Notesale: Turn your study into money

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Lecture 3 & 4
Overview and some theory
Evidence
Chemicals
Iron and steel
Ship building
Cotton textiles
Conclusions- how well did industry perform pre 1914?
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Overview and some theory
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(3) Gerschenkronian catch-up means poorer countries grow faster than rich countries via:
-Imitation of technology (they can just copy rich countries)
-State and corporate power as a substitute for markets
Abramowitz: Gerschenkron is right, but catch up is contingent on social capabilities like:
-Human capital
-Institutions …so Britain’s lead will dissolve
...
European average; Japan has caught up
Gershenkronian/Abramowitzian convergence predicts catch-up, not overtaking: doesn’t predict leader falling behind “British Disease”
(5) Gerschenkron and Abramowitz allow us to explain why Europe catches up, 1950-73:
-Strong social capabilities
-Educated population
-Lots of technology to borrow (mostly from the US)
But why does Britain not just lose its lead, but fall behind?
(6) Perhaps British Entrepreneurs just got lazy: with success of rail & textiles, they didn’t invest in new industries
(complacent)
Landes, (1965): “Britain in the late nineteenth century basked complacently in the sunset of economic hegemony
...

Cain and Hopkins argued “Gentlemanly Capitalism” was cause: they wanted to become financiers & achieve social
status by going into services rather than manufacturing: More concerned with foreign investment than UK industrial
innovation
...
US had
giant internal markets and is protected by barriers (they had large, prohibitive tariffs)
...

(8) This transatlantic productivity gap is explicable in terms of rational differences in technology:
-On demand side, US consumers prepared to accept higher degree of standardisation, facing US producers with a more
homogeneous market
...

-On supply side, shortage of skilled labour led to substitution of machinery for skilled labour in US, while abundance of
natural resources allowed development of resource-using technology
...

(9) Therefore, the use of different technology and less capital intensive production in Britain is not necessarily a sign of
failure: Landes versus Sandberg/McCloskey
...

McCloskey & Sandberg: competition will ensure the correct choice of technology and prevent failure at industry level
rather than just firm level - the forces of competition mean things are being done as efficiently as possible in the UK
...

*2nd article
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However, possible that the exceptions
provide key insight
...
)
(12) Britain did relatively well in industries where flexible production techniques remained competitive despite adoption
of high-throughput techniques in USA
...
g
...

(13) Also, Brit did well in industries where mass production techniques had still not been successfully applied, even in
USA:
E
...
Shipbuilding (flexible craft based means of production), where British industry actually had a small productivity lead
because they were outright more efficient: skilled labour
...
g, seedcrushing, coke, sugar refining and tobacco)
(15) Poor productivity performance (US Y/L lead more than 2:1 average) in industries where high throughput techniques
developed successfully in US
...
g
...
UK couldn’t compete in other industries: in car production US
had factor endowments and internal market
...

(16)
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Chemicals
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(17) Sulphuric acid production is often used as the measure for the size of the chemical industry pre 1914
...
New chemical
products were being introduced in Germany, however- organic chemistry & synthetic dyes
...
Britain was still dominant in world
production of soda ash in the early C20
...
If we add in soap, explosives and other chemicals, more balanced
assessment is possible
(19) Allegations of failure in chemical industry quite common: There is widespread perception of poor performance and a
technological lag in British chemical industry
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The LeBlanc process for soda ash production persisted instead of
adopting the Solvay plant
...
g
...
1920)
(21) Solvay Plant (c
...
Solvay v Leblanc:
Most obvious gain from switching to Solvay process is the reduction in average costs of output
...
Leblanc cartel caused a reduction in dead weight loss and distortions
...

(23) i
...
per ton
...
The advantage to switching
methods was therefore blunted: lower incentive as patent holders capture profits rather than manufacturer
...
£6 per ton in 1870s and £3 per ton by early 1890s
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Solvay v Leblanc:
Also, the gains from switching became a lot higher in the early C20:
-Gains from switching in 1894-1899 = £440,000 pa
-Gains from switching 1900-1914 = £760,000 pa
But still: little excuse for not switching in 1890 when most of remaining Leblanc producers merged to form United Alkali
Company (UAC)
...
Solvay v Leblanc:
Even Sandberg claims that Britain should have made the switch a lot sooner (optimal switching point = late 1890s)
...
There
may be entrepreneurial failure here - if there’s a profit motive they will switch, however, is there’s a cartel they won’t
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Synthetic dyes:
British chemical industry pre-1914 failed to establish a significant synthetic dyestuffs industry based on coal-tar
...

(27) ii
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-Due to government support for science and technical training
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(28) iii
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In soap, Britain had a healthy
balance of trade surplus thanks to strong presence of Unilever
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Britain’s share of
world production of pig iron fell from 50% in 1870 to 13% in 1913
...
Most
dramatic growth in USA, where share of world production rose from 14% to 40%
...
US needs a lot of steel to industrialise: share increases to
40%
...
Germany’s share remained stable and the USA’s
share again increased dramatically
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6% per annum during 1870-1913
...

(32) GB iron and steel exports continued to grow, remaining higher than German exports until just before WWI, while US
exports lower throughout pre-WWI period
...
Europe is industrialising: Britain allows other companies to compete
domestically, so share falls but productivity increases
...

(34) (Tolliday and Wengenroth) point to rapid growth of demand in Germany and USA as result of general economic
development
...
However, Britain was excluded from these buoyant
markets by tariff protection - Britain had to rely on Empire and other overseas markets
...
But when examine these issues in detail it is difficult to find evidence of entrepreneurial failure
...
In 1914 everything changes - Europe becomes disintegrated, more hostile,
policy responses to armament collapse the pre-1914 world
...
If revisionists correct, this should be explicable largely in terms
of differences in resource and factor inputs (Cf
...

McCloskey claims little difference in TFP levels between GB and USA at this time
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(37)
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Shipbuilding
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(38) In shipbuilding Britain rose to dominate world markets in the second half of the C19 largely at expense of previously
dominant USA
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Brit does well: produces domestically and sells in Europe
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From 1860 - 1914 (steam era) Britain dominates production - navy etc
...
Before this, Britain lacked ready
supply of essential raw material (timber) for shipbuilding
...

Data on shipbuilding output and employment in Britain suggest rapid growth: Net tonnage increase 1867-1911: 208,000
to 1
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(40) International comparisons show that by early 1890s, Britain accounted for over 80% of world output
...
Brit Craft Unions highly
effective in mobilising labour (high wage, high skills)
...
With machinery, you pay implicit cost, even if not
using machine
...
g, refrigerator ships (alt specifications)
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Possible because of craft based organisation of production around separate trades of
painters, plumbers, carpenters, metalworkers, etc
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With large, homogenised
products Brit fails comparatively: comparative advantage lies in customised products
...
Latest technological
developments adopted more quickly in less successful German and USA shipyards, to get around problem of shortages
of skilled labour
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Brit has absolute advantage in shipbuilding - US: unskilled, high scale, homogenous domestic market, high through-put,
resource abundant
...

From late C19 growing frequency of demarcation disputes between many trades represented by their craft unions (on
the Tyne, average of one major strike per month over demarcation issues between 1890 and 1893)
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Demarcation is big issue, however, unions lose power if they don’t own industry
...
Union system has
potential to develop into a problem as nature of British industry changes
...
E
...

The absence of a US/UK productivity gap also reflects fact that mass production methods had not yet been successfully
applied to shipbuilding: Not until widespread application of prefabrication and welding techniques to tanker production
in 1950s
...
Highly spec firm means external EoS exists- this is an example
where Brit entrepreneurs succeed: they understand the market, the workforce, etc
...
The crafts based
approach to production, that was better suited to most British industries was able to maintain an advantage over mass
production for longer in shipbuilding, but also highlights that the latest technology isn't necessarily best for all
economies
...
Indeed, Britain retained a
large share of world spinning and weaving capacity right up to WWI
...
Epicentre of debate: Ind Rev born in mills in N of Eng,
by 1914 Brit clothed the world
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(50) At the time, criticism of cotton industry focused on social issues
...
But once cotton had collapsed between the wars,
people began to look back with hindsight, and see if they could trace origins of decline in pre-WWI period: no longer an
industry, just a craft
...

-in weaving, delay in switching from power loom to automatic loom
...

Key conclusion: they were rational, given conditions faced by Lancs
...
”) Ring spinning usually seen as a high throughput technique, because whereas mule spinning
was intermittent, ring spinning was continuous
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It was better to use mule if you have a skilled workforce
...

This saving on labour costs had to be balanced against higher raw cotton costs, because ring frame put extra strain on
the cotton
...
Brit Ent had to deal with
local supply
...
Extra raw cotton costs more significant for fine yarns because high quality long staple cotton
had to be used for ring spinning
US firms were right to install rings: low skill, unspecialised, low grade cotton
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GB mill owners
installed mules, except when specialising in sub-40 counts
...

high counts
...
Fixed v Variable cost question: does cost of new machinery outweigh
productivity gains?
(57) Power loom versus automatic loom:
Sandberg provides similar analysis of choice between old power loom and new automatic loom: Automatic loom was a
high throughput method, invented in US in 1894, and first introduced in Lancashire in 1900
...

(58) Power loom versus automatic loom:
Each worker could tend more automatic looms, so saved on labour costs, however, K costs higher since automatic
looms more expensive
...
In Britain, where wages
were lower, savings from adoption of automatic loom were less than in US - Hence rational to rely more on power loom
in Lancs
...
Brit had large pool of skilled
labour, available relatively cheaply, however
...
Lazonick argues instead for a number of ‘institutional constraints’:
Chandlerian thesis argued Brit institutions were not as good
...
Vertical specialisation (US had all in-house workers/ Brit: weavers were not packers, insurers, shipper etc
...
Industrial relations
3
...
Vertical specialisation
The most important institutional constraint for Lazonick was vertical specialisation of spinning and weaving in Britain:
Compared with existence of large vertically integrated firms in US
...

This introduced a potential co-ordination problem:
Weavers could only get full benefits of automatic loom if spinners also switched from mule to ring, while spinners could
only get full benefit of ring frame if weavers also switched from power loom to automatic loom
...

(61) 2
...
For employers,
most important thing is output per input: workers were not paid hourly
...
Industrial relations
Mill owners could use inferior cotton and pass on burden of extra breakages to workers
...

Giving workers poor quality cotton to use was essentially extracting rent from workers at cost of technological
improvement
...
Liverpool cotton market
Mill owners could only take advantage of wage system in this way because of proximity of Liverpool cotton market
...
Not open to cotton spinners in other parts
of world, where cotton had to be ordered in less flexible way
...

(64) Saxonhouse & Wright cast doubt on Lazonick’s arguments: Lazonick suggests the British cotton industry should
have made greater investment in rings and automatic looms, but unlikely this would have helped with situation in
interwar period
...
Makes no sense for Brit to go down road Lazonick suggests (Chandlerian way)
...
At every thread count, British
producers are more productive than American: British producers tend to make finer qualities - UK comparative
advantage in skilled labour, mules
...
Looking at prices,
low-quality, homogenous product prices were used in calc, but this not actually the case: everyone being assessed on
low-quality cotton for purposes of industry statistics - Brit made tailored products
...
Higher productivity was always more than offset by higher wages
...
e
...
Quality
production based on skilled labour
...

At no point are US textiles cheap enough to compete with Asia, or quality enough to compete with Brit
...

Adjustment to competition from abroad/ Stable 2:1 US productivity lead/ Productivity similar in Germany
...
Labour scarce in US, skills plentiful in Brit
...
E
...
shipbuilding: as long as mass production
wasn’t possible there was no productivity gap between Britain and the USA
...

Probably the best case for entrepreneurial or institutional failure out of the industries we have considered
...

(72) Iron and steel
Some element of inevitability to the substantial productivity gap, given Britain’s levels of industrial development versus
USA and Germany
...

(73) Shipbuilding
Late spread of high-throughput production methods and superiority of flexible crafts based production explains relative
success of industry and no productivity gap pre 1914
...

Cotton textiles
Mass production in US but UK competitive on basis of flexible production with external economies of scale → small
productivity gap
Would have been competing with India and Japan otherwise*
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Thus, they are overtaken by the corporate USA
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Elbaum and Lazonick develop this critique:
“Inherited and persistent constraints impeded British firms from acquiring the market control, authority in labor relations,
or managerial hierarchy necessary to avail themselves fully of modern mass production methods
...

Three popular myths
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This is true
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US 28%
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Europe: Efficient, competitive multi-mode transport/ America: Long distances,
rail and (poor) roads
(78) In 1907, Britain had 388 “giant” factories
...
workers in “giants” in each: UK 12
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8%
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Britain was competitive with the US in scale before 1914, and Germany was not far behind
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(79) Chandler argued that British firms suffered from being family-owned and operated
-Lack of professionalized management structures
-Failure to transition to the corporate economy
This assumes that British firms actually were more family-owned and operated
...
Difficult to sustain that 3% of company votes held back the whole
UK economy
(81) Lesson One: Don’t confuse pre-1914 with interwar
The collapse in European trade starts during the war, with predictably awful consequences for British trade
intermediation (shipping) and optimal plant scale
...

But this assumes Chandler was not only right about why industries succeed, but that there was no other reason for
success or failure…



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