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EH1: SB TOPIC 3 Cotton Textiles and the Great Divergence Slide 2 TOPIC 3: COTTON TEXTILES AND THE GREAT DIVERGENCE: LECTURE OUTLINE A. BRITAIN AND INDIA 1. The Importance of Cotton Textiles 2. Factor Prices in Britain and India 3. Total Factor Productivity 4. High Wages and Changing Technology 2 Slide 3 COTTON TEXTILES AND THE GREAT DIVERGENCE 1. THE IMPORTANCE OF COTTON TEXTILES Shift of competitive advantage in cotton textiles from India to GB key episode in Great Divergence of living standards between Europe & Asia In C17th India worlds most important net exporter of cotton textiles, GB a major net importer. By mid- C19th GB worlds major net exporter and India a major net importer Until recently, India had all but disappeared from the story of GB development Literature also tended to ignore factor prices until recently 3 Slide 4 Broadberry/Gupta Broadberry & Gupta: analyse shift of competitive advantage from India to GB in terms of factor prices and their impact on choice of technology High GB wages led to adoption of capital- intensive technology Technological progress then faster in capital- intensive technology because of LBD and patent protection 4 Slide 5 Habakkuk thesis Analogy with Habakkuk thesis of technological difference between UK and USA in C19th driven by high wages in USA In context of C18th cotton textile industry, Britain was the high wage economy and production method required substitution of labour by capital 5 Slide 6 Shift in competitive advantage Import of cotton textiles to GB from India by EIC opened opportunities for import substitution as new cloths, patterns, designs became fashionable GB wages between 4 and 6 times higher than in India, so GB producers could not use L-intensive Indian production methods to compete with India This stimulated substitution of K for L amongst firms seeking export markets, but also in domestic trade after repeal of protective Calico Act in 1774. Technological progress faster on K-intensive technology. Productivity eventually high enough to overcome much higher wages in GB 6 Slide 7 2-stage process of technological change (1 ) Switch from traditional methods to K-intensive technology in GB in response to high wages: machinery and factory system (2) Faster rate of technological progress in K- intensive technology: divergence of technological development in GB and India Full effects of increase in GB productivity delayed until after Napoleonic Wars by increasing wages and raw cotton price before supply adjusted to major increase in demand for inputs 7 Slide 8 2. FACTOR PRICES IN BRITAIN AND INDIA 2A. WAGES Chaudhuri quotes anonymous writer from 1701, who claims that same amount of labour that cost a shilling in England cost 2 pence in India Data specific to cotton textile industry show GB wages higher by factor of 4 as early as 1680, rising to factor of 6 by 1770 (TABLE 1) 8 Slide 9 TABLE 1: Weekly earnings of cotton operatives in Britain and India, circa 1680-1820 (s/d) 9 Slide 10 Raw cotton costs Price of raw cotton in GB higher than in India, where raw cotton grown (TABLES 2 & 3) Rise in prices in both countries from mid C18, but slower increase in India. Sharp price rise in GB as result of growing demand before supply of cheap cotton secured from US Delayed shift in competitive advantage 10 Slide 11 TABLE 2: Price of raw cotton in Britain, 1680-1879 11 Slide 12 TABLE 3: Comparative raw cotton prices in Britain and India, 1710-1830 12 Slide 13 Rental price of capital R = P K (i + P K ) Range of interest rates available for GB (TABLE 4) Indian return on secured loans at least 2% higher than in GB 13 Slide 14 TABLE 4: Interest rates in Britain and India (% per annum) 14 Slide 15 Rental price of capital (2) Price of bar iron taken as proxy for price of capital goods Depreciation rate 1.5% pa from Feinstein Higher price of capital goods in GB offset by lower interest rates Anglo-Indian differences in rental price of capital much smaller than differences in wages 15 Slide 16 TABLE 5: Rental price of capital in Britain and India ( per ton) 16 Slide 17 3. TOTAL FACTOR PRODUCTIVITY TFI prices weighted average of wages, raw cotton and rental price of capital Weights (Jones, Edwards): raw cotton 50%, wages 25%, capital 25% Ratio of comparative TFI prices to comparative output prices yields comparative TFP: A/A* = (W/W*) (C/C*) (R/R*) 1-- /(P/P*) 17 Slide 18 Comparative TFP Law of one price: in competitive markets, selling price must be equal, but FOB prices can still differ: SP = P + T TABLE 6: Initial FOB price ratio 200 (from Chaudhuri) extended forwards with price index for GB and assumption of stagnant prices in India Comparative TFP shifted in GBs favour at rate of 0.4 % p.a. before 1770 and 1.8% p.a. 1770- 1820 18 Slide 19 TABLE 6: Comparative GB/India costs and prices (India =100) 19 Slide 20 Shifting competitive advantage (1) Stage 1: Before 1770s GB FOB price higher than price of Indian goods CIF for most products Indian goods exported to GB for re-export British production for protected home market and small range of export products 20 Slide 21 Shifting competitive advantage (2) Stage 2: 1770s to 1790s Repeal of Calico Act Competitive advantage started to shift in GBs favour with rising productivity in Lancashire However, wage and raw cotton costs moved in favour of Indian producers so GB FOB price in England still above CIF price of Indian goods sold in GB on wide range of products 21 Slide 22 Shifting competitive advantage (3) Stage 3: 1790s to 1830s Continued growth of productivity in Lancashire Wages and raw cotton costs moved back in GBs favour GB displaced India from home market and became competitive in 3 rd markets where transport costs similar 22 Slide 23 Shifting competitive advantage (4) Stage 4: From 1830s Further productivity gains in GB (esp in weaving) made GB competitive even in Indian market TABLE 7: GB share of Indian market still only 2.7% in 1830s GB share rose above 60% by 1880s 23 Slide 24 TABLE 7: British cotton textile exports in the Indian market, 1810-19 to 1890-99 24 Slide 25 4. HIGH WAGES AND CHANGING TECHNOLOGY 4A. Britain as a high wage economy Reluctance to characterise GB as high wage economy explained by SOL debate GB real wage slow to rise during Ind Rev But need to consider money wage and comparative level GB very high wage economy compared to India (prior Smithian growth + late marriage) 25 Slide 26 4B. High wages and factor substitution David (1975) model: two technologies T 0 (labour intensive) and T 1 (capital intensive), each with fixed proportions Available Process Frontier (APF) linear combination, because could combine the two techniques Factor prices determine position on APF Higher wage/rental ratio in GB led to substitution of capital for labour 26 Slide 27 FIGURE 1: Choice of Technique 27 Slide 28 28 Slide 29 4C. Faster technological progress with capital intensive technology Greater LBD on K-intensive technology (Arrow) Stronger incentive to search for improvements in machine-intensive processes, where innovations could be patented English patent system expensive and difficult to enforce, but many patents taken out in cotton textiles during Ind Rev Trial-and-error process: technological progress locally neutral, preserves initial factor proportions 29 Slide 30 FIGURE 2: Localised technological progress 30 Slide 31 4D. High wages and factor substitution in cotton Most dramatic developments in spinning, where it took 10,000 operative hours to spin 100 lb of cotton using labour intensive methods in India Use of Cromptons mule cut operative hours to 2,000 (Table 8) Differences less dramatic in weaving before power loom in C19 th, but capital-labour ratio also higher in C18 th GB 2-3 male weavers per loom in Bengal and Coromandel compared with one in GB 31 Slide 32 TABLE 8: Best-practice labour productivity in spinning 80s yarn in England, 1780-1825 (operative hours to process 100 lb of cotton) 32 Slide 33 4E. Factor prices and endogenous technological change in cotton Note that the argument does not depend on labour-saving bias in technological change, for which evidence is at best limited before 1830 However, having substituted capital for labour, rate of technological progress accelerates because of LBD and patent protection for innovations embodied in machinery 33 Slide 34 4F. Patent data Sullivan: machinery and motive power accounted for 42.9% of all patents in GB, 1661-1710, rising to 46.6% 1801-50 Textile innovations played important part in acceleration of patenting in GB from mid-C18 th Spinning largest category in Woodcrofts (1857) subject matter index of English patents Dramatic increase in productivity (Table 8). Improvements to Cromptons mule reduced OHP from 2,000 to 135 between 1780 and 1825 34 Slide 35 4F. Why was Britain first? New comparative work on level of real wages within Europe reveals GB and Holland as highest wage countries from C17 th (Allen, van Zanden) But Holland lacked large home market, important in mercantilist era. Patents more valuable in large market France had large market but low wages 35 Slide 36 5. CONCLUSIONS Rise of GB cotton industry needs to be considered alongside decline of Indian cotton industry Factor prices played an important role Import of cotton cloth from India created opportunities for import substitution Large wage gap stimulated substitution of capital for labour Technological progress on machine intensive technology locally neutral but faster than on labour intensive technology 36 Slide 37 Shifting competitive advantage Faster productivity growth in Britain shifted competitive advantage in Britains favour Delay in shift because of rise in raw cotton costs in Britain before new source of supply in US secured 37 Slide 38 TOPIC 3: COTTON TEXTILES AND THE GREAT DIVERGENCE: LECTURE OUTLINE B. COTTON AND THE TRANSITION TO MODERN ECONOMIC GROWTH IN BRITAIN 1. Trends in Output and Prices 2. Technology 3. Contribution of Cotton to Growth 38 Slide 39 B. COTTON AND THE TRANSITION TO MODERN ECONOMIC GROWTH IN BRITAIN 1. TRENDS IN OUTPUT AND PRICES Cotton cloth is the symbolic consumers good of the Industrial Revolution Cotton industry exhibits dramatic technical progress, spectacular increase in output & huge fall in price To assess what happened to output have to rely on retained imports of raw cotton, an input 39 Slide 40 Measuring output growth Raw cotton imports best available measure of output, because: no cotton grown domestically, so retained imports give complete measure import & re-export data are of highest quality there was little waste, & innovations that occurred did not produce more yarn or cloth from given amount of raw cotton 40 Slide 41 Growth of cotton industry TABLES 1 and 2 from Deane & Cole show spectacular growth of cotton industry, with peak period of growth 1780-1800, @ 10.3% per annum. 41 Slide 42 TABLE 1: Estimates of cotton-industry output, 1760-1816 42 Slide 43 TABLE 2: Development of the cotton manufacture of the United Kingdom, 1819-1871 43 Slide 44 Falling prices TABLE 3 from Ellison shows spectacular fall in price of cotton yarn of two qualities. Quality measured by fineness or count of yarn. Count of 40 hanks per lb. is quite coarse; count of 100 is much finer. (A hank is 840 ft). 1 lb. of yarn of count 40 sold for 16 s. in 1779, but 2s 6d. by 1812. By 1860 only 11d. Finer count of 100 saw its price per lb. fall from 38s. in 1786 to 5s 2d in 1812 and 2s 4d by 1860. 44 Slide 45 TABLE 3: Price of fine and coarse yarns (s./d) 45 Slide 46 Supply and demand Can we make any inferences about the role of shifts in supply and demand from these broad trends? Since observe a substantial fall in the price of cotton, can rule out idea that increase in output was driven by an exogenous increase in overseas demand, despite dramatic increase in exports FIGURE 1: an exogenous increase in demand would have caused an increase in price We are therefore clearly observing an exogenous increase in British supply 46 Slide 47 FIGURE 1: Effects of an Increase in Overseas Demand 47 Slide 48 Increase in domestic supply Furthermore, since price fell sharply, demand must have been fairly elastic (FIGURE 2) This means many of the gains of technological progress in GB were shared with rest of the world through a deterioration in the terms of trade 48 Slide 49 FIGURE 2: Elasticity of Demand in the Cotton Industry 49 Slide 50 Williams Thesis This disposes of one part of the Williams Thesis: the idea that GB developed by exploiting trade relations with the periphery to earn huge profits which financed investment But as Findlay and ORourke point out, this still leaves open another aspect of the Williams Thesis, since GB cotton industry grew by importing raw cotton from slave plantations in the New World 50 Slide 51 2. TECHNOLOGY Key activities in converting raw cotton into cotton cloth : (a) preparation (carding) (b) spinning (c) weaving (d) finishing To see the old technology in action, and get a feel for the industry, visit Quarry Bank Mill, Styal, Cheshire, http://www.nationaltrust.org.uk/quarry-bank/ http://www.nationaltrust.org.uk/quarry-bank/ 51 Slide 52 Technology Why were people looking for new ways to make cotton textiles? Broadberry & Gupta: cotton cloth imported from India, became fashionable. Import substitution required development of less L-intensive production methods since wages 4-5 times higher in England than in India 52 Slide 53 Mechanisation Before IR, preparation & spinning typically occurred in cottage industry on Jersey wheel principle: hand carding to remove impurities from raw cotton hand spinning on the Jersey wheel principle Before IR, weaving occurred on hand looms, again, often on cottage industry basis 53 Slide 54 Hand carding & spinning 54 Slide 55 Handloom weaving 55 Slide 56 Mechanisation of carding Mechanisation of carding process relatively simple, setting spikes on rollers to remove impurities 56 Slide 57 Mechanisation In spinning, major series of inventions during 2 nd half of C18 th, which created an imbalance between spinning & weaving sections: Hargreaves spinning jenny Arkwrights water frame Cromptons mule (combining features from both) Hargreaves spinning jenny, invented in 1764 & patented in 1770, used principle of Jersey wheel, but applied to many spindles. Capable of producing soft weft yarn 57 Slide 58 Spinning Jenny 58 Slide 59 Spinning Arkwrights water frame, patented in 1769, made a number of improvements, inc. use of rollers for drawing out threads, powered by water. Capable of producing strong warp yarn. Cromptons mule, introduced in 1779, combined moving carriage of spinning jenny & rollers of water frame. Capable of producing both weft & warp yarn. 59 Slide 60 Arkwrights Water Frame 60 Slide 61 Cromptons Mule 61 Slide 62 Spinning Many attempts to improve mule. Water power applied to spinning action by William Kelly of New Lanark in 1790, & before long, steam power also applied. This made mule semi-automatic. However, power still not applied to return action of carriage (known as putting up). This achieved in 1825 by Richard Roberts with his patent for self-acting mule. 62 Slide 63 Roberts Self-Acting Mule 63 Slide 64 Weaving Given these dramatic improvements in spinning, considerable efforts made to mechanise weaving. But as late as 1787, Edmund Cartwrights powerloom met with little success, & he went out of business. Many complex actions needed to be mechanised and coordinated on a loom. Commercial success awaited powerloom of Sharp & Roberts, patented in 1822. 64 Slide 65 Powerloom 65 Slide 66 Imbalance Most improvements before 1820s on spinning side, which led to huge increase in productivity in spinning. (TABLE 4 from Chapman). OHP (operative hours to process) 100 lb. of cotton fell from 50,000 in C18 th to 135 in 1825 with Roberts self-acting mule. This created enormous imbalance, which provided incentives to innovate in weaving. Yet there was long delay, which shows that demand not sufficient for technical progress. 66 Slide 67 TABLE 4: Labour productivity in cotton spinning 67 Slide 68 Imbalance Also need to consider supply, or stock of knowledge. It was not formal scientific knowledge that was important here, but a trial & error process, without laboratory experiments. Chance had a role to play; some people got lucky & this affected timing of particular innovations. Historians of technology have focused on the macro inventions. But many productivity gains came from piecemeal improvements to these inventions (micro inventions). 68 Slide 69 Imbalance TABLE 5 from Ellison: from 1820s, imbalance redressed; improvements much greater in weaving than in spinning. In spinning, annual output per operative doubled between 1829-31 and 1859-61, from 1546 lb. to 3671 lb. In weaving, spectacular 6-fold increase in annual output per operative from 521 lb. to 3,206 lb. 69 Slide 70 TABLE 5: Labour productivity in cotton spinning and weaving, 1819-1882 70 Slide 71 Handloom weaving Effect of this was reduction in number of weavers from 1820s, while number of spinners rose. TABLE 6 from Ellison: brunt of decline in employment in weaving borne by handloom weavers, falling from 225,000 in 1829-31 to 60,000 by 1844-46. 71 Slide 72 TABLE 6: Employment in the cotton industry, 1819-1882 (000) 72 Slide 73 Steam power TABLE 7: Diffusion of steam power fairly slow, with water power competitive until 1820s. Even by 1838, when first reliable data available, Mussons figures suggest that in cotton, water wheels accounted for nearly 22% of HP used in factories. 73 Slide 74 TABLE 7: Power used in cotton textile factories (HP) 74 Slide 75 Steam power Textiles accounted for more than use of steam power in GB manufacturing as late as 1870. Cotton alone accounted for 300,480 of total textile steam HP of 513,335 (TABLE 8). So cotton crucial part of modernised sector, accounting for nearly one third of total steam power. 75 Slide 76 TABLE 8: Industrial motive power in the United Kingdom, 1870 (HP) 76 Slide 77 Finishing In pre-industrial era, grey cloth bleached in open meadows by exposure to sunlight. But with huge increase in scale of industry, no longer feasible. Solution was use of chemical agents, initially sulphuric acid, later chlorine from 1790s. Printing initially with a block press. Use of cylinder press in 1783 speeded up process. 77 Slide 78 3. CONTRIBUTION OF COTTON TO GROWTH In many accounts of IR, cotton plays a leading role. To what extent is this justified? Cotton textiles accounted for half value of all exports at its peak, but this surely overstates importance of cotton Made smaller contribution to value added than to gross output, because its main raw material (cotton) was imported, and made up large share of value of output 78 Slide 79 Contribution to growth Since value added was about two-thirds of gross value, cottons share of export value added closer to one-third than a half In input-output terms, backward linkages primarily abroad, to cotton growers in America & Egypt Also few forward linkages, since cotton industry produced for consumers (people made own clothes) 79 Slide 80 Contribution to growth Nevertheless, cotton clearly important as an example for other industries to follow Also, many other industries were slow to modernise, so cotton accounts for substantial share of TFP growth Cotton accounted for 0.13% p.a. TFP growth during 1780-1860, out of an economy-wide total of 0.55% p.a., i.e. cotton accounted for nearly of all TFP growth in economy (despite having weight of only 7%) 80