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Will 21st Century USA have a surprise boom, as did the 19th Century UK?

Larry Kummer, Editor

Summary:  Today we have an essay by Andrew Odlyzko, one of the top polymaths and futurists writing today. He reminds us of the difficulty in accurately predicting the future, and the peril of relying on past successes to solve our problems. The industrial revolution relieved the UK’s crushing debt in the 19th century. As the post-WW2 boom relieved the US’s large war debt.  The future might not be so kind to us.

 

Excerpt from
“Crushing national debts, economic revolutions,
and extraordinary popular delusions.“

By Andrew Odlyzko,
Professor of Mathematics. University of Minnesota.

.
Introduction

A superpower with crippling debt, exorbitant taxes, glaring inequality, wages far exceeding those of competitors, high and persistent unemployment, lack of basic workplace skills, malnutrition, a rapidly growing rival across the ocean to the West, heated debates about the role of government in the economy, and widespread pessimism about the future. Could that be any country but the U.S. today, with China as the looming threat?

Toss in costly military misadventures in the Middle East, Greece unable to pay its debts, a sclerotic domestic legal system clogging up the economy, and the rising competitor flouting copyright and other property rights and relying on slave labor, and the case seems clinched. Yet this is also an accurate description of Britain around 1850, with the United States as the transatlantic rival. Surprisingly, what followed was an explosive acceleration of the Industrial Revolution that saw the UK sprint ahead of others during the “Great Victorian Boom” of the third quarter of the 19th century.

Britain in the 1840s

Britain in the 1840s was the world’s leading power, militarily, economically, technologically, and financially. However, there was pervasive doubt as to whether it could maintain its leadership. By far the most vociferous debates on economic topics were about trade barriers, especially for food. One of the arguments that protectionists used for the maintenance of high tariffs was that the British advantage in trade and manufactures was a fleeting one, earned by success in the Napoleonic wars, and that rising powers (the United States, in particular) were bound to forge ahead.

A key reason for the pessimism about Britain’s future was its national debt. It did emerge victorious from over a century of wars with France, but at a staggering cost. In 1815, national debt was over twice the country’s GDP, possibly as high as 250%, and even in the 1840s, it was around 150% of GDP, a level that is currently exceeded among the large industrialized countries only by Japan. The joke was that half the debt was incurred pushing the Bourbons off the throne of France, and half putting them back in.

This burden was far higher than it seems by modern standards. The economy of the time was barely industrial, and hence taxes, although regarded as the world’s highest and barely tolerable, brought in only about 10% of GDP to the national government (and another 2% to local ones).

The widely hated income tax was brought back in the early 1840s (by a Conservative government, as a “temporary” measure), at what was regarded as an extortionate rate of 3%. National debt was about 15 times the annual spending by the UK government, as opposed to perhaps 7 times for Japan today. Interest on the debt took about half of the national budget. This debt burden was a national obsession, and figured heavily in almost all policy discussions.

Military spending was also heavy, as the Pax Britannica was not easy to maintain. … By contrast, the United States had little military spending (at least until the start of the Mexican-American War), and practically no national debt.

… Unlike the UK, United States had plenty of land, and rapid population growth, both from immigration and from high fertility. Thus incentives to invent and install labor-saving machinery were higher than they were in Britain, which was plagued with unemployment and underemployment. A Martian arriving on the scene would surely have predicted that the U.S. was a much more promising place for major economic and technological advances.

Poverty in Britain was widespread, and malnutrition was rife. The malnutrition was not the kind that has led to the recent epidemic of obesity in the United States and many other modern countries, but one of hunger. Contemporary readers of Dickens’ Oliver Twist were not shocked by the famous scene where the request by Oliver in a workhouse, “Please, sir, I want some more,” was treated as an outrageous impudence. Outright starvation was becoming less frequent, but was common. The Irish Potato Famine, one of the great tragedies of modern European history, in which about one million out of the eight million inhabitants of Ireland perished, took place during this period.

About half the population was illiterate, and lack of skills was a topic of frequent discussion and complaints. Inequality was glaring. The middle class was growing, but it was small, and a wide gap separated it from the bulk of the “lower classes.” The Bront¨es were lower middle class, but their £200 annual income was equivalent, on a GDP per capita basis, to about $500 thousand for the U.S. today, and they had servants. (Charles Darwin and John Stuart Mill by this standard lived on about $2.5 million per year, yet were only upper middle class.) The truly rich were far richer yet, and lived opulent lives.

But all tended to die young, as medicine had not advanced much beyond bleeding and snake oil. (In addition to the potato blight that resulted in the Irish Famine tragedy, a serious cholera epidemic hit Europe in the late 1840s, at a time when people did not even know what caused it, and thousands from all walks of life died.)

Although poverty was widespread, hordes of lawyers were doing very well. The fictional Jarndyce and Jarndyce inheritance case of Dickens’ Bleak House dragged on for generations, until “the whole estate [was] found to have been absorbed by costs.” It may have been inspired by several notorious cases in Britain that took decades to settle.

Yet out of such unpromising circumstances came the full flowering of the Industrial Revolution, and it was Britain, with its huge national debt and other handicaps, that was the leader. …

The Railway Mania

… What sparked the “Great Victorian Boom”? It was likely a combination of factors. But the role of railways should not be underestimated. They provided Britain with the world’s leading transportation infrastructure, which not only lowered costs of moving goods and people, but served to create more of a “real-time economy,” able to respond quickly to changes in demand and to minimize inventory costs.

Some recent scholars have come up with low estimates for railways’ contribution to British economic development, but those estimates may be missing some of the most important intangible benefits. Certainly contemporary investors and the public thought railways were important. By 1880, when Endymion and Gladstone’s article were published, total investment in that industry came to more than half of the country’s GDP, comparable to $8 trillion for the United States today.

Railways and the British non-revolution of 1848

In addition to helping spark the “Great Victorian Boom,” the Railway Mania likely had other beneficial effects on Britain. The Marxist historian Eric Hobsbawm has claimed that railways saved British capitalism from a crisis by providing a productive outlet for excess savings. But perhaps more important (but related) was the contribution that railways made towards preventing a revolution in Britain in 1848. Most of continental Europe was convulsed that year by a series of armed revolts. The UK remained an oasis of unusual calm. While conventional histories usually regard this as a puzzle, some observers have suggested this was due to the Railway Mania.

The political grievances on the continent were greatly magnified by the economic downturn that started in 1846 and deepened in 1847 and 1848. Britain was singularly alone in basking in relative prosperity. (It was not complete prosperity, as the Irish Famine and other economic crises occurred during this period.) The gigantic flows of money into railways, visible in Fig. 2, amounting to around 7% of GDP in 1847 (comparable to a trillion dollars for the U.S. today, and over two trillion, if we compare investments not to GDP, but to government spending) produced plenty of jobs, and, in Disraeli’s words, likely helped “make the Chartists forget the Charter.”

In the peak year 1847, direct employment just in construction of new lines involved an army of manual workers that was over twice the size of the British Army. On top of that were the spillover effects from goods and services provided to those workers.

Railway investment was more than twice as large as the military budgets. All this money was coming from the pockets of individual investors, in pursuit of private profit. It was a pseudo-Keynesian stimulus, in effect. It produced a supply-side shock to the economy that compensated for the negative effects of famine and of disruption in foreign trade. …

Conclusions

It has often been said that “history does not repeat, but it rhymes.” Thus we should not expect the future to unfold exactly the way the past did. There is no reason to expect a great spurt of growth for the U.S. On the other hand, we should not be shocked if it does materialize. A very persistent lesson from the past is that predicting the future is very difficult.

… As another example, Britons of the mid-19th century worried about the potential threats, economic and military, from the United States, czarist Russia, and, perhaps most, from their ancient enemy France. Hardly anyone worried about Germany, the ancestral home of the British royal family, and at that time broken up into numerous independent states.

… At a higher level, British observers were right to be paranoid about their future. The boost that the Railway Mania and other factors gave to their economy did lead to the “Great Victorian Boom.” However, they did not reform their economy and society, and by the end of the 19th century both Germany and the U.S. moved firmly ahead of Britain in economic and technological developments. …

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Other works by Odlyzko

See his full archive at his website. Here is a sliver of his large body of brilliant work:

Tinkerbell dusting the economy

For More Information

If you liked this post, like us on Facebook and follow us on Twitter. See these posts looking into the future…

  1. Good news: The Singularity is coming (again).
  2. The Singularity is in our past.
  3. Has America grown old, and can no longer grow? Or are wonders like the singularity in our future?
  4. Is America on the road to zero growth?
  5. Why America’s growth is slowing, and a solution.
  6. American Exceptionalism gives us a faith-based public policy. Our confidence might be our weakness.
  7. Let’s learn about hyperinflation. Who knows what the future holds for us?

Growth could have been even faster in the 19th and 2th centuries

If only Charles Babbage had finished this, then completed his Analytical Engine — a fully programable computer running in 1870.

Babbage’s Difference Engine
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