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Industrialization from an Economic Perspective
Dr. Roberto Bonfatti explains the steps in industrialization: technological progress, capital accumulation, and the timing of industrialization.
So, Meiji Japan managed to industrialise and to become one of the world’s richest nations. But what is so special about industrialisation? In other words, do countries need to industrialise if they want to become rich like Japan did? Well, all available evidence seems to suggest that this is indeed the case. With the exception of a handful of oil-rich economies, virtually all countries that managed to achieve high per capita incomes went through a period of rapid industrialisation. This was the case of Britain, the USA, and Germany. It was also the case of the other successful Asian economies such as Korea, Taiwan, Singapore, and Hong Kong. So let’s try to use economic theory to understand what’s special about industrialisation.
We will proceed in three steps. The first is to ask ourselves, what is the key engine of economic growth? In other words, what pushes per capita incomes up over time? As economists have long known, the key engine of economic growth is technological progress, which we broadly define as the human being’s innate tendency to improve the way in which they work. This is very intuitive. If I discover a better way of doing my job, I will produce more, and thus receive a higher income. Consider two examples. First, I’d like you to imagine that I’m a farmer working in a field. If I don’t use any fertiliser, then clearly I won’t be able to produce much and my income will be low.
But if I discover that manure is a good fertiliser and I start using it, then my field will become more productive and my income will increase. Technological progress, the adoption of manure as a fertiliser, has just increased my per capita income. Consider another example. Suppose I work in a factory assembling cars. If I do so manually, it may take me a month to assemble a single car. Presumably then, my salary will be low to reflect my low productivity. Now suppose that an inventor comes along and sells a machine to my boss which I can use to assemble cars automatically.
I will now be able to work much more quickly and assemble maybe 10 cars a month and my salary will then go up to reflect my increased productivity. Again, technological progress, the invention of the car assembling machine, has increased my per capita income. These two examples illustrate how the key engine of economic growth is technological progress. Now let me turn to the second step. Our two examples look very similar, but there was actually a crucial difference between them. And, as it turns out, in the long run, technological progress can only increase per capita incomes in an economy made up of factory workers, but not in an economy made up of farmers.
To see why, consider what happens in the two cases after I become rich. One possibility is that I will end up having more children. On the one hand, I can afford more, so I would probably want more. On the other, I can now pay for better nutrition and health so that more of the children I have will actually survive. But what’s going to happen to my children when they grow up? Well, if I’m a farmer, they will have to live off my land. And although my land has become more productive, the fact that it is now shared among many children will make them poorer than I was.
As economists have long known, this negative effect on per capita incomes will effectually offset the positive effect generated by my innovation. So that my children or grandchildren or grand-grandchildren, will end up having the same per capita income I had before making my innovation. In other words, technological progress does not increase per capita incomes in the long run. Now suppose that I’m a factory worker and that my children will also work in my factory. Will they all have to use the machine I used, just like in the previous example, they all had to use my land? Of course not.
By the time they grow up, my boss will have bought more machines which can accommodate my children, as well as the children of my colleagues. Differently from land, machines are not a fixed supply, but can be accumulated over time. This process known as capital accumulation is the key reason why technological progress can increase per capita incomes in the long run. As economies become richer and their population expand, more and more machine can be built to accommodate everyone, so that individual productivity can continue to grow. The third and final step has to do with the timing of industrialisation. In my example, I have assumed that an inventor has to come about for my boss to buy a machine.
In reality, as the case of Meiji Japan well illustrates, my boss can have also bought a machine that was invented a long time ago in a foreign country. This is what those Japanese elite did when they travelled to Prussia. They learned about better modes of production used in that country, which they then brought back home. This implies that in countries in an earlier stage of industrialisation, there are actually two engines of economic growth. The first, technological progress, or the fact that new machines are invented over time. But the second is capital accumulation itself. The fact that these countries can increase their stock of the machines already used in more advanced industrial economies.
It is for this reason that countries in an early stage of industrialisation, such as Meiji Japan or China in the last three decades, tend to grow faster than more advanced economies. Their growth is propelled not only by technological progress, but also by capital accumulation itself. So let us put things together. Industrialisation is required for technological progress to translate into sustained economic growth. And we should expect that countries grow particularly fast in the early stages of industrialisation, as the case of Meiji Japan well illustrates. Let me ask you a question. If industrialisation is so important, then why don’t all countries industrialise? After all what’s most striking about Meiji Japan is that it was an exception.
For a long time, it was the only Asian country to have industrialised. And of course, still today, many countries around the world have yet to industrialise. Think of Africa or parts of Asia and Latin America. The reason why I’m asking you is that we economists still don’t have a sure answer to this question. Why countries fail to industrialise is still a matter for debate. And this probably explains why we are still unable to eradicate poverty around the world. But I conclude by giving you one possible answer in which many economists believe. According to this answer, what many countries miss is the political will to industrialise.
The logic of this argument is that industrialisation can only occur in a very specific political environment, which is actually quite hard to realise. Let’s go back to our factory example. Think about how many things could go wrong which could prevent me from getting to work with a machine. There could be no inventor maybe because no one around us has the knowledge to invent anything or because they don’t have the money to invest in the invention. Or maybe no one around us wants to invent anything because they expect that if they did invent something, then their invention would be stolen from them.
Equally seriously, my boss can not have the money to buy the machines or may be reluctant to expand production if he expects that his profits would then be expropriated by the government or that you would have a hard time to reach the market due to discriminatory regulations or poor transport infrastructure. This suggests that industrialisation requires a lot of government policies to be in place. There must be a good education and financial sectors to provide people with the resources they need to innovate and invest. There must be a good protection of property rights, including intellectual property rights to ensure that if someone innovates or invests, they’ll be able to retain their returns from their activity.
Or if this is still not enough to convince people to make large investments, there must then be an intervention by the government which must accumulate capital in the interests of its citizens. Finally, there must be open access to markets and good transport infrastructure. If this view is correct, then what made Meiji Japan successful was that for some reason, it had reached a new political equilibrium, which delivered all the government services required to harness industrialisation. Given how rare these political changes seem to be, this was really a remarkable event in modern economic history.
There are three critical steps to industrialization: technological progress, capital accumulation, and the timing of industrialization. All three of these steps came together in Meiji Japan and combined they transformed the economy of Japan into one of the richest in the world.
In this film, Dr. Roberto Bonfatti explores the economic theory of industrialization. He explains some of the common pitfalls that countries fall into during the process of industrialization. Roberto shows how Japan not only avoided these mistakes, but became an example to other countries.
Roberto concludes by asking a question: if industrialization is so important, then why don’t all countries industrialize? He suggests that many countries lack the political will to industrialize. Do you agree with this answer or is there another explanation you prefer.
This article is from the online course:
The Politics of Economics and the Economics of Politicians
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The Politics of Economics and the Economics of Politicians
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