History of Economics

L14. Social consequences

Manuel Flores
mflores@uic.es
 Outline
The efficiency game, how do we distribute the benefits between this increase in
efficiency? indeed the ones that benefited the most where the unskilled workers,
but why? business owners have accounting benefits but it does nit mean that they
benefited the most form it.

• Introduction
• Sharing the spoils
Increase in the demand for unskilled workers, because particular skills are
difficult to replace by machines is destreza*/dexterity this is difficult to replace
with machines, another skill that was really demanded it was in the retail sector
(shops) marketing becomes really relevant, product differentiation in introduced
social intelligence is still hard to replace by machines.

• Income inequality Social intelligence along with dexterity how it affected women? Women compared
to man are more qualified of this social skills so it may have benefited from this
hard to replace skills.
• Inequality in life prospects
Strength became less important

• Why did landowners not receive the gains? so this affected man. So overall
women benefited somewhat
more than man, and the
unskilled ones too, inequality
• Technological advance and unskilled wages decreased

• The demographic transition

• Why did owners of capital not gain more?

2
Introduction

• While the IR was driven by the expansion of knowledge,

unskilled labor reaped more gains than any other group.

• Associating the IR with misery is not supported by the available

empirical evidence.

• The gains to land and capital did initially not exceed those of
labor. wages increased more than income per capita, increases in income per capita = output per capita =
technological progress = increase in capital per worker. Workers benefited more that owners of capita.

• Thus modern growth, right from its start, by benefiting the most
disadvantaged groups in preindustrial society, particularly
unskilled workers, reduced inequality within societies.

During the IR there is an increase in efficiency, with the same input we create the same output

3
 Sharing the spoils

• When more output is produced per unit of K, L and land

engaged in production, the average payments of these
three factors of production must increase.

• But there is nothing in the fundamental equation of growth

that describes exactly how the factors share the gains.
Increase in efficiency will be equal to the real rates of payments
• All that must apply is that: (real wages), what will be the growth rate? the change in real
wages.
increase in efficiency = increase in real wages/wages
b = wL / total income gA = agr + bgw + cgs growth of interest rate = increase in real
wages/wage
for capital this growth rate has been close to =0
where gr, gw, grs are the growth rates of the real payments
to K, L and land. how do we measure real wages over capita? Real Interest rates
what is the share of all capital rent as a share of
a, b, c are a share of input factor as a share of the income
capital income?
a = real capital / total income 4
 Land in the long run received non of the
gains from the IR

Real farmland rents per acre in England, 1210-2000.

what we can compute

from this figure

we can conclude that land

owners dod not benefit
from this in crease in
efficiency

Source: Figure 14.2 in Clark (2007)

5
 Physical capital owners also received
none of the gains from growth
there was an increase of capital owners

• The real rental of capital (net depreciation) is just the real interest
rate.
• But the real interest rate, if anything, declined since the IR (see
figure in L9) if there are barriers of entrie the competition is lower
• Total payments to capital have expanded enormously since the IR,
but only because the stock of capital grew rapidly.
• The stock of capital has grown as fast as output, and its
abundance has kept real returns per unit of capital low.
 The product agr has been 0
 Thus all the efficiency gains have shown up as wage increases:
𝑔𝐴 ≈ 𝑏𝑔𝑤
• Since b = 0.75, every 1% efficiency advance since the IR has
thus tended to increase wages in average by 1.33%.

6
 Unskilled male wages have risen more
since the IR than skilled wages

Real hourly wages for building laborers in England, 1220-2000.

real wages are multipied by 8 as there is an improtant increase in the

employment of unskilled workers

Source: Figure 14.3 in Clark (2007)

7
 The skill premium and the gender gap in
wages Effect on the industrial revolution wage gap and the skill premium
The skill premium during this period it might reminded

• A simple interpretation of the shrunken skill premium is that it is at

least partly the result of the declining rate of return on capital.
• The wage pattern over a lifetime for skilled workers differs from that of unskilled
workers
• The relative supply of skilled workers will be influenced by the interest rate on
capital
 We would expect the skill premium to be higher in high-interest-rate societies
more supply of workers lower wages

• The gap between men’s and women’s wages has narrowed

• Discrimination in employment? promotions? wages?
• The IR improved women’s economic position
 By reducing gender gap in earnings the IR (again) narrowed overall
inequality in modern societies
Wage discrimination between black and white monopolistic competition: perfect competition
man: R. Oaxaca and A. Blinder 1973
Race shouldn’t have any impact on the wage
Women discrimination must be related with the
fact that man want man coworkers to work with
8
Income inequality

• Was there an initial association between faster growth and

inequality, the so-called Kuznets curve, in the transition out of
the Malthusian state? Overtime income per capita in England is flat but it starts to increase
during the industrial revolution. Social Inequality during the hunter
• Seems unlikely gathers societies were low compared to the industrial revolution,
wealth(stock) is a measure of inequality.

• The distribution of wages is much more equal than the

distribution of ownership of capital.
• One crucial determinant of inequality in any society is the share of labor
income in all income.
• The larger this is, ceteris paribus, the lower inequality will tend to be.
• This share rose for England from about 0.63 in the early 18th century to
0.75 in the early 2000s.

• However, over the long stretch of human history there may well
have been a type of Kuznets curve.

9
Wages rose as a share of national
income between 1760 and 1860

Shares of labor, capital, and land in net national

income in England, 1750-2000
it represents shares, what happens
to the different areas, what can we
conclude from this? what would
happen to inequality? we should ask
our selfs how are this input factors
distributed in our society? unequally,
how are wages distributed in our
society? there are more equally
shares of areas
distributed.

Source: Figure 14.4 in Clark (2007)

10
 Inequality, historically
% cumulative
income Social inequality grows overtime and hits its peak during the industrial revolution
no ineq (G=C)
—————> current curve
-> G=1
A % cumulative
B
population

G= A/ A+B Pre- and post-industrial wealth distributions

Source: Table 14.2 in Clark (2007)

11
Inequality in life prospects

Since the industrial revolution the social inequality has declined dramatically

Life prospects of rich and poor

Source: Table 14.4 in Clark (2007)

12
Why did landowners not receive
the gains?

• Why did landowners not benefit hugely from an increased

scarcity of land as population and incomes rose rapidly after
1800?

1. The income elasticity of the demand for many land-intensive

products has been low.

2. Enormous growth in the productivity of agriculture led farm

output to rise faster than population.

3. The mining of fossil fuels (coal and oil) has provided for
modern societies the energy of which agriculture used to be a
major provider.

13
Technological advance and
unskilled wages

• Soon after the arrival of the IR the “machinery question” became a

matter of debate among political economists. Would new labor-saving
machines reduce the demand for labor?

• A number of tasks performed by people were quickly mechanized.

• But the grim future of a largely unskilled and unemployable L-force has
not come to pass. Instead the earnings of these unskilled workers have
risen relative to those of the skilled. Why?

• There are two attributes of the human machine that are hard to replace:
1. Dexterity
2. Social intelligence

 The past in this respect, however, is no guide to the future.

14
The demographic transition

English fertility history, 1540-2000

Source: Figure 14.6 in Clark (2007)

15
What led to the modern demographic regime with few
children despite high incomes?
university women access: after franco’s regime

1. The general rise of incomes reduced fertility.

• The decline in gross fertility is clearly correlated with income, both across
societies and within particular societies over time
• G. Becker  the driving force in declining fertility was just the great gain in
incomes since the IR
• Income, however, certainly cannot by itself explain the modern decline in fertility.

2. The desired N. of children per married couple is independent of

income and the preference was always for 2-3 surviving children.
• But to achieve a completed family size of even 2 children in the high-mortality
environment of the Malthusian era required 5+ children
• In late 19th century child mortality in England had fallen substantially

3. Increased social status of women

• Women had always desires a smaller N. of surviving children
• Increased bargaining power within households during late 19th century

16
Why did owners of capital not
gain more?

• The 1st wave of great innovations of the IR, in textiles, did not
offer above-average profits because of the competitive nature of
the industry.
• Productivity growth in cotton textiles in England from 1770 to 1870, for
example, far exceeded that in any other industry.
• But the competitive nature of the industry, and the inability of the patent
system to protect most technological profits, kept profits low.

• The 2nd wave, in railroads, seemed to offer more possibilities.

• Railways are a technology with inherent economies of scale.
• Railways absorbed a large fraction of all fixed capital investment in England
in the mid-19th century.
• But again the rush to enter quickly drove down profits to very modest levels.
• Consumers were again the main beneficiaries.

17