Unit 2 Technology and incentives

2.7 Cheap coal, expensive labour: The Industrial Revolution in Britain and incentives for new technologies

Eve Fisher, a historian, calculated that making a shirt at this time required 500 hours of spinning, and 579 hours of work in total—costing $4,197.75 at the 2022 Federal minimum wage in the US.

Before the Industrial Revolution, weaving, spinning, and making clothes for the household were time-consuming tasks for most women.

What was the impact of inventions such as the spinning jenny? The first spinning jennies had eight spindles. A machine operated by just one adult replaced eight spinsters working on eight spinning wheels. By the late nineteenth century, a single spinning mule operated by a small number of people could replace more than 1,000 spinsters. These machines did not rely on human energy; they were powered first by water wheels, and later by coal-powered steam engines. Figure 2.11 summarizes these changes.

Old technology New technology
Lots of workers Few workers
Few capital goods (spinning wheels) Lots of capital goods (spinning mules, factory buildings, water wheels or steam engines)
… requiring only human energy … requiring energy (coal)
Labour-intensive Labour-saving
Capital-saving Capital-intensive
Energy-saving Energy-intensive

Figure 2.11 The change in spinning technology during the Industrial Revolution.

The model in Section 2.6 provides a hypothesis (potential explanation) for why someone would bother to invent such a technology, and why someone would want to use it. In the model, cloth producers chose between technologies using just two inputs—energy and labour. This is a simplification, but it shows the importance of the relative costs of inputs for the choice of technology. When the cost of labour increased relative to the cost of energy, there were innovation rents to be earned from a switch to the energy-intensive technology.

This is just a hypothesis. Is it actually what happened? Looking at how relative prices differed among countries, and how they changed over time, can help us understand why technologies such as the spinning jenny were invented in Britain rather than elsewhere, and in the eighteenth century rather than at an earlier time.

In this bar chart, the horizontal axis shows 6 cities and the vertical axis shows the labourer’s daily wage in the early 1700s, measured relative to the price of 1 million British Thermal Units, which ranges from 0 to 5. The cities are ordered according to their relative wage: Newcastle has the highest relative wage, followed by London, Amsterdam, Strasbourg, Paris, and Beijing.
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Figure 2.12 Wages relative to the price of energy (early 1700s).

Robert C. Allen. 2008. The British Industrial Revolution in Global Perspective. Cambridge: Cambridge University Press. p. 140

Figure 2.12 shows the price of labour relative to the price of energy in six cities in the early 1700s—specifically, the wages of building labourers divided by the price of 1 million BTU (British Thermal Units, a unit of energy equivalent to slightly more than 1,000 joules). Labour was more expensive relative to the cost of energy in England and the Netherlands than in France (Paris and Strasbourg), and much more so than in China.

The relative price was high in England for two reasons: English wages were higher than wages elsewhere, and coal was cheaper in coal-rich Britain than in the other countries.

In this line chart, the horizontal axis shows years from 1580 to 1820, and the vertical axis shows the wage relative to the cost of capital. There are two lines, labelled England and France. From 1580 to 1640, the relative wages in England and France were similar and close to 1, but from 1640 onwards, the relative wage in England rose steadily to 1.7 in 1820 while it stayed fairly constant in France.
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Figure 2.13 Wages relative to the cost of capital goods (late sixteenth to the early nineteenth century).

Robert C. Allen. 2008. The British Industrial Revolution in Global Perspective. Cambridge: Cambridge University Press. p. 138

Figure 2.13 compares the price of labour relative to capital goods in England and France, from the late sixteenth to the early nineteenth century. It shows the wages of building labourers divided by the cost of using capital goods. This cost is calculated from the prices of metal, wood, and brick and the cost of borrowing, and takes account of the rate at which the capital goods wear out, or depreciate.

The figure shows that wages relative to the cost of capital goods were similar in England and France in the mid-seventeenth century, but that from then on, in England but not in France, workers became steadily more expensive relative to capital goods. In other words, the incentive to replace workers with machines was increasing in England during this time, but this was not true in France. In France, the incentive to save labour by innovating had been stronger during the late sixteenth century than it was 200 years later, at the time the Industrial Revolution began to transform Britain.

From the model in the previous section, we learned that the technology chosen depends on relative input prices. Combining the predictions of the model with the historical data, we have one explanation for the timing and location of the Industrial Revolution.

That is, relative to the costs of both energy and capital goods:

  • wages—initially the pay women received for spinning cotton thread—rose in the eighteenth century in Britain compared with earlier historical period
  • wages were higher in Britain during the eighteenth century than elsewhere.

No doubt it helped, too, that Britain was such an inventive country. There were many skilled engineers and machine makers who could build the machines that inventors designed.

Figure 2.14 summarizes the application of our model to Britain. In the 1600s, the relative price of labour to energy was low and technology B on isocost line HJ was used. B was cheaper than A. In the eighteenth century, when the relative price of labour was high, A was cheaper. Firms switched to the energy-intensive technology A on isocost line FG.

In this diagram, the horizontal axis shows the number of workers, ranging from 1 to 13, and the vertical axis shows tons of coal, ranging from 1 to 10. Coordinates are (number of workers, tons of coal). There are two points: A at (1, 6), and B at (4, 2). There are two sets of two downward-sloping lines each, representing isocosts. The first set, representing technology in the 1600s, consists of the line HJ connecting the points J at (0, 4), B at (4, 2), and H at (8, 0), and a higher-cost, parallel line passing through point A. The other set, representing technology in the 1700s, consists of the line FG connecting the points G at (0, 8), A at (1, 6), and F at (4, 0), and a higher-cost, parallel line passing through point B. At the relative price of labour in the 1600s, firms use technology B and there is no incentive to develop technology A because A costs more (it lies outside the line HJ). At the relative price of labour in the 1700s, the relative price of labour to coal is higher so technology A now costs less than technology B (B lies outside the line FG).
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Figure 2.14 A model of the cost of using different technologies to produce 100 metres of cloth in Britain in the seventeenth and eighteenth centuries.

Exercise 2.7 Britain but not France

Watch our video in which Bob Allen, an economic historian, explains his theory of why the Industrial Revolution occurred when and where it did.

  1. Summarize Allen’s claim using the concept of economic rents. What assumptions are you making?
  2. What other important factors may explain the rise of energy-intensive technologies in Britain in the eighteenth century?

The relative prices of labour, energy, and capital can help to explain why the labour-saving technologies of the Industrial Revolution were first adopted in England, and why at that time technology advanced more rapidly there than elsewhere.

What explains the eventual adoption of these new technologies in countries like France and Germany, and ultimately China and India? One answer is further technological progress, where a new technology is developed that dominates the existing one in use—meaning that it takes smaller quantities of inputs to produce 100 metres of cloth. We can use the model to illustrate this. In Figure 2.15, technological progress leads to the invention of a superior energy-intensive technology, labelled A′. The analysis in Figure 2.15 shows that once technology A′ is available, it would be chosen in countries using A, and also in those using B.

In this diagram, the horizontal axis shows the number of workers, ranging from 1 to 10, and the vertical axis shows tons of coal, ranging from 1 to 10. Coordinates are (number of workers, tons of coal). There are three points: A at (1, 6), A-prime at (1, 3) and B at (4, 2). There are two downward-sloping lines, labelled HJ and FG. Line HJ represents the isocost for £80 and connects the points J at (0, 4), B at (4, 2), and H at (8, 0). Line FG represents the isocost for £40 and connects the points G at (0, 8), A at (1, 6), and F at (4, 0). The set of technologies that require 1 or more workers and 3 or more tons of coal, which includes point A, are dominated by point A-prime.
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Figure 2.15 The cost of using different technologies to produce 100 metres of cloth.

Energy- or labour-intensive?: In this diagram, the horizontal axis shows the number of workers, ranging from 1 to 10, and the vertical axis shows tons of coal, ranging from 1 to 10. Coordinates are (number of workers, tons of coal). There are two points: A at (1, 6), and B at (4, 2). There are two downward-sloping lines, labelled HJ and FG. Line HJ represents the isocost for £80 and connects the points J at (0, 4), B at (4, 2), and H at (8, 0). Line FG represents the isocost for £40 and connects the points G at (0, 8), A at (1, 6), and F at (4, 0).
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Energy- or labour-intensive?

Where the relative price of labour is high, the energy-intensive technology A is chosen. Where the relative price of labour is low, the labour-intensive technology B is chosen.

A technological improvement: An improvement in technology : In this diagram, the horizontal axis shows the number of workers, ranging from 1 to 10, and the vertical axis shows tons of coal, ranging from 1 to 10. Coordinates are (number of workers, tons of coal). There are three points: A at (1, 6), A-prime at (1, 3) and B at (4, 2). There are two downward-sloping lines, labelled HJ and FG. Line HJ represents the isocost for £80 and connects the points J at (0, 4), B at (4, 2), and H at (8, 0). Line FG represents the isocost for £40 and connects the points G at (0, 8), A at (1, 6), and F at (4, 0).
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A technological improvement

Improvements in cloth-making technology occur, resulting in a new technology, labelled A′. This technology uses only half as much energy per worker to produce 100 metres of cloth. The new technology dominates technology A.

A′ is least-cost: In this diagram, the horizontal axis shows the number of workers, ranging from 1 to 10, and the vertical axis shows tons of coal, ranging from 1 to 10. Coordinates are (number of workers, tons of coal). There are three points: A at (1, 6), A-prime at (1, 3) and B at (4, 2). There are two downward-sloping lines, labelled HJ and FG. Line HJ represents the isocost for £80 and connects the points J at (0, 4), B at (4, 2), and H at (8, 0). Line FG represents the isocost for £40 and connects the points G at (0, 8), A at (1, 6), and F at (4, 0). The set of technologies that require 1 or more workers and 3 or more tons of coal, which includes point A, are dominated by point A-prime.
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A′ is least-cost

Technology A′ is cheaper than both A and B, both in countries where wages are relatively high (isocost line FG) and in low-wage, expensive-energy economies (isocost line HJ). The new labour- and energy-saving technology, A′, is inside FG and HJ, so it will be adopted in both economies.

A second factor that promoted the diffusion of the new technologies across the world was wage growth and falling energy costs (due, for example, to cheaper transportation, allowing countries to import energy cheaply from abroad). Both rising wages and falling energy costs in poorer countries steepened the isocost lines, providing an incentive to switch to a labour-saving technology.1

Either way, the new technologies spread, and the divergence in technologies and living standards was eventually replaced by convergence—at least among those countries where the capitalist revolution had taken off.2

Nevertheless, in some countries we still observe the use of technologies that were replaced in Britain during the Industrial Revolution. The model predicts that the relative price of labour must be very low in such situations, making the isocost line very flat. Technology B could be preferred in Figure 2.15 even when technology A′ is available if the isocost line is flatter than HJ, so that it goes through B but below A′.

Question 2.9 Choose the correct answer(s)

Figure 2.14 depicts isocost lines for the 1600s and the 1700s in Britain. Based on this information, read the following statements and choose the correct option(s).

  • The flatter isocost line HJ for seventeenth century Britain indicates higher wages relative to the price of coal.
  • The increase in wages relative to the cost of energy in the 1700s is represented by the outward shift of the isocost line from HJ to the parallel isocost line going through A.
  • At the same time as the fall in energy costs, if the wage level had also fallen, then eighteenth century Britain would definitely have stayed with technology B.
  • The comparison between isocost line FG and the parallel isocost line going through B suggests that an innovation rent was earned in eighteenth century Britain, when firms moved from technology B to A.
  • The slope of the isocost line is the negative of the price ratio, −(wage/price of coal). A flatter isocost line indicates lower wages relative to the price of coal.
  • An increase in the level of wages relative to the cost of energy would lead to a steeper isocost line.
  • The relative price matters, not the absolute level. So if wages fall, but by relatively less than the energy costs so that the price ratio still increases, then technology A may still be the better choice.
  • The comparison between these two lines shows that the cost of production is lower at A than at B. Therefore, firms adopting technology A enjoy some profit in excess of that which they earned with the alternative: an innovation rent.

Exercise 2.8 Why did the Industrial Revolution not happen in Asia?

Read David Landes’ answer to this question, and this summary of research on the great divergence to discuss why the Industrial Revolution happened in Europe rather than in Asia, and in Britain rather than in Continental Europe.

  1. Which arguments do you find most persuasive, and why?
  2. Which arguments do you find least persuasive, and why?
  1. Robert C. Allen. 2009. ‘The Industrial Revolution in Miniature: The Spinning Jenny in Britain, France, and India’. The Journal of Economic History 69 (04) (November): p. 901. 

  2. David S. Landes. 2003. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe From 1750 to the Present. Cambridge, UK: Cambridge University Press.