What Really Made Us Rich? A Nobel Prize Winner’s Look at the Industrial Revolution

By: Mr. Blanton 

A core question–probably the question–in economics is: why are we wealthy? You can think of wealth as money, but you would be wrong. More money doesn’t mean more wealth. More money, more problems. Just ask Zimbabwe or Biggie. It is better to think of wealth as a measure of social welfare–are our collective living standards improving or not?

Framed in that way, what is remarkable about most of human history is not the presence of wealth, but its absence. Poverty, not riches, was the norm. The great historical change in human economic history–the “Great Fact” as economist Dierdre McCloskey refers to it–came with the British Industrial Revolution and the spread of industrialization across the globe. Albeit unevenly and not equally, the Industrial Revolution sparked a deep structural change in how human economies functioned that broke the cycle of poverty. Human societies became increasingly wealthier such that incomes and standards of living sustainably rose over time; we live in a wealthier world because of the Industrial Revolution. 

If wealth is so important and the British Industrial Revolution helped to generate it, what caused the Industrial Revolution? Economic historian, Joel Mokyr, was recently awarded half of the Sveriges Riksbank Prize in Economic Sciences, colloquially referred to as the Nobel Prize in Economics, for his answer to that question.

To understand the significance of Mokyr’s answer, we need some context. Research on the history of the Industrial Revolution has tended to fall within two broad categories of explanation: institutions as cause and exploitation as cause.

The institution’s explanation argues that “good” institutions are crucial for economic growth. Imagine if people feared that their property would not be protected, there would be little incentive to invest for the future. But the fact that institutions exist to protect property–police, courts, intellectual property protections, to name a few–helps to guarantee that people will take positive and productive risks with their money, transforming it to investment. Not all investments pay off, but some do. The ones that pay off tend to pay off big. Without institutional protection, no pay off, no growth. Some historians argue that Great Britain increasingly adopted the right kind of institutional protections, especially after the Glorious Revolution, that led to the right investments and to the Industrial Revolution the next century. Good institutions encourage risk taking. Glorious Revolution, bang, Industrial Revolution.

Others argue that exploitation–colonization and slavery–was an unearned source of investment that facilitated the Industrial Revolution. Extraction is the key. It was the unjust and violent transfer of resources from the exploited to the exploiter that changed the game. Such exploitation merely shifted resources around, but did so in a way that privileged some and hobbled others. This perspective tends to interpret economic success as a result of exploitation and economic failure as a result of being exploited. Great Britain, as one of the premier European colonizers, exploited and extracted its way to increased domestic investment, planting the seeds of the Industrial Revolution.

For Mokyr, however, neither of these views does the job completely. Exploitation happened, undeniably; institutions matter, no doubt. But neither explain the well-spring of innovation. Spain was also a significant exploiter and colonizer. Yet, they didn’t industrialize like Britain. Why? They didn’t do much with their extracted wealth. Smaug sitting on his pile of gold is still just sitting on a pile of gold. Spain wasn’t much different. 

For Mokyr, it was the cultivation of the right kind of culture–a culture open to change, to innovation, to the rigor of scientific thinking and curiosity–that moved the needle. James Watts’ steam engine changed economic history. But perhaps what meant the most to Watts wasn’t low taxes or British colonization, but the existence of scientific clubs, the dissemination of information through early scientific journals, and the willingness to put any and all ideas to the test. The Scientific Revolution changed how ideas were generated and tested, and that process of idea generation, Mokyr argues, mattered more than exploitation or institutions solely.

In economics lingo, Mokyr sees culture as a positive externality. The cultivation of an open, curious, and scientific culture in Britain had positive (and massive) economic spillover effects. Here’s an example: the cost of transporting goods and people fell substantially thanks to the steam engine. It wasn’t perfect, as most technologies aren’t. But as the technology improved, steam ships helped facilitate economic integration, and trade barriers between countries started to fall. By the late nineteenth century, the global economy was more economically integrated than ever before. The steam engine doesn’t deserve all the credit, but it mattered–a lot. No Scientific Revolution, no steam engine.

Who is right? It’s a matter of debate. Still, Mokyr’s conclusion that the right kind of culture was essential to the story of the Industrial Revolution might be an important lesson for our own economic future.