The minimum wage induced spur of technological innovation ought not be praised

In a recent article at Reason.comChristian Britschgi argues that “Government-mandated price hikes do a lot of things. Spurring technological innovation is not one of them”. This is in response to the self-serve kiosks in fast-food restaurants that seem to have appeared everywhere following increases in the minimum wage.

In essence, his argument is that minimum wages do not induce technological innovation. That is an empirical question. I am willing to consider that this is not the most significant of adjustment margins to large changes in the minimum wage. The work of Andrew Seltzer on the minimum wage during the Great Depression in the United States suggests that at the very least it ought not be discarded.  Britschgi does not provide such evidence, he merely cites anecdotal pieces of support. Not that anecdotes are bad, but those that are cited come from the kiosk industry – hardly a neutral source.

That being said, this is not what makes me contentious towards the article. It is the implicit presupposition contained within: that technological innovation is good.

No, technological innovation is not necessarily good. Firms can use two inputs (capital and labor) and, given prices and return rates, there is an optimal allocation of both. If you change the relative prices of each, you change the optimal allocation. However, absent the regulated price change, the production decisions are optimal. With the regulated price change, the production decisions are the best available under the constraint of working within a suboptimal framework. Thus, you are inducing a rate of technological innovation which is too fast relative to the optimal rate.

You may think that this is a little luddite of me to say, but it is not. It is a complement to the idea that there are “skill-biased” technological change (See notably this article of Daron Acemoglu and this one by Bekman et al.). If the regulated wage change affects a particular segment of the labor (say the unskilled portions – e.g. those working in fast food restaurants), it changes the optimal quantity of that labor to hire. Sure, it bumps up demand for certain types of workers (e.g. machine designers and repairmen) but it is still suboptimal. One should not presuppose that ipso facto, technological change is good. What matters is the “optimal” rate of change. In this case, one can argue that the minimum wage (if pushed up too high) induces a rate of technological change that is too fast and will act in disfavor of unskilled workers.

As such, yes, the artificial spurring of technological change should not be deemed desirable!

The great global trend for the equality of well-being since 1900

Some years ago, I read The Improving State of the World: Why We’re Living Longer, Healthier, More Comfortable Lives on a Cleaner Planet by Indur Goklany. It was my first exposition to the claim that, globally, there has been a long-trend in the equality of well-being. The observation made by Goklany which had a dramatic effect on me was that many countries who were, at the time of his writing, as rich (incomes per capita) as Britain in 1850 had life expectancy and infant mortality levels well superior to 1850 Britain. Ever since, I accumulated the statistics on that regard and I often tell my students that when comes the time to “dispell” myths regarding the improvement in living standards since circa 1800 (note: people are generally unable to properly grasp the actual improvement in living standards).

Some years after, I discovered the work of Leandro Prados de la Escosura who is a cliometrician who (I think I told him that when I met him) influenced me deeply in my work regarding the measurement of living standards and who wrote this paper which I will discuss here.  His paper, and his work in general, shows that globally the inequality in incomes has faltered since the 1970s.  That is largely the result of the economic rise of India and China (the world’s two largest antipoverty programs). Figure1Leandro

However, when extending his measurements to include life expectancy and schooling in order to capture “human development” (the idea that development is not only about incomes but the ability to exercise agency – i.e. the acquisition of positive liberty), the collapse in “human development” inequality (i.e. well-being) precedes by many decades the reduction in global income inequality. Indeed, the collapse started around 1900, not 1970!


In reading Leandro’s paper, I remembered the work of Goklany which had sowed the seeds of this idea in my idea. Nearly a decade after reading Goklany’s work well after I fully accepted this fact as valid, I remain stunned by its implications. You should too.

Some reasons why I love capitalism

Here is a list of things I love about capitalism. Before presenting the list, it is important to say what I mean about capitalism. By capitalism, I mean free market capitalism. I don’t mean oligarchic capitalism (as it is very common in Latin America), state capitalism (communist countries) or Crony capitalism (sadly, more and more prevalent in the US). What I mean by capitalism is a system consistent with personal choice, private property, and voluntary exchange. The system Adam Smith described in Wealth of Nations. With that in mind, here is the list:

capitalism is true to human nature;

capitalism (slowly but surely) produces (immense amounts of) wealth;

capitalism is (more or less) stable;

capitalism helps the ones who need the most;

capitalism allows us to help others in need;

capitalism reduces violence;

capitalism reduces the incidence of wars;

capitalism breeds cosmopolitanism;

capitalism makes a better use of natural resources;

capitalism produces more beautiful cities;

capitalism is consistent with the Bible.

Revisiting Epstein’s Freedom and Growth

I was fortunate to be invited give the Epstein Lecture at LSE this March. The series is named after the great LSE economic historian Larry (Stephen) Epstein. Here I’ll summarize why it was such an honor to give the lectures. The content of the lecture will be another post.

Epstein was a historian whose origin field of expertise was medieval Italy. I encountered him through Freedom and Growth. Published in 2000, I first read it a couple of years later, perhaps in 2002 or 2003. At the time I was devoted to a story of economic growth shaped by Douglass North, particularly Structure and Change in Economic History (1981).

The focus of Structure and Change was on transaction costs. High transaction costs limited market exchange and kept societies poor for most of history. Sustained economic growth could only occur once transaction costs fell to a level that allowed markets to expand and the division of labor to develop. On this view, market expansion or Smithian growth was itself a stimulus to technological innovation. But what kept transaction costs high?

One answer North gave was the state. To paraphrase: the state had the ability to both keep a society mired in poverty through predatory behavior and to provide the preconditions for growth by securing property rights. The origins of sustained economic growth for North lay in institutional changes that occurred secured property rights and lowered transaction costs. The most important such institutional change was the Glorious Revolution of 1688.

North’s account received many challenges, but the issue that Epstein honed in on was the assumption that there was such a state, able to either revoke or secure property rights. It was assumed that “rulers rule”. Epstein contested this arguing that New Institutional Economists

“project backwards in time a form of centralised sovereignty and jurisdictional integration that was first achieved in Continental Europe during the nineteenth century; they therefore fundamentally misrepresent the character of pre-modern states.”

North, Wallis, and Weingast would address this in their 2009 Violence and Social Orders. But Epstein’s criticism was spot on in 2000. Epstein argued that alongside the problem of predatory states, a central problem was the lack of integrated markets. He attributed market disintegration to coordination and prisoners’ dilemma problems between political authorities. In so doing, Epstein set the agenda for the subsequent “state capacity” research agenda.

Epstein made several points which continued to be expanded upon by current research (see here). First, he documented that the lower interest rates that the British state paid after 1688 were characteristic of city republics from the middle ages onwards. He argued that the English monarchy in the 17th century was characterized by an anomalously backwards financial system. Lower interest rates after 1688 partly represent a convergence to the Republican norm achieved by Italian city-states centuries earlier.

Second, he challenged the argument that monarchies “overtaxed” cities. There was “no evidence that townspeople paid higher taxes under monarchies than republics”. Per capita taxes were likely higher in Republican city-states.

Third, he disputed that Republican city-states like Florence brought economic freedom noting that “republican subjects faced several limitations to their economic and political freedoms that monarchical subjects did not”. All of this challenged generalizations made by historical sociologists like Charles Tilly and economic historians like North.

Epstein’s historical evidence came from medieval Italy. Late medieval Italy was highly urbanized and prosperous by pre-industrial standards. According to Broadberry’s estimates, per capita GDP in Italy in 1450 was not matched by England until 1750. Like growth elsewhere in the premodern world, it was Smithian growth, driven by trade, market integration, and the division of labor. But unlike in England, this Smithian growth did not continue and blossom into modern growth. Epstein’s explanation for why this did not take place was that late medieval Italy suffered an “integration crisis”.

He saw the late medieval period as characterized by new opportunities for growth and innovation. Urbanization increased. Capital markets expanded and deepened. Interregional trade developed. Proto-industrialization took place. But Epstein contended these opportunities were only seized in areas where political authority was centralization.

In reference to proto-industrialization, he observed that

“Crucially, the success of regional crafts was inversely proportional to the concentration of economic and institutional power in the hands of a dominant city.”

With respect to the establishment of permanent fairs, he noted that

In fifteenth-century Lombardy, new fairs proliferated only after the balance of power shifted decisively from the former city-states to the territorial prince with Francesco Sforza’s victory in 1447.

Market integration was complemented and perhaps driven by political integration. Integrated urban hierarchies were themselves the product of political centralization.

“Centralisation underlies all the major institutional changes to market structures previously described. It lowered domestic transport costs, made it easier to enforce contracts and to match demand and supply, intensified economic competition between towns and strengthened urban hierarchies, weakened urban monopolies over the countryside, and stimulated labour mobility and technological diffusion.”

The more centralized parts of Italy — notably Lombardy — were better able to benefit from these trends than was Tuscany. But in general, political fragmentation and regional diversity were “distinctive features of pre-modern Italy” in general and an impediment to its long-run growth prospects.

Unlike in his analysis of interest rates, Epstein brought little data to bear on these claims and I am unaware of subsequent research on late medieval Italy. As such, the thesis of a late medieval integration crisis laid out in Freedom and Growth remains speculative. Epstein would no doubt have fill in the details had he lived longer. Subsequent research has mostly focused on early modern rather than medieval Europe (see here).  But the larger message: the importance of the state for premodern economic development has been central to subsequent research, including my own work (e.g. here).

Rosenbloom on the Colonial American Economy

Joshua Rosenbloom is an economic historian worth following if you are interested in American economic history during the colonial era. He has recently published what appears to be an overview article of the topic (probably for a book or an invited symposium) which perfectly summarizes the current state of the research. I believe that this should be widely read by interested parties.  Here are key excerpts for some of the topics he discusses. I provide some comments to enrich his contribution, but these should be understood as complements rather than substitutes to this excellent overview of the American economy during the colonial era.

On Economic Growth 

Mancall and Weiss (…) concluded that likely rates of per capita GDP growth could not have been higher than 0.1 percent per year and were likely closer to zero. In subsequent work, Mancall, Rosenbloom and Weiss (2004) and Rosenbloom and Weiss (2014) have constructed similar estimates for the colonies and states of the Lower South and the Mid-Atlantic regions, respectively. Applying the method of controlled conjectures at a regional level allowed them to incorporate additional, region-specific, evidence about agricultural  productivity and exports, and reinforced the finding that there was little if any growth in GDP per capita during the eighteenth century. Lindert and Williamson (2016b) have also attempted to backcast their estimates of colonial incomes. Their estimates rely in part on the regional estimates of Mancall, Rosenbloom and Weiss, but the independent evidence they present is consistent with the view that economic growth was quite slow during the eighteenth century.

This is still a contentious point (see notably this article by McCusker), but I believe that they are correct. In my own work, using both wages and incomes, I have found similar results for Canada and Leticia Arroyo Abad and Jan Luiten Van Zanden have found something roughly similar for the Latin American economies (Mexico and Peru).

It is also consistent with even simplistic accounts of the neoclassical growth model. The New World was an economy of abundant land input whose outputs (agricultural produce) were mostly meant for local consumption. If one wanted to increase his income, all he had to do was use more inputs at really low costs. There is very little in this situation to invest in increasing total factor productivity and incomes would only increase at the dis-aggregated level (following the same region over time) as we are capturing the extent of inputs included over time (e.g. the long-settled farmer has a high income because he has had the time to build his farm, but the short-settled farmer brings the average down because he is just starting that process).

On Monetary History and Monetary Puzzles

In lieu of specie, the colonists relied heavily on barter for local exchange. In the Chesapeake transactions were often denominated in weights of tobacco. However, tobacco was not used as a medium of exchange. Rather merchants might advance credit to planters for the purchase of imported items, to be repaid at harvest with the specified quantity of tobacco. Elsewhere book credit accounts helped to facilitate transactions and reduce the need for currency. The colonists regularly complained about the shortage of specie, but as Perkins (1988, p. 165) observed, the long run history of prices does not suggest any tendency of prices to fall, as would be expected if the money supply was too small. (…) With only a few exceptions the colonies issuance of these notes did not give rise to inflationary pressures. There is by now a large literature that has analyzed the relationship between note issuance and prices, and finds little evidence of any correlation between the series (Weiss 1970, 1974; Wicker 1985; Smith 1985; Grubb 2016. As Grubb (2016) has argued, this suggests that while the circulation of bills of credit may have facilitated exchange by substituting for book credit or other forms of barter, they did not assume the role of currency.

In this, Rosenbloom summarizes a puzzle which has been the subject of debates since the 1970s (starting with West in 1978 in this Economic Inquiry article). In many instances (like South Carolina and Pennsylvania), the large issues of paper money had no measurable effect on prices.  This is a puzzle given the quantity theory of the price level. The proposition to solve the puzzle is that as the paper money printed by colonies tended to be backed by future assets, they were securities that could circulate as a medium of exchange. If properly backed and redeemed, people would form expectations that these injections were temporary injections and there would be no effect on the price level all else being equal. Inflation would only occur if redemption promises were not held or were believed to be humbug. This proposition has been heavily contested given the limited information we hold for the stock of other media of exchange and trade balances. I have my own take on this debate on which I weigh using a similar Canadian monetary experiment (see here), but this is a serious debate. Basically, it is a historical battleground between the proponents of the fiscal theory of the price level (see notably the classical Sargent and Wallace article) and the proponents of the quantity theory of the price level.  Anyone interested in the wider macroeconomic debate should really focus on these colonial experiments because they really are the perfect testing grounds (which Rosenbloom summarizes efficiently).

On Mercantilism, the Navigation Acts and American Living Standards

The requirement that major colonial exports pass through England on their way to continental markets and that manufactures be imported from England was the equivalent of imposing a tax on this trade. The resulting price wedge reduced the volume of trade and shifted some of the producer and consumer surplus to the providers of shipping and merchant services. A number of cliometric studies have attempted to estimate the magnitude of these effects to determine whether they played a role in encouraging the movement for independence (Harper 1939; Thomas 1968; Ransom 1968; McClelland 1969). The major difference in these studies arises from different approaches to formulating a counterfactual estimate of how large trade would have been in the absence of the Navigation Acts. In general, the estimates suggest that the cost to the colonists was relatively modest, in the range of 1-3 percent of annual income. Moreover, this figure needs to be set against the benefits of membership in the empire, which included the protection the British Navy afforded colonial merchants and military protection from hostile natives and other European powers.

The Navigation Acts were often cited as a burden that the colonists despised, but many economic historians have gone over their impact and they appear to have been minimal. It does not mean that they were insignificant to political events (rent-seeking coalitions tend to include small parties with intense preferences). However, it does imply that the action lies elsewhere if someone wants to explain the root causes of the revolution or that one must consider distributional effects (see notably this article here).

These are the sections that I found the most interesting (as they relate to some of my research agendas), but the entire article provides an effective summary for anyone interested in initiating research on the topic of American economic history during the colonial era. I really recommend reading it even if all that you seek is an overview for general culture.

How poor was 18th century France? Steps towards testing the High-Wage Hypothesis (HWE)

A few days ago, one of my articles came online at the Journal of Interdisciplinary HistoryIt is a research note, but as far as notes go this one is (I think) an important step forwards with regards to the High-Wage Hypothesis (henceforth HWE for high-wage economy) of industrialization.

In the past, I explained my outlook on this theory which proposes that high wages relative to energy was a key driver of industrialization. As wages were high while energy was cheap, firms had incentives to innovate and develop labor-saving technologies.  I argued that I was not convinced by the proposition because there were missing elements to properly test its validity. In that post I argued that to answer why the industrial revolution was British we had to ask why it was not French (a likely competitor). For the HWE to be a valid proposition, wages had to be higher in England than in France by a substantial margin. This is why I have been interested in living standards in France.

In his work, Robert Allen showed that Paris was the richest city in France (something confirmed by Phil Hoffman in his own work). It was also poorer than London (and other British cities). The other cities of France were far behind. In fact, by the 18th century, Allen’s work suggests that Strasbourg (the other city for which he had data) was one of the poorest in Europe.

In the process of assembling comparisons between Canada and France during the colonial era (from the late 17th to the mid-18th centuries), I went to the original sources that Allen used and found that the level of living standards is understated. First, I found out that the wages were not for Strasbourg per se. They applied to a semi-rural community roughly 70km away from Strasbourg.  Urban wages and rural wages tend to differ massively and so they were bound to show lower living standards. Moreover, the prices Allen used for his basket applied to urban settings. This means that the wages used were not comparable to the other cities used. I also found out that the type of work that was reported in the sources may not have belonged to unskilled workers but rather to semi-skilled or even skilled workers and that the wages probably included substantial in-kind payments.

Unfortunately, I could not find a direct solution to correct the series proposed by Allen. However, there were two ways to circumvent the issue. The most convincing of those two methods relies on using the reported wages for agricultural workers. While this breaks with the convention established by Allen (a justifiable convention in my opinion) of using urban wages and prices, it is not a problem if we compare with similar types of wage work. We do have similar data to compare with in the form of Gregory Clark’s farm wages in England. The wage rates computed by Allen placed Strasbourg at 64% of the level of wages for agricultural workers in England between 1702 and 1775. In comparison, the lowest of the agricultural wage rates for the Alsatian region places the ratio at 74%. The other wage rates are much closer to wages in England.  The less convincing methods relies on semi-skilled construction workers – which is not ideal. However, when these are compared to English wages, they are also substantially higher.

Overall, my research note attempts a modest contribution: properly measure the extent to which wages were lower in France than in Britain. I am not trying to solve the HWE debate with this. However, it does come one step closer to providing the information to do so. Now that we know that the rest of France was not as poor as believed (something which is confirmed by the recent works of Leonardo Ridolfi and Judy Stephenson), we can more readily assess if the gap was “big enough” to matter.  If it was not big enough to matter, then we have to move to one of the other five channels that could confirm the HWE (at least that means I have more papers to write).