Porridge to Progress: Economic Development through

the Lens of Wage and Price History

Bob Allen

New York University Abu Dhabi

2015

Objectives today:

• Describe my project of writing wage and price history of the world

• Discuss implications for--– measuring market integration & globalization– Measuring standard of living– Incentives to adopt modern technology

Wage and price history

• First price histories written in mid19th century• Based on surviving accounts of institutions that lasted

hundreds of years• Historian abstracts prices from all transactions and

wages paid to all employees• Large tables in local money and units of weight and

measure in many languages.• Since 1980s, I have been putting them in spreadsheets

and converting units.• Data on my website (www.nuffield.ox.ac.uk) and

elsewhere.

Europe--"The Great Divergence in European Wages and Prices from the Middle Ages to the First World War," Explorations in Economic History, Vol. 38, 2001, pp 411-447.

Asia--“India in the Great Divergence,” Timothy J. Hatton, Kevin H. O’Rourke, and Alan M. Taylor, eds., The New Comparative Economic History: Essays in Honor of Jeffery G. Williamson, Cambridge, MA, MIT Press, 2007, pp. 9-32.

“Wages, Prices, and Living Standards in China,1739-1925: in comparison with Europe, Japan, and India" (with Jean-Pascal Bassino, Debin Ma, Christine Moll-Murata, and Jan Luiten van Zanden), Economic History Review, 2011, Vol. 64, pp. 8-38.

Americas--“The Colonial Origins of Divergence in the Americas: A Labour Market Approach,” (with Tommy Murphy and Eric Schneider), Journal of Economic History, 2012, Vol. 72, pp. 863-894.

“American Exceptionalism as a Problem in Global History,” Journal of Economic History, 2014, Vol. 74, pp. 309-350.

Wages and prices in Damascus

prices in Basra market

Measuring global market integration

Globalization and integration of markets

0

0.5

1

1.5

2

2.5

3

US

$ p

er

bu

sh

el

1820 1840 1860 1880 1900

US export London

Egy pt Cawnpore

price of wheat

Before steamships and after…

cotton prices also converged

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10

20

30

40

50

60

US

ce

nts

pe

r lb

1800 1825 1850 1875 1900

Liv erpool Gujarat

New Orleans Egy pt (quality adjusted)

Price of Raw Cotton

Cotton cloth prices fell as British technology improved.

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10

20

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60

US

ce

nts

/sq

ua

re y

ard

1790 1810 1830 1850 1870

MA England Egy pt Gujarat

Price of Cotton Cloth

Internationally traded materials prices

20

40 60

80 100

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140 160

180

$ p

er

ton

1800 1820 1840 1860 1880 1900

Egy pt Britain USA

price of bar iron

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10

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25

30

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40

$ p

er

tho

us

an

d b

oa

rd f

ee

t1820 1840 1860 1880 1900

Egy pt Britain USA

price of lumber

Prices of non-traded goods varied according to wages

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$ p

er

tho

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1820 1840 1860 1880 1900

Egy pt Britain USA

price of bricks

Measuring standard of living

Pre-industrial wages

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5

10

15

20 gra

ms o

f silver

per

day

1375 1475 1575 1675 1775

London

Amsterdam

Vienna

Florence

Delhi

Beijing

Labourers' wages around the world

How do the wages map into living standards? We must measure the cost

of living:

• Collect prices of all of the important consumer goods.

• These must be converted to grams of silver per metric unit.

• A basket of goods must be specified and its cost computed.

What was the subsistence wage in England in the Industrial Revolution?

• Sir Frederick Eden, The State of the Poor, 1797, Vol. II, pp. 433-4, reports on an Ealing gardener.

• Aged 40, regularly employed, with a wife, and four children aged 8, 6, 4, and 1-1/2

• He seems fairly typical.

The Respectable Lifestyle (Northern): Basket of Goods

Strasbourg quantity price nutrients/day per person g. silver spending grams of per year per unit share calories protein

bread 182 kg .693 36.0% 1223 50beans/peas 52 l .477 5.5 370 28meat 26 kg 2.213 12.8 178 14butter 5.2 kg 3.470 4.0 104 0cheese 5.2 kg 2.843 3.3 54 3eggs 52 each .010 1.1 11 1beer 182 l .470 20.0 212 2soap 2.6 kg 2.880 1.7linen 5 m 4.369 4.8candles 2.6 kg 4.980 2.9lamp oil 2.6 l 7.545 4.3fuel 5.0 M BTU 4.164 4.6

total 412.1566 100.0% 1941 80

The Respectable Lifestyle (Mediterranean): Basket of Goods

Strasbourg Naples Diocletian quantity price Price Price per person g. silver g. silver G. Silver per year per unit per unit per unit

bread 182 kg .693 .790 .613 beans/peas 52 l .477 .479 .408 meat 26 kg 2.213 2.571 1.290 olive oil 5.2 l 7.545 2.505 1.160 cheese 5.2 kg 2.843 2.571 1.290 eggs 52 each .010 .127 .053 wine 68.25 l .965 .300 .774 soap 2.6 kg 2.880 2.029 1.160linen 5 m 4.369 4.854 2.924candles 2.6 kg 4.980 1.405 1.160lamp oil 2.6 l 7.545 2.505 1.160fuel 5.0 M BTU 4.164 5.452 2.617

total 507.959 258.230

Measure living standard with ‘respectability ratio’

• Annual family income = 250 * daily wage• Cost of maintaining a family at subsistence

– Add 5% to budget for rent– Family = 3 adult male equivalents– Annual subsistence cost = 3.15 * cost of basket

• Respectability ratio = annual income/annual cost of subsistence

• In late 1790s, annual subsistence cost was about £25.5, so the Ealing gardner’s ratio= 28.75/25.5 = 1.12 on regular earnings.

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pean R

especta

bility =

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137514751575167517751875

London

Amsterdam

Vienna

Florence

Delhi

Beijing

The Rest Falls Behind Northwest Europein the standard of living of labourers

What would Malthus, Ricardo, and Marx say?

• Pleased that labourer’s real wage was just above subsistence and flat for 500 years

• However, English real wage was very much above wages elsewhere in the world.

• The Rest couldn’t afford the basket. How did they rest survive?

• Symptom: many proxy variables in Asian baskets

How did the poor survive?

• More people worked more– Not too effective since women & children earned

such low wages

• Spent less money– Got rid of expensive sources of calories– Diet reduced to cheapest available carbohydrate,

beans, very little meat and oil

• Other changes in basket– Calories set at 2100 per person– Four people per household

Such baskets correspond to the World Bank Poverty Line of $1.25 per person per day.

When the subsistence ratios are calculated with these baskets, the geometry is the same but the

absolute levels are lower.

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1

2

3

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5

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132514251525162517251825

London

Amsterdam

Vienna

Florence

Delhi

Beijing

Subsistence Ratio for Labourers

income/cost of subsistence basket

Roman Empire (Diocletian price edict 301 AD)

Some implications

• Real wage in poor countries in eighteenth century was at barebones subsistence = WBPL

• Classical economists’ idea of subsistence (respectability) was over twice the cost of barebones subsistence = WBPL.

• Great divergence preceded the Industrial Revolution (indeed, caused it).

We can apply these measures across time and space

Laborers’ wages at the exchange rate were much lower in countries

with large native populations.

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$ p

er

da

y

1800 1850 1900

Egy pt India Phila Lancs

Real wages were at subsistence in Egypt and India.

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mu

ltip

les

of

su

bs

iste

nc

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1800 1850 1900

Egy pt India Phila London

The longest run so far is Egypt, and it’s still the Hockey Stick.

0 0.2 0.4 0.6 0.8

1 1.2 1.4 1.6 1.8

2 2.2 2.4 2.6 2.8

3 3.2 3.4 3.6 3.8

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-500 -250 0 250 500 750 1000 1250 1500 1750 2000

Incentives to adopt modern technology

Since the Industrial Revolution, a lot of ‘modern’ technology has

• Raised labour productivity by increasing the capital-labour ratio

• Raised labour productivity by increasing the energy-labour ratio

• If ‘modern’ technology has different factor proportions from ‘older’ technology, then relative factor prices could—and did!—play a major role in the invention and diffusion of modernity.

Why do rich countries use highly mechanized power looms?

While 300,000 Ethiopians still weave cloth with handlooms?

Why is the K/L ratio high in placer gold mining in California?

While the K/L ratio is low in placer mining in Ghana?

The breakthrough technologies of the IR raised labour productivity by increasing K/L.

Not an accident: Eighteenth century Britain was unique because its labour was very expensive

relative to capital.

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0.5

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1.5

2

1580 1630 1680 1730 1780 1830

England

France

India

Austria

Since IR, incentives to adopt modern technology have been very different in rich countries and poor

countries.