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«by Robert C. Allen Professor of Economic History Department of Economics and Nuffield College Oxford University Email: ...»

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In pre-industrial Europe, real wages moved inversely to the population. As Figure 2 indicates, the real wage rose in Britain and Italy after the Black Death of 1348/9, which cut the population by about one third. As population growth resumed, the real wage fell in most of Europe between the fifteenth century and the eighteenth. The Low Countries were an important exception to this trend. Real wages fell in rural England in the sixteenth century, but London bucked the trend in the same way as Antwerp and Amsterdam, and, indeed, as we have seen, living standards rose generally in southern England from 1650 onwards. Why were England and the Low Countries successful?

The superior real wage performance of northwestern Europe was due to a boom in international trade. The English boom began with the export of ‘new draperies’ in the late sixteenth century. These were light woolen clothes made in East Anglia and exported to the Mediterranean through London. Between 1500 and 1600, the population of London grew from about 50,000 to 200,000 in response to the trade-induced growth in labour demand.

During the Commonwealth, Cromwell initiated an active imperial policy, and it was continued through the eighteenth century (O’Brien 2006). In a mercantilist age, imperialism was necessary to expand trade, and greater trade led to urbanization. Between 1600 and 1700, London’s population doubled again, and by 1800 it approached one million. In the eighteenth century, urbanization picked up throughout England as colonial trade increased and manufacturing oriented to colonial markets expanded. Between 1500 and 1800, the fraction of the English population living in settlements of more than 10,000 people increased from 7% to 29%. The share of the workforce in agriculture dropped from about 75% to 35%.

Only the Low Countries, whose economies were also oriented to international trade, experienced similarly sweeping structural transformations. In the eighteenth century, the Dutch and the English had much more trade per capita than other countries in Europe.

Econometric analysis shows that the greater volume of trade explains why their wages were maintained (or increased) even as their populations grew (Acemoglu, Johnson, Robinson 2005, Wrigley 1987, O’Brien 1999, Ormrod 2003, Allen 2000, 2003).

–  –  –

off. As London grew, the demand for fuel expanded, 14 and the cost of fire wood and charcoal increased 12 sharply as fuel was brought from greater distances. 10 Coal, on the other hand, was available in unlimited 8 supply at constant real cost from the fifteenth to the 6 nineteenth century. In the late middle ages, coal and 4 charcoal sold at about the same price per BTU in London. The market for coal was limited to blacksmithing and lime burning. In all other uses, 140014501500155016001650170017501800 sulfur made coal an inferior fuel. As London’s wood coal population exploded in the late sixteenth century, the demand for fuel rose, as did the prices of charcoal and firewood. By 1585, wood fuel was selling for twice the price per BTU as coal (Figure 6). That differential made it worthwhile for buyers to figure out how to substitute coal for wood–in fact, a difficult problem (Nef 1932)–and shipments of coal from Newcastle to London began their rapid growth. The takeoff of the coal industry was, thus, due to the growth of London. Since this was due to the growth of international trade, the exploitation of Britain’s coal resources were the result of the country’s success in the global economy as well as the presence of coal in the ground.

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. With the exception of the mines near Mons and Liège, they were largely ignored before the nineteenth century. 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.

Why Britain’s unique wages and prices mattered: Substituting Capital for Labour Britain’s high wage, cheap energy economy was an important determinant of the pace and character of technical change. There were both demand and supply links, and I begin with the former. In analyzing these, it is useful to distinguish between product and process innovations, for they were influenced by different features of the price structure.

Historians of consumption have emphasized product innovations as a cause of the industrial revolution (Berg 2005). Trade with Asia brought new products to Britain–cotton fabrics, Chinese porcelain, coffee and tea. Britain’s high wages meant that the demand for these goods was not confined to the middle classes but included skilled workers and even labourers, so the market was far broader than in much of Europe. British manufacturers attempted to make these goods or imitations of them in order to meet that demand. Cotton textiles is a famous example we will consider later. There was also much product innovation in porcelain as English manufacturers (Wedgewood is the most famous) developed materials and designs that could compete with the Chinese (Young 1999). To an important extent, the industrial revolution was an exercise in import substitution.

Process innovations were important in their own right, and much of the product innovation also involved redesigning production processes to suit British conditions. What mattered was the wage of labour relative to the prices of capital and energy. Britain’s high–and rising wage–induced a demand for technology that substituted capital and energy for labour. At the end of the middle ages, there was little variation across Europe in capitallabour ratios. As the wage rose relative to the price of capital in Britain, it was increasingly desirable to substitute capital for labour and that is what happened. Sir John Hicks (1932, pp.

124-5) had the essential insight: “The real reason for the predominance of labour saving inventions is surely that...a change in the relative prices of the factors of production is itself a spur to innovation and to inventions of a particular kind–directed at economizing the use of a factor which has become relatively expensive.” Habakkuk (1962) used this insight to argue that high wages led Americans to invent labour saving technology in the nineteenth century, and a similar situation obtained in eighteenth century Britain.4 Economists have since debated how to formalize these ideas (David 1975, pp. 19-91, Temin 1971, Ruttan 2001, Ruttan and Thirtle 2001, Acemoglu 2003). One problem is that businesses are only concerned about costs in toto–and not about labour costs or energy costs in particular–so all cost reductions are equally welcome. I will not review the debate here. Instead, I will show that invention in the British Industrial Revolution was consistent with Hick’s observation, while the subsequent perfection of technology looks more like a neutral process. 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.

Thanks to Adam Smith, the pin factory is the most famous production process of the eighteenth century. Smith argued that high productivity was achieved through a division of labour among hand workers. It is very likely that he derived his knowledge from Diderot and d’Alembert’s Encyclopédie (1765, Vol. V, pp. 804-7, Vol. XXI, ‘épinglier’) since both texts divide the production process into eighteen stages, and that cannot be a coincidence.5 Indeed, Smith seems to have used the Encyclopédie for the exact purpose that Mokyr suggests–to find out about the latest technology.

There is a difficulty, however. The Encyclopédie’s account is based on the production methods at l’Aigle in Normandy. This was not the state-of-the-art practise as carried on in Britain. The first high tech pin factory in England was built by the Dockwra Copper Company in 1692, and it was followed by the Warmley works near Bristol in midcentury.

(Hamilton 1926, pp. 103, 255-7). The latter was a well-known tourist destination (Russell 1769), and Arthur Young visited it. Both mills were known for their high degree of mechanization, and they differed most strikingly from Normandy in the provision of power.

In L’Aigle, machines were powered by people turning fly wheels that looked like spinning wheels. In contrast, the Warmley mill was driven by water power. Since the natural flow of the stream could not be relied on, a Newcomen steam engine was used to pump water from the outflow of the water wheel back into the reservoir that supplied it. “All the machines and wheels are set in motions by water; for raising which, there is a prodigious fire engine, which raises, as it is said, 3000 hogsheads every minute.” (Young 1771, p. 138.) Powering the mill in this way immediately eliminated the jobs of the wheel turners (their wages amounted to one sixth of the cost of fabricating copper rod into pins) and probably other jobs as well.

Many French workers, for instance, were employed scouring pins. This activity was done with large machines driven by water power at English needle factories at the time.6 Arthur Young observed that the Warmley works “are very well worth seeing.” It is a pity that Adam Fremdling (2004, pp. 168-9) entertains this possibility, as does Mokyr (1993, pp. 87who also raises many objections to it.

Peaucelle (1999, 2005, 2006) has examined Smith’s sources very carefully and identified several additional French publications that he argues Smith relied on. All of these sources describe production in Normandy.

Early eighteenth century water-driven scouring machinery is still in operation and can be seen at the Forge Mill Needle Museum, Redditch.

Smith relied on the French Encyclopédie to learn about the latest in technology rather than travelling with Arthur Young.

Why did the English operate with a more capital and energy intensive technology than the French? L’Aigle was on a river, and water power drove a forge in the town, so geography was not a bar (indeed, the steam engine at Warmley shows that water power was possible almost anywhere if you were willing to bear the cost of a steam engine). The Swedish engineer R.R. Angerstein (1753-5, p. 138) visited Warmley in the 1750s and noted that “the works uses 5000 bushels of coal every week, which, because they have their own coal mines, only costs three Swedish ‘styfwer’ per bushel,” which was about half the Newcastle price.7 In addition, English wages were considerably higher than French wages. Innovation in pin making is an example of factor prices guiding the evolution of technology.

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.

One of the big themes in the history of the industrial revolution is the lag in adopting British technology on the continent. There has been a tendency to regard the inventions of the industrial revolution as such marvellous improvements that only a fool would ignore them.

Coke smelting is an important example, and Landes (1969, pp. 216, 528) attributed its slow diffusion on the continent to entrepreneurial failure. However, a close study of the economics shows that coke 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.

Research and development was expensive, and it was fundamental to inventing in the eighteenth century. Consequently, inventions were undertaken only when the R&D benefits exceeded the costs. If the French or Germans did not adopted an invention when it was freely available, then it brought them no benefit, and there would have been no point in expending resources to have invented it. If we ask why coke smelting, or the spinning jenny, or the steam engine were invented in Britain rather than in China or France, the adoption lags imply that the rates of return to these R&D projects were zero outside Britain. To understand invention, we do not have to entertain the arcane questions that arise in cultural discussions of the topic: Did Chinese science have a sufficiently developed concept of the vacuum to allow the conceptualization of the low pressure steam engine? Was French engineering theoretically inclined while British was empirical? The answer lies in different economic conditions that led different countries to invent different kinds of technology.

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 costI am thank Martin Dribe for help in deciphering the Swedish stwyfer.

effective in more places and led to its spread across the continent later in the nineteenth century.

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