Spinning Welfare: The Gains from Process Innovation in Cotton and Car Production

CEP Discussion Paper No. 1050

33 Pages Posted: 18 Nov 2011  

Timothy Leunig

London School of Economics & Political Science (LSE) - Department of Economic History

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Date Written: November 18, 2011

Abstract

Economists 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 mechanized 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 mechanization 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.

Keywords: process innovations, new goods, welfare, consumer surplus, mechanisation, mass production, automobiles, cotton, industrial revolution, second industrial revolution

JEL Classification: N22, N24, O31, O40

Suggested Citation

Leunig, Timothy and Voth, Hans-Joachim, Spinning Welfare: The Gains from Process Innovation in Cotton and Car Production (November 18, 2011). CEP Discussion Paper No. 1050. Available at SSRN: https://ssrn.com/abstract=1961473 or http://dx.doi.org/10.2139/ssrn.1961473

Timothy Leunig

London School of Economics & Political Science (LSE) - Department of Economic History ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Hans-Joachim Voth (Contact Author)

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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