Ha-Joon Chang - Economics - The User's Guide

Capitalism really took off around 1820, with a visible acceleration of economic growth all around Western Europe and then in the ‘Western offshoots’ in North America and Oceania. The growth acceleration was so dramatic that the half-century following 1820 is typically referred to as the Industrial Revolution. [32] Unlike political revolutions, such as the French Revolution or the Russian Revolution, economic revolutions do not have clear start and end dates. The Industrial Revolution has been defined as as long as 1750–1850 and as short as 1820–70.

In those fifty years, per capita income in Western Europe grew at 1 per cent, a poor growth rate these days (Japan grew at that rate during the so-called ‘lost decade’ of the 1990s), but compared to the 0.14 per cent growth rate between 1500 and 1820, it was a turbo-charged drive.

This acceleration of growth in per capita income, however, was initially accompanied by a fall in living standards for many. Some with old skills – such as textile artisans – lost their jobs, having been replaced by machines operated by cheaper, unskilled workers, including many children. Some machines were even designed with the small sizes of children in mind. Those who were hired to work in factories, or in the small workshops that supplied inputs for them, worked long hours – seventy to eighty hours per week was the norm, and some worked more than 100 hours a week with usually only half of Sunday free.

Working conditions were extremely hazardous. Many British cotton textile workers died of lung diseases from the dust generated in the production process. The urban working class lived in crowded conditions, sometimes fifteen to twenty people in a room. It was typical that hundreds of people shared one toilet. They died off like flies. In poor areas of Manchester, life expectancy was seventeen years [33] R. Heilbroner and W. Milberg, The Making of Economic Society , 13th edition (Boston: Pearson, 2012), p. 62. – 30 per cent lower than what it had been for the whole of Britain before the Norman Conquest, back in 1000 (then twenty-four years).

Given the misery that capitalism was creating, it is no wonder that various forms of anti-capitalist movements arose. Some of them merely tried to turn the clock back. The Luddites – textile artisans of England who lost their jobs to mechanized production in the 1810s – turned to destroying the machines, the immediate cause of their unemployment and the most obvious symbol of capitalist progress. Others sought to build a better, more egalitarian society through voluntary associations. Robert Owen, the Welsh businessman, tried to build a society based on communal working and living among the like-minded – rather like the Israeli kibbutz.

The most important anti-capitalist visionary was, however, Karl Marx (1818–83), the German economist and revolutionary, who spent most of his time exiled in England – his grave is in Highgate Cemetery in London. Marx labelled Owen and others like him as ‘utopian socialists’ for believing that a post-capitalist society can be based on idyllic communal living. Calling his own approach ‘scientific socialism’, he argued that the new society should build on, rather than reject, the achievements of capitalism. A socialist society should abolish private ownership in the means of production but it should preserve the large production units created by capitalism so that it can take full advantage of their high productivities. Moreover, Marx proposed that a socialist society should be run like a capitalist firm in one important respect – it should plan its economic affairs centrally, in the same way in which a capitalist firm plans all its operations centrally. This is known as central planning.

Marx and many of his followers – including Vladimir Lenin, the leader of the Russian Revolution – believed that a socialist society could only be created through a revolution, led by workers, given that the capitalists would not voluntarily give up what they had. However, some of his followers, known as the ‘revisionists’ or social democrats, such as Eduard Bernstein and Karl Kautsky, thought that the problems of capitalism could be alleviated through the reform, rather than abolition, of capitalism through parliamentary democracy. They advocated measures like regulation of working hours and working conditions as well as the development of the welfare state.

With hindsight, it is easy to see that those reformists read the historical trend the best, as the system they advocated is what all the advanced capitalist economies have today. At the time, however, it was not obvious that workers could be made better off under capitalism, not least because there was fierce resistance to reform from most capitalists.

From around 1870, there were palpable improvements in the conditions of the working class. Wages went up. At least in Britain, the average adult wage was finally high enough to allow the workers to buy more than the bare necessities, and some workers were now working less than sixty hours a week. Life expectancy was up from thirty-six years in 1800 to forty-one years in 1860. [34] N. Crafts, ‘Some dimensions of the “quality of life” during the British industrial revolution’, Economic History Review , vol. 50, no. 4 (November 1997): table 1, p. 623, for the 1800 figure, and table 3, p. 628, for the 1860 figure. At the end of this period, there were even the beginnings of the welfare state, which started in Germany with the 1871 industrial accident insurance scheme, introduced by Otto von Bismarck, the Chancellor of the newly united Germany.

The advancement of capitalism in the Western European countries and their offshoots in the nineteenth century is often attributed to the spread of free tradeand free market. It is only because the government in these countries, it is argued, did not tax or restrict international trade (free trade) and, more generally, did not interfere in the workings of the market (free market) that these countries could develop capitalism. Britain and the US are said to have forged ahead of other countries because they were the first ones to adopt the free market and, especially, free trade.

This could not be further from the truth. The government played a leading role in the early development of capitalism both in Britain and the US, as well as in other Western European countries. [35] See Chang, Kicking Away the Ladder , and H.-J. Chang, Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World (Random House, London, 2007), for further details.

Britain as the pioneer of protectionism

Starting with Henry VII (1485–1509), the Tudor monarchs promoted the woollen textile industry – Europe’s then hi-tech industry, led by the Low Countries, especially Flanders – through government intervention. Tariffs(taxes on imports) protected the British producers from the superior Low Country producers. The British government even sponsored the poaching of skilled textile artisans, mainly from Flanders, to gain access to advanced technologies. British or American people with names like Flanders, Fleming and Flemyng are descendants of those artisans: without those policies, there wouldn’t be 007 (Ian Fleming) or penicillin (Alexander Fleming); and somehow I don’t think The Simpsons would have been as fun as it is if Ned Flanders were called Ned Lancashire. These policies continued after the Tudors, and by the eighteenth century woollen textile goods accounted for around half of Britain’s export revenue. Without those export revenues, Britain would not have been able to import the food and the raw materials that it needed for the Industrial Revolution.