Chapter 8
Entrepreneurship in Britain, 1830–1900
THIS CHAPTER EXAMINES THE ROLE of entrepreneurship in the growth of the Victorian economy over a seventy-year period, beginning at a time when the Industrial Revolution was approaching maturity (see the previous chapter) and ending when the overseas British Empire was approaching its zenith (see the following chapter).
While the factory system was the major technological innovation of the Industrial Revolution (1760–1830), the introduction of railways, and the switch from sail to steam in oceangoing shipping, were the major technological innovations of the Victorian period (1830–1900). It was not so much in manufacturing, but rather in infrastructure, and most particularly in transport and communications systems, that Victorian Britons made their mark.
It is therefore a mistake to suppose that technological innovation in the manufacturing sector was the driving force in the Victorian British economy. There was certainly a good deal of incremental innovation in manufacturing, concerned with the fine-tuning of product design, but relatively little radical innovation. Steam power was the principal moving force at the end of the Victorian period, just as it was at the beginning, and horses still provided the major motive power on the roads. Although the principles of electromagnetism were discovered in Britain before the Victorian period, it was only after the end of the period that large-scale urban electrification—let alone rural electrification—got under way. Apart from the electric tram, little systematic use was made of electrical power until the very end of the nineteenth century.
It was not only technological innovation that was important in the Victorian era, however: institutional innovations were important too. Entrepreneurial attitudes were not confined to the private business sector; they were also evident in farsighted political leadership, and in the rapidly growing professional civil service too.
The Victorians were immensely proud of Britain's (unwritten) political constitution. They created an empire that exported British institutions to many parts of the world—most notably the Indian subcontinent and the large settler economies of Canada and Australia. Having “learned their lesson” from the American Revolution of 1776, when their principal colonial foundation declared independence, successive British governments administered their empire in a relatively decentralized manner. Although external access to imperial markets was restricted, trade within the empire was largely based on the principles of free trade enunciated by Adam Smith. The empire therefore constituted an enormous captive export market for British manufacturing firms, which they accessed through the transport linkages provided by rail and sea. The steady growth of the imperial population, through both natural increase and territorial expansion, coupled with rising incomes in the settler economies, encouraged product innovations. By the end of the Victorian period, British firms exported an enormous range of trademarked products, especially in sectors such as steam-powered machinery and metal household goods.
Private entrepreneurs did not enjoy particularly high status in Victorian Britain. Indeed, the owners of small firms were often classed as “tradesmen” and looked down upon by middle-class professionals and those with inherited wealth. On the other hand, setting up a business was easy, as regulations were few. A partnership between a wealthy investor and an enterprising artisan became a widely accepted and very successful business model. But other avenues of wealth accumulation were possible too. The ever-shifting imperial frontier provided potentially rich pickings for soldiers and bounty hunters. Furthermore, many young men of great ability chose to enter the church in search of spiritual rather than material rewards, with the risk-takers opting for missionary work overseas.
The principle of partnership was extended during the Victorian period through a series of reforms to company law that made it much easier for large businesses to be incorporated as joint-stock companies with limited liability for their shareholders. This in turn increased liquidity in stock markets by making it easier for ordinary people to buy and sell shares in small denominations. This in turn facilitated the growth of large firms.
However, little trust was placed in the law as a means of resolving business disputes. The law had a bad reputation for being slow, complex, and extremely expensive. Many businesses, including quite large businesses, therefore relied on local people to subscribe capital. The family was an important unit of business organization: it was not only the moral bedrock of Victorian society, but also a device for building trust between partners in a business. Many large businesses remained under the control of family dynasties, and “marrying the boss's daughter” was a reliable way of securing promotion in many firms. This illustrates the general point that Victorians invested heavily not only in political institutions, but in social and moral institutions too.
While the Victorian economy is, in many respects, a success story, it certainly had its failures. Its failure to develop the economic potential of new technologies such as electricity has already been noted. While electricity was widely used to facilitate imperial communications through the electric telegraph, mundane applications such as household lighting and power supply were relatively neglected. Similar criticisms can be made in terms of Britain's failure to capitalize on chemical discoveries such as synthetic dyes, which allowed Germany to gain a major technological lead in the chemical and pharmaceutical industries. Britain was also slow to exploit the potential of the internal combustion engine. Engineers were more concerned to perfect the working of the steam engine. Their decision to ignore the new technology was reinforced by the large supply of cheap coal available in Britain, the poor state of the roads, and highway regulations that protected the interests of pedestrians and horse traffic.
The evidence on Victorian entrepreneurship is compatible with general theories of entrepreneurship that emphasize the role of entrepreneurs in making sound decisions regarding risky innovations. Victorian Britons generally made good judgments regarding infrastructure investments and their use in building an empire of free trade, but their judgments were much weaker in the manufacturing sector. Entrepreneurs appear to have been aware of their own strengths and weaknesses, and to have concentrated on investing in those areas in which their judgments were likely to prove successful. However, if entrepreneurship is understood exclusively in terms of small business formation and growth, initiated by the self-employed, then the theory does not work so well in explaining the facts of the Victorian period. The large infrastructure projects, such as railways, at which the Victorians excelled were not run by the self-employed, but by boards of directors of joint-stock companies: boards that comprised professional experts such as engineers, bankers, and lawyers, together with leading merchants and manufacturers who had already built large businesses of their own. The distinguishing feature of successful Victorian entrepreneurship was that it was based on extensive partnerships between wealthy investors and professional specialists, rather than on the efforts of thousands of small-scale self-employed businessmen. While there were many such small businessmen, most successful small businesses seem to have thrived mainly because of the large size of the imperial market to which they had access. This market was not the product of technological innovation by small private enterprises, but of political initiatives backed up by large infrastructure projects, endorsed by politicians and civil servants and implemented by large joint-stock firms.
Background: Key Features of British Economic and Social Development, 1830–1900
The period 1830–1900 was a time of considerable political and social change. The period began badly. Following the end of the Napoleonic Wars in 1815, the economy had entered a serious depression. There were riots in Manchester and other cities. The Duke of Wellington, the hero of Waterloo, soon became a most unpopular prime minister.
The political situation improved after 1832, when the Reform Act extended the franchise and removed some of the “rotten boroughs.” But new problems emerged. In Ireland the mismanagement of the famine stimulated calls for Home Rule. Population grew rapidly (see figure 8.1), and rural poverty was rife. The great industrial cities were insanitary, as a result; and health became a major Victorian obsession. Millions left the land and emigrated to Australia, New Zealand, North America, and elsewhere.
Nevertheless, in comparison with other European countries, the UK remained remarkably stable. The Victorian notion of paternalism encouraged local elites to be responsive to local needs, and many successful businessmen became social reformers. Religion was very important to the Victorians. It provided a bond between members of different social and economic classes, particularly in the Nonconformist churches, where artisans and small businessmen could take on responsible roles as pastors. Although there was conflict between different denominations, the Christian ethic was a potent unifying force, promoting high standards of behavior in both public and private life.
The performance of the economy was steady, if unspectacular, by modern standards. But compared to the relative stasis of medieval and early modern times,growth appears to have been remarkably high. Gross domestic product per head rose from £1,672 in 1830 to £3,911 in 1900 (at 2003 market prices), an average compound percentage growth of just over 1.2 percent per year (figure 8.2). Prices were steady throughout the period, apart from cyclical changes caused by periodic booms and slumps (figure 8.3). The stability of prices helped to sustain relatively low rates of interest. Long-term interest rates were rarely above 3.5 percent, and in the 1890s fell to below 2.5 percent (figure 8.4), although short-term rates were far more volatile, particularly at times of financial crisis, such as 1846 and 1866.
Figure 8.1. Population of the United Kingdom (in millions), 1830–1914.(Source: Officer 2005.)
The combination of low inflation and low interest rates encouraged long-term investment. The Victorians were great builders—in almost every sense of the word. They built grand public buildings, which were symbolic of national pride, such as the new Houses of Parliament and, at a local level, they built numerous town halls, and clock towers too. They built institutions—reforming local government and creating numerous local charities; they built an empire, on which they believed that “the sun would never set,” and—most importantly for this book—they built a massive infrastructure of ports, railways, urban gas and water systems, and so on. This infrastructure supported the evolution of major agglomerations of factories—the specialized industrial districts later described by Alfred Marshall (1923). Thus, despite the apparently modest levels of growth in national income they attained, the Victorians left a valuable and impressive legacy. Although much of this legacy was squandered in the twentieth century in fighting two world wars and defending the empire overseas, the Victorians built so well that a significant amount of their infrastructure—both social and physical—has survived to this day.
The Victorian period in Britain has always been controversial. No sooner had Queen Victoria died in 1901 that Edwardian intellectuals began to criticize her legacy, and the debates have continued on various fronts ever since. This chapter begins by looking at the controversies over entrepreneurship in Victorian Britain that began in the 1960s and still continue today. It shows that a bewildering variety of factors have been used to explain the performance of the Victorian economy. Although several writers have identified entrepreneurship as an explanatory factor, their explanations have not been developed in a systematic way. They rely too heavily on a simplistic social stereotype of the entrepreneur.
Figure 8.2. Gross Domestic Product per Head in the United Kingdom, 1830–1914. (Source: Officer 2005.)
Figure 8.3. Price level in the United Kingdom, 1830–1914 (1851 = 100). (Source: Officer 2005.)
Figure 8.4. Long-Term Interest Rates in the United Kingdom, 1830–1914. (Source: Officer 2005.)
This chapter employs a more systematic approach to the study of entrepreneur. This approach was anticipated in the previous chapter and is further developed in the following one. It is argued that the entrepreneur is someone who specializes in taking very risky decisions about major investments. These investments involve irreversible commitments; people cannot easily get their money back if an entrepreneurial project fails. Good judgment is crucial to success under these conditions. Entrepreneurs come forward to take these decisions because they believe that their judgment is better than that of other people. If other people share that judgment, then they will lend their money to the entrepreneur. The entrepreneur will control an enterprise funded by other people's money.
If he puts his own money at risk, then the entrepreneur is a risk-bearer, whereas if he mainly risks other people's money, he is more of a risk-manager instead. The quality of his judgment in assessing the risks is put to the market test in the project that he undertakes; if his judgment is good his investors will be rewarded by handsome profits, and if he makes a mistake then they will be punished with losses. If the entrepreneur is a pure risk-manager, then it is his reputation rather than his wealth that is put at risk. Victorian society placed considerable weight on personal reputation, and so loss of reputation was a potentially serious penalty for a risk manager to incur.
As emphasized in the other chapters, if profitable projects are socially beneficial, then society benefits from the intervention of the entrepreneur, but if the entrepreneur, through political lobbying or underhand practices, profits at the expense of the public, then society will be worse off instead.
The Victorians, we shall argue, were basically successful entrepreneurs operating under good incentives that rewarded socially beneficial enterprise. They were not good at everything, however. As the Victorian era progressed, entrepreneurs increasingly focused their efforts on promoting large infrastructure projects. This was because factory production became less profitable and infrastructure projects more profitable.
In the late eighteenth century, at the start of the Industrial Revolution, infrastructure projects were often undertaken mainly as an adjunct to factory-building. Entrepreneurship was focused on the innovation of the water-powered (and later steam-powered) factory. The building of canals, and the conversion of roads into turnpikes, was useful to entrepreneurs because it reduced transport costs and thereby widened the market for their mass-produced factory goods. Many factory masters therefore invested in canal projects, for example (Pearson and Richardson 2001). By the start of the Victorian period, however, the first major wave of factory-building had come to an end. After the final defeat of Napoleon in 1815, Britain was the master of the seas, and there were major opportunities to extend maritime trade. This encouraged investments in ports and harbors instead.
To realize their full potential, however, ports needed to be connected to the great industrial centers, and canals were proving inadequate for this purpose; they dried up in summer and iced up in winter. Railways were the answer. But it soon turned out that railways could do much more than carry freight; they could carry mail and passengers at unbelievably high speed as well. New opportunities for tourism, commuting, and the development of a national system of banking were opened up. Infrastructure projects acquired a life of their own. Cities began to develop as information hubs as well as industrial centers—a function that they had always performed but could perform more easily once long-distance communication had been speeded up.
The social tensions alluded to earlier led to difficult industrial relations in many factory-based industries. British workers valued autonomy—a status very much associated with the skilled artisan—and resented the military-style discipline of the factory. If labor had been cheap, then factory owners could simply have ignored the wishes of their workers, but their workers had alternatives to factory employment; not only emigration, but employment in service industries such as transport, retailing, and banking. Factory production became steadily less economic as a result.
Infrastructure, on the other hand, prospered. The British Empire was growing fast, and everywhere there were new opportunities for development. Ports, railways, telegraphs, and urban investments were the key. It was not so much the factory as the engineering workshop that became the hub of British manufacturing. While the factory remained dominant in the textile trades, engineering workshops and “yards” were responsible for producing most of the sophisticated machinery that was exported overseas; in particular, ships and steam locomotives, and the prefabricated bridges and pipework that were exported for use in overseas projects. By the end of the century the Victorian economy was economically driven by—and dependent upon—the project of imperialism.
When the age of imperialism came to an abrupt end in 1914, so did much of British entrepreneurship (as described in the following chapter). A whole generation of budding entrepreneurs was wiped out in the trenches of World War I. Furthermore, the international political instability created by the postwar settlement at Versailles undermined the system of international trade on which the empire was built. It was not the fault of individual British entrepreneurs that they became locked in to such a vulnerable imperial system. If there was a failure, it was an overoptimistic belief, encouraged by Britain's political leaders, that the project of empire would continue indefinitely without disruption.
The Rise and Decline of Entrepreneurship in Victorian Britain: The Debate
The historical literature on Victorian entrepreneurship has focused on a rather limited range of issues. Two of these issues are briefly considered here. The first is the role of free trade policies and laissez-faire in encouraging entrepreneurship, and the second is the apparent decline of entrepreneurship in late-Victorian Britain.
Laissez-Faire
Modern political writers have looked back to early Victorian Britain in an attempt to discover the roots of modern economic growth. It is often suggested that Victorian Britain was committed to a policy of laissez-faire. According to this view, there was a popular belief that the pursuit of profit, constrained only by free competition, would lead to benefits for all; consequently, state interference was rejected as meddlesome. Under this regime of laissez-faire, entrepreneurship thrived; the fetters of government regulation were discarded, and the economy “took off.” But then trades unions appeared, the story goes, and they began to monopolize the supply of labor. Using the political power of the Independent Labour Party, they crushed the spirit of enterprise. The Victorian British economy went into decline, and the responsibility carrying the torch of free enterprise passed to the United States.
There are a number of difficulties with this story. The first involves a question of dates. For a significant period prior to 1830 Britain was at war with Napoleonic France. During this period, government had an active role in stimulating demand for both textiles (e.g., military uniforms) and engineering products (e.g., guns and armor), and when this demand ceased at the end of the war a serious recession ensued. Indeed, some military historians turn the argument around, and maintain that military procurement, by setting challenging targets for entrepreneurs, stimulated investment and innovation in precision-made factory products.
Furthermore, free trade was not official government policy until the repeal of the Corn Laws in 1846, and the prime minister, Robert Peel, who pushed through this reform, split his political party in the process. Although Richard Cobden, John Bright, and other members of the “Manchester School” had been vociferous lobbyists for free trade, it was neither their free market ideology nor the prospective benefit to industry that finally swayed Peel and his followers, but the benefits to the workers themselves. Peel was concerned that the benefit to workers of any reduction in the price of corn would be neutralized by lower wages, and it was only when he was persuaded that wages would remain high because of buoyant product demand that he agreed to the reform (Prest 2004).
Another reason for government involvement in the economy was that many of the major industrial projects in Victorian Britain involved the compulsory acquisition of land, as explained below. Far from defending individual property rights unequivocally, government presided over a system in which large amounts of private land were acquired, subject to arbitration, on the authority of the state. It is a mistake to assume that, as in the United States, land could simply be acquired by pushing forward the frontier of settlement. By 1830 Britain was already a relatively mature and densely populated country, and government regularly authorized the subordination of private property rights to the public interest.
While it is true that Adam Smith had set out in the Wealth of Nations, as early as 1776, the benefits of a deregulated market economy, his ideas did not have the immediate impact on policy that is sometimes alleged. As an intellectual product of the Enlightenment, Smith was interested in the roots of progress. His major contribution was to identify the division of labor and the growth of trade as the main drivers of progress. His major criticism of the British government was that it had given a monopoly of the country's foreign trade to the chartered trading companies such as the East India Company. The profits of these companies were essentially a tax on trade, and Smith proposed to remove this tax by taking away the privileges of these companies and promoting competition instead. While Smith believed that competition was part of the natural order, and should be employed to good effect, he did not state that competition should be given completely free reign, as suggested by the later doctrine of laissez-faire (Nicholson 1909).
If there was a governing principle in early Victorian society, it was that advances in technology created the potential for sustained improvement in the standard of living. Unlocking this potential required good institutions, and since not all institutions were fully rational, institutional reform was required. The liberalization of markets emphasized by Smith was only one of the reforms required. It was also important to ensure that the benefits of improvement were fairly distributed between different members of society. Political reform in support of a more just distribution of the benefits of progress was an important aspect of legislation from 1830 to 1850.
There was disagreement, however, about how radical the reforms should be. Some people argued that existing institutions must already be rational, in the pragmatic sense that they had stood the test of time. Others argued that they were irrational legacies from the medieval period. Radical populists such as Marx and Engels (both of whom lived in England in the 1840s) argued that technological improvements, by liberating workers from the backbreaking toil of agricultural labor, should allow them to spend more time in rewarding and creative craft production. But factory work was anything but creative and rewarding, they observed—it was repetitive, highly disciplined, and alienating. Having escaped from the tyranny of the local squire, the worker was now tyrannized by the local industrial capitalist instead. Marx and Engels predicted a worker's revolution, but in practice the Chartist Revolution of 1848 quickly fizzled out.
In the 1870s democratic socialists promoted trade unions. The idea was that the trade union would neutralize the power of the capitalist by exercise a countervailing monopoly power through control of the labor supply. The trade union movement gained considerable support after 1880—initially among skilled workers, and later among the unskilled as well. By 1900 several industries had become dominated by large and powerful trades unions, some of whose leaders sought to use strike action not only to improve wages and conditions of employment, but also to challenge the traditional rights of employers over their workers. In manufacturing, mining, and transport, wage rates rose, basic hours of work fell, and productivity growth stagnated (Broadberry 1997, 2006).
Labor disputes began to polarize political opinion. Some employers turned to confrontation, locking workers out before a strike could take effect, and hiring strikebreakers, while others agreed to conciliation. Some embraced novel forms of profit-sharing and part-ownership with employees, while others emphatically asserted their absolute rights as employers. Government began to legislate over worker's rights and trade union representation, leading to high-profile court cases that resolved the immediate issues but often left more ill-feeling between the parties than there had been before.
By 1900 many aspects of economic life were tightly regulated, and an increasing number of activities, such as education and local transport, were coming under local government control. If there was a period of laissez-faire in Britain, then it was certainly a very short one—say between 1850 and 1880—and even then the economic freedom prevailing in Britain was nowhere as great as the freedoms that existed at this time in the United States.
The Onset of Decline
The zenith of Britain's technological leadership is commonly said to be 1851—the year of the Great Exhibition in Hyde Park, London. The key innovators, it is said, were artisan entrepreneurs who, from the late eighteenth century, had pioneered the mechanized factory system (Deane 1979; Mokyr 2004). International exhibitions became popular attractions in the nineteenth century, attended by increasing numbers of the general public, and after 1851 the success of British entrepreneurs in winning prizes went into decline, while that of U.S. and continental European entrepreneurs rose.
Not everyone agrees that the decline of Victorian entrepreneurship can be conveniently dated to some time in midcentury, however. An emphasis on economic performance rather than the pace of technological innovation suggests dating decline to the end of the mid-Victorian boom and the onset of the great depression in 1873 (Church 1975; Saul 1969).
Crafts (1985) has taken a more radical view. He argues that the impact of the “industrial revolution” on British productivity growth in the first half of the nineteenth century has been exaggerated. Mass production was mainly confined to the textile industries of the north: cottons in Lancashire and woolens in Yorkshire. More generally, Pollard (1997) has argued that throughout European history innovations in manufacturing have been concentrated in marginal agricultural areas such as the north of England, where local families combined mixed farming with protoindustrial pursuits. Crafts's view suggests that there was greater continuity between the two halves of the nineteenth century than the traditional view suggests, with a modest rate of productivity growth being sustained throughout.
It is possible that while entrepreneurship was sustained for longer than previously thought, its direction shifted. As suggested in the introduction to this chapter, there was a major shift from developing the resources of the domestic economy into imperial development. Around midcentury growing numbers of the “middling sort” who aspired to fame and fortune emigrated to the settler economies within the empire, such as Australia and New Zealand, while the more highly educated joined the growing colonial civil service. On this view, the dynamism of the late- Victorian economy shifted to the frontier of empire. Some aristocratic families made a smooth transition into merchant banking, helping to fund the growth of imperial trade and investment from its London hub. The rapid growth of financial services, together with artisan emigration, drew resources away from manufacturing industry. Overcrowding and insanitary conditions in the industrial cities reduced the quality of the manufacturing labor force, fueled labor discontent, and accelerated the spread of trade unionism to unskilled workers. As a result, the rapid industrialization of the United States, Germany, and other continental European countries exposed the weaknesses caused by low manufacturing productivity growth in Britain.
Schumpeter's (1939) analysis of long waves in the world economy leads to similar conclusions regarding structural change, but by a different route. According to Schumpeter, Britain pioneered not one but two major innovations: first the factory system and then the railroads. Since the diffusion of the railroad system was a feature of the second half of the nineteenth century rather than the first, this suggests that Britain may have continued to be entrepreneurial, but switched its focus from manufacturing to transport infrastructure and utilities (Broadberry 2006). While early transport investments focused on the domestic economy, later investments were mainly concerned with supporting international trade. Railroad technology pioneered in Britain was exported to the colonial frontier. Overseas railroad investments were supported by investments in shipping lines, whereby steam-powered vessels provided regular communications with harbors served by local railroads. The growing influence of infrastructure investment, and its international orientation, is reflected in the growth of British coal exports to overseas bunkering stations, and the declining proportion of coal output supplied to domestic heavy industry (Church 1986).
Chandler (1990) suggests a different perspective on British decline, however, derived from different sources—business histories rather than national income accounts and business cycle data (as described in detail in the following chapter). According to Chandler, British entrepreneurs were slow to make the three-pronged investments in marketing, professional management, and organized research that he considers necessary for an economy to make the transition from artisan production to mass production. A conservative attachment to the institution of the family firm, and a cult of amateurism in management, made British firms unable to respond to U.S. and German competition in high-technology industries in the late nineteenth century.
An alternative view, however, would suggest that British entrepreneurs neglected investment in mass production manufacturing industry because they perceived more profitable opportunities elsewhere. Economies of mass production, as exemplified by the Chicago meatpacking industry, benefited from cheap unskilled immigrant labor and abundant land—both factors that were missing from Britain, where land was scarce, towns were congested, and most workers aspired to artisan status. Because the territorial area of the UK is so much smaller than that of the United States, British entrepreneurs were more concerned to expand internationally. They needed to invest overseas in a range of relatively small colonial markets. As a result, they evolved more flexible managerial forms than the hierarchical Chandlerian enterprise. A good example of a flexible form is the “free-standing firm,” whose operations were based wholly overseas—often in a single country—and which were controlled from a small head office, usually in London (Wilkins 1986; Wilkins and Schroter 1998). A constellation of several free-standing firms provided greater flexibility than would a single hierarchical firm on the U.S. model, managing overseas operations through national subsidiaries. By incorporating each major project as a separate company, financial transparency was increased, allowing shareholders rather than salaried managers to decide whether profits should be reinvested in new schemes.
Olson (1982) offers yet another perspective on the subject. He argues for the institutionalization of collusion as a general cause of economic decline in nations, and he uses Britain as an exemplary case. His focus is on two types of horizontal combination: combinations of workers—namely trades unions—and combinations of firms—namely trade associations and cartels. These combinations are designed to raise wages and prices by eliminating competition; in other words, they are generated by rent-seeking rather than efficiency-seeking behavior (Baumol 1994).
To discourage the entry of new competitors, a combination can obtain privileges from the state—such as immunity for strikers in the case of unions, and official recognition as lobbyists in case of trade associations. In addition, unions and employers can join forces to lobby for protective tariffs. This is what happened in Britain at the end of the nineteenth century, according to Olson. Lengthy apprenticeship schemes and restrictive practices reduced occupational mobility. The labor market became segmented into distinctive crafts, with particular types of job reserved for members of particular unions. A social hierarchy of crafts developed, analogous to an Indian caste system. So far as firms were concerned, the protection of domestic and colonial markets became increasingly important as the international competitiveness of British labor declined.
One of the difficulties with the Olson thesis is that the types of combination that impeded growth in Britain have been credited with accelerating growth in continental economies. It is said that in Germany, for example, cartels facilitated the rationalization of industry, leading to efficiency gains from the exploitation of economies of scale, while labor unions supported the diffusion of technical knowledge through industrial training schemes.
Indeed, Olson's own theory indicates that horizontal combinations can generate productivity gains as well as losses. Local trade associations not only fix prices: they can organize the provision of public goods, such as harbor improvements, which improve productivity in industrial districts. Indeed, shareholders in joint-stock firms combine horizontally to finance indivisible investments; without such combinations, large firms could not evolve to compete in international markets. Horizontal combination is therefore not intrinsically collusive in nature.
To interpret the traditional view of nineteenth-century Britain in terms of the Olson thesis it is necessary to suppose that efficiency-seeking combinations, geared to the diffusion of knowledge and the provision of public goods, dominated in the first half of the century, and that rent-seeking trades unions and cartels dominated in the second half. Part of the explanation may lie in the shakeout of the less productive firms that seems to have occurred in a number of manufacturing industries as they matured through the Victorian period. In an infant industry composed mainly of dynamic small firms, such as the early textile industry described in the previous chapter, there can be a problem in providing industry-specific public goods; since individual firms are too small to have much political influence, they must organize the provision of these goods among themselves, perhaps by forming a trade association for this purpose. As the industry matures, however, and price competition intensifies, reducing costs through economies of scale can promote industrial concentration, with small firms joining forces through merger or takeover, or simply closing down and quitting the industry. The few remaining large firms now have more political clout, and can easily dominate the trade association and use it as a front for lobbying government for subsidies or for protection from foreign competition. On this view the maturing of the manufacturing industries that were established at the time of the Industrial Revolution could account for much of the sclerosis that seemed to afflict British manufacturing industry in the late Victorian period. Government failed to respond to the policy challenges of regulating mature manufacturing industries in which firms had switched from efficiency-seeking to rent-seeking activities.
Cultural Explanations of Entrepreneurial Decline
Decline is popularly attributed to premature gentrification. In the second half of the nineteenth century, it is claimed, the social gulf between artisans and aristocrats widened. Self-employed artisans and the owners of small family firms could no longer aspire to the fame and fortune that had motivated earlier generations. Wealthy industrialists no longer challenged the aristocracy for political power, but bought into it by investing in country estates.
Wiener (1981) claims that from about 1850 Victorians became increasingly concerned about the adverse moral and social consequences of rapid industrialization. Talented young men preferred to make a career in church or state rather than trade—religious zeal and social reform provided them with greater emotional satisfactions than what was perceived as the venal pursuit of personal profit. The most prestigious schools and universities in England taught classical studies rather than science and technology, because a knowledge of the Greek and Roman empires was considered to be more relevant for careers in the army, church, or colonial service. As private enterprise was drained of talent, entrepreneurship declined, the rate of profit diminished, and investment was reduced.
McCloskey and others have challenged the notion of entrepreneurial decline in Britain by arguing that British entrepreneurs' decisions not to invest in new technologies—for example, ring spindles in the cotton textile industry—were a fully rational response to local conditions (McCloskey 1971; Leunig 2001). McCloskey's criticisms were directed at Aldcroft (1964) and others who blamed economic decline on the poor quality of British management. Like Wiener, these writers linked poor management to cultural failings.
McCloskey argues for the irrelevance of a cultural approach, claiming that en trepreneurs continued to make rational decisions; if the cumulative effect of individual entrepreneurial decisions was, say, the decline of the textile industry, then it was because entrepreneurs were pursuing an enlightened long-term “exit strategy” in response to the decline of British comparative advantage, as reflected in shifts in the international terms of trade.
Economic rationality does not have to be construed in the narrow way adopted by McCloskey, however. Rational individuals may pursue nonpecuniary advantage at the expense of pecuniary advantage, and so quit industries and trades that do not fulfill their social aspirations. Entrepreneurs from other countries, who have different preferences, and place greater weight on pecuniary rewards, may take their place in world markets. Rational action may also be contingent on the mental model used by an entrepreneur, with entrepreneurs in different cultures perceiving similar constraints in different ways. One mental model may identify only a narrow range of options, such as a narrow range of scientific techniques, while another mental model may reveal a wider range. The entrepreneurs who choose from a wider range of options are likely to make better decisions. Godley (2001) has argued that east European Jewish immigrants migrating to London embraced a local culture that was preoccupied with achieving social status through a professional career, whereas their counterparts who settled in New York embraced the local culture of the independent small businessman instead; in this way local culture can perpetuate itself through the process of assimilation even at times when quite high rates of migration occur.
This emphasis on rational action within culturally contingent mental models is a useful framework in which to evaluate the Cain and Hopkins thesis. Cain and Hopkins (2002) argue that “gentlemanly capitalism” is a continuing, though evolving, theme in British trade and investment from the seventeenth to the twentieth century. They emphasize that the moral and social aspirations that govern gentlemanly behavior impinge not only on the desirability of a career in trade, but in the way that trade itself is conducted. The gentleman trader likes to trade with people who come from the same social class—who were educated at the same school, served in the same regiment, and whose families are related, if only distantly. A gentleman can enlarge his social circle by being introduced to other gentlemen by a reputable third party. This third party acts as a bridge between the two social circles to which the respective gentlemen belong. High-status women are well qualified to act as “bridgers,” as they have both the opportunity to cultivate social networks and the capacity to offer hospitality on a large scale.
There is a minimum amount of wealth (or credit) that is required to sustain a gentlemanly lifestyle, and marriage to a wealthy heiress—such as the daughter of successful gentleman trader—can augment capital within the business community. Bridgers can therefore play a useful role as marriage brokers.
Gentlemanly capitalism is related to, though not identical with, what Chandler (1990) calls “personal capitalism.” But while Chandler emphasizes the negative aspects of personal capitalism, Cain and Hopkins emphasize the positive features of gentlemanly capitalism. Investment in social networks, they suggest, reduces transaction costs. Gentlemanly capitalism was particularly well adapted to the conduct of maritime trade, because merchants required a network of trusted agents in all the major ports with which they were connected. While some cultures were forced to rely on kinship ties to sustain trust, gentlemanly capitalists could rely on regimental loyalty and “the old school tie” instead (Jones 1998, 2000). Overseas agents could be recruited not just from the extended family but from the wider expatriate community. The honesty of local agents was reinforced by peer-group monitoring within the expatriate community, based around “the club.”
Gentlemanly capitalism had its political uses too. The values of the gentleman were useful in ensuring integrity in colonial administration. A gentleman had obligations to his social inferiors, which meant that gentlemanly administrators were more likely to pay attention to local needs than officials who saw themselves simply as bureaucrats employed by a colonial power. These values of self-restraint in the exercise of power assisted the growth of empire, allowing it to be extended (to some degree) through agreements with native leaders rather than by military conquest. The importance of empire as a link between the economic, political and cultural aspects of Victorian Britain is a theme to which we return at the end of this chapter.
The Concept of the Entrepreneur
Although the term entrepreneur is widely used in histories of Victorian Britain, there is no consistency in the way that it is employed. Most writers treat the entrepreneur as a Weberian ideal type. This ideal type is, in turn, often drawn from literature rather than life. Charles Dickens's description of horse traders at Howden fair, in East Yorkshire, is a case in point. With breath smelling of beer and stale tobacco, they talk among themselves in a private language, clinching deals with a shake of the hand. Every horse has it price; Dickenj This focus on judgment is well adapted to the studysokes that if the Queen arrived at the horse-fair in a “coach and four,” the dealers would not be shy to offer her a price for her horses.
Dickens, as a social critic, did not portray Victorian entrepreneurs in flattering terms. Perhaps the most influential contemporary was Karl Marx, who equated the entrepreneur to a capitalist. To Marx, the fundamental feature of early Victorian capitalism was the alienation of the worker from the means of production. The artisan no longer owned his own tools, and his work had been deskilled. Under the factory system, his tools had been replaced by large-scale machinery, operated by teams of workers subject to military-style discipline. The expense of the machinery meant that the ownership of the means of production, and hence the control of the worker, had fallen into the hands of a specialized capitalist class.
While Marx identified the capitalist entrepreneur with large-scale production, he also recognized the role of the petit bourgeoisie—such as the traders described by Dickens. Modern labor economists also emphasize the petit bourgeoisie in their discussion of entrepreneurship. They typically define entrepreneurship in terms of self-employment (Casson et al. 2006). This definition is too narrow to be of much use in analyzing the Victorian economy, however. In the early nineteenth century a high proportion of the population was either wholly or partially self-employed. Even women and children, gleaning in the fields after harvest, were often self-employed. The factory revolution actually reduced self-employment, rather than increased it, by turning self-employed outworkers into wage workers, and the subsequent growth of major transport and utility industries sustained this trend. Self-employed entrepreneurship remained vibrant in the retail trades, as “the nation of shopkeepers” prospered, but only a small proportion of shopkeepers demonstrated significant entrepreneurial ability by introducing new retail concepts—such as the high-street chain and the department store. To identify Victorian entrepreneurship with self-employment is therefore misleading, as entrepreneurship reduced self-employment rather than increased it, and those who were self-employed were not particularly notable for their entrepreneurship.
This highlights the fact that there is much more to being an entrepreneur than being self-employed. One of the main reasons why entrepreneurship is valued, and usually commands respect in successful economies, is that entrepreneurship is a scarce ability. The value of this scarce ability is reflected in the above-average profits earned by firms controlled by successful entrepreneurs. Entrepreneurs can appropriate their personal rewards either through ownership of a firm, or as managers whose success is recognized by promotion, bonuses, stock options, or other forms of performance-related pay. Many small firms are, in fact, unsuccessful according to the profit criterion, as the average rate of profit for small firms is often lower than for larger ones; this is because some founders of small businesses may deliberately set out to discover by trial and error whether they have good judgment or not, while others may be content to accept a low rate of profit because they value the independence that self-employment confers. This underlines the fact that many small firms that are “entrepreneurial” in the sense of being run by self-employed owner-managers may not be entrepreneurial in the sense described here, because their owner-managers lack ability; they have poor judgment that leads to a below-average rate of profit.
What kind of decisions do entrepreneurs take using this scarce ability? According to Schumpeter (1939), entrepreneurs commit to making an innovation. Without the entrepreneur, the rate of innovation would be lower, productivity growth would be smaller, and the economy would fail to develop as it should (Baumol 2002). But why is the ability to innovate so scarce? According to Schumpeter, innovation requires vision and commitment—vision to imagine an alternative world in which the innovation has taken place, and commitment to mobilize resources to realize the vision rather than to just to sit back and fantasize about it. Only a few people with heroic temperament have these qualities, according to Schumpeter.
Kirzner (1973, 1979) takes a different approach: he argues that entrepreneurs discover opportunities that could easily be missed. In a volatile economy, markets are always in disequilibrium, and people who are alert can always find opportunities to buy cheap and sell dear. Entrepreneurs are people who recognize an opportunity, and commit to arbitrage in order to exploit it. Unlike Schumpeter, Kirzner believes that almost everyone has the potential to be an entrepreneur. While Schumpeter emphasizes intermittent major innovations made by heroic individuals, Kirzner highlights continuous minor profit-making deals made by ordinary people. In this respect, the two approaches complement each other quite nicely. Schumpeter's approach explains radical innovations in factories and railroads, while Kirzner's approach explains the vitality of small manufacturing businesses and the retail sector.
Not all opportunities are what they seem, however. Some may be traps for the unwary. Knight (1921) emphasizes the risks that are taken by the entrepreneur. No one can be certain that an opportunity will turn out well. Risks are subjective, so that different people perceive different degrees of risk in the same opportunity (Casson 1982). This subjectivity highlights the difference between being an entrepreneur and being a successful entrepreneur. An entrepreneur innovates and takes risks, but a successful entrepreneur discriminates between good risks and bad risks. He does not need to discriminate perfectly. He simply needs to do it better than his competitors in the same industry.
The decisions of entrepreneurs, when taken collectively, affect the aggregate performance of the economy. It is sometimes supposed that from a social perspective, more entrepreneurship is always desirable, but this depends upon how entrepreneurship is defined. If entrepreneurship is defined as innovation, then it is certainly possible to “have too much of a good thing.” Excessive innovation can artificially reduce the supply of traditional products, and subject working lives to unnecessary change. It is obviously possible to have too much risk. While some risk is unavoidable in any innovation, a successful entrepreneur does not incur avoidable risks however bold and charismatic he may appear as a result.
The one thing that it is impossible to have too much of is good judgment (Casson 2000). Judgment is a capacity to take successful decisions under unprecedented conditions where there is no agreed procedure, or a lack of objective evidence. Good judgment trades off the risks of missing good opportunities through failure to innovate against the risk of making mistakes by making the wrong sort of innovation. A successful entrepreneur with good judgment takes only the opportunities that are really profitable. Provided that social incentives are properly aligned by a competitive market system, private profit will be associated with enhanced social welfare and higher performance. The market for corporate control allocates the best entrepreneurs to the most responsible jobs, by recruiting the most reputable entrepreneurs to run the biggest firms in each industry. Badly performing entrepreneurs who have lost reputation are replaced; if the board of directors does not dismiss them, then the firm will be taken over as shareholders sell out to the highest bidder.
This focus on judgment is well adapted to the study of entrepreneurship in Victorian Britain. The framework of company law within which entrepreneurs operated changed significantly over the Victorian period, so that any definition of entrepreneurship in terms of the ownership or management of firms suffers from the problem that the legal nature of the firm was undergoing significant change at this time. On the other hand, the function of exercising judgment in high-risk innovative sectors remained a constant requirement.
In early Victorian Britain firms could obtain joint-stock status and limited liability only by an act of Parliament, following the precedents set by the early chartered trading companies. All canal and railway promoters, for example, had to apply to Parliament if they required these privileges (see below). These companies were typically incorporated with a large authorized capital, because additional capital could only be raised by a further act. Thus most large firms were “born large”—they did not grow from small beginnings, as happened later. Most small firms were started as partnerships or family businesses, and although they could grow by increasing the number of partners, or extending the family through marriage, and so on, there were limits to how far and how fast they could grow. By the end of the century, however, companies could incorporate as joint-stock limited liability companies through a simple act of registration. This allowed small firms to grow into large industrial enterprises without a major reconstruction of their capital.
Nevertheless, as Chandler has pointed out, many family firms remained suspicious of diluting ownership by flotation on a stock exchange. They were also reluctant to delegate entrepreneurial decisions to professional employees, especially, it would seem, when the professional specialists were better qualified than the family members themselves. The predominance of close-held family firms impeded the operation of the market in corporate control alluded to above. The owners of many family firms adopted a dynastic view—treating the firm as they treated their land; as an asset to be maintained under family ownership and control as held in trust for future generations. The eldest son had a customary right to run the business, and an obligation to exercise this right, irrespective of his inclination or his competence. This created an endemic “succession” problem (Rose 1993), made famous as the “Buddenbrooks syndrome” of “rags to rags in three generations.” However, focusing heavily on the limitations of small family firms, as Chandler is inclined to do, distorts the picture of Victorian entrepreneurship, because the most important field for entrepreneurial judgment at that time was not in small manufacturing firms but in the growing number of large joint-stock companies.
A Project-Based View of the Economy
To appreciate fully the significance of innovation and risk-management, and the impact of good judgment on economic performance, it is useful to adopt a project-centered view of the economy. According to this view, the economy is not a collection of activities—as portrayed in a standard economics textbook—but a collection of projects instead. Projects are much more heterogeneous than activities—as Knight emphasized, no two projects are ever alike; for example, the outputs cater to different market niches, while the availability of inputs reflects the location of facilities, and so on. Projects have substantial setup costs, which activities do not. Projects have finite lives, with a distinct life-cycle of start-up, consolidation, maturity, and decline. Projects are risky, because the setup costs cannot be recovered if a project fails. Risks cannot be diversified away. Projects have a minimum efficient scale, so that risks cannot be spread over a large number of tiny projects. While individuals may be able to diversify risks using share portfolios, society is still exposed to systemic risk if a major project fails.
The view of the economy as a collection of projects is extremely appropriate where the Victorian British economy is concerned. Throughout the nineteenth century the projects undertaken by British entrepreneurs became increasingly ambitious—especially in scale. Even the early railway schemes had impressive titles, such as “Great Western Railway” and “Grand Junction Railway,” and architectural allusions to the Roman Empire and the Egyptian pharaohs were exceedingly common. While the pace of technological progress in Britain may have diminished as the century progressed, the diversity of the projects, and the locations in which they were based, increased dramatically as the empire expanded. Entrepreneurship became increasingly focused on managing and financing a range of projects in infrastructure, urban development, shipping, and financial services. These projects involved the use, not only of British resources, but the resources of colonies, dominions, protectorates, mandates, and independent countries under British influence, all around the world.
These imperial projects were based on domestic blueprints. Transport, communications, utilities, and public services developed in Britain were transferred abroad, being adapted incrementally to foreign conditions. Although these overseas projects sometimes foundered because local conditions were unexpectedly different from those in Britain, the performance of overseas projects often surpassed that achieved in Britain because lessons had been learned from mistakes made in the domestic environment. The Indian railway system, for example, was developed along lines designed to avoid the problems created in Britain by the railway mania, and the defective system of government regulation at that time.
Table 8.1 reports the number of acts of Parliament authorizing large projects over the period 1800–1910. It shows that number of relevant acts—so-called “Local and Personal Acts”—classified by type of project. The data presented consist of ten-year averages; the evidence is summarized using a bar chart in figure 8.5. The table provides an approximate measure of the level and direction of project-centered entrepreneurial activity. No entrepreneur could compulsorily acquire land, or otherwise interfere with property rights, without such an act. Not all applications for acts were successful, as opposition from landowners, and the promoters of rival schemes, was often acute. The numbers should be doubled, at very least, to allow for the number of unsuccessful applications. Nor were all the authorized projects successfully completed—many failed, or were scaled down, because of lack of capital.
The table indicates the flow of new projects rather than the stock of existing projects. However, since it also includes authorized amendments to schemes in progress, and changes to the capital stock of existing schemes, the flow at any one time reflects to some extent the accumulated stock. This in turn reflects the fact that entrepreneurship becomes a continuing activity when projects run into difficulties, because judgment must continue to be applied in order to rescue the project from failure.
Prior to 1830, large projects focused on the enclosure of commons and the extension of agricultural estates, together with road improvements effected by turnpike trusts and the building of canals. These reforms improved the productivity of the land, and the local transport infrastructure, providing increased traffic that could be fed into, or distributed by, the railway system. Town improvements—such as new slaughterhouses and cattle markets—also helped.
TABLE 8.1
Number of Local and Personal Acts of Parliament, 1800–1910, by Type of Project, Ten-Year Averages
Figure 8.5. Promotion of Large Projects Requiring Statutory Authorization in the United Kingdom, 1800–1914.
Railway projects “take off” in the 1830s, with a peak in the 1860s. The first railway mania occurred in the period 1844–46. The railways promoted during this period were authorized with a one-year lag in the period 1845–47. There were 119 railway Acts in 1845, 263 in 1846, and 187 in 1847. Many small investors lost their life savings in the speculation that surrounded the Mania. It was a long time before the public regained its confidence in railway investment, but when it did, a second—less virulent—Mania developed. It began in 1861, when 160 railway schemes were authorized. The number rose to 251 in 1865, falling slightly to 199 in 1866. The Mania ended with the collapse of Overend Gurney bankers in 1866—an apparently respectable firm that had been heavily involved in railway finance.
During the Second Mania, many of the schemes that had failed in the First Mania were relaunched under new names and new management. Some of the schemes were supported by towns that had missed out on the railway altogether, while other towns encouraged new schemes in the interests of greater competition, which they believed would lead to lower fares and freight rates.
New canal projects were still in progress at the time that the first interurban railway—the Liverpool & Manchester—was completed in 1830. This explains the intensity of opposition from canal interests in the early years of railway development. By 1840, however, most schemes were either for merger and rationalization, or for the conversion of canals into railways. Canal building revived at the end of the century with the construction of the Manchester Ship Canal.
From the seventeenth century onward, river navigations have made a significant contribution to freight transport in Britain, by allowing river traffic to penetrate further inland, thereby connecting the industrial heartlands to the coast. In East Anglia river navigations also assisted the drainage of the fens. The importance of maritime trade to an island such as Britain is underlined by the significant number of port and harbor improvement schemes that were promoted throughout the nineteenth century. The statistics for harbors also include piers built to develop tourism at seaside resorts.
The different transport schemes were complementary to each other. Roads fed traffic to the railways, and the railways fed traffic to the ports. The rapid extension of maritime trade in the age of “high imperialism” after 1870 allowed parts of the railway system to act as a land-bridge for traffic between the North Sea ports on the east coast, the Channel ports on the south coast, and the Atlantic ports on the west coast. Even the canals, which competed most directly with the railways, could take slow-moving heavy traffic off the railway and free up the capacity for higher-value loads.
The social problems of rapid urbanization had become acute by midcentury, not just in the industrial Midlands and north, but in London too. Victorian moral revulsion, particularly at child poverty and the incidence of disease, was translated into practical action in the form of water schemes for the piping of fresh water into city centers. These were often allied to river and drainage schemes to carry sewage out to the coast. Control of crime was aided by street lighting. A ready supply of coal, facilitated by the railways, encouraged lighting by gas, both in the streets and in the home. Electrical power was slow to develop, although the switch from horse power to electric power made the tram an important competitor to the railways so far as suburban transport was concerned.
The concept of “town improvement” had been a well-established concept in Britain since Norman times (Chalklin 1998). In the eighteenth century spa towns like Bath and Cheltenham, and fashionable resorts like Weymouth, were improved by large-scale property development in the Georgian style. In the early part of the nineteenth century, the provision for the poor, the sick, and the elderly, through the construction of workhouses and infirmaries, became a priority. Early railway stations were often on the margins of towns, on low-value marshland, for example, close to cattle markets, gasworks, asylums, and jails. As stations penetrated further into the heart of cities, they became agents of slum clearance (Kellett 1969). Some of the workers expelled from the slums were relocated to new working-class suburbs from which they commuted in special workmen's trains. Municipal socialism, which began to flourish in the 1870s, gave an added impetus to town improvement. New urban facilities that had previously been promoted by individual Parliamentary acts were increasingly promoted with the framework of local government acts, as statutory orders approved by Parliament. Towns and cities extended their administrative boundaries, and often took the initiative for promoting projects away from private enterprise. Many of these towns and cities were controlled by business elites, who used their influence to extend the boundaries of their town and applied the local rates to investments in public facilities that would improve the competitiveness of their town relative to its rivals.
Part B of table 8.1 contains a diverse and changing mixture of schemes. In the first half of the nineteenth century financial institutions—particularly mutual assurance societies—predominate, while in the second half investment trusts and large industrial enterprises—including several steam shipping lines—come to the fore. Industrial patents and educational institutions are the subject of some acts. The growing amount of local government legislation described above is also included in this category when it cannot be attributed to any single sector mentioned elsewhere in the table.
The local and personal acts are mainly concerned with projects based wholly in Britain. Projects concerned with colonial development were authorized by the colonial governments, or the Colonial Office, and are not included except in special cases. The substantial growth of overseas projects owned and managed from Britain can be readily documented from other sources. Wilkins (1989), for example, offers a comprehensive account of British enterprise in the nineteenth-century United States. The global spread of UK-based entrepreneurship can be assessed from other sources. Thus Bradshaw's Railway Manual indicates that by 1912 no fewer than 109 large overseas railway systems in twenty-nine countries were owned and managed from Britain; 32 were in the empire, and 65 in Latin America (Bassett 1913, parts 2–4; a somewhat higher figure is given by Corley 1994). Many of these companies made huge investments, although, because they often acquired control through state concession, they did not always enjoy ownership in perpetuity, as with conventional manufacturing investments.
The Role of Entrepreneurs in the Promotion of Large Projects: The Case of the Railway System
The railway industry makes an excellent case study in the finance and management of large projects by British entrepreneurs. Railways were developed through visionary foresight. The vision was implemented by entrepreneurs who showed considerable perseverance under difficult conditions.
It is possible to distinguish five main visions of the railway system in early Victorian Britain.
. The notion of an integrated national network organized around a central north-south spine was set out by the artisan philosopher Thomas Gray (1825) in the 1820s. The proposed technology was not very futuristic, however, being based on the existing mineral railways of the time.
. George Stephenson—the “father of the railways”—discovered the key combination of components that made possible the modern railway: straight routes on easy gradients, steam locomotive power, and double tracks of iron rails. As a colliery engineer, however, Stephenson always attached considerable weight to the carriage of freight rather than passengers, and the carriage of coal in particular. It was said that Stephenson always looked out for signs of coal deposits when surveying a new line of railway. His vision for the British railway system was once unkindly described as a glorified coal distribution system.
. Brunel, the author of this remark, provided the grandest vision of the railway system: a high-speed luxury transport system for the social elite (Rolt 1957). The elite would travel over land by rail, and overseas by steam-powered iron-built liner ships, which would connect with the trains at the ports.
. Robert Stephenson, George Stephenson's son, believed that every part of the country should have access to a railway. He was interested in the railway as an agent of rural development, and not just as a means of serving industry and commerce (Bailey 2003; Addyman and Haworth 2005). Stephenson's approach was very influential in other countries, but in Britain many of his regional projects achieved only limited success.
. Finally, there was a political vision of a United Kingdom bound together by rails. Railways were seen as important in allowing Scottish and Irish members of Parliament to take up their places in Westminster, and to carry the policies enacted there back to their provincial constituencies. Government therefore intervened to ensure that London was well connected by rail to Dublin via ferry and Edinburgh.
Before 1830 the typical railway project involved a short line of wooden rails from a coal mine or quarry to a neighboring port, river quay, or canal dock, where the cargo would be transferred to water (Lewis 1970). In 1830 the world's first interurban high-speed railway opened, carrying both passengers and freight on scheduled services. The success of this line, both in generating new traffic, and diverting existing traffic from road and canal, led directly to the railway mania of 1845. The financial collapse that destroyed many of the schemes promoted at the time of the mania provided a continuing agenda that lasted until 1914: namely to revive the failed mania schemes and so complete the national network that had been envisaged in 1845.
Between 1830 and 1860 the promotion of a railway was usually undertaken by a small group of local citizens, anxious to connect their town to a local port or industrial city, or to connect their port or city to London (Casson 2009). They would obtain advice on the route from a reputable engineer, and consult a local solicitor about the purchase of land. They would organize a public meeting, chaired by a local dignitary, at which a motion supporting the railway scheme would be proposed. Opponents, such as local landowners, canal proprietors, turnpike trustees, or the promoters of rival canal schemes, would often turn up and attempt to disrupt the meeting. In this case the outcome could well hinge on a timely intervention from the engineer—a role in which showmen such as Brunel excelled.
A provisional committee would be formed with a mandate to secure an act of Parliament, until which time the committee would act as a “shadow” board of directors. The 10 percent deposit paid by shareholders provided them with salable scrip—a tradable option. Because options were so much cheaper than shares, even household servants and laborers could afford to invest their meager savings in speculative railway stock. Once the first trunk lines to London had opened by 1840, it was clear that towns that were bypassed by a railway were destined to decline. Railway promotion now became a civic duty, and towns vied with each other to get themselves “on the railway map.”
Although the social elites in many towns were split along religious and party lines—for example, Church of England and Nonconformist, Whigs and Tories—civic pride and collective self-interest were sufficiently strong to unite them. Most of the competition was between towns rather than within towns; where competition arose within towns it was usually because of speculators moving in from outside, as in the case of the London-to-Brighton line. After 1850, however, interfirm competition became more common, with large regional companies, such as the London & North Western Railway and the Great Western Railway, seeking to invade each other's territory.
Parliament took the view that public benefit was the only reason for interfering with landowners' private property. A railway project afforded a potential “improvement,” and there was a long-standing tradition, derived from earlier forms of improvement, such as land enclosures and canal projects, that the benefits of an improvement should be distributed fairly between the different groups involved. No one should lose out; thus if a loss were sustained, the person concerned should be compensated. The benefits should be shared by the shareholders who financed the railway and bore the commercial risks, and the local communities whose members used the railway.
In presenting a bill to Parliament, the promoters had to prove that the prospective benefits were substantial. Promoters made traffic surveys along roads and canals to establish the existence of demand, and proposed schedules of maximum fares and freight rates to ensure that much of the benefit of the railway would accrue to the public. At the same time they had to show that their construction costs were reasonable, and their estimates robust. If their scheme was financially unsound, then the countryside might be dug up for nothing.
With so many lawyers sitting in Parliament as MPs or Lords it is not surprising that cross-examination by hired advocates was the preferred way of presenting evidence to a Parliamentary committee (Kostal 1994). To ensure compliance with standing orders, Parliamentary agents were hired. Many technical “knockouts” were achieved, and often the knockouts were mutual, so that both schemes failed. When a scheme failed, the engineers, solicitors, and Parliamentary agents would submit their claims for fees, using up all the deposits and leaving nothing for the shareholders. If the scheme succeeded, then the newly established board would issue calls on the shares so that construction could begin. Contracts for separate sections of line would be put out to tender. Although the process was nominally competitive, some contractors might have friends on the board. In common with many construction projects, initial estimates were often too low, and so the project would either have to be scaled down, and part of the route abandoned, or additional capital would have to be raised. This could require further application to Parliament, as an act limited both the amount of capital and the time in which it could be raised.
Once a line was opened, competition for traffic would begin (Reed 1957). In many cases, the strongest rivalry came from an alternative railway route. As the network developed, so the number of alternative routes between any two places increased (Turnock 1998). Mergers provided an obvious solution, but from the mid- 1850s Parliament became increasingly concerned about their monopolistic tendencies, and only approved them in exceptional cases. In the 1840s and early 1850s, however, major speculative gains could be made from the promotion of mergers. The “Railway King,” George Hudson, a draper from York, made his name by engineering the merger that created the Midland Railway (Arnold and McCartney 2004). He eliminated competition between Derby and London, and between Leeds and Hull. The tradition of “railway politics” was continued by the “Second Railway King,” Sir Edward Watkin, who coordinated the management of different companies through an interlocking chairmanship (Hodgkins 2001). His grand design was for a through line from Manchester to Paris via a Channel Tunnel. He was successful in gaining financial support from shareholders and political support from government, but engineering problems and the costs they created defeated him in the end.
Popular mythology recognizes the railway engineers—men such as George and Robert Stephenson (father and son), Joseph Locke and Isambard Kingdom Brunel—as the true entrepreneurs of the railway system. Samuel Smiles's (1862) hagiography portrays Victorian engineers not only as technocrats, but as the strategic thinkers behind the new industries that they helped to create. Detailed evidence on company promotion, such as Brunel's letterbooks (1836), suggests that this assessment is correct. It was not so much the owners of the railways as their consultant engineers who masterminded strategy in the early years. The reason is quite straightforward: the principles of railway strategy were specific to railways—a new type of network industry with a very costly infrastructure—but common across all locations. While shareholders were often endowed with good local knowledge, they had limited experience of the railway system as a whole. Consulting engineers, however, would have experience of several schemes, from which they could identify specific patterns.
Consulting engineers also socialized with each other. They met as peers at meetings of the Institutional of Civil Engineers and other professional associations, and as adversaries before Parliamentary committees on railway bills. Although Brunel and Robert Stephenson could not even agree on the best gauge for a railway—Brunel favoring the broad gauge and Stephenson the modern standard gauge—they remained the best of friends. They fought an intense battle in Parliament over lines in the West Midlands, which Brunel won; yet they dined together, and even died at about the same time! Both men advised their respective companies on strategy—the Great Western and London & North Western—planning routes that would block rival lines, devising trunk line routes to maximize the potential for profitable branch line traffic, and helping to monopolize key ports.
By midcentury it was the company secretary who was becoming the major strategic thinker in the railway sector, together with the company chairman. In the second half of the nineteenth century the most successful railway entrepreneurs seem to have been those who combined practical experience of the industry with a wide range of general interests—such as Samuel Laing, the chairman of the London Brighton and South Coast Railway, who was a former official with the railway department of the Board of Trade and who became a popular writer on philosophical issues.
Mining as a Project-Based Industry
Not all projects require Parliamentary authorization, of course. There are many projects that can be undertaken as soon as customers have revealed a demand, and a business opportunity has been recognized. This is particularly true of the mining industry.
The British Isles are rich in minerals. The Romans mined gold and lead in Wales when they occupied the country. Coal was mined as a substitute for charcoal in medieval times—albeit on a small scale (Hatcher 1993). The ironmasters of the early Industrial Revolution generated a huge demand for coal and coke, and this stimulated mining on an industrial scale. Many of the earliest mines were driven horizontally into hillsides, making it easy to bring out the minerals. Indeed, some of the key components of railway technology originated in the mining industry, where wooden tramways were used to transport minerals out of the mine and down to a river or coastal port.
Even before the Industrial Revolution, coal shipped from Newcastle, in the North East, had been widely used for brewing ale and heating the home—especially by wealthy Londoners (Nef 1932). The discovery of iron ore nearby gave a huge boost to this industry. The Staffordshire coalfield developed as the Midlands town of Birmingham expanded its specialty metals trades.
Once mineral deposits near the surface had been exhausted, it was necessary to go further down. Shafts were sunk, and winding gear installed. Pumps were necessary once the mine went down beneath the water table. The stationary steam engine was ideal for providing power to a mine—especially in a coal mine, because the mineral extracted could be used directly as the fuel. Mounting a stationary steam engine on a colliery wagon was one of the earliest inspirations for the railway locomotive.
The aristocratic owners of large estates asserted rights to the minerals underneath their land. During the eighteenth and early nineteenth centuries the aristocracy began to exploit their mineral reserves in a highly organized way (Ashton and Sykes 1929). Increasingly, the sinking of a coal mine became a major project. A large tract of land would be required, with not only mineral rights but also surface rights to facilitate access to the mine, to accommodate spoil heaps, and to provide washing and processing facilities for the coal. A large amount of expensive machinery would have to be installed. In remote locations, workers' housing and village facilities would have to be provided too.
There was no guarantee that the mine would be a success. In the early nineteenth century the science of geology was in its infancy, and so the volume of the deposits, as determined by the dimensions of the seams, could not be known in advance. Unexpected geological faults could always emerge, causing the mine to flood or the tunnel passages to cave in.
The mineral industry therefore required project-centered entrepreneurship of a high order. The scale of the investment required meant that coal mining was not an industry for the “self-made man” operating on a small scale (Mitchell 1984). Only a wealthy aristocrat could afford to “go it alone”—and even such persons would find their personal resources stretched. For this reason wealthy people often formed partnerships—sometimes with family members, creating a dynastic ownership structure. In other cases they made alliances with other families.
Since no single person could possess all the technical expertise required to operate a large mine, it was the usual practice for the owners to hire professional managers—the colliery viewers. Viewers were often self-taught, had plenty of practical experience, and needed entrepreneurial qualities. A successful viewer was someone who could improvise effective solutions to unexpected problems. Because they were so versatile, colliery viewers often moved around the country, helping to start up mines in new areas. They also transferred their skills to other industries too—thus several viewers from the North East transferred their skills to the railway industry. The most prominent example was George Stephenson. He took with him not only his familiarity with steam technology but also his ability to recognize the mineral potential of any district in which he worked. One of the skills that commended Stephenson to railway promoters was his ability to assess the mineral potential of the district through which a railway was intended to pass.
As steamships replaced sailing ships on the main ocean shipping routes, a demand was created for a network of bunkering stations around the world. Ships, like railway locomotives, needed top-quality steam coal, which was only available from a limited number of sources. South Wales was the main source of steam coal. Initially coal was mined in Wales to support the iron industry (centered on Merthyr Tydfil), but as iron ore deposits became exhausted, the coal was increasingly exported to bunkering stations instead. It was this development that led to the enormous expansion of Cardiff (and later Barry) as a port (Church 1986).
In the latter part of the nineteenth century important coal deposits were identified in south Yorkshire, near the railway town of Doncaster (Buxton 1978). A huge amount of investment went into this coalfield, including the building of several new railway lines. At a time when British manufacturing industry was losing its global market share, Britain was becoming increasingly specialized in the coal export trade. It is, to some extent, indicative of the relative decline of British manufacturing in the late Victorian period that so little of the newly discovered coal was consumed by domestic industry, and so much of it was exported instead. Because coal of different grades is found in different parts of the world, there is no economic objection to a country exporting coal of one grade and importing coal of another. At the end of the nineteenth century, however, British coal was following British capital in leaving the country. Rather than being channeled into domestic manufacturing, it was employed to support the country's imperial linkages instead.
Entrepreneurship and the Culture of Improvement: Some Reflections on the Victorian Experience
Examining Victorian enterprise from the perspective of infrastructure investment provides a fresh perspective on some of the historical controversies discussed above. Investment in railways was just the contemporary manifestation of a more general concern with “improvement” that took hold of British society in the eighteenth century. This concern with improvement was underpinned by a changing mind-set in which natural phenomena were increasingly interpreted as the outcome of hidden processes driven by universal physical laws. The created order was fundamentally rational, it was believed, and could therefore be comprehended by rational human beings. The cultivation of rationality required education, which in turn depended on the spread of literacy and numeracy. In Victorian Britain this demand for education and literacy was fed by the growth of schooling and local newspapers. Schooling was provided initially by “dame schools,” private grammar schools and the so-called public schools, but from 1870, it was provided increasingly by churches and the state.
If the entire created order was rational, then society too must be based on rational principles, it would seem. For many intellectuals this had radical policy implications. Inherited aristocratic landholdings, and the privileges of monarchy, should be swept away as anachronistic in a modern rational society. The leaders of the French Revolution pursued this line of argument to its logical conclusion—and beyond.
The lessons of the bloody French Revolution were not lost on Victorian Britons. Populist political leaders in command of a mob were infinitely more dangerous than a traditional monarchy. Absolutist states posed a military threat to their neighbors, and absolute political power of any kind should therefore be avoided.
The British already had a parliamentary system that addressed this issue—at least partially. The system was not completely democratic; only male property-owners had the vote before 1832. The monarch was not, strictly speaking, accountable to the people, but rather to the representatives of local elites—the MPs. The essence of British government was that it was local rather than national, and this was reflected in Parliamentary behavior toward the railways, as explained above.
Improvement was not just a question of raising the material standard of living, although alleviating poverty was certainly a major concern (as demonstrated by the Poor Law Report of 1834). Improvement was a moral phenomenon (Searle 1998). Material improvement was merely an instrument for alleviating the constraints on the moral improvement of the individual, and hence the moral improvement of society.
The importance of morality is exemplified in the career of William Gladstone, who was prime minister on no fewer than four occasions in the Victorian period (Matthew 2004). While Gladstone's responsibilities involved economic regulation and national budgeting, he spent most of his time reading theology (on which he amassed an enormous library that can still be consulted today). His political speeches focused on the application of moral principles to contentious issues, and eschewed the type of propaganda about wealth-creation so familiar today.
Gladstone and his many supporters perceived no conflict between acting morally and acting rationally. Revealed religion promised rewards for moral behavior in the afterlife. No rational individual would risk eternal damnation for the sake of a short-term gain. So promoting morals and promoting reason were essentially the same thing.
The passions were the main threat to rational action. The need to resist the most dangerous passions was emphasized by the Ten Commandments, which were liberally displayed on either side of the altar in the churches that the Victorians built or restored.
Self-discipline and self-control were therefore the hallmarks of a rational person. The greater a person's wealth or power, the greater their need to exercise self-control. Positions of great responsibility therefore needed to be filled by people with great self-control. Team games were deemed to provide useful exercise in self-control. Team players put the performance of their team ahead of their own interests; it was commitment and effort that counted, and not just ability.
Wealth posed a moral danger, because of the temptation to use it selfishly. Wealth must be used responsibly, by putting poor people to work, and supporting charitable causes. Personal reputation was not acquired by wealth alone, but by the proper use of wealth. Able people could be in particular moral danger unless they found a moral challenge that was matched to their level of ability. Not everyone might have the ability to take on a major challenge, but everyone could aspire to modest respectability.
Despite the success of the Victorian economy, and the prominent role of entrepreneurship within it, Victorian society did not have an “enterprise culture” as that term is commonly understood today. The Victorians were supremely confident in their abilities to make improvements, and did not feel the need for government to promote an enterprise culture in order to foster change. In modern Western countries it was the economic failures of 1970s—associated with large and bureaucratic “national champion” firms and their inability to handle Asian competition—that led to a preoccupation with enterprise culture in the 1980s and 1990s. This switched the emphasis in Western countries from championing large firms to championing small ones instead. The Victorians experienced no such failures, and therefore saw no need to compensate for them. In the Victorian economy the direction of industrial change was the opposite to that of the modern West: the Victorians were involved in creating large firms like the major textile and engineering firms and—preeminently—the railway companies. If there is a lesson for entrepreneurship from the Victorian economy, it is not that laissez-faire promotes prosperity, but rather that a sincere concern for moral and social improvement widely shared by all groups in society will generate material improvements too. John Stuart Mill observed, in his Autobiography, that happiness cannot be achieved by aiming for happiness, and the Victorian experience suggests that the same might be said about economic success—it is not achieved by aiming for economic success, but by aiming for something more fundamental that brings success in its wake.
Conclusion
The importance of the railways—and infrastructure in general—to the Victorian economy illustrates the danger of placing undue emphasis on manufacturing industry when evaluating entrepreneurship in Victorian Britain. Railway promotion was a highly entrepreneurial activity. A general approach to entrepreneurship, based on innovation, risk-management, and judgmental decision-making, captures the full significance of the Schumpeterian railway revolution in a way that other approaches do not.
Railway companies were born large. Sales growth occurred mainly through long-term traffic growth fueled by the gradual expansion of the economy, rather than by bidding traffic away from other companies. Growth of the capital stock occurred largely through merger and acquisition. Subsequent concentration of power was achieved by interlocking chairmanships and directorships. Shareholders took most of the risks, but specialist entrepreneurs took the strategic decisions: initially the consulting engineers, and later the company secretaries and chairmen.
At the time of their construction, most railway lines were projected as civic enterprises, representing a single town, or a coalition of towns along the route. Civic enterprise was particularly notable in some of the old county towns, like Chester, Lincoln, York, and Shrewsbury, which sought to renew themselves as railway hubs. The most spectacular example of a coalition of towns creating a new trunk railway was the Great Northern Railway—one of the most successful of the mania schemes. This was a merger of rival schemes, based upon a common interest in serving country towns in Bedfordshire, Huntingdonshire, and Lincolnshire. Because of its length, it connected London directly to York and Edinburgh, by a junction near Doncaster, and because of its breadth, achieved by a loop line, it was able to serve the agricultural districts of Lincolnshire too. The merger was organized by Edmund Dennison, MP for Doncaster. He used his political influence to serve his constituents by insisting that the railway terminate near Doncaster, thereby transforming a declining gentrified horse-racing town into a prosperous railway hub.
The railways system was just one of the many innovations exported from Britain to the empire in the age of high imperialism. Professional governance, which had evolved steadily since the Norman age, was exported through systems of colonial administration. This provided a framework of law and order within which various types of large project could be exported too. While many of these projects were first developed in Britain, others—such as river navigation, drainage, and water supply systems—involved refinements of technologies developed elsewhere.
Overseas projects involved the export, not only of British technology and management, but British capital and labor too. Much of the labor was highly skilled. Many of the civil engineers who left Britain for the colonies in the second half of the nineteenth century never returned to Britain. There were so many opportunities for engineers on the colonial frontier that there was little incentive for them to return. It was mainly the senior professionals, who ran consulting practices from London, who remained in Britain. Many of these consultants became involved in high finance and political negotiation, as foreign monarchs and ministers came to Britain to negotiate for railway schemes. The engineer Sir John Fowler, for example, received his knighthood not for his engineering expertise, but for the political assistance he rendered to the British government during the war in Sudan.
One of the key aspects of entrepreneurship is that it facilitates structural change. It is mistake to infer that entrepreneurship declined in late-Victorian Britain just because Britain failed to maintain its industrial lead over Germany and the United States. British entrepreneurs may well have been slow to recognize the magnitude of scale economies in heavy industries, and to appreciate the commercial benefits of organized industrial research in well-equipped laboratories. But in a small and increasingly crowded country, this was not where national comparative advantage lay.
The late-Victorian economy is an example of what is now called the knowledge-based economy. Its comparative advantage lay increasingly in the export of knowledge-intensive services, such as public administration, trade, shipping, finance, and engineering consultancy. These services were mainly delivered in packages relating to major projects for colonial and overseas development. Each project required inputs of several of these knowledge-based services for its successful completion. The whole process depended on specialized institutions such as the London Stock Exchange, an agglomeration of scientific and professional institutions, and the “freestanding” overseas company.
The twentieth century saw enormous geopolitical changes, most of which disadvantaged British entrepreneurship. War, followed by the collapse of international trade and global demand, more war and then the loss of empire, all reduced the scope for large, complex, project-based entrepreneurship coordinated through traditional British institutions such as the London stock market. The notion of an empire based on trade in agricultural products and knowledge-intensive services was replaced by the notion of an empire based on large-scale high-technology manufacturing industry. Economic logic now favored the hierarchical multinational firm rather than the free-standing firm. It is a mistake to suppose, however, that the loss of empire, and twentieth -entury economic failure, can be blamed on the deficiencies of the Victorian British entrepreneur. Entrepreneurship was a vibrant force in Britain throughout the nineteenth century. This chapter has shown that once an appropriate concept of entrepreneurship is used as an analytical template, the persistence of entrepreneurship in Britain to the end of the century can be discerned clearly.
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