17: Why Isn't the Whole World Developed?
In the preceding chapter, the case was made that the primary cause of differences in income across the world is the productivity of labor - given equal capital and the same technology, workers in wealthy countries produce an average of six times as much output per unit of input as do those in poorer countries. The benefits compound over time as the greater product of production furnishes more capital for production - hence the discrepancies that seemed fairly slight at the start of the industrial revolution have grown to massive gaps in the present day.
This chapter investigates some possible reasons for the differences in productivity. The primary argument is that differences in output stem from differences in the quality of labor, which in turn stem from the "social environment." Regarding the deeper issue of why these difference have such a profound influence on income per capita, a few hypotheses can be considered. And finally, the author considers what might be the ultimate source of these difference in labor.
Is Labor the Problem in Poor Countries?
While the output of labor in low-wage economies is poor, this does not necessarily mean the problem is attributable to the employees themselves, but it may be the manner in which they are employed and managed.
A number of British writers have argued that the ability to pay high wages was delivered mainly from the greater intensity of labor - i.e., the superior quality of the British workers - with a definite scent of bigotry and jingo. The British were better workers because they were better people, and the descriptions of Chinese, Indian, and African workers were "overtly racist."
Another theory was one of population. Some economists espoused the view that Asians simply weren't interested in labor-saving devices because labor in those nations was very cheap - there was no need to be efficient, and the availability of workers caused employers to be wasteful in their use of labor, and the workers themselves to be inefficient. However, this fails to explain why output per machine-hour, ignoring the number of workers, remains lower in poorer nations.
The notion of labor quality seemed to disappear from economics literature after the second world war, and the fashion turned from castigating workers to castigating management: the laborers were capable, but management failed to productively employ them, though the argument at that time included not only labor, but also capital and land. The point was that unskilled labor is presumed to be of the same quality everywhere, but organizational culture differed greatly among countries.
It's also possible, given the extremely low cost of labor, that managers are encouraged to substitute labor for capital, given that labor is cheaper than capital. Consider the case of weaving looms - when a thread breaks, a worker must immediately repair the problem, but if there is a problem with a second loom at the same time, it may weave bad cloth (wasting materials) until the worker finishes with the first one and can give it attention. In a market where labor is expensive and materials cheap, a worker may tend eight looms and the cost of wasted material would be minor. In a market where labor is cheap and materials are expensive, the cost of wasted material is significant and it makes more sense to hire more workers, even as many as one per loom, to prevent it.
So while the manager may be using the most efficient blend of labor and material costs, the net result will be a smaller amount of output per worker, even to the point of being a smaller amount of output overall, to best leverage economies of scale. That is, they produce at the point where the unit cost of production is the least, even if that is beneath the level of maximum production in aggregate or per worker.
(EN: This seems theoretically possible, but what's lacking is a model, based on historical data, that demonstrates how this is so in practice.)
It's fairly simple to test whether poor management is the cause of the issue - because managers, like machines, can be sent abroad to manage facilities in other nations. The author presents evidence that this was already being done. Britain sent "large numbers" of managers and skilled workmen to mills in Brazil, China, India, Mexico, and Russia, and in some mills all the key roles (manager, room boss, engineer) were staffed with foreigners. There is therefore no sign of any obvious managerial failings in the mills in poorer nations.
Why Is Labor Quality So Low in Poor Economies?
With the various other factors eliminated, we come back to the notion that the problem with labor in poorer countries comes back to the workers themselves. The workers in India "seemingly worked at low intensity and in a slapdash manner" such that employers would assign many workers per machine to achieve full output.
The Indian Factory Labor Commission report of 1909 provides a detailed account of working conditions in the mills: "A substantial fraction of workers were absent on any given day and those at work were often able to come and go from the mill at their pleasure ... leaving machines and other work unattended." A litany of specific details follows that seems a bit ludicrous (sleeping in the mill, bringing children into the mill, wandering off to have a meal or get a shave, etc.) but ultimately it suggests workers did not see work as being of any particular importance and gave it little attention. This considered, the reason factories hired far more people than they needed was in hope that enough of them would turn up on any given day - and of those who turned up, enough would do something vaguely productive.
The author details some of the attempts made by mills to get workers to attend regularly and be productive, but to little avail. Tokens or passes used as a means to get employees to ask permission before wandering off the job were ignored. Bonuses offered for good attendances provided no incentives. Threats to suspend of dismiss workers who were absent without permission had no effect.
An interesting experiment is mentioned in which an employer attempted to tie compensation to performance by paying based on output produced. The weavers ten subcontracted the work to less skilled workers to do, acting instead as labor contractors who collected a percentage.
Much of this bizarre behavior was actually quite normal by the standards of Indian culture - though totally incompatible with the industrial workplace.
Another case-study in Poland of 1820 is presented that expresses frustration with the quality of agriculture: careless harvesters left a lot of edible grain in the fields, poor threshers did lackadaisical work that extracted less grain in more time, the threshers also tossed away a lot of edible grain while producing imperfectly winnowed product (sacks of grain were full of straw, debris, and foreign material); and sacks of grain were not protected from the rain, such that some of it sprouted and had to be discarded. It's as poor an example of agricultural efficiency as was the Indian textile mill was to manufacturing.
This is also noted as one of the reasons preindustrial cultures have difficulty industrializing - there is a cultural tolerance for slapdash work - such that so long as the output is not so poor in terms of quantity and quality, there is no interest in doing better. Consider this in contrast to British manufacturing, where output quotas and quality standards are regarded as sacrosanct, not only by management but by the workers.
In such a situation, manufacturers may throw more workers into production, but high error rates prevent this from having a proportional effect on quantity or quality of output. Alternately, the job can be subdivided further, to make the work even easier and employ more people who have less responsibility - but it is not a matter of their ability to learn to do a job, but their capacity to care about doing it well.
Returning to Indian textiles, the solution to the problem is often to de-industrialize work. Some 200 years after the industrial revolution, the hand-loom sector in India is still large, particularly in cotton. These are cottage industries, handlooms in homes and small workshops. The author provides a table that shows how the handloom sector in India is still growing, even to this day: 763 bolts of cloth were produced by hand in 1900, increasing to 1420 in 1936, to 3109 in 1980, increasing to 7603 by the year 1998.
There is some contention that the survival of the handloom in India is due to government protection, as there are excise taxes on mill output but hand-woven cloth is exempt from taxes - but that doesn't add up. Given that a power loom produces 2.5 times the output of a handloom, and one operator can run eight looms at a time, this means that a single worker can produce twenty times as much cloth, which should more than compensate for the additional cost of taxes.
But in practice, power loom wavers in India supervise an average of 1.5 looms each, and the wages per worker consume a far higher percentage of the revenue of the cloth produced, such that power loom manufacturing does not have a significant profit advantage over hand loom production.
Why Divergence?
Given that the fundamental cause of income difference between economies is the quality of the labor force, and given that the difference in output between wealthy countries and poor ones is on the order of 6:1, why then is the difference in income today so much greater than in 1800? The author offers three reasons:
The first is industrialization itself. In the preindustrial world, all societies fell into the Malthusian trap. A highly productive society would experience high population growth, consuming the excess resources, which served to keep both population and productivity in check. After the revolution, economies were no longer constrained by this mechanism - production increases did not lead to population increase, which resulted in higher per-capita income, and where population growth existed it was not constrained or counteracted.
The second is that modern advances in nutrition and medicine has substantially reduced the subsistence wage - meaning that for nations that have not industrialized, populations can grow faster with less resources than previously necessary. Even in some of the poorest areas of the world where the current wage is below the preindustrial level, living standards are above the preindustrial level. This facilitates faster population growth without additional production.
The third reason, which is admittedly more tenuous, is that production techniques have enabled labor to create more value per worker. This is both in terms of the ability to leverage technology to produce more output (an individual worker with a powered loom produces far more than one with a manual loom) and in terms of error tolerance. For the latter, the author uses the example of agriculture in the preindustrial world, which was generally quite sloppy in terms of its use of land and capital (seed was strewn on land, little attention paid if too much or too little was produced, etc.)
Why the Differences in Labor Quality?
The author concedes that there is presently no satisfactory theory to explain the underlying causes of the differences in labor quality.
He also notes that economies seem to wax and wane in terms of "energetic" and "somnolent" phases, such as can be seen in the advancement or recession of the British and American economies. There are also periodic bursts of activity in which productivity increases result in dramatic economic of a given nation (consider Korea and Ireland in recent years) for a brief period of time.
(EN: An interesting case study the author does not explore is Japan, which was a third-world economy until the mid-twentieth century. Most sources consider it to have been a result of post-war reformation, but economic development began well before the war began.)
Ultimately, we can observe the effects of labor quality and examine case-studies that illustrate how quality of labor influences output of a nation or a specific facility, and attribute it vaguely to cultural values and work ethic, but an universal answer with satisfactory support for a causal relationship has yet to be uncovered.