Historical Perspectives on Economic Growth
1. The Industrialisation of Germany in the late nineteenth century
Why was Germany not the rst industrial nation?
When, and why, did Germany converge to Britain?
Did Britain fall behind?
Figure 1
Britain industrialised rst due to
• Better geography
• Britain had abundant supplies of coal, no deserts and fruitful soils ( rst nature), as well as
good market access, good defensibility, and historically already large agglomerations, such as
London and Liverpool (second nature)
• More trade
• Better institutions such as parliament and patents
• More usable knowledge
Germany did not exist as a country, but consisted of hundreds of independent states until the
Congress of Vienna (1814-15) and was only uni ed in 1871; most of these German states were
landlocked meaning that there was low market access. Furthermore, within Germany, there were
many di erent dialects as well as two equally strong confessions (Protestants and Catholics), and
a history of internal warfare (Thirty Years War, Seven Years War,…). Additionally, the urbanisation
rate was lower than that of Britain. Germany did have supplies of coal, however, they were further
from the surface than in Britain and Allen argues whether supplies of coal is enough.
Germany was in a catch-up process with Britain’s income level, even though central prerequisites
of the British Industrial Revolution were not ful lled. Germany was not even a country but more
than 30 largely tiny states with their own administrations; it was only uni ed in 1871. This should
limit competition and hence reduce innovation. It also limits the size of the market, and therefore
scaling e ects (Smithian Growth). It did not have a parliamentarian nor liberal culture and did not
have any meaningful Empire.
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, The French Revolution led to radical political changes and the Napoleonic wars. This reduced the
number of states in Germany from hundreds to less than 35. These states and their political
structure was a rmed in the Congress of Vienna (1814-15). States kept their independence,
especially on taxation and tari s, and there were transit tari s collected.
Figure 2: map of Germany after Vienna
The two main states after the Vienna Congress were Prussia (blue) and Austria (orange).
After 1815, many small states were on the verge of nancial collapse. There are three ways for
states to nance themselves: tari s (especially transit tari s), taxes, and by means of in ation.
However, Huning and Wolf (2016) argue that transit tari s create the problem of multiple
marginalisation. For example, assume that states set their tari rate where it maximises revenue.
They have to know how demand reacts to a change in tari , either because consumers will
reduce consumption, or because their state will be bypassed by traders. If all the states do this
individually, this leads to extremely high tari s and low overall consumption. However, if one of the
states reduces their rate, they will have less. This is the classical prisoner’s dilemma. The solution
to this is a common tari policy, such as the Customs Union (Zollverein).
The government founded the Zollverein largely as a means of maximising tari revenue. For such
a tari maximising customs union, geography is key. The Southern German Zollverein, which was
planned from 1820 and ran between 1827 and 1833, failed, and in the end, the Prussian led
German Zollverein prevailed. The Zollverein is an important driver of market integration (Keller and
Shiue 2014) as, for example, it allowed heavy investment in railways, and it preceded political
integration.
Technology di used to Germany early: the rst steam engine was in Prussia in 1785. The rst
railway in Germany was from Nuremberg to Fürth in 1835, following British standards and with an
English conductor. The Railway Law of 1842 meant that the state provided one seventh of railway
capital while gaining shareholders’ rights equal to one sixth of capital. By 1860 the Prussian
government was operating about 55% of the network.
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1. The Industrialisation of Germany in the late nineteenth century
Why was Germany not the rst industrial nation?
When, and why, did Germany converge to Britain?
Did Britain fall behind?
Figure 1
Britain industrialised rst due to
• Better geography
• Britain had abundant supplies of coal, no deserts and fruitful soils ( rst nature), as well as
good market access, good defensibility, and historically already large agglomerations, such as
London and Liverpool (second nature)
• More trade
• Better institutions such as parliament and patents
• More usable knowledge
Germany did not exist as a country, but consisted of hundreds of independent states until the
Congress of Vienna (1814-15) and was only uni ed in 1871; most of these German states were
landlocked meaning that there was low market access. Furthermore, within Germany, there were
many di erent dialects as well as two equally strong confessions (Protestants and Catholics), and
a history of internal warfare (Thirty Years War, Seven Years War,…). Additionally, the urbanisation
rate was lower than that of Britain. Germany did have supplies of coal, however, they were further
from the surface than in Britain and Allen argues whether supplies of coal is enough.
Germany was in a catch-up process with Britain’s income level, even though central prerequisites
of the British Industrial Revolution were not ful lled. Germany was not even a country but more
than 30 largely tiny states with their own administrations; it was only uni ed in 1871. This should
limit competition and hence reduce innovation. It also limits the size of the market, and therefore
scaling e ects (Smithian Growth). It did not have a parliamentarian nor liberal culture and did not
have any meaningful Empire.
1 of 13
ffff fi fi fifi fi fi
, The French Revolution led to radical political changes and the Napoleonic wars. This reduced the
number of states in Germany from hundreds to less than 35. These states and their political
structure was a rmed in the Congress of Vienna (1814-15). States kept their independence,
especially on taxation and tari s, and there were transit tari s collected.
Figure 2: map of Germany after Vienna
The two main states after the Vienna Congress were Prussia (blue) and Austria (orange).
After 1815, many small states were on the verge of nancial collapse. There are three ways for
states to nance themselves: tari s (especially transit tari s), taxes, and by means of in ation.
However, Huning and Wolf (2016) argue that transit tari s create the problem of multiple
marginalisation. For example, assume that states set their tari rate where it maximises revenue.
They have to know how demand reacts to a change in tari , either because consumers will
reduce consumption, or because their state will be bypassed by traders. If all the states do this
individually, this leads to extremely high tari s and low overall consumption. However, if one of the
states reduces their rate, they will have less. This is the classical prisoner’s dilemma. The solution
to this is a common tari policy, such as the Customs Union (Zollverein).
The government founded the Zollverein largely as a means of maximising tari revenue. For such
a tari maximising customs union, geography is key. The Southern German Zollverein, which was
planned from 1820 and ran between 1827 and 1833, failed, and in the end, the Prussian led
German Zollverein prevailed. The Zollverein is an important driver of market integration (Keller and
Shiue 2014) as, for example, it allowed heavy investment in railways, and it preceded political
integration.
Technology di used to Germany early: the rst steam engine was in Prussia in 1785. The rst
railway in Germany was from Nuremberg to Fürth in 1835, following British standards and with an
English conductor. The Railway Law of 1842 meant that the state provided one seventh of railway
capital while gaining shareholders’ rights equal to one sixth of capital. By 1860 the Prussian
government was operating about 55% of the network.
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