A silver and grain wages



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A. SILVER AND GRAIN WAGES

  • A. SILVER AND GRAIN WAGES

  • 1. The Great Divergence Debate

  • 2. Wages and Prices in Europe

  • 3. Wages and prices in Asia

  • 4. Explaining Europe-Asia Wage-Price Differences



1. WHEN DID THE GREAT DIVERGENCE BEGIN?

  • 1. WHEN DID THE GREAT DIVERGENCE BEGIN?

  • Recent emergence of group of revisionist “world historians”, many based in California, who claim “Great Divergence” between Europe & Asia occurred only after 1800



Although Industrial Revolution saw shift to continuous steady state growth of per capita income circa 1800, Early Modern period 1500-1800 saw levels effect from capital deepening

  • Although Industrial Revolution saw shift to continuous steady state growth of per capita income circa 1800, Early Modern period 1500-1800 saw levels effect from capital deepening

  • Huge literature examined institutional developments underpinning this: rise of market economy with incentive structures for accumulation and innovation

  • Policy implications: development is difficult since institutional frameworks hard to change



Conventional view is Euro-centric

  • Conventional view is Euro-centric

  • Deny any divergence between Europe & Asia before 1800

  • Explanations of post-1800 development:

  • Pomeranz: coal deposits & colonies

  • Parthasarathi, Frank: exploitation of colonies



Broadberry/Gupta:

  • Broadberry/Gupta:

  • Great Divergence began during Early Modern period

  • Advanced parts of Asia on same development level as European periphery by 1800



Silver wage: daily money wage in terms of silver content.

  • Silver wage: daily money wage in terms of silver content.

  • Silver is world currency. Debasement possible by reducing silver content, but all prices here corrected for this.

  • Grain wage: amount of grain that daily silver wage can purchase



Although grain wage in most advanced parts of Asia close to NW European level until 1700, silver wage much lower (as in European periphery)

  • Although grain wage in most advanced parts of Asia close to NW European level until 1700, silver wage much lower (as in European periphery)

  • High silver wages in NW Europe not simply monetary phenomenon (inflow of bullion from New World), but result of high productivity in traded goods sector (services & industry)



Early existence of key features of relationship between developed country and LDC:

  • Early existence of key features of relationship between developed country and LDC:

    • Wages in LDC meet food needs of population at LDC food prices, but not at developed country prices
    • Manufactures produced in LDC relatively expensive at LDC prices but competitive on world market because of low wages in developed country prices


2A. SILVER WAGES AND GRAIN WAGES

  • 2A. SILVER WAGES AND GRAIN WAGES

  • TABLE 1: Daily wages of unskilled and skilled building workers in terms of silver content: silver wage

    • Substantial silver wage growth in NW Europe, with GB overtaking Netherlands during C18th.
    • Considerable fluctuations, less trend growth in S. Europe, starting from same level as NW Europe in 1500
    • Fluctuations & only weak trend growth in central & E. Europe, starting from lower level in 1500
    • Regional variation similar for unskilled & skilled workers; skill premium 50% in NW, 100% in south, central & E. Europe




Silver wage shows conventional pattern: NW Europe pulls ahead of previously more developed South, with central & E. Europe continuing to lag behind

  • Silver wage shows conventional pattern: NW Europe pulls ahead of previously more developed South, with central & E. Europe continuing to lag behind

  • Strong positive correlation with urbanisation ratios



TABLE 2: Grain wage = volume of wheat or rye that daily silver wage buys. Regional pattern of grain wage is mirror image of silver wage:

  • TABLE 2: Grain wage = volume of wheat or rye that daily silver wage buys. Regional pattern of grain wage is mirror image of silver wage:

    • Negative trend in all regions
    • Highest level of grain wage in central & E. Europe




High silver wages in NW Europe did not lead to high grain wages before C19th

  • High silver wages in NW Europe did not lead to high grain wages before C19th

  • Real consumption wages may still have risen through increased consumption of non-agric goods & services.

  • TABLE 3: Real consumption wage of unskilled building labourers, based on basket of commodities, with London 1500-49 = 100 (Allen)





TABLE 3 removes some perplexing aspects of grain wage data in TABLE 2:

  • TABLE 3 removes some perplexing aspects of grain wage data in TABLE 2:

    • Real consumption wage data show opening gap between NW & rest of Europe, as with silver wage data
    • High grain wages of central & E. Europe don’t translate into high real consumption wages since urban wage earners bought bread not grain & other non-grain items were expensive


But real consumption wage data still show declining living standards in Europe, 1500-1800. Divergence due to constant real wage in NW & collapse in periphery.

  • But real consumption wage data still show declining living standards in Europe, 1500-1800. Divergence due to constant real wage in NW & collapse in periphery.

  • TABLE 3 based on assumption of constant annual number of days worked. But what about “Industrious Revolution”?



Allowing for Industrious Revolution is one way of producing modest upward trend of real wages in NW Europe (< 0.2% p.a.)

  • Allowing for Industrious Revolution is one way of producing modest upward trend of real wages in NW Europe (< 0.2% p.a.)

  • Structural change would be another way, with shift to higher paying jobs in cities



Already noted correlation between silver wages and urban development. TABLE 4:

  • Already noted correlation between silver wages and urban development. TABLE 4:

  • MIDDLE AGES:

    • 2 main urban centres in late medieval period, in Low Countries and N. Italy
  • Urban development lagged in central & E. Europe





EARLY MODERN PERIOD

  • EARLY MODERN PERIOD

    • Urbanisation stalled in N.Italy after 1500
    • Brief surge in Portugal and Spain following voyages of discovery
    • But most dramatic growth in early modern period in NL and GB
  • Urban development continued to lag in central & E. Europe



Were advanced parts of Asia more like NW Europe (as claimed by Pomeranz & Parthasarathi), with high silver wages but modest grain wages?

  • Were advanced parts of Asia more like NW Europe (as claimed by Pomeranz & Parthasarathi), with high silver wages but modest grain wages?

  • Or were they more like peripheral Europe, with low silver wages as well as modest grain wages?



3A. SILVER WAGES AND GRAIN WAGES IN INDIA

  • 3A. SILVER WAGES AND GRAIN WAGES IN INDIA

  • TABLE 5: daily wages of unskilled & skilled workers in terms of silver content & amount of grain they could buy.





Broad trend for silver wage to rise, with skilled wage double unskilled wage.

  • Broad trend for silver wage to rise, with skilled wage double unskilled wage.

  • Silver wages failed to increase as much as grain prices, so grain wages trended downwards



Southern figures generally accord well with Northern data, but Parthasarathi’s figures for 1750 in parentheses. Difficult to square with other data

  • Southern figures generally accord well with Northern data, but Parthasarathi’s figures for 1750 in parentheses. Difficult to square with other data

  • Parthasarathi claims support from work of Brennig. But:

    • Parthasarathi finds high grain wage as result of high money wage and conventional grain price
    • Brennig finds high grain wage as result of conventional money wage but low grain price
  • Neither Parthasarathi’s high money wage nor Brennig’s low grain price fits into the wider picture of trends over time and across regions



TABLE 6: Direct Anglo-Indian comparison of silver wages & grain wages for unskilled workers

  • TABLE 6: Direct Anglo-Indian comparison of silver wages & grain wages for unskilled workers

  • SILVER WAGES:

  • Great Divergence already well established by C16th:

  • Indian silver wage little more than one-fifth English level in late C16th, falling to c. one-seventh of English level during C18th

  • Even if included Parthasarathi’s estimates, Indian silver wage still only 40% of English level





Indian grain wage remained close to English level until end of C17th

  • Indian grain wage remained close to English level until end of C17th

  • Sharp divergence in C18th , as result of rise in English grain wage as well as decline in Indian grain wage

  • India looks more like peripheral parts of Europe than developing NW Europe





Detailed data on grain prices available by region for Qing dynasty (1644-1911) as result of monthly reporting system

  • Detailed data on grain prices available by region for Qing dynasty (1644-1911) as result of monthly reporting system

  • No systematic money wage data, since money wages typically supplemented by substantial food allowances (even among urban building workers). Have to rely on scattered estimates for agricultural labourers

  • Focus on Yangzi delta region, claimed by Pomeranz to be on same development level as England in 1800



TABLE 7: Silver & grain wages in Yangzi delta:

  • TABLE 7: Silver & grain wages in Yangzi delta:

    • Small drop in silver wages between Late Ming & Mid Qing periods
    • Unskilled silver wage in China about same as in India, small fraction of silver wage in NW Europe
    • Price of rice increased between Late Ming & Mid Qing periods, so grain wage declined sharply
  • Grain wage in Yangzi delta similar to Indian grain wage





TABLE 8: Anglo-Chinese comparison, similar to Anglo-Indian comparison:

  • TABLE 8: Anglo-Chinese comparison, similar to Anglo-Indian comparison:

    • Silver wage already much lower in Yangzi delta than in England by Late Ming period.
    • Yangzi delta grain wage close to English level in Late Ming period, but had fallen decisively behind by Mid Qing period.




TABLE 9: Urbanisation ratio in China compared with Europe. Rozman’s data for all urban areas adjusted onto basis of cities of > 10,000 inhabitants, for comparison with Europe:

  • TABLE 9: Urbanisation ratio in China compared with Europe. Rozman’s data for all urban areas adjusted onto basis of cities of > 10,000 inhabitants, for comparison with Europe:

    • Urbanisation already higher in Europe than in China during Ming dynasty
    • Europe’s advantage had grown substantially by early C19th (esp in England & Wales).




TABLE 10: Regional breakdown of urbanisation ratios for China suggests much flatter development gradient than in Europe:

  • TABLE 10: Regional breakdown of urbanisation ratios for China suggests much flatter development gradient than in Europe:

    • Most developed part of China (Yangzi delta) is in Jiangsu, in east central China
    • Urbanisation ratio highest here, but scale of difference with poorer regions not large
  • Urbanisation data, like wage data, suggest Yangzi delta on same development level as peripheral parts of Europe, not the NW core.





4A. BULLION FLOWS AND PRICE INFLATION

  • 4A. BULLION FLOWS AND PRICE INFLATION

  • Although silver wages in India & China much lower than in NW Europe as far back as C16th, grain wages quite close until end of C17th. Could this just be a monetary phenomenon?

  • One possible explanation could be flow of precious metals from New World into Europe during C16th. Quantity Theory of Money would suggest higher prices & wages without any real effect on standard of living



There was price inflation in Europe during C16th, attributed by some writers to bullion flows (e.g. Hamilton; Braudel & Spooner)

  • There was price inflation in Europe during C16th, attributed by some writers to bullion flows (e.g. Hamilton; Braudel & Spooner)

  • But this does not work as explanation of much higher silver wages in Europe cf Asia. Bullion also flowed to Asia.

  • Higher silver wages result of real economic development. This clear when consider regional patterns within Europe, since although prices moved together closely, wages diverged



Bullion flows entered Europe through Spain, but prices moved closely together in all European countries (Abel)

  • Bullion flows entered Europe through Spain, but prices moved closely together in all European countries (Abel)

  • This consistent with classical price-specie-flow mechanism: initial increase in Spanish prices leads to reduction in exports & increase in imports, & hence to Spanish BOP deficit

  • Spanish BOP deficit  outflow of bullion from Spain  rising price level in bullion receiving countries

  • Problems with timing of bullion flows & inflation in particular countries  reformulation in terms of monetary approach to BOP

  • Law of one price: price of traded goods increases  increase in money demand



While prices rose along same trend in all European countries, Spain lost its position as high silver wage country, while England saw biggest long run gains

  • While prices rose along same trend in all European countries, Spain lost its position as high silver wage country, while England saw biggest long run gains

  • Suggests shift of silver wage leadership from S. Europe to NW Europe reflected real economic forces rather than monetary forces

  • India & China look more like stagnating parts of European periphery than NW core



Development economists see rel between PPP-converted & ER-converted levels of p.c. income as conditioned upon real factors affecting structure of economy (e.g. Kravis; Bhagwati)

  • Development economists see rel between PPP-converted & ER-converted levels of p.c. income as conditioned upon real factors affecting structure of economy (e.g. Kravis; Bhagwati)

  • We see relatopnship between grain wages & silver wages on comparative basis as related to these same structural characteristics

  • Key results can be shown in 2-country, 2-commodity Ricardian model, with constant returns to single factor of production, labour



Applying model to early modern international economy:

  • Applying model to early modern international economy:

  • Treat grain as non-tradable commodity & cloth as tradable commodity.

  • Grain bulky & costly to transport so price not equalised between Europe & Asia

  • Cloth widely traded between Europe & Asia

  • 2 countries, Asia and Europe (i = A, E)



One international price for tradable good measured in common unit of account, silver.

  • One international price for tradable good measured in common unit of account, silver.

  • piT = pT

  • With single factor, labour, silver wage equal to revenue productivity of labour:

  • wi = pT αiT (1)

  • Hence country with higher productivity in tradable sector has higher silver wage

  • Wages equalised across sectors within each country, so this is also silver wage in grain sector.



Price of non-tradable commodity equal to silver wage divided by productivity in non-tradable sector:

  • Price of non-tradable commodity equal to silver wage divided by productivity in non-tradable sector:

  • piN = wi / αiN (2)

  • Substituting for wages from (1):

  • piN = αiT pT / αiN (3)

  • Price of non-tradable commodity reduced by high productivity in non-tradable sector as well as increased by high productivity in tradable sector



Grain wage is silver wage divided by price of non-tradable commodity. Rearranging (2):

  • Grain wage is silver wage divided by price of non-tradable commodity. Rearranging (2):

  • wi / piN = αiN (4)

  • Grain wages affected only by productivity in non-tradable sector, not by productivity in tradable sector



Consumption price given by weighted geometric average of prices of tradable & non-tradable goods. Real consumption wage given by:

  • Consumption price given by weighted geometric average of prices of tradable & non-tradable goods. Real consumption wage given by:

  • wi / pi = (αiT)β(αiN)1-β (4)

  • If grain wage equal in England & India but silver wage higher in England, real consumption wage lower in India by factor depending on weight .

  • Low silver wages in Asia reflected low productivity in cloth sector. Asian countries produced cheaper grain as result of lower silver wages, so grain wages almost as high as in NW Europe



Prosperous parts of Asia 1500-1800 look similar to stagnating parts of European periphery rather than developing NW core

  • Prosperous parts of Asia 1500-1800 look similar to stagnating parts of European periphery rather than developing NW core

  • Although Indian & Chinese grain wages comparable to NW Europe, silver wages substantially lower. This is exactly pattern observed in less developed parts of Europe

  • Great Divergence well underway before 1800.

  • Need to understand higher productivity in European traded goods sector at this time as reflecting developments in distribution as much as production (e.g. EIC and VOC)



B. WELFARE RATIOS

  • B. WELFARE RATIOS

  • 1. The respectability basket

  • 2. The subsistence basket

  • 3. Welfare ratios in Europe and Asia

  • 4. Welfare ratios within Asia



Allen (2001) introduced a novel way of comparing wages across countries , which has caught on

  • Allen (2001) introduced a novel way of comparing wages across countries , which has caught on

  • He asked if money wages were sufficient to buy the goods needed to sustain life for a family

  • Allen did this by first working out the cost of a basket of goods, with expenditure weights derived from the budget studies of Sir Frederick Eden and other social investigators from the late C18th and early C19th



The welfare ratio is the number of such baskets that can be purchased with a worker’s daily wage

  • The welfare ratio is the number of such baskets that can be purchased with a worker’s daily wage

  • The basic idea is that if this ratio is above one, then a society is living above subsistence and is able to reproduce, and as the ratio increases further, to thrive

  • Allen et al (2011) compare Europe and Asia using this welfare ratio methodology, and find, like Broadberry and Gupta, that from the C18th, the richest parts of Asia were on a par with the periphery of Europe, rather than the core



In the first basket of goods that Allen (2000) worked with, a working adult was assumed to require 2,500 calories per day, with bread supplying over 1,500 calories

  • In the first basket of goods that Allen (2000) worked with, a working adult was assumed to require 2,500 calories per day, with bread supplying over 1,500 calories

  • A substantial share of calories was obtained from products that the respectable worker would want to consume: meat, dairy produce and beer

  • The protein intake was also considered in arriving at this basket

  • In slightly modified form, this has come to be known as the “respectability basket”





Allen (2000) assumed that since women and children required less calories than a working male adult, a family of a father, mother and 3 children required 3 baskets, with an additional allowance of 5% for rent

  • Allen (2000) assumed that since women and children required less calories than a working male adult, a family of a father, mother and 3 children required 3 baskets, with an additional allowance of 5% for rent

  • He then calculated the welfare ratio as the silver wage divided by the silver cost of 3.15 respectability baskets

  • A problem which Allen encountered in his (2000) paper was that for much of the time in most European countries, welfare ratios for unskilled building labourers were below one





If welfare ratios were less than one for sustained periods of time, this implied that workers were not earning enough to work and reproduce

  • If welfare ratios were less than one for sustained periods of time, this implied that workers were not earning enough to work and reproduce

  • This was clearly an unsatisfactory conclusion to reach, since Europe managed over this period to make the transition to modern economic growth

  • Allen’s solution was to come up with the subsistence or “bare bones” basket





Workers with low wages did not consume large amounts of meat, dairy produce and beer

  • Workers with low wages did not consume large amounts of meat, dairy produce and beer

  • Furthermore, in Europe, they got most of their calories from cheap grains such as oats, rather than from expensive wheat bread

  • In Asia, poorer unskilled workers consumed sorghum rather than rice



Allen et al (2011) fist compare the welfare ratio of unskilled male labourers in Beijing with 4 European cities in the C18th and C19th (Figure 1, here)

  • Allen et al (2011) fist compare the welfare ratio of unskilled male labourers in Beijing with 4 European cities in the C18th and C19th (Figure 1, here)

  • During the C18th, Beijing’s welfare ratio trended downwards from a just under 2 to just above 1 by the beginning of the C19th, where it fluctuated until the 1870s

  • Living standards in C18th Beijing were roughly on a par with the peripheral parts of Europe, represented here by Milan and Leipzig





Welfare ratios in London and Amsterdam were already substantially ahead of the rest of Europe, with a value of 3 to 4 in the C18th

  • Welfare ratios in London and Amsterdam were already substantially ahead of the rest of Europe, with a value of 3 to 4 in the C18th

  • This does not mean that those workers ate 3 or 4 times as much oatmeal as they needed to survive

  • Rather they consumed higher quality foodstuffs (beef, beer and bread) and a wider range of non-food items

  • By this stage, even most unskilled workers in London and Amsterdam could afford the respectability lifestyle



It is also useful to compare welfare ratios within Asia (Figure 2)

  • It is also useful to compare welfare ratios within Asia (Figure 2)

  • The first point to note is that welfare ratios were no higher in the Suzhou than in Beijing. This is significant because Suzhou was in the Yangzi Delta

  • Canton in southern China also had welfare ratios fluctuating between about 1 and 2





Allen et al. also bring India into the analysis, finding that welfare ratios in Bengal were about the same as in other parts of Asia

  • Allen et al. also bring India into the analysis, finding that welfare ratios in Bengal were about the same as in other parts of Asia

  • Finally, Kyoto/Tokyo also fluctuates around the same level as the other Asian cities

  • These conclusions confirm the findings of Broadberry and Gupta (2006): NW Europe was already substantially ahead of the rest of Europe and Asia by the C18th



Contrary to the claims of the California School, the Great Divergence was therefore already underway well before 1800

  • Contrary to the claims of the California School, the Great Divergence was therefore already underway well before 1800

  • It is therefore necessary to reach back at least into the early modern period to understand the origins of the Great Divergence



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