land, relative raw cotton prices would have increased by more than they actually did,
potentially choking off growth in this crucial sector. The existence of overseas markets
also implied a higher demand for cotton textiles, and a more elastic demand as well. As
can be seen from Figure 4.5, a given supply shift due to industrial innovation would have
had a smaller output effect, and reduced cotton textiles prices by even more than was
actually the case, with inelastic demand (compare the shift from D to D’ with the shift
from D’’ to D’’’).
Not only did trade ensure that a given supply side impulse travelled further; it also
probably ensured more innovation, which was both motivated by profits and expensive
(Allen 2006). Large fixed research and development costs implied that innovators had to
make profits just to break even, and larger markets helped innovators recoup those fixed
costs. Furthermore, under certain circumstances larger markets imply more elastic
demand curves for individual monopolistically competitive firms (Desmet and Parente
2006). Thus a given price-reducing innovation will imply larger sales and revenue
increases in larger markets, meaning that as markets expand, innovation becomes more
likely. While this mechanism has yet to be quantified, presumably a closed Britain (even
a closed Britain miraculously enabled to grow cotton) would not have experienced as
much innovation as was in fact observed. Unlike China or the Mughal Empire, it was too
small to rely on its domestic markets. As it was, increases in exports were equivalent to
21% of the total increase in GDP between 1780 and 1801 Crafts (1985, p. 131), over 50%
of additional industrial output during the same period (Cuenca Esteban 1997), and over
60% of additional textiles output between 1815 and 1841 (Harley 1999, p. 187).
Furthermore, by the late 18th century manufacturing was spreading across
Western Europe, and English manufacturers were finding themselves increasingly
excluded from markets in Germany, France, Sweden and elsewhere (Davis 1962). Not
surprisingly, therefore, between 1780 and 1801 the Americas accounted for roughly 60%
of additional British exports (O’Brien and Engerman 1991, p. 186). British innovators
were largely dependent on overseas markets as their industries expanded. The
implication, in a mercantilist world in which nations systematically excluded their
enemies from protected markets, is that British military success over the French and other
European rivals was one ingredient in explaining her subsequent rise to economic
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