The Story of the Most Amazing Economic Chart in Western Civilization

 

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I have referred to the above chart as “The most important economic chart in Western civilization.” How did that amazing growth trajectory happen? As Deirdre McCloskey suggests, the West became a business-admiring civilization and that changed everything. We started respecting and rewarding innovators — and the creative destruction they unleash. But as James Bessen explains in Harvard Business Review, it took awhile for workers to benefit:

Too often, when people think about technology, they only think about the initial invention … Yet most major technologies develop over decades, as large numbers of people learn how to apply, adapt, and improve the initial invention. The initial power loom—one of the transformative technologies of the Industrial Revolution—automated weaving tasks, allowing a weaver to produce twice as much cloth per hour. But over the next century, weavers improved their skills and mechanics and managers made adaptations and improvements, generating a twenty-fold increase in output per hour. Most of the gains from this technology took a long time to realize, and involved the skills and knowledge of many people. …

During the 1830s, the textile mills mainly hired workers who had no prior experience. Experience acquired at one mill was not necessarily valuable at another because mills used different versions of the technology and organized work in different ways. But without a robust labor market, textile workers could not look forward to a long career at different workplaces and so they had little reason to invest in learning. After the Civil War, the market for skilled textile workers became very active. Only then did wages begin to grow vigorously. Weavers’ hourly pay in Lowell changed little between 1830 and 1860, but by 1910 it had tripled. It took decades for the training institutions, business models, and labor markets to emerge that unlocked the benefits of technology for ordinary workers.

Of course, technology and skills were not the only factors that helped boost wages. Growing capital investments made the workers more productive, and growing opportunities for women workers helped increase their pay. Unions also played a role, especially during the 20thcentury. But consider the magnitude of these changes: studies have shown that unionized workers earn about 15% more than comparable nonunionized workers. That’s a meaningful difference, but it looks small compared to the weavers’ three-fold increase in wages. Ultimately, the biggest factor in that wage growth was technology, the productivity growth it unlocked, and the development of mature labor markets that valued the weavers’ skills.

As Beseen also notes, similarly slow progress was seen with other key technologies such as steam engines and factory electrification. Not only does the labor market need to adjust, companies need to figure out how to best use these technologies. Along the same lines in The Second Machine Age, MIT economists Eric Brynjolfsson and Andrew McAfee relate how electric motors initially failed to increase productivity much over their steam predecessors (suggesting we are still figuring out the IT revolution):

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  1. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Like.

    • #1
  2. user_139376 Member
    user_139376
    @PeterMeza

    “We started respecting and rewarding innovators — and the creative destruction they unleash.” – That sounds exactly right, i.e. the adoption of the Patent Act of 1790.  [discussion lamenting anti-patent sentiment on this site and elsewhere omitted]

    • #2
  3. user_1008534 Member
    user_1008534
    @Ekosj

    I’m not quite sure Lowell MA’s textile industry is a comforting image. Yes, by 1910 wages had tripled. And by 1916 major firms started closing … Heading South. The technology had advanced to the point where low skill, low wage employees could operate the mills. And by the 1930’s employment in Lowell’s textile mills fell by half. By the 1970’s Lowell looked like Europe in 1946.

    Textile manufacturing is making a comeback in America. But the mills are highly automated. The few employees are largely computer aided designers, programmers and robotics techs. They are well paid, but few in number.

    • #3
  4. user_1008534 Member
    user_1008534
    @Ekosj

    The chart, however, is outstanding!!!! Capitalism isn’t perfect but it is the greatest creator of prosperity known to mankind.

    • #4
  5. Seawriter Contributor
    Seawriter
    @Seawriter

    People do not figure out how to use a new technology most efficiently until it has been out for a while – if ever. Some examples:

    The Diesel engine was viewed as a way to liberate individuals from the need to be connected to a belt-fed steam plant. Rudolf Diesel saw small Diesels as a way to allow an individual machine operator to power his lathe/mill/whatever from a one-person shop.  Instead, electric motors served that function better, but big Diesels proved useful for transportation and to generate electricity.

    Shipping containers were initially viewed as a seagoing version of airmail – to be used to express shipment of high value cargoes (luxury items). Ultimately they proved most useful for low-value goods, such as shirts and plastic toys. Containers cut shipping costs so much these items became profitable to ship.

    The Space Shuttle was viewed as a system to get stuff into space. It was lousy at that. What it was really unparalleled at was getting stuff back from space. Unfortunately it was never really used for that, so is viewed as a white elephant.

    Seawriter

    • #5
  6. user_1008534 Member
    user_1008534
    @Ekosj

    Hi Peter. Re: patents

    While I am all all for protection of intellectual property, isn’t there a genuine problem in that many patent holders have no intention of ever using them to make anything, but rather as a kind of lawsuit-tripwire. If these patent libraries have enough, then sooner or later someone (a genuine entrepreneur) will run do something similar. Then it time to release-the-lawyers and wait for a payday. Seems like in some instances, patents have gone from advancing commerce to impeding it.

    Or do I have it all wrong?

    • #6
  7. Clavius Thatcher
    Clavius
    @Clavius

    Really fascinating stuff.  We will clearly see re-invention taking place for a long time as we absorb the massive changes we see in technology.

    • #7
  8. user_139376 Member
    user_139376
    @PeterMeza

    Ekosj:Hi Peter.Re: patents

    While I am all all for protection of intellectual property, isn’t there a genuine problem in that many patent holders have no intention of ever using them to make anything, but rather as a kind of lawsuit-tripwire.If these patent libraries have enough, then sooner or later someone (a genuine entrepreneur) will run do something similar. Then it time to release-the-lawyers and wait for a payday. Seems like in some instances,patents have gone from advancing commerce to impeding it.

    Or do I have it all wrong?

    This is certainly the majority view and has been for quite awhile.  BTW, the patent system has been considerably weakened with the adoption of the AIA (America Invents Act) and recent Supreme Court rulings.  If the pendulum keeps swinging in the same direction we will soon seen the effects of weak patent protection and I suspect in might affect the shape of the GDP per person graph for the worse.  As for addressing the “Patent Troll” question directly Thomas Edison was and most universities are patent trolls.

    • #8
  9. user_82762 Inactive
    user_82762
    @JamesGawron

    James,

    I like the chart very much. However, I interpret it differently. I think we are seeing the Blessings of Liberty. Mercantilism, the economic system from the high renaissance, doesn’t have either a fully free market or the guarantee of inalienable rights. We underestimate our Enlightenment Constitution and the great blessing it bestows on us. The Blessings of Liberty are literal and the chart proves it.

    There is no particular technological advance that can really fully explain the data. 1776 explains that data.

    Regards,

    Jim

    • #9
  10. Stad Coolidge
    Stad
    @Stad

    I think the chart would mean more if it showed the non-US, Non-Europe world GDP per person, not the entire world in toto.

    Remove the contribution of the western world to show how the way they do things doesn’t pan out . . .

    • #10
  11. Ricochet Member
    Ricochet
    @ArizonaPatriot

    I generally don’t find the argument about “patent trolls” very convincing.  The essential trade-off of the patent system is that the inventor discloses the invention — providing a benefit to the public and opportunities for further advancement — in exchange for a monopoly over the invention for a fixed period.  This “deal” makes sense whether or not the inventor uses the patent.

    There is no reason to expect that an inventor to be the best person (or firm) to exploit an invention.  In fact, this would seem unlikely.  Thus, patent rights can be licensed.  This happens all the time, and the inventor and user work out a royalty agreement.  If not, they litigate.

    It would be very economically inefficient to have a rule that required an inventor to use the patented invention in order to assert patent rights.

    • #11
  12. Capt. Aubrey Inactive
    Capt. Aubrey
    @CaptAubrey

    Wonderful post, wouldn’t it be interesting if we could somehow plot income inequality along the same line and income mobility? I would predict that both inequality and mobility would be rising fastest in the US, the most free economy also makes the largest number wealthy…but fewer of them are academics or journalist so I guess we will not see it.

    • #12
  13. TKC1101 Inactive
    TKC1101
    @TKC1101

    The sustainable world where central bureaucracy could run things because they seldom changed and most humans were illiterate serfs seems to be well on it’s way to re-creation. They cannot allow such unsustainable growth and freedom to ever occur again!

    First we destroy public education so the public becomes uninformed

    Then we promote exchanging freedom for promised safety and fairness

    Then we create a religion around lack of growth and innovation because the planet

    We then foster bitterness, division and hatreds.

    We are approaching a time of choosing, folks. The new statists versus the individualists.

    • #13
  14. captainpower Inactive
    captainpower
    @captainpower

    By doing what they do best, capitalists naturally improve the conditions of everyone. Russ Roberts talks about this idea periodically on his Econtalk podcast. Over the past several hundred years, he credits capitalism for improving the state of mankind. A few hundred years ago, it didn’t matter how rich you were, you weren’t getting air conditioning or a heart transplant.

    Hans Rosling has a similar chart in his the “The Joy of Stats” excerpt “200 countries, 200 years, 4 minutes” below:

    via

    http://www.gapminder.org/videos/200-years-that-changed-the-world-bbc/

    • #14
  15. Roberto Member
    Roberto
    @Roberto

    Arizona Patriot:I generally don’t find the argument about “patent trolls” very convincing. The essential trade-off of the patent system is that the inventor discloses the invention — providing a benefit to the public and opportunities for further advancement — in exchange for a monopoly over the invention for a fixed period. This “deal” makes sense whether or not the inventor uses the patent.

    No. This is not the trade-off, it is simply the intended trade-off. Whether it functions as intended or not is a completely different question.

    Arizona Patriot:There is no reason to expect that an inventor to be the best person (or firm) to exploit an invention.

    This avoids the true question in its entirety. Does the patent in question have any value whatsoever?

    The patent office is grossly liberal in how it grants patents, not hesitating to grant patents for blindingly obvious concepts. These are not inventions in any rational sense of the word. Rent seeking by unscrupulous lawyers and their associated clients is in no way a boon to economic growth.

    • #15
  16. Petty Boozswha Inactive
    Petty Boozswha
    @PettyBoozswha

    Someone got a patent on toasted bread a few years ago.

    • #16
  17. captainpower Inactive
    captainpower
    @captainpower

    Petty Boozswha:Someone got a patent on toasted bread a few years ago.

    http://www.google.com/patents/US6080436

    via my most trusted new source

    http://www.cracked.com/quick-fixes/the-5-most-ridiculous-things-people-tried-to-patent/

    Since people are talking about patents, here is an interesting discussion about how the lawyer for this privately owned billion dollar company (Newegg) made the business case to his boss that fighting the patent litigation would save money compared to just settling out of court.

    via

    http://media.aei.org/1369/banter-180-lee-cheng-on-patent-reform/

    more on the newegg guy (Lee Cheng):

    And here’s a more ambiguous “victory”

    • #17
  18. Matty Van Inactive
    Matty Van
    @MattyVan

    The chart says it all. And click on CaptainPower’s version in #14. It’s stuff we all know, but remarkable to the point of miraculous all the same. And seeing it this way clarifies (or should) the argument for freedom which so many people STILL deny.

    • #18
  19. user_5186 Inactive
    user_5186
    @LarryKoler

    captainpower:By doing what they do best, capitalists naturally improve the conditions of everyone. Russ Roberts talks about this idea periodically on his Econtalk podcast. Over the past several hundred years, he credits capitalism for improving the state of mankind. A few hundred years ago, it didn’t matter how rich you were, you weren’t getting air conditioning or a heart transplant.

    Hans Rosling has a similar chart in his the “The Joy of Stats” excerpt “200 countries, 200 years, 4 minutes” below:

    via

    http://www.gapminder.org/videos/200-years-that-changed-the-world-bbc/

    Wonderful way to show complex data. Thanks.

    • #19
  20. Al Kennedy Inactive
    Al Kennedy
    @AlKennedy

    James, you should plot this with a log scale for GDP–the results would be even more dramatic.

    • #20
  21. user_82762 Inactive
    user_82762
    @JamesGawron

    James Gawron:James,

    I like the chart very much. However, I interpret it differently. I think we are seeing the Blessings of Liberty. Mercantilism, the economic system from the high renaissance, doesn’t have either a fully free market or the guarantee of inalienable rights. We underestimate our Enlightenment Constitution and the great blessing it bestows on us. The Blessings of Liberty are literal and the chart proves it.

    There is no particular technological advance that can really fully explain the data. 1776 explains that data.

    Regards,

    Jim

    James,

    Let me carry this a little further because I think we are on some very very interesting ground. First, let’s take a look at Socialism and try to objectively define it.

    Socialism removes the fully free market and it denies the full guarantee of inalienable rights. Remind you of anything? What if Socialism not only isn’t an advanced system like it claims but a throwback?

    What if Socialism is Mercantilism with the high middle ages theology removed and a pseudo-scientific ideology installed. First, we get a system just as inefficient and unproductive as Socialism has turned out to be and that your chart demonstrates that Mercantilism was. However, we get something else that is very interesting. Where has Socialism succeeded most? In countries that have had trouble pulling out of their Mercantilism phase. Russia struggles to keep up with the West but can’t give the Duma enough power. The Czar is still an all powerful absolute ruler. Solution the Bolsheviks. Why because Marxism is Feudalism. You just learn a little shallow pseudo-science & ideology and there you have it. No need to do anything so radical as free enterprise and human rights. China is more backward than Russia. Sun Yat-sen tries to pull China all the way to freedom but China can’t make it and collapses backward to Communism (Scientific Mercantilism) with Mao. Socialism is the remedial throwback system for failed Free Enterprise Republics.

    That’s some little chart you got their James.

    Regards,

    Jim

    • #21
  22. captainpower Inactive
    captainpower
    @captainpower

    From a different thread (Comment #8):

    Herbert E. Meyer:Within the lifetimes of most of you reading this — certainly within the lifetimes of today’s high-school and college students — the world will cross a line that’s never been crossed before and which most people never even imagined could be crossed: For the first time in history, the overwhelming majority of human beings won’t be poor. This is simply astounding — and it’s the world’s biggest under-reported news story.

    Put another way, the world is becoming “modern” and in a sense, this is what the war is really all about: Judaism and Christianity reconciled with modernity a long time ago; now — finally — Islam has begun. Of course it’s messy, sloppy, violent, and all too often going backwards rather than forward. But this is what “becoming modern” looks like.

    It’s a real shame that young people aren’t being taught about this, and aren’t being told why they’re living through one of the most dynamic, exciting — and optimistic — times in all of history.

    • #22
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