Memo Question for April 9

Memo Question for April 9: The economies settled from northwestern Europe--the United States, Canada, Australia, New Zealand--were all resource rich. So why did they industrialize? Why didn't they simply become gigantic Denmarks, shipping agricultural and other resource-based products to the European industral powers in return for manufactures?

Comments

[Josh Hausman]

There seems to be no easy, obvious answer to why the temperate colonies settled by northwestern Europeans industrialized in the 19th century. I will discuss three hypothesis from our readings: (1) tariff barriers prevented economies such as the U.S. from pursuing their comparative advantage; (2) the U.S. had a large labor force of women and children whose reservation wage was low but whose productivity in industry was high; (3) the U.S. had better industrial technology than Europe. I will focus on the U.S. However, these arguments may apply equally to Canada, New Zealand, and Australia.

Given the rich resource endowments of the U.S., a simple trade model might give the qualitative prediction that the U.S. would trade raw materials and agricultural products for manufactures produced in England and elsewhere in Europe. In fact, there was substantial industrial development in the U.S. during the 19th century. One reason may be that trade was restricted. Goldin and Sokoloff write: “The proximate cause of industrialization, though, was the increase in the relative price of manufactured goods with the cessation of trade during the Napoleonic Wars and, possibly, the maintenance of a high relative price with the imposition of a tariff on manufactured goods” (11). Unfortunately, our readings do not shed much more light on the size of American tariffs or on the extent to which Canada, New Zealand, and Australia also imposed tariffs on manufactured goods. This explanation is tempting in part because of its simplicity. It also places American industrialization in the familiar category of countries that used tariff barriers to nurture infant industries.

Goldin and Sokoloff prefer to emphasize a different factor: the availability of women and children to work in industry for low wages. Their argument is based on a comparison of the northern U.S. (particularly New England) with the south. In the North, they argue, productivity of women and children in agriculture was low relative to that of men. Thus there was a relatively cheap labor force available for industry. By contrast, in the types of agriculture prevalent in the south (e.g. cotton), the productivity of women and children was not so different from that of men, and thus there was not a cheap pool of labor available for industry. As evidence for their hypothesis, they note both that industrialization happened in the North and not the South, and that relative wages for women rose rapidly in the North after the onset of industrialization.

Temin emphasizes a third possible factor. He attempts to explain the observations of visitors from England on American industrial efficiency. A plausible explanation for these observations and the data is that America achieved a technological lead over Britain in manufacturing, perhaps because Americans were more eager to adopt British technology than vice-versa.

[Tijl Vanneste]

Some of this week's readings offer an explanation why certain regions/countries did industrialize and others didn't. Engerman and Sokoloff compared the difference in factor endowments and resulting differences in labor and social organization between Canada and the United States on one side and the former Spanish Americas on the other. A similar case could be made why the American (United States) south did not industrialize relative to the American north, with Goldin and Sokoloff making the point about lower productivity of female and child labor in the north as a trigger. Again, this partially reflects a difference in agricultural produce in the two compared regions, a difference reflected in the organization of labor (slavery and staple products in the south versus free labor and manufactures in the north). These differences however do not explain why some of these resource-rich countries did industrialize in the first place, rather than becoming gigantic Denmarks. Peter Temin poses this question in his article, without answering it. He observes that it was a matter of choice, that the U.S. could have specialized in agriculture. He only indicated that scarcity of labor wasn't a possible reason for this choice (Temin, p. 293). Another possible path that could be chosen in light of the New World's advantage in agriculture would have been to restrict free trade, accounting for a development in isolation. Sokoloff and Goldin regarded this as the 'proximate cause of industrialization' (Goldin and Sokoloff, p. 470), the stop to trade, because of war or taxes, raising relative prices. Temin makes it look that U.S. adopted tariff standards to prevent themselves from becoming Denmark. True or not true, this seems a statement that would attribute an insight to policy-makers of that time with regard of things to come that just seems too perfect.
A matter that seems crucial to me as a historian with regard to this question would be timing and context. The northeast of the U.S. was a former British colony and an early industrializing country. Denmark was not, and was also much smaller. The framework was different. Options open to the U.S., Canada et al. might not have been available anymore to Denmark, restricting its possibilities. Next to the endogenous explanations given in the readings (land availability, labor productivity and organization), this exogenous factor to me seems a bit undervalued. Perhaps Denmark could serve as a agricultural exporter because at the time it became one, there were plenty of markets to export to. Maybe when the New World economies mentioned in the memo question had to 'choose' their path, these export markets did not exist to the same extent, especially not if a country such as the U.S. was trying more closed trading policies exactly because of their agricultural advantage over Britain using the same technology.
A last remark goes back to one of Alfred Crosby's main observations in his 'Ecological Imperialism'. He looks to explain why the neo-Europes (areas that ecologically resemble northwestern Europe the most, such as Canada, U.S., New Zealand, Australia but also parts of Argentina and the south of Brazil) had become the major food producers of the world when he wrote his book. It seems perhaps that for instance the U.S. was large and diverse enough to be one of the early industrialized countries and at the same time a gigantic Denmark.

[Mitchell Hoffman]

While a fascinating question, none of the articles this week, in my view, provides any sort of satisfactory answer (though two or three of the articles cannot be said to attempt to provide an answer to this particular question).

The paper most directly relevant to this question is that by Engerman and Sokoloff. They argue that large inequality in certain colonies (including in political power, human capital, and wealth) inhibited growth and, by not so far-fetched extrapolation, industrialization. It is possible, then, that the US, Canada, Australia, and New Zealand industrialized because during the colonial stage they suffered from significantly less inequality than many other colonies.

The biggest problem with this argument, as is immediately clear and as observed by Daron Acemoglu in a comment on the paper, is that their theory is not conceptually different from many other theories dealing with cross-country income differences. Engerman and Sokoloff are aware of this and state that their hypothesis is appealing because it seems more plausible than arguments based on growth deriving from Protestantism or having been a British colony. However, much more than intuition is required to produce an argument that contributes to economic science, and much especially is needed in the cross-country income difference literature, where there are many theories and few clean tests. Engerman and Sokoloff document several types of inequality, including those in literacy, voting rights, and landholding, and argue these are correlated with income, but this is not what is needed now to distinguish between theories. I would like to see a paper that provides testable implications between the myriad theories (including legal origins, institutions, religion, geography, health, and inequality), or else hope that economists move on to studying something else.

I found the other papers more interesting, but less relevant to the question at hand. Goldin and Sokoloff argue that the 19th century North industrialized while the South didn’t because there was a lower female to male wage ratio (hereafter W/M), as 19th century industry was less male-labor intensive than agriculture. While admirable that Sokoloff and Goldin list implications of their model, the implications seemed more like historical description than conclusions from their model. Most specifically, they don’t model the dynamics of their model as modern macro or labor economics does. As such, there seem many open questions. Should we expect low W/M countries or regions that have already industrialized to become even more industrialized relative to other regions? If there were an outside force, like technological innovation that caused industrialization which in turn raised W/M, could we see this in the data (and would the model at hand help us see it?)? Domar argues the view that slavery or serfdom may arise in labor-scarce areas where elites or capitalists want to decrease the bargaining power of workers. The problem with this view is that slavery was very prevalent in small, land-scarce regions like Caribbean, and not really part of the economy of some large regions, for example, Canada. Temin argues against the view that labor shortage spurred American technological innovation, citing the higher interest rate in the US, and (arguing skeptically) thus does not provide an answer towards the question at hand.

[I Romem]

Before I begin, it ought to be noted that the wealth of natural resources is hardly a negligible factor in the economies of Canada and Australia (I do not know enough about New-Zealand). It is no coincidence that Australia is home to BHP-Billiton and Rio-Tinto, the world's largest and third largest mining companies, respectively, both of which incur annual revenues larger than the GDP of many states. While the United States also has a formidable share of the world's natural resources, they account for a much smaller relative share of its wealth in comparison to Canada and Australia.

Several arguments were brought forth in this week's readings that are relevant to this question. Temin rebuffs the claim that labor scarcity in America was responsible for its industrial ascendancy, suggesting instead that the US had a different technology than Britain due to the Brits ignoring trans-Atlantic developments. Goldin and Sokoloff suggest that cheaper female and child could have induced earlier – and perhaps a greater accumulation of – industrialization. Finally, and in my opinion most convincingly, Engerman and Sokoloff suggest that more egalitarian income distributions in these countries allowed for industrialization which was precluded by extreme income disparity elsewhere.

Instead of dwelling further on the ideas presented in the readings, I would like to suggest two of my own. First, I believe that colonies with a relative advantage compared to Europe in producing commodities that were amenable to global transportation tended to over-specialize in their production, to the point where this delayed or even prevented industrialization. Second, I believe that English speaking colonies had had an advantage over Spanish speaking ones.

During the 18th and much of the 19th century, it was very difficult to transport many commodities across the world without incurring exceedingly high costs. This precluded the transport of many raw materials such as coal and iron ore over more than short distances, and did not leave much scope for supplying grain from the New-World to the Old, as began happening from the latter third of the 19th century onwards. The typical commodity that qualified for trade in this period was either rare or absent in Europe and was generally more valuable per unit of weight than grain. This was the case for coffee, tea, sugar and spices (the latter was traded even earlier for the same reason, but was even more valuable than the others per unit of weight). Thus, colonies capable of producing these commodities had a great advantage which they pursued by specializing in them, at the expense of diverting resources to pursuits that may have hastened industrialization then or later. Canada and the northern US did not possess any such commodities until transportation became cheap enough to allow the export of grain to Europe (or much later – into the 20th century – when exporting minerals and fuels became feasible), but by then industrialization had taken hold. Australia and was colonized much later than the US and Canada and is considerably farther from Europe, but it seems that its economy is indeed heavily reliant on exporting raw materials.

Nevertheless, it remains to be explained why the US and Canada industrialized where most South American countries did not, or at least not to the same extent. It is reasonable to suppose that apart from the industrial path-breakers, most industrialization occurs via imported technology. In this context, English speaking countries had a significant advantage over Spanish speaking ones in importing British technology. This is important, because Britain was for a long time the main source of industrial know-how, whereas Spain (and Portugal) were not.

I will stop here.

[Gabriel Chodorow-Reich]

The emergence of a manufacturing sector in the United States in the mid nineteenth century presents two puzzles to economic historians. First, why did the United States industrialize at all? That is, given its vast endowment of land, why didn’t it produce agricultural goods and trade them with Europe for manufactures? Second, why did the United States adopt different manufacturing technologies from the Europeans?

Temin (1966) and Goldin and Sokoloff (1984) arrive at a similar answer to the first puzzle: a manufacturing sector developed precisely because such Ricardian trade was not possible. The Napoleonic wars caused a large drop in trade with Europe, presumably for both supply and demand reasons on the European side. Also, imposition of high tariffs on imported manufactures into the United States raised their price relative to the cost of domestic production. Of course, attributing a decline in trade to the imposition of tariffs simply shifts the economic question to one of political economy, but it will have to do for now.

A high relative price of manufactures, then, provided the necessary inducement for the development of domestic industry. Here Goldin and Sokoloff argue that relatively low agricultural wages for women and children in the north (relative to men in the north, compared with the gender-wage differential in the South) caused the manufacturing boom to occur in that part of the country. Indeed, women and children made up a large part of the industrial labor force in the north, and the expansion of industry caused a secular rise in the relative wage of women during the middle of the nineteenth century.

According to Temin, contemporary observers of U.S. manufacturing plants found that they employed a different, less labor-intensive technology than British firms. Temin suggests that higher interest rates and better adoption of cross-ocean innovations may account for the U.S. lead in technology. He emphatically rejects factor endowments as the decisive difference. In making these arguments, Temin seems to have in mind a fairly neoclassical growth model.

Two aspects of the recent growth literature may also help to explain the divergence in technology. The first is suggested by Engerman and Sokoloff and resuscitates the factor endowment explanation in a different form. They argue that the abundance of land and the relative homogeneity of human capital of European migrants caused initial inequality in the U.S. to be low relative to other former colonies. Lower inequality allowed a more benevolent institutional environment to develop, which eventually fed through to innovation and growth as good institutions do. Thus, the environment for technical innovation in manufacturing may have been better in the U.S. than in other countries.

Finally, the U.S. may have had good luck. Certainly, rising wages in manufacturing would have created incentive for firms to innovate. Following the stochastic growth literature and the importance of first-movers in new trade theory, perhaps U.S. firms simply stumbled upon positive productivity shocks, which then persevered and propogated until the U.S. had obtained a lead in manufacturing technology.

[Lemin Wu]

Both the United States and Canada are resource rich like other New World areas but in a different sense. While the other areas specialized in the production of sugar, coffee and tobacco, it seems from the readings that the US and Canada were not well-endowed with these resources. These items, compared with such crops as wheat and corns, contained higher value per kilogram, which made the costly intercontinental trade of them ever profitable. So I guess the agricultural sectors in US and Canada might not be as involved in intercontinental trade as their counterparts in southern America.

Back to the hypotheses raised and defended in the readings, I saw two important views about the question. The first is from Engerman and Sokoloff (1994). They argued that factor endowment could have large impact on the formation of economic institution. Partly through the latter, factor endowment can largely determine the pattern of economic growth. For the case of industrialization, different crops corresponded to different organizations people tend to choose to promote production. Partly out of the concern for production efficiency, plantation and slavery were established for those areas that specialized in such crops as sugar, coffee, rice and cotton. These economies, with the structure of agricultural endowment, came up with a higher proportion of black slaves among the immigrated population. The ensuing higher inequality, lower incentive to implement policy that was favorable to sustained growth, postponed the industrialization.

Another hypothesis is Goldin and Sokoloff (1984)’s idea of how the relative wages of women and young compared to men influenced the location and timing of industrialization. This is another story that serves the general factor-endowment view. Since the relative productivity of Women to Men is less in US and Canada, the newly-introduced manufacturing industry found relatively cheaper qualified labor in these places where the gap of wages between genders was formerly higher.

Evsey Domar (1970) could be relevant because it helped in linking factor-endowment characteristics with the establishment of slavery in the logic of Engerman and Sokoloff. However what happened in America seemed not to be quite consistent with the correlation between scarcity of land and slavery Domar suggested but the framework of analysis in his paper can be applied to the America’s case. Slavery, in nature, is to impose restriction on the choice set (outside choices) of the labor. Domar’s story of slavery is a little different in that the Russian government was actually serving as a coordinator for the privileged landowners trying to bailing them out of the prisoners’ dilemma in their competition for labor, in which case the relative scarcity of labor to land plays a key role. However there are many alternative stories of slavery, which Domar already acknowledged. I guess the relevant point is that, if the areas are mountainous, full of Indian tribes, the black labor have better opportunity choice (he can survive by running into the mountains or joining the Indians if the Indians are not hostile to the black people, or simply because the existence of Indian population indicates that there are still some hospitable areas the western settlers haven’t occupied). Controlling the cost of enforcement (it can also vary and play a role), I guess slavery system means more in such areas where black people are more prone to run away. The above mechanism may not be significant but it is among many similar arguments and that’s what I see as the relevance of Domar’s paper to the question of interest.

[Edson R Severnini]

Although the economies settled from northwestern Europe – the United States, Canada, Australia, New Zealand – were rich in land, they were not rich in the other factor endowments necessary to build a agricultural system able to face the competition with the other colonies in the New World. Furthermore, the human capital brought by the settlers to those countries was of higher quality and homogeneity than that brought to their competitors. Finally, the productivity of the females and children relative to the male productivity in those regions was lower than in the other European colonies. For these reasons, those countries tended to build an industrial system instead of to engage in the supply of agricultural and resource-based products to the European industrial countries.

Engerman and Sokoloff (1994) argue that despite of the enormous availability of land, the economies settled by northwestern European individuals were not endowed with substantial populations of natives able to provide labor, nor with climates and soils that gave them a comparative advantage in the production of crops characterized by major economies of using slave labor. Actually, their development was based on laborers of European descent who had relatively high and similar levels of human capital. Indeed, as a consequence of the abundant land and low capital requirements, the great majority of adult men were able to operate as independent proprietors, and then the inequality was relatively low. On the other hand, in the other colonies of the New World, the weather favorable to agriculture, the high quality of soil, and the abundant native population generated an economic system with huge productive plantations based on slave labor force and with an enormous degree of inequality. Given these conditions, the regions settled by northwestern Europeans had to look for another economic activity than agriculture to reach some development, and then started to drive efforts towards industrialization.

Goldin and Sokoloff (1984) launch other interesting argument that can be used to explain why the countries settled by northwestern Europe people have industrialized: the productivity of females and of children relative to that of adult males within the agricultural sector prior to industrialization. Their study asks how exogenous differences in the agricultural sector between two economies affect the pace and pattern of industrial development. Using examples from the pre-industrial and early industrial histories of the U. S. North and South, they found that the lower the relative productivity of females and children in the pre-industrial agricultural or traditional economy (as in North), the earlier the manufacturing evolved, the proportionately more the relative wage for females and children increased, and the higher the ratio of manufactured to agricultural goods were. Comparing the colonies settled by the northwestern Europeans and the other colonies, we see that the same argument can be applied, because in the former the productivity of females and children were also relatively lower than that of males.

[rion]

Basic model of international trade tells us if the new economies settled by northwestern Europe are resource rich, they would export resource intensive product back to Europe, rather than industrialize themselves to supply industrial products.

This argument is hard to defend if we consider how the world was at that era. The first problem is transportation cost. Unlike Denmark those new economy are far away from the Europe. With rather high tariff at this age, it would not make sense to specialize in agriculture, bearing huge transportation cost.

Another possibility is the failure of our assumption that the new economies had an edge in agriculture. As Temin argues, the technology level in the U.S. might be as high as Europe. This is quite plausible if we think about how mobile across countries labor was in this age and is consistent with Engerman and Sokoloff in that immigration policy affected the growth. They showed that Spanish America had restricted immigration and this kept the severe inequality in these countries. They argued this disparity was detrimental to economy, but if the technological knowledge in this age was more personal and difficult to transfer, then we can also argues that this lack of immigration would have made them behind technologically.

Glodin and Sokoloff examine why the U.S. north was industrialized while the southern counterpart was not until later on, but even if their argument is correct, it is hard to apply to our question, since the difference between the north and the south is qualitatively different that of the new economies and Denmark. They argue that the lower productivity, of women and children, in agriculture in the north was the source of cheap labor supply to newly developed industries. While this proposition sounds persuasive, it is quite problematic, because there are many cases where no significant growth is observed even with cheap labor supply.

[Wayne Feng]

The industrialization of the temperate colonies were initially not rapid, however over the long run we see that their growth greatly outpaces that of the tropical colonies. Goldin and Kenneth proposed the roles of women and children in the economy. Temin pointed to technological differences between the British and American manufacturers. Engerman and Sokoloff argued that the primary influence was initial factor allocations. Linked to this is Domar’s interesting proposal that serfdom existed due to labor scarcity and land cost, which in turn has links to initial factor allocations. The question as to why they industrialized in manufacturing rather than shipping agriculture and other resources based products for manufacturers may address many arguments, but the idea of initial factor allocations seems to be most convincing. Due to the amount and productivity of the land in temperate colonies, the type of people who first immigrated to these colonies was single white males. Eventually these turned into small family units of farmers. The demographics of the temperate colonies therefore were fairly homogenous due to the smaller numbers of native population. This type of demography was strictly different from those of the tropical colonies where the native populations were larger and the workforce was working on plantation style plots. Domar would certainly point to land availability and labor scarcity as the causes of these demographics. But at the same time this may have resulted from the restrictions placed on Spanish immigrants. These demographic differences (if we follow Goldin and Kenneth) allowed for temperate colonies to capitalize on low wage workers (women and children) who were productive in industry. While these may explain why temperate colonies did industrialize versus tropical colonies, why did the temperate colonies follow the path of Denmark? While they may seem similar, the situations are fundamentally different. The tariffs and initial factor allocations were different in Denmark and the costs associated with shipping resources back to Europe were quite high. With lower agricultural productivity when compared to tropical colonies, the temperate colonies may not have been able to compete. Additionally, with technology perhaps up to British levels, low wage workers (which were productive in industry), good initial factor allocations for certain industry, and a more equitable demographic (if we are to believe this would be inductive for industry) then we can say that there were more incentives to start industry in the temperate colonies then to organize agriculture.

[Willa]

Domar writes about a hypothesis regarding the origins of slavery and serfdom. Perhaps it is also a theory for the origins of industrialization dependent on cheap wage-labor derived from the type of slavery and serfdom described by Domar. His thesis is that given a high land-labor ratio, wages for labor are high as labor is a relatively scarce resource. This encourages individuals to give up land and work for others as tenants or laborers. When the situation reverses and land becomes scarce, these people are stuck to their positions despite lowered wages that can fall to near-subsistence levels. According to Marx (as mentioned by the commentary around Domar’s article), this type of alienation of labor – in which an individual sells not what (s)he produces but instead their own labor/species-being – is a necessary step in the progression towards capitalism, one that will lead to the destruction of the capitalist system. Admittedly this is speculation, but perhaps the resource-rich countries all also had large amounts of land relative to their populations and thus the high demands for labor allowed for the development of a non-landed class of free laborers, which allowed for industrialization. By Domar’s hypothesis, the difference between Denmark and these others does not need to lie in the return to farming and manufacturing but can lie in an elevated return to working for others due to a relative scarcity of land.

Goldin and Sokoloff make a very similar argument, but about a later stage, regarding the presence of low-wage workers with little outside options as a key to industrialization. This refers to the step that may come after what Domar describes leading to industrialization and deals with a different type of worker than those described by Domar. Both are tied together by the progress of what they describe leading to a situation in which cheap labor is available for industrialization. Goldin and Sokoloff focus on the relative wages/returns of women and children in agricultural production and posit that when this is low, factories are more appealing for a large segment of the population and thus are able to expand.

Both of these arguments counter the idea that industrialization depends on primarily an unproductive agricultural sector and therefore generally low reservation wages. In Domar’s story it is precisely the opposite that is necessary to start on the trajectory towards indebtedness and low wages. He attempts to explain not the link between low reservation wages and a move away from agriculture but how those reduced outside options came into existence. Goldin and Sokoloff present a story that does not require low agricultural productivity or low returns/wages in the agricultural sector for the entire population but rather for a segment of the population that can then create a bulk of factory workers. In fact, had wages in agriculture been low for the entire population, then it appears that given their story, industrialization may not have occurred.

Engerman and Sokoloff present a third story that explains different economic growth and industrialization through factor endowments that lead to different structures of wealth distribution and those that by virtue of their environmental suitability developed equal wealth distributions were more able to industrialize. This argument begins with a similar premise to that of Domar but concludes very differently, perhaps based on the degree of inequality. Domar and Engerman and Sokoloff point to different methods of development of inequality – one because of crops suited for slavery and the consolidation of wealth and the other because of a labor scarcity leading to high wages for labor. Clearly the inequality noticed by Engerman and Sokoloff appears greater than that described by Domar and perhaps this explains the difference in their theories of what happens next. In Domar’s case, the gradual development of labor with little power and therefore low reservation wages may create the basis for industrialization, although he does not explicitly make this point. For Engerman and Sokoloff, this inequality is a barrier to economic progress. Because the degree of inequality observed in both papers is so different, their conclusions may not really vary and they may both, along with Goldin, support a claim that some level of inequality of productivity and wages is necessary for industrialization.