Tuesday, 17 February 2009

The Global Ducks of the Oxford Canal

Do you want to know the real mechanics behind the rise of the global technological society? Well, if Bob Allen is correct about the origins of the industrial revolution, it is not geography, nor human capital, nor institutions, nor culture.

His fascinating reading of the origins behind the industrial revolution goes like this. First, discoveries of the 15th century led to increased trade, and that in turn, to increased urbanisation (the expansion of British trade resulted in the population of 16th century London multiplying ten folds). Second, increased volume of urban population changed pre-existing price structures (the demand for heating was too high to satisfy from logging, and thus coal was used en masse; after the initial fixed costs, large coal reserves were tapped, at a low marginal cost, which led to the eventual fall of the price of coal). Third, changed price structures of commodities altered the relative price of labour (especially in Northern England where coal was coming from). Fourth, this made labour-saving technological innovation economically sensible (and thus the industrial revolution was born). Fifth, the same line of argument holds for the adoption of the new technology (and thus the industrial revolution ended up being a primarily British phenomenon for a long while, rather than the emerging technologies spreading rapidly to other parts of the world).

The consequences, if this hypothesis was to be true, would be far-far reaching.

1. What is the upshot for archaic societies? Would the above argument mean that their opening up has more to do with the economic incentive structures embedded in the pre-existing social structure and technology set than either with lack of inventiveness, or cultural norms keeping the society closed to the new. 

This would be supported by the observation from Papua that, contrary to the way I imagined before, there seemed to be a substantial drive to opening up. The impression left was that rather than the base case being a culturally closed human group/tribe etc., it is more that you would need a cultural process introduced to shut down the opening up process. Our cultural diversity sustainability worries would take a completely different lighting. 

2. What is the upshot for development economics? To what extent could this result be translated into a general observation towards a relationship between relative wages and technology spill-over? 

It is striking how different technological adaptation is among developing economies. For instance, the former communist transition countries saw a lot of variation in this regard, despite being rather similar in their base setup. It seems that it has to do more with the effective labour cost than purely the abundance of human capital. Compare the economic transition story of Slovakia to Croatia as an example, in the early 2000’s. Despite the timing of starting the change in earnest was the same, and the initial setup, at least in economic terms, were similar, the high Croatian tourism revenues kept the kuna strong, and resulted in lack of the kind of rapid structural change that was witnessed by Slovakia. A similar point could be made when comparing a transition country to a non-transition emerging economy, say end of 1990’s Hungary to Thailand, and observe that although price levels were not that different, the difference in the cost of effective labour due to differences in human capital led to entirely different technologies being adopted, despite both undergoing substantial structural change.

3. What is the upshot for government innovation policies in economies integrated into the global economy? Would this mean that instead of state support of innovation, governments should meddle with the returns?

In fact, perhaps the argument could be extended into a speculation about the kind of innovations that will be favoured in a fully integrated global economy of the future. We have much better ideas of where individual currencies’ purchasing power is going than before, and thus perhaps about the long term relative prices in the global economy. If the relative prices could be thus somehow guessed, maybe that would have a direct implication towards innovation drives. Could this be used to speculate about new technologies emerging?

4. Is there a minimum wage argument in here? In the early 2000’s I was involved in a debate about the merits of ‘graduate minimum wage’ in the post communist transition process. I hated every bit of the idea. Maybe I was wrong. Maybe the supporters’ point about multiple equilibria referred to discontinuities in the technology set, and thus to an effective labour cost based argument similar to Allen’s. 

Therefore, does this hypothesis mean that the level of effective minimum wage would have an impact on kind of technology the economy adopts? 

What do you think?

-- Bob Allen's book reference: The British Industrial Revolution in Global Perspective (New Approaches to Economic and Social History)


My favourite cycling route goes along the Oxford canal, which is incidentally one of the routes in which coal was taken from North England to London. I will have a new topic in my chat with the ducks next time.


  1. Tamas, your very starting point kills the entire argument: you say it is not geography, and then you go on showing how it all originates from the 'discoveries', that is, from geography. That pretty much invalidates everything that comes after, no?

  2. dragon_tamer,

    your comment implies a different concept of 'geographical cause' to the one behind the argument here. In the latter, described in the post, the origin of the entire change of even was indeed a geographical discovery, but dynamics comes from a change in the resource allocation (that is, from the 'discovery') rather than from a particular geographical feature.

    Thus all the rest could still hold.

  3. Tamas,

    This was a very interesting blog, but, I'm afraid I don't understand some parts of it. On No. 4, I am totally lost, for instance. How does the minimum wage enter the scene?


  4. same here as for peter...

    and if i may add, the previous point (the one with the future relative prices and future innovation) is far into speculative territory. it is way way beyond provocation, in my view...

    nevertheless, if you could show that this worked in the past, that would be fun (my bet is that it didn't)

  5. There are number of logical problems with this post (even within the modest proportion I think I got from it):

    1. If I get the core thought right (do I?), you say that technology innovation is driven by labour cost. The higher the wages, the bigger the incentive for innovation (and thus the case for increased minimum wage).

    2. But it is mysterious to me how any lessons whatsoever can be drawn from the mechanisms behind the creation of new technologies onto the policies regarding the mere adaptation of already existing technologies. (Did those English capitalists have the option to import scores of cheap labour (or produce where it is available) rather than innovate?)

    3. Can’t see how the Croatia vs. Slovakia case supports the argument. Isn’t it the low labour cost country that got the high tech?

  6. @Anonymous:

    1. The argument is that technology innovation (and adaptation) is driven by economic incentives rather than cultural norms. The incentive structure will then include the (relative) price of labour. The dawn of industrial revolution in Britain would be a good example; possibly also serving as an evidence.

    2. The post was too brief (empty apart from a side note on this, really) on the adaptation of new technologies. Bob Allen’s original point includes a description of the French economy, and point out that just as much there was no incentive to innovate, there was also little incentive to adopt the spinning jenny technology. (Amazingly so much so, that the French government had a policy to adopt it, state-aided, and still it did not take off). French labour was just too cheap in relative terms for that.


Perhaps a possibly interesting observation could be made here: there is very little difference in the economic incentives around coming up with a new technology (or adopting a new technology), as long as it comes in small steps. (The fix cost of major R&D efforts are clearly very high.) Which would be an argument for state funding of fundamental research, and not applied one.


As for inward migration, I am not sure what the situation was, that would be a question to Bob Allen. However as for moving the production to where labour is cheap: in the case of coal mining moving was not an option, and the point is that moving into France would have made the English capitalists switch back to a pre-jenny technology, as well.

    3. In this case it is the return to the investment into technology innovation or adoption that matters. If you have low wages but high education level, then it pays to invest into better technology, and incidentally let the wages rise. Wages in Croatia and Slovakia will probably end up at similar purchasing power levels at one point, but only the latter will have seen a high level of technology investment. (In fact, if endogenous growth stories are more than tales, then Slovakia’s PPP will be higher than that of Croatia as a consequence, Ireland early 2000’s style.)

    Are these valid arguments?