Grasping Reality on TypePad, by Brad DeLong

Allen has been advocating for at least 20 years now that... England’s high wages relative to its cheap energy and low capital costs biased technical innovation in favour of labour-saving equipment, and that is why it was cost-effective to industrialise in England first, before the rest of Europe (let alone Asia).... Allen’s is not a monocausal theory... but his distinctive contribution is the high-wage economy.... The theory is appealing, in part, because the technological innovations of the early Industrial Revolution were not exactly rocket science (a phrase used by Allen himself), so one wonders why they weren’t invented earlier and elsewhere. (Mokyr paraphrasing Cardwell said something like nothing invented in the early IR period would have puzzled Archimedes.) But... as Mokyr has tirelessly argued, inventions were too widespread across British society to be a matter of just the right incentives and expanding markets—and this is a point now being massively amplified by Anton Howes....

Kelly, Mokyr, & Ó Gráda (2014)... pointed out... [that] Allen must assume that unit labour costs (wage divided by labour productivity) were... higher. But if the Anglo-French wage gap were matched by a commensurate labour productivity gap, then the labour cost to the employer would have been the same in the two countries.... Besides, you already had capital-intensive production techniques in several sectors well before the classic industrial revolution period—especially in silk and calico-printing. Silk-throwing (analogous to spinning in cotton) was mechanised in Italy before 1700. The idea was pirated by Lombe who set up a water-powered silk-throwing factory circa 1719, and he was imitated by many others by the 1730s. Then you had heavily machine-dependent printing works for textiles (especially calicoes) in many European cities before the canonical industrial revolution period. None of these seemed to require Allen’s “high wage economy”. (Not to mention, Allen’s model has implications for the diffusion of the Industrial Revolution, and Scottish industrialisation was almost simultaneous with the English one, despite wage differences.)

Nonetheless, I had mentally reconciled Allen and Mokyr in the manner of Crafts by considering Mokyr = supply of inventions, Allen = demand. But there has been a spate of critiques.... Humphries & Schneider... show that the estimated 1 million women and children who spun yarn with wool, linen, and cotton in their rural homes were paid much lower wages than Allen’s narrative has relied on: ~4 d [pence] per day, rather than the >8d/day assumed in Allen. And one of the showcases of his theory is the series of inventions mechanising yarn spinning!... persuasive, but it’s also theoretically compelling. Men, especially in big cities, may have been paid higher wages, but women and children in the countryside were not. This makes early modern England much more like a “surplus labour economy” with an “unlimited supply of labour” à la Arthur Lewis.... Labour market monopsonists also loom large in modern development microeconomics!...

Outline:

1. The Industrial Revolution and the pre-industrial economy
   • The Commercial Revolution generated a unique structure of wages and prices in eighteenth-century Britain
   • The Industrial Revolution simply would not have been profitable in other times and places
   • The slow adoption of British technology was because the first generation technologies were not profitable to adopt outside Britain
   • But the third generation technologies were
2. The high-wage economy of pre-industrial Britain
3. The agricultural revolution
4. The cheap energy economy
5. Why England succeeded
6. Why was the Industrial Revolution British
7. The steam engine
8. Cotton
9. Coke smelting
10. Inventors, Enlightenment, and human capital
11. From Industrial Revolution to modern economic growth

Eight Orienting Questions:

1. Pseudoerasmus says: Mokyr = supply; Allen = demand; both were essential. No Enlightenment, no Industrial Revolution. Is he (probably) right?
2. How do we assess how much encouragement was provided to inventors and innovators by Britain's uniquely high labor/energy price ratio?
3. What are the other places that Allen has in mind (since Hiero of Alexandria's aeropile in which building a first generation "steam engine" would have been possible as a marvel?
4. Say that there are three breakpoints in which the rate of growth of the global average efficiency of labor E jumps--the Commercial Revolution, which sees the growth rate of E jump from 0.1%/year to 0.3%/year; the Industrial Revolution, with sees the growth rate of E jump from 0.3%/year to 1.4%/year; and then the coming of Modern Economic Growth around 1870 which sees the growth rate of E jump from 1.4%/year to 5.2%/year. What would the world be like if that third jump had not occurred? What if that second jump had not occurred?
5. Had French Marshal Tallard won at Blenheim and French Marshal Villeroy won at Ramillies, France would have had the resources to build a fleet to win control over Atlantic trade. What form would a French-led European economy have taken in the eighteenth and early nineteenth centuries? Why is Allen so certain that it would not have created a profession of engineering?
6. Weren't there other roads to industrialization that involved technological change that economized on something other than labor--on energy, on capital, on other scarce inputs of one sort or another?
7. So you economize on labor by inventing the spinning machine and the steam engine. Why does it go further? What are the forward inventive linkages here?
8. If there were no oats--which British workers refused to eat in bulk--Allen would characterize Britain not as a high-wage but as an overvalued exchange rate economy. But such economies typically export not manufactures but financial and other services. How is it that Britain exports manufactures?

Allen's conclusion:

I have argued that the famous inventions of the British Industrial Revolution were responses to Britain's unique economic environment and would not have been developed anywhere else.... Buy why did those inventions matter?.... Weren't there alternative paths to the twentieth century? These questions are closely related to another... asked by Mokyr: why didn't the Industrial Revolution peter out after 1815?... [O]ne-shot rise[s] in productivity [before] did not translate into sustained economic growth. The nineteenth century was different--the First Industrial Revolution turned into Modern Economic Growth. Why? Mokyr's answer... that scientific knowledge increased enough to allow continuous invention [is incomplete]....

Britain's pre-1815 inventions were particularly transformative.... Cotton was the wonder industry.... [T]he great achievement of the British Industrial Revolution was... the creation of the first large engineering industry that could mass-produce productivity-raising machinery. Machinery production was the basis of three developments that were the immeiate explanations of the continuation of economic growth until the First World War... (1) the general mechanization of industry; (2) the railroad; and (3) steam-powered iron ships. The first raised productivity... the second and third created the global economy and the international division of labor... (O'Rourke and Williamson, 1999). Steam... accounted for close to half of the growth in labor productivity in Britain in the second half of the nineteenth century (Crafts 2004). The nineteenth-century engineering industry was a spin-off from the coal industry. All three of the developments... depended on two things: the steam engine and cheap iron....

Cotton played a supporting role in the growth of the engineering industry.... The first is that it grew to immense size.... Mechanization in other activities did not have the same potential... global industry with.. price-responsive demand... cotton... sustained the engineering industry by providing it with a large and growing market for equipment....

There was a great paradox... the macro-inventions of the eighteenth century... increased the demand for capital and energy relative to labour. Since capital and energy were relatively cheap in Britain, it was worth developing the macro-inventions there and worth using them in their early, primitave forms. These forms were not cost-effective elsewhere.... However, British engineers improved this technology.... This local learning often saved the input that was used excessively in the early years of the invention's life and which restricted its use to Britain. As the coal consumption of rotary steam power declined from 35 pounds per horsepower-hour to 5 pounds, it paid to apply steam power to more and more uses.... Old fashioned, thermally inefficient steam engines were not "appropriate" technology for countries where coal was expensive. These countries did not have to invent an "appropriate" technology for their conditions, however. The irony is that the British did it for them....

The British inventions of the eighteenth century--cheap iron and the steam engine, in particular--were so transformative.... The technologies invented in France--in paper production, glass, and knitting--were not, The French innovations did not lead to general mechanization or globalization.... The British were not more rational or prescient than the French... simply luckier in their geology. the knock-on effect was large, however: there is no reason to believe that French technology would have led to the engineering industry, the general mechanization of industrial processes, the railway, the steamship, or the global economy.... [T]here was only one route to the twentieth century--and it traversed northern Britain.

Cf: Jane Humphries: The Lure of Aggregates and the Pitfalls of the Patriarchal Perspective: A Critique of the High Wage Economy Interpretation of the British Industrial Revolution <http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0289.2012.00663.x/pdf>

Cf: Robert C. Allen (2011): Why the Industrial Revolution Was British: Commerce, Induced Invention and the Scientific Revolution, Economic History Review 64, pp. 357-384. <http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0289.2010.00532.x/pdf>

Everytime I reread http://www.ehs.org.uk/ehs/conference2007/Assets/AllenIIA.pdf, I think: Robert Allen is a fracking genius!:

The Industrial Revolution is one of the most celebrated watersheds in human history. It is no longer regarded as the abrupt discontinuity that its name suggests, for it was the result of an economic expansion that started in the sixteenth century. Nevertheless, the eighteenth century does represent a decisive break in the history of technology and the economy. The famous inventions–the spinning jenny, the steam engine, coke smelting, and so forth–deserve their renown1, for they mark the start of a process that has carried the West, at least, to the mass prosperity of the twenty-first century. The purpose of this essay is to explain why they occurred in the eighteenth century, in Britain, and how the process of their invention has transformed the world... […]

The industrial revolution was fundamentally a technological revolution, and progress in understanding it can be made by focussing on the sources of invention.... [T]he reason the industrial revolution happened in Britain, in the eighteenth and nineteenth centuries, was not because of luck (Crafts 1977) or British genius or culture or the rise of science. Rather it was Britain’s success in the international economy that set in train economic developments that presented Britain’s inventors with unique and highly remunerative possibilities. The industrial revolution was a response to the opportunity… […]

What commercial success did for Britain was to create a structure of wages and prices that differentiated Britain from the continent and, indeed, Asia: In Britain, wages were remarkably high and energy cheap. This wage and price history was a fundamental reason for the technological breakthroughs of the eighteenth century whose object was to substitute capital and energy for labour. Scientific discoveries and scientific culture do not explain why Britain differed from the rest of Europe. They may have been necessary conditions for the industrial revolution, but they were not sufficient: Without Britain’s distinctive wage and price environment, Newton would have produced as little economic progress in England as Galileo produced in Italy... [...]

The working assumption of this paper is that technology was invented by people in order to make money.... [L]abour was particularly expensive and energy particularly cheap in Britain, so inventors in Britain were led to invent machines that substituted energy and capital for labour.... The scale of the mining industry in eighteenth century Britain was much greater than anywhere else, so the return to inventing improved drainage machinery (a.k.a. the steam engine) was greater in Britain than in France or China. Third, patents that allow the inventor to capture all of the gains created by his invention raise the rate of return and encourage invention... [...]

Britain was a high wage economy in four senses:1. At the exchange rate, British wages were higher than those of its competitors. 2. High silver wages translated into higher living standards than elsewhere. 3. British wages were high relative to capital prices. 4. Wages in northern and western Britain were exceptionally high relative to energy prices...

The different trajectories of the wage-rental ratio created different incentives to mechanize production in the two parts of Europe. In England, the continuous rise in the cost of labour relative to capital led to an increasingly greater incentive to invent ways of substituting capital for labour in production. On the continent, the reverse was true…. It was not Newtonian science that inclined British inventors and entrepreneurs to seek machines that raised labour productivity but the rising cost of labour... [...]

Britain’s unusual wages and prices were due to two factors. The first was Britain’s success in the global economy, which was in part the result of state policy. The second was geographical–Britain had vast and readily worked coal deposits…. The superior real wage performance of northwestern Europe was due to a boom in international trade…. In a mercantilist age, imperialism was necessary to expand trade, and greater trade led to urbanization.... Coal deposits were a second factor contributing to England’s unusual wage and price structure…. First, inexpensive coal raised the ratio of the price of labour to the price of energy (Figure 4), and, thereby, contributed to the demand for energy-using technology. In addition, energy was an important input in the production of metals and bricks, which dominated the index of the price of capital services.... [C]oal is a ‘natural’ resource, but the coal industry was not a natural phenomenon.... It was the growth of London in the late sixteenth century, however, that caused the coal industry to take off. The Dutch cities provide a contrast that reinforces the point (Pounds and Parker 1957, de Vries and van der Woude 1997, Unger 1984). The coal deposits that stretched from northeastern France across Belgium and into Germany were as useful and accessible as Britain’s.... The pivotal question is why city growth in the Netherlands did not precipitate the exploitation of Ruhr coal in a process parallel to the exploitation of Northern English coal. Urbanization in the Low Countries also led to a rise in the demand for fuel. In the first instance, however, it was met by exploiting Dutch peat. This checked the rise in fuel prices, so that there was no economic return to improving transport on the Ruhr or resolving the political-taxation issues related to shipping coal down the Rhine. Once the Newcastle industry was established, coal could be delivered as cheaply to the Low Countries as it could be to London, and that trade put a ceiling on the price of energy in the Dutch Republic that forestalled the development of German coal. This was portentous: Had German coal been developed in the sixteenth century rather than the nineteenth, the industrial revolution might have been a Dutch-German breakthrough rather than a British achievement... [...]

The following generalizations apply to many inventions including the most famous: 1. The British inventions were biased. They were labour saving and energy and capital using.... 2. As a result of 1, cost reductions were greatest at British factor prices, so the new technologies were adopted in Britain and not on the continent.... [C]oke smelting was not profitable in France or Germany before the mid-nineteenth century (Fremdling 2000). Continuing with charcoal was rational behaviour in view of continental factor prices. This result looks general; in which case, adoption lags mean that British technology was not cost-effective at continental input prices. 3. The famous inventions of the industrial revolution were made in Britain rather than elsewhere in the world because the necessary R&D was profitable in Britain (under British conditions) but unprofitable elsewhere.... 4. Once British technology was put into use, engineers continued to improved it, often by economizing on the inputs that were cheap in Britain. This made British technology cost-effective in more places and led to its spread across the continent later in the nineteenth century.... The theory advanced here explains the technological breakthroughs of the industrial revolution in terms of the economic base of society–natural resources, international trade, profit opportunities. Through their impact on wages and prices, these prime movers affected both the demand for technology and its supply... [...]

Why did the French ignore the new spinning machines? Cost calculations for France are not robust, but the available figures indicate that jennies achieved consistent savings only at high count work, which was not the typical application (Ballot 1923, pp. 48-9). In France, a 60 spindle jenny cost 280 livre tournois in 1790 (Chassagne 1991, p. 191), while a labourer in the provinces earned about three quarters of a livre tournois per day, so the jenny cost 373 days labour. In England, a jenny cost 140 shillings and a labourer earned about one shilling per day, so the jenny was worth 140 days labour (Chapman and Butt 1988, p. 107). In France, the value of the labour saved with the jenny was not worth the extra capital cost, while in England it was. French cost comparisons show that Arkwright’s water frame, a much more capital intensive technique, was no more economical than the jenny. The reverse was true in England where water frames were rapidly overtaking jennies. The French lag in mechanization was the result of the low French wage… […]

Why did the industrial revolution lead to modern economic growth? I have argued that the famous inventions of the British industrial revolution were responses to Britain’s unique economic environment and would not have been developed anywhere else. This is one reason that the Industrial Revolution was British. But why did those inventions matter? The French were certainly active inventors, and the scientific revolution was a pan-European phenomenon. Wouldn’t the French, or the Germans, or the Italians, have produced an industrial revolution by another route? Weren’t there alternative paths to the twentieth century? These questions are closely related to another important question asked by Mokyr: Why didn’t the industrial revolution peter out after 1815? He is right that there were previous occasions when important inventions were made. The result, however, was a one-shot rise in productivity that did not translate into sustained economic growth. The nineteenth century was different–the First Industrial Revolution turned into Modern Economic Growth. Why? Mokyr’s answer is that scientific knowledge increased enough to allow continuous invention. Technological improvement was certainly at the heart of the matter, but it was not due to discoveries in science–at least not before 1900. The reason that incomes continued to grow in the hundred years after Waterloo was because Britain’s pre-1815 inventions were particularly transformative, much more so than continental inventions. That is a second reason that the Industrial Revolution was British and also the reason that growth continued throughout the nineteenth century.... The nineteenth century engineering industry was a spin-off of the coal industry. All three of the developments that raised productivity in the nineteenth century depended on two things–the steam engine and cheap iron. Both of these, as we have seen, were closely related to coal. The steam engine was invented to drain coal mines, and it burnt coal. Cheap iron required the substitution of coke for charcoal and was prompted by cheap coal. (A further tie- in with coal was geological–Britain’s iron deposits were often found in proximity to coal deposits.) There were more connections: The railroad, in particular, was a spin-off of the coal industry. Railways were invented in the seventeenth century to haul coal in mines and from mines to canals or rivers. Once established, railways invited continuous experimentation to improve road beds and rails. Iron rails were developed in the eighteenth century as a result, and alternative dimensions and profiles were explored. Furthermore, the need for traction provided the first market for locomotives. There was no market for steam-powered land vehicles because roads were unpaved and too uneven to support a steam vehicle (as Cugnot and Trevithick discovered). Railways, however, provided a controlled surface on which steam vehicles could function, and colliery railways were the first purchasers of steam locomotives. When George Stephenson developed the Rocket for the Rainhill trials, he tested his design ideas by incorporating them in locomotives he was building for coal railways. In this way, the commercial operation of primitive versions of technology promoted further development as R&D expenses were absorbed as normal business costs.... The reason that the British inventions of the eighteenth century–cheap iron and the steam engine, in particular–were so transformative was because of the possibilities they created for the further development of technology. Technologies invented in France–in paper production, glass, knitting–did not lead to general mechanization or globalization. One of the social benefits of an invention is the door it opens to further improvements. British technology in the eighteenth century had much greater possibilities in this regard than French inventions. The British were not more rational or prescient than the French in developing coal-based technologies: The British were simply luckier in their geology. The knock-on effect was large, however: There is no reason to believe that French technology would have led to the engineering industry, the general mechanization of industrial processes, the railway, the steam ship, or the global economy. In other words, there was only one route to the twentieth century–and it went through northern Britain...

Cf: <https://www.icloud.com/keynote/04hxeReqzLNViuLXuAn2bEFFA#2017-02-01_Allen_.IEH>

Notes: <http://www.bradford-delong.com/2016/07/robert-c-allen-the-british-industrial-revolution-in-global-perspective-the-economic-history-research-frontier-a-great-rec.html>