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.

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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 narrative of the “Industrious Revolution” in which workers began supplying more labour in order to buy new consumer goods available. 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 people’s homes.

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 (12 July 2018): Allen has replied to Stephenson. I have a short comment on Allen’s response to Stephenson.

Edit (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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13 Responses to Random thoughts on critiques of Allen’s theory of the Industrial Revolution

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

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

  3. 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

  4. Quick comment about Styles’s blog post http://spinning-wheel.org/2016/12/spinning-little-stories-about-the-high-wage-economy/:

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

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

  7. 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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  8. Pingback: The British Industrial Revolution in Global Perspective | Me Stock Broker

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  12. Allen’s reply to Stephenson’s critique.

    Stephenson: The data cited as ‘wages’ are not, in fact, wages paid to workers, but invoices for daily work charged to institutions by contractors. This conclusion requires knowledge of the working of the building industry, the payments systems of institutional clients, and architectural history of this period.

    Stephenson also estimates the contractor’s margins on day rates.

    Allen’s response does 4 things:

    (1) Allen disputes Stephenson’s analysis of contractor’s margins.

    Stephenson’s article discussed the contractor’s margin on DAY RATES which involve no materials cost. But Allen analyses margin on tasks or complete jobs which involve both labour cost and material cost. His discussion is about payment for a task in which the contractor supplies both labour and materials, like bricks in building a wall. First 2 paragraphs of page 8, published version of Allen’s response article: “Suppose that the labour cost of a build was £50 and the material cost £50, so overhead costs and normal profit came to £30 (30 per cent of £100)”.

    The sly move on Allen’s part is interpreting 30% of £100 as equivalent to the margin Stephenson was discussing.

    Then Allen references Gregory King, who observed that the cost of England’s housing stock in the late 17th century was 1/6 labour and the rest materials. Which Allen says is a better guide to margins!

    Whether the margin is 1/6 or 30%, Allen argues Stephenson’s maths do not add up.

    Which is nonsense! Because materials costs are not part of Stephenson’s analysis!

    I don’t know whether this is a misunderstanding by Allen, or a deliberate misrepresentation.

    But this sophistry about margins helps legitimise (in the unwary reader’s eye) Allen’s interpretation of the “price books”.

    (2) Allen says 18th century consumer guides for gentlemen are better indicators of what actual workers were actually paid than Stephenson’s discovery of the actual account books of an actual building contractor (Kempster).

    (3) Ignoring Stephenson’s entire argument, Allen proceeds to say the day rates for labour paid by Greenwich Hospital are wages. But Stephenson’s original article showed that institutions did not pay wages to labourers, but fees to contractors who paid the wages.

    (4) Since most building work was done in the 18th century on piece rates, not day rates (even though all wage series are built on day rates), Allen argues workers were better paid than the day rates actually suggest because piece rates incentivised workers to work hard. But this is just special pleading.

    One other thing. Stephenson found direct evidence of very low wages in Kempster’s books for a certain class of labourers. Allen apparently could not believe this, so he found another contractor saying he has paid a lower wage rate for cripples and old people. So he says Stephenson must have found some wages for handicapped! Amazing and outrageous!

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  13. Pingback: On the constancy of the rate of GDP growth | Nintil

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