What made England the first great industrial nation? And does the answer hold any lessons for today’s entrepreneurs? Dan Denning reviews Charles Foster’s new book, Capital and Innovation.
“All of the tools we use today in risk management and in the analysis of decisions and choice, from the strict rationality of game theory to the challenges of chaos theory, stem from developments that took place between 1654 and 1760.” Peter Bernstein, Against the Gods.
Do the English have some special genius that allowed them to industrialise ahead of everyone else? Or was Britain’s lead in the 18th and 19th centuries just luck? Charles Foster’s recently published book, Capital and Innovation (Arley Hall Press, 2004), is nominally a study of the economic development of Cheshire and Lancashire counties from 1500 to 1780 and how they gave birth to the Industrial Revolution in England. But because of the exacting level of historical detail Foster goes into, what emerges is nothing less than the DNA of the world’s first industrial economy and its maritime, trade, and military power.
It appears that there were three main reasons why the industrial revolution happened in Britain before it happened anywhere else. First, a wide redistribution of wealth began in the 16th century. Second, over time this gradual redistribution of wealth led to an accumulation of capital and the development of a north-western business culture distinct and independent of south-east gentry culture. Finally, flourishing Atlantic trade solidified the position of the emerging business class and led to heavy investment in the new industries of the revolution and of trans-Atlantic commerce.
Rental arbitrage brings down the gentry
The redistribution of wealth in 16th-century England begins with an irony. In the 1540s the Crown and the Church began to recognise ‘customary’ tenancy of renters on landed estates. Where no formal or legal right had existed before, the Crown created one, formalising in law the practice of tenants subletting land and collecting rents on it. The tenants now paid rents to the gentry that were fixed for up to three generations, while getting the market rate through sublets. It was a can’t-lose arbitrage for the tenants. But it also soon began to cost the Crown, the Church, and the gentry a great deal of the income their estates were generating.
How much? “Between 1540 and 1870 the money paid by the tenants was always less than the full market value of the land,” says Foster. The tenants used this arbitrage to build up large capital surpluses over many generations. That was the seed capital for the industrial revolution in England.
But while the tenants accumulated capital and reaped all the attendant benefits, the power of the Church and Crown waned as their rental incomes diminished. This created real political consequences, according to Foster. Foster estimates that before 1540, the Crown collected 100% of the market value on its rents. By the late 18th century, it was less than 5%.
Civil war, culture war
By tracing the history of seven families in the region, Foster shows how families patiently passed on their accumulated wealth from one generation to the next. Initially, most of the wealth derived from farming the land itself. But over time, as land values increased, families were able to accumulate more liquid capital through rental income.
A good example of this process is Peter Warburton. In 1575, he inherited the Arley Estate from Sir John Warburton. The total value of Sir John’s possessions at his death was £773. Peter began purchasing leases to increase his income, rather than simply farming the land. By the time he died 51 years later, his inherited possessions were worth £12,613 – a 1,500% increase.
What’s even more important is that more than £9,000 of his personal worth was in gold and silver coins. His leases and tithes brought in £1,146 in income. His cattle stock had grown to 213, just four more than his father’s 209. However, because of rising land and grain values, the stock itself had doubled in value. Peter Warburton had turned a farm and his leases into a source of passive income for the accumulation of capital.
He was not alone. Dozens of tenants and families were doing the same thing, enjoying the lion’s share of the rising land values at the expense of the Crown. But these families were also developing important traditions that still serve as the bedrock of a healthy economy.
They were saving. They viewed their capital as an asset for the wealth of future generations. As they accumulated capital, all the benefits of investment began to show up in the northwest. Foster explains that employment in the region expanded. Fathers had money to send their sons to London to become doctors and lawyers. And because families were able to accumulate wealth in a liquid form (cash instead of land), more children inherited money upon the bread-winner’s death than had done so under the previous regime. This had the effect of “capitalising” even more future entrepreneurs.
The attitudes of the new business class were noticeably distinct from those of the gentry in south-east England. Foster attributes this to geography and religion as well as money. The northwest was physically removed from the influence of London. The pattern would show up later in the settlement of the North American continent. Risk-takers, non-conformists, and independent-mined people tend to “light out for the territories”, as Huck Finn put it. At the very least, distance from authority tends to breed a health scepticism, not to say disrespect. By 1714, the business class in the north-west was bustling. Thomas Newcomen, through capital raised in London and in the countryside, had built his first engine for raising water by fire (a steam engine), for example.
Just a few generations later, the business culture was an established social and political force. England was well on its way to industrial dominance of Europe. Foster says that, “Old customs and conventions that had inhibited technical and commercial change evaporated and people felt free to pursue business opportunities wherever they might lead.”
Trans-atlantic trade
Trade in the Atlantic, particularly with America, was the third and final ingredient enabling the full blossoming of England’s industrial revolution. It is probably not an accident that trade with America was a factor. Not only was America resource rich and a potential market (for new English textiles), but the business class of the northwest was already familiar and comfortable with the merchants in America.
America’s business class had emigrated from England’s northwest and taken with it the same new business and political culture and religious beliefs. They were like two branches of the same family. What they lacked in physical proximity they made up for with a common culture and society, both of which were built on trade. Foster says that “by the 1770s, this new society had brought about far-reaching changes on both sides of the Atlantic. In England it devised mechanical cotton-spinning and the steam engine, the two innovations which drove the Industrial Revolution. In America, it made the United States the first great non-aristocratic, egalitarian, nation state.”
Capital and innovation
Which comes first then, capital or innovation? Foster suggests that innovation is not possible without capital. But he also shows that it takes innovation to nurse an illiquid capital asset such as real estate into a liquid war chest for the development of business and the creation of new jobs and wages. In other words, capital begets innovation. If it’s put to work in the creation of new wealth, capital multiplies. If, on the other hand, capital is used to achieve social status, it inevitab
ly diminishes. Status-based social systems tend to favour central authority and hierarchy.
England became exceptional on the global stage. But not before it had developed an entrepreneurial culture that encouraged savings, capital accumulation, and trade. These economic developments were part and parcel of a transparent legal system, a pluralist political culture, and a culture where virtually anyone could be upwardly mobile, in both economic and social terms.
One wonders what Foster might have to say about modern England. Is its business culture as entrepreneurial? Is it just as possible to improve your economic lot in life through the accumulation of capital and property in modern England as it was 400 years ago? Or has such a task become harder? Is England less capitalist and less innovative now than it was then? Foster doesn’t answer these questions. But in telling us where the revolution started and what kept it going, he’s done his countrymen a great favour. He’s reminded them of the values that made them great. Let’s hope they are listening.
To buy a copy, contact: Arley Hall Press, 01565-777231 or 777284
Category: Economics