The economics of doing the right thing

One of the greatest ever papers published in a history journal was written by Jan Vansina for the Journal of African History

Vansina makes the very simple argument that the abolition of slavery increased labour costs. These increased labour costs in turn made it more attractive to invest in mechanisation and industrialisation. And the increased investment in mechanisation and industrialisation created faster economic growth.

The countries who abolished slavery earliest, including the UK, had the fastest economic growth over the C19th. The countries who abolished slavery last, such as Portugal (and those whose economies were the most reliant on slavery), had the slowest economic growth.

I always thought Vansina’s argument was a bit limited – slavery wasn’t really a feature of the economy of the British Isles, it was mainly confined to the Colonies in the Americas, while the investment in mechanisation and industrialisation was in the domestic economy not in the colonies.

But despite these limitations I still love Vansina’s thesis – it is elegant and illuminating

And Vansina’s argument does work. It even works if you apply it more broadly across the Americas: The Northern States which didn’t have slavery were more industrialised and had faster growing economies than the Southern States (this is one of the reasons why they won the Civil War). The USA was less reliant on slavery and faster industrialisation and growth than the South American states who had a greater reliance on slavery and plantation agriculture in general.

The reason why I went back to Vansina is because of a fantastic row which is taking place in the Economic History Review about the extent to which high wages in C17th and C18th England drove increased mechanisation and industrialisation. The debate is largely around whether Britain had higher wage costs than competitors like France. This is the hottest debate I can ever recall in an academic field that is dominated by graphs and tables.

Instinctually I believe the high wage argument. In the centuries before industrialisation the rich and powerful had consolidated land ownership, building the familiar pattern of stately homes and large estates. This left a surplus rural population who were driven off the land, by force if necessary. In Scotland we call this Highland Clearances, in Ireland the Plantation System, and in England the Enclosure of the Common Land. These surplus populations were transported, willingly or unwillingly: The English as criminals to Australia, the Irish as bonded labourers to America, the Scots to Canada.

The combination of an artificially restricted Labour Market and the suppression of the Slave Trade following the Somerset Judgement pushed up wages, in particular for skilled workers in the emerging urban areas. (I’m going to do a short follow up piece on Somerset v Stewart 98 ER 499)

My family were some of the people who benefited from this. They were weavers and textiles workers in Prestwich, then a village on the outskirts of Manchester, and they became more prosperous, some ending up as landlords and mill owners.

I think that there is a bit more behind the industrialisation of the UK, in particular the availability of capital. British capitalists had access to more capital than their competitors because they systematically took the capital of other countries to invest at home, in particular India. We weren’t the only country to expropriate other countries wealth, but we used that wealth to industrialise the nation rather than make gold statues for the Pope.

But above all it was the mix of the 2: high labour costs and easy availability of capital which encouraged mass industrialisation, which came to define the UK in the C18th and C19th.

Why is this important?

Very quietly the Government has been meeting with the TUC on a plan to increase the National Minimum Wage to £9.61, the highest in the world, and a massive step towards tackling in-work poverty. They are in competition with the Labour Party whose last manifesto included an commitment to a £10 an hour NMW. This is over and above the Government’s commitment to a National Living Wage.

For those interested in policy detail the NLW is defined a 60% of median earnings, and the NWW rates both the Government and Opposition are suggesting would represent over 66% of median earnings, which would push the NMW just above the OECD definition of low pay.

The National Minimum Wage has been such a huge success, so much so that both political parties are fighting for their own version of a National Living Wage that would end low pay. I would rate the NMW as one of the greatest achievements of post war Socialism, and one of the most successful Government policies of my life time.

Despite this The Office of Budget Responsibility have estimated that even the Conservative Parties less ambitious target would cost 140,000 jobs.

This isn’t the first time that the OBR have forecast lob losses like this. The introduction of the more limited definition of the National Living Wage in 2015 was forecast to cost more the 40,000 jobs, and yet it is really hard to spot these job losses anywhere in the economy.

Measuring the rate of job losses due to increases in the NMW/NLW is tough for 2 reasons. Firstly because the unemployment statistics are pretty badly cooked these days, to disguise high levels of underemployment and poverty in the working population. Increasing the NMW to £10 an hour isn’t going to end in work poverty for people aren’t working enough hours to make a difference .

But secondly because employers have been shifting insecure low wages jobs to self-employed in order to avoid the NMW. Uber and Deliveroo have both recently lost court cases forcing them to recognise the employment rights of their workers, but bogus self employment is an increasing feature of the UK economy, albeit one slightly declining at the moment.

Despite my scepticism it is clear that something good is happening in the UK Labour Market, and employment is at high levels despite the Government fiddling the numbers. Treating workers well, giving them better pay and conditions encourages more people into the Labour force, which in turn gives more choice to employers. Businesses with a ready pool of motivated workers find it easier to expand and grow, and the economy grows with them.

Wage increases are still low, which has perturbed economists, and is linked to low levels of capital investment. If increased levels of wages lead to high levels of capital investment and higher economic growth then logically an economy like the UK with low wage growth should have low levels of capital investment and low growth. This would explain why low interest rates haven’t led to higher levels of investment or growth.

But there is one final factor in wage growth that struck me when looking at the proposed rises in the NMW/NWL. As the NMW gets higher it draws more and more workers in. And the workers who have a differential above the NMW are effected too.

A £9.60 NMW means that a quarter of the UK workforce will have their wages set by the Government. When you add to that more highly paid employees whose wages are set by the Government in the public sector we have reached a situation where HMG sets the wage rates for more than half of Britain’s workers, even allowing that some Public Sector workers will be on the NMW.

A generation ago this would have seemed like a crazy socialist scheme, and yet we have a supposedly right wing Tory Government endorsing a plan to have the Government set wages for most British workers. The National Minimum Wage really was one of the most transformative ideas in modern British politics.

We have a highly regulated labour market with the Government set the wages and conditions for the majority of workers and close to full employment. Truly this is a Socialist Utopia!

If the Government really wants to tackle low pay it doesn’t have to look very far for solutions. It can simply mandate changes to pay.

As a final comment we have been conditioned to believe that the right thing ethically and the right thing economically are always in conflict, and that Government attempts to deliver a fairer society always have negative economic consequences.

The OBR can be forgiven for making the assumption that fairer wages lead to job losses because the are obliged to use an macro-economic model given to them by George Osborne, someone who has only been out of power for a few years, and yet whose ideas already seem paloe-economic.

But when it comes to Labour markets treating people better, paying them more and giving them more rights in the workplace is a good way to create a more flexible workforce, which is good for businesses. Higher wages leads to a faster growing economy.

Maybe it’s time to think differently about how we make the arguments for progressive politicies?

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.