Cliometrics and Technological Change

1. Cliometrics and Technological Change Nick Crafts

2. Centrality of Technological Progress • The defining characteristic of Modern Economic Growth (Kuznets) • “Our knowledge of economic history, of what production looked like 100 years ago, and of current events convinces us beyond any doubt that discovery, invention, and innovation are of overwhelming importance in economic growth” (Paul Romer, 1994)

3. What Is Distinctive? • Long-run perspective in which want to measure and to explain success and failure in economic growth • Invention is partly endogenous • Localized technological progress • Divergence Big Time • Historical approach (no tabula rasa) • NB: demands more than neoclassical economics has to offer, cf. cliometric schizophrenia

4. Economic History and EconomicsSolow (1985) The danger is that “economic theory learns nothing from economic history, and economic history is as much corrupted as enriched by economic theory” And “an economic historian is merely an economist with a high tolerance for dust”

5. Keywords • Labor Scarcity • Macro vs. Micro Inventions • New Institutional Economic History • Path Dependence • Social Capability • Social Savings

6. Key Players • Moses Abramovitz • Robert Allen • Paul David • Robert Fogel • Joel Mokyr • Douglass North

7. What Sort of Growth Theory? • Exogenous • Endogenous • AK • Unified • Appropriate (endogenous innovation) • Better menu now but some items still indigestible

8. Macro vs. Micro InventionsMokyr (1990) • Macro Inventions: radical new and economically important ideas that come along occasionally and unpredictably • Micro Inventions: incremental improvements that account for most TFP growth and reflect economic incentives • Implies that explaining timing of technological breakthroughs (new GPTs) problematic and time-series predictions of endogenous growth models unreliable

9. Solow’s Seminal Paper “Gross output per man hour doubled over the interval (1909-49) with 87.5% of the increase attributable to technical change and the remaining 12.5% to increased use of capital.” (1957)

10. Crude TFP vs. Capital Deepening • US not the same before or since the Solow period • Neither “Take-Off” Europe nor “Golden-Age” Europe match the 7/8 proportion • Crude TFP growth ≠ technical change generally • Solow’s famous result, while still correct, is an outlier

11. US: Crude TFP Growth, % per year(Percentage of Labour Productivity Growth) Source Abramovitz & David (2001)

12. Europe: Crude TFP Growth, % per year(Percentage of Labour Productivity Growth) Sources: Crafts (2008); Bosworth & Collins (2003)

13. TFP Growth ≠ Technical Change • Maddison’s ‘educated guesses’ suggest technical change only a subset of TFP in 1950-73 Europe; later econometric analysis confirms that efficiency improvement a substantial part of Golden Age TFP growth, e.g. Jerzmanowski (2007) • TFP growth underestimatestechnical change in 19th century USA because standard assumptions inappropriate …… elasticity of substitution <1 and not Hicks-Neutrality (Abramovitz & David, 2001) and quite possibly in East Asian tigers (Rodrik, 1997) and controversially in Soviet Russia (Weitzman, 1970) • Intertemporal comparisons of TFP growth are not a reliable indicator of differences in rate of technical change

14. Unified Growth TheoryGalor & Weil (2000) • 3-stage model; first stage is the Malthusian economy • Onset of ‘modern economic growth’ is endogenous and triggered by population growth • Positive feedback from population size means technological progress increases in the late Malthusian phase

15. Implications for Unified Growth Theory • Scope for considerable population growth in pre-Industrial Revolution England but cannot see the GW feedback (Crafts & Mills, 2009) • Maybe a ‘peso problem’; need technological progress to materialize in sectors with favourable demand conditions • Or perhaps technological change deserves to be taken seriously and other aspects of endogenous growth literature have more potential

16. First Industrial Revolution • Not just a scale effect • Not ‘take-off’ • Ingenuity rather than abstention • Putting accelerationin TFPgrowth into proper perspective • Endogenous innovation gives some insights, mutatis mutandis (Allen, 2009; Mokyr,2002)

17. Growth in Britain (% per year)

18. Industrial Revolution and Relative Factor Prices(Allen, 2009) • Key characteristic of Britain is high-wage/cheap energy economy by international standards (cf. the Habakkuk controversy) • Adoption of famous inventions initially only had acceptable payoff at British relative factor prices • More likely to invent what pays, so Britain was in pole position • Eventually, continuing technological progress (e.g. reduced coal consumption in steam engines) means that British technology dominates and diffuses internationally

19. Steam Power and British Economic Growth • Did not dramatically raise the growth rate • Peak impact about 100 years after James Watt • Technology not well understood and not cost-effective initially • GPT growth-accounting arithmetic reconciles co-existence of slow growth in the Industrial Revolution and famous inventions

20. Total Steam Contribution Source: Crafts (2004): includes railway, steamships, steam engines

21. Social Savings of Railways • Transport benefits (consumer & producer surplus) = total economic benefits; OK with perfect competition and CRS in transport-using sector • Fogel (1964) aimed to measure contribution of new technology to growth and to destroy the ‘myth of indispensability’; freight SS = 4.7% US GDP in 1890 • Upper bound measure: (palt– prail)qrail • Compared with growth accounting includes own TFP contribution but no spillovers and no capital deepening; in absence of railway other normal-returns investments

22. Transport Benefits May Not Capture Allthe Economic Benefits • Imperfect competition in the transport-using sector • Agglomeration benefits from industrial re-location, bigger cities etc = TFP spillovers; NEG might claim key to emergence and ‘lock-in’ of manufacturing belt (cf. Fogel’s counterfactual) • Fogel (1979) argued upper bound bias enough to compensate for these omissions but depends on strong (ahistorical?) assumptions

23. The Habakkuk Hypotheses(1962) • Labor scarcity in 19th-century US meant (1) more machines, (2) better machines and (3) more labor-saving bias in technological change relative to UK • (2) and (3) not very neoclassical but may fit with endogenous innovation model (cf. Acemoglu, 2009) • David (1975) provided interpretation based on localized learning(cf. Atkinson & Stiglitz, 1969) • A key corollary is that imposing conventional growth accounting assumptions underestimates US rate of technological progress

24. Choice of Technology:The role of factor prices P1 KM/Y A Po B APF Po P1 KH/Y Source: Broadberry, 1994

25. Technical progress: Localised change α KM/Y APF A β A′ B APF′ Source: Broadberry, 1994 KH/Y

26. Did Victorian Britain Fail? • NEH said NO!; different choice of technology was profit maximizing based on different cost conditions • Micro-level neoclassical analysis undermines the neoclassical growth model’s universal technology assumption • Implies an ‘inappropriate technology’ (Acemoglu & Zilibotti, 2001) interpretation of lower British TFP • Labor-scarcity and mass-market driven US technology lacked ‘technological congruence’ for Europe in early but not in mid-20th century (Abramovitz & David, 1996)

27. Decomposition of output difference between countries 1 & 2 under appropriate technology y y = A2kα 2 • due to k • y2 y′1 due to TFP • • 1 y1 k Source: M. Jermanowski, European Economic Review 51 (2007)

28. Decomposition of output difference between countries 1 & 2 under appropriate technology y y = A2kα 2 • due to k • y = A(k)k α due to T • y2 y′1 due to E • y′′1 • 1 y1 k Source: M. Jermanowski, European Economic Review 51 (2007)

29. 20th vs 21st Century • “The restoration of inter-society income equality will be one of the major economic events of the centuryto come” (Lucas, 2000) • So divergence will be superseded by convergence according to neoclassical ideas but NIEH thinks differently

30. The Lucas Model • Countries that start growing later have faster initial growth and then experience growth proportional to income gap with leader Dy/y = a + bx where x is the number of 50 year periods since 1800. Hazard rate for beginning modern economic growth (l) evolves from 0.001 to 0.03

31. World Growth Rate and Income Variability Parameter Values: a = .02 b = .025 min = .001 max = .03 = .5 Annual Growth Rate Log Standard Deviation

32. Lucas’s Underlying Argument • Obstacles to growth removed through imitation of good policies, institutions • In globalized world, capitalmobility and financial liberalization relax the savings constraint • K/L and TFP gaps are rapidly reduced

33. Social Capability(Abramovitz, 1986) • Catch-up not automatic; need good incentive structures to assimilate technology effectively • Institutions and policies need to evolve as move from far-from-frontier to close-to frontier (cf.Aghion & Howitt, 2006; Gerschenkron, 1962) but status quo bias may intervene • Social capability not independent of technological epoch (cf. Europe and ICT)

34. The NIEH View(North, 1990) • Institutions are the underlying determinants of economic performance • Institutions are formal and informal constraints that structure behaviour • Institutions are persistent; expect multiple equilibria and path dependence • Institutional reform is opposed by vested interests and subject to government failure • So divergence may continue indefinitely

35. Path Dependence • ‘History matters’; irreversible changes in outcome probabilities and possible ‘lock-in’ • Not really about QWERTY-type examples (David, 1985) • Institutional and geographical aspects much more important; divergence not convergence (North, 1990; Krugman, 1991) • Problematic for social savings (cf. David, 1969)

36. Conclusions • Cliometrics needed more than mainstream economics had to offer; source of tension • Scope of historical questions is very demanding and counterfactuals difficult to quantify • Growth economics has moved on and perhaps is a bit less corrupting