Porridge to Progress: Economic Development through the Lens of Wage and Price History Bob Allen New York University Abu Dhabi 2015

Objectives today: Describe my project of writing wage and price history of the world Discuss implications for-- –measuring market integration & globalization –Measuring standard of living –Incentives to adopt modern technology

Wage and price history First price histories written in mid19th century Based on surviving accounts of institutions that lasted hundreds of years Historian abstracts prices from all transactions and wages paid to all employees Large tables in local money and units of weight and measure in many languages. Since 1980s, I have been putting them in spreadsheets and converting units. Data on my website ( and elsewhere.

Europe-- "The Great Divergence in European Wages and Prices from the Middle Ages to the First World War," Explorations in Economic History, Vol. 38, 2001, pp Asia-- “India in the Great Divergence,” Timothy J. Hatton, Kevin H. O’Rourke, and Alan M. Taylor, eds., The New Comparative Economic History: Essays in Honor of Jeffery G. Williamson, Cambridge, MA, MIT Press, 2007, pp “Wages, Prices, and Living Standards in China, : in comparison with Europe, Japan, and India" (with Jean-Pascal Bassino, Debin Ma, Christine Moll-Murata, and Jan Luiten van Zanden), Economic History Review, 2011, Vol. 64, pp Americas-- “The Colonial Origins of Divergence in the Americas: A Labour Market Approach,” (with Tommy Murphy and Eric Schneider), Journal of Economic History, 2012, Vol. 72, pp “American Exceptionalism as a Problem in Global History,” Journal of Economic History, 2014, Vol. 74, pp

Wages and prices in Damascus

prices in Basra market

Measuring global market integration

Globalization and integration of markets

Before steamships and after…

cotton prices also converged

Cotton cloth prices fell as British technology improved.

Internationally traded materials prices

Prices of non-traded goods varied according to wages

Measuring standard of living

Pre-industrial wages

How do the wages map into living standards? We must measure the cost of living: Collect prices of all of the important consumer goods. These must be converted to grams of silver per metric unit. A basket of goods must be specified and its cost computed.

What was the subsistence wage in England in the Industrial Revolution? Sir Frederick Eden, The State of the Poor, 1797, Vol. II, pp , reports on an Ealing gardener. Aged 40, regularly employed, with a wife, and four children aged 8, 6, 4, and 1-1/2 He seems fairly typical.

Measure living standard with ‘respectability ratio’ Annual family income = 250 * daily wage Cost of maintaining a family at subsistence –Add 5% to budget for rent –Family = 3 adult male equivalents –Annual subsistence cost = 3.15 * cost of basket Respectability ratio = annual income/annual cost of subsistence In late 1790s, annual subsistence cost was about £25.5, so the Ealing gardner’s ratio= 28.75/25.5 = 1.12 on regular earnings.

What would Malthus, Ricardo, and Marx say? Pleased that labourer’s real wage was just above subsistence and flat for 500 years However, English real wage was very much above wages elsewhere in the world. The Rest couldn’t afford the basket. How did they rest survive? Symptom: many proxy variables in Asian baskets

How did the poor survive? More people worked more –Not too effective since women & children earned such low wages Spent less money –Got rid of expensive sources of calories –Diet reduced to cheapest available carbohydrate, beans, very little meat and oil Other changes in basket –Calories set at 2100 per person –Four people per household

Such baskets correspond to the World Bank Poverty Line of $1.25 per person per day.

When the subsistence ratios are calculated with these baskets, the geometry is the same but the absolute levels are lower. Roman Empire (Diocletian price edict 301 AD)

Some implications Real wage in poor countries in eighteenth century was at barebones subsistence = WBPL Classical economists’ idea of subsistence (respectability) was over twice the cost of barebones subsistence = WBPL. Great divergence preceded the Industrial Revolution (indeed, caused it).

We can apply these measures across time and space

Laborers’ wages at the exchange rate were much lower in countries with large native populations.

Real wages were at subsistence in Egypt and India.

The longest run so far is Egypt, and it’s still the Hockey Stick.

Incentives to adopt modern technology

Since the Industrial Revolution, a lot of ‘modern’ technology has Raised labour productivity by increasing the capital-labour ratio Raised labour productivity by increasing the energy-labour ratio If ‘modern’ technology has different factor proportions from ‘older’ technology, then relative factor prices could—and did!—play a major role in the invention and diffusion of modernity.

Why do rich countries use highly mechanized power looms?

While 300,000 Ethiopians still weave cloth with handlooms?

Why is the K/L ratio high in placer gold mining in California?

While the K/L ratio is low in placer mining in Ghana?

The breakthrough technologies of the IR raised labour productivity by increasing K/L.

Not an accident: Eighteenth century Britain was unique because its labour was very expensive relative to capital.

Since IR, incentives to adopt modern technology have been very different in rich countries and poor countries.