Robert Allen

On Robert Allen’s defense of the High-Wage Economy hypothesis

Vincent Geloso Economics, History , , , , , , , , ,

The high-wage economy thesis is a topic I have blogged about many times before as I think it is an important debate among economists and economic historians (see notably here and here, see also this contribution of mine to the Journal of Interdisciplinary History). For those unfamiliar with this thesis, here is a simple summary of the idea advanced by Robert Allen: high wages relative to capital units was a key force in the industrialization of Britain and thus it explains why the Industrial Revolution was British before if was anything else.

As I have explained in the aforementioned blog posts, I am unsure of where I stand regarding this idea. I tend to be skeptical, but I have stated the evidence needed to convince me of the opposite. In the past year or so, there has been an avalanche of articles on the topic including this article by Humphries and Weisdorf, a follow-up working paper by the same authors, another paper by Judy Stephenson and a working paper by Stephenson (bis). Today, Robert Allen replies to his critics in this working paper.

I find that some of the points are convincing, however I must take issue with a particular point that falls into my ballpark as Allen mentions my work on wages in France (the aforementioned article in Journal of Interdisciplinary History). In my research, I pointed out that Allen’s computations underestimated wages outside Paris. With the correct computations, the rest of France does not appear as poor relative to England as Allen suggests. Allen concedes this point but then goes to state the following:

Geloso (2018) has pointed out that the Strasbourg unskilled wage series for 1702-64 is low in comparison to that of comparable towns, and workers may have received food, which has not been taken into account.  This is a perceptive point, but its implications are limited. The most important use I make of the Strasbourg evidence is in calculating the ratio of the wage to the user cost of capital. If the Strasbourg wage in this calculation is raised to that of neighbouring towns, the wage-capital cost ratio does rise but only by a small degree. The reason for this somewhat surprising result is that the wage is also an argument in the formula for the user cost of capital–building workers have to build the machines and the mills that house them–so the denominator of the ratio increases as well as the numerator, although to a lesser extend.

This is a incorrect characterization of my argument. First, I did not state that wages in Strasbourg did not account for in-kind payment. I stated that in-kind payment was evidence that the wages did not pertain to Strasbourg! The wages from the primary sources were for a city some 70 km away from Strasbourg, they did not concern unskilled workers and they included large in-kind compensation. To correct for this problem, I compared agricultural wages in England with those around Strasbourg that had been collected by Auguste Hanauer. What I found was the the lowest wages in farming were equal to 74% of farm wages in Southern England (as opposed to 64% with Allen’s stated wages). While I did not report this in the article because I had doubts, it is worth pointing out that the high bound of farm wages in Strasbourg is above the level reported for Southern England (which acts a proxy for England – see table 2 in my paper). As Strasbourg is a proxy for living standards outside Paris, my finding suggests a much smaller gap in living standards. It also entails a much more important change in the cost of capital to labor (wages are in the range of 50% above those suggested by Allen and sometimes they are higher by more than 100% which would mean a halving of the relative cost of capital! These are not peanuts to be thrown on the sidewalk!

Second, I ought to point out the nature of my argument. I was not trying to prove/disprove the high-wage hypothesis. My point was much more modest. The mirror of the question as to why the industrial revolution was British is why it was not French. France had a large population offering large returns to scale (in both economic and political organizations) and an array of navigable rivers that facilitated internal trade. It also key pockets of Lancashire-like industrialization such as Normandy (for textile) and Mulhouse (the French Manchester). As such, it is an entirely reasonable endeavor to try to situate living standards in France relative to Britain. If France was massively poorer than England, then Allen has a greater likelihood of being correct. If it was closer to an equal footing (I do not believe that anyone places France above England in circa 1750), then Allen’s critics have a greater likelihood of being correct.* However, regardless of the answer, the data does not infirm/confirm the high-wage hypothesis. It merely situates relative likelihood. As I point out that wages were quite above those postulated by Allen, I am merely stating the extent of the reasonableness of being skeptical of the high-wage hypothesis.

Finally, it is worth pointing out that the work of Leonardo Ridolfi is absent from Allen’s reply. The latter’s work is very important as it echoes (in a much richer manner) my point that wages outside Paris were not as low as cited by Allen.**

*As I assume a greater equality of capital returns across both countries, the smaller the wage gap, the smaller the relative differences in capital/labor costs ratios.
** Ridolfi shows France had incomes equal to 64% of English incomes circa 1700. However, I am skeptical of this figure. This is because, while I trust the index produced by Ridolfi, I am unconvinced about the benchmark year to convert the index into international dollars.

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

Vincent Geloso History , , , , , , , , ,

A few days ago, one of my articles came online at the Journal of Interdisciplinary History. It 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).

“Watch” the (industrial) revolution!

Vincent Geloso Economics, History , , , , , , , ,

I don’t know how I missed such a valuable article, but O’Grada and Kelly have this fascinating piece on the price of watches in England from the early 18th century to the early 19th century in the Quarterly Journal of Economics. Starting from Adam Smith’s quote that the price of watches had fallen 95% over roughly one hundred years, they collected prices of stolen watches reported in court records.  They find that Smith was wrong. The drop was only 75% (see the sarcasm here).

watch-prices

Why is this interesting? Because it shows something crucial about the industrial revolution. This was a complex good to build which required incredible technical advances – many of which could be considered general purpose technologies which could then be used by other industries for their own advances (on the assumption that other entrepreneurs noticed these technologies). But, more importantly, it provides further evidence against the pessimistic view of living standards in Britain at the beginning of the Industrial Revolution. These “new” goods became incredibly cheaper. Along with nails, glass, pottery and shipping , watches did not weigh heavily in the cost of living of the British. However, they did weigh heavily as industrial prices which meant that costs of production were falling progressively which augured well for the beginning of the industrial revolution*.

Literally, you can watch the industrial revolution in that paper! (sorry, bad pun)

* By the way, I use the term because it is conventional but a revolution is a clean break. The British industrial revolution was not saltation as much as it was a steady process of innovation from the early 18th century up to the mid 19th century. The real “revolution” in my eyes is that of the late 19th century. The technological changes from 1870 to 1890 are the most momentous in history and if there was any technological revolution in the past, this was it.

Ten best papers/books in economic history of the last decades (part 1)

Vincent Geloso Economics, History , , , , , , , , , , ,

In my post on French economic history last week,  I claimed that Robert Allen’s 2001 paper in Explorations in Economic History was one of the ten most important papers of the last twenty-five years. In reaction, economic historian Benjamin Guilbert asked me “what are the other nine”?

As I started thinking about the best articles, I realized that such a list is highly subjective to my field of research (historical demography, industrial revolution, great divergence debate, colonial institutions, pre-industrial Canada, living standards measurement) or some of my personal interests (slavery and the great depression). So, I will propose a list of ten papers/works that need to be read (in my opinion) by anyone interested in economic history. I will divide this post in two parts, one will be published today, the other will come out tomorrow.

  • Higgs, Robert. “Wartime Prosperity? A Reassessment of the US Economy in the 1940s.” Journal of Economic History 52, no. 01 (1992): 41-60.

Higgs’s article (since republished and expanded in a book and in follow-ups like this Independent Review article) is not only an important reconsideration of the issue of World War II as a causal factor in ending the Great Depression, it is also an efficient primer into national accounting. In essence, Higgs argues that the war never boosted the economy. Like Vedder and Gallaway, he argues that deflators are unreliable as a result of price controls. However, he extends that argument to the issue of measuring GDP. In wartime, ressources are directed, not allocated by exchange. Since GDP is a measure of value added in exchanges, the wartime direction of resources does not tell us anything about real production. It tells us only something about the government values. As a result, Higgs follows the propositions of Simon Kuznets to measure the “peacetime concept” of GDP and finds that the prosperity is overblown. There have been a few scholars who expanded on Higgs (notably here), but the issues underlined by Higgs could very well apply to many other topics.  Every year, I read this paper at least once. Each time, I discover a pearl that allows me to expand my research on other topics.

  • Allen, Robert C. The British industrial revolution in global perspective. Cambridge: Cambridge University Press, 2009.

I know I said that Allen’s article in Explorations was one of the best, but Allen produces a lot of fascinating stuff. All of it is generally a different component of a “macro” history. That’s why I recommend going to the book (and then go to the article depending on what you need). The three things that influenced me considerably in my own work were a) the use of welfare ratios, b) the measurement of agricultural productivity and c) the HWE argument. I have spent some time on items A and C (here and here). However, B) is an important topic. Allen measured agricultural productivity in England using population levels, prices and wages to proxy consumption in a demand model and extract output from there (see his 2000 EREH paper here). As a result, Allen managed to compare agricultural productivity over time and space. This was a great innovation and it is a tool that I am looking to important for other countries – notably Canada and the US. His model gives us the long-term evolution of productivity with some frequency. In combination with a conjonctural estimate of growth and incomes or an output-based model, this would allow the reconstruction (if the series match) of a more-or-less high frequency dataset of GDP (from the perspective of an economic historian, annual GDP going back into the 17th century is high-frequency). Anyone interested in doing the “dirty work” of collecting data, this is the way to go.

  • Broadberry, Stephen, Bruce MS Campbell, Alexander Klein, Mark Overton, and Bas Van Leeuwen. British economic growth, 1270–1870. Cambridge University Press, 2015.

On this one, I am pretty biased. This is because Broadberry (one of the authors) was my dissertation supervisor (and a pretty great one to boot). Nonetheless, Broadberry et al. work greatly influenced my Cornucopian outlook on the world. Early in my intellectual development, I was introduced to Julian Simon’s work (see the best of his work here and here and Ester Boserup whose argument is similar but more complex) on environmental trends. While Simon has generally been depicted as arguing against declining environmental indicators, his viewpoint was much broader. In essence, his argument was the counter-argument to the Malthusian worldview. Basically, Malthusian pressures caused by large populations which push us further down the curve of marginally declining returns have their countereffects. Indeed, more people means more ideas and ideas are non-rival inputs (i.e. teaching you to fish won’t make me unlearn how to fish). In essence, rising populations are no problems (under given conditions) since they can generate a Schumpeterian countereffect (more ideas) and a Smithian countereffect (size of market offsets). In their work, Broadberry et al. basically confirm a view cemented over the last few decades that England had escaped the Malthusian trap before the Industrial Revolution (see Crafts and Mills here and Nicolinni here). They did that by recreating the GDP of Britain from 1270 to 1870. They found that GDP per capita increased while population increased steadily which is a strong piece of evidence. In their book, Broadberry et al. actually discuss this implication and they formulate the Smithian countereffect as a strong force that did offset the Malthusian pressures. Broadberry and al. should stand in everyone’s library as the best guidebook in recreating long-term historical series in order to answer the “big questions” (they also contribute to the Industrious Revolution argument among many other things).

  • Chilosi, David, Tommy E. Murphy, Roman Studer, and A. Coşkun Tunçer. “Europe’s many integrations: Geography and grain markets, 1620–1913.” Explorations in Economic History 50, no. 1 (2013): 46-68.

Although it isn’t tremendously cited yet, this is one of the best article I have read (and which is also recounted in Roman Studer’s Great Divergence Reconsidered). This is because the paper is one of the first to care about market integration on a “local” scale. Most studies of market integration consider long-distance trade for grains and they generally start with the late 19th century which is known as the first wave of globalisation. However, from an economic historian perspective, this is basically studying things once the ball had already started rolling.  Market integration is particularly interesting because it is related to demographic outcomes. Isolated markets are vulnerable to supply shocks. However, with trade it is possible to minimize shocks by “pooling” resources. If village A has a crop failure, prices will rise inciting village B where there was an abundant crop to sell wheat to village A. In the end, prices in village A will drop (causing fewer deaths from starvation) and increase in village B. This means that prices move in a smoother fashion because there are no localized shocks (see the work of my friend Pierre Desrochers who argues that small local markets were associated for most of history with high mortality risks). In their work, Chilosi et al. decide to consider the integration of markets between villages A and B rather than between country A and B. Basically, what they wonder is when geographically close areas became more integrated (i.e. when did Paris and Bordeaux become part of the same national market?). They found that most of Europe tended to be a series of small regions that were more or less disconnected from one another. However, over time, these regions started to expand and integrate so that prices started moving more harmoniously. This is an important development that took place well before the late 19th century. In a way, the ball of market integration started rolling in the 17th century. Put differently, before globalization, there was regionalization. The next step to expand on that paper would be to find demographic data for one of the areas documented by Chilosi et al. and see if increased integration caused declines in mortality as markets started operating more harmoniously.

  • Olmstead, Alan L., and Paul W. Rhode. Creating Abundance. Cambridge Books (2008).

This book has influenced me tremendously. Olmstead and Rhode contribute to many literatures simultaneously. First of all, they show that most of the increased in cotton productivity in the United States during the antebellum era came from crop improvements. Secondly, they show that these improvements occured with very lax patents systems. Thirdly, they show how crucial biological innovations were in determining agricultural productivity in the United States (see their paper on wheat here and their paper on induced innovation). On top of being simply a fascinating way of doing agricultural history (by the way, most economic history before 1900 will generally tend to be closely related to agricultural history), it forces many other scholars to reflect on their own work. For example, the rising cotton productivity explains the rising output of slavery in the antebellum south. Thus, there is no need to rely on some on the fanciful claims that slaveowners became more efficient at whipping cotton out of slaves (*cough* Ed Baptist *cough*). They also show that Boldrine and Levine are broadly correct in stating that most types of technological innovations do not require extreme patents like those we know today (and which are designed to restrict competition rather than promote competition). In fact, their work on biological innovations have pretty much started a small revolution in that regard (see one interesting example here in French). Finally, they also invalidated (convincingly in my opinion) the induced innovation model that generally argued that technologies are developped merely to ease scarcities of factors. While theoretically plausible, this simplified model did not fit many features of American economic history. Their story of biological innovations is an efficient remplacement.

Testing the High-Wage Economy (HWE) Hypothesis

Vincent Geloso Economics, History , , , , , , , , , , , , , , , , , , , ,

Over the last week or so, I have been heavily involved in a twitterminar (yes, I am coining that portemanteau term to designate academic discussions on twitter – proof that some good can come out of social media) between myself, Judy Stephenson , Ben Schneider , Benjamin Guilbert, Mark Koyama, Pseudoerasmus,  Anton Howes (whose main flaw is that he is from King’s College London while I am from the LSE – nothing rational here), Alan Fernihough and  Lyman Stone. The topic? How suitable is the “high-wage economy” (HWE) explanation of the British industrial revolution (BIR).

Twitter debates are hard to follow and there is a need for summaries given the format of twitter. As a result, I am attempting such a summary here which is laced with my own comments regarding my skepticism and possible resolution venues.

An honest account of HWE

First of all, it is necessary to offer a proper enunciation of HWE’s role in explaining the industrial revolution as advanced by its main proponent, Robert Allen.  This is a necessary step because there is a literature attempting to use high-wages as an efficiency wage argument. A good example is Morris Altman’s Economic Growth and the High-Wage Economy  (see here too) Altman summarizes his “key message” as the idea that “improving the material well-being of workers, even prior to immediate increases in productivity can be expected to have positive effects on productivity through its impact on economic efficiency and technological change”. He also made the same argument with my native home province of Quebec relative to Ontario during the late 19th century. This is basically a multiple equilibria story. And its not exactly what Allen advances. Allen’s argument is that wages were high in England relative to energy. This factors price ratio stimulated the development of technologies and industries that spearheaded the BIR. This is basically a context-specific argument and not a “conventional” efficiency wage approach as that of Allen. There are similarities, but they are also considerable differences. Secondly, the HWE hypothesis is basically a meta-argument about the Industrial Revolution. It would be unfair to caricature it as an “overarching” explanation. Rather, the version of HWE advanced by Robert Allen (see his book here) is one where there are many factors at play but there is one – HWE – which had the strongest effects. Moreover, while it does not explain all, it was dependent on other factors that contributed independently.  The most common view is that this is mixed with Joel Mokyr’s supply of inventions story (which is what Nick Crafts has done). In the graph below, the “realistically multi-causal” explanation is how I see HWE. In Allen’s explanation, it holds the place that cause #1 does. According to other economists, HWE holds spot #2 or spot #3 and Mokyr’s explanations holds spot #1.

hwe

In pure theoretical terms (as an axiomatic statement), the Allen model is defensible. It is a logically consistent construct. It has some questionnable assumptions, but it has no self-contradictions. Basically, any criticism of HWE must question the validity of the theory based on empirical evidence (see my argument with Graham Brownlow here) regarding the necessary conditions. This is the hallmark of Allen’s work: logical consistency. His work cannot be simply brushed aside – it is well argued and there is supportive evidence. The logical construction of his argument requires a deep discussion and any criticism that will convince must encompass many factors.

Why not France? Or How to Test HWE

As a doubter of Allen’s theory (I am willing to be convinced, hence my categorization as doubter), the best way to phrase my criticism is to ask the mirror of his question. Rather than asking “Why was the Industrial Revolution British”, I ask “Why Wasn’t it French”. This is what Allen does in his work when he asks explicitly “Why not France?” (p.203 of his book). The answer proposed is that English wages were high enough to justify the adoption of labor-saving technologies. In France, they were not. This led to differing rates of technological adoptions, an example of which is the spinning jenny.

This argument hinges on some key conditions :

  1. Wages were higher in England than in France
  2. Unit labor costs were higher in England than in France (productivity-adjusted wages) (a point made by Kelly, Mokyr and Ó Gráda)
  3. Market size factors are not sufficiently important to overshadow the effects of lower wages in France (R&D costs over market size mean a low fixed cost relative to potential market size)
  4. The work year is equal in France as in England
  5. The cost of energy in France relative to labor is higher than in England
  6. Output remained constant while hours fell – a contention at odds with the Industrious Revolution which the same as saying that marginal productivity moves inversely with working hours

If most of these empirical statements hold, then the argument of Allen holds. I am pretty convinced by the evidence advanced by Allen (and E.A. Wrigley also) regarding the low relative of energy in England. Thus, I am pretty convinced that condition #5 holds. Moreover, given the increases in transport productivity within England (here and here), the limited barriers to internal trade (here), I would not be surprised that it was relatively easy to supply energy on the British market prior to 1800 (at least relative to France).

Condition #3 is harder to assess in terms of important. Market size, in a Smithian world, is not only about population (see scale effects literature). Market size is a function of transaction costs between individuals, a large share of which are determined by institutional arrangements. France has a much larger population than England so there could have been scale effects, but France also had more barriers to internal trade that could have limited market size. I will return to this below.

Condition #1,2,4 are basically empirical statements. They are also the main points of tactical assault on Allen’s theory.  I think condition #1 is the easiest to tackle. I am currently writing a piece derived from my dissertation showing that – at least with regards to Strasbourg – wages in France presented in Allen (his 2001 article) are heavily underestimated (by somewhere between 12% and 40% using winter workers in agriculture and as much as 70% using the average for laborers in agriculture). The work of Judy Stephenson, Jane Humphries and Jacob Weisdorf has also thrown the level and trend of British wages into doubts. Bringing French wages upwards and British wages downwards could damage the Allen story. However, this would not be a sufficient theory. Industrialization was generally concentrated geographically. If labor markets in one country are not sufficiently integrated and the industrializing area (lets say the “textile” area of Lancashire or the French Manchester of Mulhouse or the Caën region in Normandy) has uniquely different wages, then Allen’s theory can hold since what matters is the local wage rate relative to energy. Pseudoerasmus has made this point but I can’t find any mention of that very plausible defense in Allen’s work.

Condition #2 is the weakest point and given Robert Fogel’s work on net nutrition in France and England, I have no problem in assuming that French workers were less productive. However, the best evidence would be to extract piece rates in textile-producing regions of France and England. This would eliminate any issue with wages and measuring national productivity differences. Piece rates would perfectly capture productivity and thus the argument could be measured in a very straightforward manner.

Condition #4 is harder to assess and more research would be needed. However, it is the most crucial piece of evidence required to settle the issue once and for all. Pre-industrial labor markets are not exactly like those of modern days. Search costs were high which works in a manner described (with reservations) by Alan Manning in his work on monopsony but with much more frictions. In such a market, workers may be willing to trade in lower wage rates for longer work years. In fact, its like a job security argument. Would you prefer 313 days of work guaranteed at 1 shilling per day or a 10% chance of working 313 days for 1.5 shillings a day (I’ve skewed the hypothetical numbers to make my point)? Now, if there are differences in the structure of labor markets in France and England during the 18th and 19th centuries, there might be differences in the extent of that trade-off in both countries. Different average discount on wages would affect production methods. If French workers were prone to sacrifice more on wages for steady employment, it may render one production method more profitable than in England. Assessing the extent of the discount of annual to daily wages on both markets would identify this issue.

The remaining condition (condition #6) is, in my opinion, dead on arrival. Allen’s model, in the case of the spinning jenny, assumed that labor hours moved in an opposite direction as marginal productivity. This is in direct opposition to the well-established industrious revolution. This point has been made convincingly by Gragnolati, Moschella and Pugliese in the Journal of Economic History. 

In terms of research strategy, getting piece rates, proper wage estimates and proper labor supplied estimates for England and France would resolve most of the issue. Condition #3 could then be assessed as a plausibility residual.  Once we know about working hours, actual productivity and real wages differences, we can test how big the difference in market size has to be to deter adoption in France. If the difference seems implausible (given the empirical limitations of measuring effective market size in the 18th century in both markets), then we can assess the presence of this condition.

My counter-argument : social networks and diffusion

For the sake of argument, let’s imagine that all of the evidence favors the skeptics, then what? It is all well and good to tear down the edifice but we are left with a gaping hole and everything starts again. It would be great to propose a new edifice as the old one is being questioned. This is where I am very much enclined towards the rarely discussed work of Leonard Dudley (Mothers of Innovation). Simply put, Dudley’s argument is that social networks allowed the diffusion of technologies within England that fostered economic growth. He has an analogy from physics which gets the point across nicely. Matter has three states : solid, gas, liquid. Solids are stable but resist to change. Gas, matter are much more random and change frequently by interacting with other gas, but any relation is ephemeral. Liquids permit change through interaction, but they are stable enough to allow interactions to persist for some time. Technological innovation is like a liquid. It can “mix” things together in a somewhat stable form.

This is where one of my argument takes life. In a small article for Economic Affairs, I argued (expanding on Dudley) that social networks allowed this mixing (I am also expanding that argument in a working paper with Adam Martin of Texas Tech University). However, I added a twist to that argument which I imported from the work of Israel Kirzner (one of the most cited books in economics, but not by cliometricians – more than 7000 citations on google scholar). Economic growth, in Kirzner’s mind,  is the result of entrepreneurs discovering errors and arbitrage possibilities. In a way, growth is a process of discovering correcting errors. An analogy to make this point is that entrepreneurs look for profits where the light is while also trying to move the light to see where it is dark. What Kirzner dubs as “alertness” is in fact nothing else than repeated and frequent interactions. The more your interact with others, the easier it becomes for ideas to have sex. Thus, what matters is how easy it is for social networks to appear and generate cheap information and interactions for members without the problem of free riders. This is where the work of Anton Howes becomes very valuable. Howes, in his PhD thesis supervised by Adam Martin who is my co-author on the aforementioned project (summary here), showed that most innovators went in frequent with one another and they inspired themselves from each other. This is alertness ignited!

If properly harnessed, the combination of the works of Howes and Dudley (and also James Dowey who was a PhD student at the LSE with me and whose work is *Trump voice* Amazing) can stand as a substitute to Allen’s HWE if invalidated.

Conclusion

If I came across as bashing on Allen in this post, then you have misread me. I admire Allen for the clarity of his reasoning and his expositions (given that I am working on a funded project to recalculate tax-based measures in the US used by Piketty to account for tax avoidance, I can appreciate the clarity in which Allen expresses himself). I also admire him for wanting to “Go big or go home” (which you can see in all his other work, especially on enclosures). My point is that I am willing to be convinced of HWE, but I find that the evidence leans towards rejecting it. But that is very limited and flawed evidence and asserting this clearly is hard (as some of the flaws can go his way). Nitpicking Allen’s HWE is a necessary step for clearly determining the cause of BIR. It is not sufficient as a logically consistent substitute must be presented to the research community. In any case, there is my long summary of the twitteminar (officially trademarked now!)

P.S. Inspired by Peter Bent’s INET research webinar on institutional responses to financial crises, I am trying to organize a similar (low-cost) venue for presenting research papers on HWE assessment. More news on this later.

The High Wage Economy: the Stephenson critic

Vincent Geloso Economics, Liberty , , , , , ,

A recent trend has emerged in economics. The claim is that high wages can have a dynamic positive effect on market economies.  The intuition is that high wages increase productivity because they incite management to find new techniques of production. In essence, its an argument about efficiency wages: efficiency wages increase incentives to innovate on the part of managers, they can also incite workers to acquire more human capital and work harder and more diligently.

In economic history, this claim has been taken up by scholars like Robert Allen (see his work here for the general public) who argues that the Industrial Revolution took place in England because of high wages. The high-wages of England in the 17th and 18th centuries (relative to all other areas in Europe), together with cheap energy, created an incentive for capital-intensive methods of production (i.e. the industrial revolution). In fact, a great share of the literature on the desirability of high wages for economic development has emanated from the field of economic history.

I have always been skeptical of this argument for two reasons. The first is that efficiency wages is a strange theory that relies on debatable assumptions about labor (strangely, I have been convinced of this point by Austrian scholars like Don Bellante and Pavel Ryksa). The second is that numerous scholars have advanced large criticisms of the underlying data. Robert Allen – the figurehead proponent of the high wage argument – has been constantly criticized by historians like Jane Humphries (see here) for the quality of the data and assumptions used. Allen defends himself on numerous occasions and many of his replies (mainly those on the role of family size in living standards) show that his initial case might have been too conservative (i.e. he is more “correct” than he claims).

Until a year or two ago, I was agnostic on the issue even though I was skeptical. That was until I met Judy Stephenson – a colleague at the London School of Economics. Judy did what I really like to do – dig for data (yes, I am weird like that). She went to the original sources of data used by Allen and others and she looked at what any Law-and-Economics buffs like me like to look at – transaction costs and contracting models.

She recently published her work as a working paper at the LSE and what she found is crucial! Labor was not hired directly, it was hired through contractors who charged costs on the basis of days worked. But this did not translate into wages actually paid to workers. The costs included risks and overheads for contractors. Somewhere between 20% and 30% of the daily costs were not given to workers as wages. Thus, the wage series used to claim that England (Stephenson concentrates on London though) had high wages are actually 20% to 30% below the level often reported. They are also substantially close to those in western Europe.

Thus, the high wage story for England seems weaker. This little piece of historical evidence brought about by Judy is something to think about carefully when one makes the argument that high wages are conducive to growth. Since most of the argument brought to the public was informed largely by this argument in economic history, it makes sense to be cautious when thinking about it in the future.