eco exam

The Industrial Revolution

Tim Copeland

The Ohio State University

[email protected]

June 26, 2018

Econ 4130: Lecture 9-I 1 of 1

Industrial Revolution

Prior to 1750, the family unit was the primary economic engine of society. Families were reasonably self sufficient given that most people were still agricultural labors.

“For the first time in history, the living standards of the masses of ordinary people have begun to undergo sustained growth. Nothing remotely like this economic behavior was even imagined to be theoretical possible before.”

Econ 4130: Lecture 9-I 2 of 1

Cottage Industry

Before mass production

Rural families organized by urban merchants Workers purchased raw materials from a supplier Merchants purchased finished product for urban consumers Workers were typically still primarily farmers

Home production was extra income Each family made only a small amount

Econ 4130: Lecture 9-I 3 of 1

Proto-Industrialization

Proto-factories sprung up with the increased population to meet the new demand for manufactured goods

Artisans worked in workshops Workers were supervised by a foreman

Artisans aren’t employees of the factory Paid per unit of output (piece rate)

Production is capital intensive Firm provided access to the needed capital

Workers rented machines from firm usually a monthly fee deducted from pay

Econ 4130: Lecture 9-I 4 of 1

Characteristics of Modern Industry

1 Extensive use of mechanically powered machinery 2 Use of new sources of power

Coal and steam 3 Growth in the manufacturing sector 4 Diminished role of the agricultural sector

Agricultural output takes off Farming is no longer the largest employer

5 Larger scale of enterprise The Rise of Big Business

Econ 4130: Lecture 9-I 5 of 1

Prior Conditions

The Industrial Revolution was preceded by two other equally important “revolutions” that made the IR possible.

1 Scientific Revolution

2 Agricultural Revolution

Econ 4130: Lecture 9-I 6 of 1

Scientific Revolution

Europe 1550-1700 sees the emergence of modern science

Nicolaus Copernicus 1543 Heliocentric solar system Disproves Aristotle’s perfect orbits

Development of the scientific method Francis Bacon & Royal Society 1660

Study “for improving our natural knowledge” Empiricism

Break from the classical “sciences” First systematic use of data to test theories Value on practical pursuits

Gradual process through trial and error

Econ 4130: Lecture 9-I 7 of 1

Agricultural Revolution

Food production increased significantly such that the average British family used less than half of its income on food. For the first time, most people had significant amounts of disposable income to produce manufactured goods.

Smaller proportion of the population was needed in agriculture, which freed people for industry. England produced 300% more food in 1870 than 1700, but only 14% of population worked the land.

Econ 4130: Lecture 9-I 8 of 1

Agricultural Revolution

Major Developments:

Enclosure

Technological Advancement

National Market

Econ 4130: Lecture 9-I 9 of 1

Tragedy of the Commons

A common resource is a non-excludable and rivalrous good. Use of the commons yields a large benefit to the individual, but places a small cost on all parties sharing the commons.

An individual can’t exclude other users from extracting value from the resource, a rational user has an incentive to maximum his current use of the resource.

Econ 4130: Lecture 9-I 10 of 1

Tragedy of the Commons

Since the resource is rivalrous, increase use leads to diminished returns from that resource. So the individually rational market outcome is complete depletion of the resource due to the misalignment of individual and societal incentives.

Avoiding this outcome requires restraining both consumption and access to the resource. Converting common property to private property is one way to accomplish this.

Econ 4130: Lecture 9-I 11 of 1

Tragedy of the Commons

Since the resource is rivalrous, increase use leads to diminished returns from that resource. So the individually rational market outcome is complete depletion of the resource due to the misalignment of individual and societal incentives.

Avoiding this outcome requires restraining both consumption and access to the resource. Converting common property to private property is one way to accomplish this.

Econ 4130: Lecture 9-I 11 of 1

Enclosure Movement

Starting in 1760, British Parliament passed laws enclosing common pastures into private plots

Eliminated the tragedy of the commons Make some individuals really wealthy

Produced incentives for experimenting with new techniques Large farms emerged that hired landless workers

Former serfs and free tenants

Econ 4130: Lecture 9-I 12 of 1

New Farming Techniques

Alternately used the same land for crops and pastures to replenish soil between harvests Used turnips, legumes, and clover to help return nutrients to the soil Wide spread use of new world crops

Corn Potato

Mechanized farming Seed drill (1701) Dutch Plow (1730) Mechanical reaper (1814)

Econ 4130: Lecture 9-I 13 of 1

Industrial Revolution

1750 to roughly 1850

Mechanically powered machinery The emergence of the factory system Technological innovation and capital accumulation increased MPL in the factories Rapid economic growth was not observed until 1850 Changes spanned all aspects of society

Econ 4130: Lecture 9-I 14 of 1

Factory System

Steam Engine Thomas Newcomen 1712 James Watts 1778

Assembly line Conveyer Belt System 1785

Interchangeable Parts Joseph Whitworth 1841

Scientific Management Fred Taylor 1890

Efficiency Wages Larger than normal market wages

Econ 4130: Lecture 9-I 15 of 1

Coal and Iron

Charcoal had long been used as fuel for iron smelting Sulfur in coal created impurities in the iron

Invention of coke allowed for the use of coal in blast furnaces Coal is more widely available Burns heater and longer

Economies of scale by locating next to coal mines By late 1700’s, Britain was producing 200,000 tons of iron

Net exporter of iron and iron goods

Econ 4130: Lecture 9-I 16 of 1

Steam Engines and Water Power

Newcomen’s Steam Pump 1712 Draining mines Powering mine carts

Early steam engines were very inefficient Wasted 95% of available heat energy Only produced 15 horsepower

Improvements led to engines capable of 1,000 horsepower

Econ 4130: Lecture 9-I 17 of 1

Population Growth

Britain experienced rapid population growth Jobs without apprenticeship allowed earlier marriage Greater availability of food led to better nutrition Coal production helped Britons heat their homes cheaply Better soap production led to better hygiene

Population of London doubled between 1700 and 1801 City of 1 million people England had 5.5 million in 1750

Econ 4130: Lecture 9-I 18 of 1

Factory Life

Initially, manufacturing happened in workshops. Workers rented out the machinery and floor space from the factory owner, but got paid at a piece rate. Workers controlled when and how long they worked, since the factories were “open” for 16 hrs a day.

Workshops gave way to modern factories, where employee conduct was regulated and disciplined. Most workers earned hourly wages.

Econ 4130: Lecture 9-I 19 of 1

Factory Discipline

Factory owners imposed strict codes of conduct of workers: Fines for tardiness Dismissal for public drunkenness Beaten for taking breaks or socializing at work

As political suffrage expanded, those conditions eventual led to the development of unions and labor laws.

Econ 4130: Lecture 9-I 20 of 1

Why the Change to Factories?

Two theories have been proposed to explain the change from workshops to factories:

1 Coordination

2 Coercion

Econ 4130: Lecture 9-I 21 of 1

Coordination Theory

The need for new factory discipline arose because of:

Larger startup investment costs New technology More use of manmade power More fixed capital per worker

Greater division of labor Assembly line Specialization

Greater coordination was required to achieve profit maximizing efficiency needed to overcome the large initial investment required for new technology.

Econ 4130: Lecture 9-I 22 of 1

Coercion Theory

Factory discipline was profitable because it extracted more effort at a given wage from the workers, not because it lower costs.

Firms got workers to increase daily output above what they were natural delivering in the workshop.

Econ 4130: Lecture 9-I 23 of 1

Urbanization

Expanding urban industries created a high demand for jobs Factory wages were higher than agricultural wages

Initially just sons and daughters of farmers migrated Over time majority of the rural population moved

Overcrowding Poor sanitation Higher incidence of epidemic diseases

Econ 4130: Lecture 9-I 24 of 1

Urbanization

People increasingly moved into cities England:

30% of population living in cities in the early 19th century 75% living in cities by the 1901 census

Russia had only 12.5% of people living in cities Moscow and St. Petersburg each had over 1 million people Most of eastern Europe is still mostly agricultural

Econ 4130: Lecture 9-I 25 of 1

Malthus’s predictions: Population would vary inversely with wages Individuals would regulate marriage decision in response to economic conditions

Econ 4130: Lecture 9-I 26 of 1

Lee’s findings: Population does vary (strongly) inversely with wages Population change driven by mortality rate, not birth rate

http://www.nber.org/chapters/c9671.pdf

Econ 4130: Lecture 9-I 27 of 1