Jonah Patel
The Industrial Revolution in Britain during the 17th century marked the beginning of modern economic growth in the conventional sense, with high amounts of energy conversion and strong institutional factors such as property rights, literacy, and free trade. This period witnessed a shift from manual manufacturing to factories, and the invention of the steam engine by James Watt in 1776 further propelled economic development. Global nominal income surged to $100 billion by 1880, and wheat production in the United States made a significant contribution to the nutritional welfare of the poor. In the 20th century, economic growth spread worldwide, with world GDP per capita increasing fivefold. Notably, the highest growth rate occurred during the 1960s in the post-war reconstruction era.
| Characteristics | Values |
|---|---|
| Time Period | 17th century |
| Location | Britain |
| Causes | Strong property rights, patents and copyrights, efficient financial institutions, literacy and education, free trade, and a competitive market |
| Other Causes | Steam engine invented by James Watt |
| Global nominal income by 1880 | $100 billion |
| World GDP per capita in the 20th century | Quintupled |
| Global nominal income by 1960 | $1 trillion |
| Global nominal income by 1980 | $10 trillion |
| Economic growth measurement | Increase in real GDP, real GDP per capita |
| Factors for economic growth | Increase in physical capital goods, technological improvements, human capital, labour force, etc. |
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What You'll Learn
Industrial Revolution
The Industrial Revolution was a period of rapid and unprecedented change in economic systems, particularly in Britain and Europe, transforming the way people lived and worked. It marked the transition from an agrarian and handicraft economy to one dominated by industry and machine manufacturing. This period saw the development of new machines, power sources, and ways of organising work, making industries more productive and efficient. It also witnessed the emergence of new industries, such as the automobile industry in the late 19th century.
The Industrial Revolution is often divided into two parts: the First Industrial Revolution and the Second Industrial Revolution. The first phase lasted from the mid-18th century to about 1830 or 1840 and was largely confined to Britain, with some proto-industrialisation occurring in Sweden and other parts of Europe. It was characterised by the emergence of new technologies, such as the spinning jenny, flying shuttle, water frame, and power loom, which revolutionised the textile industry. The development of the stationary steam engine was also a significant milestone during this period, with the first commercially successful industrial use of steam power patented by Thomas Savery in 1698.
The Second Industrial Revolution took place from the mid-19th century until the early 20th century and had a broader geographic reach, including Britain, continental Europe, North America, and Japan. This period saw rapid advances in the steel, electric, and automobile industries. It was marked by the widespread use of steam power, with steam-powered boats and ships carrying goods across Britain and beyond. The factory system also became more prominent, with owners and managers overseeing a large workforce.
The Industrial Revolution had a significant impact on economic growth. It led to an unprecedented rise in population and population growth, with global nominal income expanding to $100 billion by 1880. The revolution transformed rural societies and led to sustained growth in the living standards of ordinary people, as noted by economist Robert Lucas Jr. However, it is important to note that the benefits of economic growth were not evenly distributed, and workers' living standards declined in some cases.
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Mercantilism and colonialism
The time period constituting modern economic growth is widely regarded to be the Industrial Revolution, which began in Britain and then spread to the rest of Europe. This period witnessed a significant increase in energy conversion, leading to a surge in global nominal income, which reached $100 billion by 1880.
Colonies were viewed as existing for the economic benefit of the mother country, with little regard for their own development. The mercantile system encouraged monopolistic trade practices, barring foreign competitors from accessing colonial markets. This approach led to the implementation of trade restrictions, such as the Spanish flota system in 1565, which restricted trade with American colonies to two annual fleets, and England's Navigation Acts, which aimed to exclude the Dutch from its carrying trade.
Mercantilism also had detrimental effects, including the encouragement of brutal practices such as slavery and imbalanced trade. Colonies endured inflation and excessive taxation, which fueled discontent among colonists, ultimately leading to revolts and revolutions. The belief in mercantilism began to wane in the 18th century, partly due to the influence of French Physiocrats, who advocated for a more natural approach to trade and industry, prioritizing agriculture as the true source of wealth.
Colonialism, driven by mercantilist policies, had a significant impact on the economies of European nations. Great Britain, France, Spain, and Portugal competed for colonies, believing that colonial resources were essential for their self-sufficiency and economic growth. This competition led to the establishment of vast colonial empires, with Britain and France being particularly influential. The exploitation of colonial resources, such as raw materials and markets for finished goods, propelled economic growth in the colonizing nations, contributing to their wealth and power on the global stage.
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Global trade expansion
The development of trade and market economies dates back to ancient times, with temples in Sumer acting as creditors and legitimising trade. The Lydians introduced the use of gold and silver coins around 650–600 BC. Ancient Egypt, by the 3rd millennium BC, was home to nearly half of the global population, and the city-states of Sumer established a trade and market economy based on the shekel, an ancient silver coin.
The Industrial Revolution played a pivotal role in global trade expansion and modern economic growth, particularly in Britain and Europe. The conversion of high amounts of energy and technological advancements revolutionised production methods. The invention of the steam engine by James Watt in 1776 marked a significant turning point, shifting manufacturing from manual labour to factories. This technological advancement also spurred innovations in transportation, including locomotives and ships.
The expansion of wheat production in the United States after 1860 significantly influenced global trade. The increased supply of wheat flooded the world market, resulting in a 40% decrease in prices. This development, along with the expansion of potato cultivation, positively impacted the nutritional welfare of underprivileged populations.
During the twentieth century, economic growth spread globally, with world GDP per capita increasing fivefold. The highest growth rates were achieved in the 1960s during post-war reconstruction. Global nominal income surged to $1 trillion by 1960 and $10 trillion by 1980. The expansion of international trade was also influenced by the increasing number of countries and the resulting changes in national boundaries.
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Technological advancements
Economic growth is dependent on increases in capital goods, labour force, technology, and human capital. Technology-enabled innovation is the major spur to productivity growth and economic prosperity. Advancements in technology have driven the rapid rise of the digital economy, with businesses reaching global markets and customers with ease. This has opened new avenues for economic activity, providing new opportunities for entrepreneurs, small businesses, and established companies to expand their reach and scale.
The impact of technology on labour markets is profound, with automation and digital advances shifting labour demand towards higher-level analytical, technical, and managerial skills. However, there is a lag in equipping workers with skills that complement new technologies, hindering the broader diffusion of innovation within economies. This has resulted in a paradoxical situation where productivity growth has slowed as digital technologies have boomed. Dominant firms have reaped major productivity gains, but the impact across firms has been weak, leading to concerns about "secular stagnation".
Looking forward, technology will continue to shape the landscape of economic development, offering fresh prospects and introducing new obstacles. Governments, businesses, and individuals will need to embrace evolving technologies and navigate the associated challenges. This includes adapting policies and regulations to keep pace with rapid technological advancements and ensuring collaboration, lifelong learning, regulatory adaptation, digital inclusion, and ethical considerations.
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Human capital
Economic growth in the modern sense first occurred during the Industrial Revolution in Britain and then in the rest of Europe. The Industrial Revolution led to a high amount of energy conversion, and global nominal income expanded to $100 billion by 1880. The world average GDP per capita was about $158 per annum throughout prehistory (inflation-adjusted as of 2013) and did not rise much until the Industrial Revolution.
The Human Capital Project is a global effort to accelerate more and better investments in people for greater equity and economic growth. As of October 2024, 95 countries at all income levels are working with the World Bank Group on strategic approaches to transform their human capital outcomes. The World Bank Group's Human Capital Index (HCI) shows that nearly 60% of children born today will be, at best, only half as productive as they could be with complete education and full health. This reflects a serious human capital crisis, with strong implications for economic growth.
COVID-19 threatens to wipe out a decade of human capital gains, as countries struggle to contain the virus and rebuild their economies. More than 1 billion children have been out of school due to the pandemic, and globally, $10 trillion of lifetime earnings could be lost for this cohort of students.
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