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Wednesday
Nov202013

Is Endogenous Technology Conservative?

In our previous post, we reviewed the basics of the debate between Paul Ehrlich and Julian Simon over whether economic growth would lead to widespread resource scarcities and demographic catastrophes.

In The Bet: Paul Ehrlich, Julian Simon and Our Gamble over Earth’s Future, Paul Sabin puts this debate, and their famous wager, in context and provides useful and interesting historical details.

Sabin also follows one interpretation of this debate in which Paul Ehrlich is the liberal, voicing left-wing concerns about economic growth, and Julian Simon the conservative, subscribing to a techno-optimistic view.

Though it is true that Paul Ehrlich considered himself to be from the left, and Julian Simon’s views came to be adopted by the right (and Simon himself embraced some American conservatives’ climate-skeptic views), it is wrong to see this debate as pitting liberal vs. conservative views of technology and economic growth.

At the center of the debate are some basic economic questions: is technology endogenous, and can it change enough to overcome scarcities?

There is nothing inherently right or left in the answer to these questions.

To an economist, it is natural to presume that technology is endogenous, and many economists view technological change as a powerful factor capable of overcoming all sorts of scarcities.

John Hicks anticipated this in his Theory of Wages, writing

A change in the relative prices of the factors of production is itself a spur to invention, and to invention of a particular kind—-directed to economizing the use of a factor which has become relatively expensive…

The most famous version of this idea is embedded in the endogenous technological change models every economist encounters in graduate school (and nowadays, many even see in their undergraduate studies).

In the basic neoclassical growth model, as formulated by Robert Solow, long-run economic growth necessitates exogenous technological change (except in some degenerate cases). Without such technological change raining down as mana from heaven, capital accumulation can drive growth for a while, but must ultimately come to an end. One way of understanding the reason for this is that as capital accumulates, the capital-labor ratio increases and this makes labor “more scarce” (relative to capital). This increases wages and reduces the return to capital, discouraging further capital accumulation.

Looked at it from this perspective, what endogenous technological change models do is that they create incentives for technology to also advance. As a result, even though labor does become more expensive (thus more scarce), this does not choke off economic growth. Scarcities are overcome by technological ingenuity.

Nice in theory, but does this have anything to do with reality?

Actually yes. Considerable empirical evidence shows that technology does indeed respond to incentives, including scarcity.

An interesting example comes from David Nye’s  Electrifying America: Social Meanings of a New Technology, 1880-1940, where he argues

Cities grew larger, better transportation was needed, so the [electric] trolley was invented, called into being by the crowded late nineteenth century cities….By the 1870s large cities had ceased to be accessible by foot, or built to the scale of pedestrians, and traffic congestion was terrible.

But crucially, the difficulties that over-congestion created also induced the development and adoption of new technologies in the form of the electric trolley, which ultimately solved the major conundrum that cities were facing at the end of the 19th century.

The famous Habakkuk hypothesis in economic history also amounts to the same thing (with different historical examples to back it up).   

In American and British Technology in the Nineteenth Century Habakkuk argued that technological progress was more rapid in 19th-century United States than in Britain because American labor scarcity induced faster technological progress and mechanization.

Habakkuk, for example, quoted from a contemporary observer of technology, Pelling, who wrote:

… it was scarcity of labor `which laid the foundation for the future continuous progress of American industry, by obliging manufacturers to take every opportunity of installing new types of labor-saving machinery.’

Or in Habakkuk’s own words:

It seems obvious—- it certainly seemed so to contemporaries—- that the dearness and inelasticity of American, compared with British, labour gave the American entrepreneur … a greater inducement than his British counterpart to replace labour by machines.

More recently, economic historian Robert Allen suggested in The British Industrial Revolution in Global Perspective the same mechanism as the reason why Industrial Revolution took place in Britain rather than in continental Europe or elsewhere.

A more contemporary example comes from the work of economists Richard Newell, Adam Jaffee and Robert Stavins. They show with historical data from Sears catalogs that, when energy was abundant and cheap, innovation in air conditioners tended to reduce prices and leave energy efficiency largely unchanged. After the oil price hikes, when energy became more expensive and “scarcer”, the direction of technological progress changed and air conditioners started becoming more energy efficient over time (but not much cheaper).

So the idea that technology is endogenous and responds to prices and scarcities isn’t an ideological belief, but an economic idea with fairly solid empirical backing.

This of course doesn’t mean that technological change is always powerful enough to overcome all scarcities. That’s another empirical question, and one we will discuss more in the next post.

But here, to put it into context, it is perhaps also useful to note that belief in the power of technology to overcome scarcity and create abundance is not under the monopoly of the right.

Many of the early socialist thinkers, including Robert Owen, Henri de Saint-Simon, Charles Fourier and Edward Bellamy, believed in the power of technology to create their utopian societies. Even Karl Marx was fairly optimistic about what technology and scientific knowledge could achieve (even though he was fiercely critical of what technology did under capitalist control, arguing, for example that “all progress in increasing the fertility of the soil for a given time isn’t progress towards winning the more long-lasting sources of that fertility… Capitalist production, therefore, develops technology, and the combining together of various processes into a social whole, only by sapping the original sources of all wealth…”).

Neither is there anything inherently progressive or left-wing in arguing, as Paul Ehrlich did, that the world is overpopulated and population must be controlled at all costs.

Matthew Connelly’s entertaining and troubling Fatal Misconception shows how the obsession to control population (which in practice means international organizations controlling or attempting to control population in poor countries) could acquire an almost fascistic zeal.

In light of all this, it would seem that the debate between Ehrlich and Simon shouldn’t be viewed as the struggle of left and right-wing ideologies, but an economic and empirical debate.

On the economics of it Simon’s position seems right: technology is endogenous and does respond to scarcities and prices.

On the empirics of it, that is, on the question of whether this response of technology is powerful enough to overcome all scarcities and avoid serious negative environmental consequences, the answer is a little more nuanced as we will see next week.

Tuesday
Nov192013

Ehrlich, Simon and Technology

A new book by Paul Sabin, The Bet: Paul Ehrlich, Julian Simon and Our Gamble over Earth’s Future, revisits the famous wager between Ehrlich and Simon.

Many scholars and commentators over the years have publicly, and sometimes very loudly, worried that we will outgrow our planet’s ability to support us. One of the most colorful was the environmentalist Paul Ehrlich, who repeatedly predicted over the 1960s and 70s widespread resource scarcities and consequent demographic catastrophes. He became more than a public intellectual, almost a household name as a result.

But Ehrlich was challenged by economist Julian Simon, who believed that technological ingenuity would overcome any scarcities before these would have much of an impact on human welfare.

Simon challenged Ehrlich to a bet about the prices of a bundle of commodities that Ehrlich would choose.

Ehrlich picked chromium, copper, nickel, tin, and tungsten as five commodities that would experience increases in their inflation-adjusted prices between 1980 and 1990. The wager ended with a victory for Simon when the prices of all five commodities fell.

But as Sabin recounts, the story would have been different if the bet was extended two more decades.

The next figure shows that indeed Simon’s victory may have been premature.

 

Before the Great Recession prices had reached and surpassed their 1980 level.

That of course neither proves nor disproves Simon’s broader point: technology will respond to scarcities.

That being said, revisiting this bet and the preceding and ensuing debate is interesting for several reasons as we will discuss in the next several posts.

To give a preview, in the next post, we will suggest that the oft-drawn interpretation of the wager between Ehrlich and Simon, repeated by Sabin, as the facing off of liberal and conservative views about growth and technology misses the point.

We will then review some of the economics literature on how technology responds to scarcities and the implications of this for climate change.

We will conclude with a final post on the role of politics in technological change. 

Thursday
Nov142013

Labor Coercion in the British Industrial Revolution! Surely not?

Can’t be true? Didn’t Britain have inclusive institutions? Yes on balance it did, but of course reality is full of grey areas.

One such grey area is labor coercion. There was probably less labor coercion in Britain by the 19th century than most other places at the time — certainly less than the extensive labor coercion in the US South, coexisting with the broadly inclusive set of institutions of the US North.

Less than elsewhere, but still there.

For instance, the Combination Acts banned trade unions until 1824/25, and even then groups of nascent unionists like the Tolpuddle Martyrs were shipped to the penal colony of Australia in 1834. (This was done by invoking obscure laws that made it illegal to, of all things, ‘swear oaths’ …).

In our blog post on why Barbados and Jamaica are different we pointed out how the Masters and Servants Acts have been used to repress labor in Jamaica. In fact Britain had such laws until 1875, and they made employee contract breach a criminal offense. These laws and their implementation were of course a far cry from the punitive measures implemented in the British Caribbean, but coercive they still were.

Why the timing of their abolition?

We think this is not unrelated to the political developments. The Second Reform Act of 1867 enfranchised working class English people for the first time, and they were able to use their new political power to break down some last residual elements of extractive institutions.

Path-breaking research by Suresh Naidu of Columbia University and Noah Yuchtman of Berkeley has investigated the impact of the repeal of the Masters and Servants Laws on the British Labor Market.

Naidu and Yuchtman find that the repeal of these laws had large effects on wages, which rose disproportionately in places that had previously seen a lot of prosecutions under the law. Interestingly, wages also became more responsive everywhere to changes in supply and demand conditions.

Naidu and Yuchtman also find something else that is very interesting – the industries that were the hallmark of the British Industrial Revolution were heavily involved in prosecuting people under the Masters and Servants Acts. Though the origins of these laws in England go all the way back to the fight against wages rising after the Black Death in the 1340s, they were not some anachronistic cultural left-over waiting to be modernized.

They were being involved by the modern parts of the economy. Institutions in practice are full of gray areas.

Tuesday
Nov122013

Millennials and Why Nations Fail

An interesting article in The New York Times by Tom Agan argues that millennials, those born between 1980 and 2000, are likely to revolutionize companies and innovation, with the company insiders and elites being the only thing standing on their way.

Agan draws a parallel between the theory we lay out in Why Nations Fail on how the political resistance of elites holds back innovation and growth at the country level and the resistance of the company elites that prevents innovation and growth at the company level.

This accords well with new research by Daron joint with Ufuk Akcigit and Murat Alp Celik (both from the University of Pennsylvania), arguing and empirically documenting that openness to disruptive innovations at the country and the company level is a very major determinant of creative innovations. In fact, a key dimension of that openness is how the young are allowed, or not, to contribute to the creation of innovation and wealth. Companies (and countries) that allow the young to rise up within the corporate hierarchy are much more innovative and generate higher quality and more radical innovations. We will report in more detail on this research soon.

Wednesday
Nov062013

Who is the State in Jamaica?

Last week we suggested that Jamaica had a very different type of state than Barbados at least partially because of the long history of labor repression that follows the abolition of slavery in the British Empire in 1834.

A telling example of this is the conviction of drug lord Christopher “Dudus” Coke after his extradition to the United States in 2010.

Before being sentenced Coke wrote a long letter to Judge Robert P. Patterson asking for leniency (you can read the text here).

Points 9 and 10 from the letter are very interesting. They state:

9.  I did a lot of charitable deeds and social services to help members of my community development, where I implemented a lot of social programs that the residents from my community could better their lives, programs that teach them about self-empowerment, education and skills training.

10. I also host a lot of charity events annually such as:

a. A back to school treat for the children after the summer holiday has ended, by giving the children school bags, books, pens, pencils, uniforms and other items necessary for school. I also provide the children with food and refreshment along with entertainment at this event.

b. ..

The list goes on and on and includes D.J. competitions where the winner can record a song, Christmas parties, founding a youth club, giving free food to people in old-age homes, keeping parks and recreational areas clean, helping out at a home for orphans, starting a school called the Western Institute of Technology, which teaches computer and information technology skills and was certified by the government, founding member of the local Parents Association Committee, guarantee that all children between the age of 6 and 16 were off the streets after 8pm.

As evidence he also submitted a list of unemployed people who he had helped to find jobs and a letter from the local member of the Jamaican parliament praising him for all this charitable work.

Dudus did all his charitable work (and masterminded his drug dealing) in an area of Kingston, the capital of Jamaica, called Tivoli Gardens.

He took over the running of a gang called the Shower Posse that had been founded by his father Lester Coke. The gang was so powerful that functionaries of the Jamaican government, such as the police, had to ask its permission to enter Tivoli Gardens. Lester had started out as a bodyguard for Jamaican politician Edward Sega who was instrumental in creating Tivoli Gardens out of the Back-0-Wall shantytown in the 1960s and who was elected, without interruption, for 43 years to the Jamaican parliament, becoming Prime Minister between 1980 and 1989.

Seaga built a political machine in Tivoli Gardens using exactly the same strategies, handing out food and supporting education while at the same time groups like the Shower Posse made sure that the votes got delivered.

Seaga’s Jamaican Labour Party was not the only political party thus based. Michael Manley’s People’s National Party, which, as we noted in our previous post on this topic, is responsible for initiating a severe economic decline in Jamaica, has another infamous neighborhood in Kingstown, Trenchtown.

This again goes to underscore that Jamaica does not have the same institutions as Barbados.

Jamaica has suffered from a long history of violence unleashed by the attempts of former slave owners to repress labor after the abolition of slavery in the British Empire. The political parties which emerged in the 1940s in the context of a nationalist movement started using violent tactics early on and they built their support bases with the cooperation of gangsters in the context of a very weak state unable, or maybe unwilling, to provide order. This violent polarized politics bred very inefficient economic policies, as it has done in much of Latin America, and Jamaica experienced economic divergence from Barbados.

In fact the Jamaican state has a lot in common with the state in countries like Colombia where, as we discuss in Why Nations Fail, paramilitary groups provide many state like services to local people and deliver votes for politicians.