BSc Soc.

, Economic Sociology, Group 16 – British Capitalism

Indhold
British Capitalism.......................................................................................................... 2

1 The most important factors in Britain economic predominance .................................2

1.1 Stable society........................................................................................................ 2

1.2 Part conclusion...................................................................................................... 5

2 The important factors for Britain’s geopolitical fortunes.............................................5

2.1 Politics of trade......................................................................................................5

2.2 Part conclusion...................................................................................................... 7

3 The role of business leaders in British capitalism .......................................................7

3.1 The role of business leaders..................................................................................8

3.2 Wedgwood and Schumpeter..................................................................................9

3.3 Part conclusion....................................................................................................10

4 The impact of the wars .............................................................................................11

4.1 18th Century Wars..............................................................................................11

4.2 1st World War......................................................................................................12

4.3 2nd World War.....................................................................................................13

4.4 Part conclusion....................................................................................................14

5 Conclusion................................................................................................................. 14

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 BSc Soc., Economic Sociology, Group 16 – British Capitalism

British Capitalism

In this assignment we will look upon which factors where important for British
capitalism from the start of The First Industrial Revolution. We will describe
how government and business has developed and see how they have shaped a
society to fit entrepreneurs. First, we will sum up the most important factors for
Britain’s rise to economic predominance between 1680 and 1800. Here we will
focus on Britain’s strong agricultural sector, governmental development and
the Cash Nexus relationship. We will then go into depths with the factors that
were the most important determinants of Britain’s geopolitical fortunes.
Furthermore we will give a picture of which role contemporary business leaders
played in effecting the long-run performance, using Wedgewood as main
example. Here we will account some of Schumpeter’s theories. And at last we
will look at the different wars’ impact on British capitalism.

1 The most important factors in Britain economic

predominance
In the following part we will account for which factors played a large role in the
rise of Britain’s economic predominance in the period between 1680 and 1800.

1.1 Stable society

Wealth, a stable society, the approval of new laws, the improvements on the
banking system, the significant technical and managerial innovations, and the
infrastructure are among the most important factors that led Britain into the
predominance during the First Industrial Revolution.

Prior to the period between 1680 and 1800 Britain was a prosperous country in
contemporary terms due to the agricultural sector, the commercial sector and
the rise of a manufacturing sector1. Britain had already before the Industrial
Revolution established a cash nexus which was an initial step towards

1
McCraw, Thomas K. “Creating Modern Capitalism” p. 53. England: Harvard University Press, 1997

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capitalism. The current cash nexus was between the landed aristocrats, their
tenants and peasants. Besides the early introduction to the beginning of
capitalism with the transaction money for work, Britain had also an economic
advantage which was due to the British lead in imperialism. This advantage
was primarily based on the triangular trade between Britain and its colonies.
The triangular trade enabled Britain to increase its wealth by being able to
trade with the British colonies, the other European countries as well as
domestically.

Britain’s agricultural background played a big part as well in how Britain

became a wealthy and economic successful country. This well-developed
agricultural society was capable of feeding the growing population. These great
supplies of food enabled Britain to develop and think innovatively in other
sectors of industry2. This is not always the case; an increase in population does
not necessarily mean there will be an increase in income per capita or an
increase in new ideas and innovations.

Britain’s wealth prior to the Industrial Revolutions, combined with the well-
developed agricultural sector, the commercial sector, and the emerging
manufacturing sector, played a crucial part in establishing a stable society, that
put together with a king who was willing to make compromise, made the
foundation for a wealthy and stable society. The nation’s resources were
mainly possessed by landed elites. The landed elites have for the past long
period of time been involved in English government which meant that Britain
did have a solid foundation for engage challenges, in which there were conflicts
of interests, by compromise.

Once King William replaced King James II and political order was restored
William gathered the Parliament and important constitutional acts were
passed. Among the important acts was the Bill of Rights which prohibited
standing armies during peacetime, lowered the military cost, and prohibited
taxes, not levied by Parliament. The act also improved the individual civil

2
Diamond, Jared. “Guns, Germs and Steel”, Great Britain: Chatto and Windu, 1997

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rights. Together with other acts a whole new form of monarchy was starting to
emerge; a monarchy ruled by a constitutional system based on a web of laws.

Britain fought many wars doing late 17th and 18th century. These wars were
expensive so the fact that the parliament gained control over public finances
and military spending is very important to keep in mind3. The wars were in the
beginning financed by taxes, but later on the state started to borrow money to
finance the wars. The money was borrowed by issuing government securities,
which were publicly available from 1694, where individuals and businesses
were allowed to trade on the London stock exchange. These public stocks
provided the businessmen with the opportunity to invest idle balances in low-
risk bonds, with a fixed annual premium, that could be easily and rapidly
liquidated at any time. The state borrowings led to the foundation of the Bank
of England and the beginning of the banking systems. Later on the banks got
even further improved with the Bills of Exchange. The bank system also
created new opportunities for financing innovations on credit.

During the First Industrial Revolution Britain was taking the lead in making
invention to innovation. As a result of what Schumpeter called the creative
response Britain was using the core inputs; coal iron and raw cotton, to create
new inventions that reduced production time and costs 4. By thinking creative
the inventors came up with new ways of producing goods and the
entrepreneurs made the ideas and inventions become innovations. Some of the
carrier branches and inventions at the time were; the cotton spinning, the iron
products and the waterwheels. Many of the uses of the core inputs of the time
led to the innovation that completely changed the sectors where the
innovations took place. Though the technical innovation led to some major
changes it could not have been done without the development in managerial
and organizational structures. The development of factories and the structures
within the factories were very important to the fact that Britain was able to
take the predominance in the economic rise during this period.

3
McCraw, Thomas K. “Creating Modern Capitalism” p. 55. England: Harvard University Press, 1997
4
Schumpeter, Joseph A: "The Journal of Economic History", p. 152. Harvard University, 1947

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1.2 Part conclusion

The infrastructure before the creation of canals, turnpikes and roads in Britain
was very poor. So because Britain was capable of reforming the domestic
infrastructure while entering the First Industrial Revolution it had an enormous
advantage in transporting the goods and resources from one part of the
country to another. The funding of the turnpikes and the canals came primarily
from the private investors. Merchants, landed aristocrats, gentry and industrial
investors were all interested in a better infrastructure. The British colonies, the
triangular trade with Africa and the New World put Britain in the position of
being one of the first nations to trade internationally and thereby taking an
important infrastructural step towards global dominance.

2 The important factors for Britain’s geopolitical fortunes

We will now look at the earlier described factors, that we have considered most
determinant for Britain’s geopolitical fortunes. The factors we will analyze are
the following; Politics of trade and Infrastructure.

2.1 Politics of trade

To understand how Britain maintained such a strong country, the
understanding of the political initiative and governmental evolving is essential.
After the Glorious Revolution in 1688, Britain was on their way becoming a
modern society. King William’s decision of summoning a parliament slightly
distributed the power of ruling between him and a parliament. One of the
outcomes from this action was The Bill of Rights (1689)5.

At the same time, the well-established infrastructure was a key factor in

developing and distributing manufactured goods within Britain. This improved
the conditions for entrepreneurs hereby inducing further incentive to start

5
McCraw, Thomas K. “Creating Modern Capitalism” p. 54, L 15. England: Harvard University Press, 1997

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businesses. The trade with colonies created a new market where they could
sell their products.

Throughout the Seven Years War, Britain financed its battle against France
mainly through taxes and public borrowing. The borrowing expressed itself in
shape of issuing government securities. These were made publicly available by
1694, when businesses and individuals were enabled to trade on the London
stock exchange. The result of the Britain’s credit financing of the wars with
France gave rise to institutional and financial innovations. The Bank of England
was for instance founded because of this economic strategy in 1694. Another
very important outcome of this was the Bills of Exchange. With the Bills of
Exchange banks could now transfer funds around without physically shipping
gold or silver coins, which was now replaced by banknotes and checks. This
system was an innovation that made it possible to keep up capitalistic markets
when the business cycle took a periodic dip. This system made Britain one of
the leading countries in Europe in the realm of finance6.

Britain’s victory over France in the Seven Years War earned it control over all of
Canada, all of East Florida, much of India, and numerous islands in the Atlantic
Ocean and the Caribbean Sea, as well as control over the Strait of Dover. The
Strait of Dover was, and still is, a vital passage for maritime commerce for
most European countries. Important contenders such as Germany and the
Netherlands were dependent on trade going through the Strait of Dover.

Since Britain was a nation with a lot of foreign financials, they were very
vulnerable and depended on their surroundings and the countries which they
traded with. Especially the colonies, which were a great business for Britain,
using a triangular trading pattern between the colonies. For instance, British
manufactures where shipped to Africa, exchanged for black African slaves who
were then sent to places like South and Central America, the West Indian
Islands, and the southern colonies of North America. They would then pick up

6
Julian Hoppit, ”The use and the Abuse of Credit in Eighteen centaury England,” in Neil
McKendrick, ed., Business life and public policy (Cambridge: Cambridge University press,
1986), p. 66.

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raw materials from the colonies, e.g. West Indian molasses and travel to
refineries and distilleries in North America or Europe to be manufactured into
rum. Goods from the colonies such as tobacco, rice, lumber, furs, and fish
where then shipped back to Britain for domestic distribution or re-export to
Europe and the colonies.

Britain also used tariffs, subsidies and other regulations to protect their
domestic and international trade. This policy became known as mercantilism,
which goal was to increase exports and re-exports, and consequently decrease
imports, and thereby strengthening domestic production. As we see in the
table, it worked out quite successfully.

2.2 Part conclusion

The policies made by the British government, for example the right to private
property and freedom of religion, improved entrepreneurs’ possibilities of
establishing new companies and thus incorporate the new innovations in these.
In addition to this the radically improved infrastructure eased the
transportation of goods, further helping the innovative spirit of the time. The
colonies provided supplies and a market, which stimulated and maintained this
increase in production. As we will see later, this dependency on foreign trade
proved to be a double-edged policy.

3 The role of business leaders in British capitalism

In the following there will be given an account of the role of business leaders.
As an example Wedgwood will be used, together with an small analysis of
Schumpeter’s theory about entrepreneurs.

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3.1 The role of business leaders

Contemporary business leaders played an enormous role in increasing the
performance of British capitalism.
If we look at how we live in societies today: Societies today are built by
organizations, by hierarchies. When the Industrial Revolution began this was
one of the important innovations. The entrepreneurs created a capitalistic
organization, the company. In the period prior to the industrialization business
units consisted of one owner and few skilled employees, who could take care of
any part of the production. During the industrialization this form of
organizational structure changed towards a more specialized and hierarchal
one. This came around when entrepreneurs saw the resource saving potential
of specialized and divided production. As seen in table 2.1 the growth in
industry in the 18th century, exceeded the growth in GDP. This was in a
considerable degree thanks to the innovations in business structure and
organization.

As Schumpeter would argue, creative response was the primary factor of

change, innovation and development within the organizational parts of the
business in the Industrial Revolutions. Prior to the First Industrial Revolution
people worked task-orientated, which means that work rhythms were
determined by the necessities of the job. Then a new innovation came, the
clock. Instead of doing task-orientated work, the workers started to have
working hours. A man was hired to watch the time. At the factories the social

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contracts with strict rules of working assignments made a big change. It gave
higher output for less money. This was an increase in efficiency of the work
each worker did. Compared to farmers who had more diverse jobs with
different tasks during the day this was a very monotonous job.

Some Business leaders have been essential for the development of the British
capitalism; Josiah Wedgwood, Henry Ford and Charles Stewart Rolls (Henry
Royce as well), all of them contributing in different ways. Some with brand
new ideas, others reinventing old ideas.

Earlier in British history the Elite of the country had controlled most resources.
Because of the huge development of the British capitalism different
manufacturers and entrepreneurs had challenged this system. This had an
impact on the British capitalism, because more people came with different
perspectives and thereby increasing overall efficiency. As mentioned earlier
these business leaders invested heavily in the development of infrastructure.
This action enhanced domestic trading, which in turn added to the incentive to
invest in these businesses, creating a positive spiral of production.

3.2 Wedgwood and Schumpeter

According to Schumpeter’s theory about adaptive and creative response, the
innovator would not necessarily become and entrepreneur or business
manager. This was in some cases because of a lack of interest, and in others
the absence of talent.

An example of a contemporary business leader is Wedgwood. The innovations

he made became very important for British Capitalism. He affected the long-
run performance in many different ways.

Wedgwood, for instance, turned his name into a brand. He started to put his
own name on his products for people to recognize his design. Wedgwood
became aware that this is what we now call marketing. Branding your own

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name and your products became a big part of the new commercial innovations.
One of the things he did to promote his product was to introduce inertia selling.
To attract people to buy his products he sold lots of pottery to the aristocrats
and people from the upper social class, who could afford his overpriced
products. The reason Wedgewood overpriced his products slightly was that he
noticed a large group of people, mainly the middle class, wanted to ape their
social betters. Not only by doing this but also by creating a story, by putting his
name on his products, he promoted himself and his work.

Wedgwood and his partner Bentley were both aware of the emerging consumer
society. They were aware that they had to focus on marketing as well as
manufacturing. To manage the challenge of new markets, new goods etc. they
had to think both innovative but also act on their innovativeness. Wedgwood
was one of the business leaders at that time, which came to understand what it
took to take part in establishing a wealthy economy. He comprehended that he
had to create the market for his luxury products. Consumers did not only buy
the products they needed, but also the ones which they were persuaded into
buying. He took the opportunities afforded by the First Industrial Revolution.

In an analysis based on Schumpeter’s theories Wedgwood would be regarded

not only as an innovator, but also as an entrepreneur. Furthermore he took
pottery, an already existing and well-developed industry, and created new
aspects in terms of marketing, branding, working by the clock and
specialization of work. Taking this into consideration Wedgwood was able to
make not only adaptive response but also creative response in terms of a
completely new way of commercial organization. These were the main features
of a successful business manager according to Schumpeter.

3.3 Part conclusion

Wedgewood is a good example of Shcumpeter’s theory, that entrepreneurs can
shape societies. He changed the way of production, he changed the
requirements of workers abilities, he changed the way they worked and how

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their day was structured. He basically changed the way businesses did
business. His inventions are forerunners of marketing, branding and
organization structure of today.

4 The impact of the wars

The impact of the wars in which Britain was involved in the 18 th and 20th
century, were profoundly different. Therefore dividing them into separate
analyses will provide us with a better general view.

4.1 18th Century Wars

The wars fought in the 18th century were of great importance to the progress of
British capitalism. The wars very extremely expensive, e.g. the Seven Year War
cost Britain approximately £ 160 million, in today’s terms this would equal the
US fighting a war with costs of more than 13$ trillion7. But, ironically, they
necessitated some of the innovations and gained Britain some resources that
proved to be vital for the advance of British capitalism in the next two
centuries.

The wars with France were over colonies, and thus access to raw materials,
and over the authority to rule international trade. As explained, the Strait of
Dover is a very important trade route. So whoever gained control of the strait
would benefit greatly from it in form of taxes and tariffs. As Britain prevailed in
these wars, they gained control of the strait, but just as important, they gained
control of some colonies, which laid the foundation for Britain’s industry, in the
sense that they provided raw materials and the market for the industry.

These wars were very expensive. So, as mentioned, the British government
issued government securities, which were generally made available by 1694.
As explained, this gave companies the opportunity to make money off idle
balances. A group of London financiers lending money to the government

7
McCraw, Thomas K. “Creating Modern Capitalism” p. 55. England: Harvard University Press, 1997.

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established the Bank of England in 1694. The Bank helped the British Treasury
coordinate the trade with government securities.

4.2 1st World War

The 1st world war (WW1) was both a good and a bad experience for Britain.

On the one hand the massive increase in weapons production leading up to

WW1 stimulated the British economy, creating a lot of jobs and great tax
revenues. It was partially the allied nation’s ability to out produce the Germans
that led to their victory. Also these companies, providing armament and ships
for the British government such as Vickers Sons & Maxim, were the companies
who proved to be among the most competitive British companies in the years
following the war8.

But the economic policy, based on the monopoly trade with the colonies proved
fatal for the British industry.

The British monopoly on business with India and other colonies, had kept the
British production apparatus artificially alive. Many parts of the British industry
were based on small, in comparison, family-run companies. These were able to
stay in business because of the advantages they had in trading with the British
colonies. But when the German submarines succeeded in cutting of the British
mercantile marine of from the colonies, it compelled India to increase domestic
production. Because of the relatively small size of many British companies,
they were unable to compete with the great American and German enterprises,
as soon as their trade relationship with the colonies deteriorated. The German
and American companies were superior. For example they were much larger
and more capital-intensive. This meant that their production and revenue were
remarkably larger. And this made them able to establish R&D departments.
They could rethink products much faster than the products of the small British

8
McCraw, Thomas K. “Creating Modern Capitalism” p. 76-77. England: Harvard University Press, 1997

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manufacturers. Because of the large-scale production, they were also able to

lower their prices to a level, where these British companies could not compete.

4.3 2nd World War

Three major things happened to the British capitalism during the 2nd World
War. Some of the most basic features of capitalism, supply and demand, were
put out of the running. Due to limitations in import and export, the British
production was dramatically decreased. This decrease also meant that the food
supply which were to a considerable extent based on imports, were profoundly
affected. This forced the government to introduce rationalization, which
basically is the opposite of capitalism as described by Weber9.

Secondly people stopped believing in the policy of laissez faire and free
market. This was due to the poor performance of the British economy during
the 1st World War and the Great Depression. Hitherto people had believed in
capitalism’s ability to establish world peace through private property and free
market, but with these three dramatic events, these believe were in the minds
of the Britons, proven wrong.

Thirdly the British government mobilized the production industry in the arms
race, leading up to the 2nd World War. This increased productivity created a lot
of jobs that in turn stimulated the buying power of the Britons. Some
companies did very well in this period of times, especially those producing
armament (e.g. Vickers), engines for British fighter planes (Rolls Royce). This
was very positive for Britain, but the high demand for these products were
based on government mobilization, and not by market forces, which meant
that by the time the war was over this demand for these products were
reduced radically. At this time, on the brink of the Third Industrial Revolution,
the British industry and production was based on blue-collar trades, but the
new “revolution” dictated innovations in communications technology and other
similar “white-collar” trades.

9
Trigilia, Carlo: “Economic Sociology”, p. 63. Massachusettss: Blackwell Publishers, 2002

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4.4 Part conclusion

In many ways the launch of British capitalism was, more or less, a direct
consequence of the many wars it participated in during the 18th century. Its
trade infrastructure e.g. with the colonies, its control over important trading
routes, the economic development and the rise in industrial production were all
direct or indirect results of these wars.

While the wars of the 18th century served to establish Britain as a

contemporary super-power, the 1st World War generally had a negative impact
on British industry. The trade with colonies were weakened remarkably, and as
a result of this the companies previously based on trade with these colonies,
were not able to compete with the massive, capital-intensive companies from
the US and Germany. But this was bound to happen sooner or later, so it was
also in favor of Britain, because it clearly showed which companies were viable
and which weren’t. It was a lesson learned the hard way.

The impact of WW2 primarily effected Britain in a bad way based on the three
factors mentioned above; the government’s rationalization, disbelieve in the
free market and the fact that blue-collar trades were outdated and there
instead was a demand for whit-collar trades.

So all in all these wars initially helped establish the British Empire, but in the
end they also phased it out.

5 Conclusion
The British capitalism was developed and refined over a long period of time,
and its precise take off is hard to point out. But in many ways the way
capitalism was perceived in Britain, came to influence the rest of the world in
the form of factories, efficiency etc. the legislative system, the laws, the
infrastructure, their colonies and the entrepreneurs played a crucial role in
Britain’s rise to dominance. Initially Britain reaped the benefits of being first,
but was later taken over, when their capitalism stagnated and became unable

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to compete with the new and innovative companies that were emerging in the
US, Germany and other places.

Number of characters (incl. space): 24.223

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