4. The demand for growth
If you make more stuff, you get richer, right? Or to put it in economicky words, if you get more productive your income increases, doesn’t it?
That’s mostly right, but there’s something missing. You also need to find someone to buy what you make. If you make more stuff and people buy it, you get richer. For an economy to grow, it needs higher productivity and also sufficient demand.
Economists tend to see this demand part as a problem that solves itself, most of the time. If people are more productive, they earn more money, and they spend this extra money buying more of other people’s wares. Yes, the economy has its booms and recessions, but these pass in time and all that really matters in the long term is productivity. And as an economist, this is mostly how I think about these things too.
But whenever an economy experiences an influx of new people seeking work, or whenever people fear that new productivity-enhancing technologies are putting them out of a job, they have to find something else to do. They have to produce something else, something new that people want. If they don’t, they will be unemployed, or else they will compete down wages to a much lower level. The economy will be more productive but, without sufficient demand, it will not grow.
This problem would have seemed especially acute to Britons in the 1600s and 1700s. As I explained in the previous blog, improved technology and production methods in agriculture were driving a population boom while forcing people off the land to seek other ways of making a living. These people needed to find something else productive to do, which, of course, meant finding something else people wanted to buy.
I’m not sure this idea we have in modern economics — produce more stuff and people will buy it — would have seemed at all obvious to our pre-industrial ancestors. When you have an economy that produces relatively few goods, most of them from the land, there’s a limit on how much stuff people want to buy. Producing more food is great, but there is only so much food anyone (even a Tudor king!) can eat. If you’d asked a typical citizen of the 1600s what they’d like more of, they might have asked for a bigger farm, more animals, perhaps a bigger house — all things that rely on the land. But it’s unlikely they’d have asked for the kind of things that get produced by an industrial revolution — a train station in their village perhaps, or even a wardrobe full of mass-produced clothes. Being a young Briton driven off the land in the 1600s, probably unable to read and with few skills or connections to the world, must have been a daunting experience.
There was, however, an important source of new stuff that had only recently been discovered by the 1600s: the New World. The discovery of the Americas and the Caribbean, together with new trade connections with south and east Asia, had brought new, desirable products to British shores: spices from South East Asia; fine textiles from India; and tobacco, sugar and cotton from the Americas. This trade played a crucial role in helping to create new work for people to do.
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England was relatively late in beginning its colonial expansion, especially compared to Spain and Portugal. Its first successful colony, at Jamestown in Virginia, was established in 1607, while its first sugar-producing Caribbean colonies emerged in the 1620s, long after Columbus first sailed west. Scotland’s only major colonial expedition, the Darien scheme, failed altogether and was a key factor in forcing the financially stricken Scots into union with England to create Great Britain. But after a slow start, England (and then Britain) became an increasingly successful colonial power, both in terms of trade and conquest. There were many atrocities — not least the trans-Atlantic slave trade — associated with this colonial growth, but it played an important role in moving Britain towards the industrial revolution.
The new luxury goods from the new world provided something new for the affluent people in Britain to spend their money on, and gave them a reason to get richer. Trade in these goods enabled a significant cadre of merchants, outside the traditional landed aristocracy and based in growing port cities like Bristol, Liverpool and London, to amass great fortunes. There had always been merchants in Britain, working trade routes across Europe and taking part in the lucrative wool trade, but never before on this scale. The riches gained from trade with the east and the New World could be spent on buying more luxury goods (i.e., more demand), or it could be invested in new ventures — new colonial ventures, new ships, or new factories. This accumulation of wealth was crucial to the birth of the modern concept of capital, something we will explore in a future blog.
We can see this influx of goods by looking at how the imports recorded in London — then by far the nation’s dominant port — changed in the 1600s. The graphic below shows how sugar, tobacco and spices and especially textiles and cotton imports increased in the 1600s, all of them more than doubling between 1560 and 1700*. These goods would have arrived on ships from across the world, and been sold on to affluent people around the country.
So how do all these new luxury goods, produced overseas (often by exploited or enslaved people) help those people in Britain who are seeking new work after being forced off the land? There are two main ways I can see.
First, the trading itself creates jobs. It’s not just wealthy merchants themselves who are needed, but also sailors, shipbuilders, dockworkers (not to mention people to go to the colonies themselves). You can see this just by looking at the population of London. In the late 1300s, London has around 25,000 people; by 1662, it has grown to around 350,000 people. All of this is a hundred years ahead of the industrial revolution, so these people are not working in huge factories. They found work that was linked to London’s global trade.
There is proof in the data, shown in the video below**. The trade and transport service industry (turquoise in the graphic) grew by almost 10 times between 1560 and 1700, while the financial services (light green) expanded by more than 4 times. Meanwhile, government services (purple), which was dominated by the navy, grew in the 1650s and then exploded after 1688. By contrast, household and domestic services (mainly servants for the wealthy) grew by only 70% over the same period. All of this trade led to a rapid expansion of the country’s service sector — which sounds a rather similar story to today’s economy.
In the long term, all this desire for trade and transport played a big part in the industrial revolution. As there was more and more desire to move goods and people around the world, the need to do so more effectively led to the development of canals and better ships, and later iron bridges, railways, steamships and a whole host of other infrastructure.
Second, and perhaps more importantly, the import of textiles and cotton helped to trigger a major change in the pattern of demand in Europe. So fine were the textiles brought in from India that they shaped European fashions and drove a huge increase in demand for them. England had always been a major exporter of textiles, largely because of its famous medieval wool industry, but could not match this influx of fine eastern cloth. However, through a mix of ingenuity and skulduggery, producers in Britain managed to take control of this burgeoning textiles market. British producers, using newly imported cotton as well as traditional wool, began to find innovative new techniques for producing better and cheaper textiles. Using its growing naval and trading power without scruples, Britain managed to shut out much of the superior Indian competition and take control of what had become one of the global economy’s most important markets.
It was the textiles industry that eventually led the industrial revolution. At first, this was based around a growing number of artisans and cottage industries which produced fabrics by hand, but it later grew into the great industrial mills of the north. There were many different conditions that made this revolution happen, but without this explosion in demand — brought into Europe from the east coast of India — there may never have been any reason to mass produce textiles.
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People have long worried about machines taking our jobs, and we still do today. In the early 1800s, the Luddites destroyed textiles machinery in the factories of northern England, and the name stuck as an insult for anyone who fears the rise of new technology. Today, we worry about artificial intelligence, self-driving cars and other “robots” making swathes of us redundant in the future (and perhaps turning evil and taking over human society). These fears are not without foundation — many of us will likely see our current jobs taken over by technology in the decades to come.
But this process of “creative destruction” has been going on ever since the original industrial revolution. While it has involved some disruption, the economy has so far always responded to technological disruption by creating more, better paid jobs. For example, automation has seen employment in British manufacturing fall from nearly 8 million in 1970 to 2.5 million today, without any fall in the overall amount produced. While those job losses have been painful for many people and communities, the economy as a whole has created many more jobs to replace those lost, primarily in the service sector.
How does the economy manage to repeatedly pull off this trick, of always finding new stuff for people to buy and jobs for people to do? The conventional answer is that this is the role of the entrepreneur: to dream up new products that people didn’t know they wanted. Henry Ford, pioneer of the automobile industry, is often quoted as saying “If I’d asked people what they wanted, they’d have said a faster horse”. People probably didn’t know they wanted an iPad until Steve Jobs dreamt it up, just as the Tudors wouldn’t have known they wanted a train station. This entrepreneurial force is hard to quantify, but it clearly plays an important role in keeping the economy moving.
What is striking, though, is how much activity in today’s economy is about persuading people to buy new things. Whole industries have grown up around advertising, branding, marketing — all aiming to get us consumers to buy stuff, and pay a little extra for it. Indeed, a large chunk of our media industry and some of the world’s biggest companies (Google, Facebook) are built on advertising money. And whether its conveyed by linear television or by Instagram influencers, this message works — we buy more stuff than ever, and there are more jobs in the economy than ever.
But as we get ever richer, as we consume ever more stuff, might there be a limit to how much demand there is in the economy? There’s one obvious reason to think so, which I’m sure has jumped out at you already: the environment. Surely we have to start consuming less stuff, not more, if we’re to avoid catastrophic climate change? And won’t that mean people losing their jobs and not finding new ones? This is certainly true in terms of physical resources — we need to consume less actual stuff if the economy is to keep growing. But entrepreneurs are smart, and there is plenty of stuff we might be able to buy which is compatible with a sustainable planet: services, experiences, sustainable products such as vegan food. Can we pull off the trick of spending more money on less physical stuff? I don’t know, but it is at least possible in theory.
And there’s a second, deeper problem to tackle here: what if we’ve already invented all the useful stuff? This idea has been best expressed in recent times by Robert Gordon, by arguing that nothing invented recently is nearly as useful to us as a flushing toilet. If the new things we create aren’t things we really need or want, will we stop buying them? Advertising and branding can take us so far, but if the underlying products we are inventing just aren’t good enough, there will always be a limit on what people will buy.
I don’t know whether Robert Gordon is right, but the lesson is that we can’t take demand for granted. To keep growing, to keep people in work, the economy must constantly find new, useful things that people want to buy. That’s always been possible ever since the industrial revolution began — and it’s never a good idea to bet against human ingenuity — but it is does not make it certain, or desirable, for that to continue in future. Technological advances will continue to raise productivity and take jobs over the coming decades. If demand cannot keep pace, our economy will face a jobs gap on a scale it has never had to seriously confront before.
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* This chart has been converted into 2013 prices, shown in £millions here. There are only six data points in this chart — in 1560, 1621, 1633, 1640, 1663/1669 and 1699–1701. However, the Gapminder software interpolates between these points, giving a slightly misleading smooth progression between the data points (in truth we do not know what fluctuations occurred between these years, especially between 1560 and 1621).
** This chart has been indexed to 1560, so that all of the sectors are at 100 in 1560 (this doesn’t mean the sectors were the same size in 1560, it’s just a way of charting their growth). I’ve started the chart in 1597 just because it makes the different series easier to see.
The data here is sourced from the Bank of England “Millennium of Macro” dataset. The data on the service sector’s growth is from: Broadberry, Stephen, Bruce M.S. Campbell, Alexander Klein, Mark Overton and Bas van Leeuwen (2015), British Economic Growth, 1270–1870, Cambridge: Cambridge University Press.