Industrial Revolution: factor prices and innovations

BY DR. RAVSHONBEK (ROSH) OTOJANOV

A previous post outlined a number of major inventions (or macro-inventions) of the eighteenth century that were the basis for the inventions of the nineteenth century that propelled productivity growth. These innovations, according to Robert Allen, would not have taken place in Britain in the absence of cheap coal deposits. Another unique factor driving the innovations was Britain’s expensive labour. Labour was expensive in Britain, and economic historians have traced the origins of the high wages back to the Black Death plague (in the 14th century) that reduced the working age population significantly. Moreover, Britain’s commercial success in the international economy played a role in the growth of wages.

Rosh01_02
Figure 1. Average nominal wages and the cost of wood and coal, 1600-1914. Panel (a): Average weekly wages. Panel (b): The price of wood (1600-1870) and coal in GBP per Toe. Data sources: Thomas and Dimsdale (2017) and Fouquet (2011)

British nominal wages were relatively higher than European wages in mid-eighteenth century. Wages rose gradually for extended periods prior to the Industrial Revolution era (Figure 1a), and the growth accelerated starting in mid-eighteenth century as more labour shifted from agriculture to manufacturing and services. Energy, on the other hand, became cheaper in the eighteenth century as the share of cheaper coal increased in the energy mix. Prior to the transition to coal use, woodfuels were primary choice for industrial heating. However, woodfuels were up to 3 times more expensive than coal (Figure 1b). The price differential was partly due to localised fuel scarcity in some regions where iron foundries and associated businesses were located. Localised wood crisis meant wood had to be shipped from greater distances and this made woodfuels costly choice for industrial and domestic heating. Thus, innovative efforts were concentrated on developing coal-based technologies. As the new technologies became efficient, their adoption in textiles and railways eventually made coal the primary choice of energy for motive power and heating. With growing weight of cheap coal in the energy mix, average energy prices declined gradually in the eighteenth century.

Rosh02_02
Figure 2. The ratios of average nominal wage to cost of capital and coal price, 1600-1914. Rental cost of capital is the average of the prices of raw materials used for building physical capital stock (bricks, wood and metals) times an interest rate. Source: Author’s calculations

Figure 2 plots the (nominal) cost of labour per unit of energy cost and per unit of rental cost of capital respectively. There was no significant long-term divergence in the factor price ratios prior to the 1830s. However, the gradual ascend of the ratios reveals that nominal wages grew faster than both the coal price and the price of capital goods in the eighteenth century. Energy and capital, as a bundle, became cheaper relative to labour offsetting the burden of high wages. Thus, capital-intensive course of development became more attractive. Greater employment of capital relative to labour put the economy on a new, higher capital-labour ratio equilibrium where labour, endowed with more capital, increased productivity. High labour productivity meant persistently high wages, and in turn, high wages encouraged further labour saving. Thus, productivity growth was the consequence of the race between technical progress and capital accumulation. According to Robert Allen, this transformation was the precise reason why the Industrial Revolution was British.

Moreover, this evidence is consistent with the revisionist narrative that there was no ‘take-off’ in the eighteenth century. Instead, the picture was one of a gradual transition in the economy from traditional to modern sectors. Many of the early inventions had measurable effects a long time after their adoption. They required relentless efforts and tinkering before becoming commercially viable innovations. For example, the steam engine was first put to use in 1712, but it took fifty years before James Watt’s design made it practical and more efficient in 1760s. Even then, greater benefits of steam technology were not properly realised until 1830s when high-pressure compound engines cut costs in textiles and railways. Similarly, Abraham Darby experimented with coke fired iron smelting in 1709, but it took many years of experimentation and refining before the method was economical and widely adopted beginning in the 1760s.

These historical observations clearly support the conjecture that technical change was biased towards saving expensive labour while expanding the use of the cheaper and abundant inputs, energy and capital during the Industrial Revolution. Moreover, Britain’s industrialisation was not as fast in the eighteenth century as previously suggested; it was a gradual shift away from the traditional labour-intensive sectors to energy-intensive modern sectors.

References

Allen, R. (2009) The British Industrial Revolution in Global Perspective. Cambridge University Press, Cambridge, 2009.

Fouquet, R. (2011) Divergences in long run trends in the prices of energy and energy services. Review of Environmental Economics and Policy, 5, 2, 196–218.

Kander, A., Malanima, P. and Warde, P. (2013) Power to the People, Energy in Europe over the last five centuries. Princeton University Press, Princeton.

Thomas, R and Dimsdale, N. (2017) A Millennium of UK Data, Bank of England OBRA dataset, http://www.bankofengland.co.uk/research/Pages/onebank/threecenturies.aspx

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