theory, by definition, since Keynes was concerned with the short run determination of
output and employment, not with long run economic growth. This has not prevented
various historians from attempting to argue that overseas demand exogenously boosted
British industrial output during the transition to modern growth. As almost 60% of British
cotton textile exports went to non-European countries during 1784-6 (Davis 1979), such a
claim is understandable. However, growth is ultimately a supply-side phenomenon, and
indeed if growth had been due to rising overseas demand, then Britain’s terms of trade
should have increased during the Industrial Revolution, whereas in fact they fell,
reflecting the cost-reducing nature of the innovations concerned (McCloskey 1981,
Mokyr 1977). Figure 4.5 makes the point in a simple manner. According to Crafts and
Harley (1992), industrial output rose by roughly 235% between 1780 and 1831, while
GDP rose by roughly 135%. If the income-elasticity of demand was unity, and foreign
incomes rose at the same rate as British ones, then the demand for British manufactures at
constant prices rose by roughly 135%. This can be illustrated by the outward shift of
demand from D to D’ (ignore D” and D”’ for now). If the industrial supply curve were
vertical, it would have shifted out by 235%, intersecting D’ at the new equilibrium,
denoted by point B. The available data on the British terms of trade suggest that at this
point, relative manufactured goods prices were (very roughly speaking) 55% lower than
in the initial equilibrium A. If the elasticity of supply were unity, on the other hand, the
supply curve would have shifted out (at constant prices) by 290% (=135+100+55), far
more than the 135% outward shift in demand.
Findlay (1990) provides a simple general equilibrium model of the late 18th
century Atlantic economy which, although it is static, can still help in thinking about how
trade really mattered during the Industrial Revolution. That revolution was initially
heavily concentrated in cotton textiles, and British imports of raw cotton came
exclusively from outside Europe, and particularly from the Americas. The American
supply was highly elastic, as a result of the then seemingly limitless endowment of New
World land, and the highly elastic supply of slave labour. The Industrial Revolution
meant a large increase in the demand for raw cotton, and hence a rise in its price at home
and abroad, implying a deterioration in Britain’s terms of trade. High American supply
elasticities minimised this terms of trade loss - in the absence of slaves and New World
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