The Co-evolution of Technology and Wages, 1600-2019

1. The Co-evolution of Technology and Wages, 1600-2019 Robert Allen Global Distinguished Professor of Economic History New York University Abu Dhabi Handbook for Historical Economics Conference New York University 2019

2. Four historical phases • Early Modern Expansion (1600-1770) • Industrial Revolution (1770-1867) • Western ascent to affluence (1867-1973) • Problem-ridden present (1973-2019)

3. Output per worker rose in all phases, but… • Early Modern Expansion (1600-1770) • Average real wage rose, wage convergence • Industrial Revolution (1770-1867) • Average real wage flat, wage divergence • Western ascent to affluence (1867-1973) • Average real wage rose, wage convergence • Problem-ridden present (1973-2019) • Average real wage flat, wage divergence

4. Questions: • Why did the periods differ? • How did evolution of technology affect wages? • How did wage changes affect evolution of technology? • How did globalization and scientific advance modulate the wage-technology interactions?

5. Phase I: European voyages of discovery led to colonies and empires • Spain and Portugal early winners • However, the best empires (from point of view of economic development) were Dutch and British • They contributed to large growth in manufacturing output, growth of cities and rural industries, agricultural & energy revolutions.

6. The industrial revolution was the result of 250 years of economic evolution.

7. In most pre-industrial societies, the real wage and the population are inversely related as in Italy

8. The inverse wage-population pattern is broken in England after 1600 due to its economic transformation.

9. Wages in Europe diverged before the IR

10. London and Amsterdam had (roughly) constant and high real wages:

11. While wages elsewhere dropped below one:

12. But England bucked that trend!(note wage convergence within England)

13. Factor price view: England was a high wage, cheap energy economy.

14. The growth of London led to the English coal industry, which gave northern Britain the cheapest energy in the world.

15. The high wage, cheap energy economy was caused by Britain’s foreign trade boom. • This began with wool cloth exports in the 17th century and was consolidated by the creation of a world empire. • The trade boom pushed the urbanization rate from 7% in 1500 to 29% in 1800. • Rural manufacturing expanded, providing more jobs. • Tight labour markets meant high wages. • The growth of London from 50,000 in 1500 to 1 million in 1800 caused the take-off of the coal industry.

16. Phase II: the Industrial Revolution:Why was the IR British? • The immediate cause was high wages and cheap energy. • They made it more profitable to substitute capital and energy for labour in England than elsewhere. • This made it more profitable to develop power driven machinery in England than elsewhere. • THEME: wages affect evolution of technology

17. Industrial Revolution was Britain’s creative response to the first globalization. • Started with Columbus (1492) and Vasco da Gama (1498). • By late 1600s, large scale importation of Indian cotton textiles and Chinese porcelain • These were wildly popular • European industry tried to manufacture competitive substitutes.

18. To compete with Asian producers, British manufacturers had to cut labour costs. • Substituting capital for labour was the main approach. • Savings in labour costs had to be greater than increase in capital costs • Incentives to mechanize were greatest where wages were high • This favoured Britain.

19. Until about 1770, all fibres were spun in cottages, mainly on spinning wheels.

20. James Hargreaves invented the spinning jenny in the 1760s, and it became the dominant technique into the 1780s.

21. Richard Arkwright developed roller spinning (originally invented by Paul and Wyatt in 1740s and 1750s) in late 1760s. It took off in 1780s. Image Credit: Science Museum/SSPL

22. Cloth was woven by hand in cottages until early 19th century.

23. Edmund Cartwright invented first power loom in 1785. More patents and a failed attempt at a factory in 1793. It only came into commercial use in early 19th century.

24. Factor prices and induced technical change • Problems with production function representation of technical change • Factor augmenting TC is overgeneralized • Technical progress cuts costs at all factor prices • Technical change as new set of input-ouput coefficients • Diffusion of techniques

25. Example: cotton spinning C A P I T A L Isoquant for hand process K low wage cost line high wage cost line L Labour

26. Spinning jenny saved labour and was only cost effective in the high wage country (Britain) C A P I T A L Isoquant for machine Isoquant for hand process K* K low wage cost line high wage cost lines L* L Labour

27. Spinning jenny would have raised costs if it had been used in the low wage country (France or India) C A P I T A L Isoquant for machine Isoquant for hand process K* K low wage cost lines high wage cost line L* L Labour

28. Perfection of the jenny (i.e. mule spinning) makes mechanical spinning profitable everywhere. C A P I T A L Isoquant for machine Isoquant for hand process K* tipping point K low wage cost line trajectory of improvements high wage cost line L* L Labour

29. A key idea in analysing invention is the transition from R&D to commercial operation: R&D expense greater in low wage country first proto-type C A P I T A L Isoquant for machine Isoquant for hand process K* tipping point K low wage cost line trajectory of improvements high wage cost line L* L Labour

30. Spinning: 1500-1770 • Wool industry very large, expands by producing ‘new draperies’. • Growth also in linen and after 1700 in cotton • Women spin all fibres and shift between industries to equalize earnings. • Huge expansion in spinning employment relative to female population. • Real earnings of women in spinning rise fast.

31. Expansion of wool spinning and employment

32. Earnings of female spinner relative to male building labourer

34. Rise in woman’s wage relative to cost of machinery raised rate of return. Profitability in France was much less.

35. Power Loom: Déjà Vu all over again Invention of spinning machines led to-- • Rapid expansion of output of low cost machine yarn • Weaving expanded to process yarn • Weaving was done by hand looms in cottages • Rise in employment (to 10% of male work force) led to high wages (rents) • High wages made invention of power loom profitable. • Power loom led to falling earnings and unemployment of hand loom weavers.

36. IR and the distribution of income • Who gained and who lost during the IR? • By how much? • How can we reconcile ‘high wage’ explanation with evidence of a big poverty problem during IR? • THEME: technology affects evolution of wages

37. Poverty was built into the Progress • Large handicraft manufacturing sector a key to high wage economy • Empire => exports of mfgs =>large sector=>high wages • Perhaps 1/3 of workforce in handicraft manufacturing • High wage=>mechanization=>falling wages in handicraft sector • That lowered average wage • Displaced workers moved into other handicraft sectors and put downward pressure on their wages • Only when the handicraft sector was liquidated did the average wage rise.

38. How did technical progress affect wages? For a long time only capitalists Phase II: Productivity & wages grow in tandem Phase I: Disconnect Between Productivity & wages

39. Wage inequality exploded as handicraft workers lost out

40. Phase III: Western Ascent to Affluence(1867-1973) • The average real wage did not rise until the handicraft sector, which had been the basis of the high wage economy in the 18th century, was liquidated. • Then wages grew in pace with output per worker. • Inequality declined.

41. Wages versus profits:British and USA experience British history American history

42. Why did the West get rich? by inventing labour saving technology. • High wages provide incentive to invent more mechanized technology. • More mechanized technology raised wages. • High (and growing) levels of education aided pure and applied research. • Over time Western technology became larger scale and more capital intensive. • Much of this technology is not cost effective in poor countries.

43. Today there is a ‘world production function’ that represents the technological options of all countries. Source: Kumar & Russell AER 2002 It shows diminishing returns to capital, limiting technology transfer.

44. 1st key feature: all change is due to rich countries inventing more capital intensive technology. All improvements are here! No Progress here

45. That’s my story of the Industrial Revolution. What happened in between? • I extended GDP, capital stock, and workforce backwards to 18th century for 17 countries. • I looked at frontiers going back. • It’s biased technical change (with improvement only at high K/L ratios) all the way back! (déjà vu all over again!) • Improved methods only pay in high wage countries.

46. These countries were poor in 1800