General Characteristics

Economic historians commonly describe the period from the late 1880s until the First World War as a period of intensive industrialization in Russia, during which a number of structural changes in the economy and society took place. It was a period marked by rapid population growth and advances in agriculture: the growth of the planted area and of crop yields, the increased commercialization of agricultural production, and a rise in the mobility of the agricultural labour force. It was accompanied by a rapid increase of capital overhead, chiefly railways, built with the assistance of foreign capital and government subsidies. But it was also a period of accelerated urbanization, an expansion of the market economy which stimulated the growth in the size of the capital stock of industry as the fastest-growing sector of the Russian economy. The increase of industrial production was also due to the formation of an industrial labour force, growing both in numbers and quality of its industrial skills. To be sure, all these changes were not sufficient to transform Russia from a backward agricultural economy into a modern industrial one; nevertheless, much was achieved during this particular period that facilitated the subsequent efforts to industrialize Russia.

It is, therefore, to the chief elements of change – the economic and social forces that harnessed Russia to the chariot of industrialization – that this chapter addresses itself. The task is a difficult one for a number of reasons.

The Background

Just after the Second World War, American economic historians launched a debate, which has remained inconclusive, on the causes of lags in the rate of growth of the French economy during the process of industrialization in the nineteenth century. Seeing a country impoverished by persistent depression in the 1930s and weakened by the German occupation, they sought other than specifically contemporary factors to explain the lag experienced by France in comparison with other European nations, particularly the two main belligerent powers of western Europe, Britain and Germany, who had led a titanic struggle for five years. If France had been retarded in her economic development, how was this to be explained?

Awareness of this supposed lag was certainly not new, for the industrial superiority of Britain and Germany – not to mention that of the United States – had long since been recognized. In the nineteenth century, scholars and economists had already noted this difference and tried to explain it. In 1819, the chemist and government minister Chaptal, who in addition to having an advanced scientific training was a strong and intelligent administrator, noted, ‘If we have not made as extensive use of machinery [as in England], it is because manual labour here costs less and because the low price of fuel in England allows them to use steam-engines with advantage everywhere.’ Richard Cobden could also remark:

“whilst the indigenous coal and iron in England have attracted to her shores the raw materials of her industry, and given her almost an European monopoly of the great primary elements of steam power, France on the contrary, relying on her ingenuity only to sustain a competition with England, is compelled to purchase a proportion of hers from their great rival.”

Justification

Conjecture: an opinion formed on slight or defective evidence or none.

The above definition conveys very well the true character of many of the results which emerge from the exercise which follows: the estimation of capital accumulation over the period 1760–1860. As will soon be abundantly clear, the sources at present available for this period do not provide the evidence which would enable one to construct even moderately respectable estimates for certain key sectors – notably manufacturing – and hence for the whole economy. At crucial points we are able to proceed only by reliance on conjecture and speculation. The results are accordingly of limited pretension and humble status; the most that can be claimed for them is that they may indicate the broad orders of magnitude of the extent of the capital expenditures in each decade on both fixed assets and inventories, at home and abroad, and of the corresponding growth of the stock of capital; the approximate distribution, by sector, of domestic fixed capital; and the broad pattern and rate of change of capital over the hundred-year period in relation to the growth of population and of the national economy.

What justification is there for attempting at this stage to construct new estimates for the economy as a whole, when so much still remains to be done on the individual sectors which can alone provide a proper foundation for aggregate estimates? Partly the answer is to be found in the great historical importance of this period of early industrialization in Britain, the uncertainty surrounding the existing estimates, and the desirability of bringing together the estimates for individual sectors which have resulted from investigations undertaken since the last synthesis was prepared.

Introduction

Because of its rapidity, sustained achievement, and initial low per capita income, the process of Japanese industrialization is a fascinating subject of study for economists and economic historians. An increasing number of Western students of Japan, after nearly two post-war decades of concerted work with their Japanese colleagues, are providing us with a substantial amount of quantitative evidence on the performance of the Japanese economy during the past hundred years. This evidence has been examined and re-examined, and we now have extremely useful sets of analyses and yet more refined data which compare favourably with those made for any other nation.

While these studies on Japan – analogous to those of Deane and Cole and others on England – were being made, another set of equally important questions for economic historians trying to understand Japan's industrialization suffered relative neglect. I refer to the set of questions which can be loosely classified under the heading of ‘entrepreneurship and management in historical perspective’. More specifically, this is the whole spectrum of questions relating to the rise, recruitment, and composition of entrepreneurship; ownership and control; and the management of industrial firms in the process of Japan's industrialization and modernization.

During the past several years, increasing attention has been paid to these questions by Japanese and Western students alike. But the literature on these aspects of Japanese economic history is either inaccessible or fragmentary, or both. The inaccessibility is mostly due to the fact that the literature is available only in Japanese.

Introduction

One of the grand themes of the literature on economic development relates to the behaviour of the investment rate in the early stages of modern economic growth. Economists from Adam Smith onward have given capital formation an important role in economic growth, and a considerable literature has grown up around the notion that modernization involves a rise in the share of income invested. The American record displays a very prolonged and pronounced long-term movement in this share, a movement that has not as yet received a very full analytical treatment.

The fraction of American real net national product devoted to investment rose from an average value of perhaps 6 or 7 per cent in the first four decades of the nineteenth century, to between 10 and 12 per cent in the decades just before the Civil War, to 18–20 per cent in the decades between the Civil War and the First World War (see Table 1). This development is one of the most striking aspects of American nineteenth-century economic growth, and we have chosen it as the organizing theme of this chapter. We have brought together the evidence on the volume and composition of saving, investment, income, and the capital stock and have attempted to answer two questions: (1) What role did the dramatic increase in the investment share play in American economic development? (2) How can the increase in the share be accounted for?

Introduction

An industrial revolution transforms a traditional society into an industrial one. The primary agent in this process is the factory system, which organizes capital and labour on a scale unheard of in traditional society, on the basis of technology and behaviour that are difficult for ‘traditional man’ to understand. By the logic of traditional social organization and according to the outlook of traditional man, the human dimension of a typical work place under the factory system is mysterious and fearsome: that is, a large number of workers, far exceeding the population of a typical traditional village, are organized into a work force in which tasks follow the dictates of the technologically determined division of labour but hang together at the same time in an interdependent framework administered by management. In other words, workers are divided and ruled by managers who derive their authority from technology and the market. Whether this new social structure, though limited to the workplace, is a boon or peril to traditional man depends very much upon the style and pace of industrialization. Eventually traditional man is transformed into ‘industrial man’, as he sheds the traditional outlook and work habits and acquires new personal qualities that enable him to manoeuvre rationally in the class structure of an industrial society. These concurrent transformations, societal and personal, are often fraught with lags and frictions requiring facilitating or regulatory interventions by the state. This chapter sets out to trace these developments in the course of Japanese industrialization.

The Course of Development

‘Scandinavia’ is an international term; it is hardly ever used by Scandinavians. In its strict sense, it means the three countries of Denmark, Norway, and Sweden, but in practice it inevitably includes Finland, not only for historical reasons but also because Finnish society, both generally and economically, is typically Scandinavian. Finland even managed to retain its Scandinavian characteristics through a century of Russian sovereignty (1809–1917). For the purposes of this paper, however, it may simplify things if the very interesting Finnish case is treated separately, after the sections on Scandinavia proper.

The combined population of Denmark, Norway, and Sweden was 4.1 million in 1800, 6.3 million in 1850, 9.7 million in 1900, and 14.6 million in 1950. Thus in 150 years it had more than trebled. It is impossible to give precise, or even imprecise, figures for the national product of the three countries during the earlier part of the period, though a recent and very tentative Danish estimate goes as far back as 1820. Comparisons are possible beginning in the 1860s. During the ninety years from 1860 to 1950 the Swedish national product increased by a factor of fourteen – perhaps a somewhat exaggerated calculation – and its Danish counterpart by a factor of ten, while the Norwegian figures show an eightfold increase during the somewhat shorter period 1865–1950. These figures must of course be treated with the greatest caution, since the definitions and the means of calculating the figures are different in the several countries.

The Industrial Revolution: Economic Models of the Labour Market

In Britain, the hundred years or so between c. 1750 and c. 1850 saw the competition of what is conventionally called the industrial revolution, and with it the corresponding transformation of the labour force from its traditional structure into a modern industrial working class. These changes constituted a stage in an irreversible social evolution, the creation of modern industrial capitalism. The new character given to society included the emergence of new classes and of new relationships between classes.

The period as a whole has a certain unity and is marked off without much difficulty as the transitional link between relatively more stable economic relations that preceded it and a re-stabilized, but different, framework that followed. Economic theorists who lived through it, beginning with the ‘classics’ of Political Economy, as well as more recent writers on economic development, have been inclined to treat it as a particular and indeed unique phase with certain laws and characteristics of its own. As far as the market for labour in this period is concerned, there has been a remarkable and indeed striking unanimity among them and among all observers. The general axiom is that in this period as a whole the market operated against labour, and that wages tended therefore to be at or near subsistence levels.

The mercantilist writers of the seventeenth and eighteenth centuries had looked upon labour as merely a factor of production, which, in a competitive world in which most industry was highly labour-intensive, should be obtained at the lowest possible cost.

Introduction

This chapter analyses the relationship between the input of capital and economic growth in Japan during the past century. Our presentation follows the broad framework set forth by Solow and Temin in the introductory chapter and is complementary to the next two chapters (by Taira and Yamamura), which deal with the inputs of labour and entrepreneurship.

The assigned task of exploring the role of investment in Japan necessarily imposes a certain sectoral as well as temporal emphasis. Only relatively little attention will have to be devoted to agriculture, since this sector never became an important recipient of either public or private capital. In Japan, at least, an understanding of the advances created by a rising level of investment deals largely with the growth of modern non–agricultural industry. This also means that (unlike Taira and Yamamura) we must concentrate especially on the history of the twentieth century, when factories, machines, and new social overhead implements reached sizeable dimensions for the first time. Of course, no attempt will be made to slight the crucial transitional years of the Meiji era or even the preceding years of Tokugawa rule, but one should always keep at the forefront the sharp distinction between the hesitant beginnings of economic modernization in the late nineteenth century and its full flowering during the past sixty–odd years.

Entrepreneur or Manager?

Regulation has been the substitute for entrepreneurship in Russia during the thousand years of its recorded economic history, and in the past five decades regulation has eliminated entrepreneurship altogether. The state cannot be considered to be the entrepreneur because this function can be exercised only by its citizens: Peter the Great established a framework of controls and incentives which induced the freemen among his subjects (and a very few foreigners) to act – and to continue to act – in new ways; Stalin's system, by contrast, prevented anyone from departing from the path which he or his officials defined as progressive. Since the First Five–year Plan, personal autonomy in the taking of economic decisions – a necessary feature of entrepreneurship – has not been permitted, but in the quarter-century before that deprivation every citizen had had the right to become an entrepreneur. In both earlier and subsequent times, however, the farm worker had much less liberty than the rest of the population. The serfs had been emancipated in 1861, but for another hundred years the country remained a predominantly rural society; townsmen, less than one-sixth of the total at the start of the century, came in 1961 exactly to equal the number of villagers, whose history had been one of uninterrupted restriction until the reform of 1906 and the Revolution of 1917. By determining the actions of those in their service, both Tsarist and Soviet governments have imposed the productive dynamism they desired.

Introduction

In the present state of our knowledge, any piece of economic history bearing the title ‘Capital Formation in Germany in the Nineteenth Century’ certainly deserves a sceptical reaction from its readers. Much basic research remains to be done before the quantitative information that title implies will be available. Recent specialized investigations into the question have stressed the difficulties in the way of obtaining a general picture, especially for the early part of the nineteenth century. German agricultural history, for example, has focused too strongly, according to one expert, on describing the experience in individual regions and branches.

The variations between individual groups of peasant farmers – differentiated according to tenure rights (and thus according to tax or debt burden), quality of the soil, size of enterprise, as well as other criteria – were so great that one may well assume that there were large variations in agricultural income and hence in the possibilities for capital formation. Individual investigations which are limited to a few farms or villages either can reflect and confirm the broad development trends that affected production techniques, marketing conditions, or consumption in all farms, or can reflect an exceptional situation.

In a more general survey, Knut Borchardt's scepticism seemed to go still further, when he labelled any attempt to estimate the national wealth as more or less ‘jesting’, since short-run price variations would tend to dominate the few observations one could hope to make.

Concepts and Scope

The definitions used in this Chapter have to meet two requirements. First, they must be applicable within the whole period under discussion. They must be flexible and broad enough to subsume the tremendous changes occurring within entrepreneurship and management from the late eighteenth century to the twentieth. However, they need not be so broad and abstract as to cover all types of entrepreneurs and managers in history. They should rather be framed with regard to characteristics of the German economy which remained constant through this whole period (without necessarily existing at other times and places) and which were, at the same time, of central importance for the development of entrepreneurship and management. Such a characteristic we find in the fact that this has been, and – for the larger part of Germany – still is, a period of industrialization structured according to capitalist principles. The general features of industrial capitalism which are most central for the study of entrepreneurship and management during the whole period are (a) a factory system which is characterized by power-generating and manufacturing machines, by large amounts of fixed capital, by maturing techniques on an increasingly scientific basis, by the separation between organizational and operative functions, and by contractual labour working under centralized managerial authority, not at home, according to elaborate patterns of labour division; and (b) largely independent and autonomous business enterprises on the basis of the private ownership and control of capital, which is used for the production of goods and services and their sale on the commercial market, according to the criteria of profitability; business enterprises relate to each other mainly through market mechanisms.

The purpose of this volume is to advance our understanding of industrial development by describing the progress of what economists call the ‘factors of production’, i.e. the inputs out of which food, clothing, and shelter are made. It is by no means clear, however, that the increase in our ability to produce food, clothing, and shelter that we call ‘the industrial revolution’ was a direct result of an increase in the factors of production. In fact, the relation between the traditional factors of production – land, labour, and capital – and the ability of an economy to produce is far more complex than the use of the words ‘inputs’ and ‘outputs’ might suggest. We therefore introduce the discussion of the factors of production by an attempt to set forward the relations between these factors and industrial development that is the subject of this book.

It is a great abstraction to talk of the economy as a whole and of only a few factors of production. The uses of such an abstraction are obvious: it enables us to make generalizations, to compare countries with each other, and to direct our research into areas of potential usefulness. But there are also limitations to this usefulness, limitations that are directly related to the ability of this abstraction to tell us something interesting about a complex world. The relationship between the factors of production and the process of industrialization to be described shortly holds good only under a variety of restrictive assumptions.