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Lecture 4 America’s Early Industrialization and the Second Industrial Revolution Se Yan.

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1 Lecture 4 America’s Early Industrialization and the Second Industrial Revolution Se Yan

2 Per capita income, 1992 PPP adjusted 1820190019501992 Latin America900131149875949 US12874096957321558 Japan7041135187319725 Western Europe12282899551317412 UK17564593684715738 Taiwan75999211590 Argentina1300275649877616

3 Engerman and Sokoloff Geography determines technology which determines institutions which determines development AJR: disease determines institutions (through types of colonization policies) which determine development –AJR is an IV paper, Engerman and Sokoloff is not –Note that could also use what types of crops can grow as IV for institutions (Easterly) –Could use other IVs as well: e.g. population density when settlers first arrive

4 Differences North vs South America New England and Middle Atlantic –Wheat, hay, livestock –Small family farms –Sparse indigenous populations Caribbean, Brazil, Southern US –Sugar, coffee, rice tobacco, cotton (all higher value crops) –Large estates (economies of scale, larger plantations more efficient in using slave labor) –Settled indigenous with tributary system of labor Spanish take this over and award to members of the elite

5 Classify countries into 3 types Colonies growing sugar and other valuable crops –Extensive economies of scale and use of slaves (West Indies and S. America) –Large slave populations (most population black and slave) –Unequal distribution of wealth even if free Laws protect privileges and restrict participation in commercial economy of broad mass of population

6 Other Spanish colonies (e.g. Mexico and Peru) Lots of natives Racially distinct elite that can claim native labor, land, and mineral resources –Large estates –Labor mobility restricted (incl. immigration) –Originally tributary labor (encomiendas) but then haciendas (local labor markets) Unequal wealth distribution Elite lots of political authority

7 North America European labor – relatively high levels of human capital Land abundant so independent proprietors Scale economies in US south but not as big as in sugar Argentina –Large grants to military families and scale economies in cattle raising?

8 Could institutions have shaped factor endowments? UK –sent over indentured servants –Encouraged immigration (population growing) –Allowed immigration other countries Spain/Portugal –missionaries, military (all single men) –Feared underpopulation –Discouraged immigration other countries –Initial migrants wanted to keep privileges and support from home country

9 Continued Hard to change land policy once make initial distribution Govt’s willingness to develop transport depended on types of crops grown

10 Is equality good for development? Con –Who saves –Capital deepening –New technology Pro –More extensive network of markets and commercialization so –Use resources more effectively, invent, build human capital so –Get specialization so –Economic growth accelerates with cumulative impact of incremental advances (not single industry or elite)

11 What evidence? US case Increases in productivity across industries of all types even if not capital intensive –Response to common environmental stimulus? (expansion of markets, as income rises, better transport) Patenting positively correlated with proximity to navigable waterways and wide no of social classes represented in patenting activity

12 Continued With equality, market for standarized products With more users and beneficiaries, projected returns go up –Easier to get political and financial backing

13 How much of this would hold today? Differences in patenting patterns Recent growth of Asian tigers

14 US Industrialization 1851: American display at Crystal Palace Exhibition in London demonstrated the “American System” – technique of interchangeable parts first adopted in firearm construction British Parliament appointed commission to investigate sources US technological leadership

15 Crystal Palace

16 American Exhibit at Crystal Palace

17 Display of Colt Revolvers

18 How did industrialization begin? New England Initially borrowed British tech – British prohibited export new machinery but machine builders (Samuel Slater) emigrated 1790 – textile mill opened using Slater’s technology Domestic industry expanded during trade embargo (1807-1815) Tariff protection thereafter

19 Slater’s Mill

20 Lowell, Massachusetts, in 1839

21 Middlesex Mfg. Co. in 1840

22 Cotton Textiles First major industry to expand rapidly Output cotton cloth increased 15.4% per year, 1815-1833 and 5.1% per year 1834- 60 Why increase? Increase in demand, tech change, learning by doing Other successful industries: glass, paper, woodworking

23 Other industries not as successful Iron: new technique was to smelt iron with coal but need bituminous coal and didn’t discover until 1840 how to use deposits with too much sulphur Except for textiles, most industries small scale unincorporated sole proprietorships or partnerships

24 Innovation in US Sustained acceleration first years 19 th century –Per capita patenting rate rose 15 times 1790 to 1860 –Expansion markets (population rising) –Same geographic areas maintained leadership (New England; South laggard) –Growing contribution by artisans and manual workers

25 Differences US and UK Wages in US high relative to UK (labor scarce) Interest rates in US high relative to UK (capital scarce) Land/resources more abundant in US US should adopt capital intensive methods

26 North, Economic Growth of the United States, p. 1: “The timing and pace of an economy’s development has been determined by: 1) the success of its export sector, and 2) the characteristics of the export industry and the disposition of the income received from the export sector.”




30 Two processes at work: Urbanization increased the demand for agricultural products Rural prosperity and abandonment of home manufacturers increased the demand for manufactured goods

31 A Non-Mechanized Chair Factory

32 A Non-Mechanized Paper Mill



35 Second Industrial Revolution, 1870-1917 Wave of industrial innovations that revolutionized processing of tobacco, grains, whiskey, sugar, vegetable oil, and other foods Refining oil and making of metals Chemical industry Wide range of machinery – office, agriculture, refrigeration units Mass production and distribution of electric power

36 Where? Especially in US, Germany, GB –From 1890s on, US leading industrial nation –By 1913 producing 36% of world’s industrial output (Germany 16% and UK 14%) –Modern, integrated multi-unit enterprise appeared in greater numbers and attained greater size in shorter period of time in US vs Europe

37 New industries Until 1880s agriculture chief source US wealth but by 1890 value of manufactures three times that of agricultural products 10 leading industries –1860: cotton goods, lumber, boots, shoes, flour and meal, men’s clothing, machinery, woolen goods, leather, cast iron, printing and publishing –1880: machinery, iron and steel, cotton goods, lumber, boots and shoes, clothing, flour and grist milling, woolen goods, printing and publishing, liquor –1900: machinery, iron and steel, printing and publishing, lumber, clothing, liquor, cotton goods, masonry and brick, general construction, meat-packing –1920: machinery, iron and steel, lumber, cotton goods, shipbuilding, automobile, general shop construction, printing and publishing, electrical machinery, clothing

38 Revolution in Production Processes New technologies: reduction milling, fractional distillation, disassembly system for processing animal carcasses Capital-intensive, energy-consuming, large batch production methods Spread electricity removed physical constraints in plant layout, design, and location

39 Why Tech Change? Continued to import tech from abroad Natural resources very important and used intensively –Elast. Substit. Capital and natural resources > 1; labor and natural resources > 1 –Elast substit labor and capital < 1 –Capital and natural resources relative complements: abundant natural resources induced higher capital-labor ratio in US mfg

40 Chandler’s view Mass distribution and mass production altered industrial structure and redefined nature firm Modern corporation able to reduce costs and efficiently utilize resources by exploiting economies of scale and scope and lowering transaction costs

41 Chandler’s view Economies of scale – increased size of single operating unit producing or distributing single product reduces unit cost of production or distribution Economies scope – economies of joint production or distribution – use of processes within single operating unit to produce or distribute more than one product Transaction costs – transfer goods and services from one operating unit to another – more efficient exchange of goods and services between units

42 Chandler’s view Development new technologies and opening new markets resulted in economies of scale and scope and reduced transaction costs and explain why multiunit industrial enterprise came when did, where did, and why did

43 Changes in labor markets Demand for managers, accountants, clerks, sales personnel Demand for high-school trained personnel Demand for trained specialists –Establishment of mechanical, electrical, and chemical engineering depts –Establishment of business schools

44 Why wasn’t the change as pronounced in Europe? Energy intensity Size of the market –1870-1930 US pop and per-capita income growing more rapidly than other countries –Less dependence on foreign trade Large physical space and scattered pop –Need more units production and distribution

45 Sources of productivity increase Cottage and artisan production to factory production But two sources of productivity increase from this shift –Technological change –Change in the organization of production –Whether substantial economic growth was realized by industrializing economies prior to the widespread utilization of machinery, and whether this initial phase of industrialization was powered by the increases in productivity, achived through changes in the organization and composition of the manufacturing workforce –More fundamentally, institutional change and economic growth

46 Starts with the standard Cobb-Douglass production function V = AK γ L β where V is value added A is a constant K is capital γ is output elasticity of capital L is labor β is output elasticity of labor Then modifies it by dividing both sides by L V/L = A(K/L) γ L s where s = (γ+β)-1


48 Organizational form of US Early Industrialization Mechanization still scarce then In England, cottage production/putting-out system was prevalent Unlike England, the US shifted from cottage production to nonmechanized factory system quite rapidly Which is more efficient?

49 Conventional Wisdom Nonmechanized factories, although employing similar technologies, had higher efficiency because of more division of labor and higher working discipline But why cottage production still prevalent in England?

50 Story The US is scarce in labor, but abundant in capital and natural resources, while England has a much lower land-to-labor ratio England more concentrated in grains; the US more variety English labor markets had more seasonality than US ones This is why England relied more on cottage manufacture than the US did This also explains the cross-country differences in female labor force participation ratio This also explains the seemingly coincidence that the rise in grain imports into England during the late 19 th century and the decline in cottage manufacture

51 Cottage manufacture/putting-out system What is it? Not new in human history But puzzling for large-scale commercial production, because it seems to have low efficiency compared with centralized manufactory

52 Facts of English cottage production High women and children labor participation ratio in rural production Adult males often divided their time b/t jobs in agriculture and in manufacturing Cottage manufacture more concentrated in the South where grain cultivation was prevalent

53 Facts of US production Cottage manufacture was never that widespread For the limited amount of cottage manufacture, women and children participation and male seasonality were similar to those in England


55 55 Closer look Massachusetts 1801: no county had as much as 10% of its land planted in crops; England 1836, it was 25% to 70% This is already a conservative estimation because corn was the principal grain in MA while wheat was the principal grain in England A lot of evidence shows that Massachusetts farmers did a lot of dairying, the chopping of wood for fuel and lumber, butchering, and other tasks around the farm during the winter months Harvest to winter wage ratios: MA 1.42; grain counties in England: 2.2; other counties in England: 1.73




59 Conclusions and Implications In a labor-abundant and land-scarce economy, putting-out system offers greater flexibility and more suitable for agricultural production Factor endowment, production organization, innovation and technological change How about other similar countries?

60 Habakkuk Thesis “It seems obvious—it certainly seemed so to contemporaries—that the dearness and inelasticity of American, compared with British labour, gave the American entrepreneur with a given capital a greater inducement than his British counterpart to replace labour by machines. The real problem is to determine how the substitution took place. Where the more mechanised method saved both labour and capital per unit of output, it would be the preferred technique in both countries. It was where the more mechanised method saved labour but at the expense of an increase in capital that the American had the greater inducement than the English manufacturer to adopt it.” --H. J. Habakkuk, American and British Technology in the Nineteenth Century (Cambridge: Cambridge University Press, 1962), p. 17.

61 Where was the American technological leadership from? Check the pattern of US exports in manufacture goods, surprisingly find that American manufacturing exports were intensive in natural resources Moreover, this tendency increased over time until the Great Depression This does not conflict with American technological leadership




65 Where did this growth come from? in the same time, the output of coal, copper, petroleum, iron ore, zinc, … led the world Transportation cost dropped significantly Compared with other economies with similar TFP growth, US used much more energy It was more a resource-based manufacturing than a technology based one








73 Map of U.S. Resource Exploitation c1900

74 David and Wright, “Genesis of American Resource Abundance,” p. 223. It is tempting to entertain the... proposition that it was the very weakness of effective property rights in mineral lands that accounts for the American expansion. On this reading, the entire historical epoch could be seen as a gigantic illustration of excessive resource depletion in a common-property setting, augmented by the urgency of a race to drain a non-renewable common pool.

75 They attribute U.S. success in mineral extraction largely to federal government policy: Gave prospectors open access to public lands Created and funded the U.S. Geological Survey in 1879 Granted states public lands for institutions of higher education (Morrill Act), many of which trained mining engineers

76 How did the U.S. overcome the disadvantage of the high cost of labor and capital? By means of technological innovation not adopted by its international competitors? By substituting resources for capital and/or labor? By using tariffs to protect industry?



79 Debate over Role of the Tariff The U.S. used tariffs to foster its own industrialization (infant industries argument). Now it is promoting free trade—“kicking away the ladder” that developing nations need. The U.S. industrialized despite the tariff not because of it.






85 Tinplate Industry Very unique industry in terms of tariff protection Counterfactual analysis suggests that in the absence of protective tariff, domestic tinplate production would have arisen about a decade later as US iron and steel prices converged with those in Britain

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