Unit 2 Technology and incentives

2.10 Growth: Escaping the Malthusian trap

Conditions in eighteenth century Britain led firms to adopt new labour-saving and energy-intensive technologies and provided incentives for further innovation, and that the shift to production in firms and the expansion of markets brought opportunities for specialization and the division of labour. Together, these changes brought about rapid increases in the average product of labour.

The population grew (Figure 2.1) but productivity grew faster.

Figure 2.17 shows the contrast between the paths of real wages and population before and after 1800. Before then, as Figure 1.12 explains, Britain was stuck in a Malthusian trap. Around 1800, the economy moved to what appears to be an entirely new regime, with both population and real wages simultaneously increasing. This is labelled the ‘Escape’.

In this scatterplot, the horizontal axis shows population (in millions), and ranges between 0 and 20. The vertical axis shows the wage index normalized to be 100 in 1860, and ranges between 40 and 100. Data is given in the following format: (year, population in millions, wage index). (1285, 4.9, 61) (1295, 5.3, 53) (1305, 5.3, 62) (1315, 5.6, 60) (1325, 5, 65) (1335, 4.7, 72) (1345, 4.4, 62) (1355, 3.5, 61) (1365, 3.2, 71) (1375, 3.2, 78) (1385, 2.8, 84) (1395, 2.8, 84) (1405, 2.6, 85) (1415, 2.5, 90) (1425, 2.5, 94) (1435, 2.5, 84) (1445, 2.3, 93) (1455, 2.3, 93) (1465, 2.3, 93) (1475, 2.4, 93) (1485, 2.4, 88) (1495, 2.3, 96) (1505, 2.6, 91) (1515, 2.8, 87) (1525, 2.9, 81) (1535, 3, 78) (1545, 3, 71) (1555, 3.2, 67) (1565, 3.2, 70) (1575, 3.5, 71) (1585, 3.6, 72) (1595, 4.2, 58) (1605, 4.4, 62) (1615, 4.7, 57) (1625, 5, 67) (1635, 5.2, 72) (1645, 5.4, 70) (1655, 5.6, 72) (1665, 5.6, 87) (1675, 5.5, 71) (1685, 5.4, 75) (1695, 5.4, 67) (1705, 5.5, 76) (1715, 5.7, 74) (1725, 5.8, 74) (1735, 5.7, 83) (1745, 6.1, 91) (1755, 6.3, 86) (1765, 6.7, 82) (1775, 7, 74) (1785, 7.6, 81) (1795, 8.3, 73) (1805, 9.1, 72) (1815, 10.3, 76) (1825, 12, 87) (1835, 13.8, 92) (1845, 15.6, 88) (1855, 17.6, 95) (1865, 19.7, 100).  The economy was stuck in a Malthusian trap twice, the first time lasting from the 13th to the 16th century and the second time lasting throughout the 18th century. In the 19th century, the economy escaped from the Malthusian trap and experienced a sustained growth in the population and real wages.
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Figure 2.17 Escaping the Malthusian trap.

Robert C. Allen. 2001. ‘The Great Divergence in European Wages and Prices from the Middle Ages to the First World War’. Explorations in Economic History 38 (4): pp. 411–447.

Figure 2.18 zooms in on the ‘Escape’ portion of the wage data. Although rapid technological progress and rising labour productivity (that is, output per worker, or the average product of labour) began in the eighteenth century, the sustained increase in wages came later. The steps in the figure explain how this happened.

From technological progress to rising living standards. Note: Labour productivity and real wages are five-year centred moving averages. Arrows connect causes (the end of the arrow shaft) to results (the head of the arrow).
From technological progress to rising living standards. Note: Labour productivity and real wages are five-year centred moving averages. Arrows connect causes (the end of the arrow shaft) to results (the head of the arrow).
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Figure 2.18 From technological progress to rising living standards. Note: Labour productivity and real wages are five-year centred moving averages. Arrows connect causes (the end of the arrow shaft) to results (the head of the arrow).

Robert C. Allen. 2001. ‘The Great Divergence in European Wages and Prices from the Middle Ages to the First World War’. Explorations in Economic History 38 (4): pp. 411–447.

The continuous technological revolution: There are two diagrams. Diagram 1 is a line chart where the horizontal axis shows years, ranging from 1760 to 1930, and the vertical axis shows the real wage index and labour productivity index, both ranging from 0 to 400 and normalised to equal 100 in the year 1760. There are two lines, showing real wages and labour productivity. Both the real wage and labour productivity remain fairly constant around 100 from 1760 to 1810, and steadily rise afterwards to reach values of 350 and 180 in 1910, respectively. Two points on the real wage line are labelled: the invention of Hargreaves’ spinning jenny in 1764, and the invention of Watt’s steam engine in 1781. Diagram 2 is a flowchart showing the effects of technological improvement. The Industrial Revolution led to more and better capital goods per worker, so average output per worker rose, but some workers are displaced.
The continuous technological revolution:
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The continuous technological revolution

The story begins with technological advances, such as the spinning jenny and the steam engine, that increased output per worker. Innovation continued as the technological revolution was established, displacing thousands of spinsters, weavers, and farmers.

Urban unemployment: There are two diagrams. Diagram 1 is a line chart where the horizontal axis shows years, ranging from 1760 to 1930, and the vertical axis shows the real wage index and labour productivity index, both ranging from 0 to 400 and normalised to equal 100 in the year 1760. There are two lines, showing real wages and labour productivity. Both the real wage and labour productivity remain fairly constant around 100 from 1760 to 1810, and steadily rise afterwards to reach values of 350 and 180 in 1910, respectively. Two points on the real wage line are labelled: the invention of Hargreaves’ spinning jenny in 1764, and the invention of Watt’s steam engine in 1781. Diagram 2 is a flowchart showing the effects of technological improvement. Average output per worker rises, but some workers are displaced. The power of workers falls and wages remain low.
Urban unemployment:
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Urban unemployment

This loss of jobs meant that those remaining in work would have a lot to lose were they too to lose their job as finding a new one would be more difficult. This weakened workers’ ability to demand higher wages and kept wages low, shown in the flat line between 1750 and 1830. The size of the pie was increasing, but the workers’ slice was declining.

New opportunities: There are two diagrams. Diagram 1 is a line chart where the horizontal axis shows years, ranging from 1760 to 1930, and the vertical axis shows the real wage index and labour productivity index, both ranging from 0 to 400 and normalised to equal 100 in the year 1760. There are two lines, showing real wages and labour productivity. Both the real wage and labour productivity remain fairly constant around 100 from 1760 to 1810, and steadily rise afterwards to reach values of 350 and 180 in 1910, respectively. Two points on the real wage line are labelled: the invention of Hargreaves’ spinning jenny in 1764, and the invention of Watt’s steam engine in 1781. Diagram 2 is a flowchart showing the effects of technological improvement. Average output per worker rises, but some workers are displaced. The power of workers falls and wages remain low. Low wages and higher average output per worker leads to higher profits, which in turn leads to expansion of factory production, so demand for labour rises.
New opportunities:
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New opportunities

In the 1830s, higher productivity, without wage rises, led to a surge in profits. Profits, competition, and technology drove businesses to expand. The demand for labour went up. People left farming for jobs in the new factories.

Workers’ power: There are two diagrams. Diagram 1 is a line chart where the horizontal axis shows years, ranging from 1760 to 1930, and the vertical axis shows the real wage index and labour productivity index, both ranging from 0 to 400 and normalised to equal 100 in the year 1760. There are two lines, showing real wages and labour productivity. Both the real wage and labour productivity remain fairly constant around 100 from 1760 to 1810, and steadily rise afterwards to reach values of 350 and 180 in 1910, respectively. Two points on the real wage line are labelled: the invention of Hargreaves’ spinning jenny in 1764, and the invention of Watt’s steam engine in 1781. Diagram 2 is a flowchart showing the effects of technological improvement. The power of workers rose through three channels. First, demand for labour rises, so the power of workers rises. Second, as a result of labour market regulation (restrictions on employing women and children; working hours), labour supply falls, which also raises the power of workers. Third, the extension of the right to vote raises the power of workers.
Workers’ power:
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Workers’ power

The supply of labour fell when business owners were stopped from employing children. The combination of higher labour demand and lower supply made it easier for workers to gain higher wages.

The escape from Malthusianism: There are two diagrams. Diagram 1 is a line chart where the horizontal axis shows years, ranging from 1760 to 1930, and the vertical axis shows the real wage index and labour productivity index, both ranging from 0 to 400 and normalised to equal 100 in the year 1760. There are two lines, showing real wages and labour productivity. Both the real wage and labour productivity remain fairly constant around 100 from 1760 to 1810, and steadily rise afterwards to reach values of 350 and 180 in 1910, respectively. Two points on the real wage line are labelled: the invention of Hargreaves’ spinning jenny in 1764, and the invention of Watt’s steam engine in 1781. Diagram 2 is a flowchart showing the effects of technological improvement. When the power of workers rises, wages rise.
The escape from Malthusianism:
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The escape from Malthusianism

The wages of working people increased as they gained the right to vote and formed trade unions. These workers were able to claim a constant or rising share of the increases in productivity generated by the continuous technological revolution.

A summary of how technological progress led to higher wages.: There are two diagrams. Diagram 1 is a line chart where the horizontal axis shows years, ranging from 1760 to 1930, and the vertical axis shows the real wage index and labour productivity index, both ranging from 0 to 400 and normalised to equal 100 in the year 1760. There are two lines, showing real wages and labour productivity. Both the real wage and labour productivity remain fairly constant around 100 from 1760 to 1810, and steadily rise afterwards to reach values of 350 and 180 in 1910, respectively. Two points on the real wage line are labelled: the invention of Hargreaves’ spinning jenny in 1764, and the invention of Watt’s steam engine in 1781. Diagram 2 is a flowchart showing the effects of technological improvement. The Industrial Revolution led to more and better capital goods per worker, so average output per worker rose, but some workers are displaced. The power of workers falls and wages remain low. Low wages and higher average output per worker leads to higher profits, which in turn leads to expansion of factory production, so demand for labour rises. The power of workers rose through three channels. First, demand for labour rises, so the power of workers rises. Second, as a result of labour market regulation (restrictions on employing women and children; working hours), labour supply falls, which also raises the power of workers. Third, the extension of the right to vote raises the power of workers. When the power of workers rises, wages rise.
A summary of how technological progress led to higher wages.:
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A summary of how technological progress led to higher wages.

The Industrial Revolution, combined with changes in institutions (labour market regulation and extension of the right to vote), eventually led to rising real wages.

The story of the continuous technological revolution demonstrates that there are two influences on wages.

  • How much is produced: We can think of this as the size of the pie to be divided between workers and the owners of other inputs (land or machines).
  • The share going to workers: This depends on how wages are determined (individually, or through bargaining by trade unions with employers, for example) and if workers have well-paying employment opportunities other than their current job. If many workers are competing for the same job and their next best alternative is a low-paid job, then wages are likely to be low.

After 1830, the pie continued growing, and the workers’ wages grew along with it.

Britain had escaped from the Malthusian trap. This process would soon be repeated in other countries, as Figure 1.1 shows.

Question 2.10 Choose the correct answer(s)

Figure 2.17 plots real wages against population in England from the 1280s to the 1860s.

According to Malthus, with diminishing average product of labour in production and population growth in response to increases in real wages, an increase in productivity will result in a larger population but not higher real wages in the long run. Based on the information above, read the following statements and choose the correct option(s).

  • The data from the 1800s and the 1860s is consistent with Malthus’s description of the economy’s growth, because the population grows as real wages rise.
  • There is clear evidence of a persistent and continuous Malthusian trap between the 1280s and the 1800s.
  • The Malthusian traps seem to occur in a cycle of 60 years.
  • The Malthusian model does not take into account the possibility of a persistent positive technology shock that may offset the diminishing average product of labour.
  • It is true that Malthus assumes population growth in response to real wage increases. However, as population increases, the average per capita output falls, resulting in a fall in real wages back to subsistence level. This feature is not evident in the graph post-1800s.
  • There are actually two periods—between the 1280s and the 1590s, and between the 1740s and the 1800s—when a Malthusian trap is evident. There is, however, the period in between, when the negative relationship between the real wage and population seems to break down (no population growth despite the wage increase).
  • Though the second cycle of the Malthusian trap lasted about 60 years (between the 1740s and the 1800s), the first cycle seems to have lasted around 300 years.
  • If technological developments increase the average productivity of labour faster than population growth decreases it, then population growth and real wages can coexist. This is what is shown by the escape trajectory of the English economy after the eighteenth century.

Exercise 2.13 The basic institutions of capitalism

The escape from the Malthusian trap, in which technological progress outstripped the effects of population growth, took place following the emergence of capitalism. Consider the three basic institutions of capitalism in turn:

  1. Why is private property important for technological progress to occur?
  2. Explain how markets can provide both carrots and sticks to encourage innovation.
  3. How can production in firms, rather than families, contribute to the growth of living standards?