This paper attempts to shed new light on the proximate determinants of domestic investment in Victorian Britain by focusing on the relationship between asset markets and investment behavior. It demonstrates that Victorian investment fluctuations were associated with divergences between the valuation of installed capital as determined in asset markets and the supply price of new capital as determined in commodity markets. After showing how investment fluctuations in Victorian Britain were related to real equity prices, the paper concludes with a summary of findings on the determinants of real share prices.

Previous “new” economic history research on late Victorian Britain often assumes that technology was exogenous to British entrepreneurs. Foreign innovations were available for inspection, and if they were not found suitable, there was no way to adapt new techniques to the British situation. Alternatively, one can assert that technological failure is a key issue in any study of retarded economic performance. A test for the presence of induced innovation—an endogenous theory of technological change—is applied to the British pig iron and cotton textile industries. Results are compared to other technological studies of British and American industry.

The paper presents an estimate of the limits to British economic growth in the period 1870–1914. It is argued that in contrast to the historical experience, vigorous and effective exploitation of the technological possibiites of the period would have required the relative expansion of some sectors—most of which, like engineering, were growing in relative size in any case—and the relative contraction of others. The conservatively estimated gains from such counterfactual sectoral shifts of economic activity were found to be of the order of 25 percent to 50 percent of British GNP in 1913. The paper concludes with a brief consideration of why opportunities of this magnitude were not seized.