©Deirdre Nansen McCloskey | COPYRIGHTED MATERIAL

A Comment for the Session on Relative Prices and Enlightenment

by Deirdre McCloskey
For the Social Science History Association meeting, Sunday, 10AM, 21 November, 2010
Filed under editorials/ comments/ articles related to speaking engagements

A Shilling is a Shilling, Wherever Saved,
and So the Dearness of Labor
Can't Explain Even the Direction of Innovation:
and Something is Always Relatively Dear,
and so the Dearness of Labor
Certainly Can't Explain Its Amount.

Pp. 188-192 in Bourgeois Dignity: Why Economics Can't Explain the Modern World (University of Chicago Press, October 2010):

Coal as merely a new source of heating, in short, does not work very well for explaining our riches. Robert Allen, who would disagree, has emphasized that coal was relatively cheap in England compared with labor, as against its high relative price on much of the Continent. By the end of the eighteenth century, certainly in London, and even the once-poor North, English people enjoyed higher real wages than most of the Continent, except the Netherlands: "Craftsmen in London or Amsterdam earned six times what was required to purchase the subsistence basket [of goods], while their counterparts in Germany or Italy only 50% more than that standard." His argument is that cheap coal relative to scarce labor led to innovation. That is, he attributes the scale of British innovation to the pattern of factor scarcities. Labor was scarce relative to coal fuel in Britain, and so innovations would be labor-saving. And so Britain would have a large volume of innovations.

Neither "and so" makes much economic sense. The economic historian H. J. Habakkuk in 1962 put forward the same argument about the United States during the nineteenth century: labor was scarce relative to capital, and so America innovated by saving labor. Allen himself accurately summarizes one crushing point against such an argument, following critics such as Peter Temin and other economic historians reacting to Habakkuk: "One problem is that businesses are only concerned about costs in toto-and not about labor costs or energy costs in particular-so all cost reductions are equally welcome."1 Well put. As another leading student of technology, Tunzelmann, remarks, "In truth, it is extremely difficult to make a logical theoretical argument for the seemingly self-evident proposition that scarce labor should induce labor-saving bias in technology." 2 A shilling got from saving not labor but coal (coal saving was in fact the obsession of early users of steam engines, as Margaret Jacob has shown from their writings) is the same shilling that one got from saving labor (which Jacob notes was seldom mentioned by the engineers she has studied). 3 If one would prefer an inconclusive theoretical argument over a conclusive empirical finding such as Jacob's (at the University of Chicago after its better day of true empiricism they say "That's all right in practice, but what about in theory?"), one could refer to the economist Daron Acemoglu's argument about the set-up costs of research: precisely because coal was abundant in Britain the engineers sought innovations that justified the set-up costs of looking into ways of saving it, not labor. 4 Later, in the nineteenth century, as Allen and I discovered some time ago, British iron- and steelmaking made advances mainly by saving coal, as in for example Neilson's recycling of hot gases from the blast furnace to cut coke usage by two-thirds, or the hard driving later in the century with similar results. 5 By that time Britain had even higher wages, and the real price of coal had not much changed. What happened, one may ask, to the alleged labor-saving bias between the late eighteenth and the late nineteenth centuries?

If wages relative to coal prices were all that mattered, Jacob has also noted, Belgium and the extreme south of the high-wage Netherlands, both of which had coal, and in any case could import it very cheaply from Northumberland across the North Sea, would have been the Birminghams and Manchesters of the late eighteenth century. And to look at the point from the opposite side, why did not industry on the low-wage parts of the Continent away from the Netherlands therefore explode with coal-saving innovations? As Mokyr puts it, "Economies that had not coal would constantly be under pressure to develop more fuel-efficient techniques, or engines that used alternative sources of energy," instancing windmills in Asia or water mills in Rome (both of which, he notes, were not greatly improved subsequently, or used to power an industrial revolution). 6 You can see the underlying illogic: something is always relatively scarce, "and so" innovation in saving the scarce input will be high. "And so" every age and place has an incentive to innovate in great volume. The logic has somehow gone astray.

Cheap coal can indeed explain the location of power-hungry industries in Lancashire vs. Wiltshire, or Birmingham vs. Bordeaux (though, by the way, Allen does not sufficiently acknowledge the importance of water power). If one is willing to glide by the point that a shilling is a shilling, as Allen does so glide, after tipping his hat to the critics of Habbakuk, then the high ratio of wages to coal might be supposed, illogically, to affect the composition of innovations. The matter to be explained in the Industrial Revolution, though, is not the composition of innovation, but its magnitude. Patrick O'Brien and Caglar Keyder recognized the point long ago, arguing that France took "another path" than Britain did to the twentieth century. One could ask therefore why in eighteenth-century Italy or indeed China there was not a labor-using path to the modern world. That British innovations were biased (as the economists put it) toward labor saving, if they were (though in iron making, as I said, they definitely were not, and about the whole economy the econometric studies agree that Britain was not), says nothing at all about how many innovations in total the British would make. If spaghetti is cheap relative to rice in Italy compared with Japan you can expect Italians to eat relatively more spaghetti than rice. Yet such an expectation does not say anything about how much food in total the two countries will consume, one sort of food aggregated with another. In explaining modern innovation the aggregate is what matters, not the pattern.

It is easy to get confused about the economics here. China did use labor-intensive methods of all kinds. Doing so, however, is merely using old technology (not innovating new technology, that is, getting really new ideas) in a way determined by the abundance of labor relative to, say, land. In such matters, Allen properly affirms, relative prices matter. Yet using people to hoe the fields by hand instead of using capital-intensive methods such as great iron plows is not an advance of the sort that made us rich compared to our great-great-great-great-great grandparents. It is not an "advance" at all, in fact, but a choice of different routines from existing plans of business, different paths on the same map. Allen cites Rainer Fremdling, who has persuasively shown that the nonuse of coke for iron on the Continent before the 1850s-it had been in use in Britain for a century by then-was not an entrepreneurial failure (as Landes for example had argued) but a matter of relative prices. 7 Peter Temin had argued earlier, likewise, that the use of charcoal for blast furnaces in the United States in the same era was another case in point: wood for charcoal was cheap relative to coal there. 8 And I had done the same sort of research on British iron makers about a claimed "failure" to use now Continental techniques of by-product coking later in the century, or a "failure" to have in other ways the same pattern of use of ideas as the Americans or Germans (David Landes again made the claim I was criticizing; Landes does tend to scold for sloth and incompetence whomever was not using whatever he asserts without quantitative inquiry was the best technique; it is a corollary of his race-to-the-swiftest, éan-vital theory of world history and his overuse of second-guessing). 19

Splendid though such quantitative researches in historical economics are, however, they are not the same as explaining the innovativeness of British vs. Continental economies in the eighteenth and early nineteenth centuries, or the innovativeness of Europe generally 1700 to 1900. To explain the size as against the composition of innovativeness you need factors like a lead in the practical side of the Enlightenment (Jacob, Goldstone, Mokyr, Israel) or in entrepreneurial éan vital (Landes; though note how poorly the hypothesis does in the late nineteenth century) or-to come to the One True Explanation-in the extent to which a rhetoric of dignified and liberated business had been adopted (McCloskey). One needs, to put it again in economic jargon, an explanation of absolute, not comparative, advantage.

Relative prices of the sort economists usually concern themselves with, in other words, have a highly doubtful connection with the amount of innovativeness in total. As Allen argues, the scale of Britain's mining of coal and lead and tin explains "why steam engine research was carried out in England." 10 That sounds reasonable. Margaret Jacob for example would probably agree. For the same reasons, as Alan Olmstead and Paul Rhode have recently argued, biological innovation in crops and livestock took place in the United States during the nineteenth century-this against still another version of the scarce-labor hypothesis (which claims that mechanization was the key to American agricultural improvement). 11 Economies of scale in a leading industry, though, is not a theory of the amount of innovation of all sorts, in banking and insurance and cotton and wool and glassmaking and printing. The total amount of innovation is what is to be explained. You can, again, lose on the swings what you gain on the roundabouts: America's attention to innovation in agriculture, natural though it was, left less attention to be devoted to innovation in chemicals.

The historian the late John Harris argued for coal in a way that makes more sense than the static arguments favored by the economists. He wrote that in Britain in the seventeenth century and before, "the move to general use of a cheaper mineral fuel. . . nearly always necessitated important technical change in order to accommodate the use of the equipment of the relevant industry," such as glass making or salt making. "The long success with this change of fuel. . . over a couple of centuries was a major reason for a willingness to try new methods in other industrial fields and to be prized away from traditional practices." 12 Yes: the accident of easy coal and expensive forests could lead to a tinkering mentality (say) about applications of heat. (Though again the Chinese were in such matters many centuries ahead.) In this case, however, the Coal Effect works through habits of the mind, not (as the economist would wish) directly through relative prices. I stand with the admirable Tocqueville: "Looking at the turn given to the human spirit in England by political life; seeing the Englishman. . . inspired by the sense that he can do anything. . . I am in no hurry to inquire whether nature has scooped out ports for him, or given him coal or iron." 13

  1. [back] Allen 2006, p. 10See Temin 1966, 1971; and Mokyr 1990, p. 166.
  2. [back] Tunzelmann 2003, p. 87.
  3. [back] Jacob, personal correspondence, 2008Compare MacLeod 1988, pp. 151-181 on the saving of capital vs. labor saving in patent applications.
  4. [back] Acemoglu 2002; but Boldrin and Levine (2009) have another model, with diminishing returns to inventive labor rather than fixed costs of inventingIt's that way with models independent of scientific test
  5. [back] McCloskey 1973; Allen 1977.
  6. [back] Mokyr 1990, p. 160.
  7. [back] Fremdling 2000, referred to in Allen 2006, p18.
  8. [back] Temin 1964.
  9. [back] McCloskey 1973.
  10. [back] Allen 2006, p. 27.
  11. [back] Olmstead and Rhode 2008a, 2008b.
  12. [back] Harris 1992, p. 133.
  13. [back] Tocqueville 1835, p. 116.