The Industrial Revolution in England: Anatomist of a Revolution

Dan Denning examines Charles Foster’s book Capital and Innovation, on why the Industrial Revolution happened in England before it happened anywhere else.

Anatomist of a Revolution
By Dan Denning

“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 the developments that took place between 1654 and 1760.”

            – Peter Bernstein, Against the Gods

To appreciate what Charles Foster has accomplished in Capital and Innovation, it is altogether fitting to conjure up the memory of Robert Hooke. Hooke is one of history’s greatest and least-appreciated natural philosophers. He was London’s chief surveyor after the Great Fire in 1666 and laid out many of the city’s streets.

But what distinguished Hooke from his 17th-century contemporaries like Sir Isaac Newton and Robert Boyle was his voracious curiosity about everything. Hooke was no specialist. While Newton looked to the stars through a telescope of his own inventing, Hooke looked through a microscope at the natural world. He is justly famous, in particular, for being the author and illustrator of Micrographia, an illustrated volume of engravings as seen under Hooke’s microscope. He was a man who looked at the world and saw more than most.

Charles Foster has put the question of how Britain became the world’s first industrial nation under a Hooke-like microscope. His answer is just as detailed and fascinating as any of Hooke’s engravings – which were done during the heart of the period Foster writes about. Reading it, we’re reminded that while history lends itself to grand narratives and large theories, the origins of England’s industrial greatness are revealed through patient scholarship and analysis.

The Industrial Revolution in England: From Fields of Green to Ruling the Waves

Foster’s book is nominally a study of the economic development of Cheshire and Lancashire counties from 1500-1780 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 the world’s foremost maritime, trade, and military power.

The model Britain offered the world, Foster says, was a society with a “wide distribution of wealth, an appropriate business culture, pluralist political arrangements, and a legal system that protects individuals and private property.” Foster uses the historical record to give us 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. Secondly, over time, this gradual redistribution of wealth led to an accumulation of capital and the development of a northwestern business culture distinct and independent of southeast 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.

The Industrial Revolution in England: Rental Arbitrage Brings Down the Gentry

The redistribution of wealth in 16th-century England begins with an irony. In the 1540s, for reasons Foster does not go into, the crown and the church began to recognize “customary” tenancy of renters on landed estates. Where no formal or legal right had existed before, the crown created one, formalizing in law the practice of tenants subletting land and collecting rents on it. A victory for common law and commerce. A blow to the crown. But not right away.

The new law itself didn’t cause a redistribution of wealth. After all, the owners of the estates still derived the bulk of their income from the rents they collected from whomever the tenants were. But the rents the tenants paid to the gentry were fixed. What’s more, they were fixed for a long time, with the introduction of three-life leases in the 1540s. These leases allowed tenants to pass on the fixed-rate rentals for up to three generations.

Later, after it counted the cost, the gentry phased out three-life leases and began to receive market value on its rental properties. But in the beginning, there was an enormous gap between the market value of rents and what the gentry received in the form of fixed rents from three-life leaseholders.

It began to cost the gentry considerable income when land values began going up. The tenants paid a fixed rate to the gentry while getting the market rate through sublets. It was a can’t-lose arbitrage that began to cost the crown, the church, and the gentry much of the income their properties were generating.

How much? Foster says that “Between 1540 and 1870, the money paid by the tenants was always less than the full market value of the land.” 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 end of the period, in the late 18th century, it collected less than 5%. But long before rental income became a trickle of the market value that tenants were collecting, the cost hit the crown’s bottom line:

“The poverty of the crown led to the increased importance of Parliament, with its ability to raise taxes. The efforts of Charles I to govern without Parliament were a major reason behind the outbreak of the Civil War. The massive transfer of landed capital out of the hands of the traditional governing group in society that had occurred by then may have been an important reason why the Stuarts, unlike all other European monarchs, lost their civil war.”
The Industrial Revolution in England: Civil War, Culture Ware

Foster’s story could become a political history at this point. But it does not. Later, I’ll look at some of the political consequences of the growing wealth of the new business class in the northwest. However, Foster rightly emphasizes a crucial point in the development of the Industrial Revolution: the accumulation of capital as a prerequisite to economic development.

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 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 British pounds. Peter began purchasing leases to increase his income, rather than only farming the land. By the time he died, 51 years later, his inherited possessions were worth 12,613 pounds – a 1,500% increase.

What’s even more important is that over 9,000 pounds of his personal worth was in gold and silver coins. His leases and tithes brought in 1,146 pounds in income. His cattle stock had grown to 213, only four larger than his father’s 209. But 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 breadwinner’s death than under the previous regime. This had the effect of “capitalizing” even more future entrepreneurs.

Wages rose with employment growth. Standards of living improved. But the attitudes of the new business class were noticeably different than the gentry culture of southeast 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, nonconformists, and independent-mined people tended to “light out for the territories” as Huck Finn said. At the very least, distance from authority tends to breed a healthy skepticism, not to say disrespect for it.

Foster shows that there was a relation between the business culture that developed in the northwest (one that favored equality and independence) and the growing religious activism of the new business class. There were two main waves of Puritan and nonconformist migration to America, once in 1620-1640 and later in 1675-1715.

The first period coincided with Charles I’s increasingly High Anglican religious policies. This put him at odds with the emerging merchant class in the northwest and nonconformists in London. Later, it would cost Charles his head, but not before many from the northwest left England for Massachusetts.

The second period marked the end of the Stuart pretensions to the English throne when the Hanoverians, through George Louis, ascended to the throne in 1714. By then, the business class in the northwest was bustling. Thomas Newcomen, through capital raised in London and in the countryside, had built his first engine for raising water by fire (the steam engine).

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.”

The Industrial Revolution in England: Trans-Atlantic Trade

Foster’s first two explanations for the rise of the Industrial Revolution haven’t received much historical treatment. It takes a patient man to cull the historical record for evidence of increased rental income in individual estates in northwest England.

But a redistribution of wealth clearly began with the introduction of three-life leases. With the coincident rise in land values, the tenants reaped a windfall over 300 years, passing on accumulated capital to their children, building new industries and developing a business, political, and religious culture that was distinct from southeast gentry culture.

Trade in the Atlantic, particularly with America, was the third and final piece in the full blossoming of England’s Industrial Revolution. It’s 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. America and England were like two branches of the same family. What they lacked in physical proximity they made up for with a common culture and society. They were both 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 that drove the Industrial Revolution. In America, it made the United States the first great nonaristocratic, egalitarian nation-sate.”

 In England, the revolution grew in intensity:

“By the middle of the 18th century, many of these business families, much helped by the huge growth of trans-Atlantic trade, had amassed capital amounting to thousands of pounds and were busy investing in every new technical and commercial project they could find. I suggest that it is the existence of so much capital in the hands of so many dedicated businessmen that led to the famous technical innovations.”

The Industrial Revolution in England: 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 like 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 inevitably diminishes. Status-based social systems tend to favor central authority and hierarchy. Foster describes this as a “government ethical system.” He adds:

“Historically, most human societies have been dominated by the ‘government’ ethical system, and that could be one reason why they were usually slow at innovating their technologies. The development of business society between 1500 and 1800…was an exceptional event that helps to explain why the northwest of England was able to improve its technology so rapidly.”

The northwest did indeed improve its technology. 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 less?

Is England less capitalist and less innovative now than it was then? Foster doesn’t answer these questions. But in telling us where the Industrial Revolution started and what kept it going, he’s done his countrymen a great favor. He’s reminded them of the values that made them great. Let’s hope they are listening.

Dan Denning
January 18, 2005

The Daily Reckoning