, and training, etc., where one
condition that caused difficulty was how to eliminate the obstacle which
slavery represented to economic growth. The U.S.A. had been far past
the 'take-off' and yet a bitter war was necessary to adapt part of the
heritage and counter the threat to the unity of the country. In Russia,
the spurt covered by Professor Gerschenkron had led to a situation where
war shook up society so much that there was revolution. He submitted
that one could regard this as a take-off in the sense that the decks were
not clear for growth by 1910. Perhaps one aspect of the pre-conditions
was that the economy should be strong enough to avoid collapsing
during war.
Professor Kuznets said he would conclude by pointing to the fact
that the number of countries where growth had occurred was not much
more than twelve or eighteen, over a period of 150 years. And many of
these came from a narrow range of countries close to the West European
historical heritage. Growth in very different countries, for example,
Japan, had been inadequately studied. All we could do so far was to
classify the results of this experience so that our expectations of uniformity
and divergence could be associated with some view of the conditions
required for development. Professor Kuznets thought that his emphasis
on epochs would show the source of similarities and differences in ex-
perience. He thought similarities were due to invariant characteristics
in modern society, while differences were due to differences in heritage
and timing. For the present, he thought the only useful study was the
sources of such invariance and difference, and the way in which these
affected each other.
Professor Kuznets suggested that Professor Rostow's analysis put too
much emphasis on similarity. The pre-conditions differed, as did take-
offs. The stress on the self-sustaining nature of later developments put
much emphasis on similarity, as compared with differences that one
would find if one looked at processes that did not sustain themselves. If
there was to be value in the Rostow hypothesis, which, like all hypotheses,
could be useful only by guiding the investigator, it was important that
the terms used should lead in the right direction, especially since part
of the interest in take-off was to learn how to plan for future growth.
A scrutiny of the evidence suggested that there was not sufficient generality
in the characteristics Professor Rostow stressed to warrant accepting his
hypothesis as a guide.
Professor Hoffmann said that he had calculated figures for the ratio of
the output of investment goods to that of consumer goods in terms of
value added in manufacturing industry. These figures showed that the
ratio was high in each country at the moment when growth became rapid.
The same was true for the ratio of consumer goods to investment goods
398
within exports of manufactured goods. His figures suggested that such
changes were a necessary condition for growth, and that each country
could build up its output of capital goods only slowly.
Professor Delivanis took up the point that the underdeveloped coun-
tries had to make a bigger leap in net investment than nineteenth-century
developing countries. Even if net investment were doubled, it would
take time to double the total stock of capital, especially when one remem-
bered that population and the value of money would be changing. It
was also easier to raise the proportion of the national income invested
when the national income was rising. Professor Delivanis suggested that
present-day underdeveloped countries could avoid expensive investment
mistakes because of the greater knowledge they had, thanks to the ex-
perience of other countries in the last century.
All in all, he thought that other disadvantages were more important,
especially the monetary experience of underdeveloped areas. Their
problem was complicated by the large number of possible investment
alternatives from which they could choose. Professor Kuznets had sug-
gested that inventions in the U.K. were made in order to break shortages,
and it was hard for underdeveloped areas to know what kind of invest-
ment decision to make remembering the structural and monetary conditions
in which they had to operate. Monetary problems were not simple, and
this complicated the problem. Perhaps things had been easier when the
U.K. had dominated the world monetary system, and he suggested that
differing monetary experience and a difficult foreign trade position were the
main factors determining how underdeveloped countries would develop.
Mr. Mathur was disturbed over some difficulties inherent in historical
analysis. The unit covered by the papers in the Round Table had been
arbitrarily taken to be the country, but for the study of the take-off one
could equally well define any other region as a unit of historical study.
If one concentrated attention on regions which had started development
earlier, by taking a suitably small area one could push back the date of
the take-off. Small pockets in India had taken off in the 1920's, for
example the Jamshedpur steel region and some of the Bombay textile
areas ; but the country as a whole had certainly not taken off. Similarly,
if for a nation one took its legal definition comprising all subjects who
owed common allegiance to a sovereign then the principal country of a
colonial empire might have taken off, but the nation as a whole would
hardly be found to have done so.
Mr. Mathur also wondered if the economic historians were not a
little too indifferent over the way the take-off took place. For economic
history to be a satisfactory guide to future planning, the experience of
the past must not only be described but evaluated with reference to what
was alternatively possible. The lack of data was perhaps a restriction
on such studies but the method of the military historian could perhaps
be followed. For instance, one would like to know how much of the
man-power and capital resources or technical knowledge were left un-
utilised and why, and also how big was the deviation from an efficient
02 3~
programme of capital accumulation in the sense described by Professors
Dorfman, Samuelson, and Solow.
Professor North took up Professor Landes' point about the traditional
character of the Rostow scheme. He had grown up as an economic
historian to talk of the prerequisites of the industrial revolution and of
the industrial revolution itself. That scheme looked very much like
Professor Rostow's. These traditional views came from Toynbee and
Mantoux, who looked on experience in the U.K. as something radical
and explosive. This U.K. experience had been extraordinary, and the
U.K. had been a leader ; yet the scheme had remained and Professor
Rostow had rationalized it and brought in some economics. Nevertheless,
fundamentally it was the same scheme.
Good or not, it was an inadequate scheme to explain what had hap-
pened since Britain's industrial revolution, with the succession of leader
and follo'\l'er. When he had himself studied U.S. development, he had
found the scheme inadequate and had been forced to start again from the
beginning. Perhaps one would have to do the same for most European
countries.
Professor North said that as he had listened for several days to the
discussion, he had been struck how Professor Rostow kept bridging parts
of experience in other countries into his scheme. We were now very
far from the original Rostow scheme, with the result so shapeless that the
original scheme had vanished.
Returning to his own views on the U.S.A., Professor North said that
Professor Kuznets had complained that he had ignored the civil war.
His own point on the civil war had been that not only had the North
been able to defeat the South; it had also been able to grow during that
decade, and the growth had continued.
Professor Boudeville agreed with Professor Landes that a study of
sectors was more important than an aggregate study so far as historical
growth was concerned. But was the modern growth of underdeveloped
countries going to follow the same lines when the economic environment
was so different ? What had remained invariant for these countries ?
What had changed to their advantage ? What had changed to their
detriment? Were these the three fundamental questions?
It was generally agreed that capital coefficients, and hence capital
cost, had increased since the early nineteenth century. But had one to
deduce from this that growth in a harder world was more difficult nowa-
days? Was it not necessary to distinguish between the scarcity of capital
and its high financial cost on one hand and the greater awilability of
knowledge and the higher physical productivity of investment on the
other. Professor Boudeville could not see why the cost of development
would not also fall.
Finally~ were the precise differences between past leading sectors so
important when technical and international conditions had changed for
the taking-off countries. What was more important was present potential
markets. From the economist's point of view one had to stress the
400
contrast existing between a good knowledge of 5-year growth models
and a very poor one of 15-year growth models. 'Prospective' in the
French meaning of the word, where successive waves of investment had
to alter the actual optimum structure valued at tomorrow's accounting
costs, and to adapt it to a population growth itself a function of economic
structure. 'Prospective' could not be thought of as a simple projection
of yesterday and Professor Boudeville felt certain that the remaining
papers in the conference would raise the problem of structural change
more and more.
TENTH SESSION
THE DISCUSSION OF PROFESSOR LEIBENSTEIN'S
PAPER ON 'POPULATION GROWTH AND THE TAKE-
OFF HYPOTHESIS'
Professor Cipolla introduced the paper. He said that Professor
Leibenstein had been a pioneer in linking demography and economics in
the context of long-run economic growth. He saw demography not as
an exogenous phenomenon but as one which fitted into the system. The
paper under discussion was a product of this long-standing interest, and
he would like to consider it as it appeared to an economic historian.
If one looked at population before the industrial revolution, one got
the impression that it was held in the • Malthusian trap'. Whatever the
country, one found that the gross birth rate was usually about 30-55 per
thousand. With death rates around 25-35 per thousand, this gave one
a population growth rate of 0·5-1·5 per cent per annum. But this growth
soon ran into difficulties, and a peak in the death rate eliminated a high
percentage of the population.
If, in 1750 one looked back, one could argue that Malthus had been
basically right. Looking forward, one found a change. There were no
more dismal peaks in the death rate that characterized previous European
history. The disappearance of these peaks itself provoked a population
explosion, which was further exaggerated when, in the nineteenth cen-
tury, 'normal' death rates started to fall, and fell more quickly than
birth rates. Eventually, the birth rate also fell and a new equilibrium was
established with low death and birth rates. The 'population explosion'
was, in the European experience, part of a more or less balanced aggre-
gate of changes, and if population grew, production also steadily increased.
Thanks to the industrial revolution, the European population was able
to escape the Malthusian trap.
If one looked at modern underdeveloped areas, one found something
very different indeed. The diffusion of Western medical techniques
had resulted in lowering the death rate while the birth rate remained
high. Population was therefore 'exploding'. However, in Europe the
growth had been a direct result of improved productivity, as part of a
balanced process which not only led to more mouths to feed but also
.f.OI
The Ecanomics of T ake-o.IJ into Sustained GrO'Wth
gave the means to feed them. In underdeveloped countries today, the
population explosion appeared as the result of foreign developments -
more mouths to feed, but no local capacity to feed them. It was this
problem that Professor Leibenstein sought to solve through a period of
take-off during which income could grow more rapidly than population.
Professor Robinson found what Professor Leibenstein said about the
relation between population and growth on pages 174-7 and 178-80 some-
what puzzling. His instincts were all with Professor Leibenstein when the
latter said that population problems were a vehicle for explaining self-
sustained backwardness. He would remind Professor Leibenstein that
Indian economic historians had believed just this ; that there had been
long periods during which income per head had been falling. This
Malthusian part of the paper had to be contrasted with what Professor
Kuznets had said about the U.S.A.- that population growth had made
a positive contribution to growth of income per head. While Professor
Leibenstein had been assuming the diminishing returns which a Malthusian
background implied, it was equally clear that Professor Kuznets had been
assuming rapidly increasing returns.
In commenting on the U.S.A., Professor North had suggested that
specialization had been a major dynamic force. At the 1957 lEA con·
ference in Lisbon, the question studied had been whether there was an
economic advantage for a nation of having a population of 200 or 250
million, rather than of 50 or 15, and just how size affected income and
income per head. The conclusion seemed to be that internal economies
were singularly unimportant, since most of the countries considered had
plants of much the same size. As between countries like Belgium, France,
the U.K. and the U.S.A., differences were in the degree of specialization,
in the opportunities for the vertical disintegration of specialist concerns
and in the degree of competition in the economy.
Professor Robinson said that the conference in Lisbon had found
more evidence for the importance of this kind of increasing return than
he had originally expected, and had therefore concluded that nations
could be too small.• It seemed likely that populations could also be too
small relatively to area for rapid growth. Professor Robinson suggested
that if we looked at underdeveloped areas it was very useful to separate
those countries where diminishing returns were weak, and increasing
returns strong, from those where Malthus was still hard at work. If this
were done, one had a vivid contrast between India and Pakistan on the
one hand and Africa on the other. In Mrica, a bigger market was often
an important prerequisite of growth. There were many possibilities for
increasing returns which simply did not exist in Asia. For example,
Uganda had too small a market to make it worth setting up a steel works.
The small scale of many of the economies in Africa was a major problem.
Professor Robinson thought it was also important to bring in the
last part of Professor Leibenstein's paper, where he considered the adjust·
ment of fertility rates. He had himself always liked to distinguish •Mal
thusian' effects from ' Brentano ' effects - the differences between fertility
402
rates in richer countries, with better education, and in poorer ones. The
richer countries had lower fertility rates than the poorer ones. In the
earlier period, the factors which had offset Malthusian diminishing returns
had been not only the increased production which resulted from modern
science, but the fact that science had provided substitutes for land. There
were not .only better seeds and fertilizers, but better machines in place
of horses, and so on. This was one reason why the Malthusian effects
had been postponed. To escape from the Malthusian situation, it was
necessary to have a period during which income grew more rapidly than
population ; but how long would that period need to be ? In the early
stages seventy-five years had been required, but now twenty years was
sufficient. He was greatly impressed by experience in Japan, where
fertility rates had been halved since 1945. But all this was concerned
with what happened after take-off, and he had great sympathy with those
in India who regarded an attack on fertility rates as a pre-condition for
take-off. Was it really beyond our powers to discover some means for
controlling fertility, even in a country with a rural population that was as
poor as it was in India ?
These population problems meant that one only got sustained growth
once the demographic break-through had been achieved. Perhaps it was
related to Professor Rosenstein-Rodan's 'big push', the major question
being the length of the period over which the break-through was achieved.
Again, there was the question whether an increase in rural population
precluded increased industrialization. He did not think one could have
an increasingly impoverished rural population alongside an advancing
industrial one, because advancing rural incomes were needed to provide
part of the incentive to industrialize. Probably part of the working
capital of industry had to be the surplus from agricultural production.
This surplus was needed to make possible exports to pay for the imports
required by industrialization, to supply food to the towns, and to eliminate
or reduce imports of food. Professor Robinson did not see how one
could escape Malthusian forces by regarding the rural population as
wholly separate from industrial.
Dr. Singer thought one might answer this last question by inverting
the process. He wondered whether, with extreme overpopulation,
industrialization was not a pre-condition for raising agricultural pro-
ductivity, and he was not sure that an agricultural surplus was necessary.
He thought that the predestined role for a country like India was as an
exporter of industrial products. He could not conceive of a fall in the
rural standard of living resulting from industrialization, but thought that
industrialization would result in a spreading of rising incomes as popu-
lation left the land and agricultural productivity rose.
As for Professor Robinson's other points, Professor Kuznets had said
that economic growth depended on expanding the stock of knowledge,
and he thought this was the key. The more people existed, the likelier
the chances of producing scientific geniuses. He would like to support
strongly the suggestion that the distinction between countries with
.of. OJ
increasing and with decreasing returns was important. He would, how-
ever, throw in the additional point that societies in some underdeveloped
countries lived in almost unbelievable isolation. In some parts of Ethiopia,
for example, one would have to establish the pre-conditions in virtually
every village separately. This was quite as serious an obstacle to growth
as overpopulation.
On Professor Leibenstein's paper, Professor Singer noted that on
page 175 Professor Leibenstein appeared to regard an increase of per capita
income as the criterion for an improvement. Yet a lengthening of the
individual life might be equally an improvement, which would mean
that a fall in the death rate was in itself an improvement in the standard
of living. As for the discussion of stationary populations on page 172, it
was important to remember that what happened would depend on whether
the stationary population resulted from high or low birth and death rates.
The burden of dependency would be greater the higher these were. A
stationary population did not by any means imply low dependency.
On page 175, while it was true that population pressure was an obvious
reason why low rates of investment did not work, it was not the only
reason. All that was required was that a 'big push' should give increas-
ing emphasis to cumulative effects. For example, social overhead capital
worked more effectively as there was more population. Growing con-
nexions between internal markets would have the same kind of result,
as would many other factors. Finally, on pages 177-8, the discussion of
falling mortality rates suggested that their impact was on the lowest age
group. Dr. Singer said that in a discussion of this point at the World
Population Conference in 1954, he had suggested that the strongest effect
was on the 15-30 age group and not the 0-15 group. The results were
even more favourable economically speaking than Professor Leibenstein
had suggested, since this group was available for work.
Mr. Boserup wanted to add some comments to Professor Leibenstein's
remarks on the relationship between investment and population growth
in traditional, pre-take-off societies. Professor Leibenstein might be
right that there was no evidence of secularly declining per capita income,
but it was scarcely justifiable to argue from that fact that population
growth could not have been autonomous. It was only apparently a sur-
prising coincidence that investment tended always to be just about what
was needed to keep per capita income constant. In a primitive and
traditional agrarian community there was, almost by definition, no con-
ception or vision of progress. Attitudes to effort and leisure were linked
to survival at a customary standard of living. But by the same token
one could expect very strong resistance to any tendency for a fall below
that customary standard. Therefore, in such a community, an autonomous
rise in population would by itself call forth the effort in terms of invest-
ment and savings which was needed to eliminate its effects. Thus, the
constancy, in the past, of per capita incomes at low levels could quite
plausibly be reconciled with an hypothesis of autonomous population
growth. As for the possibilities of take-off in underdeveloped countries
404
in the present situation of accelerated population growth, he would agree
with Professor Leibenstein's main thesis with the slight modification that
to some limited extent the population problem did take care of itself,
for population growth elicited an additional effort in the subsistence
sector of the economy which would not have been forthcoming in its
absence.
Professor Solow wanted to try to make more precise, though more
formal, the partial model which underlay Professor Leibenstein's basic
conclusion about the role of population growth in the theory of the
minimum but large effort required to give sustained growth. In doing
this, he would explain one point of disagreement with Professor Leiben-
stein. The conclusion that if population growth were an exogenous
obstacle, then one could not explain the various occasions where there
had been constant or rising per capita income was not necessarily true.
Once diminishing returns were brought into the picture, then one could
produce a model which did make the phenomenon at least possible.
For the moment he would exclude technical progress, except to
remind Professor Robinson of J. S. Mill's remark that the only thing in
the world not subject to diminishing returns was knowledge. It was
also probable that population growth was not significant in isolation, but
only in relation to the amounts of the other factors of production that
were available. This all linked up with what Professor Robinson had
been saying about increasing returns.
Professor Solow first took a situation where there were diminishing
returns, so that the relation between output per head and capital per
head was as in Fig. 1.
As population rose, he assumed that participation rates were constant,
so that the rise in the population was paralleled by a rise in the labour
force. The relation between output per head and capital per head would
then be given by the curve OF, the fall in the steepness of the slope of
the curve as one moved towards the right showing diminishing returns.
Given the level of capital per head (OK0 ), the length of the ordinate (Kof'0 )
gave one output per head. If the savings ratio were 5 per cent, then
saving per head would represent one-twentieth of the ordinate (KoX)·
Assuming that savings and investment were equal, one could therefore
add KoX to capital per head in the next period. This one could do by
drawing the line xK1, at 45°,
which gave capital per head as
OK1 and output per head as Output F
K 1F 1 for the next period. The per head
process could then continue, Oo t------71"
with a not very rapid rise in
output per head, and a falling
rate of growth of output. X
Professor Solow then took 1 --C~a-p-it-a.,..l per
r:.__ _ ____.Ko=-K-
the second case, where there head

was an exogenous increase in FIG. 1.
nK the labour force, one com-
N pletely insensitive to economic
Output
per head conditions. The appropriate
sQ
diagram would now be Fig. 2.
N Saving was there used for two
purposes. First, it went to
equip the extra labour with
the amount of capital required
Capital per to keep capital per head con-
head stant for the whole labour
FIG. 2. force. Second, any surplus
went to increase capital in-
tensity. With diminishing returns, any increase in the amount of capital
per head might require a fall in the rate of profit on capital. He would
here like to join Professor Leibenstein in saying that one needed a causal
theory of investment opportunities.
Professor Solow said he would suppose that all capital available after
equipping the extra labour at the original level of capital per head could
find productive employment ; he would not go into the question of how
one could induce an enterprise to submit to a lower rate of return on its
investment. If output were Q, and the labour force N, then output
per head would be QfN. If the (constant) savings ratio were s, then
total investment would be ~ per head. How much of this would be
required to equip the labour force at the originai capital intensity ? If
the exogenous rate of growth were n then the amount of saving per head
required to equip the labour force at the initial capital intensity of KfN
would be ~- So s~- ~ was the amount (per capita) available for
deepening capital.
If one took the original curve OF from Fig. 1, and multiplied it by
the savings ratio, one got the curve ~ in Fig. 2. If one plotted the rate
n:
of growth of labour force multiplied by the amount of capital per head,
s;
one got the straight line shown on Fig. 2. Thus Fig. 2 showed that
n:.
at low levels of capitalization the curve was above the straight line
Anywhere below the point where the two curves cut, there were
excess savings available for increasing capital intensity. Beyond this
point, the existence of diminishing returns meant that there were not
sufficient savings to maintain capital per head, so that the only way out
might be a change in participation rates if the rate of growth of output
per head were to be sustained. Only at the point of intersection would
there be equilibrium, with thrift, productivity, and population growth
so balanced as just to keep the capital intensity of production constant.
406
Rate of +Ve
growth of
population
_y,
FIG. 3.
But this position was not reached by pure coincidence ; if one started
from any point to the right or left of it forces were set in operation which
induced a movement towards it. The inevitable evolution of the system
would be toward this one equilibrium point.
Professor Solow said this was why he took issue with Professor Lei ben-
stein and insisted that diminishing returns could be part of an explanation
of what had been the fate of a large part of the world. However, the
difference was not very important because, on other grounds, he agreed
that treating population growth as a purely exogenous factor was not an
intellectually satisfying procedure.
He would therefore proceed to treat n not as a constant but as a vari-
able which responded to economic conditions. He would assume that
n, the rate of growth of population, was related, for simplicity, to the
amount of capital per head. He would postulate that at very low levels
of capital per head n was negative, but that as capital per head (and
therefore income) rose, so did n, until it reached an upper limit and then
turned down again. This was shown in Fig. 3.
It is now possible to redraw Fig. 2 to take account of this, as he had
done in Fig. 4. The curve ~ now took a shape similar to that in Fig. 3,
and the diagram had three main sections. In the first phase, the savings
curve lay above the population curve (range a). Over the range b, one
Output
per head
Capital per
head
FIG. 4.
407
nad the rate of growth of population above that of savings, and a con-
sequent fall in capital intensity. Beyond this was the range c, in which
savings were again sufficient, because of the fall in population growth, to
allow capital deepening. Thus if one started from a low level of capital
intensity, the system would increase that intensity steadily up to the
point X. Beyond that, unless the system could get past Y, there would
be a tendency to return to X. Nevertheless, if the system could get as
far as Y, there was the possibility of renewed increases in both income
and capital per head.
Professor Rostow said that the curve showing diminishing returns from
the outset implied that land and knowledge were fixed from the initial
period. He would like Professor Solow to allow for the raising of the
curve to allow for changes in knowledge.
Professor Solow replied that there were many other possibilities. A
change in technical possibilities would raise the ~ curve - as would
a rise in the (constant) savings ratio. If this happened, a situation might
well arise where the ~ curve was far enough above the x-axis for there
to be no point of contact between it and the ": curve. At all levels of
population growth, or per capita income, the society would be able to
deepen capital. Professor Solow added that while he thought that tech-
nical progress was the most important way in which this could happen,
he did not think one should minimize the effects of a rise in the savings
ratio or a fall in the rate of population growth brought about by conscious
efforts.
Mr. Berrill thought there were some obvious examples, Australia for
example, where population inflow had helped growth. But there were
countries like Ceylon and Mauritius where increasing population had
been harmful. This was not merely a question of the shortage of land ;
population was often unwilling to move to places where land was more
plentiful.
On past history, Mr. Berrill thought that India did show a fall in
real income per head since 1880. He also thought that very low agri-
cultural incomes in some parts of the country need not prevent take-off
elsewhere. This was a judgment about the past and not a comment on
the position today. Nowadays voters could not allow large agricultural
sectors to suffer, while they sat by. They demanded health and welfare
services and the government was forced to respond in a way that meant
that it was much more difficult to have this dichotomy today.
Mr. Berrill suggested that in the past too much attention had been
given to the part played by the death rate in increasing population. Not
enough stress had been laid on variations in the birth rate, both between
countries and over time. Current discussions of the birth rate had to
accept the fact that the situation was much more complicated today. It
wa! not merely a question of waiting for higher incomes or the spread
.of.08
of birth control to reduce population. Japan had achieved a dramatic
fall in birth rates by legalized abortion, subsidized contraceptives, and
so on; but it was probable that such methods would not succeed else-
where. One often found that fertility was connected with the availability
of land, the absence or presence of jobs for women, education, religion,
and many other similar factors.
Since it was impossible to prevent the death rate from falling - we
could not hold back health measures - we had to improve the lot of
the existing population by improving education, welfare schemes, and
incomes while concentrating on trying to lower the birth rate. This
would be very complicated, and in view of its limited role historically he
thought unwise to suppose that it could help very much. The idea that
the fall in the birth rate could be achieved in 25 rather than 75 years
was attractive, but he thought that what was possible would differ from
case to case, and that much detailed study of these individual cases was
needed.
Professor Bentzel recalled that on pages 172-4 of his paper, Professor
Leibenstein said that a model with zero growth was not plausible and
that some net saving was likely. Professor Bentzel did not see why this
should be so. Professor Leibenstein's arguments were not convincing;
the fact that there are people with positive savings did not guarantee a
positive net saving in the community; we must not forget all those who
had negative savings. Were there not historical examples of countries
which we could regard as stationary in most respects ?
Professor Rostow said that the Leibenstein paper dramatized the effort
required to surmount the population barrier, and also the bonus that
one got in the shape of a fall in fertility rates if take-off occurred. But
population was not a simple variable. People consumed food, provided
labour, and used non-agricultural goods. Making any judgment on the
relation between population and economic development became a ques-
tion of the balance between the need for a supply of workers for industrial-
ization and enough consumers' demand to stimulate activity without
diverting resources from investment. If one looked at the rate of popu-
lation increase during historical experience of take-off, the rate had been
around 1·5 per cent in the U.K., 0·5 per cent in France, 1 per cent in
Germany, 3 per cent in the U.S.A., a little over 1 per cent in Japan and
about 2 per cent in Russia. What could we conclude ?
In the U.K. the population situation had been good. There had been
a sufficient increase in output to prevent any acute pressure on food,
while the changing structure of industry worked with the natural increase
of population to provide an adequate labour force. Up to 1790, at least,
the real incomes of consumers had been rising and so had sustained
demand. In France it was probable that the rise in population had not
been optimal. There had been no pressure on food supplies, and perhaps
there had been some lack of a push from the countryside. There might
have been a relative weakness in consumer demand, outside the cities, for
non-agricultural consumer goods. Perhaps the French case was untypical.
409
Tke Economics of Take-off into Sustained Growth
In Germany, on the other hand, Professor Rostow thought condi-
tions had been nearly perfect, apart from a slight pressure on food sup-
plies. In the U.S.A., in the early days, good land had been in ample
supply and the consequently high output per head had delayed industrial-
ization somewhat. Perhaps there had been some conflict between the
richness of the natural resources and. industrial development. Professor
Rostow suggested that perhaps Japan's inability to increase consumption
in the rural market led her to look abroad to what Professor Tsuru regarded
as an excessive extent. Russia had obviously experienced population
pressure in the existing circumstances and this had led to problems of
domestic demand and to pressure on the food supply. This was partly
because Russia had not eliminated the feudal system as rapidly as Japan
had.
Looking at the investment function, Professor Rostow said that there
were two important factors. The first was, how much of the population
was urban, the second was the assumption that growing income was a
normal phenomenon. He was sure that there were ways of summarizing
what had been said in terms of leaps or windfalls in the stock of capital
or discontinuous shifts in productivity ; but we must look directly at the
sub-functions of investment for the take-off sectors and for the sectors
crucial in the pre-conditions ; i.e. education, social overhead capital, etc.
There were also changes in the investment function in agriculture, and
shifts in technology. One therefore had to allow for the flow of industrial
technology, for shifts in agriculture and transport, and for education, as
well as, possibly, foreign trade. Disaggregation was the key to growth
analysis.
We might well decide in the end that all we could do was to generalize,
but as we went through the functional papers, we might well be able to
show the relations among these sectoral shifts, and characterize their role.
Mr. Mathur referred to page 176 of Professor Leibenstein's paper where
the per capita income in non-take-off countries was considered to be
constant and found it hard to apply to an overpopulated country with a
growing population. In countries like India and Pakistan, as population
grew the quality of the soil might be falling, forests were being removed
and human capital was deteriorating because of low consumption standards.
Each day that passed makes it more difficult to take-off, for the high level
of investment required for it would encounter greater obstacles. This
might well mean that take-off at later dates would not be possible without
substantial foreign aid. He pointed to Professor Gerschenkron's analysis
in which there were certain times which were particularly favourable to
take-off, and, if such an opportunity were missed,. it might well be very
difficult to take-off later on.
As regards Professor Solow's contribution Mr. Mather said it failed
to answer the question for which it was produced - Professor Robinson's
point about diminishing and increasing returns in a country. Professor
Solow had presented a two-dimensional production function of the
Wicksellian type which could only deal with the diminishing additional
410
productivity of investment per man as an economy used techniques with
a higher degree of mechanization by comparisons with another economy
using a less mechanized technique. But each technique within its economy
was supposed to be operating at constant returns to scale. In this sense,
the production function was a purely engineering phenomenon and would
be basically the same in whichever country the technology might be used.
Increasing or decreasing returns for a given technique within one country
depended upon the wealth of its resources in relation to the density of
population. It required a third axis to represent it diagrammatically.
Professor Solow said that for the record he would beg to differ. (He
commented in writing later that one must distinguish carefully between
increasing returns to scale and increasing returns to variable proportions,
The latter could be dealt with in his diagram just by altering the curvature
of the Q/N curve. In the case of increasing or decreasing returns to
scale, one could not proceed solely in terms of intensive variables, so that
plane diagrams would not do. But in neither case did any fundamental
difficulty arise, so long as we were not worrying about competition or
other market equilibrium. Obviously, if there were increasing returns to
scale or increasing marginal productivity of capital, the case for a critical
minimum effort lay very close to the surface. One might call this the
'infant country argument'. But he was quite unclear about the force of
Dr. Mathur's remark. Among the differences between the U.S. and
India were differences in natural resource endowment, in already achieved
capital formation and income per head, in the level of technology - it was
very important to understand this - and in the skill and training of the
labour force. Clearly not all such circumstantial detail could be incor-
porated into a diagram, but any of these differences was amenable to the
same kind of analysis, if Dr. Mathur would specify which he meant.
Professor Leibenstein summed up, saying that all he had tried to do
was to give a brief sketch of what he thought was involved in the popu-
lation element in growth, though it was likely that other people might
hold very different ideas. It was impossible to draw up a model that was
historically sound, since we did not have all the facts, and did not believe
all those that we had. What he had been able to do was to give some
broad trends and ideas. Actual population movements were obviously
much more complicated, and he had merely presented a few trends on
which there was broad agreement.
So far as what he had to say was related to Professor Rostow's thesis,
Professor Leibenstein thought that this model fitted better into the pre-
take-off period - into the pre-conditions. Professor Rostow' s thesis
itself turned out to be much less simple than the original statement of
it had suggested. What Professor Leibenstein had originally thought the
thesis implied was that there was some point at which a series of events
raised investment and led to growth. The time period did not seem then
to have been taken very seriously.
The criterion which Professor Leibenstein used to denote growth
was a rise in income per head. When a country was backward this would
411
be constant, or changing very slowly. Then, one had a change in the
situation which led to sustained growth. Professor Leibenstein felt that
population pressures explained 'sustained stationariness' rather than the
take-off. In aeronautical terms, it explained why the runway was too
short for take-off, but not how it could be lengthened. The next ques-
tion was whether one could have a theory based entirely on exogenous
population growth. If population were constant, most countries would
either have a positive rate of investment, with gradual growth, or a
negative rate of investment, with progressive decline. He had said that
this latter situation was rarely supported by historical evidence, but he
had not said that one could not invent a model to explain the situation.
In attempting to build a model which fitted the main facts he had inevitably
missed out on others.
This led to the question whether population growth could possibly
be a wholly exogenous factor. He stood completely behind what he had
said in his paper. As a result, one of the main points in his paper had
been the notion of induced population growth, and he regarded changes
in the death rate as mainly responsible for this in backward countries,
and the birth rate in more advanced ones. The usual belief was that
induced population growth declined with rising income per head. At low
levels of income, fertility rates were roughly constant, and this was the
traditional stage. Mortality was the only factor markedly sensitive to
changes in income per head. Second, there was the transition stage,
where there was some decline in fertility rates - a crude fertility response.
Finally, one had the advanced, highly-urban economy where fertility
rates were highly sensitive to higher real income.
Professor Leibenstein suggested that the vast difference between
underdeveloped and developed areas did not lie in the levels of fertility
rates, but in the degree of their response to changes in income. In the
transitional stage there was some response in the end, as changes in
urbanization, production functions, and career opportunities took place,
and as a belief in the future permanence of sustained growth took hold.
As for what caused changes in fertility rates, this was very hard to say.
One's students could easily list twenty or twenty-five factors which affected
fertility rates, but it was hard to go further. For example, it seemed that
movement from the country to the town would lower fertility rates but
it was not true that all cities had low fertility rates. Indian cities had
high ones ; urbanization as such did not help. The nature of the response
was therefore something that we did not understand well, though he
would stress the importance of the feeling that new economic opportuni-
ties were now open, for which having a large family was a handicap.
Perhaps, also, one's approach was more rational and calculating when
one was richer.
Replying to specific points, Professor Leibenstein said that Professor
Robinson had suggested that perhaps the 'push' might in some way be
connected with the population situation. He thought this was right. The
size and duration of the push required would depend on it. If he was
-1U
right in thinking that the rate of fertility decline depended on the rate
at which new career opportunities developed, and the rate at which people
moved off the land into new environments, then there should be a con-
nexion between the size of the push and the available job opportunities.
There was also the important question of the kind of push - the kind
of situation created by the investment. Many of the statistics suggested
that, between groups, the higher the income was the lower was the fertility
rate. Within the group, however, it seemed that a higher income went
with a higher fertility rate. This made sense in terms of responses.
Moving into a new group led to new economic _possibilities, and made
it an economic advantage to have fewer children. Within the group, it
was the other way round.
Dr. Singer had mentioned the burden of dependency, and he would
like time to think over these interesting comments which suggested that
it was important, even with a stationary population, whether death rates
and birth rates were both high or both low. Mr. Boserup had suggested
that in backward societies there was a likelihood that more difficult condi-
tions would be met by members of the society working and straining
harder. This might be true, he was not sure. He thought one must
make a distinction between what happened in a specific situation, which
was all that any one individual could see, and what happened in the
economy as a whole. In a rural area it was very likely that farmers would
borrow from moneylenders ; they would increase their indebtedness,
rather than try to invest. He did not see that this situation was much
more encouraging than the one he had himself suggested.
Professor Leibenstein said that Professor Solow had produced a series
of models giving similar results to his own. The only major change he
would suggest was the bringing in of fertility decline. Mr. Berrill had
suggested that a population increase could lead to either increasing or
diminishing returns, and he would merely ask where one started, while
not denying the possibility of increasing returns. For example, was one
dealing with the coming of the white man, or with an indigenous popu-
lation ? White immigrants would often bring with them new techniques,
and therefore a great leap in production possibilities. With new tech-
niques, there might be a stage of increasing returns, but this was a special
situation.
ELEVENTH SESSION
THE DISCUSSION OF PROFESSOR LEIBENSTEIN'S
PAPER ON TECHNICAL PROGRESS, THE PRODUCTION
FUNCTION AND DEVELOPMENT
Professor Marczewski introduced the paper, pointing out that Professor
Leibenstein voluntarily limited the model to cover the situation where
investment in modernization was held back not by a shortage of savings
but by a lack of willingness to invest. This was a situation which economic
.of.IJ
analysis had tended to ignore. Professor Leibenstein showed how, at a
certain stage, investment received a stimulus which had not existed
before take-off. What he tried to explain was why technical progress
was very low before take-off, and very high afterwards.
The key to the paper was the assumption that the possibilities for
technical progress increased as capital increased relatively to labour -
as capital intensity grew - so that possible combinations of capital and
labour increased as one moved up the isoquant in Fig. 1. This implied
that when wages were low, as in underdeveloped areas, the number of
profitable combinations was not large. It would require a big rise in
wages to make any alternative combination preferable. As big rises in
real income were not possible, new production functions would call for
a rise in productivity, and that would require more investment. So one
had a vicious circle. Entrepreneurs were not interested in modifying
production functions, and very high investment per head was necessary
to make them prepared to do so. In developed countries, even a small
increase in wage rates would lead entrepreneurs to modify production
functions.
Professor Marczewski said that he would look at two main points.
First, was it true that one had this discontinuity in the production function,
with greater possibilities for technical progress, with a higher capital-labour
ratio ? He was not convinced that greater capital intensity was the true
basis for rapid take-off. He did not agree with the statement on page 193
that ' Inventions are easier to achieve when the processes involved are
simple rather than complex'. Must one agree that inventions became
simpler to make as capital per head rose ? Could there possibly be a
simpler invention than the thread used to cut butter ?
Professor Marczewski suggested that perhaps the key difference lay
in the effect on marginal wage cost and marginal capital cost for every
one per cent rise in wages. He thought that with these two variables it
was easy to explain why investment and modernization was easier to
stimulate in advanced than in backward countries. There was no need
to bring in discontinuous production functions. There were other reasons
why underdeveloped areas found investment more difficult than developed
ones. Professor Leibenstein assumed the perfect substitutability of labour
and capital. Yet substitutability was not complete, but only partial.
Indeed, there was often complementarity, and that was mentioned only
once in the paper. More precisely, each unit of capital often required
a corresponding amount of labour to work with it. Substitutability was
much harder to achieve than Professor Leibenstein's model might suggest.
Each unit of capital required a certain quantity and a certain quality of
labour. It was only when a certain degree of industrial and mercantile
development had been reached that a reserve of sufficiently able labour
became available to adopt new production functions quickly.
A major difference between modern and former underdeveloped areas
was that the modern backward countries did not have sufficiently adapt-
able labour to allow changes in the production function, which required
414
adaptable workers. In the old days, the artisan in countries like the U.K.,
France, and Germany could easily learn new methods of production which
were introduced gradually as a result of technical progress. There was
no need to make the kind of leap that modern underdeveloped areas
were trying to make - a leap into the unknown with centuries to be
caught up. Outside Europe, only countries like China and Japan had
had a very large number of artisans in the pre-take-off period, and this
put them in a more favourable position.
Professor Marczewski wondered whether it were true that nothing
but the availability of labour prevented the rapid adoption of new methods
and techniques. The entrepreneur also had to face competition, as well
as having a desire to cut prices and expand sales. There was also the
engineer's desire to develop new processes, whether these were economi-
cally profitable or not. It was not possible to reduce everything to a
comparison of the cost of labour and the cost of the machine. And when
there was not complete substitutability between capital and labour,
everything could certainly not be reduced to a question of relative wage
and capital cost.
Finally, the size of the market was an important exogenous variable.
New production functions could not be established unless producers
could count on a minimum volume of sales. From this point of view,
the modern underdeveloped countries were badly placed. They could
not easily sell in third markets, and even if pure numbers of consumers
made their home markets seem large, purchasing power was very low.
A producer in an underdeveloped area could not count on a good internal
market. This was not just a theoretical idea. Professor Marczewski said
he had studied developments in Eastern Europe, which showed that the
restricted character of the domestic markets there was the main obstacle
to take-off between the wars. The relatively over-populated Eastern
European countries could not export agricultural produce because of
severe competition from new countries with more extensive agriculture.
Nor could they compete in industry with the more developed industrial
countries of Western Europe and North America. This was the reason
for the difficulties of Eastern Europe before the war. These difficulties
were by no means reducible to a question of substitutability between
capital and labour.
Professor Bentzel found Professor Leibenstein's analysis a little con-
fusing. One of the reasons why was that the wage rate was regarded
as an exogenous factor in the model. But, in a growth process, changes
in real wages could be realized only as a result of the growth itself and
therefore, in an analysis, such changes had to be treated as endogenous
variables. Regarded as an exogenous factor in a growth model, the wage
rate must be interpreted as the nominal and not the real wage rate. Pro-
fessor Bentzel thought that Professor Leibenstein had not paid enough
attention to this. Therefore his results were not convincing.
With a slight conceptual modification, Fig. 1 in Professor Leibenstein's
paper could be looked upon as showing the minimum amounts of capital
41 5
and labour necessary to produce one unit of output. Accordingly, the
axes had to be interpreted as amount of labour per unit of output, say n,
and amount of capital per unit of output, say k. In such a diagram the
isocost lines had the equations
c =nw +kq(r +d)
for different values of c, the unit cost. Here w was the wage rate, q the
price of capital goods, r the rate of interest and d the rate of depreciation
In perfect competition there was equality between minimum unit
cost and price, so that the isocost tangent to the isoquant had the equation
1 =nw + kq(r +d)
p p
According to this formula the ratios p_ and -- ( p d) were the values of the
w qr+
points of intersection between the tangent isocost and the n- and k-axes.
In his analysis, Professor Leibenstein had proceeded from the idea
that a wage increase - if sufficiently great - should be followed by a
move of the point of tangency along the isoquant to the left and upwards,
as a result of a change in the slope of the isocost lines. Such a move
must, however, imply a move of the point of intersection between the
tangent i&ocost and the k-axes. But, as could be seen from the formula,
for given interest and depreciation rates this could be realized only if
there was an increase in the quotient between the price level of the goods
produced in the sector under consideration and the price level of capital
goods. This, obviously, could happen only if the wage rise was strictly
limited to the special sector under consideration. As soon as the wage
rise in this sector was followed by a wage rise in the sector producing
capital goods - which we must imagine to happen in a growth process
- the price of capital goods would increase and the original price ratios
would be restored. When this had happened the situation in all sectors
was precisely the same as at the starting-point of the analysis, i.e. before
the wage increases had started. The only exception was if the nominal
price level had been raised.
In Professor Bentzel's opinion Professor Leibenstein's model- re-
garded as a general growth model - implied that a process of economic
growth must be associated with a continuing increase in the price level
of consumer goods as compared with the price level of capital goods.
Such a feature, however, was not consistent with available empirical
findings. The crucial point in Professor Leibenstein's analysis was,
according to Professor Bentzel, that he took it for granted that an exo-
genous- i.e. a purely nominal- wage rise implied a shift in the price
ratio between labour and capital. However, as the price of capital goods
was determined by costs of production, that price must be influenced
by a wage rise to the same extent as the prices of other goods.
Further, Professor Leibenstein's assumptions as to the patterns of
change of the isoquants were said to lead to another conflict between
416
theory and empirical findings. Professor Leibenstein's results must
imply that the growth process was followed by an increase in the capital-
output ratio. But statistics for the long-term trend of this ratio indicated
that it was constant or falling. The U.S. figures, given by Fabricant,
and the Norwegian figures given by Professor Aukrust, showed a very
sharp decline in the capital-output ratio. Such a decline was not con-
sistent with Professor Leibenstein's model. It was, however, fully con-
sistent with a more traditional model assuming that new inventions meant
an overall shift in the isoquants.
Professor Delivanis thought the paper gave a plausible explanation of
why investment was higher with high wages. He also thought, however,
that one should not forget what Keynes had said about the importance
of having good entrepreneurs. One could not achieve economic develop-
ment through capital accumulation alone, and the discussion in earlier
sessions of Russian and Belgian experience had shown the importance
of having foreign entrepreneurs to apply new techniques. Professor
Leibenstein had stressed the importance of transmitting technical pro-
gress to complementary industries. This led Professor Leibenstein to
suggest the need for government interference to establish the necessary
pre-conditions at home and, if necessary, abroad.
Perhaps we should also remember that, through patents, firms could
keep innovations to themselves. So it was not true, as Professor Leiben-
stein suggested, that new techniques would be taken up by competitors,
and that the originator would therefore lose his advantage. Perhaps
Professor Leibenstein had said too little about enterprise, though it was
important, and we had to remember that Spiethoff as well as Schumpeter
had stressed the importance of technological progress.
Mr. Mathur returned to the contention that where the capital intensity
was low there were fewer alternative techniques. He did not think this
was true and took the example of a simple operation like cooking. In
an underdeveloped country one would be able to choose between three
or four types of ovens, vessels of different types and materials, several
kinds of fuel and so on, making the different combinations run into
hundreds. If more complex operations were considered and a large
number of activities were grouped in different ways, the sub-economies
or techniques formed would be even larger. Nor did he agree that new
processes were more likely to be capital intensive. Here again, in an
underdeveloped region the number of possible innovations was great
and many of these did not require heavy use of capital. For instance,
the introduction in India of the Japanese method of dee cultivation or of
less-haphazard sowing and seed improvements would hardly require an
increase in the degree of mechanization to improve agricultural pro-
ductivity.
So far as the theoretical basis was concerned, it seemed that Professor
Leibenstein wanted to show that the inducement to invest was connected
with the shape of the production function. But the one thing which was
missing from the paper was the inducement to invest. The willingness
417
to invest, according to Mr. Mathur, depended upon factors unconnected
with the ex ante production function. Given the former, the latter only
determined the form in which the new investment would be embodied.
As for why underdeveloped countries did not use the most productive
techniques, Professor Leibenstein had suggested that it was because the
difference between the existing and the optimum techniques was very
great. Mr. Mathur thought that more serious obstacles were high rates
of interest, lack of knowledge or skill, lack of organizing ability, low thrifti-
ness, etc. With these the shift to an optimum technique, even one close
to the existing one, would not take place.
Mr. Mathur suggested that a fundamental objection to Professor
Leibenstein's formulation was on a point raised by Joan Robinson some
seven years back, namely, the neglect of the measurement of capital in
the production function. He did not think a realistic production function
could ever be invented in which one could put on the capital axis some-
thing that was independent of wage and interest rates. A realistic pro-
duction function required machines of different physical specifications
and as the wage changed different ones become eligible ; but the curve
itself must shift because the price of capital goods altered. Professor
Leibenstein's production function did not shift with changes in wages
and rates of interest and must be abandoned altogether. The only pro-
ductivity curves which had some logical validity were those of Joan
Robinson and David Champernowne which, Mr. Mathur said, could
easily be combined with process matrices of the Sraffa-Neumann type.
Professor Solow said that the paper tried to kill two birds with one
stone. First, it tried to deal with technical progress, and second with
the inducement to invest ; and this despite the fact that we all knew how
hard it was to kill one bird with one stone. He thought it fair to point
out that we were· only at the beginning of the econometric analysis of
technical change and that there was little realistic that we could hope to
say now. Nor was there any real chance that we could now say very
much that was useful about the inducement to invest in the nineteenth
century.
Professor Solow said that he would like to challenge one of Professor
Leibenstein's points. This was the crucial question of whether tech-
niques were more or less discontinuous at low or high levels of capital
intensity. He agreed with Dr. Mathur that the way to look at the prob-
lem was not in terms of capital and labour alone, but in terms of~many
more dimensions. The kind of question the entrepreneur faced was
how much of each kind of capital, and how much of each kind of labour,
to employ. Neo-classical economics was framed in these terms, and at
this specific level he was prepared to agree that there were big discon-
tinuities at low capital intensities- with capital and labour both (some-
how) looked on as concrete things. But he was inclined to suggest that
there was something to be gained by thinking of capital as a kind of jelly,
and he was prepared to wash out the difficulties of measurement since
rigour was not essential.
If one did this, he was not at all sure that the discontinuities were
greater at low rather than high capital-labour ratios. Sir Dennis
Robertson had immortalized the illustration of the ten men with spades
being replaced by nine men with slightly larger spades. On purely a
priori grounds it seemed very odd that discontinuity should be greater
at low capital intensities. As for the locus on the production function
where changes in techniques were most likely to take place, Professor
Solow suggested that these were most likely at that point on the produc-
tion function where the entrepreneur happened to be working at a par-
ticular moment. It was unlikely that an American producer, for example,
would be spending much time or energy in searching for new inventions
which required very low capital intensity.
It was therefore necessary to distinguish between pioneers and late-
comers to industrialization. The underdeveloped areas had a whole set
of past inventions to catch up on - inventions made in the developed
countries, but at a time when capital intensity was much lower. In
pioneer countries like the U.K. in the early nineteenth century, and the
U.S.A. at the end, the crucial fact was that this was a true scientific
revolution. Man could change the given elements in the system. Nowa-
days, underdeveloped countries knew the techniques, which already
existed in the engineering textbooks ; the obstacles to progress lay in the
absence of a skilled labour force, a group of active and aggressive entre-
preneurs and, despite what Professor Leibenstein said, of savings. The
adoption of new techniques would require a great deal of new capital,
and in this context capital was not jelly.
Professor Robinson wondered if he could broaden the discussion, and
bring about more communication between the model makers, applied
economists, and economic historians. Professor Cairncross had said that
one could not explain all economic progress in terms of capital investment.
In his paper to the lEA's 1953 Round Table at Santa Margherita, Pro-
fessor Cairncross had suggested that about one-quarter of progress could
be explained in these terms. More recently there had been an interesting
study of British economic development by Reddaway and Smith in which
they had tried to distinguish the extent to which increased productivity
since 1945 was caused by higher capital per head, and the extent to which
it rested on other factors. 1
Professor Robinson said that he had played with these figures and had
found that if one took the 'going rate' of capital per head, and removed
the element of growth due to increased inputs of capital and labour in
the existing proportions, it was true for Britain since 1945 that one could
only explain a quarter of growth in this way. The explanation of the
remainder lay elsewhere - in better management, know-how,. research,
education and so on. There was no econometric way of disentangling
the relative importance of these other factors, but at least it was clear
how big a part of progress was due to them. Nevertheless, we should
not underrate the part played by capital investment itself. It was the
1 Economic Journal, March 1960.
419
operation which changed the nature of capital, even when it was purely
a question of replacement. The benefits of such things as better layout
could only be reaped if there were gross investment, even if this meant
only replacement investment. He therefore thought that any attributing
of some improvements to extra capital and some to other elements was
too simple. The two things went together, and many new forms of pro-
gress only became possible with the introduction of new capital.
If one asked how receptivity could be increased, he agreed with what
Professor Marczewski had already said. What part could be played by
education in its most general forms ? It was necessary to produce artisans
who could accept and employ new techniques, with all the complications
these implied. He was reminded of a plant, which he had visited in
Kenya, whose management was bitterly regretting the introduction of
new, capitalistic forms of textile machinery because it had too little
maintenance staff to keep it going. If Professor Kuznets' premiss that
there was an international stock of knowledge was accepted, a major
question was what made it more or less possible to take over these tech-
niques. If we were to learn from history we had to be able not only to
interpret but to act. One of the factors favouring the transmission of
knowledge was education. Another was research. In some industries,
the world's stock of knowledge could be readily transmitted. But, above
all in agriculture, there were other fields where that general knowledge
needed to be adapted to specific local conditions before it could be success-
fully applied. So, in the U.K. for example, there was a Commonwealth
research organization which was engaged in finding how to apply these
general results to particular countries.
One also had to remember that the way in which capital was intro-
duced depended partly on whether machinery was available in particular
forms. It was not only in the stock of knowledge, but in its particular
embodiments, that conditions in the U.K. and the U.S.A. were so dif-
ferent from those in the rest of the world.
Mr. Boserup drew attention to an important case where economic
growth would be delayed by a constellation exactly opposite to that
depicted in Fig. 3 in Professor Leibenstein's paper, namely the attempted
transition from the traditional to the labour-intensive 'Japanese' method
of rice cultivation in India. This innovation would be represented by a
change (a lowering) of the lower portion of the production isoquant. But
if the budget line was fairly steep this might produce no new point of
tangency at a more labour-intensive combination of factors, just as, in
Professor Leibenstein's case, the new capital-intensive production pro-
cess, in conjunction with a relatively flat budget line, failed to be used
in the economy. The impression that the budget line in Indian agri-
culture was fairly steep, i.e. that agricultural wages were after all not so
low in comparison with prices of other inputs, was consistent with the
fact that the Japanese method had largely failed to be adopted in India
despite much propaganda. This failure was sometimes explained by
pointing to high agricultural wages or to actual scarcity of manpower .
.of-20
Hague - Summary Record of t'M Debate
Professor Cairncross was baffled by the general liking of economists
for jelly rather than jam. In real-life economics, there were 'too many
pips'. It was not possible to look on real-life relationships as continuous,
and what we needed was a new kind of 'quantum economics' where there
was enough of both continuity and discontinuity to solve real problems.
This would inevitably mean abandoning diagrams for algebra.
Once technical knowledge had been created, the question was how
it could be applied commercially. The most dramatic differences in
technique existed between countries, or even within countries, in spite
of the universal availability of new knowledge. This showed how neces-
sary it was to tailor development to suit the existing set of market circum-
stances. It was commercial development rather than basic research which
was particularly difficult. Perhaps, however, one should draw a line here
between agriculture and industry. In agriculture, modern techniques
could normally be used in relatively small units, and this ought to make
it easier to spread new techniques. But competition, the most powerful
commercial force making for industrial development, did not seem to
work in agriculture.
Professor Cairncross did not think that one could use any assumption
of continuity in studying the possible techniques available in industry.
It was not true that there was a series of possible techniques available
to suit varying relative prices of capital and labour. The main problem
was one of the diffusion of techniques, not of jumping from techniques
appropriate to cheap labour to those which implied dear labour.
As for what made this diffusion hard, Professor Cairncross suggested
that simple inertia, custom, and social institutions were the most important
elements in underdeveloped areas. These had to be tackled via educa-
tion, etc. There was no question that sheer ignorance was one reason
in underdeveloped areas for the lack of investment in modern machinery.
Often those who were in closest contact with foreigners were more aware
of w~t could be done and feared the risks of change less. But in many
underdeveloped areas the scale of operations was too small. When
purchasing power was low, and the market small, it was not always pos-
sible to use modern techniques. A machine to meet so small a market
might simply not exist. There had been no real move towards the
'miniaturization' of mechanical applicances, apart from domestic appli-
ances where the trend derived from the very large number of American
homes. The use of such applicances also presupposed the availability
of electric power, spares, etc. Engineers might help underdeveloped
areas by concentrating on ' miniaturization', but they seemed to be
moving towards larger units.
Professor Cairncross argued that where there was a movement towards
higher capital intensity, as with automation, this need not raise the capital-
output ratio. So much more output was obtained from the larger capital-
intensive investment that the ratio usually remained much as before.
In one case where there had been a choice between mechanical and
manual methods of spinning, the Indians had found that the simpler,
421
manually-operated machines used more capital as well as more labour
per unit of output. In the real world one did not have a nice gradation of
techniques, some for country A and some for country B. Nevertheless,
Professor Leibenstein was tackling the fundamental problem, though the
explanation probably needed to be one in terms of anthropology or
education rather than statistics. If the statistical approach were to be
tried, we probably needed more information on capital-output ratios for
different industries and for different techniques.
Mr. Berrill was sure that this was a question of choices between quite
different production functions, and not of movements along a given
function. Both capital and labour would be saved, but would often
require an increase in the scale of output that was too great for under-
developed areas. Mr. Berrill thought that one fundamental objection to
what Professor Leibenstein had written was that it was not true that
improvements were easier to make when processes were simpler. But
even if another simple technique could be found, there was a danger of
being unable to adapt labour skills to it. The movement even from the
sickle to the scythe represented a very big jump in native techniques.
On the inducement to invest, Mr. Berrill agreed that the quantity
of labour and the size of the market were both important. Yet another
important fact was that with the more capitalistic techniques each man
was responsible for a more expensive piece of capital equipment and if
he made a mistake could ruin it. For example, labour in backward
countries could do much more harm if they ruined a bulldozer rather
than a plough. There was also the nature of the expanding market itself.
It was hard to get an increase both in the size of the market and in wages.
In most underdeveloped areas it was hard to get either.
Professor Rostow agreed with Professor Cairncross that economics most
nearly resembled chunky marmalade. The discontinuities were very
marked, and depended on the way in which science and technology solved
certain problems. This set a relatively narrow range within which the
capital-labour ratio could be varied. But even when the capital intensity
was broadly set, as with the textile mill, the railroad, power from water,
and so on, there was still this narrow range for variation in the capital-
labour ratio. The marmalade contained peel as well as jelly.
One could see historically how, once the break-through had taken place,
these incremental changes occurred. If one looked at a modern economy
like the U.S.A. one found a hard core of inflexibility around which some
changes were possible. There were therefore a number of continuities
and discontinuities. There were situations where the underdeveloped
countries wanted power machinery in modern factories, but not modern
material-handling machinery, because labour was cheap.
On education, Professor Rostow agreed that this was very important,
and there were periods when good maintenance labour was scarce. But
one should not exaggerate. It was remarkable how quickly one could
achieve a high level of maintenance, through rapid education in a well-
run factory. There were excellent opportunities for education on the
.of.22
job in any factory. He did not mean to diminish the emphasis to be
accorded education in economic development but only to state that there
were only rare instances of periods when the supply of labour was short
for any substantial period of time because of an educational, as opposed
to an entrepreneurial, bottleneck. While we should not underestimate
the dangers of labour being inefficient or the need for education, we
should not be too pessimistic either. Vigorous entrepreneurs were much
morelikely to be lacking.
Professor Rostow said that in his experience anthropologists and
sociologists were not very helpful in explaining the transmission of new
techniques. He found their ideas too static and thought that they under-
estimated the speed at which techniques and approaches could be changed.
For example, they said that one could not hope for industrialization in
India unless the family system was changed. Yet the response actually
being obtained there was what the economist would have expected. One
needed the insights of the behavioural scientists, but they suffered from
the same weaknesses as the static, classical economists.
Professor Cipolla said that he could not resist Professor Robinson's
call for the co-operation of economic historians. He had been very
interested in Professor Kuznets' claim that essentially we were today
witnessing and studying the world-wide diffusion of the Industrial Revolu-
tion. However, while economists seemed generally inclined to think that
this diffusion was happening at an exceedingly slow pace, looking at
things from a long-range historical perspective, Professor Cipolla had
the feeling that the diffusion was possibly too rapid. The only event in
history which we could compare with the industrial revolution was the
neolithic discovery of agriculture. The Neolithic Revolution occurred
sometime around 9000 B.C. in the Near East, and it took 7000 years to
reach England. The industrial revolution covered the same distance
in less than 200 years. Economists might think this was slow, but as
an economic historian, Professor Cipolla was frightened by its speed. It
was bringing new techniques to societies that were not always culturally
ready for them.
Professor Gersckenkron also commented on the question of the speed
of diffusion. He thought that the present rapid speed of diffusion did
imply some dangers but that if the industrial revolution had not
stopped at the boundaries of Russia in the nineteenth century and the
early twentieth century then perhaps we should be less afraid of Soviet
Russia today than we were. Being late in this kind of process could
be just as dangerous as being early. As for the international stock of
knowledge and its diffusion, an important aspect was that of imitation.
The question was what should be taken out of this existing stock of
knowledge, and there he did see regularities. The stock of knowledge
was not homogenous, and a backward country could choose. For example,
when Russia was first building blast furnaces, she began by imitating the
U.K., later she copied Germany, and finally, after 1900, the U.S.A. In
order to get the biggest blast furnace this was the only possible procedure.
433
The Economics of Take-off into $ustained Growth
This raised the question of the connexion between capital and technology.
Russia wanted to use the most recent techniques, and was prepared to
pay the price of a higher capital intensity if this were necessary.
On the other hand, if one took a smaller country like Bulgaria, from
1900 to 1940, one had a very high rate of growth of manufacturing out-
put, but without structural changes. If one put the data into a Cobb-
Douglas function, for the first and higher orders of industry, one would
find that there had been only a negligible rise in productivity. If one
were able (which would be more difficult) to do the same thing for Russia,
one would find a big rise in productivity, and also a big rise in capital
intensity. Capital and technology had been complementary.
On the question of expanding markets, Professor Gerschenkron said
that as he read the memoirs ofRussian engineers and entrepreneurs, he
could not fail to be impressed by how forward-looking they were. First,
they feared obsolescence ; second, they were very impressed by the idea
of an expanding market, and chose the size of enterprise that was appro-
priate to the future rather than the present.
Professor Cootner wondered whether differences between historians
and model builders did not all too often arise because when the historians
saw an incorrect assumption on a diagram they assumed that the whole
analysis was incorrect. So, for example, several participants had thrown
doubt on the assumption of Fig. 1 of Professor Leibenstein's paper that
more alternative techniques were available where the process in question
was very capital intensive. To a large extent, the shape of any production
function was a question of fact. Professor Cootner said that he had
himself studied production functions, and got the impression that there
was greater variation in that region of a function where modern, advanced
economies were operating. If one looked at a modern power plant, one
could not fail to be impressed by the large number of possibilities avail-
able. This was even more true if one was careful not to confuse changes
between functions with movements along one or the other of them.
In power stations changes in thermal efficiency over large ranges of
size were not considerable. Yet people in the industry spoke of technical
change when it was merely a question of a new plant. It was important
not to confuse the two things. Professor Cairncross had suggested that
underdeveloped countries found new techniques superior, despite low
wages. This was connected with what Professor Leibenstein said on
page 186. One could have lower labour costs and still find it economic to
install capital-intensive plant.
Professor Landes returned to the capital intensity of Russian iron and
steel. His impression was that up to 1900 output per blast furnace had
been low, and he wondered if it had been ideological pressure which had
led to the introduction of bigger furnaces than the country could really
afford. It might, however, be a good policy for a follower country to
choose deliberately to use the latest technology, especially if techniques
were developing very rapidly. So, while the Russian decision to install
large blast furnaces before 1914 might seem to have been mistaken, in
424
the course of time, and with a high rate of growth it had been proved right.
Professor Leibenstein said it was quite clear that the scope of the dis-
cussion had been much wider than that of his paper. He had realized
that this would happen, and had said on page 186 of his paper that: 'There
is very much more to this problem of investment determination than the
points made in this paper. What follows does not pretend to be a theory
of investment. It is only part of the picture. I simply want to sketch
some notions about the nature of the production function and the nature
of technical progress that would support the type of investment functions
under which low rates of investment would exist in the pre-take-off stage,
and high rates afterwards.'
On simplification, Professor Leibenstein wondered if it really was
true that one would have more distinct and different techniques at low
capital-labour ratios than at high ones. He had suggested the opposite.
He thought that one should distinguish between past inventions that were
spectacular and which had led to a simpler process, and those made in
an advanced country, where a minute division of labour and of simplifica-
tion of manufacture meant that large numbers of individuals were each
able to concentrate on a small aspect of the production process. This
meant that large numbers of people were in a position to make improve-
ments in their own small part of the production process, and this was
why he thought that discontinuities were smaller in more advanced
countries. He agreed that one could get some very spectacular improve-
ments in advanced countries, but things went the other way too.
Professor Leibenstein said that if he were to rewrite his paper, he
would make the last points first and vice versa. He would put the third
part first and stress that the bundle of techniques from which the entre-
preneur could choose would depend very much on what was in his mind,
on the amount of information he had, and so on. In an underdeveloped
country the amount of information the entrepreneur had was small.
Knowledge was scanty, and he could only consider the few alternatives
he knew about. With this discontinuity of knowledge, the production
function might well be as he had suggested.
The second point would have been that the locus of technical progress
affected the number of alternatives known to people. He had really
left out the question of scale, and if he were to rewrite the paper, he
would not bring it in. Technical progress would currently be taking
place where both output and the capital-labour ratio were high. The
limiting factor on a shift in techniques was not only lack of alternative
techniques at so low a scale, but the impossibility of any shift at so low
a scale. The third point would have been that the locus of possible
techniques was discontinuous. It was not of particular importance why
the techniques were discontinuous ; capital goods were not made in all
possible sizes, and we should accept that.
He agreed with Mr. Mathur that many possible techniques were
available in underdeveloped countries, but not all of these were efficient
ones. He had not tried to argue that all production functions were as
425
he had assumed ; all he had suggested was that they existed in a suffi-
ciently large number of industries to mean that it was easier to shift to
new techniques in an advanced country. There were many reasons for
this, but he would especially mention the fact that agriculture was very
important in countries with low capital-intensity. Professor Leibenstein
said that while simple inventions might not be expensive in capital (though
he wondered if this was equally true in terms of output and wages) what
was important was really the whole cost of the shift including the cost
of increasing the amount of knowledge and showing people new tech-
niques - and this added to the cost of the change.
Professor Bentzel had wondered whether one really could assume
that a rise in wages was exogenous, so he would like to explain what he
had in mind. He had been thinking of two alternative processes of
change, in one of which the change would work and in the other of which
it would not. In the existing underdeveloped areas, it was impossible
to find closely-similar techniques. If entrepreneurs thought it reason-
able to expect a major change in the whole situation, including a rise in
wages, their inability to change to new, but fairly similar techniques,
meant that these expectations were not fulfilled. In a developed country
such expectations could be fulfilled, with the rise in output per head suffi-
cient to allow higher wages to be paid. He agreed that there were many
other reasons why it might not be possible to raise output per head, but
he had been concentrating on some particular situations where technical
progress was not relevant, and others where it was.
Professor Leibenstein emphasized how much he agreed with Professor
Robinson that the stress should be on other elements besides capital,
but stressed that it was important to realize that without investment
many of the improvements we were considering simply were not pos-
sible. He thought this very important for underdeveloped areas where
there was no steady investment or expansion which could lead to new
techniques.
TWELFTH SESSION
THE DISCUSSION OF THE PAPERS
BY MR. BOSERUP AND PROFESSOR BULH~ES
Dr. Singer introduced the two papers, saying that Professor Landes
had already expressed the hope that we might bridge the gap between
theory and the current problems of underdeveloped countries. The two
authors each possessed the kind of experience required to do just this.
Professor Youngson, in his book Possibilities of Economic Progress, had
said : 'When thinking about economic progress, the most important thing
to decide is what not to think about'. One thing that could not be avoided
was the rdle of agriculture, since- at least until this meeting- econom-
ists had agreed that higher agricultural productivity was a quite essential
pre-condition. Unanimity was not proof, but it was important. Perhaps
4z6
we tried to balance what we regarded as the rather unsophisticated talk
of those in underdeveloped areas about industrialization and the shortage
of capital by more sophisticated talk about human factors and agriculture.
This emphasis on the agricultural pre-condition might be connected
with the reasonable view that, where most people were farmers, develop-
ment which did not benefit them was not worth the name. Even if
obtained through confiscation, taxes, unjust land tenure systems or
worsened terms of trade, higher agricultural productivity suggested that
the farmer should benefit. But we must realize that if we added this
value judgment to the analysis, the increase required in agricultural
productivity would be very high, since poor farmers would want to eat
and retain more food as they became better off. Once again, we had an
example of what we might term quantum economics. A small increase
in agricultural productivity might not raise deliveries of agricultural out-
put ; for that a large rise would be needed.
One way of getting such increased deliveries might be to allow farmers
more of other goods (incentive goods) to buy. Here we found that in
a free economy the agricultural pre-condition had its own pre-condition
- a bigger supply of manufactured goods. The country papers had
emphasized the lateness of the rise in agricultural productivity, certainly
in Britain, Japan, and Russia. Professor Rostow could derive comfort
from having been attacked from two sides. Professor Landes had said
that the Rostow scheme was too jumpy, with its emphasis on initial
acceleration, to do justice to the gradualistic development of developed
countries. Others had said that the orderly sequence of the Rostow
model did not allow for the necessary compression of the various elements
of growth required to get underdeveloped countries over the population,
and other, humps. These two criticisms were not completely inconsistent;
they had in common the view that increasing degrees of backwardness
required progressively shorter periods before take-off. But now Mr.
Boserup concluded his paper with the opposite hypothesis that, in the
future, underdeveloped countries would creep into growth rather than
take-off. We were clearly far from agreement.
Dr. Singer said that he could not forbear pointing out that the statistical
evidence was not very favourable to the agricultural pre-condition thesis.
First, the productivity differential between agriculture and industry tended
to diminish as we moved from poorer to richer countries ; industry was
more efficient as compared with agriculture in underdeveloped countries.
Mr. Boserup convincingly explained all the special difficulties of trans-
mitting technical progress to farmers, but, if a rise in agricultural
productivity were a pre-condition, the relative degree of agricultural
inefficiency should be lower in underdeveloped areas. This did not
appear in the statistics.
Second, the rise in productivity in agriculture as compared with non-
agricultural activities was not higher since 1950 in underdeveloped than
in developed countries. This too seemed to be implied by the pre-
conditions thesis.
Turning to the papers themselves, Dr. Singer said that Mr. Boserup
dealt with the general problem, and stressed the mutual interdependence
of agricultural and industrial growth. On page 204 his discussion of the
'scissors crisis' in Russia and of Poland showed that here it was the
industrial 'pre-condition' that was lacking. On page 206 he recorded as
the general case the fact that because agricultural enterprise was tied to
a particular piece of land, innovation could not be introduced by the more
normal process where new and traditional firms grew side by side. Exist-
ing enterprises had, so to say, to be conquered from within. The tradi-
tional cultivator had either to be changed or removed. On page 216 Mr.
Boserup returned to the same theme with reference to South Asia, and
it would be interesting to hear from Professor Rostow how this fitted
into his own scheme.
The second part of the Boserup paper dealt with four types of land
tenure system - in descending order of developmental efficiency the
British, Eastern, French, and Mediterranean. To him, this was an ex-
tremely interesting analysis. If novel, which he could not judge, it should
be a landmark in the development of growth economics. The immediate
problem was that Mr. Boserup's ranking (with East Germany and Russia
ahead of France) did not agree with Professor Gerschenkron's or indeed
with Professor Rostow's. This required some revision of thought some-
where, and was especially important since Mr. Boserup carried over his
bad opinion of the low developmental value of the peasant-owner system
into his views on South Asia.
This question of South Asia was dealt with in the third part of the
paper. A key argument was that fear of unemployment and other social
consequences prevented the carrying-out of the brutal policies that had
been needed in Europe to bring in efficient land tenure. He was not
sure that Mr. Mathur would agree, having criticized the desire to intro-
duce mechanization into Indian agriculture. This unresolved difference
of opinion over the facts needed settling. However, assuming that Mr.
Boserup was right, presumably the kind of social consideration that he
had in mind was Western ideas about the Welfare State. If Mr. Boserup
was right, and this was related to what Professor Kuznets had said about
the accumulation of knowledge, the acquiring of such knowledge about
economic and social organization might well be harmful to the under-
developed countries in that it might impede them from adopting policies
that were necessary for take-off. Nor was Dr. Singer quite sure that
Mr. Boserup was fair to the share-cropper. Finding it hard to explain
what had happened in Japan, Mr. Boserup suggested that starvation was
the driving force. But Dr. Singer was not sure that this was a good
argument for minimizing its importance. Perhaps Mr. Boserup's low
opinion of share-cropping should be revised with reference to Japan.
Perhaps experience in the Mediterranean could be refuted by this
example.
Dr. Singer raised three specific questions. First, he thought that on
page 202 the suggestion that a low elasticity of supply in agriculture could
428
not be made good by imports of food without worsening the terms of
trade contradicted what was said in Professor Bulhoes' paper. Nor
could he square Mr. Boserup's description of the 'Eastern type' system
on pp. 210-11 with Professor Gerschenkron's view that emancipation made
it harder to move to the towns. Finally, on share-cropping, one could
just as easily take exactly the opposite view from Mr. Boserup and say
that this was a system giving high incentives ; so he was unhappy about
the way Mr. Boserup ranked the various systems.
Turning to Professor Bulhoes' paper, Dr. Singer thought that this made
a valuable contribution to the discussion on Professor Leibenstein's paper
by emphasizing the value of diversification for development. He argued
that the initial stage could include any form of specialized activity,
broadening out later into diversification. This was related to the idea
of leading sectors, though not identical with it. It might add to our
knowledge and improve our policies if we were to look at these ideas,
and especially the great truth that the more diverse an economy was the
greater would be the opportunities for progress. One specific question
he would like answered, and which he hoped would be, was whether Sio
Paulo could have ever developed without coffee. The answer seemed
to be 'no', but he was not entirely happy about this. Professor North
had already noted, in his discussion of the American South, that the
production of a big and efficiently-produced primary crop did not lead
to growth in that same area. The growth of Sio Paulo could be attributed
to the systematic and artificial exploitation of Brazilian primary export
producers. As the chronic inflation of the past century had gone on,
the external value of the currency had not been adjusted to allow for
inflation, but there had been a high export tax on primary produce
(including coffee) and subsidies on industry.
The post-war boom had helped the coffee producers to overcome
this handicap, but primary producers in other regions outside Sio Paulo
had moved there to escape their difficulties. How far was the growth of
Silo Paulo under these artificial conditions really proof of the fact that
once one had a successful export crop diversification would follow ?
When Professor Bulhoes described the obstacles to the development
of foreign trade as a leading sector during the take-off, one of the things
about which he said very little was the chronic handicap which primary
producers suffered because of low elasticities of supply and demand.
They also experienced competition through the development of synthetic
substitutes, and the rise in agricultural productivity in developed countries.
These kinds of difficulty in the way of foreign trade as a leading sector
should all be remembered, and Professor BulhOes made a plea for price
stabilization schemes supported by taxes on consumers in more developed
countries. One of the striking developments of our days was that the
propensity of the developed countries to give aid was now greater than
to make trade concessions. The slogan 'Trade not Aid' seemed to have
vanished, and, though we never said it outright, our policy now seemed
to be 'Aid not Trade'. Professor Bulhaes did not need to conceive of
the scheme being financed by a tax on the consumers of coffee, because
that was contrary to his whole philosophy.
Professor North said he could only try to pick at parts of this enormous
subject. To begin with, he thought that both papers made it clear how
important this question of agricultural development was during the period
before take-off. It was important not only in leading to the changes which
were required for the reconstruction of society, but for economic growth
itself. Indeed, he would say that agriculture has a key role, meaning that
it not only expanded industry but led, for example, to a more diversified
pattern of home manufacture. It was also clear that in many countries
diversification had not emerged. There had been spurts of income
because of various pressures, but none of these had come to anything.
As for what he had said about America's South, he thought the crucial
points were made in his paper. The complementarities and comparative
advantages discussed were relevant not only to the U.S.A. but to agri-
cultural economies in general.
He would not comment at length on Mr. Boserup's classification of
systems, but his impression was that British historians would not agree.
As for exports, what one was trying to do was to use export expansion to
assist the domestic sector, and a critical point was that this implied giving
a predominant role to agriculture.
Finally, there was the question of the terms of trade and here he
thought that the 'Prebisch argument' was wrong, because it held that
since Britain's terms of trade had improved after 1880, those of the
primary producers had become worse. In fact both had improved their
position. The prices paid by the U.K. were measured c.i.f. while those
of primary producers were measured f.o.b. This was a period of enormous
falls in freight rates which lowered the price paid by importing countries
without causing any similar fall in the price received by the primary
producers. Other arguments were equally false, for example the claim
that the movement of people to the new agricultural lands at the end of
the nineteenth century was irrational because the price of wheat was
falling ; for costs were falling too. Much of the historical evidence on
what happened to agriculture needed to be re-thought.
On the contemporary issue of the terms of trade, he felt much less
precise. It was one thing to say that the terms of trade had not behaved
in a particular way in the past, but quite another to say that they would
continue to behave differently in the future. The fears of a permanent
shift of the terms of trade in favour of the primary producers that had
been expressed at the end of the war no longer held. It also had to be
remembered that trade in primary products, with the exception of par-
ticular commodities like petroleum and bauxite, had grown less rapidly
than trade in other things. Though the period in question was only a
short one, there were good reasons for this. In the nineteenth century
there was a growing demand for primary produce and no danger of the
development of synthetic substitutes which, since they were often pro-
duced from ubiquitous raw materials, could be produced without the
430
same volume of imports. So while it had been agricultural development
which had set off expansion in the U.S.A., this need not happen today.
Then there was the twentieth-century conflict between social and
economic efficiency. He had been persuaded by Mr. Boserup's points,
and hoped that others would elaborate the argument. He merely wanted
to emphasize that there were immense potentialities for increased pro-
ductivity in agriculture. We must never forget that the rise was as rapid
as it was in industry. American experience showed that big increases
in productivity could be gained by relatively cheap investments in such
things as new kinds of seeds or ways of eliminating disease.
Where would this lead the 'one-crop' economies ? On the one hand,
there was the dilemma of their dependence on agriculture ; on the other,
the fact that we knew of no good alternatives in the short run. In many
cases, the ability to produce alternatives was very much inferior and yet
underdeveloped countries seemed quite willing to abandon their export
economies and to industrialize.
Professor Gudin thought that the Round Table had all too often con-
fused economic development with industrialization, regarding agriculture
as an inferior activity. This was harmful, because it led underdeveloped
countries to neglect agriculture where the productivity of capital could
easily be much higher than in other activities. This had been well under-
stood by economists like Nurkse and Kaldor, on visits to Latin America.
But industry retained its superior prestige and agriculture continued to
be neglected. As Mr. Mathur had said, such things as the improvement
of seeds, prevention of erosion or pests, and the better use of fertilizers
might yield enormous results, while requiring small investment. Again,
governments neglected agricultural research: unlike industrial research,
which the firms could carry out for themselves, agricultural research and
the dissemination of its findings required government action.
Professor Gudin said that in Argentina the alluvial soil was over one
metre deep. Before 1930 this country had reached a high standard of
living, with a well-fed and well-dressed population, based solely on
agriculture. This successful agricultural economy was ruined by Peron,
who maintained a low internal price for wheat and a high external one.
Naturally, other countries refused to go on buying Argentinian wheat,
while the farmers reduced their output of a crop for which they were
being paid only a fraction of its price. The same happened over meat,
Britain refusing to pay the prices asked. But for this error in policy Argen-
tina could have remained a prosperous ecoMmy, with a high standard
of living, based on agriculture. However, Professor Gudin did not regard
Argentina's attempts to industrialize as a mistake, despite her lack of
resources like coal and iron ore, provided that industrialization contri-
buted to the country's welfare and did not represent a burden.
Professor Gudin said that the terms of trade argument was usually
put forward against agricultural development. In that respect he would
merely support all that Professor North had said about the Prebisch
argument, which was without foundation. He would just add that one
431
could not compare the terms of trade between the 1870's and the 1930's
because there was hardly any article of trade that appeared in both years.
The simple question of computing freights, mentioned by Professor
North, was enough to make the analysis valueless. It was true that
agricultural countries were subject to greater variation in the prices of
their products but industrial countries, while enjoying greater price
stability, were subject to unemployment and low exports during depressed
periods.
Professor Gudin thought that the important rule for underdeveloped
countries was to avoid industrialization at whatever cost. Admittedly,
highly-protected industry could pay higher wages than agriculture, but
the unqualified claim that a transfer of labour from agriculture to industry
raised national product was not true. To start with, one could not com-
pare the product of a worker in agriculture, with virtually no tools, with
that of a worker in industry supported by, say, ten thousand dollars worth
of machinery and equipment. One could rather show that the same
capital, if invested in agriculture, would have had higher productivity.
An industry that required 100 per cent tariff protection was a burden
and not an asset to the country. It was difficult to understand the
necessity of such protection, considering that industrial techniques
could be transferred easily from one country to another, which made large
differences in cost inexplicable. Superiority in the quality of labour and
in external economies in developed as compared with underdeveloped
countries were largely compensated by lower wages in the underdeveloped
ones.
For Professor Gudin, economic development could be summed up
in two words - demand and productivity. A country had to have an
international demand for its products whether these were industrial or
agricultural. Productivity was essential. Due to lack of satisfactory
productivity, Brazil had failed to 'take-off' with sugar, cotton, or rubber.
She lacked the essential human element, capable of sustaining high pro-
ductivity. The human element and technology were the most important
factors for progress. This was why countries populated by Dutch,
Germans, Swiss, British, etc., could never be poor because where natural
resources were lacking human ability found ways of replacing them. The
U.S.A.'s great advantage was that she began with a territory empty of
population, so that its whole population was created by European migra-
tion, whereas countries like Mexico, Peru, and Bolivia had to face the
tremendous task of raising the level of civilization of a very large Indian
population.
Finally, Professor Gudin said that he agreed keenly with what Dr.
Boserup said in the second part of his paper on agrarian reform and
'disguised unemployment'. One should not, certainly, base agrarian
refonn on humanitarian rather than efficiency grounds. Poor farmers
lacked health, literacy, know-how, credit, and, last and least, land. It
was these other elements which the farm labourer needed and, without
them, no agricultural reform could succeed. As for disguised unemploy-
432
ment, Professor Gudin pointed out that merely transferring labour from
the land, without changing agricultural methods of production, would
simply result in a reduction of output. Marginal productivity, though
it was low, was nevertheless positive.
Professor FaUfJel said that he was not sure, from his interest in agri-
cultural reform in South-east Asia and in Mrica, whether or not he
agreed with Professor Gudin. Mr. Boserup had put forward some useful
theories on agricultural reform. The economic historians tended to
oppose what had happened in agricultural reform in the eighteenth and
nineteenth centuries to what happened today. Everyone today thought
that the question was simple ; a need to escape a vicious circle, to improve
the lot of the peasants, put the wealth of the landowners at the disposal
of the state, and so on. Mr. Boserup's paper was helpful in showing the
need to regroup peasants to make a community for development.
Professor Marczewski thought that when he asked on page 202 : 'Are
there examples of successful take-off without a preceding or concurrent
expansion of agricultural output and productivity?' Mr. Boserup's
analysis seemed to ignore France, whose experience exactly confirmed
this, especially after 1715 or 1720. French agriculture developed con-
tinuously, and the huge rise in productivity continued after population
had begun to fall. He agreed with Mr. Boserup, on page 212, that perhaps
no very important change in the French social structure took place in the
century before take-off, but thought that in the long run the abolition of
feudal rights did have one big result in that it prepared the way for changes
in the nineteenth century.
Professor Marczewski suggested that there was a negative example
which one could quote as confirmation of the crucial rdle of agriculture,
and this was the U.S.S.R. and the other People's Democracies. For
doctrinal reasons they had initially stressed industrial development and
neglected agriculture, but since 1953 this policy had been dramatically
changed and agricultural development accelerated. He would insist on
only one point, and that was on the terms of trade. Professor North had
criticized the Prebisch argument, but there was another sense in which
the terms of trade were very important. It was instructive to look at
the internal terms of trade between agriculture and industry and see how
big an advantage there was in producing industrial goods at home rather
than importing them against agricultural exports.
Mr. Mathur congratulated Mr. Bosrup on the way he had dealt with
some of the Asian agricultural problems. Agrarian structure was, how-
ever, a political question too, and in democratic countries where there
were a large number of provinces each with autonomy on questions
affecting land, reform might take a fairly long time to achieve. But
much agricultural advance could be secured in the meantime by a govern-
mental effort to promote all-round community development, the intensive
use of land and the use of idle resources and manpower. It was true
that there was shortage of labour in some areas in the harvest season, but
at other times the labour surplus was high. In Bengal, as many as 180
433
days a year were available for extra work, and in few rural areas in India
there were less than 100 spare days. The harvest season could be length-
ened by staggered sowing, which could be done if minor irrigation works
were undertaken extensively to avoid dependence on the rains. Too little
of this had been done by the government of India, and on this neglect
of improvements which required little capital he would like to refer
Dr. Singer to D. K. Rangnekar's study for the Royal Institute of Inter-
national Affairs, London (1958), page 36, and the Ford Report on India's
Food Crisis (1959), page 237.
Professor Dupriez thought that an important question that had been
ignored was the difficulty of transforming institutions to change from a
subsistence to a monetary economy. The more backward an economy
was the greater was the importance of subsistence agriculture. There
had even been much in Europe 300 years ago, though the more advanced
social structure and bigger ruling class had had some effect. To turn
a subsistence economy into a monetary one involved something rather
like the barter terms of trade. If the agriculturist had to start buying
food it would cost more than when he supplied it to himself. To be forced
out of this he had to be given a bigger reward, and made to feel he was
gaining even though some things cost more.
As for the possibilities of development, the fact that it was hard to
achieve implied that it was not easy to introduce roundabout methods
of production and to acquire capital and fertilizers without a monetary
economy. It had been hard to introduce fertilizers in Mrica, for example,
because one could not have fertilisers without a monetary system.
Professor Hoffmann wondered whether one should not split agricul-
tural labour productivity into that in the animal and that in the vegetable
sector. As productivity in animal farming was higher, he wondered
whether average labour productivity would not rise during take-off
because of a shift from vegetable to animal products.
Professor Boudftlille stressed the importance of urbanization for agri-
cultural productivity. Especially in countries like Brazil, and in the Sio
Francisco valley, one could not have modern agricultural development
without a nearby town. A modern Fazenda needed a town where it
could buy all the things labour needed. Professor Bulhaes had spoken
of the importance of agriculture to take-off, did he think one should add
the contribution of mineral production, especially iron ore? Itabira's
development would not lead to higher profits but to larger hard-currency
exports. Foreign trade would thus allow more investment and a bigger
employment multiplier.
Professor Rostow suggested that the Japanese case deserved a more
special status in the array of patterns than Mr. Boserup had allowed for
it in his paper. He also thought that, whatever the difficulties suffered
by the Japanese peasantry, the Japanese had now created a pool of know-
ledge to improve the lot of labour-intensive agriculturists everywhere.
Professor Rostow thought that the efficiency of the large unit in agri-
culture had been overestimated, and that of the peasant underestimated.
434
On national p,roblems, he thought that it was premature to suppose that
the problem of agriculture in China had been overcome. Again, while
he agreed that on the whole the difficulties in India supported what
Mr. Boserup and Professor Leibenstein had said about the real costs of
transforming production functions, the Indian task might be easier in
the light of knowledge gained in Japan and Formosa.
Mr. Berrill thought that the main feeling about agriculture was that
it was the hardest field for any economic historian to generalize about.
If one asked whether a boom in agricultural exports could lead to take-off,
the answer was that there were many cases where it did, and many where
it did not. One had to capitalize on the agricultural boom by diversifying
the economy, and this meant industrialization. Although Denmark was
so much an agricultural country, more than 50 per cent of her output
was now industrial.
Mr. Boserup had produced a pattern for agricultural systems, and
this made it easy for others to produce equally-attractive alternatives.
He thought one could reasonably say that the large-scale producer in
agriculture was always in trouble, and that the glamorous role of the
large-scale producer had been over-emphasized in the U.K. Peasant
production seemed to continue alongside the large producers. The main
point was that it was almost impossible to set a pattern with agriculture.
One could prove anything by reference to it.
Mr. Boserup replied to the discussion of points in his paper. He
might have exaggerated the positive role of the big agricultural unit in
pre-revolutionary Russia. What he had termed the 'eastern' type was
characteristic - apart from East Germany - of only parts of northern
Russia. Dr. Singer had also suggested that the French pattern of peasant-
ownership had not been so much of an obstacle to development. This
was evidently a matter for discussion. Our ideas about the timing and
tempo of economic growth in France would in any case have to be recon-
sidered in the light of the new figures put forward by Professor Marczewski.
Still, Mr. Boserup thought- and here Professor Marczewski seemed to
agree- that the absence in France of a sudden and wholesale agricultural
reform had a lot to do with the fact that small-scale enterprise, with
vociferous political interests, had continued throughout the nineteenth
century to be predominant in the French economy.
He would find it more difficult to agree that the evils of the share-
cropping system had been exaggerated. The trouble with this system
was not only that the share-cropper was uninterested in improvement, it
also fitted in only too well with the system of social status and of attitude
to work under which the landowner would try to avoid even doing super-
visory work.
Professor Gudin had mentioned a general tendency in underdeveloped
countries to frown on agriculture. He thought one ought to be more
precise about this. Ten or fifteen years ago it was certainly true that
the problem of growth in underdeveloped countries was seen as that of
promoting industrialization and nothing more. This was not surprising,
435
for the late 1940's were a period of agricultural reconstruction. Agri-
cultural output was increasing by leaps and bounds, and one could
understand why people should have thought that agricultural expansion
would follow automatically if only urban demand were raised through a
policy of industrialization. However, since then there had been a big
change, at least in Asia, where it could certainly not be said that people
were now unaware that agriculture might be the decisive bottleneck. He
thought that Professor Gudin might have misunderstood his attitude to
agrarian reform. It was certainly very important in Asia, but he did not
see how it could come about, in a sufficiently radical way, in view of the
strong political pressure for land and tenure policies designed mainly to
protect the interests of small- and medium-sized farms.
Mr. Boserup agreed with Mr. Mathur that no serious efforts to foster
co-operation had been made in India, though there had been a lot of loose
talk. As for the reserve of agricultural labour, he thought that this could
be exaggerated. The peasant family was not easy to mobilize to work
for anyone else ; there was also the fact that involuntary idleness among
agricultural labourers was far smaller than was often supposed.
Professor Rostow and Mr. Berrill had suggested that, in the dis-
cussion of the relative virtues of different agricultural patterns, he had
put too much faith in the productive importance of the size of the holding.
There was perhaps here a slight misunderstanding. His faith was not
so much in size as such. The important question was whether the agrarian
structure gave room for the exercise of a genuine entrepreneurship. This
would usually require market sales and hence a certain minimum size for
the cultivating unit.
Professor Bulhiies recalled that Dr. Singer had asked whether Silo
Paulo could have progressed without coffee. This was a hard question.
He thought that coffee was the basis of capital formation, and one needed
efficient production as the basis for new investment. This implied that
the two things needed for take-off were, first, an efficient technique for
mobilizing savings and, second, a system for using these savings reason-
ably. Mr. Boserup had said that in Mexico a great deal of industrializa-
tion had been followed by a relapse into stagnation, and growth had been
resumed only after land reform. This was correct up to a point, but
stagnation in Mexico came after the nationalization of petroleum. Later,
tourism was the main source of capital formation, especially in irrigation,
which had been the key thing in Mexico. So the main point was that
there must be a big source of saving. Without investment, the use of
natural resources was the main starting-point for take-off. He wanted
to refer to the paper by Professor Cairncross which said that if income
rose, there would be greater opportunities for investment, so that a rise
in investment would follow a rise in income. He thought this was perhaps
even more important than Professor Cairncross did, and therefore did not
think Sio Paulo could have progressed without coffee.
Professor BulMes thought that with agriculture and mining, the
essential thing was not technical progress, but an expansion in the market.
436
It was not just a question of the terms of trade; for then one was thinking
internationally. Even within a country agricultural prices were fixed
differently from industrial ones ; that was why there was the policy of
price parity for agricultural products in the U.S.A. There was always
the fear that such a programme would lead to over-production. This
was why he had suggested his own scheme of taxation. He did not insist
on it, but liked the idea of using the consumers' surplus arising from a
fall in price in imports. This would go to exporters, not to protect pro-
ducers but to allow investment to be financed.
THIRTEENTH SESSION
BY PROFESSOR CAIRNCROSS
Professor Solow said he would concentrate on only two of the ideas in
Professor Cairncross's paper. It was interesting that we came to capital
formation so late in the meeting, since not long ago it would have been
in the forefront of everyone's mind. Now, the tendency was to play it
down, and, while this had been a move in the right direction, it should
not be allowed to go too far. Professor Robinson had mentioned the
study, footnoted by Professor Cairncross, by Reddaway and Smith of
'Progress in British Manufacturing 1948 to 1954 '. This showed that even
over a six-year period, increases in physical capital and labour could only
account for a fraction of growth. There was a very large 'residual',
presumably caused by better management, higher-quality labour, tech-
nical progress, and possibly internal or external economies of scale in
firm or industry.
This result had been quite generally noticed. His own data for the
U.S.A., confirmed by different methods by Kendrick and Fabricant at
the N.B.E.R., suggested that over the forty years, 1909 to 1949, perhaps
as much as 80 per cent of the recorded rise in non-farm product per man
hour was due to 'the residual '. Professor Aukrust found similar results
for Norway in the paper cited by Professor Cairncross, and had also
inaugurated a large-scale cross-country study at ECE, whose results
were awaited with interest. Similarly, the Kuznets' figures for Japan
provided a strong parallel.
In the form the work took, it seemed to say that, with giflen inputs
of K and L (and why did people always worry about the units that K
was measured in, and never the units for L) output would anyhow rise
at 1! per cent per annum, or some other figure, even with no net invest-
ment at all and a constant labour force. The apparent moral was that
capital formation was less important for development than might be
supposed and that the important thing was somehow to build in the
'free ride'. There was much truth in this. Although he detested the
use of the words static and dynamic to mean bad and good, perhaps
437
classical and neo-classical economists had paid too little attention to this
for Ricardo, and later Mill, were writing of the stationary state as a pre-
dictable future phenomenon at the moment when the law of diminishing
returns was suffering a violent blow in the U.K. But we should not go
too far, and that for at least two reasons.
One was that though we did not know what governed the famous
residual, he suspected that much of it must result from better-trained
and healthier labour and better, more-aggressive management. These
things could not be procured without cost, and represented a kind of
capital formation. Their fruits were yielded over a long period, and
they required the investment of resources at the beginning, before the
output came. A second reason was that the model was too simple in an
important respect. It implied that all technical progress was like time
and motion study, giving higher output from the same labour and capital.
This was not plausible.
Professor Solow pointed out that mo!!t productive innovation seemed
to require new kinds of physical equipment. Capital was surely not
jelly in the short run, and new technology required at least gross invest-
ment. Though it did not necessarily require net investment, it remained
true that the higher the rate of capital accumulation was, the more rapidly
could technical change be absorbed, and the more rapid the rate of
effective technical change would be. He had worked out a model embody-
ing this kind of hypothesis, which required giving explicit attention to
the age of the capital stock. Though hard to use empirically, some
econometric work he had based on it suggested that, over a period of
two decades, sheer capital accumulation could account for a much bigger
fraction of the increase in output - not in the sense that if one had capital
accumulation without technical change one would gain so very much,
but that given the rate of improvement of technique, the social yield on
additional investment was higher.
Finally, Professor Solow said that he and a few of his high-minded
colleagues had been fighting a doomed but gallant rearguard action against
excessive reliance on the capital-output ratio as a tool of economic analysis,
and especially of planning. When people used the marginal capital-
output ratio, they seemed really to be groping for something more like
the marginal product of capital, of the rate of return on it. This was
hard to discover, but was what one had either to know or to estimate to
get rational decisions. Professor Cairncross himself almost slipped when
he wrote on page 244 about how capital formation might not lead to an
acceleration in output, if it took the form of housing or inventories which
did not add perceptibly to productivity, though they might yield a high
enough return to be worth while. Later, on page 248, he mentioned that
the absence of housing might slow growth.
Professor Samuelson had told him that in Japan there was a theory
that only plant and equipment, and mainly equipment, really mattered,
and that since their equipment-output ratio was very low, they gave a
tremendous increase in output. There were industries for which not
438
only the capital-output ratio, but also the input-output ratio was very
low I Long-lived assets might seem to have a high capital-output ratio,
but this appearance might be partly due to using an inappropriate measure
of NNP. An asset whose flow of utilities was getting closer should
appreciate in value for that very reason, and this should be counted in
NNP as a sort of negative depreciation.
Professor Bentzel said that the use of capital-output ratios, at least
marginal ones, might be all right as tools of analysis for some purposes
especially in connexion with problems of the allocation of resources.
Yet, in his paper, Professor Caimcross used these ratios in a way which
was likely to lead to a result giving too little importance to capital forma-
tion in the growth process. Professor Caimcross came to regard the
capital-output ratio as given by the state of technical knowledge. Pro-
fessor Bentzel could not accept this constancy ; the marginal capital-
output ratio could probably change very considerably from time to time
even within the same branch of industry. If we assumed that the pro-
duction function took the form q = Q(n, k), the capital-output ratio was~
and the marginal ratio
dK __!_ l
- =dQ= dn •
dQ dK Q,.t dK+Qtt
Here, Q,. 1 was the marginal productivity of labour and Q~: 1 the marginal
productivity of capital. This simple formula illustrated the elementary
fact that marginal capital-output ratio was a function not only of the
marginal productivity of capital but also of the marginal productivity of
labour and of the change in the quantity of labour. The implication of
this was that if investment led to an increase in employment, the marginal
capital-output ratio would be low ; if labour did not increase, the marginal
capital-output ratio would be high. There were several reasons for
believing that the marginal capital-output ratio would be comparatively
high in a fully employed society ; there could not be a rise in employment,
and the only possible change was in the marginal product of capital.
The contrary was true in an underdeveloped economy.
In historical terms, Professor Bentzel was less sure. At least in
Sweden, industrialization had been followed by a big rise in employment
and this was the reason why the marginal capital-output ratio was very
low. However, this did not mean that capital formation during take-off
was unimportant for growth. He thought that Professor Caimcross
might have missed this, and he did not see that the Caimcross example
of a high capital-output ratio today had much to do with what had hap-
pened in earlier times. It was especially true that the marginal capital-
output ratio had very little to do with profitability.
Professor Bentzel thought that perhaps one reason why the statisticians
put so little stress on the importance of capital formation for growth
usually was that the available investment data were not the proper ones
439
for growth analysis. The figures for investment were defined in the
national accounting sense, but perhaps this was not very useful. There
were many expenditures which obviously influenced production and
could be called investment, but which were not included in the tradi-
tional concept of investment. For example, in the Swedish metal-
manufacturing industry, expenditures on tools, research, development
work, etc., were of the same order of magnitude as investment expendi-
tures measured in the national accounting sense. In the light of this
fact it was not very surprising that it was impossible to find a good
correlation between production and investment.
Professor Marczewski thought that on page 2#, of Professor Cairncross'
paper one might attribute part of the 'residual' to movements of factors
of production from less to more productive employments. All depended
on how the calculation was made. If one took an overall residual, then
part of it would be due to shifts of labour and capital between industries.
On the other hand, this would be caught by an industry-by-industry
analysis. On page 245 of the paper, Professor Marczewski wondered what
Professor Cairncross really meant when he wrote that 'if income is grow-
ing fast, investment opportunities are likely to be expanding even faster'.
If he was thinking of the accelerator, it did not work this way. Or was
he thinking of some new long-term mechanism ?
On the capital-output ratio, Professor Marczewski thought that French
experience was illuminating. If one included land, the ratio of capital
to net domestic product was 8·3 in 1788, 7·1 in 1852, 8·3 in 1880, 8·8
in 1892, 7·8 in 1900, and 7·2 in 1911. If one excluded land, the figures
for the same years were 3·0, 3·0, 4·5, 5·5, 5·9, and 5·4. The coefficiency
without land had risen regularly, and it was only the fall in the price of
land that had kept the inclusive ratio from rising•steadily as well.
Professor Cootner thought that one possible explanation of the residual
was economies of scale. In thermal electricity in the U.S.A a large
producing unit operating at a total output of say ten times that of a small
unit, would be able to do so at only half the cost per kilowatt, at any
moment of time. A bigger plant did not require the same investment
of capital per unit of electricity produced. One also got a benefit from
more intensive use of the asset. So far as the transmission of technical
change was concerned, the main evidence was for coal-using power
stations. One had large bursts in investment as part of what appeared
to be a long cycle, which allowed excess capacity to build up. During
these large bursts, the secular rate of decline in the amount of coal used
to generate a unit of electricity rose from 1l per cent per annum to about
3 per cent. This suggested that when a big dose of investment was
undertaken, there were substantial possibilities for raising productivity.
Miss Deane wanted to support the point that capital was not a strategic
factor in take-off. Professor Tsuru had suggested that one essential for
take-off was that any surplus should always go into productive invest-
ment. He went on to argue that Malaya, for example, should oblige
foreign capitalists to reinvest their profits within Malaya. But a country
+f.O
which needed foreign capital had to make conditions attractive for it,
and accept its terms. It was not a question of having access to capital,
but of knowing how to apply it productively. In Malaya two-thirds of
such earnings were reinvested domestically, and only one per cent re-
patriated. The remainder went to inflate Malaya's sterling balances;
in effect, Malaya was actively investing abroad at that stage.
The reasons why foreigners withdrew their earnings varied. Perhaps
local or central governments were not aware of opportunities for domestic
investment. There might also be specific obstacles such as shortages of
skilled workers or raw materials. The important factor was not merely
having access to capital but providing strong inducements to investors.
Dr. Singer found it difficult to understand Professor Cairncross'
strictures in the capital-output ratio as a tool of planning. It was obvi-
ously not a guide to the allocation of investment between sectors, and
there might be systematic bias, though he was not sure in what direction.
But he did not see that the use of the overall capital-output ratio did any
harm. Provided the resources of capital, land, and knowledge were put
to good use, one could compute any ratio one wanted. Then if one
minimized the capital-output ratio, one also maximized output. He
thought that all would accept the proposition that computing the cost
of development was very useful for rational fiscal policy, and did not see
why this should be linked with the tendency to regard investment as a
'penny in the slot' process.
Professor Robinson recalled that while in Delhi he had seen papers
exchanged between Rosenstein-Rodan and Reddaway. The former's
attempts to work both ways with the overall capital-output ratio seemed
to produce improbable results : considerable discrepancies arose in rela-
tion to the amount of capital required for given expansions and the
amount of income generated by them. In the end, one had to come back
to sectoral capital-output ratios. Overall ratios dominated by the high
amounts of capital going to public utilities meant nothing. In a country
like India, one ranged from the very low ratios in clothing to ratios of 5,
7, or 10 in public utilities. To take an average figure could give one
only a misleading impression of what was needed for any specific group
of investments.
Dr. Singer was not happy about what Professor Caimcross said on
self-financing on page 247. As Professor Cairncross himself admitted,
industry was likely to have its capital needs met more fully than was
housing and other social capital when capital was scarce. At the same
time, the lack of these complementary types of capital was likely to hold
back industrial progress. How did one achieve the correct balance
between the two ?
Professor FfJU'IJel thought that a great merit of the Cairncross paper
was that it brought together many useful thoughts. On page 249 he
wanted to emphasize the basis for the fact that European countries had
little difficulty in generating finance for industrialization. The standard
of living had been much higher than in modern underdeveloped areas,
441
and wages were nevertheless quite low. This was a very different situa-
tion from that where today one often had over-population in countries
with developed systems of social security.
Professor Fauvel doubted how true it was, as suggested on page 251,
that an increase in the rate of growth of capital depended on a new
understanding of the value of capital accumulation, and a willingness to
give it priority over other objects of expenditure. This seemed opti-
mistic. In reality, savings rose because there was some pressure that
forced a rise, and this was true both in the nineteenth century and now.
Entrepreneurs were forced to acquire capital through savings by the
pressure of competition. Finally, on page 250, Professor Fauvel thought
the justification for the Rostow thesis that even before take-off 5 per cent
of the national income would be saved was that a minimum of savings
was always required because some capital was needed even in agricul-
tural regions. This was the minimum of savings needed for the renewal
of capital on a bare survival basis.
Professor Dupriez thought that uncertainty about the nature of the
'residual' should vanish if one went back to fundamental economic
theory. It then became clear that it resulted from the fact that the
industrial revolution was a qualitative process. Otherwise it would have
run into the bottleneck of full employment and labour shortage. The
unexplained part of progress was fundamental ; we had been able to
improve living conditions during the industrial revolution because it had
changed production functions. If the industrial revolution had been
purely quantitative and we could have explained the process additively,
by increases in factors alone, then marginal productivity would not have
risen. But we knew that marginal productivity was not constant.
This stressed the importance of the fact that factors of production
were not the same throughout the process. We knew that because of
technical progress output would expand even with zero net investment,
and it followed that progress would be greater if net investment was
positive.
Professor Delivanis said that Professor Solow had mentioned a dangerous
Japanese misconception. He would like to say that the same attitude
was expressed in some ECE reports, and taken up by some Greek econo-
mists who complained about the proportion of investment in buildings
in Greece.
On pages 247-8 of his paper, Professor Cairncross had mentioned
that with an imperfect market it was relatively easy for industry to get
the capital it needed. But in some countries it was difficult for industry
to obtain capital because managements tended to keep dividends down.
Shares were only bought by those who owned the firm, not for dividends
they might offer but to give capital appreciation. This sometimes made
it almost impossible to find local people to run an industry. If one
studied incomes per head, conditions before 1914 were not so favourable
as many people appeared to think. Professor Marczewski's figures, for
example, showed that income per head in France in 1913 had been only
442
$186. This was admittedly greater than income per head in South East
Europe today, but very low when compared with what we should regard
as satisfactory now. Finally, Professor Delivanis said that on page 248
of his paper Professor Caimcross suggested that the rise in the savings
ratio must be regarded as part of the growth process. He thought that
under favourable conditions one could have growth without a rise in the
savings ratio if income rose sufficiently to give greater gross investment.
Professor Aukrust thought that there could not now be basic dis-
agreement with what Professor Cairncross said about the 'residual',
though this was a different view from that expressed some time ago. The
success of the Harrod-Domar equation had driven home the idea of a
fixed ratio between investment and growth, but there was now too much
evidence for us to believe this. Table 1 set some of this out. The top
four lines gave the findings in the 1942 Tinbergen article when (with
shaky material) he tried to break down the growth rate into the contri-
bution of labour, capital and the 'residual'. The lower part of the table
gave the results so far unpublished, of a similar ECE study, using the
Tinbergen methods. Assuming a Cobb-Douglas production function the
residual had been computed as in the Table.
TABLE 1
Growth Contribution of
rate of 'Residual'
NNP Labour Capital
Tinbergen's figures ~1942•
Germany (1870--1 14) 3·4 1·2 0·7 1·5
U.K. 1·6 0·8 0·5 0·3
France 1·9 0·6 0·2 H
U.S.A. 4·1 2·3 0·7 H
ECE conclusions
Norway (1900--38) 2·7 0·6 0·7 1·4
(1948-59) 3·1 0·3 1·6 1·2
U.K. (1949-57) 2·7 0·6 0·9 1·2
W. Germany (1939-48) -4·6 0·1 -0·5 -4·2
(1950--55) 9·5 1·5 1·9 6·1
(1955-59) 4·9 1·2 2·1 1·7
Israel (1952-58) 9·5 2·2 3·4 3·9
• J. Tinbergen, 'Zur Theorie der langfristigen Wirtschaftsentwicklung', W~ltw.
Archiv, 1942, I.
Norway gave the kind of results that one would expect, while the
German figures were interesting in that they showed the effects of the
war and of subsequent reconstruction. Everyone was impressed by the
German performance, and the figures showed that in 1950--55 with
economic reorganization there was a high residual of 6·9 per cent, falling
to the more normal 1·7 per cent after this unusual period was over. The
443
exception was Israel, which had been able to increase the capital stock
at the high rate of 11 per cent, but had nevertheless had a residual of
3·9 per cent. If one used more refined production functions, such as
that outlined by Solow in the introduction to the discussion, more of the
residual would have been attributed to capital, but the remaining residual
would still be a large one.
Professor Aukrust thought there were two important implications.
One was that it was not necessary to have a spurt in investment to get a
spurt in income. It had been pointed out that take-off in Japan had not
been accompanied by an associated rise in savings. But he wondered if
there could be any case of a take-off where there was not an associated
increase in the skill of the population. Perhaps the Rostow hypothesis
needed to be modified to show that rising saving was not an essential
part of the take-off process.
The notion of a constant capital-output ratio, sustained for technical
reasons, was the second assumption that could not be continued. If one
thought that a Cobb-Douglas function was a good approximation to the
truth, then investment only played a limited role in raising output. The
capital-output ratio itself was partly determined by the investment rate.
With net investment zero, there was still some growth. A higher marginal
capital-output ratio should have been expected for the 1950's, because
investment had been high.
Professor Cairncross seemed to have questioned the Norwegian sav-
ings data for the late nineteenth century. Nevertheless, he ought to have
quoted the net investment figures, which had varied over the period
between 6 and 8 per cent. Norway had relied on capital imports.
Professor Robinson had said that we needed to look at the economy
sector by sector, but he wondered if this would really be any better.
How did one measure the sectoral capital-output ratios ? One would
have to compare capital directly employed in an industry with value
added by that industry. But what mattered was not this but the addition
to NNP from investment. There were pitfalls here. If a particular act
of investment raised output in one sector, but withdrew labour from
elsewhere and hence lowered output there, that should be taken into
account when computing the value added resulting from that investment.
Similarly, one could have 'spreading effects', with the construction of
roads adding to value added elsewhere. Internal and external economies
would make any sectoral analysis very complex.
In other words, the capital-output ratio was something like the ve-
locity of circulation, in that it tended to be constant, and yet when one
most needed it to remain constant for policy to succeed, it began to alter.
The capital-output ratio, like the velocity of circulation, should be rele-
gated to the museum of antiquated economic tools where it belonged.
Mr. Berrill thought that the rate of growth in Professor Solow's
'free ride' was important. We knew that increased productivity was
bound up with industrial growth. And in a direct sense house con-
struction was unproductive so that there was at least something in the
444
Japanese mythology. If one were growing fast, and concentrating on
particular industries, one would get a better free ride. Nevertheless, it
was hard to make sure that all investment was made in the right directions.
In the underdeveloped areas, despite differences in income per head,
all were trying to get the same increase in investment. They could
develop only if investment could be diverted from trade and agriculture
into industry. But the desire to invest in trade and agriculture was not
silly. With imperfect competition in both trade and industry, returns
were good, and investors knew they would be investing their capital
safely in trade, but were not so sure about industry. Mr. Berrill sug-
gested that by creating uncertainty in agriculture, land reform in itself
tended to divert investment towards industry. But the fact that in the
past small investments had yielded good returns should not be projected
into the future. Rising population, the desire for a high rate of growth
and the demand for housing and welfare services all made conditions
very different in modern take-off.
Mr. Mathur said he interpreted Professor Cairncross differently from
Miss Deane. On page 246 Professor Cairncross implied quite clearly that
where good management was not present progress might not occur
because finance remained a bottleneck for the individual entrepreneur.
One example of this was small-scale and cottage industries as well as
agriculture in underdeveloped and over-populated countries where man-
agement was not very good and where investment was low since only a
small proportion of borrowings could be obtained at a reasonable interest
rate. The inducement to invest could be created if cheaper credit could
be obtained. In this case, the Keynesian recommendation of low interest
rates was very relevant for encouraging investment in the right lines.
Even if investments were made, their product was not always used owing
to the high price of the product. Thus canal water was not always used,
as there were high water rates in India (though not in Burma and Thailand)
owing to an untenable doctrine that a public utility must pay for itself.
Here also a policy of subsidization was needed and finance had to be
made liberally available by the government for it.
Professor Hoffmann wanted to support the statement that the biggest
need in take-off was for building capital. In the German case, a little
over 50 per cent of investment had been in building. A crucial problem
in initiating take-off was the need to finance capital formation in building
and in transport. This was one reason why many underdeveloped
countries needed foreign aid. As for the capital-output ratio, Professor
Hoffmann said that if one disaggregated manufacturing industry into
branches, one found that there was great stability in the inter-industry
relations of capital-output ratios. This was of some help in policy making,
so far as there was a typical manufacturing industry structure. Most of
our statistics were for mature countries.
Mr. Boserup mentioned two reasons why the capital-output ratios
found in five-year plans and similar documents did not show what Dr.
Singer wanted. It was the true incremental ratios that one was interested
#5
in, but the figures that could be distilled from plan documents were
already averages of fairly large ranges of investment and should there-
fore not be expected to be equal in the different sectors. Another defect
was that they took account only of output in the same sector as that in
which the capital was employed. The capital-output ratio ought to
measure the total increase in output resulting from investments. This
seemed to be the reason why Professor Bentzel wanted to use the capital-
output ratio as a guide to planning rather than the profitability of capital ;
Dr. Aukrust, on the other hand, wanted to l!crap the capital-output ratio
altogether, not because he disagreed about what would be ideally desir-
able, but because he just could not believe that a ratio such as that desired
by Professor Bentzel could possibly be calculated.
Professor BoudetJille asked Miss Deane two questions. First, if foreign
capitalists were encouraged to reinvest their earnings in domestic indus-
tries, these industries might become dominated by foreigners. Should
self-financing be controlled through a maximum size of the plant as
Bata was in France in 1936 ? Second, he agreed that the rate of interest
was a big brake on investment in general in underdeveloped areas. All
firms had trouble in getting long-term capital. But was it not obvious
that the main difficulty for local firms was in the high rate on short-term
funds. These rates could reach 3 per cent per month and be more
expensive than long-term loans.
Did Miss Deane see any danger in fostering foreign credit banking
in rapidly developing countries as one of the best ways of helping them ?
Professor Rostow thought that if one tried to do what Professor Solow
wanted and attempted to get the greatest possible ' residuals ', it might
be necessary to proceed by going beyond aggregates and looking at invest-
ment in more detail. In the U.K. and on the Continent there had been
a big ferment in the economy between the wars, with the growth of elec-
tronics, sheet steel, aircraft, cars, and so on. But the rate of growth of
income during the 1930's had not been high enough to allow all the new
technical possibilities to be fully exploited. Since 19+5 this had been
possible. If one wanted to analyse other surges in other economies,
where the absorption of technical progress had been rapid, then it would
once again be a matter of isolating those blocs of industries where the
surges had taken place. He was not saying that such a movement could
not be widespread ; but he did say that its satisfactory study might require
disaggregation.
On the question raised by Professor Cairncross (page 251) as to whether
Adam Smith was concerned with take-off, the emphasis in Smith's
writings was on education, on the problem of diverting income to modern
activities, on the provision of social capital, on foreign trade and special-
ization with an expanding market. On the other hand, there was little
in Adam Smith's writings about the possibility of introducing radically
new production functions. He would therefore say that Smith was a
man of the late pre-conditions rather than of the take-off itself.
Professor Caimcross, replying to the discussion, said that the old
++6
masters, Smith, Ricardo, and Mill, had been quoted, but none of them
had thought in terms of a take-off into sustained growth. In 1848, for
example, Mill was doubting whether invention would be able to sustain
growth indefinitely. Professor Cairncross thought that the atmosphere
had been much more favourable to his views during the discussion than
it had been during the discussion of a paper expressing similar views at
the Santa Margherita Round Table in 1953. Perhaps while capital had
been over-rated in 1953, the pendulum had now swung too far the other
way. Capital was obviously very important if one included in it not
only physical investment but also the cost of education, research, etc.
Professor Gerschenkron had spoken of commercial morality, and we did
not know the cost of introducing that.
Professor Caimcross thought that on the capital-output ratio he was
as ambivalent as most. Regarded simply as a quotient, it was about as
useful as the proportion of red-heads in a theory of population. Other
variables behaved in much the same way in relation to output : for
example, as Professor Cipolla had mentioned, energy requirements per
unit of output tended to remain constant. But we did not build on this
a theory attributing economic progress to the use of energy.
If one tried to use the concept operationally there was a danger of
assuming that the line of causation ran from capital to output, whereas
in his view it was more correct to turn things round the other way and
to think first of the expansion of output and then of the level of invest-
ment necessary to sustain it. This way of looking at things was the more
likely to be correct the higher the proportion of investment went into
social capital and was not reflected in any immediate rise in output. As
for the usefulness of the concept as an instrument of planning, it was
obviously wrong to make the capital-output ratio do duty for the older
concept of the marginal productivity of capital. The latter was a micro-
economic concept, while the capital-output ratio transferred the analysis
to the level of the economy as a whole, and one was therefore concerned
with very different effects from those arising in the individual firm. The
difficulty of taking full account of the consequences of investment on
other firms and industries had been raised by Professor Bentzel, who
was concerned with net changes in investment, employment, and output
across the whole economy. Precisely because of this difficulty, while it
was possible to compare the rate of growth of capital and of income
ex post over the whole economy, it was doubtful whether the ratio between
the two was an operational concept capable of inclusion in an economic
model.
The discussion of the residual had shown that this did not seem to
be functionally related to investment. But was it not essential to dis-
aggregate investment to make sense of what happened ? Economists
did not pay sufficient attention to differences in social yields from dif-
ferent forms of investment. The private return to industrial investment,
for example, was reduced in various ways below the social return : by
the need to pay higher wages when new machinery was introduced, by
447
The Economics of Ta~-off into Sustained GrO'UJth
taxes, by price-concessions to extend the market, etc. Thus the 'take-
off' for the community was not unaffected by the precise direction of
investment. If the ' free ride' aspect of the residual did depend on the
rate of investment, then it was likely that a sustained high rate ofinvest-
ment would give better results than a series of short spurts, since it
would be likely to lead to external economies of various kinds.
The conflict between the work of the United Nations and that of
Professors Solow and Aukrust, suggested that the r6le of capital was
more complete than had been assumed. Figures for the rate of invest-
ment relatively to the rate of growth of income were interpreted to sug-
gest that there was a functional relationship between the two in the
various countries. The correct statement might be that where output
was growing rapidly, investment would be high, and technical advances
would be more rapidly absorbed.
Professor Cairncross agreed with Professor Bentzel that it was im-
possible to leave out of account simultaneous changes in labour availability
and employment. The same modes of thought would not necessarily
apply to an underdeveloped and a fully-developed country, and perhaps
this discussion had been too much concerned with developed areas. He
also agreed with Mr. Mathur and Professor Aukrust that part of the
residual came from shifts of factors of production between industries.
What he had meant on page 245 was that when incomes rose rapidly the
accelerator came into action, especially if capacity had not been fully
stretched.
Professor Cairncross said that he had calculated from the Marczewski
figures that in France, between 1788 and 1912, only 1-2 per cent of GOP
had been invested in agriculture. Yet agricultural output had more than
doubled. Perhaps the figures understated the investment in agriculture,
and there had, of course, been a parallel investment in social capital.
This raised Dr. Mathur's point that it was hard for the Indian peasant
to acquire capital on reasonable terms, so that there were bottlenecks.
This was no doubt true, but the amount of investment in agriculture
required was not likely to be very large.
Professor Fauvel had suggested that people always needed to be
forced to save. This was true in a sense, but if one thought back to the
sixteenth and earlier centuries there had been much saving devoted to
the construction of cathedrals and other public buildings. Was this
forced ? In the nineteenth century much investment had been financed
by landowners from their rents. What was lacking previously was a
capital market and, no doubt, scope for large and profitable investments.
Landlords responded to fashion and opportunity rather than to any
compulsion.
H~- Summary Record of the Debate
FOURTEENTH SESSION
BY PROFESSOR COOTNER
Professor Robinson said that the paper began and ended with the
question whether it was likely that, because of uncertainty and lack of
foresight, the lumpiness of its units of investment and its immobility,
there would be too little investment in social overhead capital provided
by public utilities. If this were to be so, countries might well experience
delay in economic development and lose potential economies of scale.
Turning first to the assumptions attributed by economic theorists to
entrepreneurs in the industries in question, Professor Robinson agreed
that it would be very unrealistic to assume that entrepreneurs assumed
the continuance of existing levels of demand. Professor Cootner rightly
began by repeating this sort of assumption, but at the end of his paper
went on to construct a different kind of model in which he assumc;d
perfect foresight, awareness of risks, the existence of a risk premium, and
a consequent tendency for investment in social overhead capital to be
below the socially-desirable level.
Professor Robinson hoped that participants would forgive a rush of
bees to his bonnet, but he would like to persuade the Cootners and
Solows to burn everything written on this subject and take a fortnight
off in an ivory tower to reconsider the whole theoretical approach de
novo. He would especially like to point out that risks and uncertainties
included the risk of becoming rich as well as the risk of becoming poor.
Uncertainty allowed one to kid oneself and one's associates that the
chances of becoming wealthy were very favourable. To take an analogous
case, in a world of perfect certainty it was doubtful whether so many
authors would spend their time and energy in writing new texts of
economics as they did in our uncertain world.
Coming back to investment in social overhead capital, Professor
Robinson wondered whether a man like George Hudson, the Railway
king, could really be best described as a risk averter. Had not uncer-
tainty in his case resulted in more and not fewer miles of railway ? And
was not the same true of Cecil Rhodes ? Professor Robinson said that
he was unwilling to chance his hand in the presence of so many experts
on America, but were there not such optimists there ? He felt that the
same was true for other kinds of social overhead capital as well, and
could not accept the view that uncertainty meant that there was too little
provision of social overhead capital.
Before leaving differences between private and social net product,
Professor Robinson said he wanted to discuss an aspect which Professor
Cootner had not covered. He would like to remind participants that
while Professor Cootner stressed the possibility that the entrepreneur
would underestimate the gains available to him, a different case had been
identified by Pigou and others. Here part of the gains inevitably accrued
449
to others, the best example being where railway building gave gains to
landowners and local entrepreneurs in any industry. This problem did
not arise where the railway developer himself owned the land.
Professor Robinson turned to the dynamics of social overhead invest-
ment, and to the part played by it in creating and leading development.
He hoped the Round Table would forgive him if he began from a rathel
concrete concept of development and went on to ask how far history
and experience justified it. If one took the Italian Vanoni plan, it had
three essential features. First, it tried to create a picture of reasonably
possible levels of production, not only in total, but in the various sectors.
In Professor Cootner's terms, it aimed at improving foresight and creating
confidence in growth. Second, it aimed at creating in Southern Italy
an infra-structure of water supply, roads, electricity supply, improved
railways, and so on, capable of meeting the needs of regional development.
Third, and this was what he wanted to stress, it was hoped to use this
investment in infra-structure in Southern Italy to start a multiplier pro-
cess which would trigger-off industrial development in the South and
cause a regional take-off. He wondered whether this was a possible
operational concept and whether experience suggested that it was effective.
A major difficulty had been leakages of demand, especially to the North
of Italy. Further, it had been difficult to set off sustained growth. In
the light of the difficulty in sustaining growth in Southern Italy he hoped
that the historians would be prepared to say more about some of the
railway-assisted take-offs in the past. If he might change the metaphor,
he looked on the problem as rather like that of putting a multi-stage
rocket into orbit. All the stages had to ignite, and not just the first. In
America they did ignite during the phase of railway building ; in India
they did not. Why ? In particular, he wondered whether underdeveloped
countries generally could rely on investment in government-financed
infra-structure to provide the first stage towards take-off into sustained
growth.
Professor North said that he wanted to buttress Professor Cootner's
ideas on long cycles. The conclusions reached by Professor Cootner
were very much those of his own study of America. Fundamentally,
he thought that the long swings depended on agriculture. The price
of cotton had reached a peak in 1836-9, and had subsequently fallen
until1845. If one looked at output, one saw that there was a lag of about
five years between the taking up of new land and an increase in output.
The same was true of wheat and maize. One had a supply curve for these
products which was very elastic over a big range, since a small rise in
prices brought new land into use ; but the curve was very inelastic with
respect to a price decline.
As for social overhead capital, cotton had not needed this. With
wheat and maize, there had been no incentive to build railways when
prices had been low, but an extremely strong one when prices were
rising and supply was inelastic. This started the process all over again.
One thing about long swings was that they were evident only after 1815.
450
There were many problems of acceleration, growth, and take-off because
if one looked at long swings one could see all kinds of movements, and
numerous examples of acceleration. It was very hard to discern decisive
periods when there had been an acceleration.
Professor Rostow suggested that the power of the railways in inducing
take-off lay in their multiple effects. They restructured markets by
reducing transport costs. They opened up the possibility of agricultural
specialization, and so raised farm output. They opened up agricultural
markets to manufactures. By making it possible to transport bulky goods
more cheaply, they had a direct effect on the development of industries
like coal, iron, and engineering which brought in new production functions.
By their lateral effects, they brought new men and new savings into
highly-productive activities. One got all these multiple effects from the
activities of one sector.
Professor Robinson and Mr. Berrill both insisted that what Professor
Rostow was so far discussing was the results of the existence of railways,
whereas there would also be the pure multiplier effects of the construction
of the railways. The local demand for labour would spread through into
the raw material and consumer goods industries.
Professor Rostow said that in an underdeveloped area one would not
get a powerful stimulus to the coal and iron industries until a certain
scale had been reached. Before that, the necessary supplies would be
imported. But as one laid down more lines, one got a whole succession
of effects, some of which were the multiplier effects of the initial construc-
tion on income, while others were of a more long-term nature. To look
on the provision of social capital simply as an input might .not be a suffi-
cient notion. This had a bearing on the comparison of the Vanoni plan
with a railway-assisted take-off. A necessary element in the Vanoni plan
was that out of the successful construction of social capital one not only
got a fall in costs but a direct stimulus to the rest of the economy, and
effects on agriculture through a rise in effective demand. The problem
of the Vanoni plan was that there might be leakages and it might not
generate a local input industry and that there might therefore be an
inadequate rise in aggregate demand.
This was similar to the problem of achieving take-off in the U.S.
South. This had been encouraged partly by investment in social capital,
as in the TVA ; but an important component had been the rise in the
price of cotton and a consequent increase in income and effective demand.
If one made a case-by-case study of those firms which had been estab-
lished in the South, one found that few of them went to exploit lower
labour costs. Most of them moved to exploit increased effective demand.
So if the South of Italy had no export sector to lead growth, the question
was not simply how to give the region better roads, schools, power, and
other industrial inputs. It was also how to raise effective demand within
the region.
Professor Robinson stressed that it was the aim of the Vanoni plan to
raise effective demand. Professor Rostow suggested that whether one
.of.SI
got take-off depended also on whether there was sufficient entrepreneur-
ship in terms of both quality and ability to establish and spread new
industries. Another question was whether the total actions envisaged
in the plan would produce a rise in real incomes sufficient to allow the
development of new industries and the spread of modern technology.
The fact that the main inputs did not originate in Southern Italy was
one reason for the scepticism he felt about the Vanoni plan. Successful
take-off required entrepreneurs and rising real incomes.
Professor Boudii'Ville suggested that on the question of risk and uncer-
tainty in making investments in social capital, it was very hard to evaluate
risks in underdeveloped areas in the way that one did in Europe. In
underdeveloped areas, the evaluation of uncertainty was mainly sub-
jective ; all probabilistic calculations were difficult. Generalizing, Pro-
fessor Boudeville suggested that we were concerned with the questions
of certainty and uncertainty on the one hand and of whether these were
subjective or objective on the other. With objective certainty there was
no risk. With subjective certainty there were doubts of the kind one
had with long-term investment. Objective uncertainty represented a
calculated risk- a stochastic risk. In Professor Cootner's study we
were only concerned with objective uncertainty. In the real world, and
especially in a country that was taking-off, we are concerned with the
expectations of entrepreneurs about public investment, and not with the
views of an insurance company.
Professor Boudeville suggested that Professor Cootner's paper dealt
with only part of the problem of investment in underdeveloped areas.
Most investments there were concerned with substantial pecuniary ex-
ternal economies. Others were better explained in terms of Professor
Rostow's lateral effects. If one considered the case of Brasilia, there was
access to Sao Paulo and to Belo-Horizonte. What risks and pecuniary
external economies were attached to this large and apparently question-
able investment ? First, there were the sorts of external economy that
one could not measure ; political ones, north and south integration. This
was subjective uncertainty. Second, Brasilia represented a way of de-
veloping or opening up new land and there were objective certainties or
risks of inflation from the expenditure on social capital in the wilderness.
One could calculate the multiplier, polarization vectors, etc. But entre-
preneurs had to bet on new structures. In countries that were taking off
these bets were mostly subjective and were grounded on government
stability. The decision to build Brasilia was not justified merely by
considering pecuniary economies, but by the necessity of transforming
entrepreneurs' subjective uncertainty into objective uncertainty as far as
the immediate development of the Near West was concerned. In this
social overhead capital was of primary importance.
Mr. Mathur wished to make some remarks about the question Pro-
fessor Robinson had raised about the abortive spurt in India when the
railways were being built. One could see traces of sustained growth
from some crude estimates of national income per capita deflated by the
452
Hague - Summary Record of tlrs Debate
9-year moving average index number of the price of food-grains (which
form a large proportion of consumption). This figure was almost doubled
(from 23 to 43) in the sixty years between 1867 and 1927. The thirty-year
period after 1897 showed the biggest rise in this economic indicator in
absolute and proportional terms. The consumption of food-grains per
head had fallen after 1920, but there was an increase in industrial pro-
duction and in other crops to make up for it. Employment in organized
industry had been a little less than a million in 1914, while by 1939 it was
1·8 m. By 1945, it had risen to 2·7 m., so that in the six years of the
Second World War it had increased by the same absolute amount as it
had done in a period four times as long that preceded it.
The building of railroads did have a delayed effect in opening up
the country, but the direct effect on employment and wages was short-
lived. The backward linkages, like the supplying of rolling-stock, had
their effects in Britain, as did the multiplier effect or forward linkages.
He did not consider that insufficient demand had been the reason for
slow industrial expansion, as quite a lot of British textiles were being
absorbed in India. A dependent country should not be studied in isola-
tion ; its development or lack of it, in response to investment, was in-
evitably bound up with the effect on the economy of the dominant
country.
During the second half of the nineteenth century and eai'Iy twentieth
century, laisse:tll faire principles did not apply in India with canals, roads,
and railways; and the civil servants strove to develop the country. Road
construction was decentralized in 1917 and subsequently declined. There
was also a tailing-off in railway and canal construction after the First
World War. It seemed there had been a change in the political philo-
sophy of British governments in their attitude to economic development
of India.
As for the policy implications of social overhead capital, Mr. Mathur
said that a major question in planning was how big a project should be
in relation to present demand. On the whole, one could reasonably claim
that in social overheads like dams, bridges, public utilities, etc., it was
better to build units big enough, or capable of being expanded enough,
to cater for expected demand over a long period.
Professor Cai'nu:ross recalled that on page 280 of his paper Professor
Cootner said that he would 'expect to find alternate cycles in the relative
prices of industrial and primary products which corresponded to the
cycles in social overhead capital and other investment'. If one asked
what were the big users of capital, the answer was that they were new
countries in course of development, and the stages of production farthest
away from the consumer. For example, the textile, chemical, and steel
industries required more capital as one moved away from final con-
sumption towards the raw material stage.
If one looked at nineteenth-century swings in prices and in relative
prices, one found that the biggest rises and falls were closely correlated
with a relative shortage or abundance of foodstuffs and materials and with
453
the consequent pressure to add to supplies by developing new countries
or by expanding capacity to provide raw materials. Either course re-
quired a relatively large amount of capital so that investment rose and
inflation tended to follow. Rising prices for grain in the late 1890's, for
example, led to the development of Canada, heavy investment there, and
a world inflation. Similarly, after 1945 there was again a need to develop
raw materials. But this time the shortage was made good within the
industrial countries and, with no ' new ' lands to develop, extra investment
was concentrated more in the industrial countries and less in the under-
development areas. The underdeveloped areas were already at a dis-
advantage for this reason, and the further development of synthetic
substitutes for the products of underdeveloped countries would worsen
the position.
Mr. Berrill was attracted by Professor Cootner's paper, having lived
so long with Professor Rostow's overshooting of primary and secondary
production. He was sure that this was how expansion took place in the
nineteenth century. Although in the short run overbuilding was ex-
pensive, sooner or later expansion of the economy should mean that the
end result was satisfactory. However, this need not necessarily be the
case, and Canada, for example, had been wrong over uranium. And
even if one was right in the long run, there might have been a much
cheaper alternative. For instance, the cost of constructing railways had
been very high in the U.K. and the U.S.A.
On the Vanoni plan, Mr. Berrill said that if one looked back at other
countries it was clear that whether the plan had been misguided in
thinking that it could act as a pump primer depended on the precise
situation. There were many countries where one could say that take-off
would not have occurred without the railways. A push which did not
last long enough would not lead to take-off; nor was one where there was
an export leak likely to be successful. One difficulty with railway engines
and rolling stock was that the important content was often high. The
basis for expansion which one could develop from primary produc-
tion was limited, though a war might help. In most cases the boom in
primary produce has helped countries like Canada and Australia which
had pre-war starts. So the important issues when considering something
like the Vanoni plan were: the length of the push; the ability to trap
demand at home ; the kind of market one created; and some factor inter-
rupting the inflow of supplies from abroad.
Professor Cootner said that Professor Robinson had touched on a
point near to his heart - risk-bearing. It was true that one could point
to many instances where the future had been overestimated, but this
did not prove that the people in question were risk averters. The failure
of such men made others become risk averters themselves ; if people
wanted certainty there would be no progress at all. Professor Cootner
said that he had been studying future markets. Although one found
many cases where speculators lost money, in the long period one found
that most of them made a fairly steady return of the kind Keynes had
454
predicted. There were so many who did not want to lose, and it was
this which deterred them from participating.
As Professor Boudeville had said, none of this proved that there was
no risk aversion, especially in underdeveloped areas. Professor Cootner
said that his own work had now gone beyond the futures market, and
what he had found was often compatible with the fact that in financial
matters many people acted as though they were risk averters. While he
had less evidence on railroads, he was impressed by how many grandiose
projects were stymied in financial markets. While he could not list all
the cases, he was struck by the extent to which people underestimated
demand, and thereby choked-off investment. Professor Robinson had
shown how Rhodes' other enterprises supported his railways, and how
these enterprises themselves benefited from railroads that were supposed
to be failures. There were similar examples in the U.S.A. One often
found farmers accepting low dividends from railroads because they got
other benefits ; and many railway entrepreneurs made cities bid for the
privilege of being on these routes.
Many of the things that we attributed to cautious peasants and
farmers were really examples of risk aversion. An Indian farmer who
one year lost half of his crop was likely to starve to death. He would
therefore give up a great deal in order to avoid risk. He would not shift
to a potentially more profitable, but also more risky, line if he knew he
could keep going on an older line. On the other hand, if there were
many risk lovers, then the Darwinian process was on our side, and Pro-
fessor Robinson had supplied several examples. Professor Cootner noted
that it was primarily in those periods of U.S. history when the risky
railroads were being built that government support was extended. When
lines were short and promising then such aid was not given. It was
important not to interpret his paper as saying that subsidies would never
help ; but it seemed unlikely that one would get the same decision from
a civil servant earning a low salary as from a man with the chance of a
large gain.
Turning to Southern Italy, Professor Cootner said that a study of
the area in the nineteenth century showed no lack of social overhead
capital, and thus made it difficult to blame such a lack for its backward-
ness. On the question of whether investment in social overhead capital
would lead to growth, the reasons were those which Professor North had
mentioned for the South of the U.S.A. If there were no reasons for
expecting railway building to set off other industries or to reduce the
dependence of a region on agriculture, there was no reason why railroad
building should lead to growth.
In the U.S.A. the building of railways itself had very substantial
effects on machine building. Many producers of textile machinery were
brought into the industry. Iron, and later steel, were stimulated; 75 per
cent of all steel produced in the 1870's and 1880's went to the railways.
In the 1840's the big boom in iron and steel in the U.S. depended on the
relaying of track put down in the 1830's plus the fact that all of the U.K.'s
455
T'M Economics of Take-off into Sustained Growth
capacity was involved in building its own railways. The industry in the
U.S.A. was on the Atlantic seaboard, and therefore relatively near to
England. Then, in the 1850's, the demand for iron declined, and the
U.K. cut prices to sell in the U.S.A. This was partly why the U.S.A.
had made its own iron in the 1840's, and why production fell in the 1850's.
When building of railroads passed beyond the Appalachians, it no longer
paid to import from England, and new ore and coalmines were opened up.
In connexion with the points Professor North had raised, Professor
Cootner said he would merely conunent that in Labrador and Venezuela
iron ore investment in the last fifteen years had shown a long slow swing,
with the situation now difficult because all this ore was coming on to the
market at once.
Professor Cootner thought that what he had said about 'pecuniary
external economies' covered what Professor Boudeville had said about
Brazil, even though it might be necessary to change most or all of the
coefficients in the matrix. If one built a railway in a country like Brazil
this would alter all production functions. The question to answer about
Brasilia was not whether its construction would generate investment but
whether the same amount of capital put into a coastal railway would not
be more valuable. It was not the rise in investment, but the extra net
output from alternative investments which was the important thing.
Replying to Mr. Mathur, Professor Cootner said that Chenery had
shown that whenever there were economies of scale it was always better
to build a little ahead of demand and expect demand to grow later. But
this did not mean that one should always do this. If the period before
the asset in question could be fully used was a very long one it might
well be better to use the capital elsewhere, depending on the inter~st
rate. He also hoped that Mr. Berrill had not understood him to say
that mistakes of overbuilding were always good for the economy.
Professor Caimcross had raised the question of changes in primary
product prices. It was true that one effect of technical change was to
reduce the rents to be earned by primary producers who could make
goods which industrial lands did not have ; but the phenomenon he had
described might persist nevertheless. The period since the 1930's had
been one where, despite the slump, investment in primary produce had
been sustained. He did not think that we had wiped out the Malthusian
reliance on food and raw materials.
As for take-off, many of the surges of growth in underdeveloped
areas were not wholly or even partly determined by economic causes.
There were many sociological and psychological factors of the kind that
Professor Boudeville had mentioned. It was necessary to persuade people
that there was much leas risk than they thought ; to change their atti-
tudes to risk ; or to offer fantastically high rates of return. One very
important thing was to find people who would respond to financial incen-
tives in the same way as entrepreneurs.
FIFTEENTH SESSION
BY MR. BERRILL
Professor Delivanis said that it was a pleasure to introduce such an
excellent paper, and the one which was closest to his own field. Mr.
Berrill showed from the data in his paper that the take-off of the U.K.,
France, Germany, Japan, and Finland, to which he would add the
U.S.S.R., was not financed by foreign capital. The author explained
in his paper why this was so in the U.K. This situation was well known,
but what Mr. Berrill showed afterwards that even in Canada and in
Australia the contribution of foreign capital to take-off had been limited,
was usually ignored. Mr. Berrill distinguished between qualitative and
quantitative factors. So far as the latter were concerned, he stressed the
importance of new fields of contacts with foreign markets, of new ideas
and new knowledge and of technology. The possibility that foreign
capital might cause damage when an 'enclave' was created, whose main
contacts were with foreign markets, was mentioned and rightly dismissed.
The contribution of Professor Maurice Bye from Paris on the 'grande
unite internationale ', as reproduced in International Economic Papers,
Vol. VIII, might be mentioned in this connexion.
The difficulties resulting from bad statistics, particularly the con-
fusion of capital transfers with other invisible items, either by mistake
or because of the desire of those making the transfer to do so secretly,
were clearly explained. Mr. Berrill attributed the small importance of
default before 1914 to the effects of inflation. He himself believed that
it was also due to the important fraction of capital, chiefly from the U.K.,
invested in public utilities, to the small profits of the railways and to
the invoicing of machinery and spare parts at higher prices when ordered
in the mother country. Mr. Berrill attributed the reduced importance
of bonds after 1945 to inflation and default. Professor Delivanis himself
believed that this applied to private individuals but not to institutional
lenders like the IBRD, the insurance companies, or to the Swiss. In
his witty explanation of the frantic search for foreign capital by many
underdeveloped countries, Mr. Berrill mentioned the desire for indus-
trialization and for increased international liquidity. Professor Delivanis
would like to add the growing monetary experience of the public after
a long inflation.
He also added that he did not think Mr. Berrill had put enough
emphasis on the desire to acquire foreign exchange rather than foreign
capital, since the latter could be replaced by forced savings at home
while the former could not - as German experience in 1933-8 showed
clearly. Increased foreign exchange reserves made imports easier, since
increased possibilities for replacing them by home-made commodities
led to new demands, particularly when living conditions improved and
the elasticity of demand fell. They also made the application of an
457
The &onomics of Take-off into Sustained Growth
austerity policy less necessary, allowed the appearance of 'soft' currencies
and reduced the cost of certain investments.
Professor Fauvel said that he had not realized before that at the end
of the nineteenth century the timing of so many investments had so
little to do with take-off. Two of the few cases where foreign capital
had fostered take-off were Puerto Rico since 1940 and Israel since 1949.
He did not think that the Puerto Rican case had been sufficiently studied.
Yet Puerto Rico had taken more per head of U.S. federal funds and
private lending than anywhere else, and this had created a diversified
manufacturing industry supplying the American market. This led to
the last sentence of Mr. Berrill's paper. Did this lending help to put a
stop to population increase ? He did not see any fall in population pressure.
Nor did he think that French aid to Algeria had reduced the rate of growth
of population there. And what beneficial results there were in Puerto
Rico had occurred only in a laboratory experiment, since it was much
smaller than a country like Algeria. He also doubted whether the effects
of a fall in fertility rates could be noticeable in twenty years. Professor
Fauvel pointed out that if one could reduce the period of child-bearing
this would increase the number of women available for the public utilities
and for agriculture. This was a very effective way of dealing with the
situation, and much better than the luxurious way of hoping that the
inflow of foreign capital would reduce the fertility rate.
Professor North said he had just completed a study of the effects of
international capital movements on economic growth. He had been par-
ticularly interested in the links between international capital movements
and other international economic relationships. The only certain con-
clusion was that there was no simple answer. On the terms of trade,
Professor North thought that he might have had more information than
Mr. Berrill. He had found the U.S. case stimulating, because there the
terms of trade led capital movements in an interesting way. It was clear
that a relative rise in export prices, initiated by cotton and wheat, was
an important factor stimulating the initial inflow of capital to the U.S.A.
On the other hand, the effects of the terms of trade in the 1850's were
not so clear, and he thought that a very important factor then had been
the movements of gold out of the U.S.A. which had changed the whole
climate and had played a very big role in altering the character of inter-
national relationships. On the other hand, if one looked at other countries,
one found no clear relationship between the terms of trade and capital
movements, even where, as in the Australian case, one would have expected
to find some.
Professor North pointed out that there was no normal sequence of
events in capital importation. Countries did not always begin as net
borrowers and end as net lenders. To suppose that they did was to put
too much emphasis on the U.S. example as being typical. Canada,
though borrowing capital, was also finding new resources, and had there-
fore been a net borrower for 150 years. He did not agree with the article
by Knapp in the Economic Journal which had suggested that capital
458
movements had little effect on growth ; but at the same time he was
not at all certain how they helped growth. The inflow of capital did
accelerate growth and lead to a boom, but the only thing that capital
itself was doing was to redirect resources into the construction of social
overhead capital during the boom. Only with unemployed resources
could the inflow of capital lead to more rapid growth. With full employ-
ment, the effect of capital imports was more circuitous than many people
supposed. If one looked at the combined activities of people and capital
one could produce a logical explanation which would apply generally
with a few variations.
Dr. Singer had made it clear that in the long run direct investment
had not had the results that were wanted of it, so that perhaps portfolio
investment was better. Professor North said that portfolio investment
was much less likely to lead to the development of a dual economy. He
thought that if one wanted to look at the effect of the inflow of capital
on economic growth, the main thing was not its effect on the export
sector but on the domestic sector. This effect might be either direct or
roundabout. He did not suggest there were no problems, for example,
of repayment, but that one must always link the export and domestic
sectors in trying to solve such problems.
Dr. Singer said that on the Puerto Rican case, which fully justified
the end of Mr. Berrill's paper, he would like to point out that this was
one of the few countries where the natural increase of the population
was being removed by emigration. On other points, Dr. Singer said
that near the middle of page 286 of his paper, Mr. Berrill had speculated
that perhaps 20 per cent of total savings during take-off had usually come
from abroad. The current figure for underdeveloped areas would
perhaps be 30 per cent, if one left China out of the calculation. In other
words, if one ignored the investment of profits, the contribution of
foreign capital to take-off was now significantly higher than it used to
be. It was therefore very important to correct the common idea that
foreign capital was less important than it used to be in stimulating economic
development.
On the facts, Dr, Singer was not sure about the contention on page 297
that the biggest difference compared with a century ago was the small
volume of bond issues. He thought that the important change was rather
that from private to public investment, but perhaps Mr. Berrill was only
writing of the movement of private capital to underdeveloped areas.
Dr. Singer said that if one listed underdeveloped areas today in terms
of the contribution of foreign capital to capital formation, and in terms
of the total rate of investment as a percentage of national income, it
would not be easy to show that there was any correlation between the
two. He suggested that foreign lending was not so much raising total
investment as allowing a given rate of growth to accompany higher rates
of consumption. This had a bearing on the earlier discussion of whether
growth was harmful to consumption.
On 'enclave' investment, Dr. Singer thought we should be careful
459
not to hold preconceived ideas on whether this had effects outside the
enclave, and led to valuable results. Everything depended on the par-
ticular circumstances. When Sears Roebuck had first gone to Latin
America, he had agreed with those who had said that the result would
be a harmful, parasitic investment bringing a demonstration effect in
favour of spending on American consumer goods. Yet, as things had
turned out, foreign exchange difficulties had meant that Sears were
unable to import from the U.S.A. at the end of the war, and this had
stimulated domestic demand in countries like Mexico. It was for the
governments of receiving countries to turn enclave investment into
something more useful.
Professor Gudin said that Dr. Singer had mentioned an outflow of
3 to 4 billion dollars a year to the under-developed areas. But the inflow
of interest and amortization to the U.S.A. in 1954 was greater than the
outflow, and it had been suggested that merely reinvesting this interest
and amortization would be a sufficient contribution. Dr. Singer replied
that his figure was for a gross outflow, excluding reinvested profits.
Professor Robinson thought it would be interesting to look at Mr.
Berrill's paper and ask what function foreign capital performed. Logically,
if not quantitatively, there were three functions. First, it added to savings
and to the investible resources of the country concerned. It was right
for Mr. Berrill to try to put this in perspective by suggesting that it made
a 20 or 25 per cent addition to these resources. The Arthur Lewis rule
that savings would rise from 5 to 10 per cent of national income during
take-off, meant that investment during take-off had to double, and a
25 per cent addition to investible resources would mean that half of the
extra investment was financed from outside. If we also remembered
that take-off was linked to the leading sectors and that the development
of public utilities was very important, then an increase of some 25 per
cent in investment, concentrated in the public utilities, was a significant
contribution to the total dynamics of take-off.
Second, foreign capital helped in easing the foreign exchange
position, and he wished to ask Mr. Berrill to go back to the role of foreign
trade in take-off. To summarize the position there, some participants
had wanted to identify the difficulties which arose if foreign trade did not
increase pari passu with income. One example was the need to make
import-saving developments if a country was deprived of the resort to
foreign sources of supply of components. This meant that the phasing
of development became more critical and more difficult. A major contri-
bution of foreign investment was therefore in adding to the general
foreign reserves of the banking system and allowing expansion to occur
without any need to apply the brakes because of balance of payments
difficulties.
Third, one had the sheer limitations of institutions. During the
Victorian era, much foreign investment had taken the form of public
utilities. Capital markets in the underdeveloped areas had been inade·
quate, and it had been easier to raise money in London, Paris, BrusseJs,
46o
or (later) New York. Much of the reason for this reliance on foreign
capital had been that capital markets did exist in these places. He there-
fore wondered whether Mr. Berrill could give a thumbnail sketch of his
interpretation of the functions of foreign capital.
Professor Robinson also wondered whether anyone had tried to
calculate in constant prices the scale of total foreign lending. He sug-
gested that even though we now had the World Bank, there had been
a greater ability to lend abroad in the nineteenth century than there was
now. World lending at the turn of the century had probably been
£250 million per annum which might be £2,000 million today - the
equivalent of $5 or 6 billion. Perhaps, in relation to existing world
capital, lending abroad had been bigger in the nineteenth century. It
was unthinkable that today the U.S.A. should be lending half its savings
to other countries; yet that was what the U.K. had been doing a cen-
tury ago.
So far as enclaves were concerned, Professor Robinson thought that
there were two points to be considered. At an early stage, they might
merely be small centres with many leaks abroad and which therefore
failed to disseminate growth. But later, they might well become the
leading regions in the countries concerned. Professor Robinson said he
was worried by Professor Rostow's habit of insisting on the importance
of leading sectors rather than leading regions. Bombay and Calcutta
must once have been enclaves in the very worst sense. More recently,
through the limited amounts of foreign funds available and the desire
to replace imports by home-produced goods, they had become the most
active centres for progress. So he did not think it fair to condemn them
a priori and outright.
Professor Marczewski agreed on the importance of international capital
for underdeveloped areas. But it not only allowed them to benefit
internally, by developing leading sectors ; he wanted to stress the fact
that it also allowed the beneficiaries to reconcile growth with the pressures
which that growth necessarily threw on the balance of payments. Take-
off expressed the fact that a country was catching up with the rest of the
world, and this required increased imports, more intensive internal
demand and more difficult exports. The solution of such foreign trade
problems represented the strategic r6le of foreign capital.
Professor Marczewski thought that Mr. Berrill might have said more
about political factors. These were just as important if one went back
into the past as they were today. Most British investments in the nine-
teenth century had been made within the Empire. French preferences
for investment in Russia were also largely political Between 1919 and
1939 in Europe, one had a situation where Eastern Europe needed capital
for take-off, but Germany needed it for modernization. Although the
marginal efficiency of capital was higher in Eastern Europe, the U.S.A.,
the U.K., and France had all invested in Germany instead, because the
political situation was unstable in Eastern Europe.
Since 1945 international capital movements had largely consisted of
461
public investment, to make up for the lack of private investment and
so to continue with its earlier task. This was a very important thing,
but did not lead to a distribution of capital according to the relative
marginal efficiencies of capital. We had a distribution of investment
which did not maximize world production, and did not channel funds
to those countries with the greatest needs. The World Bank had done
its best to distribute capital fairly, but we were still far from allowing
capital to go where it was most needed.
Professor Dupriez said that Mr. Berrill and others had stressed an
historical fact of extreme theoretical importance. This was the difference
between investments in the 'liberal ' age and those made now. It was
a difference between capital invested in private enterprise and investment
in social capital. He had recently called the former investments 'capital'
and the latter 'para-capital'. The former investments had to be made
on the basis of the marginal efficiency of capital ; otherwise, the investors
would lose money. The latter group could not be judged by marginal
efficiency, but by usefulness, as was the case with consumption goods.
ln>king at 'capital', this had been important for take-off in most
areas in the nineteenth century, but not the most important factor. It
had rather supported and followed the entrepreneur. During take-off,
Belgium had imported British entrepreneurs to bring in new processes,
and they had brought capital with them. The British entrepreneur had
acted as a catalyst, but there had never been a large amount of British
capital in the big public companies.
Professor Dupriez wondered whether the reason why the net inflow
of capital into modern underdeveloped areas did not last for long was
connected with the fact that the first capital was brought in by incoming
entrepreneurs. If one looked at Katanga, new capital had come in from
outside for a time, but then institutions had developed within Katanga
itself. Self-financing had developed, even though it was self-financing by
Belgian companies. The Union Miniere had brought in no new capital
since 1925. New companies had brought in Belgian funds, but much
capital had come from self-finance.
A final point that should be considered, to put the present position
of underdeveloped countries in perspective, was that there was a shift
to huge investments in social capital by governments. This was happen-
ing both nationally and internationally. Guarantees against the expro-
priation of foreign capital were doubtful, and this had encouraged the
development of the whole set of international institutions which were
important in seeing that obligations were honoured.
Professor Boudeville stressed the importance of large firms in helping
underdeveloped countries to take-off. Big firms could transform an
economy, and he was thinking here especially of the nationalization or
regionalization of production. They could develop domestic supplies of
materials and could establish a centre of trained labour. Where there
were large international firms, these often obtained a monopoly in the
country where they were established, and being able to trade inter-
462
nationally was one way in which they could reach an optimum scale of
production. There were some dangers, however, and it was preferable
for these firms to proceed by reinvestment rather than self-finance. There
was also the danger that they might join with other firms to set up large
and tight monopolies. The Bata company had arranged quota systems
in some Wlderdeveloped areas, and this had not given good results.
Professor Boudeville said that many investments were of a political
nature. With no kind of political control, some countries would remain
outside the range of international investment, because they had no
monetary system. In other countries one might get no automatic equating
of marginal utilities. Perhaps it was the role of international investment
to take funds to places where there would be no automatic channelling
of capital. A similar question was whether one could equalize rates of
return on capital in such a way as to maximize world revenue. All that
had been said on take-off suggested that this was impossible because of
polarization. One would then be concerned with marginal social product
rather than marginal utility, and this was something about which we
knew too little. The idea of maximizing world income by equalizing
rates of profit was a matter of pure theory and nothing more.
Professor Boudeville thought that we should stress investment in areas
where polarization was possible ; for social reasons, we had to stress the
importance of helping countries with the greatest instability. He was
not sure that this was the best way of investing. One needed a reduction
of tension within the country before international capital movements
could have a maximum effect.
Professor Marczewski did not think there was the conflict which Pro-
fessor Boudeville saw between the marginal efficiency of capital and
polarization. They were complementary and not exclusive methods of
analysis.
Mr. Mathur said that the question of the role of enclaves was wider
than had so far been recognized, because it raised the whole issue of the
impact of the West on underdeveloped countries. He thought it was
time we reviewed the long-term economic significance of the relation
between colonial countries and their territories abroad. The case where
the local population had been displaced by the conquerors was quite
different from the type of occupation where Western concepts had been
introduced into the traditional structure and encouraged to grow. For
instance, in India, the original social structure had been maintained and
in matters of religion, social attitudes, and personal laws there was hardly
any interference by the British government, except to prevent crimes
like widow burning and infanticide. In such a case, though it was true
to say that foreign rule and political suppression are never pleasant and
no substitute for democratic self-government; that the colonial govern-
ment had acted very largely in the interest of the ruling country ; that
Western scholars would themselves admit that many things which could
have been done for the ruled country were deliberately not done, and
that in general the take-off had been delayed ; nevertheless, if one took
463
The Economics of Take-off into Sustained GrO'liJth
a wider view, one saw thar pre-conditions for growth had been created
by the foreign power which might well not have been established otherwise.
India had been unified, good administration and public works policy
of the Moghuls revived ; new technology had been introduced and,
above all, education, liberal thought and desire for advancement instilled.
It was not possible to say how much of this would have taken place had
there been no colonial rule, but what the British did in the nineteenth
century should not be compared with what a modern Indian government
would do. The alternative then was a multitude of princely states
operating on medieval principles of government.
Mr. Mathur did not think that there was sufficient discussion in
Mr. Berrill's paper on the future of foreign capital in underdeveloped
areas. The issue was greatly affected by political expectations as to
whether capital would be secure. The foreign investor had to face the
likelihood that in fields of public importance assets would sooner or later
be nationalized. Businessmen were usually aware of this possibility and
looked only for the lines where the rate of profit was high enough for them
to recoup their investments quickly. This tended to limit the flow of
long-term investments. The problem was not confined to foreign invest-
ments, as nationalization did not always discriminate against foreigners ;
domestically-owned assets were not entirely secure. In such circum-
stances, the need for larger international lending through the auspices
of, and with the guarantee of, the United Nations agencies was becoming
imperative. The attitude of the International Monetary Fund was not
as enlightened for purposes of growth as it might have been. If the
Keynesian plan for an International Bank had been accepted originally,
it would have been better for the underdeveloped countries. For not
only did it contain provisions for the creation of credit but also implied
a positive duty for the advanced countries to help to correct the balance
of payments problems of underdeveloped countries. If that vision could
be re-established it would be an answer to the most difficult problem of
development planning -lack of foreign exchange.
Mr. Mathur abo referred to the view of Professor P. M. S. Blackett
that the pre-conditions of the Newtonian revolution in technology had
resulted from the importation of advances previously made in the East.
As a result of this and of the later assistance given by the underdeveloped
countries during the take-off of the now advanced countries, the more
generous ones among the latter might also feel it equitable that some
recompense be now made after many centuries of neglect.
Dr. Singer stressed that he was not an authorized spokesman of the
United Nations, but that he would like to stress one point. Even though
the terms imposed by the IBRD might look severe, there were offsetting
factors. It was true that the loan had to be repaid in the currency in
which it was made, and that it carried a S or 6 per cent interest charge,
but the Bank agreed that tying the loan to a specific project was not
sensible, and the true criterion was the whole plan into which it fitted.
The IBRD financed the marginal project on which the whole, wider plan
464
depended. One had to remember that the effect of IBRD loans was
perhaps also to cushion consumption. There were many in the Bank
who were worried about the harsh terms for repayment, and the 'bargain
basement' had been introduced in the form of the International Develop-
ment Association (IDA). The real benefit of any IBRD loan was shown
in the spreading of development in the receiving country. Professor
Cairncross said that Mr. Berrill's paper was mainly concerned with
the receiving country and not the lender. Capital imports might rarely
form a large proportion of indigenous investment but that was not true
of capital exports. There was a point of some importance here in relation
to the famous transition from a 5 to a 10 per cent savings ratio. Some,
including Mr. Mathur, seemed to think that savings might overshoot
needs. Was there any law which said that the savings proportion could
not exceed 10 per cent. It was very hard to know the answer, and just
as hard to know why savings should level off at all. In the U.K. there
was no evidence to suggest that the savings ratio had been very different
in the nineteenth century from now, and one question was how it had
been possible to lend so much abroad at that stage, while so much more
was needed at home now.
Professor Robinson wondered whether one might say that we would
help one country at a time to take-off, but not all of them at the same
time. How far were amounts of capital lent, and the dates on which
they were lent, synchronized ?
Professor Cairncross pointed out that no country in the nineteenth
century was satisfied merely with one injection of foreign capital ; they
all kept returning. Countries like Australia and New Zealand had been
early borrowers, but they were still coming to London for loans. On the
other hand, it was certainly true that the predominant borrowers had varied
from time to time.
Professor Cairncross said it was a mistake to treat all capital invest-
ments abroad as if they were of the same kind, and he would distinguish
five kinds of movement. First, there was capital for public utilities. In
the past most of this had gone into railways. Second, there was invest-
ment in such things as oil, tea, rubber, etc., where there was an export
commodity and an enclave in the strict sense, with no need to develop
outside it. Third, there were medium-term export credits to help an
underdeveloped area to acquire capital equipment. These were increas-
ingly replacing long-term issues. Fourth, there was direct industrial
investment in the receiving country. This usually took the form of
setting up branch factories and differed from the first and second types
of investment in that it had a significant effect on the local economy and
was directly financed. Though investment in railways, etc., was now
usually financed by the public issue of bonds, industrial investment was
usually financed by private firms. Private foreign capital mostly came
from the U.S.A.; public capital mostly came from the World Bank, or
from governments. As one would expect, direct investment only began
once the basic infrastructure was there. This meant that most of the
465
direct investment by the U.S.A. was in developed industrial countries.
There was a limit to this kind of investment in underdeveloped countries,
which was soon reached unless there was access to export markets. Fifth,
there was the movement of hot, short-term money. Such funds often
moved away from underdeveloped areas.
Professor Cairncross said that when talking about enclaves, one had
to remember that in Africa a high-subsistence sector was an important
part of the economy. The monetary part of the economy was itself an
enclave, often largely made up of foreigners. It followed that early
investment in sqch a country must in some sense always be enclave
investment.
Mr. Berrill began his reply to the discussion by considering the
criticism that he had played down the importance of political factors in
the nineteenth century. Of course political factors had a big influence
on international capital movements, especially in their direction. Perhaps
he had treated the problem too much in global terms. When asked what
was the difference between investment in the nineteenth and twentieth
centuries, it was not easy to answer, because there was no information
on the size of short-term trade credits, and one had to try to give the
right answer on the basis of what information there was. This made
one give undue importance to particular kinds of investment. There
were very real problems in the way of accurate comment, and he did not
think Dr. Singer had allowed, for example, for help given via commodity
agreements, or by countries like France and Italy offering special prices
for foreign goods. He therefore thought it was very difficult to give a
sensible guess of total international investment now as compared with
earlier days.
Replying to Professor Dupriez, Mr. Berrill said that he could not
identify the productive effect of foreign investment from its more general
repercussions, but he did think that in the nineteenth century one could
put one's finger on a particular piece of investment created by a particular
loan. This was much more difficult now that so much foreign lending
was between governments, to protect the balance of payments or to give
governments cash which it was unable or unwilling to obtain by taxation.
That was why he had said that foreign capital now helped to keep the
rate of growth of capital above the rate of investment. Perhaps one should
try to separate off 'soft' loans made to help governments out of political
difficulties.
Perhaps one important influence of foreign lending was to ease the
foreign exchange situation where a country was not growing by the export
of a primary product. The essence of take-off was that it sucked-in
imports, technicians, machines, etc., and perhaps a developing country
was bound at first to find that it was bringing in new imports more rapidly
than it was ending old ones. In the modern world, we were always
looking at the foreign exchange situation in a way that had not been true
in the nineteenth century. The main trouble then had been found in
raising the necessary cash ; the problem of exchange had been thrown
466
back on the banking system. No one borrowed consciously to ease a
foreign exchange shortage, but the shortage showed up in inter-bank rela-
tionships between the countries concerned. It was similar to the balance
of payments problem within the area of one country, which resolved
itself into a question of whether to go on lending or not. When advising
on the scale of foreign borrowing, one often found that a country wanted
four times what London was prepared to lend to it. It then became a
question of whether the foreign government was right.
One argument put forward by governments in under-developed
countries was that of Mr. Mathur, who claimed that foreign funds were
needed for expansion and raising incomes. Second, there was the 'big
push' arguments, and third, the question, what was all this about the
problem of foreign exchange, all that was lacking was money I In a par-
ticular instance where he had been involved, this had meant that the
government could use any pound raised in tax as foreign exchange, be-
cause it had no central bank and was tied to Sterling. One had to be
careful in arguing back from industrialized countries today to the foreign
banking policies of other times.
Another argument was that the foreign exchange problem was purely
one of servicing the debt. But if one then argued with the country as
to how much it should borrow, a new series of arguments came up. The
biggest questions were then about taxation, and one had the inevitable
conflict between equity and poverty. There was again the 'big push'
argument that once take-off was achieved, there would be a sufficient
inflow of revenue to service the debt from rising incomes.
Mr. Berrill said he would end by discussing enclaves. If one were a
believer in leading sectors, then one was bound to take the view that
enclaves would be needed if take-off were to be achieved. The question
was how long they should last. Perhaps they would not need to last
long in the twentieth century, but they certainly did last in the nineteenth.
There were clearly some cases where the enclaves need not have lasted
so long. There were others where there was certainly some interference
in local affairs. But whether economic conditions would have been better
had there been no enclaves struck him as a question to avoid. But what-
ever the answer for the past, how short could the life of an enclave be
in the future ? Professor North thought that their main task was to affect
the domestic market. He did not deny that they produced for export,
but thought they could only export successfully if they had a major
effect at home. M. Boudeville thought their main benefit would be by
reinvesting in and diversifying local industry, and that one should only
allow part of the industry to become monopolized so that there could
be imitation.
Professor Robinson had suggested that all enclaves started out as
bad but that most ultimately became good. This suggested that growth
must start out as enclave growth, but that there were many ways of
ensuring that growth took place domestically and was rapid.
THE FINAL SESSION

Professor Solow said he would talk in his capacity as an economic
theorist and more particularly as one interested in economic growth.
First of all, we had to be clear what the job of economic theory was ; it
was to simplify. It would do no good to carp at model builders because
their theories did not reflect the full richness of reality. To that com-
plaint the proper reply was what Brahms was supposed to have said to
a friend who reproached him with the resemblance between the first
movement of his First Symphony and the last movement of Beethoven's
Ninth: 'Das kennt jeder Esel ', any ass knows that. A model was an
abstract and simplified picture of some aspect of reality. The art of
economic theory was to capture one or more strategic aspects of actual
economic growth and discover some previously unforseen conclusion.
One of the profoundest remarks of the Round Table was Professor
Gerschenkron's quotation from Wittgenstein to the effect that anyone
who asked a question had a responsibility to say what kind of answer he
expected. If one asked a question of economic theory one could not
expect an answer full of contextual detail.
Any model designed to describe the behaviour of an economic system
over time generally comprised three important components : rules of
behaviour, parameters, and initial conditions. (There must of course
also be some definitions and possibly some identities.) He would give
a simple example which was not irrelevant to our subject. Imagine a
small jar containing a limited quantity of whatever it was that fruit flies
ate. If one put a few fruit flies into the jar and did nothing else except
keep the input of food constant, what would happen to the population of
flies ? Raymond Pearl and others proposed this simple model : it was
natural to imagine, first of all, that the rate of growth of the population
bore a component proportional to the current population. Since the
food level each morning never exceeded a fixed amount, there should
also be an upper limit - the maximum allowed by the food supply. One
might also expect the rate of increase to have a component depending on
the amount by which the present population fell short of the maximum.
If one supposed that the change in population per unit of time depended
on this, and if one knew what the population was to begin with, one had
a model for the population process. This rule of behaviour stated the
general connexion between the increase in population and its level, but
this relation depended on two parameters - two constants which charac-
terized the fruit flies and the jar. With different living creatures and
different jars the parameters might differ but the model might still apply
with different values for the parameters. It was also clear that the actual
course of population growth would depend on how many flies one begins
with - there would obviously have to be at least two.
From these components one could deduce the size of the population
at any moment of time. In fact the model would trace out a logistic
468
curve with the upper asymptote depending on the available food supply
and a lower one depending on the number of flies one began with. No
actual population would exactly obey this law, but the model would give
a good approximation to the truth. As an aside, he thought that this
kind of model might have some relation to the retardation of the growth
of industries first discussed in detail in the U.S.A. by Kuznets and Bums
-but somewhat ignored recently. Professor Rostow might want to make
this into a separate concept or perhaps even the basis of his notion of
leading sectors, though Professor Kuznets apparently did not agree with
this. He himself could imagine that an industry producing a specific
commodity with a market that had some natural saturation level-
vacuum cleaners, electric refrigerators, perhaps even motor-cars - might
behave like this, but he did not see how the argument could apply to
industries producing intermediate goods like steel or chemicals.
He did not mean to draw an absolute distinction between initial
conditions, laws of behaviour, and parameters, but this might be a good
way of outlining an orderly relation between economic theory and eco-
nomic history. He would first ask what it meant to believe in a series
of stages of economic development. It might mean something purely
descriptive, for example, that we lived in the automobile age because
there were now lots of motor-cars which clearly did not exist in the past.
This was an important literary device, but it had been insisted on here by
some and denied by others that the notion of stages could have some
analytical content. If that was so then one had to make up one's mind
whether a stage in take-off was a matter mainly of initial conditions, of
the values of the parameters or of behaviour rules. But one could not
say all three, though he had noticed a tendency for historians to do just
this. If one did say all three, one had stolen any element of continuity,
of inter-connexion between past and present, and that was a bad thing
both for history and for economics.
It was not clear to him whether, when Professor Rostow and his
allies said that take-off was a distinct stage, they lileant merely that a
certain level of the key variables having been reached we could say that
a new stage had also been reached. They might alternatively mean that
when a certain definable momentum had been achieved, certain constants
describing the behaviour of the economic system would undergo an
irreversible change. Or they might mean that the fundamental laws
governing economic life had changed so that we must now proceed under
entirely new rules of the game. He had occasionally felt during the
Conference that take-off in any country occurred when Professor Rostow
felt that it had occurred, a method of procedure which left him singularly
unmoved because he needed more precision.
He would like to go on to say something about the kind of helpful
hints for do-it-yourself model makers which the Conference seemed to
have suggested. First, there was the great puzzle of what we seemed to
agree on calling ' the residual'. The puzzle did not surprise him in view
of his interest in the question over several years. He saw a two-fold task
469
for model builders and econometricians. First, they should try to isolate
the residual element on a basis narrower than pure aggregates - even
though this allowed for a new residual element, namely the external
effects from other industries which Professor Marczewski had spoken
about. Second, they should try to allocate the residual element, however
roughly, to its components which should range from technical progress
to such pedestrian things as lower rates of absenteeism. In tum, this
posed a problem for the economic historians. All the real evidence for
the importance of the residual came from relatively recent times. Could
we be reasonably confident that there was such a residual, especially during
the industrial revolutions in England, France, or Germany ?
This led him to a second consideration, and this time to an unresolved
question of economic theory, dramatized for him by some remarks in
the conference. It had been argued that the key difference made by the
industrial revolution was not so much realized technical progress as the
confident expectation of continued technical progress. He was not sure
whether, in his scheme, this ought to be viewed as a change in the para-
meter or as a rule of behaviour. What he did know was that the full
implications of the change had never been worked out, either for the
theory of distribution or of economic growth.
Third, there was a simple point. In common with most model
builders, except perhaps the sea-faring Dutch, he had tended to work with
closed models which ignored international trade. The Round Table made
it clear that more attention should be paid to international trade in the
theory of growth, especially where economies of scale could not be ex-
ploited unless an industry could find good export markets. A closely
related point was the perpetual complaint of location theorists that one
should not ignore the spatial and geographical aspects of economic life.
His rationalization of the question was that while transport costs changed
they did not often do so radically, so that the terms on which goods were
moved across space did not play an active role in an already settled and
advanced community. However valid this view for mature communities,
Professor North and others had made it clear that it would not do for
economies on the verge of industrialization, whether historical or contem-
porary. For economies at this stage of development the geographic
details might be important. The key role could probably be played by
a decline in internal transport costs and international freight rates,
which would enlarge the market for an industry and allow production
on an appropriate scale. This would increase profitability for existing
firms and lead to an industrial ferment which guaranteed future invest-
ments.
His next helpful hint was one about which he was not at all sure,
although he had been one of the two or three people promoting it here.
Theories of economic growth often minimized the problem of effective
demand. In analysing economic development and industrialization it
was usually assumed that the only limit to net investment was the volume
of net savings from all sources. No one here had supported the orthodox
470
view, although some had noted that at very low levels of income it was
unkind to speak of a rise in net saving from, say, 3 to 7 per cent of net
national income as if it were merely a matter of will power. In any case,
it might well be that there was room in models of economic growth for
the inducement to invest. Perhaps one ought not to think in terms of
the accelerator or of any automatic theories of investment, but rather
put all the weight on profitability, particularly short-run profitability of
a continued nature. He would pose this now as a question for historians
and students of underdeveloped countries. If private investment was
not always straining against the volume of saving, what held it back ?
What sort of investment-behaviour equation would be reasonable for a
society just beginning to industrialize?
The sixth helpful hint was that much said in the Round Table sug-
gested that there might be a serious problem in industrializing economies
from a divergence between private and social benefits and costs. This
might take the form of a divergence between private and social rates of
time preference, and he thought it would be interesting to experiment
with ways of determining the social rate of return on investment. The
problem was complicated by technical progress, even more so when this
was complementary with investment, but it seemed an interesting task
which he would like to pursue.
Until he saw contrary evidence, he would doubt the generality of the
idea of long swings. He did not say that they did not exist in some sense,
but was doubtful how widespread they were. His scepticism was based
simply on a desire to keep the number of cycles with which he dealt to
a minimum. But if Professor North and Dr. Cootner were right, and
there was a kind of 20-year cobweb cycle in economies which were
still mainly agricultural, it would be interesting to try to produce a formal
explanation and see if there was any resemblance to the spurts and
accelerations discussed during the conference.
His final question was about the appropriate degree of aggregation.
One need not tell the model-builder that it was difficult to produce dis-
aggregated models, since he already knew this. Any problem might
have an optimum degree of aggregation, and he did not think that any-
thing sensible could be said in the abstract. Mathematical models of
economic growth and development implied responsibilities for economic
historians and statisticians to which he would refer later.
Professor Solow said he would now tum to the other question of
what the economic historians should regard as their responsibility if they
wished to collaborate with economic theorists. He realized that there
might be no such desire, since history like theory was an activity worth
pursuing for sheer intellectual pleasure. But granted that economic
historians wanted to set problems for economic theory what must they
do ? First, there was disaggregation. He thought few people realized
the appetite of a disaggregated economic model for parameters. It
appeared that as the number of sectors in a dynamic model increased,
the variety of modes of behaviour that it could exhibit also increased.
471
This implied that if one did not know the empirical values of the para-
meters one might not be able to say anything interesting about the quali-
tative behaviour of the model. So, if economic historians wanted help
from multisector models they would have to produce much more in the
way of estimates not of observable qualities but of parameters. He would
like to give the warning that this was a difficult task even when the data
were good and plentiful ; for remote periods it might well be impossible.
He wondered whether every economic historian of the nineteenth century
had a clear idea of the price and income elasticities of the demand for
wheat. Yet every time an input-output table was mentioned he winced
at the thought that for ten sectors one required a hundred numbers, all
of these changing and some of them very rapidly ; and practically none
of them were known.
His second question was quite different, namely why had there been
no mention here of the so-called ' dual economies ' ? In a sense, of course,
this problem had been discussed. There had been oblique references
to the supply of labour to industry by movements out of agriculture.
We had been aware that before industry developed there had been agri-
culture, and that even after industry had developed some agriculture had
remained. But the precise relation between the growing industrial
complex and the surrounding subsistence economy seemed to have
escaped analysis. This could be stressed by what seemed to be one
attempt in Professor Rostow's paper to work both sides of the street.
Professor Rostow said that if agriculture was not productive enough
there could be no take-off, but that if agriculture was too productive, as
in the Argentine and the U.S.A., take-off might equally be delayed.
This was certainly possible, but anyone who wanted to explain the absence
of T sometimes by too little A and sometimes by too much A owed an
independent measure to his audience of what just enough A would be.
It would not do to say that if T occurred then there was just enough A.
There was the well-known paper by Arthur Lewis on this subject which
he had missed hearing discussed here.
He had been putting off as long as he could the question that he
really had in mind. The heart of a model, as he defined it, was a set of
behaviour rules -of statements connecting the movements of one
economic variable with other economic and non-economic variables.
These rules were never exact, but were the economists' primitive sub-
stitute for the general laws of nature in physics, like the inverse square
law or the conservation of energy. It had always seemed to him that
Professor Rostow's scheme contained no behaviour relation of this kind,
so that however evocative its terminology and its description might be it
had little or no analytical content. His experience here had not changed
his mind, and he had noticed, for instance, that the discussion of the
country papers seemed to concentrate mainly on such questions as 'did
Ruritania experience a take-off ?' and 'exactly when did Ruritania ex-
perience take-off ?' There was much less discussion about the precise
mechanism of take-off, by which he meant something much more than
473
statements about whether railroads or textiles were the main carriers of
industry. In the course of the discussion, there had been some fascinating
studies of mechanism. For example, one entry in his notes ran 'North
on South', and some of Mr. Berrill's analyses of the role of export markets
were very useful; but on take-off itself there seemed to be a lack of dis-
cussion of mechanisms. One telling illustration of this was when Pro-
fessor Robinson described the Vanoni Plan as an attempt to make the
South of Italy take-off through a process of investment in social overhead
capital. One cause of failure was apparently the heavy leakage of secondary
expenditure to the North, and possibly abroad. Even if it were possible
to trap the multiplier chain of expenditure in the South, Professor Robinson
asked, would the region have taken off, or would the higher level of
income have fallen back to the initial level as soon as the injection of
investment ended? The only answer offered was that it would depend
on the quality of the available entrepreneurs. Given good, vigorous
entrepreneurship, the South would have taken off; without it, no. Since
he did not think we had any satisfactory measure of the goodness or
vigour of entrepreneurs other than the results of their efforts, he could
not read any content into that answer. Actually, he thought Professor
Robinson's question suggested that we were really dealing with economic
growth and not with some mysterious stage. On the assumption that
secondary effects could be trapped, he thought the main question to be
answered was how much additional investment could be induced by the
rise to a new plateau of income. Whether or not investment was really
so important in bringing growth as we once thought it to be, we did
know that investment generated income. He did not think Professor
Cairn cross meant to argue in his paper that in any mechanical way income
or income growth automatically bred investment. He would perhaps
agree that the behaviour relation governing real investment at any income
level would be quite complicated, that the parameters of that relation
varied from place to place and possibly from time to time. But he thought
that to know something about that relation would provide much of the
answer to Professor Robinson's question. It was also worth noting that
this was precisely the kind of question that any theory must answer, so he
commended a study of the investment function to economic historians and
the providing of behaviour relations and mechanism to the model builder.
A related question which fascinated him was that there had been
much talked about economies of scale, both the internal technological
and the external economies of specialization observed by Adam Smith.
There had also been discussion of the importance of transport improve-
ments and foreign trade in enlarging the extent of the market by which
the division of labour was limited. He thought this was extremely im-
portant, but would like to see some quantitative evidence from experience.
Was there any? Did we know whether ir.terr.al or external economies
were more important in reducing costs in industrialized countries?
Incidentally, he remembered Professor Cairncross saying that the pro-
duction of miniature capital equipment would be of great benefit to
473
The Economics ()j Take-off into Sustained Growth
industrializing countries. He rather suspected that one of the important
inventions in the history of the factory system was precisely of this kind
- the fractional horse-power engine which freed the individual machine
from depending on a central source of power.
He wanted to repeat Simon Kuznets' warning that economic his-
torians were making deductions from a small number of cases. There
were only about 15 countries for which there were long-period quanti-
tative data. There was nothing wrong with attempting to use this data ;
one just had to make the best use of it one could. But he thought it
unsound and unconvincing to erect profound generalizations on such
inductions and then go back and test them on the self-same body of
data which suggested the generalizations in the first place. The new few
observations might falsify the original induction. There was a great
temptation to save the grandiose generalization by patching it here and
there. For example, one argued that the savings ratio did not have to
rise from 5 to 10 per cent; one argued that if there had been technical
change without take-off then the response was lacking. Such difficulties
could be avoided if some genuine behaviour mechanisms could be set up.
and we gave a virtuous promise to abandon them if they proved unreliable
One must suspect theories which were elastic enough to withstand the
discovery of any new fact, whatever it was.
Finally, there was the concept of self-sustained and irreversible
growth. What did it mean ? Did it imply changes in parameters or
laws of behaviour ? Professor Solow suggested that perhaps the best
thing might be for economic historians and model bu:i.lders to remain
friends, but no more -for the economists to misuse historians' data and
for the historians to misunderstand the economists' theories. Then
Professor Gerschenkron's 'strain of backwardness' would tell first on
one side, then on the other. In that way, progress would be made by
all. He would remind the Conference that Edgeworth had once remarked
that any amount of researcn was better than bickering, and that we should
all, like good Athenians, at least eschew the disparagement of each others'
pursuits.
Professor Hague said that, having behaved on the principle that a
good rapporteur, like a Victorian child, should be seen and not heard,
he would like to take this unique opportunity of having the last word.
Professor Rostow had spoken in the first session of growth as a multiplier
process and had said that Professor Solow thought that it was more of
an accelerator process. He felt it might be useful to try to see what
help the multiplier and accelerator were in solving Professor Rostow's
problems. It would be remembered that, about 1930, the income (or
employment) multiplier had been developed to explain how, in a static
situation and with unemployed resources, one could increase the level
of income by a definite multiple of an initial increase in investment. But
the multiplier said nothing on the way in which the potential full-employ-
ment level of income could be increased ; there were enough resources
available and unused already without trying to produce more. As a
474
result, the multiplier said nothing about growth ; and later work of
Professor Hicks and others had shown that the multiplier was neither an
initiating factor nor a factor which magnified fluctuations in the economy.
For that, the accelerator was much more important.
Professor Hague said he would look for a moment at the kind of
multiplier situation which Professor Robinson had envisaged in discussing
Southern Italy and the Vanoni Plan. The multiplier analysis merely said
that if one had an initial increase in investment in social overhead capital,
one would get a rise in income whose size depended on the marginal
propensity to consume. This rise in income was made up of the initial
rise of investment and the induced rise in consumption. In order to
stimulate growth, one had to go beyond this and see that the original
increase in investment, which came to the same thing as expenditure on
capital goods, was of a kind that would lead to growth via what we had
learned in the past ten days to describe as backward linkages and spread-
ing effects. So far as the increase in consumption was concerned, the
important thing was to see that this consumer spending did not go on
imported goods or into the wrong parts of the economy. In other words,
one wanted the best possible spreading effects and in the right places.
The difficulty here was that the consumer might well spend the money
on things which did not have the biggest possible domestic spreading
effects. As he had said on a previous occasion, if there was extra money
to spend in the U.K. this might well go on holidays in Cannes, Chablis,
and text-books of economics. And a prim-i Italians in the South would
have many imported goods to tempt them.
However, assuming that the money was spent at home, the crucial
hope was that since there were some bottlenecks even in an economy
where there was unemployment, one was likely to induce some invest-
ment. It was induced investment that the Vanoni Plan had relied on,
and the whole process now became one of a Hicksian interrelation be-
tween the accelerator and the multiplier. It followed that, while the
income multiplier was a useful tool of analysis, there was not, and could
not- ever be, what Professor Rostow seemed to want- a growth multi-
plier. As Professors Hicks and Harrod had made clear in other contexts,
autonomous or induced investment was the driving force lying behind
economic growth. It also seemed from his analysis that a Harrod-Domar
model of equilibrium growth was less useful than the multiplier-accelerator
analysis, even in the study of economic growth. Perhaps balanced-growth
models had done some harm to economic analysis quite apart from any
which they had done by the stress they laid on the capital-output ratio.
Professor Hague said that in a sense this was all very elementary, but he
thought that it might help to tidy up and clarify some of the things that
had been said, and make up for some of the things which had not been
said.
Finally, he just wanted to say that he had been a little distressed by
the fact that the analyses of the theoretical economists in the Round
Tables had so often ignored the fact that all their hypotheses had to take
475
account of the person who made so many of the decisions upon which
growth depended- the entrepreneur. Although it might be a little dis-
heartening, he felt, for example, that studies of what we had talked about
as 'the residual' which concentrated on what had happened in individual
firms might well be the most useful next stage in explaining this fascinating
phenomenon. So far as under-developed areas were concerned, he had
often thought that take-off and subsequent growth often depended more
than anything on the spreading of sheer common sense among a relatively
uneducated and unthinking population. He therefore merely wanted to
stress that the decisions of human beings, and the way in which they
were taken, were often overlooked. And, even in the biggest firms, the
process of decision-making remained very often much less sophisticated
than economists seemed to think. Human beings were the most important
factor underlying economic growth, and this reminded those of us who
were teachers of the importance of education, not least of education in
management.
INDEX
Entries in the Index in Black Type under the Names of Participants
in the Conf'erence indicate their Papers or Discussions or their
Papers. Entries in Italics indicate Contributions by Participants
to the Discussions
Abramovitz, Moses, ed., 262 n. Bittermann, Eberhard, 101 n., 102 n.
Adams, Henry, 154-S Bjerke, J., 249 n.
Africa, agriculture in, 433 Blackett, P. M. S., 464
Agriculture, and development, 13-14, Blackmer, D. L. M., and Millikan,
36-7,68-9,134-5,201-24,225-39,34 2, M. F., xxi
344, 367-8, 370, 379-81, 426-37; in Bloch, Marc, 205 n.
Africa, 433 ; in France, 211-14; in Boserup, Mogens, 201-24, 341, 349, 384,
(}ernrulny, 100-4, 115, 210-11; in 404-6, 420, 428-87, 436-6, 446-6
Italy, 213-14; in Japan, 145-7, 218; Boudeville, Jacques, 304, 318-19, 329,
in Latin America, 225-39, 429-37 ; 347,362-3,400-1,434,446,462,462-3
in South Asia, 216-24, 428-37 ; in Brentano, L., 402
Spain, 213-14 ; in United Kingdom, Bretton Woods Agreement, 237
209-10 Briggs, Asa, 73 n.
Allen, Zachariah, 60 n. Britain. See United Kingdom
Anglo-Japanese Agreement (1902), Brown, E. H. Phelps, 68-9
291 BulhOe&, 0. G. de, 226-39, 326,
Ashton, T. S., 70, 250 n., 336, 337 428-87, 436-7
Asia, South, agriculture in, 216-24, Burn, D. L., 54 n., 60 n.
428-37 Burns, A. F., 1, 2 n., 28
Assisted take-off, 291-7 By~. Maurice, 205, 457
Aukrust, 0., 244 n., 349,362,372-3,417,
437,443-4 Cairncross, A. K., 240-80, 269,303,307,
Australia, foreign capital and take-off 316-16, 326, 330, 338-9, 360, 362, 371,
in, 295 374, 419, 421-2, 487-48, 446-8, 463-4,
466-6
Baines, E., 7 n. Cain1 (Viscount of), 235
Baldwin, R. E., and Meier,(}. M., Canada, industrial distribution of capi-
253 n. tal of, 256 ; railways in, 291-2; take-
Baran, Paul A., 289 n. off in, 286, 291-3
Barkhausen, M., 94 n. Cantillon, Richard, 202 n.
Barnett, Harold, 279 n. Capital, foreign, and take-off, 285-300,
Beeke, H., 76 457-76
Belgium, take-off in, 375-8 Capital formation in the take-off.
Bentzel, Ragnar, 328, 347, 381, 409, See Investment
416-17' 439-40 Capital markets, 149-50, 257-60; in
Berrill, Kenneth, 18 n., 77-8, 80 n., u.s., 56-7
~.301-2,309,322,326,339,349, Capital-output ratios, 30-1, 253-6, 320,
369, 376, 384-6, 408-9, 422, 436, 444-6, 322, 345, 350, 373-4, 437-48
461, 464, 467-87 466-7 Carter, A., and Wilson, C., 289 n.
Berry, T. W., 44 n. Chambers, J. D., 65, 328
Bienengrlber, A., 112 n. Champernowne, David, 418
Bigelow, J. P., 46 n. Chenery, H. B., 262 n., 265-6, 277, 456
Biasing, W. M. Frh. v., 85 n Chiva, lsac, 215 n.
477
Index
Cipolla, C. M., 316, 319-20, 401-2, 423 Education and take-off, 17, 60-1
Clapham, J. H., 269 n., 317 Evans, G. H., 46 n.
Clark, Colin, 306, 354 Expansion, causes of, in U.S., 54-62
Clark, V. S., 50 n., 53 n., 55 n., 56 n.,
60n. Fabricant, S., 417, 437
Coale, Ansley, J., and Hoover, Edgar Fauvel, Luc, 433, 441-2, 458
M.,181 Finckenstein, H. W. Graf. v., 101 n.,
Cobb-Douglas production function, 102 n.
424,443,444 Firestone, 0. J., 34
Colbert-Louvois conflict, 159 n. Fischer, Wolfram, 83-94,325-6, 335,
Cole, Arthur H., 47, 51 n., 52; and 344-M, 352-4, 373, 378-9
Smith, W. B., 268 n. Foreign capital and take-off, 285-300,
Cole, W. A., and Deane, Phyllis, 65 n., 457-76
67 n., 70 n., 76 n., 254-5, 289 n. Foreign exchange, 18-19
Colean, Miles, and Newcomb, Robin- Foreign trade and take-off, 336-7, 339-
son, 271 n. 341
Colquhoun, P., 76 France, agriculture in, 211-14; invest-
Congress of Berlin, effects of, on ment in, 120-3 ; railways in, 128-31,
Russia, 158-9, 381, 386 360, 361-2; take-off in, 119-38, 354-
Cooper, Charles A., 269 n., 273 n. 365
Cootner, Paul H., 5 n., 261-84, 331, 381- Francis, Dewitt, 46 n.
382, 424, 440, 449-58, 454-6 Frankel, S. H., 241 n., 288 n.
Cotton textile industry, in Japan, 148-
150; inU.K.,xix,6,13-14,69-70, 71- Gallman, Robert, 34, 44 n., 46, 329
72,75; in U.S.,49-51,54-5, 331-2,450 Gayer, A. D., Rostow, W. W., and
Coxe, Tench, 45 Schwartz, A. J., 269 n.
Germany, agriculture in, 100-4, 115,
Dahmen, E., 158, 310 210-11; customs legislation in, 88-9;
Darwinian process, 455 railways in, 91-2, 106, 352; role of
Dating of take-off, 7-9, 344-5 government activity in, 83-94, 344-
Daugherty, C. D., 5 n. 354; take-off in, 32, 34-5, 95-118,
Davenant, C., 357 344-54 ; and U.K., comparison of,
Davis, Lance, 57 n. at mid-19th century, 117-18
Deane, Phyllis, 31, 307-8, 310, 340-1, Gerschenkron, Alexander, 38, 151-69,
341,342,343,440-1; and Cole, W. A., 210 n., 303, 305, 310, 326, 330, 344-5,
65 n., 67 n., 70 n., 76 no 254-5, 356-8, 378-90, 385-90, 423-4
289 n.; and Habakkuk, H. J., 63-82, Gibb, GeorgeS., 51, 60
319, 334-43 Gilboy-Schumpeter index, 66
Delivanis, D., 307, 335, 350-1, 371, 399, Goldsmith, R. W., 44 n., 255
417, 442-3, 457-8 Goodrich, C., and Segal, H., 272 n.
Demography. See Population Government activity, role of, in Ger-
Distinction between pre-conditions and many, 83-94, 344-54
take-off, difficulties of, xvi-xx Growth, and investment, intercon-
Di Tella, G., 15 n. nexion of, 243-8 ; a sectoral process
Dobb, M., 206 n. of, xvi; self-sustained, xxii, 9-11, 27,
Dobson, B. P., 76 n. 39-40, 395-6 ; stages of, xviii, 385-90,
Domar, Harrod-Domar model of equili- 391-401
brium growth, xxiv, 443, 475 Gudin, Eugenio, 330,347,371,431-3,460
Droppers, G., 142 n.
Duesenberry, James, 206 n. Habakkuk, H. J., 301; and Deane,
Dunham, A. L., 269 n. Phyllis, 63-82, 319, 834-43
Dupriez, L~on, 375-8,380-1,434,442,462 Haberler, G., 238
Hague, D. C., xiii, 474-6
Eckaus, R. S., 276 n. Hall, A. R., Singer, C., Holmyard, E. J.,
Edgeworth, F. Y., 474 and Williams, T. L., eels., 70 n., 72 n.
Index
Hamilton, Henry, 259 n. Italy, agriculture in, 213-14; take-off in
Harris, S. E., ed., 140 n. 450, 473 ; Vanoni Plan, 450, 451-2,
Harrod, R. F., 475 ; Harrod-Domar 454, 473, 475
model of equilibrium, xxiv, 443, 475
Haussmann (Baron), 129, 364
Hayek, F. A. von, 384 Jackman, W. T., 73 n.
James, Emile, 316
Hazard, Blanche, 53 n.
Henderson, W. 0., 83, 85 n., 88 n., Japan, agriculture in, 218 ; Anglo-
93 n., 106 n., 107, 351 Japanese Agreement (1902), 291 ;
cotton textile industry in, 148-50;
Hicks, J. R., 475
Hilgerdt, Folke, 46 n. Land Tax Reform in, 145-7 ; rail-
Hirschman, A. 0., 4, 47 n., 48 n., ways in, 144, 374; stock market in,
57 n., 205, 247, 380 149-50; take-off in, 139-50, 290-1,
Hoffmann, W. G., xviii, 1 n., 2 n., 4 n., 366-75
32, 86-118, 162, 303-4, 306, 316, 334-5, Japanese capitalism, characteristics of,
342, 844-64, 351-2, 361, 398-9, 434,
in initial stage, 141-50
445; and Miiller, J. Heinz, 32
Jevons, H. S., 380
Holmyard, E. J., Singer, C., Hall, Johansson, Osten, 32, 249 n.
A. R., and Williams, T. L., edl., 70 n., John, A. H., 69 n.
72n. Joslin, D. M., 68 n.
Hood, W. C., and Scott, A., 256
Hoover, Edgar M., 56 n. ; and Coale, Kaldor, N., 206 n., 257, 431
Ansley J., 181 Kalecki, M., 206 n.
Hoselitz, B., ed., 151 n. Kendrick, J. W., 437
HOhner, Otto, 113 n. Keynes, J. M., xvii, 16 n., 179-80, 327,
Hudson, George, 449 380,417,445,454-5,464
Kindleberg, Charles, 228
India, take-off in, 452-3, 463-4 King, Gregory, 31, 65 n., 74, 357
Industrial revolution, as take-off, in Kisch, H., 94 n.
U.K., 80-2 Knapp, G. F., 210
Industrialization in the U.S., 44-62, Knapp, J.• 458-9
268-76, 324-34 Knoll, Franz, 95 n.
International Bank for Reconstruction K61lman, W., 94 n.
and Development, 237, 238, 286,298, Kondratieff cycle, 72, 312
303,457,461,462,464-5 Kulischer, Josef, 99 n., 104 n.
International Development Association, Kuntzemiiller, A., 92 n.
465 Kuznets, Simon, xiv-xxiv, 1-3, 22-48,
International Monetary Fund, 237, 172 n., 254, 255, 306,308,310-11, 312,
464
816-24. 323-4, 326, 329, 330, 336-7, 372,
International trade, the rate of, in 373, 374, 378, 395-8
U.K., 77-80
Investment, in Germany, 32, 34, 35 ; in Labrousse, C. E., 355
Japan, 33, 34 ; in Sweden, 32-3, 34 ; Land Tax Reform in Japan, 145-7
in U.K., 31,34-5; and growth, inter- Landes,David,305,307,317-18,328,335-
connexion of, 243-8 ; minimum re- 336,342-3,348-9,354-6,391-5,424-6
quired for take-off, xiv-xv, 26, 75, Lange, Oskar, 226
139, 172, 248-53, 286-7, 315, 320-1, Laspeyre method, 351
342, 345, 351, 369, 371-5, 460, 465, Latin America, agriculture in, 225-39,
474; rate of, in France, 120-3 ; in 429-37
Germany, 113-17; in U.K., 74-7; Laufenburger, H., 348
and take-off, xiv-xvi, 15-18, 240-60, Leading sector, agriculture as, 203-7,
437-48 229-31, 426-37
Iron industry, in Germany, 106-8 ; in Leading sectors and take-off, 1-21, 40,
U.K., 69-71, 75; in U.S., 53 123-32, 301-14, 319, 325, 327-8, 338-
lsard, W., 268 n. 340, 361-2, 367
479
Index
Leibenstein, Harvey, 170-84, 181-200, Musson, A. E., and Robinson, E.,
319, 324-S, 401-18, 4II-13, 418-18, 5 n., 76 n.
425-6 Myint, H., 204 n.
Leontief, W. W., 7, 303, 304, 309, 310, Myrdal, G., 226, 313
318, 360
Lewis, P., and Richards, H., 270 n. Napoleonic Wars, effects of, 78, 85,
Lewis, W. A., xiv-xv, 218, 248, 257, 97, 331, 334, 335
320,342,369,460,472 Nawa, T., 143 n.
Linkages, 11-19 Nef, J. U., 82
List, F., 89, 307, 348 Neumann type of process analysis, 310,
~ood. w. w.. 15,370 418
Lord, John, 5 n., 76 n. Newnark, Fritz, 308, 330, 347-8, 373
Lowell, F. C., 12, 59 New Zealand, foreign capital and take-
Lundberg, E., 244 n. off in, 294-5
Lyaschenko, P. I., 269 n. Newcomb, Robinson, and Colean,
Miles, 271 n.
Mackenroth, Gerhard, 96 n., 97 n. Newman, W. H., 268 n.
Madden, John J., 286 n. Newtonian revolution in technology,
Msklakov, V., 168 n. xxii, 10, 21, 312, 464
Malthus, T., xxiii, 21, 178-9, 205, 376, Nicholls, W., 226
380, 382, 401-3 North, Douglass C., 44-82, 275 n., SM-
Manne, A. S., 265-6 834, 331-4,337, 346, 349-SO, 361-2, 374,
Manoilesco, M., 347 381, 400, 430-1, 450-1, 458-9
Mantoux, P., 400 North, Simeon, 59
Manufacture, in U.K., 69-82; in U.S., Nurkse, R., 220, 262 n., 303, 342, 370,
44-62 431
Marczewski, J., 119-88, 207 n., 304-S,
316,326-7,331,343,345-6,350,~. Ohkawa, 33 n., 142 n., 143 n., 368
358-9, 363-6, 379-80, 413-15, 433, 440,
461-2,463 Page, Thomas W., 57 n.
Markovitch, T., 119 Pearl, Raymond, 468
Marshall, Alfred, 265, 307, 312, 391 Pebrer, P., 77
Marx, Karl, xvii, 16 n., 343, 380 Peron, J. D., 19, 431
Massie, Joseph, 66 Perroux, Fran~ois, 119, 122, 162,
Mathur, G., 309-10, 322-3, 372, 399-400, 212 n., 348
410-II, 417-18, 433-4, 445, 452-3, 463-4 Peters, Max, 104 n.
Matschosz, Conrad, 106 n., 112 n. Petty, William, 65, 357
Meade, J. E., 88 n. Pigou, A. C., 449
Meade, R., 70 n. Poor, Henry V., 273 n.
Meier, G. M., and Baldwin, R. E., 253 n. Population, effects of, xxiv, 11-13, 69,
Merton, R. K., 2 96-100, 170-84, 328-30, 333-4, 339,
Miliukov, P., 168 n. 344, 348, 401-13
Mill, J. S., 376, 405, 438, 447 Population growth, autonomous, 174-
Millikan, M. F., and Blackmer, 177; induced, 177-80
D. L. M.,xxi Pr~bisch, R., 430, 431-2, 433
Monbeg, Pierre, 229-30 Pre-conditions of take-off, xxi, xxiv-
Moody, Paul, 59 xxvi, 26, 27, 36-7, 38, 39, 69, 166-7,
Moog, Viana, 239 320-1, 349-50, 366-7, 383-4, 389-
Moore, Frederick T,, 267 n. 390
Morgan, Robert C., and Shannon, Pressnell, L. S., cd., 65 n., 68 n.,
W. A.,45.n. 69 n., 250n.
Morris, Morris D. 57 n., 58 n. Price, A. H., 88 n.
Mulhall, Michael G., 118 n. Prym, A., 88 n.
Miiller, J. Heinz, and Hoffmann,
Walther, 32 Quesnay, F., 202 n.
48o
lndex
Railways, investment in, 6-7, 8, 14, 17, Schultz, Theodore, 206 n., 233-4
267-76, 449-50, 451, 455-6; in Schumpeter, J. A., xviii, 71-2, 94,
Canada, 291-2; in France, 128-31, 140 n., 142 n., 185, 195, 269 n., 307,
360, 361-2; in Germany, 91-2, 106, 310, 312, 344, 391, 417; Gilboy-
352; in Japan, 144, 374; in U.K., Schumpeter index, 66
80-1 ; in U.S., xix, 53, 268, 270-3, Schunder, F., 88 n.
327-8 Schwartz, A. J., Gayer, A. D., and
Rangnekar, D. K., 434 Rostow, W. W., 269 n.
Ranis, G., 290 n. Scitovsky, T., 262-3
Rasmussen, W. D., and Towne, Scott, A., and Hood, W. C., 256
M. W.,44n. See, Henri, 207 n., 210 n., 222 n.
Reddaway, W. B., 441; and Smith, Segal, H., and Goodrich, C., 272 n.
A. D., 244 n., 419,437 Self-sustained growth, :xxii, 9-11, 27,
Redtenbacher, F. J., 87 39-40, 395-6
Rhodes, Cecil, 449, 455 Shannon, W. A., and Morgan, Robert
Ricardian diminishing returns, xxii, C., 45n.
:xxiii, 9, 21 Siebertz, P., 90 n.
Ricardo, D., 205, 380, 438, 447 Simkin, C. G. F., 294 n.
Richards, H., and Lewis, P., 270 n. Simmons, E., 151 n.
Robertson, Dennis, 419 Singer, C., Holmyard, E. J., Hall,
Robinson, E., and Musson, A. E., 5 n., A. R., and Williams, T., eds., 10 n.,
76n. 72n.
Robinson, E. A. G., 311,327, 328-9,329, Singer, H. W., 225-6,227,247 n., 288 n.,
339-40, 358, 369-70, 373, 382, 402-3, 302-3, 308-9, 313, 316-17, 328, 341,
419-20,441,449-50,451,460-1,465 342,343,358,370-1,380,403-4,426-30,
Robinson, Joan, 174, 191 n., 309,418 441, 459-60. 464-5
Roepke, H. G., 71 n. Skempton, A. W., 72 n., 73
Rohrscheidt, K. v., 88 n. Slater, Samuel, 49, 59
Rosenstein-Rodan, P. N., 262 n., 277, Smith, Adam, 17, 48, 66 n., 235, 315,
403,441 446-7,473
Rosovsky, Henry, 33, 372 Smith, A. D., and Reddaway, W. B.,
Rostow, W. W., xiii-xxvi, 1-21, 22-43, 244 n., 419, 437
63, 69, 74 n., 75, 80, 96, 119-32, 139- Smith, W. B., and Cole, A. H., 268 n.
141, 142, 149, 151, 155, 161-8, 170-1, Social overhead capital, xxv-xxvi, 15-18,
175 n., 181, 203 n., 224, 226, 248 n., 26, 27-8, 113, 261-84, 449-56
250 n., 269 n., 270 n., 280 n., 284, Solow, Robert, :xxiv-xxvi, 319, 326, 350,
285, 291-3, 301-14,305-7, 311-14, 315, 358,312,405-8,408,411,418-19,437-9,
317, 318, 319, 320-22, 322, 323, 324, 468-74
327-8, 335-6, 337,337-8, 340,341,346, Spain, agriculture in, 213-14
359-61, 366-9, 374-5, 380, 382-4, 408, Spiethoff, A., 114, 417
409-10, 422-3, 434-5, 446, 451, 451-2; Spreading effects, 3-7, 301-14, 320,
and Gayer, A. D .• and Schwartz, 324-5, 332-4, 352
A. J., 269 n. Sraffa-Neumann type process matrices,
Rothbarth, E., 329 418
Rother, Christian von, 93-4 Stages, theory of, 22-5, 95-6, 315-24
Russia. See Union of Soviet Socialist Stages of growth, xviii, 385-90, 391-
Republics 401
Steinbeiss, Ferdinand, 90
Sawyer, John E., 59 n. Stigler, George, 48 n., 332
Sayers, R. S., 10 Stock markets. See Capital markets
Scale effects, 196-9 Stolypin, P. A., 168
Scandinavia, foreign capital and take- Stone, P. A., 250 n.
off in, 295-7 Swank, J. H., 5 n.
Sc~oller, Gustav, 109 Sweden, investment in. 32-3 ; take-off
Schubert, H. R., 70 n. in, 295-7
Index
Take-off, assisted, 291-7; character- 6, 13-14, 69-70, 71-2, 75; and Ger-
istics of, 25-8, 35-40 ; concept of, many, comparison of, at mid-19th
391-401,468-76; dating of, 7-9, 344- century, 117-18; rate of investment
345 ; empirical evidence for, 28-34 ; in, 31, 34-S, 74-7; structure of
and foreign capital, 285-300, 457-76; national wealth of (1800--1927), 254-
and foreign trade, 336-7, 339-41 ; 255 ; take-off in, 63-82, 289-90, 334-
formulation of, xiv-xxvi, 139-41, 161- 343 ; transport in, 72-4, 80-1
169, 323-4; unassisted, 289-91 ; in United States, capital-output ratios in,
Belgium, 375-8 ; in Canada, 286, 255-6 ; cotton textile industry in,
291-3; in France, 119-38; 354-65; 49-51, 54-S, 331-2, 450; foreign
in Germany, 32, 34-S, 95-118, 344- capital and take-off in, 293-4; in-
354; in India, 452-3, 463-4 ; in Italy, dustrialization in, 44-62, 268-76, 324-
450, 473; in Japan, 139-50, 290-1, 34 ; railways in, xix, 53, 268, 270-3,
366-75 ; in Latin America, 225-39, 327-8
429-37; in Sweden, 295-7; in U.K., Union of Soviet Socialist Republics,
63-82, 289-90, 334-43 ; in U.S.S.R., industrialization in, 151-69, 378-90
151-69, 378-90
Tarle, E. V., 153 Viner, J., 88 n.
Tawney, R. W., 308-9, 348 Voechting, F., 214 n.
Taylor, George, 44 n., 47 n., 268 n.
Technical progress, and development, Wallis, George, and Whitworth, Joseph,
14-15, 185-200, 413-26 S4n., 60n., 61
Textile industry, in France, 123-8; in Ware, Caroline, SOn.
Germany, 109-11, 346. See also Weaver, Warren, xxiii, xxiv, 2 n.
Cotton textile industry Weber, Max, 304, 334, 340-1, 348, 349
Textile machinery industry, in U.S., White, Lynn, 214 n.
50-1 Whitney, Eli, 59
Thaer, Albrecht, 101 Whitworth, Joseph, and Wallis, George,
Theory of stages, 22-S, 95-6, 315-24 54 n., 60n., 61
Thomas, Brinley, 58 n., 326 Wicksellian type production function,
Tinbergen, J., 253 n., 443 410-11
Tooke, T., 66 n. Williams, T. L., Singer, C., Hall, A. R.,
Toutain, J. C., 119 and Holmyard, E. J., eds., 70 n.,
Towne, M. W., and Rasmussen, W. D., 72 n.
44n. Wilson, C., and Carter, A., 289 n.
Toynbee, Arnold J., 231 n., 239, 400 Witte (Count), 167
Transport, development of, in Ger- Wittgenstein, L., 385, 468
many, 104-7; in U.K., 72-4, 80-1 ; Wood, G. H., 70
in U.S., 55. See also Railways
Tsuru, Shigeto, 16 n., 139-60, 366-76 Yatsunsky, V. K., 297 n.
Tucker, G. S. L., 250 n. Young, Arthur, 66
Turgot, A. R. J., 205 Youngson, A. J., 296 n., 426
Yudo, Koda, 149 n.
Ulmer, Melville, 271
Unassisted take-off, 289-91 Zollverein, 85-9, 95, 105, 112, 353
United Kingdom, agriculture in, 209- Zunkel, F., 94 n.
210 ; cotton textile industry in, xix, Zymelman, M., 1 S n.
THE END

The Economies of Take-Off

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THE ECONOMICS OF TAKE-OFF

INTO SUSTAINED GROWTH

MoNOPOLY AND CoMPETITION AND THEIR REGULATION

THE THEORY OF INTEREST RATES

EcoNOMIC FAcToRs IN PoPULATION GROWTH

© International Economic Association [963

First Edition 1963

SBN 333 03155 5

SPECIAL pressures and distractions, at play first on Professor

LEADING SECTORS AND THE TAKE-OFF

II. RETARDATION AND THE THEORY OF PRODUCTION

Spreading Effects: Backward, Lateral, and Forward

III. LEADING SECTORS AND THE DATING OF TAKE-OFF

IV. HOW SELF-SUSTAINED IS SELF-SUSTAINED

V. LINKAGES BETWEEN LEADING SECTORS AND

(iv) Capital Formation: Industry and Social Overhead Capital

(v) Foreign Exchange

VI. SOME CONCLUSIONS

NOTES ON THE TAKE-OFF

I. REQUIREMENTS FOR A THEORY OF STAGES

II. CHARACTERISTICS OF THE TAKE-OFF

III. EMPIRICAL EVIDENCE ON THE TAKE-OFF STAGE

IV. DISTINCTIVENESS AND GENERALITY OF THE

INDUSTRIALIZATION IN THE UNITED

24th Conference on Income and Wealth (forthcoming). A summary of this evidence

II. THE SCALE OF EXPANSION

III. MODERN VERSUS HOUSEHOLD MANUFACTURE

IV. THE STRUCTURE OF MANUFACTURING INDUSTRY

Value of Value added Rank

Chicago, Buffalo). The North-east, which accounted for three-

1 V. S. Clark, History of Manufactures in the United States (New York:

V. THE CAUSES OF EXPANSION

Manufacture, I, p. 286; and the abundant material in Eighth Census, Manufactures,

THE TAKE-OFF IN BRITAIN

II. THE RATE OF GROWTH

average real incomes in the last three decades of the century z - a

III. CHANGES IN PRODUCTION FUNCTIONS

IV. THE RATE OF INVESTMENT

V. THE R6LE OF INTERNATIONAL TRADE

expansion of exports in the war period. Indeed there is little evi-

VI. THE INDUSTRIAL REVOLUTION AS A TAKE-OFF

GOVERNMENT ACTIVITY AND INDUS-

I. THE BRITISH AND CONTINENTAL CASES

II. GOVERNMENT AS LEGISLATOR

III. GOVERNMENT AS ADMINISTRATOR

IV. GOVERNMENT AS ENTREPRENEUR

THE TAKE-OFF IN GERMANY 1

II. THE DEVELOPMENT OF POPULATION

population surges in Saxony and the Rhenish-Westphalian region ;

III. THE DEVELOPMENT OF AGRICULTURE

Innovations such as the improvement in agricultural techniques

(Per cent of total area)

a whole. In 1864 it had reached 51 per cent in Prussia at the expense

1100 -44/50 56/60 66/70 76/10 16/90 96/1900 06/10 lt/13

The improvement of agricultural methods created the conditions

IV. THE DEVELOPMENT OF TRANSPORT AND INDUSTRY

Industrial and Agricultural Production

_...,...- Total Agricultural Vegetable

customs barriers were removed. The development of German mer-