Temin – 2 Views of the Industrial Revolution July 3, 2018

1 2 Views

• Traditional view

– Inventors/entrepreneurs came from all social classes and parts of the country

– Innovation across all industries

– Suddenness of shift difficult to find parallel

– Landes (Promethus Unbound)

– Deane and Cole growth estimates

– Mokyr

• ”Localized growth”

– Newer theory

– Multiple economists adjusted growth estimates of IR-era UK downward (Harley 1982, Crafts and Harley 1992)

– Implied that residual industries, or those grouped as ”other manufacturing,” may not have grown as much as previously thought

– Craft theorized that growth was restricted to cotton and iron, not manufacturing as a whole

2 Two Good Ricardian Trade Model

• Simple general equilibrium model of international trade

• 2 countries (A,B)

• 1 factor of production (L)

• 2 goods (X,Y )

• Constant returns to scale production (fixed labor acg needed to produce one unit of output of good g in each country c)

• Competitive markets, P cg = wcacg

• Fixed, immobile supply of labor (Lc)

• Representative consumer maximizes U c = U c(Ccx, CcY )

We assume country A has a comparative advantage in X. The quantitative way of saying this is:

aAX aAY

< aBX aBY

This also implies:

P̃AX P̃AY

< P̃BX P̃BY

where P̃ represents a price in autarky (no trade)

The last thing we assume is that trade is free and frictionless. As a result, trade will occur until the prices in both countries are equal. So:

P̃AX P̃AY

< P̄AX P̄AY

= P̄BX P̄BY

< P̃BX P̃BY

Each country produces the 1 good it has the comparative advantage in

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3 Extending to multiple goods

• Goods in economy indexed 1, 2, …N

• an, a∗n represents British, foreign labor requirement respectively

• Reordered so a ∗ 1

a1 is highest (Britain has higher comparative advantage for lower numbers)

• w,w∗ wages in Britain, abroad

Line A

• a∗a for each good

• Shows interaction between number of exports and relative prices in the goods market

Line B

• More domestically produced goods mean more demand for labor, leading to increased ww∗

• Shows interaction between number of exports and relative wages in the labor market

Theory 1 – Broad technical change

• Increased a∗a for all n

• increased exports, demand for labor in UK

• A→ A′ on graph

Theory 2 – Narrow technical change

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• More complicated

• If productivity change is confined to good already exported by Britain, trade balance at any w w∗ achieved with export of fewer goods (B → B

′ on graph)

• Productivity change that causes reordering is more complicated, and not easily graphed

4 Empirical Analysis

An indirect test of the two main theories can be carried out by observing the lists of imported and exported goods during the Industrial Revolution.

The author’s empirical tests consistently show that orderings or rankings of England’s exports did not change drastically during the industrial revolution. Had the narrow/localized productiv- ity change theory been accurate, export proportions of lagging aspects of manufacturing would decrease, or become negative, and we do not see this.

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