ECON: The Beneficial Industrial Revolution

A good race between technology and labor

You turn on your TV. In the economic bulletin time, you see the pessimist GDP forecast for next year, or the high monthly inflation rate, or the trend of increasing interest rates from Central Banks worldwide, or the global semiconductor crisis, or the falling cryptocurrencies prices. Then, you start pondering that economists only concern about the macro aspects (if you read the article “What is Economics?”, in which I explain the economic branches). However, this economical media approach is completely different from the academic world.

You may have seen the Nobel Prize that occurred last week. In the economics nomination (strictly, the Nobel Prize for Economics is not a typical Nobel: a topic for the next article), David Card, and Guido Imbens jointly with Joshua Angrist won. These three economists have been revolutionizing the way economics experiments occur. Due to the advance in data analysis, they have been studying microeconomic events such as immigration, minimum wage, and schools through natural experiments. But this tendency is not restricted to them. The majority of current papers have been exploring a more micro perspective, especially labor economics. And so, we arrive at today's topic.

Since the Industrial Revolution, economists have been analyzing the effect of technological advances on workers' wages. The mainstream literature shows us that the fabric system enhanced productivity, overall. With more production, more capital. An apparently simple correlation that changed the whole economic system. Thus, the companies (or capitalists if you are using a Marxist theory) are willing to pay more.

Okay, I agree that I need to base my assertion on data. So, the legendary economist Angus Maddison made a few statistic predictions and reached one of the greatest discoveries in economics (although controversial to heterodox economists, just a small group of individuals who do not believe in mathematics). Maddison concluded that the global GDP rose 135 times from the hypothetical beginning of the Industrial Revolution, 1720, to 2020, while the population grew 9.2 times. Clear evidence of the productivity boom. But, there are more. During this period, the GDP per capita (grossly, how this economic pie is divided) grew 15 times. Another evidence that the wages increased since the Industrial Revolution. Our qualitative thinking is correct.

The graph above display the World Gross Domestic Product during all Common Era period. The incredible GDP rise is because of the Industrial Revolution.

As usual, shall we plot a graph from a demand-supply model?

In the labor market graph, the demand measures how much the companies want to hire, and the supply expresses how much people are willing to work at a certain wage. If you desire to remind what is demand, I suggest that you look at the “Law of Demand” article. The y-axis is the wage instead of price, and x-axis is the quantity of labor instead of quantity demanded.

The graphic plotted expresses the demand shift during the Industrial Revolution. As stated before, with the boost of productivity, firms can afford higher payrolls; hence, the demand for hiring from companies increases. Considering the supply from workers is constant, the wages naturally increase: the natural equilibrium point W0 moves to a new equilibrium in W1. Not only the salary raise, but also the quantity of labor. The technology expanded the production–possibility frontier without precedents, as numerous fields in agriculture, industry, and service have been developed.

After all, the workers benefited the most from the race between technology and labor. The industrial revolution increased wages and the scope of jobs, although several heterodox economists disregard the evidence and persist in the wrong idea.

Thank you for reading this article so far! Feel free to contact me either in the section 'Contact us' or on Instagram (@meep.blog) if you have any doubts. Do not forget to subscribe to our blog. “See you”!

Luigi