Trade and the industrial revolution. (Lecture 1)

1. Lecture 1 Trade and the Industrial Revolution

Franco Passacantando
Academic year 2015-2016
Global Trade, M112 Master Degree in International Relations, LUISS Guido Carli
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2. Main Issues of today’s lecture

• What can the history of the extraordinary economic development
in the 19th century tell us about the relationship between trade
and innovation?
• Was trade one of the main factors causing the industrial
revolution? Would the revolution have happened in a closed
economy?
• How did the geography of international trade change and the
balance of power among different continents change as a result
of the industrial revolution?
FO, Chapters 6 (pp.311-345) and 7 (pp.378-383)
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3.

I. The industrial revolution
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4. 1. Industrial Revolution: background

It started in the cotton industry which rapidly replaced the traditional
woolen textiles industry (the share of wool fell from 60 per cent in 175254 to 20 cent in 1810). As a result Agriculture’s share of British male
employment fell from 61 per cent in 1700 to 29 per cent in 1841
Eventually innovations spread to most other industrial sectors
(metallurgic industry, transportation).
Three main factors of change
•technical innovations
•creation of new waterways
•railways
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5. 1. Industrial Revolution: technical innovations

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

- Macadam Road introduced in 1820 (time to travel from Manchester to
London reduced from 4-5 days in 1780 to 36 hours in 1820). Horse-drawn
carriages.
- Navigable waterways in Britain quadrupled between 1750 and 1820;
- Canal construction in France, the river Rhine, in Italy the river PO which,
since the prehistory, has always been used as a main waterway.
- Erie Canal, constructed between 1817 and 1825, reduced the transportation
costs between Buffalo and New York by 85 per cent and cut the journey time
from 21 to eight days.
- Suez Canal (101 mile long) opened in 1869. It cut the distance from Britain
to Bombay from 10,667 miles too 6224 miles. It accelerated the use of
steamships because sailboats could not be used on the canal. (they had to
be towed. First which tried was wrecked)
- Panama canal (launched in 1879 but completed only in 1907)
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7.

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8. 1. Industrial Revolution: Railways

• 1825: world’s first rail line, the Stockton and Darlington Railway. In
Italy the first railway was between Napoli and Portici in 1839 (it
used English steam locomotives);
• 1869: A transcontinental line linked the East and West coasts of the
United States;
• 1885: the Canadian-Pacific railroad was completed;
• In the decade prior to the First World War main railways were
built in Argentina, India, Australia, China and elsewhere, largely
financed by British capital. India was the fourth country in the
world in terms of total railway mileage.
• From virtually nothing in 1826, almost a million kilometers of rail
had been built by 1913 (Maddison, 2008).
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9. 1. Why was the industrial revolution revolutionary

Reduction in transportation costs:
cost of transporting commodities (freight rates as a
percentage of the price of a commodity). (p.383)
- coal from Britain to Genoa: from 213 % in 1840 to 54 % in
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1910.
wheat from East Coast of US to Britain: from 10.3 % in 1830
to 3.2 in 1910
rice rom Rangoon to Europe: from 73.8 per cent in 1880 to
18.1 in 1910
not just greater quantities of goods being traded but also a
greater variety of goods which greatly increasing competition
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10. 1.Why was the industrial revolution revolutionary

Change in the relationship between population and wages’ growth
• English population rose from 5.9 million in 1751 to 14.9 million in 1841 “due to
increase in marital fertility: average age of marriage for females came down
from 26 in the early 700s to 23 by 1830-37”. FO p.315
• In the past population expansion led to a decline in living standards. because
of diminishing productivity (which would provoke famines, diseases and other
disasters). This reduced population or slowed down its growth. Malthus (late
18th century) predicted that population growth, by exceeding resource growth,
would lead to catastrophes.
• This did not happen. In fact real wages increased. From the industrial
revolution on population growth ceases to vary endogenously, thanks to
technical progress.
• New land (in the US) and coal allowed Europe the escape the curse of
diminishing returns
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11.

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12. 1.Why was the industrial revolution revolutionary

Productivity improvements
Number of operative hours to process 100 lb. (45 kilograms) of
cotton:
• 50,000 in India.
• 2000 in England (fell to 300 by 1795, 135 by 1825, 40 in 1972)
(p.320)
besides spinning and weaving, innovations were introduced also in
bleaching, dyeing and printing, were used also in other industries
(silk, linen. woolen) and had a strong impact on the industries
producing the intermediate products (like chemical industry)
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13.

II. The contribution of trade to the
industrial revolution
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14. II Trade and the Industrial Revolution: sources of growth

There has been considerable discussion on whether the
sources of growth during the British Industrial Revolution
are to be found more on the side of supply or of demand.
Did the technological innovation spur growth or was the
demand increase due to the opening up of frontiers and
reduction of transportation costs?
What type of evidence would one have to look at to answer
this question?
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16. II Trade and the Industrial Revolution: sources of growth

The fact that Britain’s terms of trade fell significantly implies that British
supply curves must have been shifting out more rapidly than the demand
curves for British manufactured goods. Overseas demand was not the
exogenous driving force behind British industrial output growth.
However this does not imply that trade was irrelevant to that growth.
Domestic innovation and inventiveness were crucial factors, but three
questions:
(a)what would have been the effects of those innovations on resource
constraints
(b)and on demand in the absence of international trade
(c) have those innovations been favored by international trade
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17. II Trade and the Industrial Revolution: relief on resource constraints

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

•Two of the main British imports for over two hundred years were first sugar and then
cotton from the New World.
•According to Eric Williams in his famous book Capitalism and Slavery (1966) it was
the profits of the Atlantic slave trade that financed the Industrial Revolution was .
Critics have argued that (a) the profits derived from it were a small share of national
income and (b) in the long run it was technological progress rather than capital
accumulation that supported income growth. However there is no doubt that
1.Africans were the main component of the labor force which produced the essential
raw material for the British industry. Slave trade reached its peak in the years of the
industrial revolution and almost 80 per cent of US export were produce by Africans.
tables 5.1 and 6.6
2.the slave trade became a very profitable business. “Eltis and Jennings (1988)
report that Britain’s terms of trade with Africa fell from 112 in 1750 to 40 in 1800
(that is to say, the price of slaves in terms of imported manufactures rose by a factor
of two and a half)” FO p. 340
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19.

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20.

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21. II Trade and the Industrial Revolution: relief on resource constraints

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

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

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

• Trade systematically raises the elasticities of supply and
demand facing an economy. Absent trade, input costs
would have risen, and output prices would have declined,
more rapidly than would otherwise have been the case.
• This would hardly have increased the profitability of
investing in new textile technology.
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25.

III. The Great Specialization
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26. III. Deindustrialization of China and India

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

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