Category Archives: Innovation

Cold, Calculating Political Economy’: Fixed costs, the Rate of Profit and the Length of the Working Day in the Factory Act Debates, 1832-1847

By Steve Toms (Leeds University Business School)

URL: http://econpapers.repec.org/paper/pramprapa/54408.htm

The paper re-analyses the evidence presented by pro and anti-regulation interests during the debates on factory reform. To do so it considers the interrelationship between fixed costs, the rate of profit and the length of the working day. The interrelationship casts new light on the lobbying positions on either side of the debate. It does so by comparing the evidence presented in the debates before parliament and associated pamphlets with actual figures contained in the business records of implicated firms. As a result the paper identifies the compromise position of the working day length compatible with reasonable rates of profit based on actual cost structures. It is thereby able to reinterpret the validity of the claims of contemporary political economy used to support the cases for and against factory regulation.

Reviewed by Mark J Crowley

This paper was circulated by NEP-HIS on 2014-03-22 and its a follow up to that reviewed by Masayoshi Noguchi in an earlier post on the NEP-HIS blog (click here)

This second paper by Toms draws on a range of archival materials from both government and businesses to explore in detail the implications of legislative changes on British business during the industrial revolution.  It shows how the debates concerning the implementation of stricter working hours were contentious. Outlining the difficulties faced by the government and businesses to uniformly apply these new measures, particularly since businesses were exposed to different pressures according to their contribution to society, it shows how these factors further influencing the implementation and drafting of these measures.   By citing the debates of the anti-regulation bodies in Parliament, and also Parliamentary debates, it exemplifies how the interpretations of profit influenced the debates tabled by the Ten Hours movement – the pressure group created with a view to enshrine, in legislation, a maximum 10 hour working day.   This perspective in itself is new, particularly since it moves away from the traditional approaches adopted by trade union historians such as Alistair Reid and others who have examined the influence of unions in these disputes, but have examined them from the perspective of strikes (Reid, 2005).

 

Summary

Adopting a theoretical approach, especially in its examination of different interpretations of profit in the nineteenth century, this paper scrutinizes the range of factors that determined wages in nineteenth century factories, concluding that the reasons were much more complex than originally assumed.  In claiming that accounting manipulators were used as a major force in setting these wages, Toms shows how the considerations governing the decisions about wages were based on a range of accounting methods, although these methods at this time were not well-developed.  Furthermore, he claims convincingly that accountancy was poorly practiced in the nineteenth century, primarily owing to the apparent paucity of regulations governing the profession.   In adopting this approach, Toms highlights the two sides of the debate suggested by historians so far concerning the role of accountancy, that being: that it did not have an important role at all; or that it played a role that was sufficient to encourage competition.  By doing so, he has lucidly integrated the laissez faire ideology to elucidate the role of accountants in the policymaking process.

Working conditions at factories were often difficult and dangerous, the implications of which are discussed in detail in this paper

Working conditions at factories were often difficult and dangerous, the implications of which are discussed in detail in this paper

Pressures on workers and the arduous hours did result in greater pressure on government to develop measures to regulate working hours

Much of the debates concerning workplace rights have adopted either a policy history perspective (examining the efforts of the government to regulate the economy) or a social history perspective (examining the perceived improvement in rights for workers).  Yet a detailed analysis of the implications of company accounting on government policy decisions has not yet been undertaken.  While economic historians such as Nicholas Crafts have used econometrics as a method to try and explain the causes of the industrial revolution, (Crafts, 2012) little attention has been given to the implications of these changes in terms of workplace legislation on not only the workers themselves, but on the calculations affecting industrial output and their response to government intervention.  Through examining the role of prominent socialists such as Robert Owen, this paper highlights the complex nature of the debates concerning profits, loss and its correlation with productivity to show that while the pro-regulation movement sought to protect the rights of individual workers, the anti-regulation movement created an inextricable link between the reduction of profit and the justification for longer working days. Locating this argument within the debate concerning fixed costs, it demonstrates how the definitions and arbiters of profits, loss and value was a moveable feast.

Robert Owen's ideas to reform the system and ensure greater equality were especially influential

Robert Owen’s ideas to reform the system and ensure greater equality were especially influential

This approach to the data has led to a different account of the costs faced by businesses than has hitherto been suggested by historians, and while Toms is careful to claim that this does not resolve the conceptual disputes surrounding the practice of accounting in the nineteenth century, it does provide a platform for further debate and a re-examination of the figures.  For example, in the analysis of the Ashworth accounts, Toms claims that the adoption of a variable approach to costing of volume-based products shows an annual running cost of £2500 per year, £3800 less than Boyson concluded in his 1970 study.  In his analysis of profit, Toms concludes that there could be a 3 hour variable that would not have detrimentally affected the profitability of companies.  Claiming that profitability would be at last 10 percent with 58 hour or 55 hour working week, this challenges previous assumptions those longer working hours would yield greater profits.  However, he highlights that the only significant difference would be that if these figures were compared to the onerous 69 hour week, where the profit margins could be expected to rise by a further 5 percent, although the pro-regulation body, for the purposes of strengthening their argument, presented this variable as high as 15 percent.

The final part of the paper lucidly examines the impact of foreign competition.  Citing the increased costs of British production when compared with European counterparts, with Manchester reported to be 50 percent higher in terms of spinning production costs than Switzerland, Toms shows how superficially the justification for maintaining the British market was now becoming even more difficult.  However, a deeper analysis of the figures reveals a different story, and to illustrate the point, evidence from Mulhausen is juxtaposed with Lancashire to show how wages were on average 18 d per day higher in Lancashire, although their productivity was almost double that of their German counterpart, and concludes that in effect, the overseas threat to the British market was as substantial as originally assumed.

Critique

This paper is extremely ambitious in its scope and development, and has covered significant ground in its analysis.  Its conclusions are convincing and are based on deep theoretical and conceptual understandings of the accountancy process.  My only suggestion is that the final section of the paper examining the ideological theories of profit could be fleshed out more so as to fully contextualise the political, legislative and business developments at this time.  It may also be possible to connect these issues with the contemporary debates concerning ‘thrift’, and the development of commercial banking.  For example, the idea of thrift was widely debated with the growth of friendly societies, and the decision of the government to open a Post Office Savings Bank to enable workers to deposit their savings.  Therefore, was there any connection between contemporary ideas of profit and thrift, and if so, was there a common ideological strand that linked people together in terms of their perceptions of money and its role in the wider society?

 

References

Crafts, NFR., “British Relative Economic Decline Revisited: the Role of Competition”, Explorations in Economic History (2012), 49, 17-29

Reid, Alastair J., United We Stand: A History of Britain’s Trade Unions (London: Penguin, 2005).

 

They must have done something different: currency controls, industrial policy and productivity in postwar Japan

Effects of Industrial Policy on Productivity: The case of import quota removal during postwar Japan

Kozo KIYOTA (Keio University and RIETI) and Tetsuji OKAZAKI (University of Tokyo and RIETI)

URL: http://www.rieti.go.jp/jp/publications/dp/13e093.pdf

Abstract This paper attempts to provide a systematic analysis on the effects of industrial policy in postwar Japan. Among the various types of Japanese industrial policy, this paper focuses on the removal of de facto import quotas through the foreign exchange allocation system. Analyzing a panel of 100 Japanese manufacturing industries in the 1960s, we find that the effects of the quota removal on productivity were limited—the effects were significantly positive, but time was required before they appeared. On the other hand, the effects of tariffs on labor productivity were negative although insignificant. One possible reason for this is that the Japanese government increased tariff rates before removing the import quotas and maintained high tariff rates afterward. As a result, the effects of the Japanese industrial policy in the 1960s might be smaller than widely believed in the Japanese economic history literature.

Reviewed by Sebastian Fleitas

“I haven’t got anything against open competition. If they can build a better car and sell it for less money, let ’em do it. But what burns me up is that I can’t go into Japan. We can’t build, we can’t sell, we can’t service, we can’t do a damn thing over there … I think this country ought to have the guts to stand up to unfair competition” Henry Ford II (1969)

People used to say that a miracle happened in Japan during the sixties. By 1960, the Gross Domestic Product per capita (GDPpc) of the US was 2.8 times that of Japan. In the same year, the GDP per capita of Chile was the same of the Japanese while Argentinian was 40% higher. One decade later the situation had dramatically changed. By 1970, US GDPpc was only 1.5 times greater than the Japanese. In addition, Japan GDP pc was 85% higher than the Chilean and 33% higher compared to the Argentinian. While comparison of GDPpc actually raise more questions than answers, the comparison with these Latin-American countries can be appealing because Japan and these countries had very aggressive currency controls and industrial policies during this period. The difference of results makes us think that Japan must have done something different, something better. To find these differences it is needed to evaluate separately the effects of each of the policies applied during those times, understanding the incentives that they provided to the firms. As Lars Peter Hansen – recent Nobel Prize in Economics- suggested, one key important thing in Economics is that we can do something without doing everything.

This paper, circulated in NEP-HIS 2013-11-09, focuses on the removal of de facto import quotas through the foreign exchange allocation system during the sixties in Japan. This system was used as a powerful tool for industrial policy in the 1950s, and hence their removal was supposed to have a substantial impact on industries. After direct control of international trade by the government ceased in 1949 as a part of the “Dodge Plan,” the Japanese government regulated trade indirectly through the allocation of foreign exchange. This implies that, given the prices, there was a de facto import quota for some goods, since the upper limit of the import quantity was determined by the foreign exchange budget. Under continuing pressure from the IMF, the Japanese government swiftly removed the de facto import quotas.  However, this process was different from what the literature in economics refers to as trade liberalization. The removal of import quotas did not necessarily constitute trade liberalization because tariff protection was substituted for import quotas. Therefore, to correctly quantify the effects of the quota removal, it is needed to control for the effects of the tariff protection.

In order to estimate the effect of quota removal, this paper utilizes detailed industry-level data from the Census of Manufactures (100 Japanese manufacturing industries in the 1960s) and data on trade protection. This enables them to control for industry (not firm) heterogeneity while covering the majority of manufacturing industries. Based on governmental information, the authors precisely identify the timing of the quota removal for each commodity, using original documents of the Ministry of International Trade and Industry (MITI). The authors estimate the parameters of interest (effect of the quota removal and the tariffs) using least square estimation including industry and time fixed effects. In this sense, the identification strategy of the effect of the quota removal is based on the variation in the timing of the quota removal across industries.

The authors find that the effects of the quota removal on productivity were limited. None of the industry performances are systematically related to the removal of the import quotas. Additionally, an increase in tariffs generally has significantly negative effects on the number of firms, output per establishment, and industry value added. The concern about reverse causality (higher tariffs were imposed on small industries in terms of the number of establishments and value added) is addressed using leads of the tariff and quota variables. The authors also check the effects on the growth rate of the result variables, finding that the quota removal had significantly positive effects, but time was required before they appeared. One explanation they provide for this is that the Japanese government increased tariff rates before removing the import quotas and maintained high tariff rates afterward.

I think that the main takeaway from the paper is that it suggests that the effects of the Japanese industrial policy in the 1960s might be smaller than widely believed in the Japanese economic history literature. However, I think the paper will benefit if the authors discuss more clearly some aspects. First, it is important to clarify what are the intended effects of the policy and what are the mechanisms for the effect of the quota removal on productivity. A clear discussion about mechanisms and intended effects could help the reader to understand the evaluation of the policy and what are the expected results. For example, is it a good or a bad result to see increases in productivity along with a decrease in the number of establishments? It seems natural to think that the government could impose de facto quotas to limit external competition and provide a handicap for the firms during the learning process. However, it is not clear what the intention of the government was when they removed the quota. Sometimes, the quota removal could be the result of the government thinking that some firms of the industries already have an appropriate level of productivity and that the less productive firms need to exit to allocate the resource to more productive production. But sometimes, the quota removal compensated with an increase in tariffs could be just a way to update the protectionism against the lobby of the new world financial institutions.

Second, I think the paper would benefit from a more detailed discussion about the identification strategy used and its suitability. A relevant challenge to the identification is the potential endogeneity of the timing of the quota removal. Since the Outline of the Plan for Trade and Foreign Exchange Liberalization was announced before the actual liberalization took place, the firms should have had incentives and time to adjust their behavior. Additionally, as mentioned above the criteria of the government could have been based on the observed trends of the industries. Suppose that the government decided to increase more the tariffs in those sectors that already have the lowest increases in productivity and that they suppose would be the most affected from the quota removal. Since the authors do not control for the pre-existing trends of the productivity of the industries, this issue can undermine the identification strategy, which is based on the idea that the timing of the quota removal varied exogenously across industries. Controlling for time trends per industry could help to capture these potential trends, and help to control for at least this potential source of endogeneity.

just an American cartoon. Jan 1969

Finally, a third issue is related to the identification of the coefficients for tariffs and quota removal. Even assuming that the timing of the quota removal was exogenous, an issue raises from the fact that while the tariff rate is a continuous variable the quota removal is a binary variable. However, this quota removal binary variable tries to represent a treatment effect that is potentially different by industry. In this sense, the dummy variable is only a proxy for the actual severity of the removed protection. At the same time, as it was discussed before, the loss of protection via quota removal could be correlated with the tariff increases since the authorities would have tried to compensate the affected industries. If this is the case, the tariff effect is not precisely identified since it can be capturing the unobserved heterogeneity on the severity of removed protection. In this sense, maybe the use of a continuous variable that represents the magnitude of the removed protection via the quota removal could help to better identify the effects of those variables separately.

To sum up, I think this and other papers from the same authors are making important contributions to better understand the effects of the industrial policy during postwar Japan. In this paper the authors point out that the effects of quota removal might be smaller than widely believed in the Japanese economic history literature. Even more, they point out that the effects of different policies generally overlap and that any assessment of these effects needs to take care of this fact. I cannot stress enough how important industrial policy was for postwar Japan, but if you still have doubts, you should have asked Henry Ford II.

Patents, Super Patents and Innovation at Regional Level

Related Variety, Unrelated Variety and Technological Breakthroughs: An analysis of U.S. state-level patenting

By Carolina Castaldi  (c.castaldi@tue.nl), School of Innovation Sciences, Eindhoven University of Technology

Koen Frenken, (k.frenken@tue.nl) School of Innovation Sciences, Eindhoven University of Technology

Bart Los, (b.los@rug.nl), Groningen Growth and Development Centre

URL: http://econpapers.repec.org/paper/eguwpaper/1302.htm

Abstract

We investigate how variety affects the innovation output of a region. Borrowing arguments from theories of recombinant innovation, we expect that related variety will enhance innovation as related technologies are more easily recombined into a new technology. However, we also expect that unrelated variety enhances technological breakthroughs, since radical innovation often stems from connecting previously unrelated technologies opening up whole new functionalities and applications. Using patent data for US states in the period 1977-1999 and associated citation data, we find evidence for both hypotheses. Our study thus sheds a new and critical light on the related-variety hypothesis in economic geography.

Review by Anna Missiaia

This paper by Carolina Castaldi, Koen Frenken and Bart Los was distributed by NEP-HIS on 30-03-2013. The paper is not, strictly speaking, an economic or business history paper. However, it provides some very interesting insights on how technological innovation and technological breakthroughs happen. This is a large and expanding field in economic history and on-going research on the economics of innovation, I believe, can be of interest to many of our readers.

Professor Butts and the Self-Operating Napkin: The “Self-Operating Napkin” is activated when the soup spoon (A) is raised to mouth, pulling string (B) and thereby jerking ladle (C) which throws cracker (D) past parrot (E). Parrot jumps after cracker and perch (F) tilts, upsetting seeds (G) into pail (H). Extra weight in pail pulls cord (I), which opens and lights automatic cigar lighter (J), setting off skyrocket (K) which causes sickle (L) to cut string (M) and allow pendulum with attached napkin to swing back and forth, thereby wiping chin. (Rube Goldberg, 1918).

The paper is concerned with the study of how innovation in a region is affected by the connections within its sectors in terms of shared technological competences. The term “variety” conveys this concept. The authors differentiate in two types of variety: related and unrelated variety. The former describes the connection among sectors that are complementary in terms on competences and can easily exchange technological knowledge. Unrelated variety, on the other hand, steams from sectors that do not appear to have complementary technology.

These two different types of variety are useful to distinguish for their effects on innovation. Related variety supports productivity and employment growth at regional level. However, unrelated variety is the one that causes technological breakthroughs, as it brings a completely new type of technology into a sector. In a subsequent stage, unrelated variety becomes related, being absorbed by the new sector.

The paper keeps these two types of variety separate and tests for their effects. The authors use patent data for US states in the period 1977-1999. The methodology implies regressing the number of patents as a proxy for innovation, on measures of related variety, unrelated variety, research and development investment, time trend and state fixed effects.  Variety is measured by looking at the dispersion of the classification of patents within and between technological classes of the patents. The paper also proposes two different regressions, one using the total number of patents as dependent variable and one using the share of superstar patents, which represent patents that lead to breakthrough technologies. Superstar patents are distinguished from “regular” patents according to the distribution of their citations: superstar patents have a fat tail, meaning that they are cited more in later stages of their development compared to regular patents.

A nice contribution of this paper is to measure super patents through their statistical distribution of their citations instead of relying on superimposed criteria such as being on the top 1% or 5% of the citations. The idea here is to distinguish between general innovation (regular patents) and breakthrough innovation (superstar patents). Theory predicts that regular patents will be positively affected by related variety, producing general innovation, while superstar patents will be positively correlated with unrelated variety, producing breakthrough innovation. The empirical analysis nicely confirms the theory.

Technological progress is said to resemble a flight of stairs

The possible shortcomings of the paper are related to the role of geography in the analysis. The sample is at US state level and the underlying implication is that variety in the state affects the number of patents registered in it. There could be, under this assumptions, some issues of spatial dependence. The authors touch upon this point in two parts of the paper: in the methodology section they explain that superstar patents tend to cluster in fewer states that general patents and this pattern requires a different approach for the two types of patents. It would be useful if this issue could be elaborated further by the authors in a future version of the paper.

As for the possible spatial dependence effect among explanatory variables, the authors try to control for the fact that R&D in one state could affect the patent output of neighboring states as well. They construct an adjacency matrix to capture the effect of the R&D effort of neighboring states.

The conclusion is that the analysis is robust to spatial dependence. In spite of this robustness check for spatial dependence, some concerns remain. Restricting the R&D effect only to neighboring states could be a limit, as the effect could not only go through physical proximity, but also through other types of connections: for example, the same firm could have different branches in different non-adjacent states, leading to an influence not captured by the adjacency matrix.

In short, this paper provides a very interesting insight on how two types of innovations can arise as measured by patent citations at regional level. The results are consistent with the theory and could be useful to future research in historical perspective. A further improvement of the paper could be to conduct more robustness check on the geographical aspects of these results, especially expanding them to non-adjacent states.

Images of the future technology – The Jetsons, 1962