This post covers some abstracts from Robert Allen's excellent introductory book on Global Economic History. Its fundamental quest is why some countries get rich while others remain poor.
A central point that Allen raises is the gridlock of low wages constraining growth. Abundant cheap labour deters capital deepening, which is essential to raise productivity and increase wages. Low wages also means that the average purchasing power is low.
Britain’s high-wage, cheap-energy economy made it profitable for British firms to invent and use the breakthrough technologies of the Industrial Revolution... wages in Britain were sufficiently high for most people to eat bread, beef, and beer, instead of subsisting on oatmeal. More to the point, so far as technology is concerned, British wages were high relative to the price of capital... In the early 19th century, which is the first time a comparison can be made with Asia, labour was even cheaper relative to capital in India than it was in France or Austria. The incentive to mechanize production was correspondingly less in India... As a result of these differences in wages and prices, businesses in England found it profitable to use technology that saved on expensive labour by increasing the use of cheap energy and capital. With more capital and energy at their disposal, British workers became more productive – the secret of economic growth. In Asia and Africa, the cheapness of labour led to the opposite result... the technology of the Industrial Revolution was inappropriate for continental countries where wages were lower and energy prices generally higher than in Britain... the high wages of rich countries induced them to invent products that economized on labour by increasing the use of capital. This led to an ascending spiral of progress: high wages induced more capital-intensive production that, in turn, led to higher wages. This spiral underlies the rising incomes of rich countries...
The reason that poor countries are poor is because they use technology that was developed by rich countries in the past. The most successful industry of many developing countries is the manufacture of clothing. The key technology is the sewing machine. The treadle sewing machine was first produced commercially in the 1850s, and the electric sewing machine was introduced in 1889. Export success in most developing countries today is based on 19th-century technology... Even in 1990, capital per worker in India had increased only to $1,946 and output per worker had reached $3,235 – putting India on a par with Britain in 1820. The obvious question is why Peru, Zimbabwe, Malawi, and India do not adopt the technology of the Western countries and become rich themselves. The answer is that it would not pay. Western technology in the 21st century uses vast amounts of capital per worker. It only pays to substitute that much capital for labour when wages are high relative to capital costs... When capital per worker is high, it takes a lot more capital per worker to increase output per worker by $1,000 than is required when capital per worker is low. Labour has to be very expensive to make it worthwhile to build all that extra capital. The Western countries have experienced a development trajectory in which higher wages led to the invention of labour-saving technology, whose use drove up labour productivity and wages with it. The cycle repeats. Today’s poor countries missed the elevator. They have low wages and high capital costs, so they make do with archaic technology and low incomes...
The power loom was never cost-effective in low-wage countries, where people continued to weave with hand looms... In the 1890s, an English immigrant named James Henry Northrop made a series of inventions that resulted in a fully automatic loom. It greatly increased labour productivity but required substantial investment. These looms were profitable to install in America where wages were very high, but they were too expensive to use in Britain – even though Britain was a high-wage economy by world standards. The Northrop loom was even less appropriate in poor countries. The process of technical change, in which inventors in the leading economies sought to save high-wage labour, resulted in machinery that further increased the competitive advantage of rich countries without conferring any advantage on the poor countries of the world.
This about the role of cotton industry in triggering Industrial Revolution in England and the iterative evolution of the associated technologies is instructive,
James Hargreaves’ spinning jenny, developed in the mid-1760s, was the first commercially successful machine, followed closely by Richard Arkwright’s water frame. Samuel Crompton’s mule, invented in the 1770s, married the jenny and the water frame (hence its name) and became the basis of mechanical spinning for a century. These machines owed nothing to scientific discoveries. None involved great conceptual leaps; instead, they required years of experimental engineering to come up with designs that worked reliably... The crux in explaining why the Industrial Revolution was invented in Britain is, therefore, explaining why British inventors spent so much time and money doing R&D (Research and Development, that is, Edison’s ‘perspiration’) to operationalize what were often banal ideas. The key is that the machines they invented increased the use of capital to save labour. Consequently, they were profitable to use where labour was expensive and capital was cheap, that is, in England. Nowhere else were the machines profitable. That is why the Industrial Revolution was British.
This about the productivity enhancement from steam engine should put things in perspective when we evaluate digital technologies today.
Half of the growth of labour productivity in Britain in the mid-19th century was due to steam.
This is a good description of how capital intensive manufacturing imports destroyed Indian cotton industry,
In 1812, a group of English cotton manufacturers met to oppose the extension of the East India Company’s trade monopoly. They prepared a memorandum that showed 40-count yarn cost 43 pence per pound to spin in India but only 30 pence in England. The conclusion was that India was a great potential market for British products if only competition were allowed. They were right... they could not have made this argument even ten years earlier, since at that time British 40-count yarn cost 60 pence per pound. The technology of 1802 was not sufficiently productive to undercut India. The machines of 1812 could do that. The machines continued to be improved, and by 1826, the price of 40-count yarn had dropped to 16 pence. At that price, not even the poorest woman in India found it worthwhile to spin, and Indian production of cotton yarn evaporated until mechanized factories were set up in the 1870s... The impact on India was large. The country shifted from being a major exporter to a major importer. The spinning industry was wholly destroyed, and India imported all its cotton yarn. Weaving output also declined, although hand-loom weaving survived on a smaller and less remunerative scale. In Bihar, the share of the work force in manufacturing dropped from 22% around 1810 to 9% in 1901. This was de-industrialization big time!
Allen makes an important claim about the drivers of economic transformation across history, from Napoleonic times to East Asia,
The standard development strategy, which built on Napoleon’s institutional revolution, had four imperatives: create a large national market by abolishing internal tariffs and improving transportation; erect an external tariff to protect ‘infant industries’ from British competition; create banks to stabilize the currency and provide business with capital; and, finally, establish mass education to speed the adoption and invention of technology... The industrialization of the USA also depended on four supportive policies that constituted the ‘standard model’ for economic development in the 19th century. The first was mass education. Great strides in this direction had been taken in the colonial period, and they were extended in the 19th century and were increasingly guided by economic motives. The other three policies were originally proposed by Alexander Hamilton in his Report on Manufactures (1792) and consisted of transportation improvements to expand the market, a national bank to stabilize the currency and insure a supply of credit, and a tariff to protect industry. Without the tariff, the southern and western purchases of manufactures would not have led to US industrialization since Britain would have satisfied the demand, as it did in the colonial period... they were applied by many countries after they were popularised by Friedrich List... US cotton manufacturing grew rapidly behind the tariff wall... Protectionism became a characteristically American policy as Northern interests took charge of the country... It has only been since the Second World War that the USA has sought to unwind the system of protection, finding that its interests were better served by penetrating other countries’ markets than by protecting its own.
He points to an important difference in the industrialisation contexts of today's developing countries with those of their developed peers - the larger minimum size for industrial production.
The difference in wages between rich and poor countries had grown, so that the new highly capital intensive technology of the 1950s was even less suitable to poor countries than was the technology of 1850. In addition, a new problem appeared. The new technology of the mid-20th century involved not only high capital to labour ratios but also large plant sizes. These were often too big for the markets of poor countries. Automobiles are an important example. Most Latin American countries promoted their production, but markets were too small for efficient operation. The MES (minimum efficient size) for vehicle assembly plants in the 1960s was 200,000 autos per year. The MES for engines and transmissions was closer to one million per year, while sheet metal presses could produce four million units in their lifetime. Only seven companies (GM, Ford, Chrysler, Renault, VW, Fiat, and Toyota) produced at least one million autos per year and had engine, transmission, and assembly plants of MES. (Efficiency in metal stamping was realised by changing body design only every few years). Smaller firms were burdened with higher costs.Latin American car markets were smaller. In the 1950s, about 50,000 new cars were sold each year in Argentina. Impost substitution industrialisation (ISI) looked a great success in terms of the growth in output, but the industry was far too small to realize the economies of large-scale production. The small size of the national market was exacerbated by its division amongst 13 firms, the largest of which produced only 57,000 vehicles. The upshot was that the cost of producing an automobile in Argentina was 2.5 times the cost in the USA. Argentina could never compete internationally with this industrial structure, and the overall efficiency of the economy was dragged down by this sector... The contrast with the 19th century is stark. Scale was not an issue then. Around 1850, a typical cotton mill had 2,000 spindles and processed 50 tons of yarn per year. The USA consumed about 100,000 tons of yarn annually, so it could accommodate 2,000 cotton mills of the MES. It was the same story in other modern industries: a blast furnace produced 5,000 tons per year and total consumption in the USA was about 800,000 tons, or 160 times MES; a rail mill rolled 15,000 tons of rails per year, while the USA laid 400,000 tons (only 27 times more!). The high USA and European tariffs raised the prices paid by consumers in the 19th century, but they did not burden their economies with an inefficient industrial structure. That is a fundamental reason why the standard model worked in North America but not in South America.
This is an interesting point about Africa,
Poverty itself is a cause of warfare since it makes recruiting troops very cheap. Low wages causing war, which, in turn, restrains the economy, leading to low wages – another poverty trap. In addition, the actors and issues in many well-known wars were the creations of colonial indirect rule.
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