Spinning welfare: The gains from process innovation in cotton and car production
AbstractEconomists and economic historians want to know how much better life is today than in the past. Fifty years ago economic historians found surprisingly small gains from 19th century US railroads, while more recently economists have found relatively large gains from electricity, computers and cell phones. In each case the implicit or explicit assumption is that researchers were measuring the value of a new good to society. In this paper we use the same techniques to find the value to society of making existing goods cheaper. Henry Ford did not invent the car, and the inventors of mechanised cotton spinning in the industrial revolution invented no new product. But both made existing products dramatically cheaper, bringing them into the reach of many more consumers. That in turn has potentially large welfare effects. We find that the consumer surplus of Henry Ford’s production line was around 2% by 1923, 15 years after Ford began to implement the moving assembly line, while the mechanisation of cotton spinning was worth around 6% by 1820, 34 years after its initial invention. Both are large: of the same order of magnitude as consumer expenditure on these items, and as large or larger than the value of the internet to consumers. On the social savings measure traditionally used by economic historians, these process innovations were worth 15% and 18% respectively, making them more important than railroads. Our results remind us that process innovations can be at least as important for welfare and productivity as the invention of new products.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1352.
Date of creation: May 2011
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Web page: http://www.econ.upf.edu/
Process innovations; new goods; welfare; consumer surplus; mechanisation; mass production; automobiles; cotton; industrial revolution; second industrial revolution;
Other versions of this item:
- Tim Leunig & Joachim Voth, 2011. "Spinning Welfare: the Gains from Process Innovation in Cotton and Car Production," CEP Discussion Papers dp1050, Centre for Economic Performance, LSE.
- N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
- N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
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