World Political Science Review Volume 3, Issue 2

2007

Article 1

The Economic Rise and Fall of the Great Powers: Technological and Industrial Leadership since the Industrial Revolution Espen Moe∗

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University of Science and Technology (NTNU), Trondheim, Norway, [email protected]

Originally published as Espen Moe, Stormakters økonomiske vekst og fall: Teknologisk og indus˚ trielt lederskap, 1750-2000, Norsk Statsvitenskapelig Tidsskrift Argang 2006, Nr 01, pp.46-74. Reprinted with permission from Norwegian Political Science Association. Produced by The Berkeley Electronic Press.

The Economic Rise and Fall of the Great Powers: Technological and Industrial Leadership since the Industrial Revolution Espen Moe

Abstract The article looks at Schumpeterian growth. What makes nations rise is their ability to use technological progress to create growth industries. But industrial leadership does not automatically translate into future industrial leadership, as technological progress means that the key industries never remain the same. I compare Britain, France, Germany, the U.S. and Japan during five periods of industrial leadership, from the Industrial Revolution until today, to analyze why certain nations have been better able to rise to industrial leadership, and stay there, than others. The theoretical framework blends Joseph Schumpeter and Mancur Olson’s work to yield three theoretical propositions which receive broad empirical support. First, human capital is crucial. Second, the state must prevent vested interests from blocking structural economic change. Third, the states that have managed to do so have been characterized by political consensus and social cohesion. This is because consensus and cohesion provides the state with more autonomy for independent policy-making. KEYWORDS: innovation, Schumpeter, states

Moe: The Economic Rise and Fall of the Great Powers

1. Introduction Long-term growth and development is one of those topics that continues to fascinate us—economists, historians, economic historians, sociologists, political scientists—maybe because what at first glance seems so simple to a great extent still persistently eludes us. Or because the consequences are so great in scope: Small differences in growth rates between different countries will in the long term gravely change the balance of power between them. The leading powers of today are not the same as 250 years ago, among other things because the growth industries of today are not the same as then. Industries rise and fall, and as a consequence different states have exercized economic leadership at different historical moments. These are also the states that have dominated world politics— Spain, the Netherlands, Great Britain, the United States. This is an article about rise and fall. Why have some countries been so much better than others at achieving success within the world’s core industries? Why do countries fail to translate leadership in one core industry into leadership within future ones? And why are some better than others at this? Does fall follow inevitably from rise, or can it be prevented? In the following, I suggest an underlying dynamic that purports to explain these long-term cycles. This is a dynamic where success does not necessarily breed success, but often failure. I combine Joseph Schumpeter and Mancur Olson to produce a theoretical framework where the onus is on the slow and steady build-up of rigidities in the economy, vested interests gaining political power, and in the process making it ever harder for the state to undergo necessary structural economic change. As a core industry experiences rapid economic growth, it becomes politically influential. This influence is used to block policies that go against the interests of the industry. Hence, only states that are able to prevent vested interests from becoming powerful enough to block structural change, may entertain hopes about future industrial and economic leadership. While the main focus is on vested interests, I suggest a potential solution in the shape of political consensus and social cohesion. Only states characterized by strong political consensus and/or social cohesion have the strength and relative autonomy to resist the power of vested interests. Hence, economic success is a story about how vested interests have been prevented from depriving the state of its autonomy and how those countries that have managed this are countries characterized by consensus and cohesion. Following the theory section, I include brief empirical evidence from five core industries—cotton textiles, iron, chemicals, car manufacturing and industries drawing on information and communication technologies (ICTs)—over five time periods, to provide a tentative test and support for the overall argument.

Published by Berkeley Electronic Press, 2007

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2. A Theoretical Framework In one sense, the point that different time periods have been characterized by different growth industries is trivial. The growth industries of yesteryear are not the same as those of today. It would have been odd if the cotton textile industry of the Industrial Revolution was still the world economy’s main engine of growth. In a different sense, the point is not equally trivial. This is an argument that privileges certain industries over others for the reason that they are deemed more important for overall growth and development than other industries: First, in general they have been industries drawing on generic technologies. Hence, they have had multiplier effects on the economy through their contribution to other sectors. Second, these are industries that have drawn upon technological breakthroughs. This has allowed major productivity improvements, and stemming from technological breakthroughs, the growth of entirely new industries. The above is a very Schumpeterian view of growth and development;1 that is growth based on technological innovation, knowledge, and human capital.2 The Schumpeterian economy is cyclical, always in flux, and characterized by shocks and disequilibria rather than a steady walk towards economic equilibrium. Schumpeter adopted the Russian economist Kondratieff’s view of the world economy as going through successive waves of industrial revolutions of empirically 50–60 years each. While for most scholars (including Schumpeter) this is far too deterministic a view of the economy, there is more than just a rough consensus that through most historical epochs, certain core industries and

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Without downgrading the importance of other kinds of growth, there are several reasons to focus on Schumpeterian growth. Traditional neoclassical theories—the dominant economic framework for the past 50 years—can only account for a very modest amount of long-term growth. Abramovitz (1956) and Solow (1956) provided early attempts at growth theories that only illustrated the inability to provide a satisfactory explanation of growth. The model could only explain 10–20%, the residual accounting for the remaining 80–90%. This approach has since been refined, yielding far better results (e.g. Mankiw, Romer and Weil 1992), but has met with criticism from other scholars (e.g. Dinopoulos and Thompson 1999:137pp; Grossman and Helpman 1994:28p). Economic analyses in any case routinely attribute such significant portions of overall growth to technological progress that Schumpeterian growth is important enough to justify a focus exclusively on this (e.g. Kim and Lau 1994; Moe 2007) 2 This implies that there are several kinds of growth. Mokyr (1990) produces the following typology: 1) Investment-led, or Solovian growth (after Robert Solow)—economic growth takes place when capital accumulates more rapidly than the growth of the labor force, thus leading to higher output per capita through increased productivity. 2) Smithian growth, based on commercial expansion, also known as gains from trade—a more specialized division of labor leads to productivity growth. 3) Growth based on scale or size effects. http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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technologies have been particularly important for a country’s growth and prosperity.3 Why cannot just every country start employing these new technologies right away? This is the perspective taken by a host of textbook economic theory. Technology is a public good. Once invented, it is there for everyone to use (e.g. Fagerberg 1994:1149). However, diffusion of technology is never immediate. New and revolutionary technologies do not give rise to growth industries just anywhere. Being technologically ahead of the competition radically improves your chances of being industrially ahead as new technology effectively serves as an entry-barrier against other actors. Hence, industrial leadership is inextricably linked to technological leadership. Countries that have mastered the core technologies of a particular historical era, and have been successful in setting up industries based on these technologies, are the ones that have forged ahead, grown in power and stature (e.g. Freeman and Perez 1988; Reinert 1993). Thus, my focus is not only industrial leadership, but technological and industrial leadership. Schumpeter views the economy as characterized by long-term economic cycles, driven by the growth of one or a few leading industries. When these industries saturate, the world economy drifts into a structural depression that can ultimately only be resolved when (or if) new growth industries, based on breakthrough technologies, provide the world economy with a new industrial engine. In Schumpeter’s (1942:81pp; 1983 [1934]) own terminology: The world economy goes through “waves of creative destruction”. Depression leads to the destruction of old firms and industries, but also to the creation of new ones. For a country to be economically successful in the long run, both creation and destruction must be allowed to occur. When the core industries of the past no longer yield the profits and investment opportunities they once did, the country needs to move on. Seeking to prevent the phase of destruction only leads to the silting up of economic rigidities and long-term stagnation. The industries singled out in this article, are industries that have been instrumental in the rise of some countries, and in the demise of others. They in other words symbolize both creation and destruction.

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A number of scholars have identified the same core industries. Freeman and Perez (1988:50pp) single out five technoeconomic paradigms, of 50–60 years each, from the Industrial Revolution on towards today. These were based on cotton textiles, iron, steel, electric industry (including chemicals), oil and consumer durables, and computers and microelectronics. Similar core industries can be found with Bairoch (1982), Gilpin (1987), Hobsbawm (1969), Landes (1998), Modelski and Thompson (1996), Rostow (1978). Published by Berkeley Electronic Press, 2007

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2.1 Rise and Fall, Vested Interests, and the Role of the State There are many examples that instead of future success, economic success instead breeds failure. If a country has invested heavily in one set of industries based on one set of core technologies, these investments cannot necessarily be translated into new industries based on new technologies. British industrial experiences derived from leadership within cotton textiles could not easily be taken advantage of by a nascent chemical industry a century later. And the bigger the difference between the old and the new industries, the bigger the chance that the industrially dominant power of the past will not be the dominant power of the future (Gilpin 1996: 413). Because technological change has been the main engine of industrial growth, one of the clues to great power success lies in human capital.4 But diffusion is also important. Innovations need to be diffused into the overall economy as fast and painlessly as possible. Producing the best experts in the world counts for precious little if the state is unable to make good use of them (e.g. Freeman 1995; Lundvall 1998). While technology does indeed spread, diffusion is often slow, in particular across borders. Hence, human capital must be the first variable in our framework.5 Schumpeter needs to be supplemented with Mancur Olson (1982; 2000). Olson does not have Schumpeter’s cyclical understanding of the economy. His focus is on the overall economy, not on specific technologies or industries. However, Olson provides the mechanism by which Schumpeter’s long-term shocks, macro trends and creative destruction occur. Structural economic change 4

Background conditions like well-functioning markets, property rights and infrastructure are also crucial. Growth on any scale has rarely been the outcome in countries where property rights were systematically abused. But if we were to analyze the causes of present-day growth and development in industrialized countries, property rights would give us little leverage for the obvious reason that most countries are already doing fairly well in this respect (there is no variation on the independent variable!). Hence, as long as the countries are fairly developed, we need to look beyond background variables to explain success or failure. 5 Human capital is no neat and easy variable. There are a number of different indicators, and it should not be taken for granted that the same indicator works equally well for each and every time period and industry. The 18th century British cotton industry does not put the same requirements on human capital as present ICT-based industries. In a day and age where the sciences were still not extremely advanced and the technologies relatively simple, basic training was relatively more important than it is today. With today’s highly sophisticated technologies, this is no longer good enough. Hence, comparing Japan and the US with respect to ICT-based industries, a focus on higher education would be more pertinent than one on basic literacy. Also, it was often the case that the human capital most relevant to industry came from sources outside of the established educational framework. This was especially important in Britain up until the mid-19th century. Thus, what is important is to what extent a country produced human capital that was relevant to industrial development, and not where this human capital was produced. http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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is always a thorny process, and routinely meets with resistance from vested interest groups that feel threatened by change.6 As an industry grows to become economically prosperous, it normally also acquires political influence through lobby groups and politicians speaking on its behalf. As it becomes organized, it becomes capable of speaking with a strong, unified voice. Thus, institutional stability leads to institutional rigidity. Societies that have had to start over again, reforming their institutions and breaking up old monopolies of power and economic vested interests, are the ones that have been economically prosperous. Stability leads to a silting up of vested interests, to stasis, sclerosis and to an inability to shift the status quo, as the country gradually drifts into economic obscurity (Olson 2000). Olson emphasizes that if the economy is controlled by vested interests, it loses its ability to change and adapt. This argument can easily be translated into a dynamic rather than a static argument. Technologies come and go, and industries and vested interest groups come and go with them. Unlike in the Olsonian world, Schumpeter’s first mover is not institutional stability or rigidity, but technological change (or its absence). When technological change is allowed to take place, Olsonian sclerosis (from the silting up of institutional rigidities) will not occur. When the process of creative destruction is blocked, it will. Rigidities may silt up in the Schumpeterian world as well—because of vested interests rising from the implementation of new technologies. But even new technologies mature, soon becoming commonplace and obsolete. As this happens, the state needs to actively protect and promote new technologies and industries while young and vulnerable, against competition from abroad, and against vested interests attached to old and established technologies and industries. Neither Schumpeter nor Olson would have argued like this; they thought that the state should stay out of the economic sphere. Also, if government protection becomes permanent, we are stuck in an Olsonian trap where vested interests have again been allowed to grow powerful. Towards the end of a technology or an industry’s product cycle (e.g. Vernon 1966), it is important not to support it, as this will impede upon structural change, channel resources away from new and promising industries, and harm the chances of future success. Still, there must be a role for the state. No one else can prevent industries from becoming so powerful that a few decades down the line, they themselves have 6

There will always be vested interests resisting change. New knowledge displaces existing skills and technological change leads to losses for those that have invested heavily in the old technology. Hence, potential losers have routinely sought to set up obstacles in order to obstruct innovation (Mokyr 1990; 1998:51pp): 1) Outright physical resistance against new technology—riots, strikes, the physical destruction of machinery. 2) Laws and regulations restricting the implementation of new technologies, as well as barriers of entry—guilds, trade unions, labor unions, lobby groups, state monopolies etc. 3) Lobby groups that have managed to shield themselves against foreign competition through protection and favorable treatment, like tariffs and subsidies. Published by Berkeley Electronic Press, 2007

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enough influence to block future structural change, and to prevent new and promising industries from arising. 2.2 Political Consensus and Social Cohesion The primary mission of the state becomes a balancing act—preventing vested interests from blocking structural change. For short, it needs to prevent technological progress from creating the forces of its own destruction. Or to frame it in terms of Schumpeter, the state must see to it that both the “destructive” and the “creative” aspects of creative destruction are allowed to play themselves out. What works today will in all likelihood not work equally well in 50 years. But some states seem persistently better than others at this. How is the rising state different from the falling? A plethora of arguments can be found— strong vs. weak, democratic vs. authoritarian, centralized vs. decentralized, etc.7 However, very different regimes have been able to achieve economic—states as dissimilar as laissez-faire Britain and US, authoritarian Germany and Japan. A common denominator is hard to find if the measure applied is too rough. As analytical tools, strong vs. weak and so on seem too blunt to hold much promise. Hence, the key to whether or not a state can successfully control its vested interests has to do with a different kind of strength, namely that of cohesion (which I divide into political consensus and social cohesion). My suggestion is that the more cohesive the state, the greater the chance of preventing vested interests from gaining control over the state. And the greater the chance that the state will rise to achieve technological and industrial leadership.8 The reason why cohesion is crucial is that without it, policies of structural economic change will scarcely be undertaken. One might imagine long-term economic growth to be among the highest priorities of a state. It is not (e.g. De Long 2000:139p)! Instead, politics consists of a myriad of minor and seemingly trivial decisions. Before any decision can be made on large-scale, abstract and 7

Epstein (2000) argues that historically limitations to sovereignty, and the inability to enforce a unified, non-discriminatory regime is what held most states back. Only a centralized state could realistically create growth and development. Mokyr (1990) instead suggests that centralized states also have a greater capacity for decisively screwing up. They can more easily adopt antitechnology regulations, and more effectively cater to vested interests than a less centralized state. While strong states may be better at implementing change once they have decided on it, it may be easier to find the willingness to do so in weaker states. 8 This argument distinguishes between strong states and strong powers. Strength as a power rests on economic and military might, strength as a state on the social bonds that hold the country together. Of the two superpowers, only the US was strong as a state, although both were supremely strong powers (Knutsen 1999:168). The Soviet Union was fraught with corruption, instabilities, a stalling economy and a less than convinced population. http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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overarching issues, countless minor concerns have to be satisfied. True, technological change and long-term growth are concerns, but mainly of highflying rhetoric, and with a focus often decidedly short-term (as in re-election). This is true of present-day democracies, where politics often comes down to administration, bureaucracy and negotiations, but also true in authoritarian regimes of yesteryear, where military issues would normally take priority over issues of growth. Survival is the most immediate concern of most regimes. The likelihood of survival diminishes radically when controversial decisions with potentially grave redistributive effects have to be made (e.g. Pierson 1996). The likelihood that the state will pursue policies of structural economic change without solid backing either in the parliament or the people, is small indeed. Cohesion applies to both conditions within the regime and to the overall population. Political consensus applies to the ruling elites,9 social cohesion to the people.10 Political consensus makes it harder for vested interests to pursue continued protection, and it makes it less risky for political parties or other decision makers to pursue policies with potentially large redistributive effects. Social cohesion in the people makes it less risky for political parties or other decision makers to pursue with potentially large redistributive effects. Consensus and cohesion means less room for vested interests to exploit footholds and fragmentation within the polity. 2.3 Methodology Why does technological and industrial leadership often not translate into future leadership? The arguments of Schumpeter and Olson suggest three main reasons. For technological and industrial leadership, a country needs to fulfill two conditions. First, it must have a human capital advantage. Second, it must have weak and fragmented vested interests. Countries that have fallen from leadership 9

Strong and permanent political alliances and the lack of political fragmentation is one situation in which the power of vested interests can be neutralized. This applies to democracies, but equally well to authoritarian regimes, although in a different way. Here, one would instead focus on what kind of power alliances the ruler needs to satisfy in order to stay in power. Even the most authoritarian dictator needs a support base on which his power rests. Political consensus should therefore be important in dictatorships as well. 10 The reasoning is as follows: 1) A lack of political consensus and/or social cohesion makes it easier for vested interests to pursue their own agenda. Lack of consensus makes it easier to exploit disagreement and fragmentation between political parties and other decision makers. A lack of cohesion makes it more risky for political parties to implement policies with potentially large redistributive consequences (as in concrete losers, and not so concrete winners). 2) Political consensus and/or social cohesion makes it easier to pursue structural economic change, that is implement policies that are in the interest of society as a whole, but that go at the expense of powerful vested interests. Published by Berkeley Electronic Press, 2007

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(or failed to rise) are as a rule countries with strong vested interests, able to force their preferences on the political leadership. Either human capital or a lack of vested interests is not in itself sufficient. The absence of vested interests will be of little benefit if the human capital base is insufficiently developed to take advantage of opportunities arising from new technology. Likewise, if vested interests are strong enough to block change, the country will still not be able to provide conditions conducive to the establishment of new industries, regardless of human capital. Further, there is a third condition that also needs to be fulfilled: High levels of political consensus and/or social cohesion. In the final analysis, this means that what makes a country rise to technological and industrial leadership is the combination of a high value on the human capital variable and a low value on the vested interests variable, but that this low value is contingent on a high value on the consensus and cohesion variable.11 Consensus and cohesion is thus crucial because it works through the vested interest variable. All three variables are hard to operationalize. They are not easily quantifiable, and singular indicators may not provide a valid representation. It is also a problem that the empirical analysis stretches 250 years back in time and contains comparisons between countries and industries from different time periods. The quality of data (especially quantitative data) deteriorates dramatically when going far back in time, making rigid testing difficult. On the face of it, human capital seems easily operationalizeable. However, there is a multitude of human capital indicators, and it is impossible to find one that is equally valid independently of time period and industry. Hence, rather eclectically, I have sought to assess to what extent the human capital produced in each country was relevant to that particular industry, and to what extent it is possible to trace a link between human capital and industrial leadership for each and every industry. Thus, what is important is not the absolute level of human capital (if even measurable), but how the country compared to its closest rivals. Indicators on vested interests, consensus and cohesion exist, but are not well developed. For the vested interest variable, I have sought to identify the major political issues pertaining to economic policymaking (and that actually had economic effects), whether or not significant vested interests blocked change, and

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It should be noted that a high value on the consensus and cohesion variable does not by necessity yield a low value on the vested interest variable. Consensus and cohesion does not guarantee that the right decisions will be made, only that the state has the necessary autonomy to make these decisions. The state could easily be consensual and cohesive around the “wrong” decisions, like for instance about protecting the existing industrial structure against change. Hence, consensus and cohesion is a necessary condition for the state to be able to curb the power of vested interests, but not in itself sufficient.

http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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whether or not a state actively resisted such interests.12 For consensus and cohesion, a multitude of data exists for the postwar years.13 However, for most of the earlier cases this does not apply. Ultimately, I have had to make overall assessments of both vested interests and consensus and cohesion based on my reading of the literature. I have done my best to shy away from controversy, relying on data that the overwhelming majority of scholars in the field should be able to agree with. Yet, the assessments, evaluations and conclusions are all mine.

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I am not a priori identifying particular vested interests. Still, certain vested interests seem more relevant than others, namely economic interests. In particular; have political elites been receptive to the needs of new and vulnerable industries, or have these industries been at the mercy of policies tailored to the needs of the established industries? For each time period, I have identified the major economically and industrially related political issues, relevant vested interest groups, and to what extent they were successful in influencing government policies. Hence, industrial lobby groups figure prominently, whether lobbying for or against protection, for change in the education curriculum, etc. The variable contains both a deductive and an inductive component. It is deductively derived from theory, but since there are a multitude of vested interests and no a priori selection criteria, selection can only be accomplished inductively, through a thorough examination of the historical record. 13 I have divided the variable into two components—consensus and cohesion. A state characterized by both consensus and cohesion is better off than a state that is low on consensus and high on cohesion. But whether “low on consensus and high on cohesion” is better or worse than “high on consensus and low on cohesion”, strikes me as an empirical rather than a theoretical question. While I believe that the literature presents quite clear indications as to the values on the variable, I have tried to shy away from controversial interpretation. Political consensus: I am looking at broad consensus as to the major economically and industrially relevant political issues among the ruling elites. For practical purposes, this means the government and parliament, but it is not always this simple, especially with less representative regimes. Bismarckian Germany was less than democratic, but there were still very obvious alliances supporting the regime. The Kaiser was closer to omnipotence than most Western monarchs, but a lot of wheeling and dealing went on behind his back. When a ruler relies on implicit political alliances in order to remain in power and to implement policies, “ruling elites” becomes a very fluid notion. Social cohesion: The bonds that tie a country together (Knutsen 1999:168). Societies founded on networks of trust and cooperation help realize the human potential (OECD 2001b:39p). Putnam (1995a; 1995b) laments what he sees as a decrease in social capital in the US, and Fukuyama (1995) focuses on how successful economies are characterized by a high degree of trust. Dayton-Johnson (2001:8, 35, 59) defines it as the degree of “interconnectedness and trust among a group of people”. I have sought to make overall assessments as to the general level of cohesion in the people based on the historical literature, and the evidence of trust, the record of unrest and turbulence in the population. However, as reliable and valid data on social cohesion are harder to get hold of than for political consensus, privilege has been given to consensus. Published by Berkeley Electronic Press, 2007

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3. The Industrial Rise and Fall of the Great Powers For the next part of the article I analyze nine cases for five different time periods and industries, combining the comparative and the historical method.14 With one exception (the car industry), I juxtapose one positive and one negative case for each time period and industry. The time periods and industries are late 18th to early 19th century cotton textiles, early-to-mid 19th century iron, late 19th to early 20th century chemical industry, early-to-mid 20th century automobile industry, and finally, late 20th century ICT-based service industries. For each time period and industry, I compare the lead economy for that period against another great power that fared distinctly worse. Hence, for cotton textiles and iron, I juxtapose British success and French relative failure. For chemicals, I contrast German success with British failure, and for ICTs, I compare US success and Japanese misery. The one exception is the car industry, where I only look at the rise of the US, without making more than tacit comparison. The reasons for this will become clear later. This design ensures considerable variation on the dependent variable, for each time period and for all the cases put together. This makes it easier to draw reliable inferences. This cannot be a conclusive test, both because the variables are loosely defined and because space constraints severely limit the amount of empirical material included. Still, as long as the values on the dependent variable are systematically matched by the values on the independent variables (and backed up by a historical narrative), it greatly increases the theory’s plausibility and enhances its prospects ahead of more rigorous testing.15 3.1 Cotton Textiles No industry is more closely associated with the Industrial Revolution than the cotton textile industry. Based on a number of British innovations starting in the 1760s (spinning jenny (1764), water frame (1769), mule (1779)), productivity increased to such an extent that by the end of the century, a mule would produce 200–300 times more than a normal spinning wheel (Brose 1998:36; Landes 1969:85; Mokyr 1999:21p). Cotton textiles accounted for 40% of British exports, and while roughly on a par with France prior to the French Revolution, by the end of the Napoleonic Wars, Britain had left France far behind, with a raw cotton consumption that was now four times that of France (Hudson 1992:183; Modelski and Thompson 1996:99). 14

For this, I employ Mill’s (1904:253pp [1843]) Method of Indirect Difference. For a more extensive treatment of this, empirically and methodologically, see Moe (2004). 15 In Eckstein’s (1975:108) terminology, this is a plausibility probe. The results are not conclusive, but sufficiently rooted in data to warrant more rigorous testing. http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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3.1.1 The British Cotton Textile Industry Britain had a distinct human capital advantage over France, one that did however not rest on formal education. England had only two universities—Oxford and Cambridge—both in decline, and neither showing any interest in technology and science. The only English institutions of higher learning that showed any interest in technology and industry were the religious Dissenter academies, and a disproportionate amount of industrial champions received their education in such institutions, as well as in the more practically oriented Scottish universities. The advantage thus lay in the informal education sector, and in the ability of Britain to make good use of available knowledge for industrial purposes. Learning happened through scientific journals and in scientific societies,16 which brought together people with ideas, skills, and money, translating technological breakthroughs into industrial ventures (Freeman and Louçã 2001:180; Mokyr 2002:43pp; Pyenson and Sheets-Pyenson 1999:321). Links between scientists, inventors, and entrepreneurs were stronger than anywhere else, making Britain far better than France at utilizing existing knowledge for practical purposes (Ashton 1997:12pp [1948]; Evans 1983:108; Mokyr 1990:241; Perkin 1969:68pp). And despite the failings of the education system, Britain was endowed with a large number of mechanically skilled people—far more than France. While these were not people that could perform great scientific feats, they were many, and they were prolific at tinkering and experimenting, and at applying scientific knowledge developed elsewhere (Jacob 1997:165pp; Landes 1999:153; Mokyr 1990:240). Vested interests was a minor problem. Guilds had been weak since the Glorious Revolution (1688). Rent-seeking was also only a minor problem as the role of Parliament made lobbying a slow and cumbersome process (Mokyr 1990; Morgan 1999:46; Root 1991:338pp). While there had been a prohibition on the import of Indian cloth and calicoes since the late 17th century, this had for political reasons (not economic!) developed into a loophole whereby cotton textile manufacturers located in Britain for all practical purposes was given protection and favorable regulations by the state—very much against the interests of the dominant industry of the day, wool. While it is hard to credit British politicians with any conscious industrial policy, political outcomes still persistently went against powerful vested interests and in favor of cotton textiles (Landes 1969:82; O’Brien, Griffiths and Hunt 1991).

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The first of these societies was the Royal Society of London, founded in 1662, publishing the scientific journal Philosophical Transactions as early as 1665. During the 18th century, a host of similar institutions sprang up in other cities as well, as Liverpool, Birmingham, and Manchester (Pyenson and Sheets-Pyenson, 1999:321). Published by Berkeley Electronic Press, 2007

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Cohesion, and in particular political consensus, made it easier for Britain to resist its vested interests. Much of the 18th century had seen “a robust social consensus anchored in a distinct and relevant political mythology…forged on the anvil of large-scale war…this consensus rendered England self-confident, productive and strong” (Knutsen 1999:107). War (primarily against France) had played a major role in forging a British identity (Colley 1992). British ruling elites were characterized by major political consensus. Developments during the midcentury had led to a more or less unanimous and unequivocal pro-industry stance.17 Riots were violently clamped down by soldiers, and the death sentence was introduced for certain industry related offences (like tampering with bridges and mines). Petitions to ban new technology were persistently rejected by Parliament. Labor organizations were banned if perceived as threatening the advance of technology, and ancient statutes and regulations were removed (Colley, 1992; Freeman and Louçã, 2001:178; Mokyr, 1990; 2002; Morgan, 1999:46). 3.1.2 The French Cotton Textile Industry France failed, despite far more conscious industrial policies. An activist education policy sought to promote the sciences for the purpose of creating industrial growth. France had more than 20 universities. The Académie Royale des Sciences was founded as early as 1666. By the late 18th century, France was the world’s center of science, with the École Polytechnique the finest science school in Europe (Ahlström, 1982:30p; Keck, 1993:117; McCloy, 1977:410 [1946]). However, unlike Britain, France dismally failed to diffuse this knowledge. Scientists worked either for the political establishment or against it. In Britain, they simply worked—with no hidden political agenda. French scientists depended on personal relations with the political establishment, as engineering knowledge was the property of the state, in the service of national interest. One would invent something, then get an academy or learned society to look at it—intellectual activity had little practical application (Crouzet, 1990:31; Jacob, 1997:139; Landes, 1994:649; Mokyr, 1990:242pp; 2002:74). Consequently, diffusion occurred mainly through French industrial espionage and through the hiring of skilled British artisans. With the French Revolution, this source of diffusion disappeared. The technological gap had been modest prior to the Revolution. By the end of the Napoleonic Wars, France was using equipment that had already

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At the start of the Industrial Revolution, Britain faced widespread resistance in the form of riots and attacks against new machinery (Hobsbawm 1969:67; Mokyr 1990:256pp; Morgan 1999:46; Pugh 1999:40). Hence, we have to be ambiguous with respect to social cohesion. More important is the decisiveness with which the riots were suppressed.

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been obsolescent in Britain for more than two decades (Crouzet 2003:234; Jacob 1997:178p). Vested interests was a considerable problem. While guilds had weakened substantially since the 1750s, a network of craft guilds and small producers supported by local authorities in general opposed technological innovation, and would often be strong enough to resist labor-saving inventions. Rent-seeking was rampant. With the king not facing up to any parliament, secrecy shrouded the wheeling and dealing of pressure groups and government, away from the public sphere. Consequently, French economic policies were a cobweb of favoritism and vested interests (Bossenga 1988:696; Mokyr 1990:259; Root 1991). Unlike Britain, France did not support cotton textiles, putting a total ban on the sale of cottons (O’Brien, Griffiths and Hunt 1991:418), even if during the 17th century, Colbert and Richelieu had actually tried to encourage cotton manufacture. Instead, industrial policy favored the already dominant wool industry. A complete lack of both consensus and cohesion made reform impossible, and allowed vested interests to effectively veto economic policy-making. Late 18th century France saw massive uprisings against new technology, in particular against the nascent cotton textile industry.18 But unlike Britain, the state was too weak to assert itself in favor of industrialization. The ancien regime’s attitude towards new technology was highly vacillating. French kings sought reform, realizing that they were stuck with a system that perpetuated huge budget deficits and hampered growth, but met with fierce resistance from the privileged classes. A lack of political consensus among the ruling elites made crucial reforms impossible. Attempts at introducing a property tax and abolishing the guilds (1776) created large-scale tension, with clergy, nobility, magistrates, craftsmen, merchants and urban people all uniting against it. Hence, for structural change, the king would have to side against the forces from which he normally derived support, and with forces that were hostile towards him. Social cohesion was not strong enough for the king to jeopardize the implicit alliance with the privileged classes and instead seek support from reformist elements in the bourgeoisie. Reform affected the privileged classes enough to arouse their resistance, but not the bourgeoisie to such an extent that they could be drawn upon for support. A complete lack of political consensus made it impossible to implement structural economic reform, no solution possible short of revolution (Furet 1992:51p; Hoffman and Rosenthal 2000:442pp; Magraw 1999; Mokyr 1990:258pp; 2002:270; Price 1993:71, 139; Wright 1995:34pp). The Napoleonic Wars exacerbated the problems. France already lagged behind Britain, and by the time of peace, Britain’s lead had become insurmountable. 18

Although because of the endemic level of riots all over France towards the end of the 18th century, it is hard to know to what extent riots were directed against the introduction of new technology, or against the regime in general.

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3.2 Iron Iron was the second major early Industrial Revolution industry, and many of the breakthroughs stem from the same time period as the revolution in cotton textiles. Still, it was not until after the Napoleonic Wars that iron became the driver of the economy (Greasley and Oxley 2000:109, 114). Also, from the 1830s onwards, iron became of ever more important because of the links between iron, coal, steam power and railroads. This provided Western European economies with a crucial mid-19th century boost. 3.2.1 The British Iron Industry This also symbolizes the high-water mark of British economic and industrial dominance, fueled by an iron industry head and shoulders above the competition. By 1850, Britain produced half the world’s iron and two thirds of the world’s coal. France never came close. The British human capital story is essentially the same as for cotton textiles. The education system changed little. No system of primary education was introduced, with opposition to reform from the Church, landlords and Tories.19 In any case, formal education was of little importance to iron, and again, the British advantage stemmed from other skills. Men like Smeaton, Wilkinson, Watt and Trevithick—responsible for some of the most important breakthroughs of the era—were all very well connected with the scientific societies. They did not have much formal education, but were well-read in technical matters, possessing an abundance of “technical literacy” (Mokyr 2002). The Newcomen steam engine would never have materialized without the theoretical ideas of Boyle, Torricelli and others.20 Watt derived much knowledge from interaction with scientists in Glasgow (Brose 1998:45p; Landes 1969:104; Mokyr 2002:72). Neilson’s hot blast drew on courses in chemistry, again from the university in Glasgow (Mokyr 2002:84pp). Britain successfully combated its main vested interest—agriculture. By the end of the Napoleonic Wars agricultural interests had grown more powerful than before, and were strongly represented in Parliament by the Tories. Boosting production during the war in order to deal with Napoleon’s blockade led to Corn 19

Conservatives feared that mass schooling could lead to revolution (also, it was expensive and not necessary); the Church feared that reform implied secular education and godlessness (Lindert 2001; Vincent 2000:31). 20 At the same time, it is probably also true that many of the advances within steam engine construction—Watt, Trevithick, Woolf—were accomplished through a combination of experimenting and good mechanical intuition, without really having the epistemic base for it (Mokyr 2002) http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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Laws being imposed in 1815 in order to protect landed interests against foreign imports. The landed interests controlled the state, blocking every attempt at repeal, especially in the 1830s and onwards, as economist crisis hit the country hard. Overproduction in industry (in particular in iron, but also in coal) combined with a structural crisis affecting iron badly and with government policies artificially restricting the expansion of markets, in particular foreign markets. The crisis was not resolved until the 1840s Tory cabinet of Robert Peel went against what was normally perceived as the party’s own vested interest, by systematically reducing and abolishing customs duties, culminating with the 1846 Corn Law repeal (Bairoch 1993:21; Lloyd-Jones 1990; Schonhardt-Bailey 1991:547). Another example of powerful vested interests being defeated losing out, is the battle between canals and railroads.21 The mid-19th century was a turbulent period in Britain. Still, compared to France, Britain was calm and stable, and as time passed, Britain became calmer, France not. Whigs had long been pro-industry. However, it took the political consensus of Whigs and Tories to repeal the Corn Laws. Only a conservative government, itself seen as part of the vested agricultural interests could be strong enough to go against these same interests.22 While the Tories were by no means united, it is still remarkable that a full third of all Tory MPs voted for a repeal that they had been massively against only four years earlier (McKeown 1989:356; Pugh 1999:69p). By 1832 Britain was on the brink of social revolution. Hence, social cohesion was at an all-time low. But whereas France underwent two actual revolutions, stifling economic growth and preventing any stability, Britain opted for reform. Protest and dissent was channeled into institutionalized forms, with the 1832 extension of the franchise a key reform. It led to increased legitimacy for the ruling elites, with the middle-class now playing a crucial role in maintaining the social and political stability of the regime. Post-1832 regimes could rely on a groundswell of cohesion in the populace very much unlike in France, and policymaking could be pursued without the fear of revolution. In 1848, when Europe was plagued by revolution, Britain saw no upsurge in unrest (Evans 1983:218; Perkin 1969:393pp; Pugh 1999:48pp; Tilly 2004:163).23 21

Unlike in France, the British state came down on the side of railroads right away. See for instance Harris (1997:685p), Freeman and Louçã (2001:194). 22 This episode nicely illustrates how policies of structural change can be politically risky. The Tories split, as two thirds of the party voted against the repeal. Those that voted for, including Peel, subsequently left the party. 23 True, political unrest lasted throughout the 1840s, with the Chartist movement (1837–48) mobilizing hundreds of thousands in bitter protests, demanding universal suffrage, abolition of property qualifications on MPs, etc. But 1848—the year of European revolutions—was also the year that Chartist rallies subsided. On one occasion, the government recruited 100,000[!] volunteers to prevent a Chartist demonstration from becoming violent. Published by Berkeley Electronic Press, 2007

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3.2.2 The French iron Industry With France as well, the human capital story is much the same as for cotton textiles. The education system changed little, and with the exception for Napoleon’s reign, the state was indifferent to elementary schooling. Also, France was deeply split between secular revolutionaries and a very conservative and antirevolutionary Catholic Church (Cipolla 1969:78; Furet 1992:334p). The French Revolution led to higher education reform, with a greater emphasis on science and technology, but while the Grandes Écoles produced excellent engineers, they did not provide industrial education. Skills were particularly deficient in machinery, where technological change was stifled by a lack of the scientific and technological knowledge found in Britain (Brose 1998:46; Trebilcock 1981:194p). But diffusion was still the biggest problem. Linkages between science and industry were absent. Government attempts to promote diffusion— prizes for the emulation of British technology, special societies to encourage technological progress, large industrial fairs—were no success. French scientific literature (e.g. Carnot (1824)) was ignored, while second-hand translations attracted much interest in Britain. Attempts at importing steam engines were persistently frustrated by academic scientists (Brose 1998:49; Jacob 1997). Diffusion of coke smelting took place through British ironmasters, in 1785 resulting in the first coke-blast furnace on the Continent. But the Revolution put a stop to further diffusion, and by the end of the Napoleonic Wars, this was one of only two French furnaces to produce coked pig iron. Further, puddling and rolling did not appear until after the wars, when it diffused through Welsh craftsmen. Thus, France languished three decades behind the British iron industry (Freeman and Louçã 2001:160; Landes 1969:140; Mokyr 2002:88). Vested interests was a huge problem. Early 19th century France was characterized by a string of weak governments. Hence, vested interests could largely run free. A number of industries obtained tariff protection, and while this probably saved the iron industry in the short run, it allowed a host of inefficient iron works to survive. A government commission stated outright that lower tariffs would unjustly harm those that had entered into business with the expectation that tariffs should be upheld. Hence, tariffs should be understood solely in terms of protecting the existing industrial structure (Landes 1969:201, 216; Trebilcock 1981:170; Wright 1995:146p). Some tariffs had distinctly contradictory consequences. Being scarce in coal, France was highly dependent on imports. Yet, in response to pressure from coalminers, tariffs were placed on coal imports, worsening the situation for iron miners who depended on coal for iron-smelting. The construction of a railroad network was another huge problem. Here, it was

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the railroad bureaucracy (the Corps des Ponts et Chaussées)—deeply entrenched in the state itself—which blocked change. 24 A main reason for the inability to curb vested interests was a complete lack of consensus and cohesion. Governments had very little autonomy. Staying in power without triggering revolution was itself hard enough, without having to challenge vested interests as well. While France did undergo periods of apparent stability, whenever crisis occurred, no groundswell of social cohesion in the people was there to support and uphold the regime. Every economic crisis triggered fears of revolution, with actual revolutions occurring in 1830 and 1848, and Louis-Napoleon performing a coup d’etat in 1851 (Price 1993:160pp; Trebilcock 1981:187; Wright 1995:146p). Also: To the extent that a political consensus actually did exist, this was not a consensus about structural change, but rather about preserving the political and economic status quo. This is hardly surprising, as government was at its strongest when it was most closely in tune with the king, which for all practical purposes meant being strongly conservative and opposed to change. The exception to the rule was Napoleon III, who had more autonomy than any French ruler since Napoleon. This enabled him to go against vested interests both with respect to tariff policies, railroad construction and financial reform, which was beneficial to iron. Still, at this point it was far too late to catch up with the British iron industry. 3.3 Chemicals The late 19th century saw a host of new industries, significantly more knowledgeintensive than prior industries. One of these was the chemical industry, which became of great importance to late 19th century and early 20th century economic growth. This is the industry that best signals the waning of Britain as a dominant power, and the rise of Germany. In 1850, Britain had the largest chemical industry in the world by virtue of producing detergents, bleach, soda etc., for its giant textile industry. And while the first synthetic dye was invented in Britain (1856), almost all subsequent inventions were German. By the late 19th century, the German share of the synthetic dyes world market amounted to roughly 85%. 24

An efficient railroad network would have been a solution to France’s geographic problems, which was of particular relevance to iron. However, because of the influence of the railroad bureaucracy construction of railroads was centralized, complemented by expensive canals, and held to such high standards that construction was far slower and costlier than elsewhere in Europe. It was also determined by political rather than economic and industrial concerns, hence regularly bypassing the most important industrial areas. Instead of a decentralized network, France ended up with a hub-and-spokes system, all (rail-)roads leading to Paris. This would not change until president Louis-Napoleon in an 1851 coup d’etat installed himself as Emperor Napoleon III. Financial reform would also have to wait until then (Smith 1990; Trebilcock 1981:150pp, 169, 184pp).

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3.3.1 The British chemical industry In terms of human capital, Britain was now struggling. In 1870 Parliament made elementary education universal—very late compared to most other countries (Lindert 2001; Chambliss 2003). The higher education system also improved painfully slowly. British industry was constantly hampered by not having access to trained managerial and technical personnel. The government took little initiative to make education more relevant to industrial development. Even in the late 19th century, the universities perceived of applied research as clearly subordinate to ‘pure’ science (Donnelly 1986:204p; Hobsbawm 1975:59). At Oxford and Cambridge, the grand total of Bachelor of Science honors degrees awarded between 1880 and 1900, was a measly 56 (Murmann 2003:55). Scientific and technical training did expand, but compared to Germany, British efforts were meager. By the end of the 19th century, Britain spent £26,000 on universities for all purposes.25 Prussia alone spent £476,000. In 1872, the University of Munich had more trained chemists than all of Britain! In organic chemistry research, in 1882 Germany produced 574 scientific abstracts, Britain 59. By 1913, Britain was outnumbered ten to one with respect to engineering students (Berghoff and Möller 1994:269pp; Brose 1998:86; Horstmeyer 1998:246; Keck 1993:119; Murmann and Landau 1998:38pp).26 The foremost British experts were still world-class. However, Germany had far more of them (Donnelly 1986:220). Vested interests had now become a problem, preventing reform in at least three areas. Religious and aristocratic interests torpedoed education reform. First, they could not see why it mattered (after all, in the past it had not). Second, they were afraid of awakening the masses. Third, it would cost a massive amount of money. Also, there was no pressure for education reform from the industry (Evans 1983:324; Hobsbawm 1962:30; Hoppen 1998:597pp; Lindert 2003:330). The second area was patent legislation. The existing legislation was adapted to the needs of the old industries, among other things not distinguishing between product and process. The consequence was uncertainty as to what a patent covered. Did it cover for instance the rights to produce “the color red”, or the rights to the process used to produce that color? This led to extensive litigation as to which firms had the rights to produce what colors, and workable rules were not in place until 1865. Until then, British firms spent more time in court than in the laboratory (Murmann 2003:87pp)! Third, vested interests dominated the tariff issue. As the rest of the world shifted towards protectionism, Britain stuck with free trade. Protectionist voices rose in the 1880s, but no strong British 25

However, keep in mind that as of yet neither Oxford nor Cambridge were funded by the state (Murmann 2003:55). 26 Germany produced 3,000 graduate engineers per year, England and Wales only 350 (Hobsbawm 1969:182). http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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protectionist movement arose until the early 20th century (Bairoch 1993:27; Brose 1998:81). The chemical industry definitely preferred tariffs, but unlike cotton textiles, it did not speak with any unified voice, and did not have spokesmen in Parliament. Instead, the textile industry, which wanted access to cheap and highquality German dyes, lobbied heavily for free trade. And British dyestuffs were also countered by natural dyers and colorists, who used their strong trade organizations to lobby for free trade. As a consequence, British alkalis suffered from tariffs imposed by Germany, and exports to the US came to an almost complete halt following US tariff increases on a number of inorganic chemical products. For all practical purposes, old vested interests had sent British chemicals tumbling (Chang 2002:38; Horstmeyer 1998:235pp; Murmann 2003:193). A combined absence of consensus and cohesion made it very hard to pursue policies of structural change. There was no political consensus around education reform (Hoppen 1998:598p; Lindert 2003:330; Pugh 1999:101). With respect to patents, a chemical industry lacking in high-skilled and prestigious experts, was unable to push for an adequate patent system, when other and more powerful vested interests were going against this (Murmann 2003:187pp). On trade, protectionism was associated with high food prices, starvation and the selfish interests of the landed aristocracy. The major new groups that received voting rights with the 1867 franchise extension were strongly pro-free trade. That the Liberal party was the dominant party, and at the same time staunchly free trade, made tariff reform impossible to such an extent that the Conservatives shunned the issue even when in power, aware that it would lose them the next election. This duly happened in 1906. Even at a stage when British industries were struggling, with the economy in obvious decline, raising the tariff issue led to a Liberal landslide, pushing tariff reform into the indefinite future (Judd 1996:187pp; Klug 2001:221; Pugh 1999:115, 145). 3.3.2 The German chemical industry In terms of human capital, Germany (or Prussia) had by far the best education system of the day, both in primary and in higher education. In 1772, Prussia was the first European country to make free compulsory primary education universal (Crouzet 2001:137; Keck 1993:121). The system was reorganized after Prussia in 1806 was routed at the Battle of Jena. The humiliation led to the modernization and decentralization of the education system. German academies of science had existed since the 18th century (Chambliss 2003; Keck 1993:117p). In addition, technical schools provided education in chemical-technical subjects, and the 1830s saw the rise of the polytechnic. Fierce competition between sovereign German states meant that nearly every German university ended up with at least a

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small chemistry institute, giving Germany a much deeper pool of talent and resources than other countries (Lenoir 1998:23p; Murmann 2003:76; Rocke 1993:54p).27 Still, the real expansion of higher education started in the 1870s (Keck 1993:119; Murmann and Landau 1998:38).28 The first R&D laboratory was set up in the 1870s, and within a decade, all major German manufacturers had inhouse laboratories with permanently employed academically trained chemists performing industrial scientific research. Connections between universities, technical universities and industry were close, stemming from an awareness of the importance of science and industry to the German state. Professors often taught at both universities and technical universities and took on consultancy work for industrial firms. From the mid-1880s, the chemical industry even sponsored reform at universities and technical universities in order to reshape the curriculum to better reflect the demands of the industry (Horstmeyer 1998:246; Lenoir 1998:25; Meyer-Thurow 1982:376; Murmann and Landau 1998:39p; Rosenberg 1998:209). The German state was quite effectual at preventing old vested interests from blocking the rise of the chemical industry and was eagerly supporting the new industry. But success also had to do with a relative lack of old vested interests. Germany had no powerful textile lobby. Religious opposition to secular education was only modest, and since the education system was decentralized, the Junkers were unable to block education spending, bar in the eastern parts of Prussia. Instead, the German state was instrumental in aiding rather than blocking the chemical industry, through funding—for education in general, but also by subsidizing the R&D laboratories that dye firms were lobbying for (Keck 1993; Murmann 2003). The chemical industry also got the patent law that it lobbied for,29 and the tariff regulations that it wanted.30

27

The fragility of the British talent pool can be witnessed by the fact that when Prussia in 1865 convinced Professor Hofmann to come back to Berlin from London, the British chemical industry never recovered (Murmann 2003:76). 28 12 new universities were set up between 1870 and 1918 (Wehler 1985:125). 29 No patent law originally existed; hence German firms could pouch experts, copy, borrow and steal, with their competitors abroad embroiled in costly and time-consuming litigation because of old-fashioned patent regulations. And since Britain did offer patent protection, German firms could patent there, locking out the competition, without providing the same rights to foreign firms in Germany (Horstmeyer 1998:239; Murmann and Homburg 2001:194pp; Wehler 1985:32). In 1877, when Germany got its patent law, the lobbying of the German Chemical Society managed to secure for the industry a clause allowing process patents only, not product patents. Thus, it made it impossible to patent something along the lines of “the color red” (Freeman and Soete 1999:90; Murmann and Homburg 2001:199). 30 However, it is worth noticing that the organic chemical industry was not interested. Thus, the organic dye industry managed to get an exception from the general tariff increases in 1879 and 1882, whereas the inorganic alkali industry was successful in getting what for it was a much http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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Social cohesion was hardly the reason why German governments could pursue autonomous economic policies. Arch-conservative Junkers, breakneck speed industrialization and a rapidly growing Socialist party made for a society rich in social challenges. Political consensus also seems a less fruitful variable than in the other cases. Bismarck ran Germany on a day-to-day basis, avoiding political alliances, seeking as best he could to balance highly diverging political interests against each other, among other things switching from free-trade to protectionism more or less overnight because of a need for new political allies, rather than from any change of conviction. Economic problems were subordinate to political problems. However, at the same time, the government bureaucracy was filled with experts that were supportive of science and industry. Thus, while not articulated in actual government policy, a strong consensus in favor of industry did exist. Still, the two most important points explaining why old and established vested interests could not dominate German economic policy-making was that established vested interests were far weaker than in for instance Britain, and that the new and rising industries were stronger, better organized, could draw upon a mass of highly-skilled and prestigious experts, and consequently much more easily able to gain the ear of German policymakers than their British colleagues (Freeman and Soete 1999:90; Murmann 2003:167; Murmann and Landau 1998:40; Schulze 1998:183). 3.4 The automobile industry Of the five industries included here, the automobile industry is the exception. It had a massive impact on the world economy, at a time when old industries were stagnating. The technological breakthrough that enabled the growth in the car industry—mass production—had truly revolutionary effects. The assembly line in 1914 enabled Ford to reduce the time it took to manufacture a Model T by 88% (Brinkley 2003:153)!31 But is this Schumpeterian growth? The technology that revolutionized the industry was not a product technology, but a process technology. It allowed for faster and cheaper production, not for an improvement of the actual product. Success depended less on technological sophistication than on bringing relatively familiar technologies as cheaply as possible to as many as possible.32 Hence, success depended on Smithian—demand, access to capital, needed tariff increase. This almost completely shut out British exports, although the transition to more advanced technological processes was also crucial. 31 From 12 hours 30 minutes to 1 hour 32 minutes (Brinkley 2003:153). 32 Granted, towards the late 1920s, General Motors surpassed Ford as a consequence of having a far wider line-up of cars (Brinkley 2003). However, other factors were more important. Ford was not surpassed by GM because GM was in possession of technologies that were out of reach for Ford, but because Ford chose not to employ these technologies. Even if the car has undergone extremely rapid changes, this has seldom brought one manufacturer a decisive advantage over the Published by Berkeley Electronic Press, 2007

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market size—rather than Schumpeterian variables. For this reason, I look only briefly at one country—the US, accounting for 70–90% of the world’s pre-World War II production (Modelski and Thompson 1996:102).33 In terms of human capital, US primary education was on a par with the best, but Europe was still ahead in higher education and in the sciences (Goldin 2001; Mowery and Rosenberg 1993). However, this was of little importance to the car industry, which compared to other industries, was not very researchintensive. Still, the US benefited from an education system that emphasized engineering and the wide diffusion of mechanical skills. The machine tools used by Ford were created by highly skilled mechanics, but not by people with anything resembling Ph.D.s (Cowan 1997:228; Freeman and Louçã 2001:272, 283; Mowery and Rosenberg 1993). Also, the US benefited from path dependencies, as it had an advantage over Europe stemming from mass production of sewing machines and bicycles, and from precision machine tooling. All involved a kind of human capital missing in Europe (Cowan 1997; Hounshell 1984). The vested interest argument has some explanatory power, but not as much as for the other cases. Infrastructure was one area in which vested interests might have interfered. A proper road network, repair shops, gas stations, etc. were all requirements for the car industry to become a genuine mass consumption industry. And the 1920s saw the US completely transformed in terms of highways and buildings. True, government infrastructure expenditures were modest by current standards (Miller 2003:190; Moss 1995:138). At the same time, “road building gave the auto industry a larger government subsidy than railroads received in their entire history” (Leuchtenburg 1993 [1958]:184).34 The US was dominated by labor-intensive industry, resulting in a pressure for high tariffs. However, the car industry was highly capital-intensive, preferring global free trade in order to maximize the size of the market. This battle was not resolved in favor of capital-intensive industry until the 1930s (Ferguson 1984:78pp; Hiscox 2002:59p). Hence, old vested interests eventually lost out. But at this stage, the others. In the car industry, you have not had to be the technological leader as long as you have been able to compete on price. 33 It is hard to find obvious countries to compare the US with. Rather than failure, the car industry is an example of both European and Japanese success, but with a later starting point than the US. But this was not because the US car industry was more sophisticated. On the contrary, on the whole European cars were technologically more advanced. When after World War II Europe introduced mass-production techniques on a large scale, catch-up was more or less immediate, and by 1960 Western Europe accounted for 40% of the world’s automobile production. The growth of Japan was even more extreme (Freeman and Louçã 2001: 279; Modelski and Thompson 1996: 102). In the automobile industry, diffusion has been exceptionally rapid and monopoly profits hard to reap. Dominance has only to a limited degree had to do with technological advantage. 34 By 1929, total expenditures on roads and streets (local, state and federal) amounted to $1.4 billion a year, or a full 2% of US GNP (Heilbroner and Singer 1994:128). http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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US had for two decades already been the supreme leader in mass production car manufacture, and the explanatory power of the argument seems limited.35 Smithian arguments about demand, market size and access to capital seem to have the greater explanatory power. If the vested interest argument is low on explanatory power, then this must also be the case for the consensus and cohesion argument. True, a political consensus, going against the vested interests of traditional US industries, did emerge. The Republicans left their traditional protectionist political platform in 1928. And while the Democrats ran on their first high-tariff platform ever during the same election, four years later, Roosevelt came down on the side of capitalintensive industries. By 1936, the political consensus had decisively shifted in favor of capital-intensive industry (Ferguson 1984; Hiscox 2002). However, once again, it should be emphasized that at this stage the US car industry had already reigned supreme for a couple of decades. Hence, the consensus argument seems to have only modest explanatory power compared to Smithian arguments. 3.5 Information and communication technology (ICT) industries This section must by default be somewhat speculative, as developments in the ICT sector are still very much on-going. It is a difficult sector to do justice to for another reason as well. A distinction must be made between industries manufacturing ICT equipment and the services employing such equipment. While ICT manufacturing industries have exhibited stellar productivity growth rates, these are industries that pulled together are too small to have much of an impact on the overall economy. Instead, the main impact on overall growth and productivity growth from ICTs stems the application of ICTs in the services. As ICT using services account for more than a quarter of total GDP, far above average productivity growth rates in this sector has considerably impacted overall growth. This is where the US has leapt ahead (van Ark and Inklaar 2003:11; van Ark, Inklaar and McGuckin 2003:17; Yusuf and Evenett 2002:105). In terms of ICT manufacture, the US and Japan are both winners, but in terms of utilizing ICTs in the service industries, the US has been a spectacular success and Japan a laggard.36 35

On the other hand, the car industry actually managed to avoid most of the tariff increases. Hence, tariffs on cars did not follow the overall pattern, and was down to 10% by 1930 (Freeman and Louçã 2001:263). 36 For both the US and Japan I have chosen to emphasize consensus over cohesion, as there is not that much separating the two in terms of cohesion, and since quantitative indicators yield inconclusive evidence (e.g. Dayton-Johnson 2001:4; Fukuyama 1999; OECD 2001c:44). This may well be a secular trend within this variable: Cohesion has increased to such an extent that for most Western societies, it is no longer a problem for the state. Then again, while a low level of cohesion no longer leads to social revolutions, it may still lose you the next election! Published by Berkeley Electronic Press, 2007

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3.5.1 US ICT industries The US human capital record is good. During World War II, the US dramatically increased funding for its higher education system,37 which was perpetuated by the onset of the cold war. Science-based industries were accompanied by a system of research universities, developing from mediocrities into some of the world’s finest science institutions (Mowery and Rosenberg 1998:23, 30pp, 46; Nelson and Romer 1996:49). A recent world university ranking showed American universities holding the first 17 spots (the highest ranked Japanese university 105th) (Kalaitzidakis, Mamuneas and Stengos 2001:18pp). Links between academia and industry have been strong, leading to the rapid diffusion of technology and to its industrial application. The state has been involved, primarily through government procurements, contracts and R&D funding, which after the war secured the US a first-mover advantage in most ICT industries (Castells 2000a:68; Langlois and Steinmueller 1999:21p; Mowery and Rosenberg 1998:134pp, 165). Rather than being curbed by vested interests, the US ICT sector received special favors. As US ICT industries were instantly competitive, no infant industry protection was necessary, even if government procurements were helpful. But as Japanese competition stiffened (late 1970s onwards), the perception that US high-tech industries were undermined by foreigners playing by different rules, created widespread support for the protection of high-technology industries.38 Clinton perceived of a role for government as supporting strategic industries, in particular ICTs (Gilpin 2000:232pp; Krugman 1994:266; Langlois and Steinmueller 1999:58). However, ICTs have been essential to the economy, not as manufacturing industries, but by enhancing overall industrial productivity, in particular within the knowledge-intensive services. Hence, the primary obstacle against structural change has come from vested interests resisting deregulation and liberalization in the services, in particular with respect to financial reform.39 Economic deregulation and liberalization occurred earlier and faster in the US than elsewhere. Two service industries gained in particular by applying new ICTs—IT and finance (Castells 2000a:148; Rosecrance 1999:146). For the past decade, US politics has not seemed consensual. But throughout Carter, Reagan, Bush and Clinton, interest groups have been unable to block certain policies, namely policies of deregulation and liberalization. In this 37

Federal R&D expenditures soared from $83.2 million (1930 dollars) in 1940 to $1,313.6 million in 1945, with the Department of Defense accounting for roughly a third of this (Mowery and Rosenberg 1993:39). 38 Although there is disagreement as to how much a number of these initiativesactually helped (Gilpin 2000:232pp). 39 Lobbying activities failed, both during Carter, Reagan, Bush and Clinton. Clinton even extended these policies abroad, putting pressure on foreign governments in order to achieve an open and deregulated world economy (Castells, 2000a:142). http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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area, political consensus has been strong, and presidents from different parties have taken on each others’ legacies.40 There has been broad agreement on low tariffs, removing foreign investment restriction, getting rid of quotas and monopolies, deregulating capital markets, private ownership and competition in banking and telecommunication. Here, Clinton could rely on a healthy amount of consensus in both parties (Castells 2000a:140pp; Micklethwait and Woolridge 2004:117pp; Rosecrance 1999:146). 3.5.2 Japanese ICT industries Japan has also spent vast resources on human capital. Among the results are very impressive mathematics and science literacy (15-year olds) figures, with the US quite far behind (OECD 2002:69pp, 158). At the same time, concerns have been raised that the Japanese system while good for an era of mass production technologies and industries, does not work equally well for ICTs. It is clear that education and training must be made more conducive to creativity and entrepreneurship (Barker and Goto 1998:258; Castells 2000b:265; OECD 1999:50; Rosecrance 1999:110). Castells (2000b:251p) makes the point that the Japanese science system is good at adapting technology, but not at generating it: Universities are “degree-granting bureaucracies, primarily aimed at cultural reproduction and social selection, not centers of innovation and training for autonomous thinking.” The Japanese system is unable to generate a critical mass of researchers and programs for radical innovations, despite a wealth of engineering graduates. Japan is still geared towards mass-production and manufacturing, and is far better at producing super-computers than it is at computer-mediated communication (Castells 2000b:250pp; Odagiri and Goto 1993:87p).41 ICTs enjoyed special favors from the state in Japan as well, specifically targeted by MITI. Government help contributed to rapid catch-up in the ICT industries, even if it is unclear exactly how much. But while highly proficient at mass-producing high quality ICTs, Japan has failed to utilize these in the services, and so with respect to deregulation and liberalization, reform has met with 40

Clinton, who explicitly declared to reverse 12 years of Republican policies, instead extended on important parts of it. It was Clinton who proclaimed “the end of welfare as we know it” and “the end of big government” (Micklethwait and Woolridge 2004:117pp). Friedman (1999:106) describes the economic differences between Clinton and Dole during the 1996 presidential campaign as only slight. They both accepted that they were subject to international flows of capital, and that deviating from the preferences of international investors would harm the economy. 41 Although, it should be added that on a number of higher education indicators, Japan stacks up well against for instance the US—e.g. figures on research scientists per 10,000, R&D spending as a percentage of GDP, basic research as percentage of GDP (OECD 2001b; Yusuf 2003:179). Published by Berkeley Electronic Press, 2007

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stubborn resistance from vested interests. First, an “iron triangle” constituted by the Liberal Democratic Party (LDP), the bureaucracy and vested interest groups, has actively prevented structural reform. Linkages between these actors are close and cemented, and the reforms have met with extreme resistance. Second, the iron triangle has been protecting a “dual economy”. A highly efficient and internationally competitive export-oriented manufacturing sector coexists with a distinctly low-level productivity domestic manufacturing and service sector protected by regulations and subsidies (Grimond 2002; OECD, 2001a:44; Sakakibara 2003:ix, 42pp). Vested interests have made it excessively difficult to implement anything but incremental change, and sectors that in the US have undergone dramatic productivity improvements have remained largely unchanged. This includes a sheltered banking system, where loans have been handed out based on quasi-contractual relationships rather than on profit evaluations, resulting in a stunning amount of bad loans and a persistent high level of bad debts. The extent of the bad debt has been downplayed in order to make it politically feasible for the government to help out leading banks and customers. Any structural reform would be costly to banks, depositors and taxpayers (and the politicians), and the presence of such interests have prevented substantive structural reform. The reason why vested interests have been so powerful in Japan is a lack of political consensus, although in a somewhat different way than for the other cases. The LDP reigned unchallenged for four decades, without much political opposition from the Diet. But this is only political consensus in the sense that it has left power with one party. The government, including the Prime Minister, has normally been under complete control by the party organization. Politics is conceived by the Party, in conjunction with the bureaucracy and with vested interests. Bills may be drafted by the government, but with the instruction of Party committees or research groups.42 PMs come and go, controlled by faction leaders behind the scenes – people devoted to protecting the status quo rather than promoting reform (Castells 2000b:225pp; Grimond 2002; Sakakibara 2003:47pp). To quote Grimond (2002): “Its [LDP] two main purposes – rent-seeking and selfperpetuation through electoral success – have both flourished under the status quo. Almost every interest-group imaginable is represented within its ranks, and it takes care to look after them.”43 Hence, the LDP leadership has rarely been proreform. Small shopkeepers—mom-and-pop stores—are the backbone of Japanese

42

When the bill is drafted, another LDP organ approves it before it goes to the LDP General Council for final approval. Similar processes take place with respect to the budget (Grimond 2002; Sakakibara 2003:47pp). 43 It also rests on a gerrymandered election system where rural districts are grossly overrepresented compared to urban ones (on average somewhere like 5:1) (Grimond 2002). http://www.bepress.com/wpsr/vol3/iss2/art1 DOI: 10.2202/1935-6226.1020

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retailing. They are also the backbone of the LDP (Lewis 2004:46p; Sakakibara 2003:138p). Regulations are responsible for the low level of productivity in the nonexport sectors, but reform would have put thousands of firms out of business and hundreds of thousands out of work. The Japanese economy is more genteel than the US, but also less efficient at Schumpeterian creative destruction, and less well adapted to structural change. Emphasis has been on safeguarding the weak rather than closing down inefficient firms. Cuts in the labor force have been marginal, with no major restructuring of business taking place (Castells 2000a:191; Friedman 2000:60; Fukuyama 1995:165; Gilpin, 2000 281p; Gordon, 2003:327; Grimond, 2002). The service sector in particular has given rise to an enormous amount of bad bank loans. It is here that we find what The Economist (2004:81) labels “‘zombies’ – companies that are competitively dead, but sustained by their banks, continue to walk the Earth and give healthier firms nightmares.” As long as politics is shaped largely by the actors of the iron triangle, rather than by the government, it is exceedingly hard to muster the necessary political consensus to go against these very same interests. Because vested interests have been able to block deregulation, liberalization and opening Japan up to an integrated, global economy, those sectors that have had the potential to utilize ICTs the most intensely—banking and other financial services—have been deprived of the opportunity and incentive to do so, in the process falling far behind the US (Gilpin 2000:280; Gordon 2003:325; Rosecrance 1999:124). 4. Conclusions In this article I have tried to approach one of the genuine macro questions of the social sciences. The question can be phrased in a number of ways. In a narrow sense, it can be interpreted as an attempt at making inferences about the causes of long-term technological and industrial growth in a small number of great powers over a limited time period. However, broader interpretations are possible. On the one hand, the article is an attempt at making general inferences about the rise and fall of the great powers. The links between International Relations and International Political Economy are obvious, but are far too often ignored. The rise and fall of the great powers is closely linked to the economic rise and fall of the same powers, in turn linked to their technological and industrial rise and fall— especially so in a world where Schumpeterian growth is becoming ever more important. The article introduces a logic that can explain why the rise of a great power will not go on forever, but instead often lead to decline, independently of war and foreign politics. For only one example of the strong correlation between

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the rise and fall of the great power s and their economic rise and fall, see Modelski and Thompson (1996). On the other hand, the article is also an attempt at making inferences about long-term growth and development irrespective of geography or time frame. Do the results apply only to the great powers? There is no reason to assume that the logic of the framework is limited these only. There is no reason why it should be any less important for smaller powers to prevent vested interests from wresting away control of economic policy-making. However, what is reasonable to assume, is that smaller powers to a lesser extent are able to achieve actual industrial leadership. Yet, breakthrough technologies are very often generic technologies. Hence, countries can reap huge rewards from applying these technologies to improve the productivity of new and existing industries, even if they are not in a leadership position per se. Which means that it is important to encourage the growth of human capital and new technology also for a small country. However, what it might imply is that smaller countries should rely more on the diffusion of knowledge rather than the actual production of it, as the new knowledge and technologies is more likely to arise from larger countries. In any case, the logic of the argument stands, great power or not. Further, these are problems that are of continuing relevance, and there is no reason why this relevance should decrease in the future. Elected politicians are under ever greater pressure to come up with fast and easy solutions to societal problems—and preferably without any negative consequence to a simple human being (unless you want to lose the next election). This is a political and economic context that makes structural change hard to implement, and which leaves vested interests with a large playing field. A number of European economies are already struggling with serious structural problems. These will not just disappear. The consequences are serious and potentially wide-ranging. More concretely, the article has presented a theoretical framework for the understanding of long-term economic growth and development with a focus on Schumpeterian growth, combining Schumpeter’s argument with Mancur Olson. The utility of the theory has been demonstrated through empirical evidence from nine case studies in five core industries for five different time periods. Due to obvious space constraints, no exhaustive account can be given of each case. And while I have tried to shy away from controversial assessments, it must be up to the reader to accept or reject my evaluations. Also, when the empirical material spans several centuries, easily operationalizeable variables are hard to come by. Hence, while more rigorous analysis needs to be undertaken, the cases included here provide encouraging support for the theory on all the variables. They illustrate how the rise and fall of the great powers follow an overall pattern of development. This pattern does not play itself out in exactly the same way for each and every country, industry and time period (which is not to be

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expected), but the general theoretical mechanisms seem to be very similar across both time and space. Only one (US automobile industry) of the cases deviates markedly from the pattern, and it does so primarily because it is a case of Smithian rather than Schumpeterian growth. Hence, the US car industry should not be seen as a falsification of the theory, but as a reminder of its limits: Even if technological progress is becoming an ever more important part of economic growth, it is not necessarily so that Schumpeterian growth is always more important than other kinds of growth. In any case, Britain, France, Germany, the US and Japan illustrate the theory for the four other industries and time periods. The leaders all had decisive human capital advantages over their competitors (even if human capital was not always derived from formal education institutions). Vested interests proved decisive for a country’s ability to pursue policies of structural change. And it was quite a lot easier for countries characterized by high degrees of political consensus and social cohesion to go against the influence of vested interests. France succumbed to vested interests continuously blocking structural change, and political elites were far too weak to do anything. Britain was successful at breaking vested interests through political consensus on several occasions, but was unable to do so towards the end of the 19th century, when new industries posed challenges very different from those that the system was designed to cope with. In the same period, Germany’s rise to prominence was to a great extent aided by the fact that their old vested interests were relatively weak, making it easier for new industries to find political favor. In the US, a political consensus developed against labor-intensive industries, and more recently, political consensus over deregulation and liberalization enabled the US to come up with institutional arrangements far more conducive to growth in the service industries than in Japan. The framework receives substantial empirical support, from both the positive and the negative cases. The rise and fall of the great powers is ultimately linked to a combination of elements: A country needs a solid human capital base in order to secure for itself the ability to leap technologically ahead. The country then needs to prevent vested interests from blocking structural economic change. Only countries that have been able to prevent vested interests from locking the state into an obsolescent status quo, have been able to succeed. Finally, making decisions that go against powerful vested interests is politically risky. Only states characterized by a high degree of political consensus and/or social cohesion are strong enough to pursue economic policies independently of powerful vested interests. Only such states can realistically expect to be ready to accept the challenges presented by new and promising technologies and industries. One important implication stems from both the theory and the empirical cases: The future is never won once and for all. The framework establishes a

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