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EH1: SB TOPIC 3

EH1: SB TOPIC 3. Cotton Textiles and the Great D ivergence. TOPIC 3: COTTON TEXTILES AND THE GREAT DIVERGENCE: LECTURE OUTLINE. A. BRITAIN AND INDIA 1. The Importance of Cotton Textiles 2. Factor Prices in Britain and India 3. Total Factor Productivity

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EH1: SB TOPIC 3

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  1. EH1: SB TOPIC 3 Cotton Textiles and the Great Divergence

  2. TOPIC 3: COTTON TEXTILES AND THE GREAT DIVERGENCE: LECTURE OUTLINE • A. BRITAIN AND INDIA • 1. The Importance of Cotton Textiles • 2. Factor Prices in Britain and India • 3. Total Factor Productivity • 4. High Wages and Changing Technology

  3. COTTON TEXTILES AND THE GREAT DIVERGENCE 1. THE IMPORTANCE OF COTTON TEXTILES • Shift of competitive advantage in cotton textiles from India to GB key episode in Great Divergence of living standards between Europe & Asia • In C17th India world’s most important net exporter of cotton textiles, GB a major net importer. By mid-C19th GB world’s major net exporter and India a major net importer • Until recently, India had all but disappeared from the story of GB development • Literature also tended to ignore factor prices until recently

  4. Broadberry/Gupta • Broadberry & Gupta: analyse shift of competitive advantage from India to GB in terms of factor prices and their impact on choice of technology • High GB wages led to adoption of capital-intensive technology • Technological progress then faster in capital-intensive technology because of LBD and patent protection

  5. Habakkuk thesis • Analogy with Habakkuk thesis of technological difference between UK and USA in C19th driven by high wages in USA • In context of C18th cotton textile industry, Britain was the high wage economy and production method required substitution of labour by capital

  6. Shift in competitive advantage • Import of cotton textiles to GB from India by EIC opened opportunities for import substitution as new cloths, patterns, designs became fashionable • GB wages between 4 and 6 times higher than in India, so GB producers could not use L-intensive Indian production methods to compete with India • This stimulated substitution of K for L amongst firms seeking export markets, but also in domestic trade after repeal of protective Calico Act in 1774. • Technological progress faster on K-intensive technology. Productivity eventually high enough to overcome much higher wages in GB

  7. 2-stage process of technological change (1) Switch from traditional methods to K-intensive technology in GB in response to high wages: machinery and factory system (2) Faster rate of technological progress in K-intensive technology: divergence of technological development in GB and India • Full effects of increase in GB productivity delayed until after Napoleonic Wars by increasing wages and raw cotton price before supply adjusted to major increase in demand for inputs

  8. 2. FACTOR PRICES IN BRITAIN AND INDIA 2A. WAGES • Chaudhuri quotes anonymous writer from 1701, who claims that same amount of labour that cost a shilling in England cost 2 pence in India • Data specific to cotton textile industry show GB wages higher by factor of 4 as early as 1680, rising to factor of 6 by 1770 (TABLE 1)

  9. TABLE 1: Weekly earnings of cotton operatives in Britain and India, circa 1680-1820 (s/d)

  10. Raw cotton costs • Price of raw cotton in GB higher than in India, where raw cotton grown (TABLES 2 & 3) • Rise in prices in both countries from mid C18th, but slower increase in India. • Sharp price rise in GB as result of growing demand before supply of cheap cotton secured from US • Delayed shift in competitive advantage

  11. TABLE 2: Price of raw cotton in Britain, 1680-1879

  12. TABLE 3: Comparative raw cotton prices in Britain and India, 1710-1830

  13. Rental price of capital • R = PK (i + δ – ΔPK) • Range of interest rates available for GB (TABLE 4) • Indian return on secured loans at least 2% higher than in GB

  14. TABLE 4: Interest rates in Britain and India (% per annum)

  15. Rental price of capital (2) • Price of bar iron taken as proxy for price of capital goods • Depreciation rate 1.5% pa from Feinstein • Higher price of capital goods in GB offset by lower interest rates • Anglo-Indian differences in rental price of capital much smaller than differences in wages

  16. TABLE 5: Rental price of capital in Britain and India (£ per ton)

  17. 3. TOTAL FACTOR PRODUCTIVITY • TFI prices weighted average of wages, raw cotton and rental price of capital • Weights (Jones, Edwards): raw cotton 50%, wages 25%, capital 25% • Ratio of comparative TFI prices to comparative output prices yields comparative TFP: • A/A* = (W/W*)α(C/C*)β(R/R*)1-α-β/(P/P*)

  18. Comparative TFP • Law of one price: in competitive markets, selling price must be equal, but FOB prices can still differ: SP = P + T • TABLE 6: Initial FOB price ratio 200 (from Chaudhuri) extended forwards with price index for GB and assumption of stagnant prices in India • Comparative TFP shifted in GB’s favour at rate of 0.4 % p.a. before 1770 and 1.8% p.a. 1770-1820

  19. TABLE 6: Comparative GB/India costs and prices (India =100)

  20. Shifting competitive advantage (1) • Stage 1: Before 1770s • GB FOB price higher than price of Indian goods CIF for most products • Indian goods exported to GB for re-export • British production for protected home market and small range of export products

  21. Shifting competitive advantage (2) • Stage 2: 1770s to 1790s • Repeal of Calico Act • Competitive advantage started to shift in GB’s favour with rising productivity in Lancashire • However, wage and raw cotton costs moved in favour of Indian producers so GB FOB price in England still above CIF price of Indian goods sold in GB on wide range of products

  22. Shifting competitive advantage (3) • Stage 3: 1790s to 1830s • Continued growth of productivity in Lancashire • Wages and raw cotton costs moved back in GB’s favour • GB displaced India from home market and became competitive in 3rd markets where transport costs similar

  23. Shifting competitive advantage (4) • Stage 4: From 1830s • Further productivity gains in GB (esp in weaving) made GB competitive even in Indian market • TABLE 7: GB share of Indian market still only 2.7% in 1830s • GB share rose above 60% by 1880s

  24. TABLE 7: British cotton textile exports in the Indian market, 1810-19 to 1890-99

  25. 4. HIGH WAGES AND CHANGING TECHNOLOGY 4A. Britain as a high wage economy • Reluctance to characterise GB as high wage economy explained by SOL debate • GB real wage slow to rise during Ind Rev • But need to consider money wage and comparative level • GB very high wage economy compared to India (prior Smithian growth + late marriage)

  26. 4B. High wages and factor substitution • David (1975) model: two technologies T0 (labour intensive) and T1 (capital intensive), each with fixed proportions • Available Process Frontier (APF) linear combination, because could combine the two techniques • Factor prices determine position on APF • Higher wage/rental ratio in GB led to substitution of capital for labour

  27. FIGURE 1: Choice of Technique

  28. 4C. Faster technological progress with capital intensive technology • Greater LBD on K-intensive technology (Arrow) • Stronger incentive to search for improvements in machine-intensive processes, where innovations could be patented • English patent system expensive and difficult to enforce, but many patents taken out in cotton textiles during Ind Rev • Trial-and-error process: technological progress locally neutral, preserves initial factor proportions

  29. FIGURE 2: Localised technological progress

  30. 4D. High wages and factor substitution in cotton • Most dramatic developments in spinning, where it took 50,000 operative hours to spin 100 lb of cotton using labour intensive methods in India • Use of Crompton’s mule cut operative hours to 2,000 (Table 8) • Differences less dramatic in weaving before power loom in C19th, but capital-labour ratio also higher in C18th GB • 2-3 male weavers per loom in Bengal and Coromandel compared with one in GB

  31. TABLE 8: Best-practice labour productivity in spinning 80s yarn in England, 1780-1825 (operative hours to process 100 lb of cotton)

  32. 4E. Factor prices and endogenous technological change in cotton • Note that the argument does not depend on labour-saving bias in technological change, for which evidence is at best limited before 1830 • However, having substituted capital for labour, rate of technological progress accelerates because of LBD and patent protection for innovations embodied in machinery

  33. 4F. Patent data • Sullivan: machinery and motive power accounted for 42.9% of all patents in GB, 1661-1710, rising to 46.6% 1801-50 • Textile innovations played important part in acceleration of patenting in GB from mid-C18th • Spinning largest category in Woodcroft’s (1857) subject matter index of English patents • Dramatic increase in productivity (Table 8). Improvements to Crompton’s mule reduced OHP from 2,000 to 135 between 1780 and 1825

  34. 4F. Why was Britain first? • New comparative work on level of real wages within Europe reveals GB and Holland as highest wage countries from C17th (Allen, van Zanden) • But Holland lacked large home market, important in mercantilist era. Patents more valuable in large market • France had large market but low wages

  35. 5. CONCLUSIONS • Rise of GB cotton industry needs to be considered alongside decline of Indian cotton industry • Factor prices played an important role • Import of cotton cloth from India created opportunities for import substitution • Large wage gap stimulated substitution of capital for labour • Technological progress on machine intensive technology locally neutral but faster than on labour intensive technology

  36. Shifting competitive advantage • Faster productivity growth in Britain shifted competitive advantage in Britain’s favour • Delay in shift because of rise in raw cotton costs in Britain before new source of supply in US secured

  37. TOPIC 3: COTTON TEXTILES AND THE GREAT DIVERGENCE: LECTURE OUTLINE • B. COTTON AND THE TRANSITION TO MODERN ECONOMIC GROWTH IN BRITAIN • 1. Trends in Output and Prices • 2. Technology • 3. Contribution of Cotton to Growth

  38. B. COTTON AND THE TRANSITION TO MODERN ECONOMIC GROWTH IN BRITAIN 1. TRENDS IN OUTPUT AND PRICES  • Cotton cloth is the symbolic consumers’ good of the Industrial Revolution • Cotton industry exhibits dramatic technical progress, spectacular increase in output & huge fall in price  • To assess what happened to output have to rely on retained imports of raw cotton, an input

  39. Measuring output growth • Raw cotton imports best available measure of output, because: • no cotton grown domestically, so retained imports give complete measure • import & re-export data are of highest quality • there was little waste, & innovations that occurred did not produce more yarn or cloth from given amount of raw cotton

  40. Growth of cotton industry • TABLES 1 and 2 from Deane & Cole show spectacular growth of cotton industry, with peak period of growth 1780-1800, @ 10.3% per annum.

  41. TABLE 1: Estimates of cotton-industry output, 1760-1816

  42. TABLE 2: Development of the cotton manufacture of the United Kingdom, 1819-1871

  43. Falling prices • TABLE 3 from Ellison shows spectacular fall in price of cotton yarn of two qualities. • Quality measured by fineness or count of yarn. Count of 40 hanks per lb. is quite coarse; count of 100 is much finer. (A hank is 840 ft). • 1 lb. of yarn of count 40 sold for 16 s. in 1779, but 2s 6d. by 1812. By 1860 only 11½d. • Finer count of 100 saw its price per lb. fall from 38s. in 1786 to 5s 2d in 1812 and 2s 4d by 1860.

  44. TABLE 3: Price of fine and coarse yarns (s./d)

  45. Supply and demand • Can we make any inferences about the role of shifts in supply and demand from these broad trends? • Since observe a substantial fall in the price of cotton, can rule out idea that increase in output was driven by an exogenous increase in overseas demand, despite dramatic increase in exports • FIGURE 1: an exogenous increase in demand would have caused an increase in price • We are therefore clearly observing an exogenous increase in British supply

  46. FIGURE 1: Effects of an Increase in Overseas Demand

  47. Increase in domestic supply • Furthermore, since price fell sharply, demand must have been fairly elastic (FIGURE 2) • This means many of the gains of technological progress in GB were shared with rest of the world through a deterioration in the terms of trade

  48. FIGURE 2: Elasticity of Demand in the Cotton Industry

  49. Williams Thesis • This disposes of one part of the “Williams Thesis”: the idea that GB developed by exploiting trade relations with the periphery to earn huge profits which financed investment • But as Findlay and O’Rourke point out, this still leaves open another aspect of the Williams Thesis, since GB cotton industry grew by importing raw cotton from slave plantations in the New World

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