David R. Henderson  

Why Tyler Cowen's Pessimism Fails to Persuade Me

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"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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COMMENTS (9 to date)
Patrick Peterson writes:

In addition to the difficulties and costs of war keeping per capita incomes from rising, please don't forget the massive increase in population that was made possible by the industrial revolution. That per capita incomes rose at all during the period is pretty amazing and a huge contrast to today, when population growth on a percentage basis is minimal comparatively.

Kevin Erdmann writes:

The problem today is the opposite. The problem isn't that our current context is too analogous to the industrial revolution. The problem is that we are already blocking our version of the industrial revolution.
How would it have worked out if agricultural productivity had ramped up and we prevented all those former ag workers from moving to the cities to work in factories? It would have been a disaster.
That is exactly what we are doing today. But, today's revolution is in innovative dense networks of human information workers and in the services that rise up in the nontradable sectors around them. These complementary populations require residential density. When the industrial revolution required urbanization, urbanization could happen. Today, the necessary urban density is unattainable. So, about 40 million Americans can participate in economic activities in cities that contain these dense networks, and no more.
If we could actually allow our post-industrial revolution to take place by accommodating the need for urban housing, the first thing that would happen is that domestic rental income would drop and total real estate values would drop by about 50% of GDP. This could only bode well for relative wages.

To analyze the argument, I call attention to the medium (Bloomberg) more than the writer (Tyler Cowen). From the times when Drudge Report, my first source for headlines, has linked me to articles on Bloomberg, I have judged Bloomberg to be mid-left mainstream.

I believe mainstream media feed themselves by advancing images of problems which they assume may need governmental intervention. So would Bloomberg even carry a piece which was completely free-market, which conjured no worry which might "require" action by the state?

I do not know, not being a Bloomberg aficionado. But a writer wanting coverage in that medium may need to offer at least marginal support to their statist worldview. Unless of course I am mistaken.

mbka writes:

What Patrick Peterson said:

In addition to the difficulties and costs of war keeping per capita incomes from rising, please don't forget the massive increase in population...

A LOT of past and current economic patterns are primarily driven by demographics. Not to mention social patterns.

Pierre Lemieux writes:

I am always puzzled that people use the unreliable Census Bureau median income data. See https://www.bea.gov/papers/pdf/arnold_katz_fcsm_paper.pdf.

David R. Henderson writes:

@Patrick Peterson,
In addition to the difficulties and costs of war keeping per capita incomes from rising, please don't forget the massive increase in population that was made possible by the industrial revolution. That per capita incomes rose at all during the period is pretty amazing and a huge contrast to today, when population growth on a percentage basis is minimal comparatively.
Good point about then. See this for more on those numbers. Specifically, on page 40, the author points out that Britain’s population rose from 7.8 million in 1761 to 23.1 million in 1861. That’s a compound annual growth rate of just a hair over 1 percent. However, that’s comparable to recent population growth rates in the United States. In 2000, the U.S. population was 282.2 million. In 2013 it was 316.5 million. That’s 12.2 percent growth. The compounded annual rate is about 0.9 percent, only slightly lower.

Max writes:

For me, one or two important metrics are missing in Tyler's Equation. Inflation and currency stability is the important counter point. A short googling didnt turn up much on the point, but what about inflation? Did prices rise during that period or did they fall? Did technical advancdement also lead to lower prices?

Could be, seeing that many basic task had much better performance, meaning less costs and more revenue, but perhaps also lower prices.

Perhaps than a real decrease of 0.5 % is nothing, if suddenly bread is affordable!

Mark Bahner writes:

Tyler Cowen wrote, "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."

David responds: "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."

Indeed. As part of a project to collect predictions of 21st century economic growth from a wide variety of disciplines, I used Brad DeLong's calculations of gross world product per capita to calculate historical annual per-capita gross world product growth rates:

Economic growth in centuries past, and predictions for 21st century

Annual per-capita gross world product growth rates (to one significant digit) were:

1400-1500 0.1%
1500-1600 0.0%
1600-1700 0.2%
1700-1800 0.2%
1800-1900 1.3%

So a growth rate of 0.22% from 1760 to 1831 is in no way extraordinarily slow. It's almost exactly what the rest of the world was doing in that time frame.

Mark Bahner writes:
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.

Would you be less optimistic if you knew with certainty ;-) that four of the top fifteen jobs in the U.S. in 2012 were going to lose ~90 percent of their workers (on a population-adjusted basis) by 2044, and that on average, the top 15 jobs in the U.S. in 2012 were going to lose about half of their workers (on a population-adjusted basis) by 2044?

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