1. British Economic Growth in the Steam Age: Some Lessons for Today Nick Crafts University of Warwick

2. General Purpose Technologies (Lipsey et al, 1998) Over time are found to have many uses and complementarities … are pervasive Initially have much scope for improvement Eventually come to be widely used and lead to (large) rise in aggregate productivity growth BUT Initially may have no positive impact on growth or even imply a slowdown phase

3. The Solow Productivity Paradox You can see the computer age everywhere except in the productivity statistics Robert Solow, 1987

4. Steam as a General Purpose Technology Steam Engines, Railways, Steamships James Watts Invention : 1769 Liverpool & Manchester Railway : 1830 Steamship crosses the Atlantic : 1838

5. Source: Kanefsky (1979a, p338); not including internal combustion engines Sources of Power, 1760-1907 (Thousand Horsepower) 17601800183018701907 Steam53516520609659 Water70120165230178 Wind101520105 Total8517035023009842

6. Steam Engine Technology Took a long time to become cost effective in most sectors Coal consumption per hp per hour fell from 30 lb pre-Watt to 12.5 lb for Watt engine to 2 lb by 1900 when psi reached 200 compared with 6 in 1770 The big breakthrough was not James Watt but the move to the high pressure steam engine after 1850

7. Capital Cost and Annual Cost per Steam Horsepower per year (£ current) Capital CostAnnual Cost 17604233.5 18005620.4 18306020.4 18503713.4 1870258.0 1910154.0 Note: the estimates are for a benchmark textile mill in a low coal cost region like Manchester

8. Source: Crafts (2003): includes railway, steamships, steam engines Total Steam Contribution to Growth of Labour Productivity (% per year)

9. Implications Small contribution of steam pre-1830 helps explain Crafts-Harley view of industrial revolution Strong contribution of steam power in second half of 19 th century says climacteric not explained by hiatus between GPTs Puts Solow Paradox into perspective

10. Source: Oliner and Sichel (2003) ICT Contribution to US Labour Productivity Growth (% points per year)

11. Source: Nordbaus (2001) The Progress of Computing Real Cost MIPS-E ($1998)

12. Impact of GPTs on Growth ICT much bigger impact on American growth in recent past than steam ever had on UK growth Costs of computing have fallen much faster than did costs of steam power Society seems to be getting better at exploiting GPTs more rapidly

13. Source: Gayer, Rostow & Schwartz (1953) Railway Capital Authorised (£mn)

14. Railway Share Prices (June 1840=100)

15. RAILWAY BENEFITS

16. RATES OF RETURN Average private rate of return = 5%, 1830- 70 Average social rate of return = 15%, 1830- 70

17. Lessons from Railways Railway mania ended in tears Profits from railways less than optimists had hoped Users gained much more than investors

18. Does Innovation Generate Supernormal Profits? (Nordhaus, 2004) Innovators capture about 2% of the total social gain from technological progress Appropriability is low (7%) and depreciation is high (20% per year) The US stock market valuation of new economy firms grew between 1995 and 2000 at a rate that implied owners could capture 90% of the social gain

19. NASDAQ Composite Index

20. The New Economy and Stock Prices It was a bubble but fundamentals (trend growth) had improved Dot.coms experience would not have surprised someone who lived through the 1840s Economic gains from ICT not a mirage but few of them will be reaped by investors

21. Globalization Enhanced integration of international markets Promoted by reductions in transport and communications costs ….. both steam and ICT do this But is the effect to centralize or disperse economic activity?...to promote divergence or convergence?

22. Transport/Communication Costs VERY HIGH:activity is dispersed VERY LOW:activity is dispersed INTERMEDIATE: agglomeration with feedback effects based on large markets and linkages

23. Agglomeration Benefits External economies of scale Productivity rises with city size Proximity to customers and suppliers Thick labour market Still very important and cannot easily be replicated

24. Steam Power and Industrial Location Reduced transport costs for goods rather than services both on land and at sea Industry moved closer to natural resources Manufacturing cities proliferated in Europe and North America Centralizing not dispersing

25. Source: Harley (1988) Real Cost of Ocean Shipping (1910 = 100)

26. Steam-Powered Globalization Helped manufacturing and finance Hurt arable agriculture, especially land rents Lancashire cotton textiles enjoyed an Indian summer

27. Sources: Harley (1980); Mitchell (1988) Wheat Prices England and Wales (Sh/d per quarter) Ratio of Liverpool/Chicago 1852/662/12.00 1868/7254/81.49 1895/927/101.26 1910/332/51.06

28. Lancashire Textiles and Globalization (Leunig, 2005) Lancashire a high wage industry (6 x India and Japan in 1910) But continued to dominate world trade (60% world market share in 1910) Unit costs no higher than in India or Japan even before adjusting for quality Lancashire flourished because of agglomeration benefits (productivity 33% higher than rest of Britain)

29. Regional GDP/Head (GB= 100) (Crafts, 2005) 18711911 London147.3165.6 Rest SE 88.5 86.3 East Anglia 92.0 76.8 North West108.1 97.2 Yorks & Humbs 94.4 89.5 Wales 87.7 90.1

30. Source: Crafts (2005) Coefficient of Variation of Regional GDP/Person

31. Globalization and the Regions Both then and now regional income inequality rises with globalization London then and Greater London now prosper while imports hurt the provinces East Anglia suffered in 19 th century and West Midlands in 20 th century

32. London as a Financial Centre Agglomeration where size matters Benefits from thick labour markets and importance of proximity for deal-making Clerical jobs will increasingly be offshored This will strengthen the core business

33. UK Asset Management: Core Business OXERA (2005) ImportanceScore Financial Infrastructure 4.003.96 Size of Labour Pool 3.964.24 Quality of Life 3.773.36 Market Liquidity 3.694.29 Regulatory Regime 3.693.40

34. UK Asset Management: Back-Office OXERA (2005) ImportanceScore Total Labour Cost 4.002.74 Size of Labour Pool 3.924.08 Flexibility of Labour Market 3.893.22 Property Rentals 3.592.11 Financial Infrastructure 3.423.85

35. Death of Distance Greatly exaggerated ICT enables some things to go to the periphery but enhances the strengths of the core at the same time (e.g. strengthens London as a financial centre) Like steam, ICT rearranges geography but doesnt abolish it Globalization requires sectoral and spatial adjustment

36. Did Victorian Britain Fail ? Choices of technique basically correct Foreign investment profitable Emulation of USA not feasible Natural resources, economies of scale, non- universal technology: not a neoclassical world New growth economics and new economic geography complicate the argument

37. Pre-1914 Globalization Driven by falling transport and communication costs Protectionism increasing in product markets and USA a high tariff country Massive international factor flows BOTH capital and labor go from Old World to New World

38. Anglo-American Wage Gap: % Contributions to Change, 1870-1913 (ORourke, 1996)

39. Why No Wage Convergence ? TFP gaps increase because of British incompetence USA develops its own non-transferable technology USA benefits from increasing returns to scale and agglomeration economies sustained by migration

40. North Atlantic Economy Heckscher-Ohlin US comparative advantage from land abundance remains in agriculture Tariffs imply less trade and more migration New Geography Migration and increasing returns: virtuous circle of industrialization plus manufactured exports Tariffs imply more migration and promote switch in comparative advantage

41. American Overtaking of Britain Best understood in the context of globalization Reveals some limitations of neoclassical economics May have no important policy implications