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The Role of Agriculture in Economic Growth
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2.
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Standard belief was that growth of agricultural
productivity was a prerequisite for industrialization.
This had three effects:
Released labor and other factors of production to be used in
manufacturing.
Provided a market for industrial and other non-agricultural goods.
Provided Manufacturing with cheap raw materials and fuel.
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The problem is that this is true for a closed economy
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In an open economy, it works differently:
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High agricultural productivity signals to the economy that this is
its comparative advantage, and it might specialize in it.
However, if the rate of technological progress in manufacturing is
higher, this could be a “correct” but very costly decision since the
economy might get “locked into” a bad equilibrium.
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Agriculture and the Industrial Revolution
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What role did agricultural innovation play in the
economic modernization of Britain?
The paradox is, that Britain was very efficient in
producing agricultural goods, yet it did not have a
comparative advantage in it, and thus after 1870 it
increasingly abandoned it.
Britain fed with a little help a population that grew by a
factor of 2.5 between 1750 and 1850.
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Controversy:
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Was there an “agricultural revolution” that occurred sideby-side with the Industrial Revolution?
Some scholars still insist that there was one, most others
have come to deny it.
Why is this so hard to decide?
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One problem is the lack of data
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We do not really know how much was either produced or consumed,
since few farm products were taxed or paid a tariff (which is where
most information comes from)
We have data from some farms that kept good accounts that
survived, but the problem is that these may not have been
representative.
To make things more confused, Britain imports agricultural goods
from Ireland, but the Union of 1800 meant that after 1830 there are
no more trade statistics.
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One interesting thing to examine is the effect of the
Enlightenment on agriculture, or the “agricultural
enlightenment.”
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In some ways the attempt to improve farming symbolizes
the essence of the movement: the belief in the ability of
knowledge to bring about progress
In the eighteenth century there is a lot of activity trying to improve
agriculture through systematic Enlightenment kind of activities:
meetings and associations; publications; prizes and awards. French refer
to this as agromanie.
Some of which were well-known like the Honourable Society of Improvers
in the Knowledge of Agriculture in Scotland in Edinburgh in 1723. A lot
of good will, but its members were intellectuals, politicians, and local
nobility.
During the eighteenth century many such societies were founded in
Scotland and England, as well as informal gatherings such as the annual
ceremonial sheep-shearing hosted by Coke of Holkham.
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A large number of publications, both books
and periodicals on farming appeared
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Many of these tried to spread agricultural knowledge and
techniques.
William Ellis’s Modern Husbandman or Practice of Farming (8
vols.) first published in 1731 gave a month-by-month set of
suggestions, much like Arthur Young’s most successful book, The
Farmer’s Kalendar (1770).
Many of the leading scientists such as the geologist James Hutton,
the physician-botanist Erasmus Darwin, the physicist Archibald
Cochrane, and the chemist Humphry Davy wrote books on
agriculture.
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Some of these were professionals
Most famous, of course, Arthur Young, his nemesis William
Marshall, and John Sinclair (President of the Board of
Agriculture, f. 1793).
But many others. Here is a man named David Henry:
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Much like the medical enlightenment, the agricultural
enlightenment did not yield much in the eighteenth century
• Voltaire in his famed Philosophical Dictionary (1816,
Vol. 3, p. 91) caustically remarked that after 1750
many useful books on agriculture were read by
everyone but the farmers.
• Charles Gillispie (1980, p. 367) concluded that the
impact of information flows “beyond the circle of
persons who wrote, printed, and read the books,”
was probably small.”
• Most important: most scholars looking for large and
dramatic improvements in British agriculture at the
time cannot find it.
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Bottom line on agricultural enlightenment:
Some successes (e.g. in selective breeding and improved
tools).
But on the whole the entire project was disappointing, at
least before the 1840s.
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Contemporaries were aware of this:
“Agriculture, though it depends very much on the powers of
machinery, yet I'll venture to affirm, that it has a greater
dependence on chemistry. Without a knowledge in the
latter science, its principles can never be settled”
(Lord Kames, The Gentleman Farmer, 1776, p. 5).
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What seems to be clear:
British agriculture was quite productive by the standards
of the time. Recent estimates find that output per worker
around 1750 was 4.3 times that of France, and output per
acre 2.5 times higher. But that could have many reasons:
more capital, better quality soil, better workers, or
superior organization.
One mechanism that worked for British farming (much
like that in the Low Countries) was a synergy between
“arable” and “husbandry” --- that is, products of the land
and those of animals. Much of European agriculture
depended on this interaction, but in Britain between 1700
and 1850 it was brought to perfection, a system known as
“high farming.”
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European Agriculture:
Synergy between arable and husbandry
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Animals helped arable:
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Through haulage (both on the field and in transport).
Producing manure as fertilizer
Generated cash from meat, dairy products, wool, leather.
Arable helped husbandry:
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By letting animals graze on the stubble after harvest
By letting animals graze on fallow lands.
By producing fodder crops, esp. after 1700. Turnips, clover,
Mangel-wurzels, hay.
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The other element was crop rotations
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Why rotate?
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Growing the same crops on the same plots exhausts the soil
from nutrients (primarily nitrogen).
It also causes diseases and pests; alternating crops helps to get
rid of them.
Fallowing used to “rest” the land (restore some minerals and
break pest-cycles), used for grazing but it does not grow a crop,
so good rotations are land-augmenting innovations.
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Other important technological changes:
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Better tools and implements,
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Especially plows e.g. the Rotherham plow, which had a blade of
steel and was much lighter and stronger.
Better threshing machines first developed in 1784 (run on steam
after 1825).
Seed-drill (Jethro Tull)
Larger, stronger, and healthier animals through selective
breeding (Robert Bakewell).
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Andrew Meikle’s threshing machine
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Yet progress in productivity was slow
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One reason is that agricultural technology is not like
manufacturing: it needs local “tweaking” and adaptation
to specific microclimates and topographical conditions.
Another is that competition between farmers is not so
tight that each farmer must adopt best-practice
techniques or disappear. There is enormous variation in
the level of efficiency across Britain, even among
adjacent farms.
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Clearly Britain was able to feed a much larger population in 1850
than it did in 1700, so where did this food come from?
One factor, not stressed enough, is that it added many acres to land
under cultivation, by converting some pasture to arable, and by
cultivating previous un- or undercultivated “wastelands.” Moreover it
accumulated farm capital and the quality of capital improved (larger
sheep and cows).
That means that land was not a “fixed” factor, so the dangers of
diminishing returns are overestimated. Yet the new lands were
marginal, so productivity gains would be limited.
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Inputs into British agriculture, 1700-1850
1700
1800
1850
arable
11
11.6
14.6
past. and meadows
10
17.5
16
woods
3
1.6
1.5
forests, parks, commons
3
waste
10
6.5
3.0
buildngs, roads, water
1
1.3
2.2
men
612
643
985
women
488
411
395
boys
453
351
144
structures
112
143
232
implements
10
10
14
farm horses
20
18
22
other livestock.
41
71
85
Land (mills of acres)
Labor (1000’s)
Capital (mills of £)
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Estimated Output
Table 9.1: estimates of agricultural output, England 1700-1850 (1700 = 100)
1700
1750
1800
1850
Population
method
100
121
159
272
Demand method
100
143a
172
244
Crops
100
129
188
303
Meat
100
124
166
253
Dairy
100
179
244
320
Total
100
127
191
285
Population
100
114
171
331
Per capita,
demand method
100
106
93
82
Per capita,
volume method
100
111
101
86
Volume method:
a - 1760
Source: Mark Overton. Agricultural Revolution in England. Cambridge: Cambridge University
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Press, 1996, p. 75.
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Notes:
Population Method: assumes fixed consumption per capita, taking into account
imports and exports
Demand method: Infers output from population, corrected for changes in
prices and income (constant price and income elasticities) and taking account
of foreign trade.
Volume Method: based on contemporary estimates.
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What the data show:
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Until 1800 or so, British agriculture kept more or less pace with rapid
population growth.
After that it fell behind a bit, and imported more and more food, esp.
from Ireland and the Baltic areas.
Britain achieved its agricultural growth without an agricultural
revolution, without a risky dependence on a single high-yield crop
(e.g. Irish potatoes), without increasing the number of people
working on the land, and without spectacular macroinventions that
turned production upside-down (such as nitrate-fixing).
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What was critical was organization and farm-size: British farms got
bigger and gradually turned to be capitalist enterprises. Widely
believed: there were economies of scale in management.
By 1800 most of British agriculture is run in relatively large units (over
100 acres) that were owned by a landlord, often absentee. This is
classical capitalist agriculture: the landlord hired a “farmer” or
capitalist entrepreneur, who rented the farm from him and managed it,
hired laborers, and owned or rented the equipment and livestock
needed to run the farm, made all the decisions, paid the workers and
the rents and kept the rest as profits.
Labor came primarily from a landless or semi-landless rural
“proletariat.” But was this necessarily bad?
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What happened to small owner-proprietors (yeomen)
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Part of the answer is that they vanished due to the
enclosures.
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What were the enclosures?
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They were the elimination of “open field agriculture.”
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To understand open fields we must first understand
traditional property rights in open-field agriculture.
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Traditionally, the lord “owned” the land
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But the tenants in the common law that ruled Britain had
many rights that were traditional and that could not be
taken away. For instance, “copyholders” held land more
or less in perpetuity even if they owned rent and other
services. Freeholders paid a rent but basically had
perpetual rights.
So consider a village owned by a lord, what would it look
like?
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Dwellings and gardens
Owned by
farmer j
Commons
and waste
Field I
Field II
Owned by
farmer k
no fences
here.
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So what does farmer j subsist on?
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2.
3.
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He grows field crops on the rectangles he owns (if they are not
fallowed)
He gets some vegetables and pulses from his small garden
He gets the right to use the commons and waste, to graze his
animals and collect other valuables (timber, fish).
He has the right to graze his cattle on the fields of farmer k
(and all other fields) after the harvest is in.
He gets the right to graze his cattle on all of a field if it is
fallowed that year.
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Open fields were thought to have been inefficient
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The system was reputed to be inefficient since coordination was
difficult to achieve and it maximized “neighborhood effects.”
The commons was supposed to be overgrazed and overexploited
because no one owned it (“tragedy of the commons”).
It was also said to be an obstacle in the way of technological change
because the entire village had to cooperate if new crops or rotations
were introduced.
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Modern research has shed new light on this
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In recent years economic historians have come to doubt
this, and shown that open field agriculture was more
flexible and capable of improvement than had hitherto
been believed. Commons were “managed” and not as
overgrazed as was once believed.
All the same, open fields had basically disappeared by
1820 through enclosures.
Why were there enclosures, and how did they work?
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Voluntary enclosure
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In most cases, the landlord takes the initiative.
If a supermajority of tenants agrees, the village can enclose
on its own. They then consolidate the holdings so that each
farmer gets one contiguous field that he then has to enclose
(by fences or hedges). The commons and wastes are largely
eliminated and divvied up between the tenants or taken by
the landlord. Rights of grazing on fields not directly owned
are eliminated.
If no majority can be achieved, voluntary enclosure cannot
be attained, so need a third party.
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This produced Parliamentary enclosures.
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Landlords could petition Parliament to enclose the land.
If granted, professional surveyors and attorneys decided
on how to divide up the village, along the same line as
above. All rental contracts were rewritten.
After 1750, over 1,800 such bills were passed to enclose
the 30% of British land that had resisted enclosures.
The procedure clearly discriminated against smallholders.
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Why?
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Smallholders were less likely to have documented rights
and could not afford lawyers.
They are the ones that depended most on wastes and
commons.
Since fencing in one’s land was mandatory, the costs per
acre fell in larger plots (since the costs of a square piece
of land are 4cn/n2 = 4c/n), where c is the unit cost of
fencing.
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As a result, a large number of smallholders lost their land.
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Many of those became a landless proletariat, who
worked for wages on others’s farms.
What complicated the matter was the disappearance of
cottage industries where men and women produced
manuf. goods in the offseason.
How can we model this?
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Consider an individual peasant
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There are two seasons, H (“high”) and L (“low) of equal
length. In both of them he faces a small piece of land
that is responsible for diminishing returns to labor.
There is another activity, call it “Z” in which the family
can make a manufactured good, but because it uses
only labor (by assumption), there are no diminishing
returns.
The family then decides to allocate its labor between
agricultural work and Z-production.
The result is a “kinked” demand for labor curve.
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MPLAL
S
EH
G
H
F
MPLZ
EL
MPLAH
MPLZ’
Labor
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In this world, the peasant will work in the Low season the
distance FEL in Z-production, whereas in the High season
he will specialize in agriculture (when he earns G)
The rise of the competition of mechanized industry means
that the price of Z falls (if Z and the good that is
mechanized are substitutes, which they not always were).
If the price of Z falls below a certain level, it will disappear
altogether. By 1850, this is more or less what happened.
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This, too, contributed to the disappearance of British agriculture,
because for many rural worker being able to “moonlight” in the offseason in cottage industries made it worth their while to stay in rural
areas. Once this was no longer available, they had no reason to stay in
the countryside.
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Another factor was the Poor Law, which subsidized them in the offseason if nothing else was available, but was abolished in 1834.
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As a result, people migrate --- either to the cities and after 1845,
increasingly to North America.
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The “service sector”
Something of an anachronism.
Basically includes everything that is not in manufacturing
or agriculture. Not sure that makes fully sense in this
economy since a lot of people sold what they made or
grew.
The British economy during the Industrial Revolution is a
reasonably sophisticated economy, with a large retail
sector, extensive transportation, financial services, as well
as personal services such as doctors, lawyers, surgeons.
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The importance of transportation costs
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The gains from trade are limited by “trading costs”.
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Trading costs consist of three basic elements:
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Physical transport costs
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Artificial costs such as tariffs and tolls
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Frictional costs such as lack of information, contract enforcement,
insurance, and such.
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In many of these respects, Britain was very fortunately
situated:
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No internal tariffs within England and after 1707 not with
Scotland either. Ireland only fully joins in in 1830.
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It has good ports and the best facilities for coastal shipping in
Europe.
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A few decent navigable rivers, but not as good as Germany.
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Transportation economics is unusual
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Often regarded as at the boundary between the private
sector and the public sector. In most modes, the private
and the public sector seem to bounce ownership and
control back and forth. Thus airlines are regulated and
deregulated, highways are built by the public sectors but
tolls farmed out, railroads are built by private sector
entrepreneurs, then nationalized and then privatized
back again
In this “grey area” Britain between 1700-1850 took an
extreme position: private initiative was predominant and
government played a passive and secondary role.
Different from other European nations.
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Consider road-building
Traditionally had been the responsibility of local authorities, but that created
classic free rider problem (“race to the bottom”).
After 1750, private roads are being built everywhere, known as “turnpikes”.
These had to be established by Parliament but when they were, they were
entitled to levy tolls and thus pay for themselves.
By 1830, 22,000 miles of road had been turnpiked (about 17 percent of the
total roads, but included the most important roads).
These roads were much improved and provided significantly faster transport.
Average speed on roads increased from about 4 m/ph to 8 mph between
1700 and 1830.
Before the railroad, stage-coaching provided a reasonably comfortable and
reliable means of travelling for those who could afford it.
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Three famous names of the road transportation
revolution:
John Metcalfe (1717-1810)
John Loudon McAdam (1756-1836)
Thomas Telford (1757-1834).
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Two Examples:
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In 1754 the trip from London to Manchester was done in
4 days, in 1784, it could be done in two days.
The longer trip from London to Edinburgh took 12 days
in winter and 10 days in summer; in 1836 it could be
done in 45 ½ hours.
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What contributed to the improvement of road transport?
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Better designed and lighter carriages (but still a long shot
away from modern pneumatic tires and asphalt roads).
Better built roads: better drained, longer-lasting, less
exertion on horses.
Better organization (more competition, more effective
horse-relays)
Better and larger bridges: some magnificent
achievements of British engineers.
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Thomas Telford's Suspension Bridge (first iron suspension
bridge ever) across the Menai Straits in Wales (compl. 1826).
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A similar effort took place with canals
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Canal age preceded the railways. In some sense this
was an inefficient investment because its effective life
was cut short by the unanticipated emergence of trains
in the 1830s.
Not very glamorous: bulky goods, mostly short trips.
Like turnpikes, they were built by private entrepreneurs,
after obtaining Parliamentary approval.
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Bridgewater canal: initiated by the Duke of Bridgewater
who owned coal mines in Worsley and wanted to
transport the coal cheaper to its customers in
Manchester. It had an aqueduct and 10 locks and built
by the brilliant engineer James Brindley, one of the
towering geniuses of engineering in the early Industrial
Revolution. Originally about 7 miles long, but soon
extended to about 14 and widely regarded the first of the
“canal mania”.
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A large network of canals were built between 1770 and
1820, coinciding with the Industrial Revolution.
One example: Leeds-Liverpool Canal.
Commenced in 1770, extended to 127 miles across the
Pennines.
Canal has 91 locks plus a 1630 ft long tunnel. Yet it cut
transport cost from Fudan
Leeds
to Liverpool by 80%.
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“five locks” at Bingley
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Or consider aqueducts: Pontcysyllte Aqueduct, built by Thomas Telford
and William Jessup, completed in 1805
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Shipping
• Took two forms: coastal and long-distance
ocean shipping (canal barges are a different
technique).
• Major breakthroughs in shipping are limited.
Little radical change in ship design before 1815.
• But advances in navigation technology (marine
chronometer).
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Harrison’s H2 (worked on it 19 years and
did not meet the requirements
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Harrison’s H4 (1762): success!
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Ship design:
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After 1820 things change. First, wooden sailing ships
improve as the rigging becomes more sophisticated
(“clipper ships”).
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With the decline in the price of iron, people get
interested in iron ships.
These ships were more rigid and had stronger structure,
although other problems emerged that required further
development.
First attempts in the 1780s, but slow progress. By the
middle of the nineteenth century most of the hulk is
made of iron. After Bessemer and the appearance of
cheap steel, ships are made of steel.
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That led to creations such as this:
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“Great Eastern”, largest ship built in the nineteenth
century, 32,000 tons, room for 4,000 passengers. Still
was hybrid, with six masts.
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The “Great Eastern”, 1858
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Improvements in ship engine design and cooling (had special need,
because supply of fresh water on board is limited). This led to the
surface condenser, which separated the water that cooled the
condenser and the water in it, was developed in the 1830s and
came into general use in about 1850.
McNaught’s compound marine steam engine.
In the compound engine, high pressure steam from the boiler expands in a high
pressure (HP) cylinder and then enters one or more subsequent lower pressure (LP)
cylinders. The complete expansion of the steam now occurs across multiple cylinders
and as less expansion now occurs in each cylinder so less heat is lost by the steam
in each. This reduces the magnitude of cylinder heating and cooling, increasing the
efficiency of the engine.
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Compound Marine Ship Engine, c. 1860
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•
Or the slow development of the screw propellor.
[one telling example: in 1837 a British engineer, Francis
Pettit Smith launched a steam ship with a screwpropellor made out of wood; in one of the trials half of it
broke off. It was noted with amazement that this accident
actually increased the speed of the vessel.]
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Ericsson’s 1838 patent for a screw propeller.
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Screw Propeller designed in 1843
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Railroads
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Not really an “invention” but a recombination of existing
techniques, above all High Pressure steam Engine and
the idea of rails, plus scores of other technical issues
dealing with coupling, braking, power transmission, etc.
Not really feasible until work on High Pressure engines
had started.
Between 1805 and 1830, scores of British engineers and
mechanics work on the problem of applying steam to
cheap land transport --- not clear what form it would take.
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First “real railroad”
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Stockton & Darlington, 1825 (but in part pulled by
horses).
After the famed “rainhill” competition, won clearly by the
design proposed by George and Robert Stephenson,
railroads “take off”
In 1830 Britain has 200 km of railroad track, most of it
pulled by horses. In 1850 it has 9800 km, in 1900 30,000.
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Stephenson's Rocket locomotive, 1829
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Medal for the Opening of the Liverpool to
Manchester Railway
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Railroads: while the technology was not
“revolutionary”, the economic impact was.
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Huge capital investment in tracks, rolling stocks, and stations. At its peak,
absorbed more than half the annual capital formation of the country.
Requires institutional innovations in capital markets, leading to boom 184446, and crash of 1847.
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Network externalities. Need to coordinate between different railroad
companies (railroad gauge, schedules). Concerns about safety.
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Enhanced labor mobility, both SR and LR. Higher degree of competitiveness.
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Railroad Linkages
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“Backward Linkages.” Effects on industries that supplied
railroad with intermediate goods, such as engines,
machinery, coaches, iron, timber, construction materials. If
there were learning effects or economies of scale, the
railroad helped to realize them. If not, however, this a cost,
not a benefit.
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Forward linkages: the positive effect that a decline in
transport cost has on the economy, which includes 1) direct
effect on consumers through cheaper transport costs of
people and goods and 2) indirect effects on specialization
and the geographical division of labor.
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Backward linkage: short term
Price of iron
Sshort
P1
E’
Po
D + DRR
E
D
Quantity
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Backward linkage: long-term
Price of iron
Po
E
P1
E’
D
D+ DRR
Slong
Quantity
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Forward linkages
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Since Fogel (1964), scholars have tried to estimate the
“net social savings” of railroads, that is, how much would
it have cost society to ship the volumes of goods with the
railroads using the next best mode?
Fogel attack on the “indispensability axiom.”
The idea of social savings is quite simple: what is the
value of a new product? This can only be assessed in
relation with the previous technology.
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The basic idea is simple
Old Technology
(canals, roads)
New technology,
(Railroads)
D
Tons/mile
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•
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So the social savings are the “red trapezoid” which requires us to
know the shape of the demand curve, and the difference in costs of
the “old” and the “new”.
To actually calculate this, one needs to make many assumptions,
since the actual demand curve is not observed. So estimate the entire
red rectangle which is larger than the trapezoid we want to measure.
So we get an overestimate. If it’s still true that it’s not very large, than
social savings are limited.
But: Railroads were not only cheaper but also more dependable,
faster etc. Is all that accounted for?
It turns out that it’s easier to compute this for freight than for
passengers, since for the latter comfort and speed may have been
more important. Overall, the estimates show that freight social
savings were about 4% of GDP in 1860, while passengers might have
added 2-6% depending on the assumptions one makes about the
costs of earlier techniques.
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This does not mean that railroad were not important:
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Direct cost-saving effects may have been relatively small.
But it made the economy more competitive because trains connected
markets with one another. It also allowed more regional specialization and
just fostered “gains from trade” effects.
It increased the mobility of labor and thus increased the efficiency of the
allocation of resources and reduced seasonal unemployment.
It made central control by government more effective (not so important in
Britain, but very important in countries like Russia)
It brought technological progress and a sense of dynamism to many places
where previously little had happened. By 1840, steam was everywhere.
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In addition to railroads, there was the telegraph
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Much smaller in its impact, but in some senses a more impressive
innovation.
Information flowed much faster than under previous systems.
Depended much more on scientific breakthroughs (Hans Oersted,
1819, and the further experiments of Andre-Marie Ampère showed
that electrical current could affect a magnetic needle).
The research that led to the telegraph was truly international (unlike
the railroad which was largely British). Joseph Henry, an American
has been claimed to be the true inventor.
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Hans Christian Oersted
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Joseph Henry, 1797-1878
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In 1831 Henry built and successfully operated, over a
distance of one mile (1.6 kilometres), a telegraph of his
own design.
The only claim that Samuel Morse has to be the inventor
was the invention of the eponymous Morse Code (one of
many codes proposed) --- and even that was due to his
partner Alfred Vail. Still, in the US his patent was upheld
so he became rich and famous.
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All the same, the first successful telegraph company was
established by two Brits, Charles Wheatstone and William Cooke.
This couple is a classic “pairing” of a learned scientist and a
hyperactive entrepreneur. Cooke was the enthusiastic entrepreneur
but had no scientific knowledge; Wheatstone as a trained scientist
knew about Henry’s work and was the brain behind the project.
Took a while before people got used to the idea. But in 1844 the
Queen had a baby boy and the news was transmitted to London by
telegraph. Then two criminals fleeing by train were apprehended by
information traveling by telegraph.
Cooke founded the Electr. Telegraph Co. with a financier named
John Lewis Ricardo which bought their patent rights and by 1852
had laid 4000 miles of cable.
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Cooke Wheatstone double needle telegraph, 1840
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Cooke Wheatstone single needle telegraph, 1850
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But the technique was far from perfect and required
many microinventions
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The main problem turned out to be wear and tear of
cables due to inadequate insulation. Of the 18,000 km
laid before 1861, only 4,800 were operational that year;
the famous transatlantic cable of 1858 ceased working
after a 3 months.
Other problems had to do with the physics of electric
impulses. They were large solved by this man:
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William Thompson, Lord Kelvin
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In the next two decades people tried to use this for
long-distance communications
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First successful cables laid in 1837 (Cooke &
Wheatstone) but system takes off only in the 1840s.
Complementary with railroads, but also considerable
impact on the speed and efficiency with which markets
worked.
In terms of innovation: more radical than most, typical
macroinvention, compared with previous technologies
(e.g., battle of New Orleans).
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The Financial Sector
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Not very large in terms of employment or value added
but very important as “lubricant.”
Worked quite differently from our own time. There was a
stock exchange but it bought and sold mostly
government securities and bonds issued by commercial
enterprises such as the East India Company, or debt
issued by canals, turnpikes, and other public ventures.
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The Stock Exchange
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Started in the late 17th century in the famous coffee
houses off Lombard Street.
In 1773 they moved into a specific building and after
1801 only “members” could trade.
But the new manufacturing firms that sprung up during
the Industrial Revolution did not have access to the stock
market. Even after the Bubble Act was repealed (1825)
they made no use of it.
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Stock market was trading in limited securities
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Shares and bonds of some utilities (canals etc.), Bank of
England and East India Company shares, and various
government securities.
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Banking in Britain, 1700-1900
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Most prominent bank is the BoE, f. 1694.
Typical product of the age of mercantilism and rentseeking. It was a private institution. The only joint-stock
bank in Britain [until 1826], and after 1720 dominated
public finances through being the sole fiscal agent of the
Crown, lending it money and placing its securities.
It was a private bank, and as such issued notes that
circulated as means of payment.
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Slowly, over time, it morphed into a central bank
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It received a monopoly on issuing bank notes (after 1844) that
circulated as cash.
These notes were declared “legal tender.”
Bank charter act of 1844, provided some indication that the B of E
was a “public institution”: it was ordered to separate its note-issuing
business from the rest, and expected to keep an eye on the Money
Supply and prevent it from over-expanding (as feared by the
“currency school.”).
Some elements of its function as a lender of last resort emerge in
1825 and again in 1844. But little power to carry out “monetary policy.”
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Other Banks beside the B of E
Private London “Merchant” Banks (descending from the goldsmiths of London)
family operated, not joint-stock), basically took deposits and made loans. Often
founded by emigrants (Baring, Rothschild). Were “correspondent banks” for
country banks.
Country Banks --- replaced notaries and attorneys as intermediaries. Grew from
almost none in 1750 to 800 in 1815 and 1100 in 1838. Lent to people they knew
to two degrees of separation. Mostly small affairs, but critical in discounting bills
of exchange.
They could issue notes, provided they had six partners or fewer. This was
important because of the need for low-denomination bills.
Could not incorporate before 1826 (and even then only if they were more than 65
miles from London).
These rules were mostly passed at the pressure of the B of E. These Banks were
very vulnerable and many of them failed during “panics.”
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How important was the Banking system for
economic development?
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People who study banks like to think they were essential.
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But in this age, they were only one means to attain the most
important thing: credit. There were many other sources.
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L-T Capital accumulation: mostly from re-invested profits,
circumvents formal credit market altogether.
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S-T loans: “inland” bills of exchange or letters of credit.
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Financial Sector also includes insurance
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Maritime Insurance important in a seafaring nation.
Started in a coffeehouse owned by Thomas Lloyd, who
moved to Lombard St. in 1692. Competitive industry of
many small underwriters, quite well organized.
Moves to the Royal Exchange in 1774.
Lloyd’s of London, an umbrella association of small and
unincorporated underwriters, sets the rules for others.
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Fire and Life Insurance
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Volume of Fire insurance grows rapidly, but the risks
grew even faster with urbanization, since many of the
early urban dwellings were built from wood.
Life insurance also grew, but not clear if people became
more prudent or whether this was a lugubrious form of
gambling. Needed sophisticate mathematicians to
compute actuarial values of life-insurance policies,
affected by changes in mortality. Such people actually
did this work, e.g. Richard Price and Benjamin Gompertz.
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Retail sector
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“England is a Nation of shopkeepers” --- Adam Smith.
Occupational specialization meant that people depended
on exchange, that is buying things from stores.
Sharp increase in that due to the “Industrious Revolution”
as well as growing consumption of imported goods.
Growing popularity of off-the-rack clothing, sold in
specialty stores.
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Many artisans were also “retail outlets” in 1700, but by 1850 much of
that has become specialized. Still, bakers, shoemakers, tailors etc. were
clearly in both categories.
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In the 1841 census, over 16 percent of employed males older than 20
declared occupations such as “grocer,” “dealer,” and “broker.” [For
women much lower, but that figure is clearly biased].
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With urbanization, increasing trade between “strangers” so consumer
less and less protected by reputation and “caveat emptor” rules.
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Number of shopkeepers in 1688 about 9.6% of all households, in 1841
perhaps 16%, numbers are hard hard to compare but they indicate a
deepening of commercialization.
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Advances in the “techniques” of selling
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Specialization between “wholesale” and “retail” merchants.
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Opening of showroom and employing traveling salesmen.
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Standardization of quality (e,g, shoe and cloth sizes).
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Emergence of marketing and advertising
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Contemporaries were increasingly bombarded with ads
for goods.
Aggressive marketing strategies can be discerned in
other industries such as printing, cutlery, clocks, highend textiles, household implements, to say nothing of
medical doctors and pharmacists selling miracle drugs.
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“Promise, large promise, is the soul of advertisement.. . . The trade of
advertising is now so near perfection that it is not easy to propose any
improvement” (Dr. Samuel Johnson, 1759)
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Josiah Wedgwood, 1730-1795
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Highly innovative entrepreneur
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In addition to major inventions in the pottery industry, was a pioneer
in skillful advertising and consumer manipulation (through name
dropping and appeal to snobbery).
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Famous for “creamware” ---a fine white earthenware substitute for
Chinese porcelain with a rich yellowish glaze; ideal for domestic
ware. The cream colour was considered a fault at the time, and
Wedgwood introduced a white to bluish white product called pearl
ware in 1779. Supplied a tea-service set for Empress Catharina
consisting of 952 pieces.
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Clever use of “fashion” and fads in textile and home decoration
created demand.
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Other services:
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Medicine and Law. In medicine we have a whole range from official
members of the establishment to country surgeons and quacks.
Other medical professionals: accoucheurs (male midwives) and
apothecaries.
Practically no government regulation or quality control despite
serious informational asymmetries. [Royal Coll. Of Medicine was an
antiquated body].
In the end, local associations of physicians merge to form the British
Medical Association (1855) which eventually starts controlling entry.
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Legal Professionals
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Only “barristers” were called to the bar and could appear
in courts. But otherwise unregulated, and ruled by caveat
emptor.
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Most legal work done by “solicitors” and “attorneys.”
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In 1730, there are 5,500-6,000 legal professionals in
Britain, in 1841 around 14,000 --- less than the rate of
population growth. Society becomes less litigious?
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In the eighteenth century courts and police protection are quite weak in
Britain. Most courts were slow, judges were unpaid, no professional
police except London.
“Law and Order” was very strict when it came to crimes against
property --- deterrent effect?
For most economic transactions and contracts, enforcement relied on
private order institutions rather than “third-party” enforcement.
Property rights are very important for economic development, and are
typically associated with “the state” and “government” --- but there are
alternatives such as reputation mechanisms and a culture in which
honesty is a dominant cultural value.
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This changes over time
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In the 1830s most judges were paid, police were
professionals and clearly this system had to be
modernized as the economy became more modernized.
This is closely associated with a growth in the mobility of
people and goods, and rapid urbanization.
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