In the previous video, we saw what the Industrial Revolution was about.
It enabled the much faster rise in income per capita than we have ever seen before.
The take off of GDP per capita was irreversible. But why did it start in Britain?
This is what this video is going to be about. According to Robert Olen, a renowned economic historian,
there were two unique features of the British economy at the time which pushed British firms into developing and adopting new technologies.
First, British workers were expensive to hire.
This is the first market signal that firms need to hunt for labour saving technologies, technologies that require less labour than before.
Second, other inputs such as coal, were relatively abundant and cheap.
The combination of these two factors led the British producers to develop and adopt
technologies which use more of the cheap input and less of the expensive input.
But why? To understand why, one needs to dig a bit deeper into the technological choice that a firm makes.
In other words, we need to understand how do firms choose the optimal technology for them?
To answer this question, we first revisit what technology is.
This is the way you combine your inputs to achieve a certain output.
Then you need to see which one of these technologies is the cheapest.
You know, the costs of those technologies because you know how much input it takes to produce a certain output.
And also, you know, how much the input costs to hire.
If you sum up the costs for each input, you will get to the total costs of producing a given quantity of output.
This is what evaluating the costs of different technologies is about.
Finally, you know how much each technology costs.
The only thing you still need to do is to make an informed choice.
You choose the cheapest available technology to get us or not, but.
How does the logic look on a graph? So here's a graph telling you that you can combine labour and coal to produce a certain output.
Let's say your business is textiles and your goal is to produce 100 metres of cloth.
This graph will illustrate the variety of methods you can use to achieve this goal.
You can produce your target by using one mortar and six tons of.
As this technology uses little labour and a lot of coal. We call it an energy intensive technology.
Alternatively, you can combine your inputs in a different way to get the same amount of output you can.
For example, use farmworker's and two tons of coal and still get your target out as this technology uses more labour and less energy.
We call it a labour intensive technology.
You can, of course, combine your inputs in a different way and use, say, three workers in seven tons of coal for five workers in five tons of coal.
Or use the most labour intensive technology, the one using 10 workers and one ton of coal.
The point I want to make here is that you can combine labour and coal in a
variety of ways to heat exactly the same production target 100 metres of cloth.
So how do you choose? You will tell me if I can hit the same target in five different ways, then I will choose the cheapest one.
If you can get an A in economics with three hours per day and with five hours per day.
You will choose the cheapest. A. This is what we call rational decision making.
And you'll be right to the stand your technology choice better.
We need to know more about the fact that prices. So let's have labour costs of, let's say, ten per day and coal cost me twenty four.
What does it mean for my total costs?
Your total cost will depend not only on the prices of inputs, but also on how you combine your own, how you combine them.
In other words, low prices and the quantity of inputs.
Let's see the total cost for each of the available technologies to us.
For example, if you employ two workers and three tons of coal to get 100 metres of cloth,
that will cost you two times ten plus three times twenty, which is a.
If we employ a different technology in which we have six workers in one ton of coal, the total cost will still be 80.
We can populate the entire graph with many points like the ones above.
Which have a special property, combinations of inputs on that line lead to exactly the same.
Total costs. This is what I would call this line.
Isaac cost line from Aysel, which means the same costs, which as well costs.
So on either coast line is a line representing exactly the same costs for the firm, no matter how you combine the inputs on that line.
Can you find different Isaac costs on the graph above? Of course, there are infinitely many Isar costs.
Notice, however, that Isaac costs above our original one will cost you more.
While Isaac goes below, your original one will represent lower total cost.
By, for example, the ones shown here. So how to choose the best technology?
All technologies. A, B, e lead to the same amount of output, but not all of them are equally cheap.
You choose the one technology which can achieve your target output with the minimal cost.
In this case, it is technology B. So far, we have assumed prices of those inputs stay the same.
But what if they're not like in the real world?
Let's spice things up a bit. What will happen if, for example, the price of coal suddenly drops to five?
And the rest of the setup remains the same? With the old prices of 10 for labour and 20 for coal.
Technology be used to be the least costly way to produce 100 metres of cloth.
However, notice that we used to have a technology which is still available technology, a which involved only one worker and six tons of gold.
We did not consider it before. Because it was way too expensive under the old prices.
But now, with the price of coal down to only five, the total cost for coal become 30 and one unit of labour is still just 10,
bringing the total cost of producing the target quantity of 100 metres down to only 40.
So we switch to a different technology, which achieves the same amount of output with lower cost of input.
Why don't we just stick to our old technology? After all, it is saving US costs.
Now, with the lower cost of coal.
Notice what will happen if we stick to technology, be under the new prices, technology be requires that we employ four workers and two tons of coal.
Right. So under the new prices, this will cost you 40 plus 10, which is 50.
So technology, because you're 50 in technology, a cost you 40 under the new prices.
So which one do you choose? Of course you will choose technology. Now, of course, in the real world,
it is not straightforward to switch from a labour intensive technology to an energy intensive technology just like that.
The adjustment costs can be significant. However, you still prefer technology a each day.
It saves you ten pounds over a year. It brings the total savings from investing in a new technology to more than 2000 pounds for working.
You assume there are 200 working working days in the year.
If the technology is cheaper than 2000 pounds, then you'll break even in less than a year, which is great for you.
You can do similar types of calculations under a variety of prices and technologies scenarios.
So let's summarise what we have found. When the price of coal goes down and labour becomes relatively more expensive.
Firms have incentives to switch to technologies which require less labour and more machinery.
Those machines, in turn, require a lot of energy to run. But firms run them because they save a lot of labour costs.
So if labour becomes more expensive and energy and capital becomes relatively cheaper.
Firms have incentives to switch to new technologies. Those new technologies use more capital and more energy in the long run.
Those technologies become the cheaper ones. Even after accounting for the adjustment costs of switching to the new technology.
But this is great. We now have the full picture to explain what was going on in the beginning of the industrial revolution,
where I'm showing you, here are the labour costs in Newcastle, London and other places across the globe.
At the turn of the 18th century. Look how expensive labour was in England and how cheap it was in other places.
So British firms had the incentives to switch and to invest in technologies which hat which saved labour and use a lot of capital and energy.
In turn, British innovators at the time had the incentives to supply those new technologies.
And that's how you end up with new technologies being created and adopted in Britain versus.
But that's not all. We just kept increasing throughout the 18th century in Britain while they remained relatively constant in, say, France.
So the incentives to create and adopt new technologies. Was not only one off.
It was sustained. Going back to the drawing board in the sixteen hundreds, when Labour was cheap relative to the cost of capital and energy,
British firms had incentives to keep a lot of labour and use fewer capital intensive technologies.
Once labour prices tripped up and energy became abundant and cheap,
the benefits from creating and adopting new energy intensive technology became apparent.
It is at that time when firms switched to capital intensive and energy intensive technologies at the expense of labour.
It was just cheaper. So in this week's videos, we have so far explain technological choices firms make by doing so,
we were able to see why it was Britain, not China, US or Japan or Europe that gave the first industrial revolution to the world.
So we have explained the takeoff.
In the rest of this week's videos will bring an intuitive model to explain why the world has remained poor for so long.
We call the framework explaining the lack of permanent prosperity, the Malthusian model to understand them all properly.
We'll need an important building block. We call this building block the production function.
