South Sea Company directors’ trading in shares, subscriptions and options in 1720
Gary Shea, University of St Andrews
1. Theoretical Introduction and background
The emergence of a new growth theory which makes endogenous the rate of growth of technological progress
or intangible capital (such as human capital) accumulation in determining the long-run growth rate of an
economy has gained great favour since its introduction (Romer, 1986, 1990; Lucas, 1988).
Our research seeks to establish a growth theory that can account better for persistent disparities in income
levels, as well as improve our understanding of the rapid growth seen in some countries since the middle of the
twentieth century. We intend to combine expertise from economic history, finance, theory and development, and
use modern techniques to consider the micro-foundations of growth. Initial research has proved very fruitful
(Trew, 2005; Nolan, Shea and Trew, 2005).
2. An historically-congruent theory of dynamic financial coalitions and growth
A simple insight from the historical literature has framed the way in which we develop our theory: Individuals
form coalitions of agents to provide finance for investment projects where fixed costs are a large element of total
costs. The mass of the coalition, the spatial dispersion of its members, and the degree of trust between agents
are all key to the development experience in this context, and all enter into the crucial decision over production
technologies.
The Industrial Revolution in Western Europe holds a number of key facts that aid our understanding of the
growth process. Cottrell (1980) and Harris (2000) both point to the importance of information problems, of spatial
dispersion and of the legal and institutional environment. In the initial stages of low growth and
underdevelopment, financial coalitions are small and invest in small, local, low-return projects. In the later stages
we see specialised financial intermediation in the shape of banks and equity markets that facilitate higher levels
of sustained growth in incomes.
3. A unique dataset
The finance of industry per se has been shown not to have constrained economic development. Problems in
raising finance for investment largely occur where the fixed cost as a proportion of the total investment is large.
Large-scale infrastructure projects, undoubtedly crucial for the development of an economy are thus prime
examples of the class of investments in which financial conditions can have a large effect on economic growth.
This has been demonstrated in a number of studies, such as Milward and Saul (1973), Mathias and Postan
(1978), Buchanan (1986), and Turnbull (1987), inter alia.
We analyse a unique and highly detailed historical dataset (Shea), which covers micro-data of actual coalition
formation in the finance of UK infrastructure (primarily canals and railways, but including also gas and
waterworks projects). These are uniquely rich micro-data on actual coalitions funding different types of
infrastructure across both time and space. They are not lone case-studies but combine to depict a broad,
disaggregated and evolving picture of financial coalitions. Initial analysis strongly supports both the more general
suppositions of historians on the ways in which finance is collected, specifically via regional coalitions.
References
Buchanan, B.J. (1986), ‘The Evolution of the English Turnpike Trusts: Lessons from a Case Study’, The
Economic History Review, 39(2), pp. 223–43.
Cottrell, P.L. (1980), Industrial Finance 1830-1914: The finance and organization of English manufacturing
industry, Methuen.
Harris, R. (2000), Industrializing English Law: Entrepreneurship and Business Organization, 1720-1844,
Cambridge University Press.
Lucas, Jr., R.E. (1988), ‘On the Mechanics of Economic Development’, Journal of Monetary Economics, 22(1),
pp. 3–42.
Mathias, P. and Postan, M. M. (eds.) (1978), The Industrial Economies: Capital, Labour, and Enterprise, volume
VII. Cambridge University Press.
Milward, A.S. and Saul, S.B. (1973), The Economic Development of Europe, 1780-1870, George Allen & Unwin
Ltd.
Nolan, C., Shea, G.S., and Trew, A.W. (2005), ‘Endogenous Financial Development and Industrial Takeoff’,
Centre for Dynamic Macroeconomic Analysis Working Paper.
Romer, P. (1986), ‘Increasing Returns and Long-Run Growth’, Journal of Political Economy, 94(5), pp. 1002–37.
Romer, P. (1990), ‘Endogenous Technological Change’, Journal of Political Economy, 98(5.2), pp. S71–S102.
Shea, G.S. (in process), The Handbook of 18th and Early 19th Century British Corporate Finance, University of
St. Andrews, mimeo.
Trew, A.W. (2005), ‘Finance and Growth: A Critical Survey’, Centre for Dynamic Macroeconomic Analysis
Working Paper 0507.
Turnbull, G. (1987), ‘Canals, Coal and Regional Growth during the Industrial Revolution’, The Economic History
Review, 40(4), pp. 537–60.