6. History: Industrial Rev. 1

What was the Industrial Revolution?

Technological innovation
• Rapid acceleration of invention after c. 1760
• Continuous process rather than a single breakthrough
Types of innovation
1. Macro inventions: fundamentally new technologies, creating large productivity gains, opening opportunities for further innovation: Steam engine, Mechanical spinnin, Coke smelting

2. Micro inventions: incremental improvements on existing technologies that increase efficiency and reduce production costs
What drives innovation?
 Supply of ideas (“inspiration”): scientific knowledge, experimentation, inventive talent
 Demand for innovation (“perspiration”): firms invest in R&D only if innovation is profitable – economic incentives matter

The Industrial Revolution represented:

• The first episode of sustained modern economic growth

• The beginning of continuous technological progress

• The fundamental transition from an organic to an industrial economy

Why was it British?

Allen: The Industrial Revolution was a product of induced innovation responding to relative factor prices.

Britain invented industrial technology because it was profitable
given the relative factor prices that prevailed in the country.
– high wages relative to capital and energy costs
➢ Labour-saving technology made Britain more competitive.
➢ Technology spread internationally only once productivity gains became
sufficiently large

Competing explanations: Allen vs Mokyr

Allen: relative factor prices

• High wages and cheap energy created demand for labour-saving technology.

• Innovation was induced by expected profitability.

Mokyr: institutions and scientific culture

• Scientific knowledge and the Enlightenment increased the supply of useful ideas.

• Institutions and intellectual networks encouraged experimentation and diffusion.

Best conclusion: Mokyr helps explain the supply of ideas, while Allen explains why particular labour-saving technologies became commercially profitable in Britain.

Theory of technology choice

Habakkuk (1962): countries choose technologies that best fit their factor endowments
– Countries with abundant labour but scarce capital or natural resources adopt labour-intensive technologies.
– Capital and resource rich countries adopt labour-saving technologies.
• Allen: industrial technology was labour-saving
i. First adopted in Britain, where the relative wage was very high.
ii. Initially, it did not pay off in countries where labour was relatively cheap.
iii. BUT, over time, micro-inventions made it so efficient that productivity gains outweighed wage differentials.
➢ Technology evolves endogenously in response to economic incentives

Allen uses an idea associated with John Hicks:

Changes in relative input prices encourage inventions that economize on the input that has become relatively expensive.

British inventors consequently developed technology that saved labour because labour was the expensive input. It was expensive relatively to capital

This is called biased or directed technological change.

A new machine was not automatically “better” in every country. Its value depended on local factor prices.

Example

Suppose a machine:

• Uses more capital

• Consumes more coal

• Requires fewer workers

It will be attractive where wages are high and coal is cheap—Britain.

It will be unattractive where labour is cheap and energy expensive—China or much of continental Europe.

Example: spinning

Proto-industry vs factory industry

Proto-industry:

-production in rural households

-merchants provided raw materials

-merchants marketed output

-labour remained largely manual

-Low fixed capital

-flexible production

Factory Industry:

-workers and machines concentrated in one location

-greater supervision and standardization

-increasing use of steam power

-machanization and division of labour

-large fixed-capital investment

-higer productivity

Industrial production

Industrialisation transformed both technology and the
organisation of production:
1. Machinery replaced manual labour
2. Steam and coal replaced animate power
3. Manufactured inputs (iron, steel) replaced natural materials
4. Larger factories increased division of labour
5. Production became increasingly capital intensive

Changing energy use

Early industrialization
‒ Water remained the main power source
‒ Iron initially produced with wood/charcoal
‒ Horse power remained important in transport (even for railways)
Transition to coal was gradual
‒ Early steam engines were highly inefficient
‒ Profitable only close to coal mines
➢ Factory industry located near coalfields

-Industrial production concentrated in northern England

-Close proximity to coalfields lowered energy costs

- Textile and iron industries clustered geographically
Geography mattered because transport remained expensive

London helped create Britain’s coal economy, but the Industrial Revolution concentrated near the coalfields because energy was much cheaper there.

Technological improvement
‒ Steam efficiency improved dramatically
o Coal consumed per horsepower-hour fell by factor of 45 (1730-
1875)
‒ Industry gradually spreads beyond coalfields

The location of industry

-Industrial production concentrated in northern England

-Close proximity to coalfields lowered energy costs

-Textile and iron industries clustered geographically

-Geography mattered because transport remained expensive

The role of steam power

General Purpose Technology (GPT)
‒ New technologies that affect the entire economy
‒ Drastically alter way of life and social conditions
GPTs define stages of industrialization
‒ 1st Industrial Revolution (1760s-1860s): steam engine
‒ 2nd Industrial Revolution (1870s-1930s): electricity, inter-changeable parts, the combustion engine
‒ 3rd Industrial Revolution (1970s-1980s): automation, computers
‒ Information Revolution (since 1990s): Internet, smart communication
➢ Steam was Britain’s first GPT because it transformed production across many sectors

The role of factor prices

Relative factor prices
‒ Not the nominal price of production factors, but their price relative to
the price of other factors.
‒ E.g. relative price of labour: nominal wages relative to the price of
capital or price of resources (land, fuel)

Technology choice depends on relative factor prices
‒ Firms maximize profits by minimizing factor costs
➢ Firms choose technologies that economize on the most expensive factor
inputs

The price of labour:

• Nominal wages highest in north-west Europe
• British wages exceeded continental Europe by a wide margin
• Labour-saving innovations therefore generated unusually high returns
• High wages alone were insufficient – relative prices mattered!

Real wages:

Britain remained among Europe’s highest wage economies
• Purchasing power exceeded much of continental Europe
• High real wages increased incentives for mechanisation
• Supports Allen’s “high-wage economy” hypothesis

The relative price of labour:

British labour was expensive relative to capital
• Mechanisation therefore reduced production costs
• Same technology was initially unprofitable elsewhere
• Relative – not absolute – prices determine technology choice

High wages affect demand and supply

Demand for technology

High wages encouraged businesses to seek labour-saving machinery. As firms choose technologies that economize on the most expensive factor inputs.

Supply of technology

High wages also allowed more people to afford:

• Education

• Apprenticeships

• Technical training

• Books

• Mathematical knowledge

Consequently, Britain had comparatively high literacy and numeracy, increasing the number of people capable of invention and technical improvement.

Purchasing power exceeded much of continental Europe!

High incomes also created mass demand for goods previously considered luxuries, including imported Asian products. This stimulated product innovation and imitation. (→ high wages alone were insufficient - relative prices mattered)

Low price of energy

Coal was exceptionally cheap in Britain
• Low energy prices encouraged energy-intensive production
• Britain combined expensive labour with cheap energy
• This factor-price combination was internationally unusual

Britain combined Europe’s highest wages with among the cheapest energy
• Labour-saving technology yielded exceptionally high profits
• This explains why industrial inventions originated in Britain

→ unique factor price ratio

Factor substitution

Induced innovation
– Firms substituted capital and energy for labour
– High wages increased returns to labour-saving inventions
– Cheap coal lowered operating costs of machinery
Macro inventions
– Initially inefficient and energy intensive
– Profitable only under British factor prices
Long-run effect
– Mechanisation raised labour productivity
– Real wages increased further with productivity

Why Britain and not Asia ?

Pomeranz: ‘Britain was first because it had coal’
– More precisely, Britain had coal where industry was concentrated.
– China had coal, too, but thousands of miles north from the Yangzi delta.
– Japan had coal, too, but very far from Kyoto and Edo.
• Allen: cheap coal mattered because of expensive labour
– British manufacturers developed energy intensive technologies that were
labour saving because labour was relatively expensive.
– In China and Japan labour was relatively cheap favouring labour-intensive
production – labour-saving machinery offered much smaller cost
advantage
Example: potteries

British firms adopted coal-intensive kilns
• Higher fixed costs but lower labour
requirements
• Profitable because coal was cheap
Chines firms adopted energy-saving but labour-intensive kilns
• Labour was abundant and cheap – energy expensive

Why not France ?

Adam Smith: English pin factories were more efficient because they had greater division of labour.
• Allen: English and French factories were both highly mechanised
– But French factories relied more heavily on human labour
– Britsh factories substituted cheap energy for expensive labour
– Same industry, different optimal technology