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  Into this arena stepped the first major economist of the Enlightenment. Richard Cantillon was an Irishman by birth and a maverick by nature. In Paris he participated in John Law’s scheme, buying and selling the ludicrously overvalued Mississippi Company shares. But whereas Law blundered, Cantillon played a canny game. He could see where all this inflationism was heading, and secretly exchanged his own banknotes before the inevitable crash. Thus he was one of the very few ‘millionaires’ who did not lose his money. Later he lived in London, and prior to his murder in 1738, he wrote what is regarded as the first proper treatise on economics, An Essay on the Nature of Commerce in General. It circulated in manuscript form for many years until it was finally published in 1755. Cantillon adopted Boisguilbert’s method of abstraction, in which the economist establishes a series of criteria for experimentation and maintains ‘all other things being equal’, thereby testing a single factor in a sort of theoretical laboratory. He developed a theory as to how the price of a commodity is determined, arguing that the key factor was not the cost of production but the demand for the item, the forerunner of our modern ‘laws of supply and demand’. He established the importance of the entrepreneur in taking on the risk of the market, and theorised that interest was a reward for risk. He further developed the quantity theory of money that Petty had advanced. In the process, he started to cut the ropes of mercantilism that had bound European economies for so long.

  When Cantillon’s book was finally published, in France, it had a significant impact on a new generation of French thinkers. This was the first ‘school’ of economic theoreticians, known to history as the Physiocrats. Led by Dr Francois Quesnay, they fervently preached a gospel of free trade and laissez-faire – freedom from government involvement in business. Linking their economic theories with Locke’s concept of natural rights, they suggested that there should be just one tax: a tax on land, which they believed was the source of all wealth. Their particular article of belief was a complex mathematical chart, the Tableau Economique, which Quesnay drew up in 1758 to show how the whole economy worked. The comte de Mirabeau, who was to become one of the leading figures of the French Revolution, declared it one of the three greatest achievements in the history of the world, alongside writing and money. Most people subsequently have found it completely unintelligible. At the time, however, it strengthened the idea that the economy was something that could be studied systematically. Among the rulers who adopted the principles of Physiocracy in governing their states were Carl Friedrich, margrave of the duchy of Baden, and Leopold II, grand duke of Tuscany. It marked a considerable turnaround from the days when government ministers dabbled in economics: now economic professionals were advising European governments.

  Adam Smith was the man who wrote the bible of ffee-market economics and thereby hammered the nails into the coffin lid of mercantilism. Smith had read Cantillon and had met the Physiocrats. He was also a friend of David Hume, who had himself written on the quantity theory of money. Smith’s magnum opus, An inquiry into the nature and causes of the wealth of nations (1776), was a magnificent encapsulation of a century of economic thinking. It discussed labour specialisation and its advantages, the uses of money, price levels, interest rates and the cost of labour, the nature of economic progress, the economic implications of the New World colonies, and the various systems of political economy. Crucially, Smith argued that the self-interest of merchants was not something that the state needed to guard against because the merchants, by becoming rich themselves, increased the wealth of the nation. He clearly laid out the argument in favour of free trade: high import tariffs encouraged smuggling; lower tariffs meant it was not worth smuggling tea and spirits into the country. He also showed that the old view of amassing wealth was simply wrong: countries did not gain by stacking up huge piles of bullion and doing nothing with it. His book was an immediate success. Most importantly, it came to the attention of the politicians. Lord North, the prime minister of the day, took on board Smith’s arguments regarding taxation and free trade with Ireland. His successor, William Pitt the Younger, wholeheartedly embraced free trade, and in 1786 drew up an agreement with the French that made Smith’s vision a reality.

  The new economic thinking of the eighteenth century was not all about political economy, however; it was about private profit too. As we saw in the section on the Agricultural Revolution, people were beginning to invest in land so it would yield better returns. Crucial to such investment was the matter of capital. In order to buy the land or pay for its drainage and other improvements, entrepreneurs needed to borrow money. Thus the eighteenth century saw the rise of banking. There were about a dozen private banks in England in 1750. There were 120 in 1784 and 280 in 1793.24 By 1800 there were five banks in Exeter alone, lending to people in Moretonhampstead and beyond – a complete contrast from the start of this book, when cash was hardly used in the south-west of England.25 The loans these banks offered had a far greater effect on the money supply than John Laws’ inflationist issuing of banknotes. If a number of depositors placed £1,000 with a bank, and the bank operated a policy of retaining a reserve of 10 per cent of its deposits, then £900 could be loaned out. If that £900 was invested in a mill building, for instance, and the vendor placed the sum he received with another bank, which also operated a 10 per cent reserve policy, then that second bank could lend out £810. The original £1,000 was now worth £2,710 on paper – after only two rounds of deposit and loan. In this way banks could make capital go a long way and a huge number of agricultural and industrial developments could be paid for, greatly adding to the prosperity of the nation.

  It would be inappropriate to end this section on economic theory without mentioning one of the century’s most important thinkers. Thomas Robert Malthus was an English clergyman who had been greatly affected by the work of Adam Smith and David Hume. Reacting to the seemingly blind optimism of those Enlightenment writers such as Turgot and the Englishman William Godwin who espoused the belief that progress would never come to an end, Malthus applied the principles of the new economics to the most fundamental question at the heart of any society: whether all the people have enough to eat. As he pointed out in the first edition of his seminal study, An Essay on the Principle of Population (1798), throughout history a significant section of society had been unable to escape dire poverty, and that was still the case – yet the Enlightenment optimists had failed to explain why this was or how it could be alleviated. As Malthus wrote:

  I have read some of the speculations on the perfectibility of man and of society with great pleasure. I have been warmed and delighted with the enchanting picture which they hold forth. I ardently wish for such happy improvements. But I see great, and, to my understanding, unconquerable difficulties in the way to them.

  Malthus saw that Mankind’s numbers increased in a geometric progression, exponentially, while food supplies only increased arithmetically. Thus it was not just in times of dearth that a growing population could not be supported. If a country of seven million is easily able to feed itself, Malthus explained, its population will increase until the food that once fed seven million people has to feed seven and a half or eight million. Food prices will go up because of demand. However, poor labourers will find that because their number has increased, the value of their labour has decreased with oversupply. Thus a section of society is deprived of food through the natural process of multiplying. In reality, however, certain checks limit population growth. Looking back at history, Malthus observed that an overlarge population is generally reduced by hunger, disease and violence. People might also take preventative measures to restrict population growth, including postponement of marriage, birth control, celibacy and abortion. Either way, the Enlightenment progressionists had been complacent. Far from society tending to a state of progress in which all its members experience ever-improving living standards, Malthus argued, quite the opposite is true.

  Many people didn’t like what Malthus said, then or subsequently: even today
, sceptics react extremely negatively to the mere mention of his name. At the time, he was subjected to personal attacks and accused of heartlessness. Those who believed in progress wrongly saw him as an obstacle in their path, preaching a gospel of doom. They were shooting the messenger, of course: pessimistic economists are not to blame for a downturn in the economy; indeed, they do far less damage than the optimists. As for being heartless, Malthus was anything but. He was that rare thing, an economist genuinely interested in the plight of the poor, rather than being preoccupied with profit. He was quite right to say that the poverty trap had to be alleviated if progress was going to be for all and not just the few. The fact that his gloomy predictions were not fulfilled was not because they were wrong in themselves but because inventors and entrepreneurs were able to take advantage of fossil fuels and find better ways of fertilising soil and transporting food, thereby introducing new factors into the equation. As it happens, the factors that prevent his predictions coming true still depend on the ongoing supply of fossil fuels. Consequently, he remains one of the most important of all economic writers. His name and the concept of ‘Malthusian checks’ are frequently intoned by those trying to predict population growth and economic trends. But here, as the eighteenth-century economist least concerned with profit and most concerned with the poor, he stands for how far economic thinking had come from the days of mercantilism and royal monopolies.

  The Industrial Revolution

  Today it is widely accepted that the Industrial Revolution began in England in the eighteenth century. You might be surprised, therefore, to learn that the term was first coined in 1799 by a French diplomat in Berlin to describe what was happening in France. The explanation behind this apparent paradox is that the ‘revolution’ was a very gradual development. Initially it was imperceptible; it spread only very slowly from many disparate, localised beginnings in various parts of England to make its mark across Europe. Only at the end of the century was its revolutionary character recognised. As the historian Eric Hobsbawm noted: the Industrial Revolution ‘was not an episode with a beginning or an end . . . for its essence was that henceforth revolutionary change became the norm’.26

  Today we tend to associate the Industrial Revolution with steam power. At first, steam was just one aspect of the changes – and a relatively minor one at that. There were only about 1,200 steam engines employed in industry and mining in 1800; there were many more waterwheels creating much more power. Indeed, water still provided more than a third of the industrial power in Britain as late as 1838.27 The real cause of industrialisation was commercial competition. If you were a mill owner and you wanted to prevail over your rivals, then you had to cut production costs and take full advantage of all the resources at your disposal. You had to change your working methods, adapt to new challenges and invest in people, machinery and buildings in order to maximise profit. In this respect, the Industrial Revolution and the Agricultural Revolution were two sides of the same coin: the desire to make money through greater efficiency in working practices.

  In searching for the root causes of the Industrial Revolution we discover two distinct emerging markets. One of these was the demand for cotton and woollen cloth; the other was for coal and metalwork. The need to see these at the outset as two separate industrial revolutions that were eventually subsumed in a much larger one becomes apparent if we look at the sources of energy. The earliest cotton mills were built in the 1740s and were powered by animals or water; none used steam before 1780. Why, then, did coal production grow so much over the course of the century? Why were steam engines required to pump out the water from the deepest mines, which reached 300 feet in 1730 and 600 feet twenty years later?28 Why was the world’s first railway bridge (Causey Arch) constructed to transport coal from County Durham to Tyneside as early as 1726?

  The answer to these questions is that there was demand for coal from industries other than textile manufacturing before 1780, albeit it on a small scale. Blacksmiths and iron founders needed coal. So too did brewers of ale and beer, distillers of gin and whisky, manufacturers of salt, and makers of bricks, tiles and glass. All these crafts needed hotter temperatures than were achievable with wood. Traditionally they had made use of charcoal, but good-quality coal was much better. It was cheaper, too, as from the sixteenth century onwards, England was gripped by a firewood shortage. Timber was needed for housebuilding and shipping, furniture and most utensils, but a lot of woods had been cut down in the Middle Ages and more were cleared in the sixteenth century as land was required to house the rapidly increasing population. Lacking wood, people naturally turned to coal to satisfy their need for fuel. Houses with brick chimneys could burn coal instead of wood to heat water for laundry and general washing. Long before 1700 coal had become the staple fuel of London, where, over the course of the seventeenth century, the population had risen from about 200,000 to 700,000. Most of the capital’s coal-335,000 chaldrons (443,875 tons) per year – came from Newcastle and was shipped down the east coast of England, a well-established route that was able to supply London’s seemingly insatiable demand for fuel. By 1770 that demand had doubled. Still the city and its suburbs carried on growing: by 1800 the population was over one million. At the same time, the rest of the country was undergoing a conversion to coal. Whereas the total output of England’s coal mines in 1700 was about 2.6 million tons, by 1800 it was four times as much. Coal was becoming cheaper too, as the costs of extraction fell with the shift from many small, labour-intensive mines to fewer, larger and deeper enterprises. The proprietors of these large mines were able to organise efficient distribution systems: using the seas, rivers and canals, they managed to cut the transport costs to just a farthing per ton per mile.29 The low costs further encouraged people to rely on coal, and so the cycle continued. By 1850, Britain’s national coal output had risen to more than 50 million tons per year.

  The reason for the exponential increase in the demand for coal in the nineteenth century was that, through the widespread use of steam engines, it became essential to many different industries. But for most of the eighteenth century, the steam engine was nothing more than a machine for pumping water out of deep mines – a coal-burning machine for the production of more coal. The original idea is said to have been the brainchild of Thomas Savery from Modbury, in South Devon, who patented his ‘invention for raising water and occasioning motion to all sorts of mill work by the impellent force of fire’ in 1698. From that description, Savery clearly understood that the implications of his device went far further than mining, but in his book, The Miner’s Friend, he emphasised that its principal use would be in draining mines of water. Having demonstrated his machine to the Royal Society in 1699 and obtained an extension of the protection of his idea by an Act of Parliament the same year, he had reason to hope his claims were about to make him rich. Unfortunately, his machine just wasn’t efficient enough. But one developed by his fellow Devonian, Thomas Newcomen, was. The two men agreed a partnership and in 1712, at the Conygree Coalworks near Dudley, Newcomen installed the world’s first working and commercially viable steam engine.

  Newcomen’s invention did not transform the world overnight. It required significant expenditure to install and used vast amounts of coal. But then the deep coal mines were exactly where the steam engine was needed most. The question was simply whether it was cheaper than teams of horses. To begin with, steam engines were just 11 per cent cheaper to run, but that was enough to persuade some owners to invest in them.30 As mines grew deeper, the savings grew greater. Newcomen engines were installed at hundreds of mines in England. They were also exported: one was built in Sweden in 1727, and by 1740, there were engines at Vienna; Kassel in Germany; Schemnitz in Slovakia; Jemeppe-sur-Meuse, near Liège; and Passy, near Paris.31 By 1750 the cost of steam power was down to 60 per cent of that of horses, and by 1770 it was just 40 per cent – a saving of 1½d per horsepower-hour. Steam engines now spread rapidly across Europe, all installed by British engineers. When the engineer John
Smeaton toured the coalfields in the north-east of England in 1767, he found no fewer than 57 Newcomen steam engines at work. He recorded that they had a collective total power output of just 1,200 horsepower, so he set about redesigning them to be more efficient. Then in 1775 the partnership of Matthew Boulton and James Watt was established to exploit the potential of Watt’s invention of a still more efficient machine. Through the use of a separate condenser, this used 75 per cent less fuel than a Newcomen engine and thus was attractive to those industrialists who did not have an unlimited supply of coal on their doorstep. John Wilkinson commissioned a Boulton & Watt steam engine in 1775 for his ironworks. Richard Arkwright had one installed at his cotton factory at Wirksworth, Derbyshire, in the early 1780s. It was from that point on that the revolution of steam power joined that of the factory system and the Industrial Revolution as we think of it was born.

  The development of the cotton factory was the consequence of a series of technical innovations that allowed cloth to be made more evenly and cheaply. John Kay’s flying shuttle, patented in 1733, was widely adopted by weavers in the 1740s and 1750s, doubling their output and creating a greater demand for spun thread. Lewis Paul and John Wyatt opened a factory using Paul’s roller spinning machine in Birmingham in 1741. Although it closed four years later, Paul’s concept of using rollers was adapted by Richard Arkwright for his water frame, patented in 1769. Arkwright, unlike Paul, was an astute businessman. Under his direction, the machine for spinning cotton became profitable, and when he died in 1792, his estate was worth about £500,000. Compare that to Mr Darcy’s £10,000 per year and Mr Bingley’s annual income of £5,000 in Jane Austen’s Pride and Prejudice – not bad for a man who could not afford the fee for his first patent.32 The money came from the large-scale mechanised systems employed in the factories he set up in Nottingham, Cromford, Bakewell, Masson, Wirksworth, Litton, Rocester, Manchester and elsewhere. These worked twenty-four hours a day, lighting up the night sky with the fire of industry. As has often been remarked, Richard Arkwright created the production-line factory long before Henry Ford. Another industrialist who accumulated a similar fortune was Josiah Wedgwood, the founder of the high-quality pottery factory that bears his name. A thorough and careful man, he laid out his estate at Etruria, in Staffordshire, to take advantage of a projected canal for the delivery of raw supplies to his factory and the distribution of the finished product. He insisted on the very best materials and the greatest cleanliness in the workplace, and his 278 staff were all specialists, organised in a strictly regimented fashion.33 He provided housing on the estate for them, and developed an early form of sickness benefit to make sure they remained loyal. At the same time, he continually raised the standard of workmanship he expected. Accepting huge commissions from Queen Charlotte and Catherine the Great of Russia meant that his industrial revolution went beyond mere mass production and focused as much on the quality of the finished product.