THE BEAR'S LAIR Lessons from the revolution
By Martin Hutchinson
Robert Allen's new book, The British Industrial Revolution in Global Perspective
[1] is a major intellectual breakthrough. Allen, Oxford professor of economic
history, has used long-term price data only now available though computer
database technology to demonstrate definitively why the Industrial Revolution
happened when and where it did.
The causes? Imperialism, cheap coal and happy sheep. Max Weber's Protestant
work ethic had nothing to do with it. Allen's conclusions have interesting
implications for the global economic position today.
To take the causes roughly in chronological order, happy sheep were the result
of the 1348 Black Death, which wiped out a third of England's population and
resulted in the restoration of much good agricultural land to grazing. As a
result, English sheep, fed
on richer diets than previously, grew longer coats, from which were created the
"new draperies", finer in quality than competitive textiles and hence
market-dominant.
The depopulation of the Black Death also caused wage rates to rise and, in
England, reproductive patterns to change, producing a decline in fertility.
England's lower fertility ensured that the impoverishing 16th and 17th
centuries were less impoverishing than elsewhere in Europe and wages remained
relatively high. One of Allen's more startling discoveries is that real wage
rates in Vienna in 1825 were a quarter of their level 400 years earlier; in
England, this immiseration did not happen.
Imperialism, next, added both to the wealth of the country and to its
urbanization (which increased returns to agriculture, thus further increasing
rural wage levels). Extensive trade in exotic goods and the construction of
large merchant and naval marines both provided high-wage urban employment and
generated large amounts of capital. The safety valve of North American
emigration worked against any Malthusian fall in rural wages, ensuring that new
generations were adequately fed and at least modestly educated.
Cheap coal was not a resource unique to England; Belgium, the Ruhr and Poland
had extensive coal deposits. Its availability in quantity for early
industrialization was, however, due to the rapid growth of London, which
generated a building industry large enough to experiment with chimney designs,
thus producing houses that could be heated by coal as its cost advantage over
wood grew. Once coal production for fuel was substantial, the mining districts
in the Midlands and the Northeast had fuel costs far below those anywhere else
in Europe, making highly inefficient experimental technologies such as the
Newcomen steam engine commercially attractive.
Once British industrialization proceeded down the learning curve, the cost
advantages of steam technology, mechanized cotton production and so forth
became so great that they allowed those technologies to be adopted in other
countries; thus Britain's early industrial success eventually ended its
monopoly on industrialization.
Thus policy genius did not produce British industrialization, nor did policy
incompetence allow Britain's early lead to slip away. There were a number of
social and policy preconditions, notably secure property rights, without which
industrialization could not have happened, but by 1700, several countries had
these. Only Britain's island status, preventing it from being subjected to
devastating war as in 17th century Germany, gave it a special ability to make
the crucial first steps.
There are nevertheless a number of modern policy lessons that can be learned
from Allen's analysis. First and most obvious, trade is essential to rapid
economic development. By allowing rapid arbitrage between high cost areas and
low cost areas, it generates capital accumulation, which lubricates other
economic activity. A world in which trade becomes bureaucratized and atomized
lessens the possibilities of new wealth generation both directly through
placing barriers to economic system optimization and indirectly through
lessening the accumulation of capital.
While rapid arbitrage of goods through free trade is highly desirable, rapid
arbitrage of labor through free migration is not. No society where unskilled
labor is in excess supply has ever been able to use that labor to improve its
wealth. Undifferentiated low-cost human labor has been in excess throughout the
vast majority of humanity's experience; it is only labor scarcity and skill
that have raised mankind's living standards above the Malthusian level.
Low-skill, undifferentiated labor does not pull up its own living standards,
though if its supply is limited, its living standards may be raised by the
efforts of others.
There is thus a huge distinction between trade policy, in which the maximum
possible freedom is desirable, and immigration policy, in which complete
freedom of migration produces an excess of unskilled labor that drives down
wages for the unskilled to Malthusian levels. This is not only the case in
high-wage economies such as the United States. In low-wage economies such as
pre-1980 China, India and Africa, the first requirement for economic growth is
to reduce the birth rate sufficiently that the society can afford to educate
the majority of its young people, and not leave them as a pool of
intermittently employed surplus unskilled labor driving down living standards
and causing disturbances.
In England, the Black Death produced the first increase in workforce living
standards above subsistence levels; in today's world, we cannot rely on disease
to help but must pursue policies of population restraint, particularly in
countries such as Kenya, where population growth above 2% annually renders
economic improvement impossible.
Another lesson from the Industrial Revolution is that it is important to be the
very best or the very cheapest. Mediocrity and average performance win no
prizes in economic development because they do not provide that margin of cost
advantage without which the first faltering steps in a new technology cannot be
profitable.
Revolutionary new technologies will eventually produce products desirable for
everybody, and/or costs far below the previous alternative. However, in the
initial phases of a new technology, the cost advantage or performance benefit
of a new technique or product is slender. Hence that new product will only be
profitable for the producers with the very best capability in an area, or the
very lowest factor costs (which will not generally include low-cost labor
because Malthusian survival puts an effective floor on that cost, making
labor-cost advantages impossible to sustain.)
There is a reason why innovation tends to happen in rich countries, in spite of
poorer countries' lower labor costs and in many areas similar skill levels.
High labor costs force innovation, and by increasing the return to acquiring
superior skills raise the quality of the labor force itself.
The German approach to economic growth, in which expensive labor is balanced by
its superb quality, is entirely economically viable and produces rapid
innovation. Similarly, US innovation tends to be concentrated in high-cost
areas such as Silicon Valley, Boston or New York, even though in many cases,
large numbers of skilled graduates are available from top universities
elsewhere. In a high labor-cost environment, the pressure to excel, for both
companies and the workforce, is inexorable and highly productive.
It thus follows that H1B visa programs as operated in the US, which allow
employers to temporarily employ foreign workers in specialty occupations, and
in which labor costs in high-skill areas are forced down by introducing
numerous apparently qualified recruits from overseas, may well be
counterproductive. By turning the workforce from an expensive critical resource
into an undifferentiated cost-controlled mass, innovation is stifled. In an
environment in which the wages of engineers and computer scientists are
suppressed by mass immigration, the best graduates will go to law school,
heading for an activity where competition from immigrant labor is less.
A further lesson from the Industrial Revolution, in particular from the
centrality of coal availability, is that intelligent resource development is
extremely important. Many countries had large coal deposits in 1700, but only
in England did the development of coal fires for London housing increase the
size of the coal mining industry to a level at which energy costs in areas
close to the mines were a 10th or less of those for competitors not so located.
Today, Brazil seems to have learned the importance of this best. Its ethanol
program to substitute for gasoline was begun 30 years ago, before others, and
relied on the optimum ethanol source, sugar cane, which produces ethanol about
eight times as efficiently as the main US source, corn. Consequently, Brazil is
today the global leader in ethanol technology, an advantage which it can use to
develop its capability in other areas.
Similarly, Brazil's exploitation of the Carajas iron-ore deposits has allowed
Vale to become the world's leading iron-ore exporter, an immense economic and
geopolitical advantage for the country. Petrobras' offshore petroleum
operations in the Tupi basin are likewise notable for the intelligence with
which they have been developed and will make Brazil a major player in the
global oil industry, particularly as its domestic needs are suppressed by the
successful ethanol program. Using resources to bully neighbors, as in Russia,
or frittering away resource advantages through environmentalist obstacles, as
in the US, produces a major competitive disadvantage that blights innovation as
well as hampering the economy generally.
Finally, the development of industry and high-productivity agriculture in
England was dependent on benign government policy, as has been guessed, but
each was also dependant on the other. English agricultural productivity rose
steadily from an already high base after 1660, providing crucial income to the
labor force as well as food for the growing cities; productivity growth put on
a particular burst of speed in 1800-1850, the period of the Corn Laws.
After 1850, with English agriculture exposed to a "level playing field" of
cheap international competition, the growth of agricultural productivity ceased
altogether for almost a century. England's unilateral trade disarmament through
its 1846 repeal of the Corn Laws crippled its agriculture and in the long run,
sped the competitive decline of its industry. It was an enormous economic
policy error.
Analogies abound today. In Britain, the 1986 Financial Services Act opened the
City of London to international competition without adequate protection for
British institutions battered by the economic chaos of the previous decade.
Consequently, Britain's unique capability in financial services has effectively
been lost, and that business is likely to migrate increasingly away from London
in the decades ahead. In the United States, the Waxman-Markey "cap and trade"
energy bill, before the House of Representatives earlier this month, would
almost certainly be a similar mistake, crippling US industry against
international competition for a goal that is still not scientifically
established with any precision.
"Those who cannot remember the past are condemned to repeat it," said George
Santayana. In the case of the enormous human advance of the Industrial
Revolution, understanding how the past happened enables us to avoid mistakes
that would prevent further such advances today.
Note
1. The British Industrial Revolution in Global Perspective by Robert
Allen. Cambridge University Press, April 2009. ISBN-10: 0521687853. Price
US$27.99, 344 pages.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-2009 David W Tice & Associates.)
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