Working Paper: CEPR ID: DP10652
Authors: Jaume Ventura; Hansjoachim Voth
Abstract: Why did the country that borrowed the most industrialize first? Earlier research has viewed the explosion of debt in 18th century Britain as either detrimental, or as neutral for economic growth. In this paper, we argue instead that Britain?s borrowing boom was beneficial. The massive issuance of liquidly traded bonds allowed the nobility to switch out of low-return investments such as agricultural improvements. This switch lowered factor demand by old sectors and increased profits in new, rising ones such as textiles and iron. Because external financing contributed little to the Industrial Revolution, this boost in profits in new industries accelerated structural change, making Britain more industrial more quickly. The absence of an effective transfer of financial resources from old to new sectors also helps to explain why the Industrial Revolution led to massive social change ? because the rich nobility did not lend to or invest in the revolutionizing industries, it failed to capture the high returns to capital in these sectors, leading to relative economic decline.
Keywords: crowding out; debt crises; financial repression; industrial revolution; misallocation; productivity; Ricardian equivalence; structural change
JEL Codes: E22; E25; E62; H56; H60; N13; N23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign Debt Accumulation (H63) | Increased Investment in New Industries (E22) |
| Reduced Investment in Agriculture (Q14) | Increased Profits in New Industries (L19) |
| Higher Profits (D33) | Accelerated Structural Change (O14) |
| Absence of Effective Resource Transfer (F35) | Economic Decline of Nobility (N93) |
| Sovereign Debt Accumulation (H63) | Absence of Effective Resource Transfer (F35) |
| Crowding Out of Noble Investments in Agriculture (Q14) | Increased Profits and Reinvestment in New Industries (O25) |