Random thoughts on critiques of Allen’s theory of the Industrial Revolution

{ This post is mostly stringing together my scattered tweets over the past couple of weeks. I’ve had numerous discussions on this subject with Vincent Geloso, Judy Stephenson, Ben Schneider, Benjamin Guilbert, Anton Howes, and Mark Koyama. But yesterday Geloso sent me the paper he’s working on for Alsatian wages and that kick-started further thoughts I shared with Geloso privately, and then with the others on Twitter. You can follow the most recent discussion below this tweet, although it’s very difficult to keep track of the many different threads. I’m generally a sceptic of Allen’s theory, but in this post it seems I ended up critiqueing the critiques as much as Allen himself. }


First, a quick preface. I love the work of Robert Allen. I love his papers on steel from the 1970s and 1980s. I have a love-hate relationship (on some days love, some days hate) with his book on the Soviet Union. I swoon over his work on English agriculture. And his little book on global economic history — is there a greater marvel of illuminating concision than that?

Allen has an old-fashioned interest in the economics of making stuff, the bread-and-butter of traditional economic history. He doesn’t shy away from learning the nuts and bolts of technology, which too many economists and historians do these days. Inasmuch as he discusses other things like institutions or culture, he doesn’t get carried away by lofty abstractions, and his point of departure is always the very concrete reasons that a firm or an industry or a country is more productive than another. I’m not rubbishing institutions or culture as explanations — I’m just saying, Allen’s virtue is to start with problems of production first.

Yet I always find myself in the peculiar position of loving his work like a fan-girl and disagreeing with so much of it.

In particular, I’m sceptical of his theory of the Industrial Revolution.

51p8cjrfv0l-_sx331_bo1204203200_

Allen has been advocating for at least 20 years now that England in the 18th century possessed a “high wage economy”. English labour costs relative to continental Europe and Asia were unusually high. This is an important part of his “induced innovation theory” for the invention and adoption of machines in the leading industries of the Industrial Revolution. In short, England’s high wages relative to its cheap energy and low capital costs biased technical innovation in favour of labour-saving equipment, and that is why it was cost-effective to industrialise in England first, before the rest of Europe (let alone Asia).

I hasten to add, Allen’s is not a monocausal theory. To the contrary, it is a complete multi-causal model, but his distinctive contribution is the high-wage economy. Here is Allen’s own flowchart taken from the book:

allendiagr

The theory is appealing, in part, because the technological innovations of the early Industrial Revolution were not exactly rocket science (a phrase used by Allen himself), so one wonders why they weren’t invented earlier and elsewhere. (Mokyr paraphrasing Cardwell said something like nothing invented in the early IR period would have puzzled Archimedes.)

But I’ve always had reasons to doubt it. As Mokyr has tirelessly argued, inventions were too widespread across British society to be a matter of just the right incentives and expanding markets — and this is a point now being massively amplified by Anton Howes.

There are more concrete reasons for scepticism. As Kelly, Mokyr, & Ó Gráda (2014) have pointed out, although nominal and real wages were indeed higher in Britain, Allen must assume that unit labour costs (wage divided by labour productivity) were also higher. But if the Anglo-French wage gap were matched by a commensurate labour productivity gap, then the labour cost to the employer would have been the same in the two countries. Actually Allen himself brings up the issue of unit labour cost in his book, but mostly hand-waves it away and implicitly assumes that ULC was higher in England. But that’s far from proven.

Besides, you already had capital-intensive production techniques in several sectors well before the classic industrial revolution period — especially in silk and calico-printing. Silk-throwing (analogous to spinning in cotton) was mechanised in Italy before 1700. The idea was pirated by Lombe who set up a water-powered silk-throwing factory circa 1719, and he was imitated by many others by the 1730s. Then you had heavily machine-dependent printing works for textiles (especially calicoes) in many European cities before the canonical industrial revolution period. None of these seemed to require Allen’s “high wage economy”. (Not to mention, Allen’s model has implications for the diffusion of the Industrial Revolution, and Scottish industrialisation was almost simultaneous with the English one, despite wage differences.)

Nonetheless, I had mentally reconciled Allen and Mokyr in the manner of Crafts by considering Mokyr = supply of inventions, Allen = demand.

But there has been a spate of critiques of Allen’s work recently. Humphries (2013); Gragnolati et al. (2011); and Stephenson (2016). The latter establishes through archival research that those builders’ wages for London on which so much of Allen’s reasoning is based weren’t wages at all, but fees paid to labour contractors and in fact the wages received were at least 20-30% lower. (That doesn’t really address the issue of the actual labour cost to firms, though.)

Then there’s Humphries & Schneider (2016). Most of the wages cited in the literature have been drawn from secondary literature (books, pamphlets, etc.), but Humphries & Schneider actually dug into all kinds of archival sources to show that the estimated 1 million women and children who spun yarn with wool, linen, and cotton in their rural homes were paid much lower wages than Allen’s narrative has relied on: ~4 d [pence] per day, rather than the >8d/day assumed in Allen. And one of the showcases of his theory is the series of inventions mechanising yarn spinning!

hs

The source of the data makes H & S conclusions persuasive, but it’s also theoretically compelling. Men, especially in big cities, may have been paid higher wages, but women and children in the countryside were not. This makes early modern England much more like a “surplus labour economy” with an “unlimited supply of labour” à la Arthur Lewis. H & S describe putting-out merchants expanding their network of spinners farther and farther away from their core areas to find fresh labour, so that even as the demand for cloth rose they could avoid bidding up wages. This was probably reinforced by a cartel-like arrangement amongst the merchants. Labour market monopsonists also loom large in modern development microeconomics!

Quick thoughts on some of these critiques:

Allen v Gragnolati: At least on the question of the jenny, Allen’s Achilles’s heel may be working hours. In the spinning jenny paper where Allen argues the jenny was profitable in England but not in France, he assumes total production stays the same when spinning productivity rises with the jenny, because households reduce working hours in response. Gragnolati et al. asked him why not increase production in order to earn more income? The jenny would have been profitable in France as long as total output rose. Allen’s response was to cite his paper with Weisdorf. He argues that the existing working hours/year estimates are consistent with the idea that British households maintained a fixed consumption target, according to which they adjusted work hours in conjunction with market wage rates. Allen’s argument therefore implicitly assumes that British and French spinners had similar preferences for leisure-work tradeoff. But this is a highly uncertain result, and it goes against the spirit of the “Industrious Revolution“. I can’t imagine this will hold up in future work. Besides, I violently hate the “peasant mode of production” idea… (Also see this.)

The wage gap & market size: I’ve mentioned this many times to people on both Twitter and in real life, but the role of market size in Allen’s model gets too often neglected. The question that no critic of Allen has so far posed is this: what is the wage gap between Britain and France that renders inventions in Great Britain profitable but not in France, given the two countries’ differences in market size. There’s a balance between factor savings due to inventions and the costs of invention which are reduced as a function of market size (i.e., costs divided by the number of goods possible to produce in a given market. In terms of the isocost model used by Allen which simplifies a section of Acemoglu’s “Directed Technical Change” paper, bigger the market size, bigger is the isocost’s shift to the origin for any given fixed cost of invention. BTW, the wage rate affects the slope of the French and British isocost curves in Allen.)

The real wage ratio for Paris/London used by Allen is ~50% in 1750-1775 and ~57% in 1775-1786, and this gets adjusted by Stephenson (2016) to ~62% and ~71% respectively. But the significance of the “Stephenson adjustment” can only be assessed in relation to market size differentials between France and Britain. And by “market size” we must take into consideration not only population and colonies but also internal barriers to trade.

But of course it’s entirely possible that further research might revise French wages upward or downward, making the Anglo-French wage gap smaller or bigger.

Allen & labour markets: The downward wage revision for spinners by Humphries & Schneider (2016) is also restricted to Britain and therefore does not address Allen’s international comparison.

Another potential problem is there may be a regional and sectoral heterogeneity in spinning wages, and Humphries & Schneider have very few cotton- and Lancashire-specific observations.

Allen assumes that wages in cotton were set by wool, which as late as 1770 is estimated at >90% of textile value added in the UK. This is equivalent to an assumption that the British labour market was well-integrated and labour was mobile. But this is unrealistic. There were natural, institutional, infrastructural, and possibly cultural reasons for labour to be relatively immobile at the time — at least between provinces rather than from the provinces to the cities. And this would have been even more likely under the rural putting-out system. Remember, we’re not talking about firms here, but about proto-industry — production taking place inside hovels.

And IF labour markets were highly local and fragmented, then that ironically supports Allen’s view against the criticism found in Humphries & Schneider (2016). What matters is not the ‘national’ wage set by spinning wool, but the specifically cotton wages paid specifically in Lancashire. (There might have even been variation within Lancashire.) You can have local labour ‘shortages’, when the labour market is not national.

In the surplus labour scenario envisioned by Humphries & Schneider, rising demand for labour need not bid up wages. But if labour markets were fragmented and local, then the Lewis-like model need not apply.

It is not convincing to argue that ‘labour-saving’ is seldom if ever mentioned in patent applications or in inventors’ records. Demand for cotton goods was growing faster than wool, and on first approximation this implies demand for cotton-specific labour was growing and cotton-specific wages could be bid up in local labour markets. The motive for producing more output faster is equivalent (especially in a constant returns-to-scale industry like textile putting-out) to demanding more labour.

It could be argued that even if labour was not very mobile, the putting-out merchants were. They could have widened their spinning network and induced more households to spin cotton rather than wool, as the demand for cotton grew. But (again) that implies higher wages in cotton than in wool.

Besides, under the putting-out system, expanding output (=increasing labour inputs proportionately) could raise transaction costs rapidly and prohibitively. Merchant-middlemen had to deliver raw material to each household, retrieve the yarn, then deliver the yarn to weavers, and then retrieve the cloth. Thus there was a natural constraint on output.


Edit-addendum (7 Dec. 2016):

Besides the question, “why was it not invented in France?”, I would also ask, “under what factor price ratios did the technology diffuse to France?” and “how did the British technology that was finally adopted in France differ from the original inventions in Britain”?

Allen’s model has very strong implications not just for invention, but for diffusion of technology. The initial invention is factor-biased, but subsequent modifications/learning-by-doing/microinventions economise on all factors of production. (Allen’s example: more energy efficiency even though coal was cheap.) When unit costs fall enough, then even in economic environments with quite different factor price ratios, the adoption of the modified technology should be possible.

That’s his theory anyway. But that adds another method of testing. Were the factor price ratios in France after 1800 ‘correct’ for the technology that was adopted? The jennies and the water-frames that were adopted in France after 1790 almost certainly had more spindles and (in the case of the frame) were more energy-efficient.

Other blogs on Allen:

How (much) were British workers paid? Evidence beyond wage rates

Spinning little stories: Why cotton in the Industrial Revolution was not what you think

The High Wage Economy: the Stephenson critic

England circa 1700: low-wage or high-wage, which blogs about the new working paper by Humphries & Weisdorf (2016). Vincent Geloso’s summary: “preindustrial labor markets had search costs; workers were willing to sacrifice on the daily wage rate (lower w) in order to obtain steady employment (greater L) and thus the proper variable of interest is the wage paid on annual contracts”.

Vollrath on Allen vs Mokyr

Howes on Allen vs Mokyr

Vincent Geloso’s summary of the Twitter ménage à entre-quatre-et-huit.

By the way, evidence from Spain does lend some support to Allen. Martínez-Galarraga & Prat (2015) find relatively high wages were a factor in Catalan industrialisation. Also see their post explaining their findings at Nada es Gratis (in Spanish). Some other historical induced innovation evidence include: Hornbeck & Naidu (2014) and Hanlon (2015).

Edit 7 Dec 2016: Vincent Geloso has another post with a new summary.

Edit 6 Dec 2016: Several people have mentioned Temin‘s debate with Habakkuk as an argument also against Allen. The USA was also a high wage economy relative to UK in the 19th century, and this was also true for other land-abundant settler economies such as Canada, Australia, and possibly Argentina in the 19th century. However, Temin’s actual argument was that wages in the USA were higher than in the UK, but then so were interest rates and the cost of capital. Allen, by contrast, argues that wages in England > France, but both energy and capital were cheaper in England than in France. The USA, as it happens, was abundant in land and natural resources and manufacturing was quite resource-intensive. Cf. Wright (1990). That’s consistent with Allen’s induced innovation idea. Also see Allen (2012).

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23 Responses to Random thoughts on critiques of Allen’s theory of the Industrial Revolution

  1. russell1200 says:

    To come up with an economic-solution to the revolution that was going on in Western Europe, when there are so many political, social, military, etc. upheavals, strikes me as narrow sited. I am sure there were economic reasons that a lot was occurring, that much of Europe’s expansion was driven by various mercantile/speculative interests would pretty well insure that.

    But to my mind if you have all this huge upheaval and ferment, it seems like you might want to go back a little further. Which to my mind takes you back into philosophical-social changes that led into the scientific revolution. But that’s pretty well trod ground I guess.

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  2. Anonymous says:

    If you want to go down the costs route, as an explanation for industrialisation, you need to look at rents as well as wages. Britain’s tax structure in the 18th century was strongly property-based. This depressed the price of British land compared to the price of French land where taxes were more sales-based. This meant that the costs of owning British land were relatively low when compared with the costs of employing British people, even though British wages may not have been much different from French wages. As a result the cost of building and running a mill was considerably lower in Britain than it would have been in France. So the economic structure favoured centralised production in Britain whereas in the rest of Europe, home production still had the edge.

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  3. Anonymous says:

    However, in addition to the cost structure, which gave Britons the incentive to industrialise, you have to take into account their educational advantage which gave them the ability to innovate. In particular Britain contained Scotland, the only country in Europe offering universal free education at the time. Granted it was basically just the three R’s. But even that provides the basic kickstart that allows people to self-learn and to spread knowledge of techniques via plans and written documents to a far greater extent than in countries where the proportion of those who could read, write and calculate was far smaller.

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  4. M says:

    like a fan-girl

    You’re a woman???????

    I don’t think I’ve read a woman with a more masculine mind since Deirdre McCloskey.

    Liked by 1 person

  5. Peter T says:

    “nothing invented in the early IR period would have puzzled Archimedes.”

    This is probably true, but also irrelevant. What can be done by one craftsperson slowly, with patience in just suitable materials, is not the same as what can be done by almost any craftsperson equipped with the general knowledge of the craft, commonplace tools and widely available materials. The C17 had a lot more commonplace tools, a lot more knowledge and a much wider range of materials than classical Greece. Watt (or even Newcomen) is hard to envisage without centuries of progress in large-scale iron casting and machining.

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  6. Pingback: Testing the High-Wage Economy (HWE) Hypothesis | Notes On Liberty

  7. Pingback: Spinning little stories about the High Wage Economy. | The Spinning Project

  8. John Styles says:

    It’s been fascinating seeing the responses to Judy Stephenson’s ‘Spinning little stories’ on Twitter and in blogs. I’m keen to offer my own response, but I don’t have a Twitter account and I’ve more to say than will fit into a blog reply box. So I’ve posted a set of comments on the blog page of my spinning-wheel.org website, under the title ‘Spinning little stories about the High Wage Economy’ (www.spinniing-wheel.org/blog). It addresses three issues that have been raised in this debate:-
    1. Robert Allen, induced innovation and the High Wage Economy, and in particular the pitfalls of Franco-British comparisons.
    2. Spinning earnings and work intensity.
    3. Yarn counts and quality.

    Liked by 1 person

  9. Pseudo: You above to Dietz Vollrath’s post on this subject.

    Vollrath’s key point – that Allen offers a potentially generalizable theory for development “takeoff” (use of that old, discredited term is mine, not Vollrath’s) – is probably worth another look: Is there an implicit model in Allen’s theory? What stylized facts might it account for? (Allen himself isn’t interested; he thinks a different “big push” model applies to twentieth century takeoffs, but he might have been right in his BIR theory and wrong about its scope. Look at all the growth economists who have ignored Solow’s view that this model applied only to “developed economies”.)

    For me, the mystery around Mokyr/McCloskey type explanations has been the (albeit contested) slow growth of the early BIR-period; yes, candle-making and a lot of other sectors underwent profound innovative cycles, but these changes, if we are to believe Crafts and Harley, didn’t make much top-line difference, Only a few sectors, like textiles and transportation, eventually made big market-expanding differences. How were they able to do that?

    My guess is that somewhere inside my imaginary “Allen model” are – among other things – switches from land to energy as a factor of production and from non-competitive to competitive goods as the focus of trade. The steam engine and the water frame may not have been any more “induced” than other inventions, but some kind of potential for structural change, related to factor costs, allowed these inventions to both move out the production frontier and find larger markets. None of this could have happened, as you point out, absent sufficient market size and integration, even if it could have gotten started locally (that is, in a high-wage locality) absent labor market integration.

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    • “Vollrath’s key point – that Allen offers a potentially generalizable theory for development “takeoff” (use of that old, discredited term is mine, not Vollrath’s) – is probably worth another look”

      Did you see my addendum about the diffusion implications of Allen’s model?

      “Allen himself isn’t interested; he thinks a different “big push” model applies to twentieth century takeoffs, but he might have been right in his BIR theory and wrong about its scope.”

      No, this is wrong. Allen has argued for the general applicability of his ‘appropriate technology’ view, precisely as Vollrath suggested. See Allen’s “Technology and the great divergence: Global economic development since 1820”. The Big Push, in the Allen view, overcomes the problem of inappropriate technology.

      “Look at all the growth economists who have ignored Solow’s view that this model applied only to “developed economies”.)”

      One phrase: “augmented Solow model”. Cf Mankiw, D. Romer, Weil 1992

      “For me, the mystery around Mokyr/McCloskey type explanations has been the (albeit contested) slow growth of the early BIR-period; yes, candle-making and a lot of other sectors underwent profound innovative cycles, but these changes, if we are to believe Crafts and Harley, didn’t make much top-line difference, Only a few sectors, like textiles and transportation, eventually made big market-expanding differences. How were they able to do that?”

      The Crafts-Harley view is a ‘remainder’ argument that by construction does not take into account (possible) productivity growth in other sectors. First they roughly calculate aggregate productivity and then subtract sectoral productivity growth. The remainder is almost zero, in the C-H view.

      Mokyr also takes the dualist view — a coexistence of a ‘modern’ fast-growing sector and a relatively stagnant traditional sector. See the Editor’s Introduction.

      Besides, it’s possible that many other ‘remainder’ sectors did have discernible but yet-unmeasured rates of growth in productivity but for what ever reason had small weights in total spending. Maybe their initial prices were very high and even decent productivity growth wasn’t enough to lower them enough to show up in spending. That seems easy to reconcile in some kind of model where you first needed more sectoral productivity growth as well as more structural transformation before creating the demand for the ‘remainder’ sectors.

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      • 1) I think your diffusion story (which I had glossed) works very well; the “model” I had in mind was more around takeoff, but you address the “then what?”
        2) Correction accepted, thanks.
        3) But the same convergence & endogenous growth crowds gang up on MRW! E.g., Klenow & Rodriguez-Clare at that Bernanke conference. MRW and M’s subsequent “Growth of Nations” are great papers. Paul Romer’s response to the later proved that slime is an induced invention, so Allen, Acemoglu, etc., must be on to something.
        4) Yes, yes, re Crafts and Harley; they don’t leave enough of a residual after netting out favored sectors even to be “the measure of our ignorance”. But on the other hand, what the heck is a discernible-but-yet-undetected contribution to TFP? It’s like saying, “This doesn’t amount to much, but a lot of them might amount to something.” You can dip the candles; I’ll take the dark satanic mills!
        Great post. And thanks for the leads to Hanlon and Hornbeck & Naidu. Great stuff there.

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        • Which is the Klenow/Rodriguez-Clare paper? Do you mean “Externalities & Growth?” I love that paper and I certainly agree that explains a lot more things than “augmented Solow”. But my point was that what ever Solow originally intended just isn’t the point if the basic model can be modified/adapted. Anyway what I like the MRW is that it has a human capital term and even the best endogenous growth models also have one.

          Re Crafts-Harley — what I mean is that productivity growth in only a handful of sectors has been directly measured. So it’s entirely possible that more sectors were dynamic than implied by the Crafts-Harley view, but they were nonetheless a small part of aggregate spending.

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  10. My reference was to Klenow, Peter, and Andres Rodriguez-Clare. “The neoclassical revival in growth economics: Has it gone too far?.” NBER Macroeconomics Annual 1997, Volume 12. MIT Press, 1997. 73-114.

    Use and misuse of the Solow Model is a big subject. Safe to say neither he nor I would deny that it could be adapted. MRW’s adaption was within the model – they looked at human capital, which Solow himself had done, and found that the model explained more cross-country variance when it had this addition.

    Scroll back a couple of years before MRW to Azariadis, Costas, and Allan Drazen. “Threshold externalities in economic development.” The Quarterly Journal of Economics (1990): 501-526. Here the model is enhanced a la Diamond (1965) and Lucas (1988), but even with all the fancy microfoundations, the scatter diagrams from the cross-country regressions (pp. 520-521) still show mainly developed countries along a convergence frontier predicted by the original model. Solow said that’s because the model only really describes the steady state of developed countries, but Barro and many others seized upon similar regressions, with similar results, to develop institutionalist interpretations of why slow-growing (and usually underdeveloped) counties were failing to occupy the same frontier curve as its mainly-OECD residents. Solow was skeptical of this use of the model; Steven Durlauf, in the last ~15 years, has made more detailed econometric arguments against this approach.

    On the other main update-Solow thread, endogenous growth theory, I share some of Solow’s reservations, but I do admire Chad Jones’ efforts to housebreak these theories and make them empirically workable. Note that this can only be done via dilution: increasing-returns-to-scale theories have a hard life in slow-growth eras like ours.

    This actually brings us back to Crafts and Harley vs. Mokyr & Cie. Your assertion that the early BFR was broadly innovative is not at all out of line with endogenous growth theories such as those of Paul Romer or Aghion and Howitt – as modified by Jones. Over long periods all that creative destruction can net to very slow growth; French War era taxes could have been just as growth inhibiting as Gordonesque “headwinds” are today.

    And then there is the question of just how broad the innovative activity was, even if we can point to many examples. Even today, Robert Lucas (hardly a Solovian) persists in spinning constant return to scale theories despite Romer’s attacks. Lucas agrees lots of scale-busting innovation is going on but sees it as taking place in too small a portion of the economy (what you just said was a possibility for the BIR) to be the recommended focus of growth theory. If we can’t sort this out for the 21st century, no wonder 1790 gives us fits.

    I believe there was broad innovation. Much of it undoubtedly helped businesses and created fortunes – but only some of it was transformative at the economy level. When I ask myself why, I keep coming back to your comment about market size.

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    • Not sure why you’re rehashing all that ancient history. But read this.

      http://www.nber.org/papers/w11009

      Many stylised facts of global growth cannot be explained unless you assume there are knowledge spillovers. What I like about this, however, is that much of TFP growth in developing countries appears to be exogenous, and proportionate to growth in the developed countries.

      This actually brings us back to Crafts and Harley vs. Mokyr & Cie. Your assertion that the early BFR was broadly innovative is not at all out of line with endogenous growth theories such as those of Paul Romer or Aghion and Howitt – as modified by Jones.

      It’s much simpler. Keep it simple. See the recent QJE paper on watches by Kelly & Ó Gráda. Significant productivity growth in watch-making started before the classic IR period. But watches just weren’t a large part of total spending. Really, it’s that simple. Composition effects.

      Over long periods all that creative destruction can net to very slow growth

      There was a lot of creative destruction in the cotton textile industry in the classic IR period. There was considerable heterogeneity in firm size and lots of turnover, but there was still rapid elimination of supernormal profits. And cotton grew fastest.

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  11. 1) Re: ancient history, one short answer is that it isn’t ancient to me, since I have just learned it in the past couple of years. Another is that the history of theory interests me, just as it interested Klenow and Rodriguez-Clare in the article you recommend.

    2) About that paper, which will take me some time to digest, one thing struck me immediately. K & R-C’s essentially propose a completely different set of stylized facts than those that have driven growth theory evaluation before or since. Neither the old Kaldor facts nor the “New Kaldor Facts” of Jones and Romer agree at all that “countries are subject to the same long run growth rate”. Indeed, both set of facts have set theorists to work on the question of why we don’t see common growth.

    However, I like the paper so far. In a sense it says that we need a Diffusion Theory in addition to Growth Theory and I think that is true. This thought is very much in line with Hicks’ 1960 statement (which is in my recent “fractionalization” post on wintertomatodotcom): “But the long-run growth of an economy is not a thing that repeats itself: it does not repeat itself in different nations; their growth is all part of a single world story”. Hicks was “reflecting” on the Corfu conference where the Kaldor facts first surfaced.

    3) The point you make about watchmaking is similar to the point I attributed to Lucas (in a reference I now can’t find) above, but I could have cited Aghion and Howitt or Robert Gordon: both in the BIR and now, there are many innovations that are very important at the success-of-business or quality-of-life level that just don’t show up at the GDP level. I’m interested, being of a macro bent, in the innovations that DO show up at the GDP level. So while I agree completely with the last paragraph of your comment, it’s the last sentence of that paragraph (“Cotton grew fastest”) that points, for me, to the most interesting fact. That’s why Allen intrigues me, even if it turns out that the faster growth of cotton points back to the rest of your paragraph: say, cotton “grew fastest” in England because it succeeded in exporting much of the “destructive” side of its growth to India.

    Did I just skip over your “composition effects”? Yes. I’ll get back to it. Decomposing means is of great interest to me when it comes to incomes, etc. I just haven’t thought that way about sector contributions to growth or GDP.

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    • Generally, I take no interest in the history of economic thought. There’s too much economic history to be busy with. One exception is the history of development economics.

      2) Neither the old Kaldor facts nor the “New Kaldor Facts” of Jones and Romer agree at all that “countries are subject to the same long run growth rate”. Indeed, both set of facts have set theorists to work on the question of why we don’t see common growth.

      Don’t forget the caveat: in steady state! Klenow & Rodriguez-Clare argue growth rates in steady state are common. The New Kaldor Fact #3 in Jones & Romer is the variation in observed growth rates that gets bigger farther from the frontier. Since there is a large variation in input growth rates, you would expect that.

      3) The point you make about watchmaking is similar to the point I attributed to Lucas (in a reference I now can’t find) above, but I could have cited Aghion and Howitt or Robert Gordon: both in the BIR and now, there are many innovations that are very important at the success-of-business or quality-of-life level that just don’t show up at the GDP level.

      I don’t know which Lucas or which Aghion-Howitt you’re talking about, even though I’m familar with their work especially the latter. But the watch-making point is NOT the same as Gordon’s. I am not saying that watch-making productivity growth understates the ‘true’ welfare gains, although it very well might. Nor am I saying that watch-making productivity increased the quantity and quality of leisure which does not show up in GDP. I’m saying watches just weren’t a mass-consumption item in the classic period of the Industrial Revolution. It’s exactly the same reason the mechanisation of silk did not transform the French economy in the same way that the mechanisation of cotton did in Britain (and later other countries).

      Basically, the price elasticity of demand for cotton cloth was much higher than for silk.

      ”(“Cotton grew fastest”) that points, for me, to the most interesting fact. That’s why Allen intrigues me, even if it turns out that the faster growth of cotton points back to the rest of your paragraph: say, cotton “grew fastest” in England because it succeeded in exporting much of the “destructive” side of its growth to India.”

      No, that’s not what I said at all.

      Cotton grew fastest because there was ‘input substitution’. Before mechanised cotton, people generally bought things made of wool and linen, which were expensive, so they bought them sparingly and rarely. Once cotton was mechanised and became cheap enough (after the 1830s), people not only substituted cotton for wool and linen, but also bought more of the goods than they used to. Shirts, shifts, undergarments, etc. had been made of linen, because they were durable and washable. But once cotton became cheap enough, durability was less of an issue, and people simpy bought more of them.

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      • Just responding to the last foil. I wasn’t attributing the “exported destruction” explanation to you; just admitting that cotton’s growth involved just as much creative destruction (a term I’m weary of) as watchmaking, even if (just an idle speculation) both the growth and the destruction involving cotton were far more articulated via an open economy.

        I completely agree that input substitution was a large part of cotton’s success. [I have wondered whether it was a more forced substitution than recorded, since the population was growing and sheep grazing acres were not (Pat Hudson emphatically denies this).] But I think that new export markets – including the need to clothe new world slaves – also explain it. Efficient British cotton won a lot of that and a lot of other overseas business, sometimes with de-industrializing effects elsewhere.

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        • Regarding the 2006 Klenow and Rodrguez-Clare paper, even as I try to evaluate it, the follow-on discussion intensifies elsewhere. Take Chad Jones, who essentially dismisses externality-based growth theories in the latest edition of his book (Jones and Vollrath, 2013, 220-223): In his new: “Life and Growth” paper (NBER and JPE, 2016), he takes on the ultimate external ties in discussing the benefits and risk of new products. While the new Klenow et al. “How Destructive is Innovation” seems to focus more on how much of the economy is explained by various strains of endogenous growth theory, while the externalities go to the background. They haven’t crossed; Jones avoids the e-word by focusing on marginal utility of consumption, and I’m pretty sure Klenow would continue to consider externalities as the mechanism by which the rival theories do or don’t get their work done – but the convergence is interesting.

          The second interesting thing is that nobody talks about capital any more. Klenow et al. follow a number of recents in letting their uber-model be an “AL” model, which mathematically is not much different from an “AK” model: growth is proportional to input times some parameter. Now, if what you are interested in is that parameter, be it the contribution of competing firms, product-improving firms, whatever, why not keep your input model simple and allow your innovation theory maximum room to roam? It’s so “tractable” that way. But despite the fact all these firms – especially the new entrants — need funding, Klenow et al. assume no “financing frictions”. In a sense, magical access to capital becomes part of the incentivizing institutional setup.

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  12. Quick comment about Styles’s blog:

    There are diminishing returns to further discussion of the jenny. I think in his blog Styles is missing the forest for the trees. He himself had already correctly dismissed in his EAJBS article the relevance of the jenny as a macroinvention. AFAIC the jenny is relevant to the Allen discussion mostly because of the “peasant mode of production” assumptions he makes about spinners’ labour supply. (Yes the organisation of work in Normandy is relevant to that issue.)

    But we should not get too diverted from Allen’s broader argument that that there was an economy-wide incentive for mechanisation.

    Styles’s point about the product mix — that the French production of Siamoises was more like checks and stripes than like the Blackburn greys, yet Hargreaves as a BG weaver was specifically motivated by the increased demand for BG — is interesting to a textiles geek (myself included) but it misses the bigger picture.

    Surely what matters to the Allen model is, there was a large and rising demand for cotton goods in general. Perhaps this is more economist versus historian stuff, but if the demand for checks had been rising more briskly than for Blackburn greys, then a different ‘Hargreaves’ weaving something else would have invented a jenny. At least I would make that assumption and I think so would Allen.

    But I do like that Styles agrees with me regarding local wages & local labour markets ….

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  13. Pingback: A Tale of Two Wages: Spinners and the Industrial Revolution | The NEP-HIS Blog

  14. Pingback: Imitar o innovar - Jot Down Cultural Magazine

  15. John Styles says:

    I agree that there are diminishing returns from further discussion of the jenny (although, given how influential yet misleading Robert Allen’s discussion has been, I’m currently writing an article about the rise and fall of the jenny to provide some empirical clarification).

    As far as forests and trees are concerned, I agree Allen’s peasant mode of production assumptions are highly dubious. My book on 18th century clothing – The Dress of the People – criticized similar assumptions embedded in the notion of custom employed by Edward Thompson to characterize plebeian attitudes to both work and consumption.

    As I said in my blog post, I’m not arguing Allen’s induced innovation model is inherently misconceived as a model. But it’s not necessarily the right model. There was certainly rising demand for cottons in the 1750s and 1760s – for candlewick, for cotton stockings, for some heavy fustians, for Blackburn Greys to print, and for checks and stripes (Inikori may have misread some of the evidence about checks, but demand was rising strongly). Raw cotton prices increased and so did linen yarn prices, but linen yarn remained substantially cheaper. If induced innovation is about substituting a cheaper factor of production for a more costly one, it’s Blackburn Greys and cotton stockings where it really applies. Any broader, economy-wide inducements to achieve substitution by mechanical means were undermined in the case of checks because it was too easy to substitute cheap linen yarn (imported from Low Wage Economies) for expensive cotton. In checks (as opposed to Blackburn Greys) the ratio of cotton yarn to linen yarn did not have to be 50:50. In other words, inducements to mechanical innovation arising from changes in raw or intermediate material costs varied according to the materiality of the product – according to its capacity for adulteration and according to the availability / elasticity of supply chains to low-cost producers of the required adulterants using existing technologies.

    The real forest / trees issue in all this is the question of why, in the 1730s, experienced innovators and investors put so much money and effort into a mechanical device for spinning cotton – Lewis Paul’s circular machine for spinning cotton with flyers and rollers. Paul’s previous major invention – his machine for pinking crape burial shrouds – has been treated by historians as a minor sideshow, but in the aftermath of the late 17th century laws enforcing burial in woolen it was extremely lucrative. The investors in his spinning machine (used exclusively for cotton) were men experienced in the textile industries and in business. But it’s hard to see how this was an induced innovation in the conventional factors-of-production sense, when (1) cotton played a relatively insignificant part in British manufacturing in the 1730s, (2) many cottons were prohibited, and (3) cotton imports from India for re-export were stagnating.

    I suspect the answer to the question of why Paul and his backers tried to mechanize cotton spinning in the 1730s lies in the way so much early-modern big-tech innovation was focused on what historians currently (and somewhat misleadingly) term luxury goods, a category which included cottons at this period. And the reasons for that lie in some combination of (1) high profit margins on luxury products, (2) mercantilist inducements offered by many European states, and (3) a surprisingly large international market, despite mercantilist restrictions, in luxuries which only a few centers could manufacture to the highest standards.

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