conditions of capitalist development -- supply, demand, or both? interesting new research

One popular and compelling explanation for the Industrial Revolution has framed it in terms of a rapid series technological innovations leading to fundamental social change. Machines and factories, built by those with the money and other resources necessary for large capital investments, were utilized to spur the rapid accumulation of profits. At the same time, these machines and factories changed the most basic aspects of people's lives, leading not only to new social roles for women and children and a new method of organizing work, but also to an increasing role for markets and market behavior, as profits and businesses sought to saturate emerging markets.

The above story speaks essentially of a supply-led phenomenon where technological forces promote changes in demand (i.e., consumption and market demand). It is also a view held by some Marxist historians. In their view, technology growth is a product of class conflict -- that is, a product of conflicting interests in society. As businesses gain power and assert their interests more forcefully, they seek out new markets for the primary purpose of extracting profits in the production process. And thus, markets (and the individual behaviors which compose them) are once again the consequence of forces outside the immediate control of market participants. Notice the chain of logic in the above explanation, because a recent alternative explanation gaining a lot of attention seeks to reverse it.

Proponents of an Industrious Revolution have attempted to show how individuals embraced market forces, making them active participants, rather than passive responders, in the Industrial Revolution. Early on, by working hard and reallocating their time to participate in consumption-led activities (rather than, say, producing at home or bartering for goods they don't produce), individuals' efficient market decisions promoted the efficiency of the broader system of industrial expansion. In buying up all the trinkets, sugar and other "luxury" market consumables, between 1650 and 1800 these consumers became a world within themselves, actively accepting and using the fruits of the market to improve their lives. One of the more well-known proponents of this view is Jan deVries, who studies the Industrious Revolution in Britain, in Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present (Cambridge: Cambridge University Press, 2008).

Even if DeVries isn't seeking to "reverse" the chain of causation and rather only add to the voluminous research on supply-side factors by considering the other side of the market, at the very least, the theoretical framework that DeVries is working under (a combination of Beckerian-style household decision making theory and rational expectations/rational actor models) ought to be considered as an historically appropriate model. In other words, we need to know more about the nature of supposed "Industrious Revolutions" in other contexts before generalization is made.

That is precisely the point of entry for a new article in the Journal of Economic History by Sheilagh Ogilvie, titled "Consumption, Social Capital, and the 'Industrious Revolution' in Early Modern Germany" (JEH, 70:2 June 2010). Ogilvie sets out to show how market behavior was significantly curtailed by social norms and local government (under the traditional notion of police -- a topic discussed elsewhere on this blog) in early modern Germany (roughly the 17th, 18th, and early 19th centuries). In a thorough search of court and town records, she uncovers evidence of significant political control over emerging markets, leading to the conclusion that markets were embraced but not without significant regulations imposed by traditional institutions.

The implications are fundamental to understanding the nature of the Industrial and Industrious Revolutions. In terms of the latter, we gain a richer view of the processes underlying economic development -- a view that discounts the necessity for free, unregulated markets and nuclear households. It "cast[s] doubt on the broader logic of the Industrious and Consumer Revolutions -- the idea that reallocating time and consumption from household to market prepares the way for modern economic growth. Alternatively, late-developing economies may not even have had an Industrious Revolution because it was stifled by institutional constraints" (35).

In other words, traditional institutions matter to the trajectory various Industrial Revolutions took and, in turn, to our understanding of modern economic growth. The fact that traditional institutions may have had a greater impact in the case of early modern Germany, relative to Britain, might say something about long run stability or performance of these economies. Did entrenched interests slow rapid capital accumulation and, further, the evils associated with it, similar to traditional histories of French development?

But there is something even more significant about Ogilivie's suggestions in terms of the former of the above ideas, i.e., the broader literature on the Industrial Revolution. Let's step back and see the Industrial Revolution as a grand social transformation -- encompassing changes in work organization, capital accumulation, familial roles, market integration, and the list of course goes on. Any social transformation is fundamentally about different sets of interests wresting for power -- if it were "so easy" to see it going one way, then why not see it going a different way, such as Germany or France? The political constituencies vying for economic and political power in these areas seems to explain modern Germany pretty well, and there are even elements of this in American economic history.

Well, to address this composition of social transformations, why not consider these traditional institutions as one element of any transformation -- in Britain, early modern Germany, the U.S.? Then the story is not about demand or supply forces working their way through toward social change. Rather, the Industrial Revolution is about how the environment was composed of power interests and how those interests played themselves out in all kinds of institutions central to the development of capitalism -- the market, the legal system, the state more generally, or firms themselves.

And perhaps this is a convincing unification of the supply and demand forces, at least an attempt to solve the either/or view suggested above. The environment, however, is not some market where supply and demand rests in market equilibrium -- it is a contested terrain where change signifies much more than higher wages and a higher standard of living.

A non-gated version of the paper can be found here: http://www.econ.cam.ac.uk/research/econpapers.html?ep=pog24 Enjoy!