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Wednesday, November 2, 2016

Criminal Records Prove Adam Smith Was Right

The crucial connection for innovation is the relationship between elite inventors and skilled artisans.

Adam Smith’s central example of technological change and improvement in consumer-durables was the watch. When writing the Wealth of Nations, he hypothesized that the price of watches fell nearly 95% over the previous century.

This diminution of price has, in the course of the present and preceding century, been most remarkable in those manufactures of which the materials are the coarser metals. A better movement of a watch, that about the middle of the last century could have been bought for twenty pounds, may now perhaps be had for twenty shillings. WN I.11.243

A new paper in the Quarterly Journal of Economics asks – was Smith right? To answer the question, authors Kelly and O Grada use the reported value of over 3,200 stolen watches from criminal trials in the Old Bailey in London from 1685 to 1810.

Before allowing for quality improvements, they find that the real price of watches in nearly all categories falls steadily by 1.3% a year, equivalent to a fall of 75% over a century. If you allow modest improvement in the quality of silver watches, the authors find an annual fall in real prices of 2%, or 87% over a century. Very close to Smith’s observation.

Watches consisted of two parts: the mechanism and the case. Most of the cost of a silver watch mechanism was the labor involved in the technical construction of the mechanism – the cutting, filing, and assembling of all the parts. By assuming constant markup, the authors are able to assess the rise of labor productivity in watchmaking by comparing how the price of a watch fell relative to nominal wages. During the period 1680-1810, real wages were roughly constant, so this rise in labor productivity is similar to the fall in real prices of watches.

At the time, London did not have a state-run police force, so criminal prosecutions for theft were privately initiated. Watches were valuable – costing more than a week’s wages for the average laborer – and they were easily resold, making them a hot commodity. Interestingly enough, however, the authors show that over the period, watch ownership among working men rose steadily through the eighteenth century and had become extensive by 1800.

Justice for All, Including the Drunks

The institutions protecting property rights were available to people of all classes, giving them all access to justice.The broader implication of the paper concerns the very nature of the Industrial Revolution. First, the authors use the evidence presented in this study to support the claim of a much earlier beginning to the Industrial Revolution (the late 1600s) than the more commonly accepted date of the mid-1800s. Second, the authors want to use this as support for a particular mechanism by which the Industrial Revolution occurred. The crucial connection for innovation, as they see it, is the relationship between elite inventors and skilled artisans. Once the technical breakthrough of watchmaking occurred, “England’s extensive tradition of metal-working and the relative absence of restrictions on hiring apprentices, along with an extensive market of affluent consumers, allowed its watch industry to expand rapidly.”

But the paper itself seems to point to a very important explanatory element. The institutions protecting property rights – the system of private prosecutions that prevailed in England prior to the introduction of the police – were relatively low-cost and easy to access for all segments of society. This is demonstrated in the paper by the fact that watch-thievery was widely prosecuted (the cost of using the courts was presumably less than the value of the watch) and that everyone from affluent gentlemen, laborers, servants, and drunks could reasonably expect justice. Mark Koyama’s work looks at how private clubs operated at the time, showing how these private-order institutions were often successful in ameliorating the problem of crime.

This first appeared at Library of Economics and Liberty.