Working Paper: NBER ID: w21280
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: sovereign debt; industrial revolution; economic growth; 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 (H63) | reallocation of resources to high-return investments (G31) |
| reallocation of resources to high-return investments (G31) | acceleration of industrialization (O14) |
| Sovereign debt (H63) | decrease in labor demand in traditional sectors (J21) |
| decrease in labor demand in traditional sectors (J21) | increase in profits for new industries (O25) |
| increase in profits for new industries (O25) | acceleration of structural change (L16) |
| Sovereign debt (H63) | crowding-out effect on private investments (E62) |
| crowding-out effect on private investments (E62) | crowding-in effect over time (E62) |
| reduction in low-productivity investments (G31) | higher share of capital owned by entrepreneurs (P12) |
| higher share of capital owned by entrepreneurs (P12) | enhanced growth over time (O40) |