Does Technological Progress Lead to more Human Capital Formation? Evidence from the French Industrial Revolution

The Complementarity between Technology and Human Capital in the Early Phase of Industrialization

By Raphael Franck (Bar-Ilan University and Brown University, raphael.franck@biu.ac.il) and Oded Galor (Brown University, Oded_Galor@brown.edu)

URL: http://d.repec.org/n?u=RePEc:bro:econwp:2015-3&r=his

Abstract

The research explores the effect of industrialization on human capital formation. Exploiting exogenous regional variations in the adoption of steam engines across France, the study establishes that in contrast to conventional wisdom that views early industrialization as a predominantly deskilling process, the industrial revolution was conducive for human capital formation, generating broad increases in literacy rates and education attainment.

Review by Natacha Postel-Vinay (University of Warwick)

While human capital is often thought to be at the root of any development process, early industrialization itself is often thought to be de-skilling. Images of children working long hours executing repetitive tasks usually come up when one thinks of the Industrial Revolution (Humphries, 2010). Yet there is also the idea that industrial and technical development might lead to a greater need for skilled labour to maintain, fix and adapt new machinery. In this case industrial development might lead to a greater supply of schooling and might result in significant human capital improvements. Focusing on early French industrialization in a recent working paper (distributed by NEP-HIS on 2015-05-02), Franck and Galor attempt to demonstrate just this.

Steam engine from Lille (Nord departement)

Making use of data from the 1840s, the authors find a positive correlation across French departements between the number of steam engines and human capital indicators such as the share of literate conscripts, the share of pupils in the population, and the number of teachers (which would be more suggestive if also set relative to population). This correlation is best illustrated in a series of shaded maps (Figure 3), although the strikingly high levels schooling and literacy in the north-eastern part of France remain to be explained. Of course, correlation does not necessarily imply causation: it may be that other factors caused both the number of steam engines and the number of teachers to increase in certain areas, which could render any relationship between the two fortuitous.

Figure 3 in Franck and Oded Galor (2015).

To tackle this endogeneity problem, the authors make clever use of the fact that the first steam engine was introduced in 1735 in Fresnes-sur-Escaut in the Nord departement, near the northern tip of France. Since technology diffusion can be reasonably assumed to occur first around the region where the new technology was first introduced (which was indeed the case), it seems possible to use each departement’s distance from Fresnes-sur-Escaut as an instrument in the regression. In the first stage of the regression, they successfully show that the shorter a departement’s distance from the first steam engine location, the larger the number of steam engines in the departement, which seems quite reasonable.

To prove the exogeneity of the instrument, the authors have to show that human capital formation was not higher closer to the first steam engine location. This is trickier. To support their case, Franck and Galor investigate the relationship between distance from Nord and economic development indicators from around 1700, such as urban population, literacy rates and university location. They find that there is no correlation (although this may be surprising in light of Figure 1). More importantly, human capital may be quite imperfectly captured by these indicators in the pre-industrial era, when human capital may have developed in ways that are quite difficult to measure: through the transmission of skills from masters to apprentices, or learning-by-doing. It has often been shown that there was no clear relationship between technological progress and literacy rates in the early modern era (Mitch, 1999). Accordingly perhaps more detail should be provided in the paper as to why the steam engine was first introduced in this region and not elsewhere.

Figure 1 in Franck and Galor (2015)

Which brings me to a broader point about the paper. Although its stated aim is to investigate the causal relationship running from technological progress to human capital formation, causality could run the other way around. Although endogeneity issues are explicitly addressed in the paper from (and confounding factors such as land suitability, rainfall, access to waterways, distance from Paris, and market integration duly controlled for), the specific problem of reverse causality is not explicitly dealt with in the text. Reassuringly the IV model should theoretically take care of reverse causality, but the authors could still discuss this possibility in more detail.

Boys at school in Nord departement in the 19th c.

Overall though, Franck and Galor rather successfully tackle a very important and highly complex aspect of industrialization processes. By showing that technological improvement led to advances in human capital accumulation, these results in turn trigger a number of questions. Through which mechanism did industrialization lead to better schooling and literacy rates? Was the process demand-driven? Or did parents’ higher wages mean that children no longer had to work to help the family? Finally, could child labour abuse in factories have led to local initiatives to promote schooling? This latter hypothesis is discussed by Weissbach (1989), who emphasizes a particularly strong will to change the status quo in Alsatian and nearby regions — which could partly explain the greater spread of schooling in this part of France. Such inquiries could be the subject of fascinating future research.

Children in a textile factory in 19th c. Provence

References

Humphries, Jane. 2010. Childhood and Child Labour in the British Industrial Revolution. Cambridge: Cambridge University Press.

Mitch, David. 1999. “The Role of Education and Skill in the British Industrial Revolution.” In Joel Mokyr, ed., The British Industrial Revolution: An Economic Perspective, 2 ed. Boulder, nd CO: Westview Press, pp. 241–79.

Weissbach, L. S. 1989. Child Labor Reform in Nineteenth Century France: Assuring the Future Harvest. Louisiana State University Press.

Help or Hindrance? Business and Welfare Policy Formation

Bringing Power Back In: A Review of the Literature on the Role of Business in Welfare State Politics

by Thomas Paster (Central European University and Max Planck Institute) (thomas.paster@eui.eu)

URL http://d.repec.org/n?u=RePEc:zbw:mpifgd:153&r=his

Abstract What is the impact of business interest groups on the formulation of public social policies? This paper reviews the literature in political science, history, and sociology on this question. It identifies two strands: one analyzes the political power and influence of business, the other the preferences and interests of business. Since the 1990s, researchers have shifted their attention from questions of power to questions of preferences. While this shift has produced important insights into the sources of the policy preferences of business, it came with a neglect of issues of power. This paper takes a first step towards re-integrating a power-analytical perspective into the study of the role of business in welfare state politics. It shows how a focus on variation in business power can help to explain both why business interest groups accepted social protection during some periods in the past and why they have become increasingly assertive and averse to social policies since the 1970s.

Reviewed by Mark J Crowley

Summary

This paper was circulated by NEP-HIS on 2015-04-19.  It is a meticulously review of a topic that is now becoming a subject of major debate in the developed world’s political culture.  At a time of austerity and belt-tightening in much of the western world in response to the economic crises of recent times, the welfare state has been targeted as an area where potential savings could be made, prompting arguments that the construct itself has become the scapegoat of austerity. Much of the attention in the recent literature on the welfare state has examined the political and social considerations behind the formation of a welfare system and its reform.  This paper hones in on an aspect that has received less attention: the role of business in the formation of welfare state policy.  Although there is still significant literature on this topic, the paper manages to draw the current research together into a coherent whole to present numerous interesting theories about the development and role of big business in public policy formulation that will be of interest to historians.

Paster embeds his argument in the Marxist critiques of the 1970s that claimed much of the decisions concerning the level of influence exercised by business in state affairs depended on their relative power and individual preferences.  He cites the fact that the state’s dependence on private business for capital does give the latter, by default, a greater level of influence over public policy.  Furthermore, with the development of Marxist theory in the 1980s with the rise of Conservative policies, especially Thatcherism in the UK and Reagan’s economics in the USA, the ‘varieties of capitalism’ approach has led scholars to examine the development and evolution of the welfare state from a different perspective.  Many have now seen a link between the influence of business preferences and the level of support offered to policy options concerning welfare reform.  Moreover, the growth of interest groups in response to the increased size of the state has seen more actors playing a part in the negotiations of public policy, particularly state welfare.

Paster outlines how much of the literature has focused on the nature of power dynamics within the business community, and its relative influence over public policy.  In many nations, leaders of corporations form a major part of the power elite. It could be argued that this was why, in many developed nations there was significant opposition to the legislation proposed for a national minimum wage for low paid workers, primarily owing to the increased costs that this would bring.  This could also have influenced the greater outsourcing of work, primarily service-based industries and call-centre work to nations such as India.  Furthermore, he outlines how there is evidence that during times of economic difficulty, both the public and business are reluctant to see greater state intervention, and that a more cautious approach does led to a relative neglect in the nature of welfare provision for the most vulnerable in society.

One of the most interesting arguments articulated by Pester in this paper is how big businesses prefer to increase the level of skills among its workforce as a means of protecting against future unemployment.  The argument focuses on how business leaders believe that highly-trained workers, in the event of finding themselves unemployed, would then be easily able to find alternative employment owing to their skills, thus reducing dependency on the state.  This has become more important with globalisation and the internationalisation of the economy.  Yet despite the growing importance of international trade, and the growing economic relationship with not only European countries but developing nations, this has also brought pressure on the development of coherent policies to assist workers.  While the idea of policy transfer could be regarded as positive, with nations comparing its social policy and potentially embracing new ideas in the aim of improving life for its lower paid citizens, international trade has also brought about increased regulation, thus increasing the influence of both businesses and the state over the development of public policy.  This, therefore, is a double-edged sword which carries numerous positive elements but also several complicating factors.

Critique  

This paper is very strong.  It shows a deep understanding of many of the issues concerning public policy development in many European countries, and the USA in the twentieth century.  In focusing on the role of big business in policy considerations, it approaches the issue of welfare reform and development from an interesting angle.

My observation on this paper would be that perhaps in trying to compare so many nations in one short article, perhaps the author is seeking to do too much.  In much of the comparative literature on the welfare state (albeit not from a business perspective) authors seek to compare two nations.  This paper has a much wider remit.  Furthermore, although the primary focus of this paper is on the role of business in the discussions concerning welfare state policy, I do feel that maybe it could benefit from some additional information, maybe only a paragraph or two, to help set the context.  The political culture concerning state welfare is different in each of the countries examined in the research.  The motivations and the political responses to the original formation of the welfare state were different among the respective politicians.  For example, it could be argued that in Britain, the earliest advocate of the welfare state in the government, Prime Minister Benjamin Disraeli, did so because of his fear that if there was no provision for the working-class, it could result in a revolution.  For the USA, the growth in welfare programmes came much later with the development of Roosevelt’s new deal.  Furthermore, the development of such policies in a very politically-conservative nation was ravaged with difficulties.  For the British case in particular, I would encourage the author to consult the numerous works of Pat Thane on the topic, which place the formation of the welfare state into the wider political and international context.  While this is only a minor criticism of an extremely well-researched paper, placing this paper in the wider political context would help strengthen the argument and highlight even more the significance and value of this research to the wider academic community.

References

Baldwin, Peter, The Politics of Social Solidarity: Class Bases and the European Welfare State 1875-1975 (Cambridge: Cambridge University Press, 1990).

Thane, Pat (ed.) The Origins of British Social Policy (London: Croom Helm ; Totowa, N.J.: Rowman & Littlefield, 1978).

Thane, Pat, The Foundations of the Welfare State, (Harlow: Longman, 1982).