INTRODUCTION

This chapter is concerned with material conditions, and, in particular, changes in the size distribution of income and changes in inequality and poverty over time. Money has no intrinsic value, but it does provide the means to access goods, services and activities that do have value. In consequence, the chapter uses income as a proxy for these, though well-being is not adequately captured in this way. Most people would agree that their standard of living is determined by more than the amount of income they have, or by how much money they receive relative to others. As Sen (1987: 1) points out, ‘You could be well off, without being well. You could be well, without being able to lead the life you wanted. You could have got the life you wanted, without being happy.’ Indeed, as we shall see at the end of this chapter, for the period for which data is available, there is discord between judgements based on the analysis of the available indicators of subjective well-being and evidence relating to the material progress of living standards.

The enumeration of poverty is often simply the outcome of a further small step in the analysis of changes in income inequality, as there is a view that the right way to define a poverty line is relative to a chosen percentile in the distribution of equivalised household income (a measure of income that takes account of differences in a household's size and composition). Piachaud (1988) and Glennerster et al. (2004) strongly advocate the use of such relative poverty measures. Current British official and quasi-official measures of poverty or deprivation also reflect this position and employ a measure based on the number or proportion of individuals who have less than 60% of equivalised median income.

From an historical perspective, however, it is clear that what it means to be ‘poor’, and what it means to be in ‘poverty’, have evolved as categorical terms as the nation has become more affluent. The World Bank tends to use ‘absolute’ or ‘bare subsistence’ poverty measures, such as their ‘a dollar a day’ standard, for international comparisons.

INTRODUCTION: LONG-RUN TRENDS

This chapter provides a brief introduction to the history of Britain's engagement with the international economy between 1870 and 2010. It begins by discussing long-run trends in the integration of the British economy with the rest of the world. Economic historians are typically interested in four types of flows between economies: trade in goods and services; flows of capital; migration flows; and flows of ideas and technology. The last flow is probably the most important one for countries hoping to catch up to the international technological frontier. While this was not the right way to characterise the British economy in 1870, it probably was at various points after the Second World War. Unfortunately, such flows are also the most difficult to quantify, and so I follow the bulk of the literature in concentrating on trade, capital flows and migration.

When measuring the extent to which commodity, capital or labour markets are integrated at various points in time, researchers have adopted several approaches. The most straightforward is simply to measure the extent of trade, or capital flows, or labour flows, and see how these vary over time. In order for intertemporal comparisons to be meaningful, it is common to express the flows as a percentage of GDP, or relative to the total population, as appropriate. Another approach is to focus on the costs of transacting internationally, which will be reflected in price gaps for a homogeneous commodity, or financial asset, or type of labour, between two markets. Falling international price gaps are a sign that markets are becoming better integrated over time, rising price gaps a sign of disintegration.

It is possible that prices could converge internationally for reasons having nothing to do with trade, while trade can increase for reasons other than the integration of international markets. If, however, price gaps converge at a time of falling transport costs, trade liberalisation, and/or rising volumes of trade, then it seems safe to conclude that integration is taking place.

INTRODUCTION

Across much of Europe, by 1650 economic issues had become what they have since remained, a prominent ‘reason of state’. If for centuries laws, taxes, privileges and proclamations had framed and affected economic life, in Britain and elsewhere, many more concerted efforts were now made to apply political power to attack poverty and encourage prosperity. Initially, Britain's dysfunctional constitution limited what could be done. But gradually at first, rapidly after 1688, a new political order was constructed that overcame some key limitations, centring on a significantly heightened role for parliament and a frequently effective ‘fiscalmilitary state’. It might be expected that ideas to enhance economic life could now be effectively implemented. Yet bold statutes and loud exhortations often encountered indifference, evasion and resistance. In contrast, numerous more modest proposals to use political power for economic ends, mainly local or personal, collectively proved highly significant. A state that raised money and waged war pretty successfully was far less good at implementing economic policies; but parliament's supreme legislative power was vigorously used by many thousands of small and scattered propertied interests, a use that continued unbroken beyond 1870.

Attempts by central government from the 1740s to reinvigorate imperial economic regulation, both within Britain and across the Atlantic, largely failed, categorically so with American independence in 1776. It was now clear to many key figures, both within the government and outside, that grand plans for the economy needed dousing with a cold shower of realism. Over the next half century there was a major rethinking of where the government should and should not look to act, allied to major administrative reforms. After 1815 such ideas chimed with taxpayers’ shouts for ‘cheap government’, as well as the increasing influence of classical economics. Yet those changes sought to address not just past failures but new and evolving problems, from revolutions in some industries, to the infant trade cycle, urban squalor, unbalanced labour markets, hazardous work, white-collar crime and currency shortages – in short, the unforeseeable problems of the first industrial revolution.

INTRODUCTION

Mid-Victorian Britain was a wonder: the workshop of the world, the hegemon behind the Pax Britannica, the manager of the international monetary system. The average Briton lived in a city, earned a living as an industrial or service sector employee, and would see her children enjoy living standards that marked a decisive break with the past in terms of health, education, consumption and leisure. Britain had come a long way from its early modern position as a peripheral, backward country. This chapter explores the evolution of the economy from 1700 to 1870, during which it passed through the decisive phase of the industrial revolution. The first section sketches a macroeconomic outline of developments in the period. This is followed by an effort to set these achievements in a comparative perspective, emphasising what was distinctive about Britain's experience. A third section further exploits international data to evaluate several hypotheses about the causes of the industrial revolution that have featured in recent debates. The final section offers a summary and conclusions.

1700–1870: A MACROECONOMIC OVERVIEW

Gross domestic product (GDP) measures a country's annual production of goods and services. Expressed in per capita terms, it is an indicator of the economy's productivity and its ability to meet the needs of its people. Figure 1.1 plots two estimates of inflation-adjusted (‘real’) British GDP per person. The first is based on the estimates of Crafts and Harley (1992); the second is a new annual series calculated by Broadberry et al. (2011a). Both show a dramatic increase over the period under study. Output per person more than doubled between 1700 and 1870, reaching 2.4 times its initial level. A sharp acceleration is evident around 1830, when the growth rate jumped from 0.3% to 1.1% per annum.

Only by today's standards might this sort of growth be judged slow; historically it was unprecedented.

INTRODUCTION

The British economy c.1700 was mired in a world of high transport costs. It is true that one could travel by coach between London and important cities in the southeast already in 1700 and that coal was being shipped on coastal vessels from Tyne to London, but for much of the economy high transport costs were a major constraint on economic activity and travel. In the 170 years that followed, transport improved greatly. Road transport evolved from packhorses and small wagons to large wagons and stagecoaches running continuously between London and major cities. Eventually steam-powered rail wagons and coaches would displace both horse-drawn wagons and stagecoaches resulting in a fundamental change in freight transport and travel. Similarly, large barges and vessels powered by steam eventually displaced smaller vessels on rivers and in the coastal trade. Along with technological change there was tremendous investment in transport infrastructure most notably in the canal and rail network.

By 1870 Britain had experienced what historians have called a transport revolution (Bagwell 1974). The most clear indicator was the dramatic increase in travel speeds and decline in freight rates. As this chapter will document, railway freight charges per ton mile in 1870 expressed in real terms (i.e. adjusting for inflation) were equal to one-twentieth the freight charge per ton mile for horsedrawn wagons in 1700. Journey travel times by railway were one-tenth the travel time of coaches in 1700. Although such calculations emphasise the importance of railways, they are not the entire story. There were significant reductions in road transport freight charges and journey times before the railways and of primary importance to industry and mining there were large reductions in transport costs associated with the shift from roads to canals. There were also major improvements in coastal travel speeds with the coming of the steamship. Long-distance shipping also witnessed dramatic reductions in freight charges especially along the North Atlantic routes.

INTRODUCTION

As we explain in the corresponding chapter in Volume I, it is important for economic historians to be familiar with the broad contours of the economic ideas of those who lived through the periods they are studying. This chapter deals with a period when both the economics profession (a term that hardly makes sense before 1870) and its relationship to the rest of British society altered considerably (for a broader perspective, see Backhouse 2002). Perceptions of the nature and status of economic knowledge changed in academia, in government and among the public at large. Economic ideas cannot be understood apart from the institutions and structures in which those ideas are generated and employed. During the early twentieth century economics became an academic subject, and for most of the century academic economists determined what counted as legitimate economic argument and policy. This position was challenged in the closing third of the century, and differences between arguments advanced by academics, journalists, civil servants, think tanks and economists employed in business became more pronounced.

The appointment of William Stanley Jevons at Owens College, Manchester, in 1863 marked the real beginning of the process by which economics became a university discipline in Britain. Marshall's Cambridge Economics Tripos was established some forty years later, and during the intervening period the formal study of economics was sporadic and localised. Nonetheless, from the 1870s the University Extension movement broadened the base for the teaching of economics, while establishing the idea that the subject was one that had to be studied systematically. Discussion in a public sphere made up of an evolving network of academics, policy-makers and journalists now took place in the context of more specialised debates among economists, which were accessible only to those who had a more systematic schooling in the subject.

Jevons was the first in Britain to publish a book devoted to the new marginalist approach to economic theory; but his major initial academic impact was on a group of students and tutors in Oxford, who during the 1880s formed the centre of British economics.

These two volumes of The Cambridge Economic History of Modern Britain follow their predecessors, published in 1981, 1994 and 2003, in bringing together experts in economic history from across the world to reflect on our current understanding of British economic history since 1700 and to describe and explain the most recent views of important historical controversies. As in those earlier volumes, the intention is to provide a text which is comprehensible to an intelligent lay audience, both at universities and more widely, but which does not avoid the sometimes difficult task of explaining economic theory and statistical methodologies as they have been used to assist in historical interpretation.

In the preface to the edition of 2003, these words appeared: ‘… change is always with us, a lesson which needs to be learned by each generation. It should be learned particularly by those eminent economic commentators who, at each stage of the business cycle, confidently predict that that stage, whether of boom or bust, will go on forever.’ As this new edition is written, in the midst of the worst ‘bust’ since the 1930s, those words possibly give grounds for some optimism. Historians usually reject any notion that one can ‘learn from history’, but it is a matter of observation – as described in these volumes – that economies, including the British economy, are resilient, that invention and innovation continue and that economic growth resumes after periods of decline.

We also trust that recent economic events will raise the profile of historical analysis. The Queen is reputed to have asked a group of economists at the London School of Economics: ‘Why did no one see this coming?’ As she implied, economic theorists failed to predict, forestall or even – after the event – very clearly explain the factors that contributed to the global economic meltdown and subsequent recession.

INTRODUCTION

Consumption has long been a key component of the historiography of Britain's industrial revolution. Early writers emphasised the importance of both home demand in creating a market for the mass-produced products of the new industries and of an export stimulus, particularly for cotton, in enabling the growth of manufacturing (Gilboy 1967; Davis 1979: 62–7). More recently the role of exports has been downgraded. Rather than instigating industrial growth, expansion of exports was the response required to Britain's increased demand for imports, particularly of tea, sugar and coffee, between 1745 and 1760 (Deane and Cole 1969: 40–98); even in the crucible of the industrial revolution, 1800–30, it was the preceding technological improvement that reduced the price of cotton and led to this product's domination of the export scene (Thomas and McCloskey 1981).

However, consumption, through home demand, has taken on a life of its own. Consumer revolutions have been identified for numerous epochs in history (de Vries 2008: 37–9) but, for the pre-industrial and industrial revolution eras, the revolution in consumption was not just one of scale but also of structure. Consumers desired a new range of goods and this drove changes in production processes and in the relationship between households and markets. Economic historians accept that consumption played a role in industrialisation, but versions vary in both nature and chronology and the particular variant can be linked to the grand narratives of the industrial revolution on offer. In some accounts, a consumer revolution preceded and played a causal role in industrialisation (de Vries 1994, 2008); in others, a shift in demand coincided with industrialisation but is not necessarily given an autonomous role (McKendrick 1974, 1982); a third links the emulative desires generated by luxury consumption to imperialist expansion, overseas trade and innovative production (Berg 2002, 2004). Others are more sceptical about the widespread transformative role of cupidity and point to the very gradual percolation of the benefits of economic change to those in the bottom half of the income distribution (Feinstein 1998; Horrell and Humphries 1992).

INTRODUCTION

Britain's labour force experienced profound changes between 1700 and 1870. Industrialisation and urbanisation shifted the location and structure of employment (Chapter 2). The composition of the workforce altered, particularly the participation and role of women and children. Britain's systems of education and training were radically revised, and its workforce achieved new levels of education. The institutions, structures and dynamics of labour supply and demand changed substantially. New rules and norms reshaped the labour market, and the conditions of work in many sectors were transformed by technical and organisational changes, often linked to the emerging new factories and firms.

There is no question that the consequences for the labour market of the economic changes that occurred during the eighteenth and nineteenth centuries were substantial. But can we say more than this? Much historical debate has centred on the question of a causal relationship between Britain's labour market and economic development. Some argue that industrialisation occurred despite poorly integrated labour markets (Pollard 1978; Williamson 1990); others suggest industrialisation in part depended on a large endowment of skilled workers (Mokyr 2009), or in operating at a high wage level (Allen 2009). Finally, others see institutions and ideologies that allowed employers to exploit vulnerable groups within the labour force, such as women and children, as facilitating industrialisation (Berg 1994; Honeyman and Goodman 1991). Research in this last tradition concentrates on the impact of economic change on labour, reminding us that Britain's industrial revolution was experienced as exploitation and immiseration by some workers.

Underlying these debates are major analytical and methodological divisions. For most economists, the relationship between output and the labour market reduces to fundamental questions about relative factor prices and how efficiently supply and demand is matched. Workers are regarded as individual agents who are free to act rationally in their own interests. Many historians and heterodox economists see labour markets differently, attributing a major role to politics, ideology and culture in their organisation and operation. Labour markets can be captured by dominant interests.

INTRODUCTION

This chapter examines the effects of the industrial revolution on social mobility rates and inequality, as England experienced the onset of modern economic growth. It has previously been impossible to measure social mobility rates before the end of the industrial revolution, because population censuses showing family relationships only become available in 1851. However, we show how, using information on surname distributions, inter-generational social mobility rates back to 1700 can be calculated. These show that social mobility has always been low in England and was surprisingly unaffected by the industrial revolution. Modern growth did not speed up the process of inter-generational mobility. In addition we show that the industrial revolution era was probably one of declining inequality in England. While we do not have information on the individual distribution of income and wealth, we can show that the share of wages in national income increased in industrial revolution England. Since wages are distributed in all societies much more equally than income from property, this would have been a force for greater income equality within industrial society.

SOCIAL MOBILITY

Was the industrial revolution associated with a period of enhanced social mobility? And how did social mobility rates then compare with those of modern Britain? We might expect that the industrial revolution would have disrupted the old social classes and created a period of enhanced mobility, compared to what came before, both upwards and downwards. Change and disruption would favour mobility. Stasis and continuity would embed immobility.

Change there certainly was in Britain after 1760. There was the creation of new industries and new occupations. The old landed aristocracy began to be replaced by a new industrial, commercial and technical class, affording opportunities for mobility to those who had heretofore lived as agricultural labourers in semi-feudal dependence. At the same time large numbers of relatively prosperous handicraft producers were displaced by the arrival of factory production. The hand-loom weavers, often owners of their looms and cottages, were displaced by low paid factory weavers.

INTRODUCTION

The role of sterling was transformed, during the period from 1870 to 2010, from being the world's most widely used currency to becoming primarily a domestic currency. In many ways this process mirrored the changing role of Britain in the international economy, as described in Chapter 3, but it also happened in the context of dramatic changes in the organisation of the international economy and the development of economic ideas. This transformation of sterling's global role had important implications for the operation of monetary policy, since the international and domestic roles of sterling were closely related. The tension between internal and external policy priorities was an enduring theme throughout this period.

Monetary policy involves the manipulation of the money supply to achieve particular targets in the national economy; it is most commonly associated with the tool of interest rates, which affect the supply of and demand for money. Monetary policy thus has domestic implications since it determines the cost of borrowing and the relative returns to savings and may affect domestic economic performance. Lowering interest rates may, ceteris paribus, increase borrowing and investment and promote real economic growth. Conversely, raising the cost of borrowing and increasing the returns to saving may slow down investment, consumption and growth.

Unfortunately, the links between interest rates, money supply and economic performance are unpredictable and depend on a range of contextual factors, including the market's judgement of the credibility of the monetary targeting (Mishkin 2007). There are also variable time lags before the effects can be measured, so monetary policy is a difficult instrument to deploy with precision. In an open economy, such as that of Britain for most of the nineteenth century and the latter half of the twentieth, interest rate adjustments also have implications for the balance of payments, since higher interest rates will attract foreign capital seeking higher returns and lower interest rates may lead to a capital outflow as domestic investors seek higher returns abroad.

INTRODUCTION

The Victorians associated the City with a particular part of London and all the diverse activities that took place there; a hundred years later the Financial Times regarded the City as ‘no longer a postal address’ but as shorthand for the ‘finance function’ (Michie 1992: 12). Today the City comprises the largest international banking centre in the world, the largest foreign exchange market, the fourth largest stock market, the largest centre for Eurobond trading, the London International Financial Futures and Options Exchange, the largest asset management business in Europe, Lloyd's of London and finally a shadow banking sector comprising hedge funds, private equity groups, money market funds, commodity funds and securitised investment vehicles.

For over a hundred years from 1870 the British financial system, with the City at its centre, adopted a ‘separation of activities’ model whereby each financial institution specialised in a particular activity and in general complemented rather than competed with each other. On the London Stock Exchange (LSE), stockbrokers took orders to buy and sell securities from investors and passed them to stock jobbers who made a price in the securities and filled the orders; neither brokers nor jobbers were owned by a bank or other corporation. Commercial banks took in deposits and lent short-term to industry. Merchant banks advised sovereign issuers and large industrial clients and were surrounded by a multitude of discount brokers, specialist finance houses and smaller private banks. In this chapter, we are concerned with the interaction between the City and the corporate economy and therefore concentrate on those institutions most engaged in servicing the needs of the corporate sector.

Before plunging headlong into a discussion of the historical development of the UK financial system, it is worth briefly considering the main features of the German universal banking model; this offers an important and instructive contrast to the separation of activities model.

INTRODUCTION

Affluence can be defined as a shift between different states, both personal and collective, a rising flow of cheaper goods and experiences, of novelty and obsolescence, as new satisfactions are discovered, and old ones are discarded. Experiences disseminate as a sequence of S-shaped curves, just a few of them at the outset, and then more frequent, affecting only small numbers slowly, rising faster to an inflection point, then slowing down and flattening out when novelty is exhausted and everyone is included (Scitovsky 1992). Likewise, in orthodox microeconomic consumption theory, wants become less compelling the more they are satisfied, so people shift their preferences sequentially to more pressing ones. But Want in general is insatiable, and the craving continues.

So far, modern affluence in the UK has largely followed these patterns. In the course of the twentieth century, the luxuries of the rich have become necessities for all. The movement has been from getting to spending, from work to leisure, from toil to comfort, from privies to bathrooms, from coal fires to central heating. The experience of affluence extended primarily to the top fifth of the population between the wars, and to the rest only from the 1950s onwards. An inflection point appears to have been reached in the 1970s, and affluence may now be levelling off, we know not for how long.

Income and spending are intermediate: the ultimate pay-offs are emotional, the ultimate purpose is well-being. In contrast, the microeconomic approach to wellbeing is to measure consumption expenditures (Olney 1991). In a rough and ready way, this is fine. At the bottom of the ladder of needs, in the quest for food and shelter, consumption expenditure is a good proxy for utility. But as satisfactions multiply, expenditure is no longer such a good measure of well-being. The focus on expenditure also implies that choice equals welfare. Now, the excitement and anticipation of choice can be good in themselves, but form only a small part of well-being.

INTRODUCTION

The Olympic Games in London in the summer of 2012 stood at the end of a long twentieth century in which the British economy changed from a manufacturing stalwart into a major exporter of services. The opening and closing ceremonies stood in remarkable contrast. The former related a story in which the Industrial Revolution and the welfare state figured heavily, the latter focused exclusively on music, Britain's foremost cultural export. In public perception, then, the British comparative advantage had little to do any more with manufacturing. Instead, the ceremony closed a twentieth century in which Britain benefited from a distinctive capability in media and entertainment. In the public mind the music industry's importance was far larger than its limited GDP share suggested.

Media can be seen as an infrastructure industry such as electricity or transport. Through information transmission, they helped markets exist and function; through the conditioning of morals and empathy they reduced transaction costs; through advertising they revolutionised the market structure of consumer goods industries; through educational materials they increased human capital; through the formation of expectations they increased citizens' aspirations; and, finally, they facilitated knowledge exchange and collective action that could kickstart institutional change, as has become evident so recently in the Arab spring. A contemporary economic historian might exclaim that media are everywhere except in the economic history literature, not unlike Briggs's (1960) remark that ‘The provision of entertainment has never been a subject of great interest either to economists or economic historians – at least in their working hours.’

This chapter examines three questions. First, we investigate how new media industries have arisen in Britain since 1870 and how we can conceptualise their emergence. Second, we explore what tendencies influenced the long-run evolution of each of these industries. Third, we assess the impact they had on the rest of the economy.

These questions are worthwhile because it is likely that Britain traditionally had a comparative advantage in entertainment production that it could never fully exploit internationally.

INTRODUCTION

During the twentieth century, the dividing line between the private and public sectors became hotly disputed territory. It was the source of more economic debate than any other topic apart from the state of the macroeconomy. The origins of that debate and of the rise of the public sector are to be found in the mid-nineteenth century. From modest beginnings in the 1870s, the public sector grew fairly consistently in peacetime periods with noticeable spurts immediately after each of the two World Wars. Expressions of ideological commitments often took the headlines – Margaret Thatcher and Michael Foot in the 1980s, or the 1920s debates about proposals for new government housing estates – though never approaching the revolutionary tendencies in Germany and Russia.

Practical action in fact often revealed a common commitment to the mixed economy. It was under a Conservative Party government that the BBC and the Central Electricity Board were established in 1926 and that Rolls Royce and the Rover Car group were rescued in the early 1970s, whilst the privatisation of the water industry and the private finance initiatives for hospitals took place under the Blair/Brown Labour partnership of the 1990s–2000s. Indeed there were several important driving forces over which the politicians had little control. National defence, reconstruction after the wars, internal unification were of vital concern whilst technological change and externally imposed political changes (the microchip for outsourcing, loss of colonies for airlines) fundamentally changed the parameters of the debates and government policies.

The size of the public sector can be measured in different ways. Production of goods and services (like health, armaments) can be measured by the value added or by incomes generated (wages, profits, rent) but public spending on goods and services is the most common; this is because of its ease of measurement, because it complements the government cash transfers on pensions, child benefit etc. and because it corresponds to the monitoring and control mechanisms used by national Treasuries (www.ons.gov.uk/ons; www.imf.org; www.epp.eurostat.ec.europa.eu).