Inequality and the Industrial Revolution

In this paper, we propose a new theory for why income inequality can be conducive to early industrial development. Technological advances in agriculture and population growth increase land rents relative to wages and as the landed elites become richer, demand for manufactured goods increases, which in turn facilitates industrialization. Using data for Britain over the period 1270–1940, we show that increasing inequality was a major contributor to the expansion of the manufacturing sector. Taking into account the more well-known drivers of modern growth, we find that inequality is a major contributor to the British Industrial Revolution, alongside foreign trade, education, technological knowledge and, to some extent, institutions.