1. Fudan University Lecture21 The economic history of technological progress Is at the foundation of long term economic growth Easy to see why: All other sources of economic growth run into diminishing returns

2. Fudan University Lecture22 Thus for example: Economies can grow through capital accumulation, but as K/L goes bigger, the MP of K falls because diminishing returns set in. Economies can grow because of better allocations through better markets and more mobility, but that slows down as it reaches Pareto efficiency. Economies can grow through more international trade (gains from trade) but eventually these will be exhausted.

3. Fudan University Lecture23 Only technological progress does not run into diminishing returns Technological progress is cumulative and (almost) irreversible Technological progress is self-sustaining and possibly a non- ergodic process, that is, it does not converge to any given equilibrium and it is incomprehensible through observation for lack of repetition, e.g., by involving only transient states which are unique, You may ask: but any human can only know a finite amount. But that is why there is specialization (the division of knowledge) which can increase endlessly as long as access costs are low and there are good search engines.

4. Fudan University Lecture24 Inventions vs. Innovations Traditionally (following Schumpeter) economic historians have made a distinction between “invention” (the first time some technique is made to work) and innovation (its implementation). Modern research has found this distinction increasingly cumbersome. Why? Because most implementation involves some further adjustment to local circumstances and thus “tweaking” the invention.

5. Fudan University Lecture25 Various ways of classifying inventions One way is to distinguish between macroinventions and microinventions. Macroinventions are major steps forward that do something that has never been done before, such as defeating gravity or converting heat into work or spinning yard mechanically rather than by hand. Microinventions are relatively small improvements, modifications, or new adaptations of existing techniques.

6. Fudan University Lecture26 There are relatively few macroinventions Some improvements are quite major, and might qualify for “macro” status themselves (e.g., Trevithick’s high pressure steam engine, invented 1804). But the vast bulk of productivity increase comes from small, incremental but cumulative improvements, many of them anonymous. Macroinventions often occur unexpectedly and their exact timing is often hard to explain, whereas microinventions often are a result of directed R&D or Learning by Doing.

7. Fudan University Lecture27 The relation between them is complementary Macroinventions strongly increase the marginal product of inventive activity. Microinventions make a new breakthrough practical, but after a while start running into diminishing returns.

8. Fudan University Lecture28 Another way of looking at inventions: General Purpose technologies. Used in complementary fashion with other technologies, and thus breed new innovations. Examples of GPT ’ s: steam engines, electricity, steel, microprocessors, synthetic materials. Much like macroinventions, GPT ’ s generate much subsequent inventive activities.

9. Fudan University Lecture29 A third way: “Biased” (factor-saving) vs. neutral inventions. (will come back to this).

10. Fudan University Lecture210 What were the sources of technological progress? Economists like to believe that people respond to incentives: opportunities provided by prospective markets and intellectual property rights. They also realize that inventors need a supportive institutional environment and complementary factors. Britain is one of the first nations that has a patent system that allows inventors to treat an invention as an “asset”. It is believed that property rights in knowledge (IPR’s) can provide important incentives to inventors.

11. Fudan University Lecture211 Britain has an early patent system (since 1624) Did this matter? There is no doubt that patent activity mirrored technological advances In the middle of the eighteenth century one can see the effect of the Industrial Revolution

12. Fudan University Lecture212 Patent Stats, 1711-1850 Total # of patents % textiles % metals % Agricultural % Chemicals 4544741711-20 931210 21721-30 48610 21731-40 85166761741-50 9887421751-60 22110 421761-70 2991711241771-80 512138431781-90 673135431791-00 932135531801-10 1122118321811-20 1533166111821-30 2710186241831-40 4652158431841-50

13. Fudan University Lecture213 Patents established property rights on new knowledge. By so-doing, they turn a patent into an asset. This may convince inventors that his property rights in the knowledge he generates will be such that it may pay off. Moreover, if an inventor has a patent, it may be easier for him to persuade people with capital to finance its development. Patents could be licensed and sold, and thus could be priced correctly by what the market thought they were worth. Patents forced patentees to provide the description of the patent in great detail, and this information was placed in the public realm. Others could study it even if they could not use it.

14. Fudan University Lecture214 Yet Patents were monopolies They could be used to block entrants from entering markets and thus provide rents to incumbent firms. They discouraged other firms from doing research in certain areas. Sometimes led to litigation, thus enriching lawyers and nobody else.

15. Fudan University Lecture215 Can patents by themselves explain the Industrial Revolution in Britain? Although there were a few high successful patentees, such as James Watt and Charles Tennant, most successful inventors and industrialists in the Industrial Revolution did not take advantage of it or tried to and failed such as Henry Cort and Richard Arkwright. How come? Patents in Britain were very expensive and cumbersome. Patents meant little unless courts enforced them. Many people (including judges) were ideologically opposed to patents A few inventors preferred to keep their knowledge secret (if possible) or simply exploit “first mover advantage.”

16. Fudan University Lecture216 Moreover: Monetary incentives that stimulated invention could be produced without the intellectual monopoly rights implied in a patent. Some of them worked through prizes and rewards (pensions) that Parliament often voted (often after the invention was complete) Others simply relied on “first mover’s advantage.” Some tried to patent but then failed to take advantage of them or lost them. Some tried to keep their inventions secret (e.g. Benjamin Huntsman) Still others played a signaling game (e.g. John Rennie).

17. Fudan University Lecture217 One example: John Rennie (1761–1821)

18. Fudan University Lecture218 Leading engineer in the Industrial Revolution 1.Rennie made his name through the construction of the first steam-powered flour mills, the Albion mills in London. 2.He opened the mills for all to see, refusing to patent anything. 3.Soon after that, his reputation was fully established and orders and commissions started rolling in. 4.He then proceeded to become Britain’s most celebrated engineer, building among others Waterloo Bridge and the West India Docks. 5.Clearly, he relied on signaling devices to make his money through his reputation.

19. Fudan University Lecture219 So what were the sources of technological creativity in Britain? Part of the story is that in Britain invention and enterprise were left to the private sector, and assets were relatively secure. But in Britain there was a high level of successful “R&D” carried out by individuals whose motives were complex. Almost everyone liked money, but few of them were only driven by greed. Those who made money often partnered up with shrewd businessmen who ran the businesses. Other motives: curiosity, altruism, a desire to impress one’s peers.

20. Fudan University Lecture220 Overall “cultural factors” may have mattered Eighteenth century is an age of “tolerance”. People became less and less suspicious of “new ideas.” Incumbents trying to defend their turf and special interests got little or no support in society. More and more people believed that people should study the world in order to achieve economic growth (Material progress). This is known as the “Baconian Program”.

21. Fudan University Lecture221 A telling example is the British Royal Society, founded in 1660 Their aim was “to improve the knowledge of naturall things, and all useful Arts, Manufactures, Mechanick practises, Engines, and Inventions by Experiments”. Many other societies like this were founded, some of them famous such as the “Lunar Society” of Birmingham and the “Society of Arts” (f.1754) which awarded prizes for inventors. In many towns one could find these scientific societies and “academies” where businessmen and industrialists met scientists, chemists, and engineers and exchanged information. In this way scientists learned of the practical needs of manufacturers, and industrialists found out where and how science could be helpful to them (which was quite limited, but not zero).

22. Fudan University Lecture222 How much a role did modern “science” play in all this? Some believe that the Scientific Revolution of the 17 th century “caused” the Industrial Revolution and point to the pathbreaking work of giants such as Newton and Galileo. Others note that the bulk of important inventions during the Industrial Revolution did NOT depend on scientific breakthroughs but were the result of clever mechanical insight, good luck, and long periods of trial and error, and deny that “modern science” had much to do with technological progress.

23. Fudan University Lecture223 It depended on the type of invention and when it occurred. In some branches there clearly was no overwhelming need for science to make progress (e.g. cotton spinning, mechanical engineering, road building). In others, inventions depended on scientific discoveries before they could be realized. Examples: Torricelli and the atmospheric engine Scheele, Berthollet and chlorine bleaching Oersted and the telegraph

24. Fudan University Lecture224 In some industries they were in between For example: coal mining, steam engineering, early chemical industries, machine tools, telegraph, livestock- breeding. In all these industries natural philosophers knew “something” but not all there was to know (which is often infinite) and a small fraction what people know today. Yet some of that knowledge, and especially scientific method and scientific mentality assisted would-be inventors. engineers, and mechanics.

25. Fudan University Lecture225 Two statements are clearly true: What was 18 th century science? It was not much like Newton. In the eighteenth century much of “natural philosophy” consisted of the three C’s: counting, cataloguing, and classifying. By describing in detail natural phenomena, even if they did not really understand them (including technological practices), experimentalists and natural historians provided a huge information base. British science was not especially distinguished, but British scientists and engineers had access to all of Western science through international contacts and the spreading and translation of books and articles.

26. Fudan University Lecture226 Moreover, the connections between science and invention were far more complex than the standard linear model suggests The “standard linear model”: Pure science Applied science Engineering Manufacturing

27. Fudan University Lecture227 Reality was (and is) far more complex: First and foremost, scientists themselves invented many things, and in many cases refused to take out a patent or benefit from their invention except for their gains through a “signaling game” (that is, being famous). Secondly, many inventors hired scientists as consultants in the hope that they can learn something from them. High-level engineers were often trained in science and in scientific culture, meaning a high degree of accuracy and knowledge of math. the insistence on the reproducibility of findings and high tolerance for novelty. the sharing of results, A belief in the rationality and know-ability of the physical world. Technology affected science as often as the other way around

28. Fudan University Lecture228 In many fields, lack of scientific knowledge was still a constraint that slowed down progress. In other words, even when people knew what worked, they did know not why. Finding out “why” was a task for the scientists, either theorists or experimentalists But sometimes it was hard, and progress was very slow. WHY? Inadequate equipment and lab techniques Insufficient computing power and lack of statistical methods Bad models of science (Josh Billings: “it isn’t what people don’t know that gets them into trouble, it’s what they think they know and ain’t so.”) Especially marked in medicine and agriculture, but also in other areas like electricity and metallurgy.

29. Fudan University Lecture229 In the nineteenth century this changed Science was applied wherever possible and people learned a great deal about natural phenomena that interested them, and in the process were able make consistent improvements. This does not mean that luck and serendipity or the “try every bottle on the shelf” procedure became unimportant, only that systematic knowledge became increasingly important. Even when inventors were unsure of the underlying process, and luck was important, “fortune favored the prepared mind.”

30. Fudan University Lecture230 Even “unscientific inventors” were able to consult scientists and tap the knowledge of science. Examples: James Neilson (“hot blast” of 1829) studied with Gay-Lussac in Paris Henry Bessemer (inventor of the Bessemer steel-making process, 1856) was no scientist, but he too had absorbed the famous discovery (1784) of three Frenchmen of what steel was. Moreover, when his famous steel making furnace turned out inferior material, he asked the leading expert of the time, Robert Mushet, who figured out how to fix it.

31. Fudan University Lecture231 Examples of areas of science that eventually affected technological outcomes Study of electrical phenomena Organic and soil chemistry Material sciences (especially iron and steel) Energy use (thermodynamics). Electromagnetism (early radio) Bacteriology

32. Fudan University Lecture232 What explains Britain’s success in the technological achievements of the Industrial Revolution? Obviously it had some of the best and most famous inventors, some “hall of famers” such as James Watt, John Smeaton, James Hargreaves, Samuel Crompton, Edmund Cartwright, Michael Faraday

33. Fudan University Lecture233 Britain was a good “emulator” In other words, they tended to take inventions made anywhere and adopt and improve them, with no “not-invented-here” syndrome. Many of the early inventions came from other countries, including: Chlorine bleaching (Scheele, Berthollet) Mechanized draw-loom (Jacquard) Gaslighting (Philip LeBon) Soda-making process (Nicholas LeBlanc, later Ernest Solvay) Continuous papermaking machine (Robert) Mechanical linen-spinning machine (De Girard) Foodcanning (Appert) Water Turbine (Fourneyron) fatty acids (Chevreul) Interchangeable parts (Honoré Blanc) Batteries (A. Volta)

34. Fudan University Lecture234 Many people at the time believed that Britain was particularly good at adapting and improving inventions made elsewhere. John Farey, an eminent engineer, testified in 1829 before a Parliamentary committee that "the prevailing talent of English and Scotch people is to apply new ideas to use, and to bring such applications to perfection, but they do not imagine as much as foreigners"

35. Fudan University Lecture235 One way of phrasing this: Britain has an absolute advantage in both macro-and microinventions, but a comparative advantage in microinventions. How do we know this? Through revealed comparative advantage. Britain is a net importer of ideas but a net exporter of mechanics and technicians.

36. Fudan University Lecture236 So what does Britain have to give her this advantage? In large part, she has “ good ” institutions, including a government in which the executive is constrained from taxing or confiscating property. It also has a large number of highly skilled and competent artisans whose job is not to invent anything but to build designs from blueprints. This is important because techniques are “ implementable ” (like music or theatre).

37. Fudan University Lecture237 What is competence? The skills and dexterity to carry out instructions and read blueprints, knowledge of friction and resistance, the behavior of animals, materials and parts, etc. The savoir faire and commitment to accuracy to make parts and materials at low levels of tolerance. Much of this was tacit knowledge that had to be transmitted in person.

38. Fudan University Lecture238 Britain’s advantage It may or may not have had an absolute advantage in all categories of human capital, but it had a comparative advantage in people who create microinventions (“tweakers and implementers”). Hence the famous statement that “for a thing to work perfectly, it has to be invented in France and improved in England” (attrib. to Jean Ryhiner, 1766). Competence and great inventions were, as noted, complementary. Thus because of its much greater endowment of competence, Britain was able to exploit its own inventions and those of others earlier.

39. Fudan University Lecture239 Two big questions: What kind of evidence is there to support this argument? If true, where does Britain’s “endowment of competence” come from? Only time for the briefest of summaries here.

40. Fudan University Lecture240 Evidence: Contemporary observers on both sides of the channel. “Revealed comp. adv.”: British technicians and mechanics much in demand on the Continent (Henderson, 1954). Implicit policy evidence: laws against emigration of skilled artisans. Many continental inventors move to England in search of a better “environment” for inventors.

41. Fudan University Lecture241 Sources of this advantage: Britain’s system of apprenticeship works well in producing competence (Humphries). Self-enforcing contracts through reputation mechanism and other private-order institutions. Scotland produces a disproportionate number of competent workmen. It has weak guilds, which gives the system flexibility. Here geography also matters: coal mines and shipping industry generate competence by creating demand for competence.

42. Fudan University Lecture242 Sources of this advantage (cont’d) Other Demand factors: Britain had a substantial middle class who could afford and bought luxury goods that were skill-intensive such as clocks, musical instruments, fancy furniture, and optical instruments (De Vries, 2008; Berg, 2005). Historical contingency: Huguenot clock- and instrument makers.

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44. Fudan University Lecture244 Not many of these “tweakers and implementers” are known But we know they existed, especially in a number of industries: Mining Clock- and watchmaking Ship-building Engineers Navigational and surveying instruments Optical industry

45. Fudan University Lecture245 Coal-mining, especially demanded high skills: Locate coal deposits from geological data (viewers). Design pumps that get the water out. Find ways around the difficulty of bringing sources of light down the shaft. Make sure there are no cave ins, explosions, floods, and other disasters. HARD technological issue: how to bring light down the shaft.

46. Fudan University Lecture2 46 Davy's original safety lamps, 1816 (Miner’s Friend)

47. Fudan University Lecture247 Shipbuilding was in this way similar: Indeed, the first “mass production” factory in Britain was set up in 1801 by two brilliant engineers, Mark I. Brunel and Henry Maudslay at the Royal shipyards in Portsmouth. They produced wooden blocks for gears and pulleys using a fine division of labor and steam power. Not only that this saved labor, the parts produced were far more homogenous than the ones made before by hand. Classic Example of “modern” mass production.

48. Fudan University Lecture248 Mechanical Engineering became central to technological progress. Joseph Whitworth: standardized screws and bolts throughout the country Many others played important roles: Joseph Nasmyth, Henry Maudslay Highly specialized tools allowed the production of ever more precise parts and lower tolerances. The important economics of this is that the operators of lathes and cutting machines learned to make power-driven machinery that could then be applied in other industries by workers with fewer skills than themselves.

49. Fudan University Lecture249 ‘ Lathe, 1816Roberts

50. Fudan University Lecture250 One of the great ambitions of the age was standardization Very important with intermediary goods such as screws, bolts, nails, and various spare parts. Also need to coordinate weights and measures, time zones. Standardization is equally important for consumers since it reduces the uncertainty in buying goods, and thus enhances competition. More and more interconnected with mass-production. Standardization becomes increasingly important a bit later with telegraph, railroads, electricity (network externalities).

51. Fudan University Lecture251 What about income distribution? Inc distr. in Britain by 1700 is relatively equal. There is a substantial middle class (“middling sorts”) or well-to-do farmers, merchants, professionals and highly skilled artisans. What was a middle class? This middle class grew substantially over the eighteenth century and beyond. Their economic significance was quite substantial for a number of reasons:

52. Fudan University Lecture252 They provided the population from which the successful entrepreneurs and engineers were recruited. Because they needed to show that they were middle class, they purchased goods that served as “costly signals” such as fancier clothes, carriages, fine home furnishings, musical instruments, and so on. These goods were skill-intensive, and thus encouraged the formation of these skills.

53. Fudan University Lecture253 Moreover, Britain was a high-wage economy Real wages in Britain were rather high compared to those in other nations (except the N’lands). It is often argued that high wages in Britain stimulated the “search” for labor saving innovations. A recent book by Robert C. Allen makes statement quite explicitly. The statement makes a lot of sense, but needs some refinement.

54. Fudan University Lecture254 1.Firms try to save on all costs, and it’s not clear if in high wage economy labor is necessarily a large cost item, maybe they can substitute other factors for it. [e.g. animal power for human muscles]. 2.This allows us to separate two issues: substitution and induced technological change.

55. Fudan University Lecture255 Substitution Other factors Labor High wage economy Low wage economy A B I

56. Fudan University Lecture256 L-saving technological change Other factors Labor I LW HW HW’

57. Fudan University Lecture257 But is there a compelling reason for inventors to “search” for L-saving innovations? Mostly not, they are trying to save costs wherever they can. Moreover, note that “high wages” does not mean that firms will spend a lot on labor. Furthermore, and less intuitive, high wages does not mean “expensive labor” --- why? Finally, steampower, the most-often cited example of a labor- saving and fuel-using device, in practice normally replaced animal power rather than human power and thus substituted one form of capital for another.

58. Fudan University Lecture258 Paul David’ interpretation of the Industrial Revolution Energy Labor Low-wage, Exp. energy High-wage, Cheap energy A B e f

59. Fudan University Lecture259 Finally, a friendly institutional environment Economists do not sufficiently appreciate how often inventors are running into political resistance from people who are trying to prevent their invention from being diffused and implemented. This makes sense in any rational choice model, since the incumbents have both physical and human capital invested in the old technology, and that capital will depreciate if the new technology is implemented.

60. Fudan University Lecture260 In those circumstances, it pays to try to resist the new technology. Historically, this took place everywhere. Two main forms: Legal and formal (try to get Parliament to enforce laws against the new technology). Informal and violent machine-breaking (“Luddism”). In many economies, this resistance was quite effective, but NOT in Britain.

61. Fudan University Lecture261 The British government took a resolute stance in support of new technology. The ideology of this is in part just an outgrowth of Enlightened thought (“progress is good”) In part it is the result of the competitiveness of the European “states-system”.

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