Last post speculated that capital was much more scarce (relative to labor) in medieval/renaissance China than Europe. We introduced the hypothesis that this was a major cause (though not a root cause) of the failure of China to automate and, by extension, the failure of China to kick-start the industrial revolution. More importantly, we introduced some simple first-pass ways to test this hypothesis: go look at market prices of labor and capital in medieval/renaissance China and Europe.
We did not go into depth actually testing that hypothesis, nor will we. Instead, we're going to go up a meta-level, and generalize this whole technique. We have a very general hypothesis about the large-scale historical evolution of China compared to Europe. It’s part of a whole worldview, in which the central gear - the central mediating factor - is the scarcity of capital relative to labor. What’s the process which generates this sort of hypothesis? Can we generalize it, to generate other broad worldviews?
Here's the idea, in 4.5 steps.
Step 1: Pick a General Resource/Constraint
Pick some very general resource, which serves as an input to production in a wide variety of areas. Our China/Europe example mainly considers capital as the resource (though we also use labor as a baseline for comparison in this case). Other important examples in economic history include transportation, energy, and fertile land. More modern and abstract examples might include research/innovation, communication/coordination, signals of status/virtue/intelligence, or material goods as a whole.
Step 2: Qualitative Analysis
Reason qualitatively about what would happen as the constraint becomes more taut/slack. What technologies (machines, contracts, organizational structures, etc) would be adopted? What would happen to market prices? What other constraints would become more/less slack as a result?
For instance, as capital constraints become more taut, we expect to see more people performing tasks which could be performed by machines (i.e. not adopting capital-intensive technology), and we expect returns on capital investments to be higher (i.e. higher market price of capital). When capital constraints become more slack, we expect the opposite.
Step 3: Compare to the Real World
Compare real-world observations (market prices, technology actually used) to our predictions to figure out (qualitatively) how taut/slack the constraint actually is, across many different industries.
In the China/Europe example, we can do this by looking at adoption of capital-intensive technologies (i.e. textile machinery, water mills, automation in general) or by looking at market prices of capital (i.e. rate of return on investments).
Step 3.5: Sanity Check
If our hypothesized constraint is actually the right gear for this model, then we should see similar tautness/slackness in different industries - e.g. we shouldn’t see a relevant technology adopted in one industry but not another, or different industries paying radically different market prices to relax the constraint.
In the China/Europe example, we should check that there actually is a broad pattern of China using labor on tasks where Europe used machines. This doesn’t mean China didn’t use any machines - our comparisons are relative, we’re thinking about more/less at the margin - but we should at least see the difference across many different industries. Similarly, we should check that capital investments had higher economic returns in China across whatever industries the Chinese invested in (though it may be that investors had a tough time capturing those returns… another potential gear in our model).
This should give us some idea of how generally-relevant our constraint is, in practice.
Step 4: Generalize
What other qualitative predictions can we make, beyond what we’ve already observed?
If we’re thinking about new technologies or new business ideas, to what extent do we expect them to be enabled/blocked by slackness/tautness of the constraint? What other constraints do we expect to become more taut/slack in response to this one? Is the constraint becoming more taut/slack over time? If so, what changes do we expect that trend to induce?
If you want a quick exercise in this, consider computational capacity as the constraint. You’ve probably already heard plenty about how the tautness of that constraint has changed over time, what new technologies have been adopted as a result, and what other constraints have become taut/slack as a result. Can you translate that information into the language of constraints/slackness/prices? Does the constraints/slackness/prices framework suggest other questions to ask, or new predictions to make?
We've already talked a bit about two resources to which this framework applies: labor and capital. One can build a whole worldview this way, and much of macroeconomics does exactly that - see MRU’s videos on the Solow model for a friendly starting point to the macro models.
There are many other very generic inputs we could think about. The next two posts discuss two other general constraints:
Some other examples which I might explore in future posts:
How taut/slack are communication/translation constraints, in general?
Also, there might be another post going into more depth on capital, especially on the main places where capital is deployed today.
Looks like your main point is that an invention that removes a bottleneck ("relaxes a taut constraint") is the one likely to succeed, is that right? Would it mean that in your China example someone inventing, say, banking or lending would make a killing? If so, is that what happened?
Great question! The short answer, in the context of the China example, is that the capital bottleneck is the first gear in the model. Whether banking/lending would relax the constraint depends on the next gear up the chain - i.e. it depends why capital was scarce in the first place.
Here are a few possibilities:
Introducing banking/lending would potentially solve the last one, but not the first two. In the constraint language, banking technology introduces new constraints: it requires contract enforcement, and it requires people with excess resources to invest (among other things). Those new constraints need to be less taut than the old capital constraint in order for the technology to be adopted.
In the case of China, banking/lending technology was almost certainly available - it simply wasn't used to the same extent as in Europe. I have heard both the malthusian trap and the institutions explanations given as possible reasons, but I haven't personally studied it enough to know what was most relevant.
I hypothesise that cultural stigma is also an important factor. The traditional hierarchy in Chinese society was the Intelligensia at the top, followed by farmers, craftsmen and finally merchants at the bottom rung. Bankers would likely be lumped with the merchants, and the lack of social status might have served to discourage innovation in that field.
I think this is very much true. Only if you are both aiming for the same things (eg. economy growth) will different constraints be the primary drivers of different choices.
But I think that the two samples were, in some aggregate sense, not aiming for similar objectives. In Medieval Europe, presumably, people believed that increasing prosperity and economic growth were good things.
This is not a universal standard. According to Karl Popper's "Open Society and its Enemies", the ancient Spartan government placed as the greatest objective : stability. All forms of change were seen as dangerous, including economic growth and population growth. Government policy was introduced with the aim to prevent both of them. At one point in Chinese history the government was so concerned that foreign trade was destabilising the country that all of the ships over a certain size were burned, and all the shipwrights had their tongues cut out to stop them teaching people how to build new big ships. They then (I think a bit later) doubled down and made it illegal to live within a few miles of the coast, to ensure you were not tempted to trade with foreigners and thereby risk new ideas entering and destabilising the realm.
I think the article has a good point but only when objectives do in fact align. The extreme conservatism described in the examples above would, I think, have stopped the Industrial revolution, regardless of capital/labour balances.