Friday, February 17, 2017

The Industrial Revolution Is No Reason To Be Pessimistic Now

See Why Tyler Cowen's Pessimism Fails to Persuade Me by David Henderson.
""Why should it be different this time?"

So asks Tyler Cowen in opening his recent Bloomberg article "Industrial Revolution Comparisons Aren't Comforting." The idea of people who ask that question--I'm one of them--is that the Industrial Revolution worked out pretty well, permanently raising living standards and then leading to a growth trajectory.

Tyler gives a surprising answer, writing, "This time probably won't be different, and that's exactly why we should be concerned." He goes on to show some adjustment problems with the Industrial Revolution. I'll list the main points and respond to each. His statements are in a box; mine are not.

Consider, for instance, the history of wages during the Industrial Revolution. Estimates vary, but it is common to treat the Industrial Revolution as starting around 1760, at least in Britain. If we consider estimates for private per capita consumption, from 1760 to 1831, that variable rose only by about 22 percent. That's not much for a 71-year period.

It's true that that's not much. But it's something. And remember what preceded it, as Brad DeLong pointed out so well in his NBER study "Cornucopia." What preceded it was centuries in which private per capita consumption grew even less.
A lot of new wealth was being created, but economic turmoil and adjustment costs and war kept down the returns to labor. (If you're wondering, "Don't fight a major war" is the big policy lesson from this period, but also note that the setting for labor market adjustments is never ideal.)

Keeping down the returns to labor is different from decreasing the returns to labor. Also, I agree with Tyler about war. I hope he keeps up that part of his writing. No matter which president and party have been in power lately, they seem to be in love with war. Tyler could be a very effective critic of that tendency.
By the estimates of Gregory Clark, economic historian at the University of California at Davis, English real wages may have fallen about 10 percent from 1770 to 1810, a 40-year period. Clark also estimates that it took 60 to 70 years of transition, after the onset of industrialization, for English workers to see sustained real wage gains at all.

Notice the "may" in front of "have." Also notice, that that amounts to a 0.26% decrease annually. Not great, but not close to horrible. Also, remember the "may."
If we imagine the contemporary U.S. experiencing similar wage patterns, most of us would expect political trouble, and hardly anyone would call that a successful transition. Yet that may be the track we are on. Median household income is down since 1999, and by some accounts median male wages were higher in 1969 than today. The more pessimistic of those estimates are the subject of contentious debate (are we really adjusting for inflation properly?), but the very fact that the numbers are capable of yielding such gloomy results suggests transition costs are higher than many economists like to think.

The question "are we really adjusting for inflation properly" is one of the two main ones to ask. And the answer is no. See Michael J. Boskin, "Consumer Price Indexes," in David R. Henderson, ed., The Concise Encyclopedia of Economics. There are three other questions. By what % has median household income fallen, even using the problematic price index that Tyler presumably is using? He doesn't say. A second question is "Has the size of households changed in the last 16 or 17 years?" It has, not by a lot, admittedly, but by 3.0 percent. A third question is "Has immigration brought down the average income of U.S. households by adding a segment at the bottom, pulling the average down even though the preexisting households have not seen a fall?" If that's so, as I suspect it is, then over 90% of households could be better off, as I suspect is true.
Industrialization, and the decline of the older jobs in agriculture and the crafts economy, also had some pernicious effects on social ideas. The early to mid-19th century saw the rise of socialist ideologies, largely as a response to economic disruptions. Whatever mistakes Karl Marx made, he was a keen observer of the Industrial Revolution, and there is a reason he became so influential. He failed to see the long-run ability of capitalism to raise living standards significantly, but he understood and vividly described the transition costs and the economic volatility.

Tyler could be right here. He doesn't make the case, and, admittedly, he can't do so in a short space. But there is a competing hypothesis: the Industrial Revolution and the real income it created, gave rise to an intellectual class whose inclination was to attack free markets. Schumpeter, in Capitalism, Socialism, and Democracy, had a good bit to say about this.
Western economies later turned to variants of the social welfare state, but along the way the intellectual currents of the 19th century produced a lot of overreaction in other, more destructive directions. The ideas of Marx fed into the movements behind the Soviet Union, Communist China and the Khmer Rouge. Arguably, fascist doctrine also was in part a response to the disruptions of industrialization in the 19th and early 20th centuries.

True.
The shift of jobs away from agriculture also poisoned economic policy. Typically the U.S. government spends more than $20 billion a year subsidizing farmers, even though virtually all economists think those expenditures are wasteful.

True, although I think that calling an annual expenditure of 0.1 percent of GDP on farm subsidies, bad as that is, "poison," is an exaggeration.
The European Union is worse yet. Although Europe has pressing problems with bank solvency, Italian and Greek debt, and refugees, an estimated 38 percent of the EU budget will be going to farm subsidies.

That is worse. A check of his link shows that it's about $90 billion per year, which is about 0.5 percent of EU GDP.
It is possible a similar logic may play out with the jobs that will be rendered obsolete by automation. That is, we may decide to subsidize and protect those jobs for centuries to come, to the detriment of long-run economic growth.

Correct. Tyler and I agree that subsidizing or protecting those jobs is a bad idea.
When it comes to automation, my all-things-considered view is still "full steam ahead," and I might have felt the same way and bit the same bullet, had I been alive in the late 18th century.

Drop the "might" and, even behind a Rawlsian veil of uncertainly, I would say the same.
But invoking the Industrial Revolution today is not going to ease my worries.

It did ease mine, not that they were large to begin with. But if this is what a well-informed pessimist thinks, then I'm still optimistic."

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