Saturday, 19 November 2016

How did the United States of America overtake the United Kingdom?

For me, one of the greatest strengths of economics is that we can see it in our daily lives. There are the news stories with subtle economic aspects; for instance, the prosperity of bees is essential for agricultural production as this produces food for labour and inputs for production. There are also more obvious issues – will the United Kingdom be faced with a ‘soft’ or a ‘hard’ Brexit? How will trade and our economy be affected? At the heart of this lies the fact that news stories are economics ‘in action’ and proof of what we find in textbooks. It is for this very reason that I am interested in economic history, as this sub-discipline provides empirical evidence to support economic theories. I also believe that it’s important to learn lessons from history to make the best out of the future; this is something definitely applicable to economic history.

A pivotal moment in economic history was the Industrial Revolution in England, a collection of events which ultimately resulted in the country’s increased economic growth. However, fast forward to the 21st Century; the largest economy in the world is the United States of America. How did the USA overtake the UK?

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There are several possible reasons. Large reserves of natural resources, such as coal and iron ore, were discovered in the 19th Century. These are important raw materials which can act as inputs into the production process. I believe that the finding of these coal deposits were also linked and contributed to the growth of railroads in the nation. Coal is necessary for steam power; this fuelled trains at the time. Consequently, the railroads were able to transport the newly discovered iron ore to factories more quickly and cheaply than before. American steel production increased. Developments such as the first Transcontinental Railroad, which was completed in 1869, would have allowed previously isolated towns to join the markets. Markets give economic agents the chance to buy and sell their goods and services and Americans would’ve been incentivised to increase their economic activity as the network of railways grew, connecting people all over the country.  In fact, this phenomenon is known as ‘the Market Revolution’. I would also like to introduce the idea of an ‘internal comparative advantage’ here. In general, the agricultural South would produce foodstuffs that couldn’t be produced in the North, and the North could produce industrial goods that the South was unable to. The transportation network allowed Americans to make best use of this.

I believe that the United States developed their industry in ways beyond what took place in the United Kingdom, especially in terms of productivity. The industrial developments that took place following the American Civil War are often referred to as ‘The Second Industrial Revolution’. Research and development in the Unites States was undertaken with the intent of producing new inventions which would ease life and production. The growth of a credit system deserves a mention; once banks gave out loans, people and firms were able to turn their plans of enterprise into fruition.  The patent system also ensured that their intellectual property would be protected, which was an incentive to carry out work. This practical approach was the complete opposite to what was mostly undertaken in the UK, which focussed on the development of scientific theory. Results of such practical research included canned food and refrigerators, coal burning stoves in houses and sewage systems made streets more hygienic. Consequently, I think that the well-fed and comfortable population would have made a more productive workforce.
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Another increase in productivity occurred as business owners changed their organisational strategies to the factory system. In factories, work could be undertaken on a grand scale in one location. Economics students may remember Adam Smith’s pin factory, an example used to illustrate the efficiency behind division of labour. During the Early Industrial Revolution in New England, factories opened in abundance, likely making use of Smith’s model. I think that this was a great improvement for economic efficiency as now all workers could be managed in one place, and the work could flow more smoothly from one stage in the production process to the next. These manufacturing industries were supported by the high tariffs placed on imports.

The American Civil War lasted from 1861 to 1865, after which slavery was abolished in the United States of America. Consequently, as workers now had to be paid in the agricultural South, the industrial North looked to be relatively more profitable. Many workers followed the economic gains towards the North, which benefitted greatly from the increased supply of labour. The censuses between 1870 and 1920 recorded that around 25 million overseas migrants entered the United States. The UK did not experience a similarly large increase in the supply of labour for industry at this time, which may have contributed to it falling behind the US. I also think that the abolition of slavery was vital to leading to more growth because it allowed a greater number of people to be entrepreneurial. Moreover, since labour will be increasingly motivated in paid freedom, compared to indentured work, I think it is likely that more innovation will be seen and this is a key driver of economic growth. 

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As often is the case with economics, we cannot attribute the success of the US’ growth to merely one event. In this case there were a series of events which made up the ‘The Second Industrial Revolution’. Yet for me, one of these events stands out as more important than the others. The growth of the transportation network, railroads and canals, resulted in the market revolution.  Even though railroads were also built in the UK, I think that the US would have benefitted more from these developments as its towns would have been relatively further away from each other. Individuals, on a greater scale than ever before, began producing goods for other than their own consumption.

In my opinion, the developments made in productivity were the main reasons for America’s success. The earliest factories developed into the mass production systems of the 20th Century, resulting in the nation’s manufacturing strength. The United Kingdom made few improvements in their productivity, something which remains an important economic issue today. I also discovered a relationship between entrepreneurship and productivity through writing this piece. Under the patent system, individual enterprise flourished. Ultimately, this would result in new methods that would make factory processes more productive with advanced technology. Alternatively, as a result of appliances which eased their home life, labour would become more motivated at work and consequently more productive. I consider the latter to be an example of increased indirect productivity. Moreover, the abolition of slavery would likely have lead to an increase in both entrepreneurship and productivity among the newly freed slaves. A recurring theme through my blog posts is that of institutions and this is again seen in this example. There was greater prosperity once the country moved away from the exclusive institution of slavery. The inclusive institution of the patent system also lead to more economic growth. 

Answering this question really demonstrated how fascinating it is to learn how economies reached where they are today. How were they affected by historical and political events? Which policies helped and hindered them? Looking at history puts economics into a valuable context. This is definitely an area of interest that I would love to further investigate in the future.