When you look at the arc of global industrial progress and the emergence of new technology, one decade stands out: the 1880s. That decade saw the arrival of electric light and power, which revolutionized everyone’s lives. It also saw the automobile, the safety bicycle, the first process for large-scale aluminum production, the Hollerith tabulating machine, the arrival in common use of the telephone and the phonograph, the linotype, the first moving pictures, the first skyscrapers and the discovery of radio waves by Heinrich Hertz. Vaclav Smil in “Creating the Twentieth Century” (© Oxford University Press, 2005) argued that the apogee of technological advance came from 1867 to 1914; the 1880s formed the very pinnacle of that crest. So, what were they doing right in that decade, and how can we get closer to replicating it?
Governments generally were better than today’s. The state was far smaller – the U.S. Federal government was about one tenth the size, relative to GDP and Britain’s was below 10% of GDP although France, Germany and Austria had somewhat larger states and Russia’s state had a substantial involvement in the private economy and was in some respects unfree. Regulation was minimal by today’s standards however, and states did not have the capacity to enforce today’s arcane regulations on environmental questions, for example.
Socialism, in the sense of hostility to market mechanisms and a belief that government could do better, was just beginning to creep into economic policy, notably in the French Third Republic. Tariffs too were becoming a substantial barrier to international trade, although only the U.S. and the newly united Germany had high protective tariffs in the 1880s, behind which they developed powerful industries. Conversely, Britain and Japan had no tariffs – Britain through foolish self-abnegation and Japan because the 1858 “unequal treaties” were still in force, as they would be until 1911. And above all, the decade was generally peaceful, with only minor wars.
Still, governance in the 1880s was not uniquely good, and did not differ much from earlier or later 19th Century decades. The 1850s, for example, a peaceful and highly prosperous decade because of the Californian and Australian gold discoveries, had generally better governments. The United States in the 1880s was highly protectionist, which led to robber barons and corporate giganticism, anti-innovation in the long run, while in the 1850s the low-tariff outward-looking Doughface Democrats were in control and the freest of free markets reigned. In Britain, Palmerston in the 1850s had been trained by Lord Liverpool and had a fine grasp of economics, whereas the 1880s Gladstone was a fanatical free trader, turning towards socialism.
In France, Napoleon III in the 1850s was far more economically intelligent than his dozy uncle or his Third Republic successors, doing much to develop France’s economy and its unique capability in luxury goods. Germany was better managed under the Zollverein inspired by Friedrich List than it would be under the more statist Second Reich. Russia was at least no worse run under Nicholas I than it would be under Alexander III (serfdom was still in force in the 1850s, but the serfs were not in effect fully liberated until 1905). Austria was considerably better run in the neo-Metternichian 1850s than would be Austria-Hungary in the 1880s under the hamstringing Dual Monarchy constitution. Only Japan was notably better run in the 1880s, at least after 1885 when Ito Hirobumi established the office of Prime Minister and particularly after 1889 when his constitution came into force, whereas the late Shogunate of the 1850s was ineffectual and still largely feudal.
The 1880s’ innovation was not paralleled by radicalism in social attitudes; it was one of the most socially conservative decades in human history. There were no great movements for sexual freedom or artistic exuberance until the next decade. The characteristic item of dress was the bustle for women, hiding the figure almost entirely, and for men the “Gladstone collar” — later termed a wing-collar, which forced the head to remain upright and pointing forward, in an attitude suggesting moral rectitude and financial probity. The Victorian values of hard work, honesty, self-improvement and self-reliance were never more venerated – it was typical that the decade’s most notorious crime, the “Jack the Ripper” murders, killed only five people, all of them women self-exiled from respectability. The lack of social license and artistic decadence may well have helped the era’s spirit of technological innovation, though it cannot be the only explanation for it.
There was no stock market bubble during the decade. The world’s stock markets had peaked spectacularly in 1873 and crashed thereafter, taking several major banks with them. The 1880s were bookended by two fairly serious recessions, in 1874-77 and 1893-96, in both of which unemployment rose and business activity sharply declined. However, the 1880s themselves were not depressed, except in agriculture. Farmers had overborrowed in the good years to 1873 and were now caught by a prolonged decline in agricultural prices as new refrigeration and transportation technology made worldwide agricultural procurement possible for the first time. Led by commodities, prices everywhere declined by about 20% over the decade, but productivity gains were great as new discoveries were applied. Living standards for ordinary workers rose, as new jobs appeared, wages mostly held steady and prices declined.
In such an environment, there was little speculation and those who overpaid for urban real estate quickly went bust. Equities were bought for their dividends; since most countries were on the Gold Standard there was no expectation of capital gains. There were two solid investments. One was prime quality bonds of governments or highly solvent enterprises, such as railroads (and even many of those were undone by the recessions of the late 70s and early 90s). The other was equities in even small companies where a genuinely new discovery promised high profitability and spectacularly increasing dividends, once the new item was accepted by the market.
This was the financial climate in which the 1880s innovation take-off occurred. It did not happen in large companies; the Pennsylvania Railroad was the largest U.S. enterprise in 1880, with 30,000 employees, and famously well managed, but railroads had ceased to be a source of major innovation by 1880, as they had been earlier. Innovative companies were far smaller; even the well-established Siemens AG, a leader in international telegraphy that was already producing electrical equipment by 1880, had fewer than 1,000 employees, while Thomas Edison’s successful laboratory/workshop at Menlo Park had fewer than 200.
Other innovators, such as Charles Hall and Paul Héroult simultaneously inventing electrolytic aluminum smelting in Ohio and France in 1886, were self-funded, although Hall’s sister Julia provided extra cash and help. (Shout-out to the ladies: Bertha Benz made her husband’s automobile marketable when she stole it in 1888 for a 70-mile outing to see her mother, the first automobile road trip, fixing its breakdowns with a hatpin and her garter and refueling its complex fuel mixture at a local apothecary.) In Japan, Eiichi Shibusawa after 1873 acted as a private equity titan, building new companies with foreign technology in many sectors and training a cadre of highly technically skilled managers to run the companies he founded.
The 1850s were different. Gold discoveries brought loose money, so there were stock and financial bubbles throughout the decade, with a crash in 1857. The environment was highly favorable for entrepreneurship, as capital was easily obtained, but less so for the long-term work that produced major scientific advances. Also, an important difference: the entrepreneurs of the 1850s were less well educated than their 1880s successors. Whereas Edison, though largely self-taught, had been a telegraph equipment entrepreneur for a decade by 1880, and such 1880s innovators as Werner Siemens, Alexander Graham Bell, Hall and Héroult were university educated, the archetypal 1850s entrepreneur Isaac Merritt Singer had been active mainly in vaudeville before 1850 and his technical innovation, that a sewing machine worked better with a straight needle rather than a curved one, took maybe an hour of his time. The increasing spread of deep scientific understanding and institutions to teach it between 1850 and 1880 explains part of the 1880s’ greater innovative fertility.
As for why innovation did not continue to match the pace of the 1880s, one significant reason may be the change in corporate structure after 1890. The two leading growth economies in 1890-1914 were the United States and Germany (Britain and France had reoriented their economies towards financialization and empire in that period). Both had high tariffs – the U.S. from 1862 and Germany from 1879. Consequently, established companies in both countries faced little foreign competition and were able, through growth in their workforce, to monopolize their domestic markets, making their founders extraordinarily wealthy — for example Siemens grew from fewer than 1,000 employees in 1880 to 82,000 employees worldwide in 1914. With those huge workforces, companies developed Chandlerian management structures, hostile to innovation internally and killing any upstarts externally. With this increased corporate rigidity, innovation slowed, and the bloat in government and its regulatory tentacles after 1914 made the drag on innovation still worse.
So, how do we get back to the innovation of the 1880s? The answer is obvious – and probably impossible to implement. We must slash government, particularly its tendency to impose regulations. To the extent a “social safety net” is thought necessary, it should be independently funded, like the Singapore Provident Fund, so it does not contribute to government bloat. Conversely, we must use our new Artificial Intelligence capabilities to break up large corporations – with routine activities being performable by AI, there is no longer any need for an army of drones performing them, or a Chandlerian management structure to manage the drones. Financially, we must return to a Gold Standard or at least set the Fed’s inflation target at zero not 2%, so that the stock market and other asset bubbles are deflated, prices are stable or declining and investors return to being compensated by dividends and innovation.
We may never return to the joyful Gladstone-collar and bustle innovating 1880s. But we can at least move in that direction!
-0-
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)