Early industrialization

For most of humanity’s history, advances in technology, productivity, and real income per capita came very slowly and sporadically. But with the development of modern science in the 17th century and the quickening of technological innovation that it sparked, the stage was set for significant improvements in productivity. The gains remained modest until the latter part of the 19th century. For the first 50 years after the beginnings of the Industrial Revolution in Britain around 1760, labour productivity grew at an average annual rate of around 0.5 percent, but it then accelerated to more than 1 percent in the 19th century. In the United States it increased at an average rate of 0.5 percent until after the Civil War.

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By the latter part of the 19th century the countries of western Europe, the United States, and Japan enjoyed a marked and sustained rate of improvement in productivity generally exceeding that of Britain, the earlier leader. Growth of real gross domestic product (GDP) per hour worked in the western European countries and Japan averaged 1.6 percent from 1870 to 1950, while growth in the United States averaged 2 percent from 1870 to 1913 and almost 2.5 percent from 1913 to 1950. (See Table 1.) Data for 10 additional industrialized countries indicated that much the same range of productivity growth rates prevailed for the smaller western European countries and for Canada and Australia. But much of the rest of the world had not yet begun to experience sustained growth of productivity and real per capita income.


Phases of growth in labour productivity, 1870–1984* 1870–1913 1913–50 1950–73 1973–84
*Real gross domestic product per hour worked; average annual compound growth rates.
Source: Angus Maddison, "Growth and Slowdown in Advanced Capitalist Economies: Techniques of Quantitative Assessment," Journal of Economic Literature, vol. 25, p. 65, Table 2 (June 1987).
United States 2.0 2.4 2.5 1.0
five-country average 1.6 1.6 5.3 2.8
the five countries France 1.7 2.0 5.1 3.4
Germany 1.9 1.0 6.0 3.0
Japan 1.8 1.7 7.7 3.2
Netherlands 1.2 1.7 4.4 1.9
United Kingdom 1.2 1.6 3.2 2.4

Two percent per year may not seem an impressive number, but when compounded over a century it results in more than a sevenfold increase. The sustained and significant increases in productivity of industrialized countries beginning in the latter part of the 19th century were one of the most momentous developments in modern history, and it became much more widely diffused in later decades.

Why did the acceleration begin in the late 19th century? The great improvements in transportation and communications that were made possible by the inventions of the steam and internal-combustion engines and the telephone and wireless communications led to a major expansion of trade, both domestic and international. The British example of free trade led to some liberalization by other countries. By the turn of the century, an increasing number of large companies were beginning to conduct purposeful programs of research and development so that invention and innovation became commonplace and even expected. Educational levels rose, and business schools were founded to teach the new science of management. The growth of per capita income itself tended to raise saving rates, and investment in new plants, equipment, and natural resource development rose substantially. Finally, the growth of productivity in agriculture and increased labour mobility made possible the enormous expansion of manufacturing and, later, the service industries.


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International Monetary Fund headquarters
International Monetary Fund headquarters, Washington, D.C.
Courtesy, International Monetary Fund

Multinational corporations, typically based in the United States, diffused capital and managerial and technical know-how and helped train nationals of their host countries for jobs, often including upper-level positions. International licensing of patents also helped diffuse technology. An increasing proportion of students in U.S. universities, particularly in business and engineering, came from developing countries. International professional associations and journals also aided in the diffusion of knowledge.

An important reason for the narrowing of the productivity gap between the United States and other industrialized nations after 1950 was the differential rates of saving, investment, and growth of capital per worker. In Japan the ratio of gross saving to GDP was nearly one-third, double that in the United States, and in western Europe it averaged nearly one-fourth (due in part to favourable tax laws). This higher rate of saving, creating capital for both private and public investing, was associated with a rapid decline in the average age of structures and equipment in those countries until 1973. The growth of domestic and foreign trade opened up more opportunities for achieving economies of scale in those countries as well. They also benefited more from resource reallocations, particularly the shift of labour out of agriculture and self-employment where the rates of return were lower.

After 1960 the achievement of technological parity with the United States in the ways noted above became the most important factor promoting productivity advance in the other industrial nations and in an increasing number of advanced developing countries. But, as other nations continued to approach the U.S. level of real product per person, there would tend to be greater convergence in levels and rates of growth of productivity. This would be so because innovations requiring those countries to invest in their own research and development would be more costly than technology transferred from abroad.

The slowdown in productivity growth after 1973 was almost universal. The oil-price shocks of 1973 and 1979 contributed to accelerating inflation in most countries, reducing economic profits and the rate of saving and investment. Some energy-intensive equipment was rendered obsolete. The growth of real research and development expenditures slowed, as did the pace of technological innovation. The beneficial effects of interindustry shifts of resources became less marked. The changing age-sex mix of the labour force tended to reduce productivity growth in the short run, especially in North America. And government regulations to protect the environment and promote health and safety proliferated in the ’70s, increasing costs and inputs but not output as it was usually measured.

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The reversal in the 1980s of most of those negative factors helped to accelerate productivity growth in the United States. The continued deceleration in other industrialized countries noted above probably reflected a decline in technology transfer from abroad. There appeared to be no reason, however, why the advance of productivity in the developing countries with adequate absorptive capacity might not continue for years to come.