Hudson’s Theory of Economics

Keith had instructed me to post this after he was gone. The following is a highly compressed version of what he considered “the most authentic picture yet of the world economy” as he saw it.

Thanks. Atanu
(atanu@atanudey.com)

Summary

Many economists see the Industrial Revolution (IR) as a model for further lesser expansions of world manufacturing and trade country by country.  The model was — and still is — aspired to by many countries but the first full burgeoning of the IR with its consequences of large profits, subsequent large re-investments and a moving on from one industry to another was confined only to  six countries with England only sightly in the lead.

Although England turned out to be the necessary instigator of it all, the other countries followed rapidly within a few years — all between the years 1780 and 1980. These are (northrn) France, Belgium, Netherland, Germany and America.  A few more European neighbours such as Switzerland and the Nordic countries also started industrialing some of their manufacturing but in unsystenic way.  They are not to be compared with the powerful government assisted copying of products and systems of the IR which Japan, Korea and China undertook before the end of the 19th century and Singapore halfway through the 20th.

Although the Asian Four now export consumer and producer goods quite up to the standard of those made in the Western Six they don’t necessarily make the most technically sophisticated components of those products, nor the scientific discoveries that gave rise to them. Those are still due to leading edge research into all the current areas of scientific curiosity and discovery.  Ninety per cent of all Nobel Prizes in the science fields (excluding economics) are won every year by scientists from one the Western Six.

The same decrepancy may apply as concerning the characteristic mode of production in the new era as we gradually leave the high heat intensity, ‘metal bashing’ era behind and develop carbon-based compounds and software using DNA-type algorithms

There are also a few other countries which already give a high value to scientific research and may well come up with highly creative industries in the future — he three Nordic countries, the three western Baltic countries, Denmark, Switzerland, Austria, Russia, India and the least populous, but possibly the most precocious, Israel.

Introduction

The following is by way of a short account of my Theory of Economics. It’s in four distinctive parts but I like to think that they all blend together as a defensible narrative which is initiated by the Industrial Revolution (IR) en passant.

The four components of the theory

The four parts are:

(a)  How the IR ‘tsunami’ ever managed to take place at all.  In particular, why should it have have occurred in England and not in any of the four north European countries mentioned above.  These countries also had plenty of the engineers and craftsmen who would have been quite capable of developing multi-spindle spinning machines — fed by the motive power from water mills initially — which rapidly took place in Manchester.

(b) The IR was motivated by two different human incentives during its heyday.  Firstly, by the simple greed of many of the cotton spinning-mill owners in the first three or four decades of the IR — from about1780 to 1830 — able to manipulate pennyless workers migrating from the countryside. These were puring out of the land at that time due to improvements in framing equipment, soil fertility, soil drainage, small farms buying — or occupying — waste land and transforming it.

Then from about the 1860s, a multitude of new industries and jobs meant that, for the first time in decades, men and women had a greater variety of jobs to choose from with higher wages. Railways were expanding enormously, as were the Potteries, as were bicycles, colourful clothing, large grocery stores with cheaper, better quality food, jewellery making in Birmingham, cutlery in Sheffield, magic lanterns, toys and other domestic entertainments, bridge making, larger iron steam ships — both mercantile and navy — and army, and many more.

Thus from the 1860s the working man and his wife could start picking and choosing what jobs to take on in order to start saving for goods by which the middle class had previoously showed their social superiority.  The latter, of course, had even higher aspirations to own the status goods that only the much richer and the large land owners could afford.  They were not to be disappointed soon after the turn of the 20th century when several classic status goods appeared almost instantaneously — automobile (replacing the aristocrats’ carriages), telephone  (replacing letter delivery); radio ( replacing expensive newpapers), cigarettes  (replacing rich mean’s cigars).

(c) Status goods are correlated with the normal limited range of perceptions that we possess, such as seeing or hearing or touch and taste and by which other people observe us and thus assess what we own and what are worth.  In other words our social standing.   Thus there is a relatively small number of visible categories such as house, furnishings, clothes, car, entertainments and personal ornaments on which, at the moment of purchase,  we all spend as much as can afford — far beyond the necessities of life. However, new status goods had all dried up by about 1985 with the personal computer and the beginnings of the smartphone.  The last two were actually nothing new but were amalgamtions and improvements of much older items;

(d) How any physical system — including the world manufacturing and trading system — has to abide by the laws of thermodynamics which says, inter alia, that at any particular level of injection of energy — electricity derived from mostly coal, oil, gas hitherto — it will seek a condition of least effort — which leads ultimately to a steady-state economy.

Simultaneous events

As to (a) above in more detail, the uniqueness of the IR, and its occurrence when it did and where it did, depended on the simultaneity of eight important factors as shown below.  They don’t all have equal weight, obviously, and whether the non-existence of only one or two of these would have impeded the full development of the IR in England at least is a moot point.  Suffice it to say that all eight factors had an important role.  England, rather than any of the other four European countries and America, was the only country where all eight factors were operating simultaneously within a relatively short time frame.

1. A surging population of jobless countryside workers in the latter half of the 18th century — as already described aboue — was available to fill as many factories as could be built in Manchester and environs from 1785 and onwards.
2. The availability of a growing domestic middle-class market for cotton apparel as a cheaper substitute for silk.  The woollen, silk and linen interests in the country had persuaded the government in 1700 to put a high tariff on the import of coloured cotton cloth from India.  This had the effect of slowly building up a modest cotton spinning capability in homes all round the country supplied by occasional imports of raw cotton from Egypt, or any surpluses of raw cotton when they had them from from India.
3. The suitability for growing cotton in plantations in the British colonies in the West Indies and, a little later, the southern states of America.  Both were also able to be supplied with millions of slaves from West Africa.
4. The immediate availability of idle water mills (to drive factory belts) in many streams and rivers of northern England.  As it became apparent that there was a world-wide market in addition to the domestic one for light weight clothing for the summer months, and yet more factories needed to be built, then recourse was made also to use the early primitive steam engines in factories even though they had not yet developed the full power needed in pumping out water from deep coal mines.
5. The availability of  many country banks in an England which, unlike the continent, had been peaceful for well over a century.  Such banks simply weren’t built in war-torn Europe.  Also, the country banks in northern England were much influenced by the relative proximity of Scottish banks which, in a far less prosperous country, had learned to attract small savers as depositors.  These were much more able to invest significant amounts of capital compared with the exclusive banks of the City of London which tended to navoid investing in the cotton spinning revolution in its realy decade.
6. A stream of Scottish inventors (trained scientifically in one of four existing Scottish universities) coming south looking for sponsors and investors.  At the time, England only had two universities, Oxford and Cambridge, and they were theological seminaries teaching little or no science.  In contrast, the philosophers of the Scottish Universities were deeply interested in the early scientists fron Galileo onwards, particularly with those who founded the Royal Society in 1660.
7. The availability of a large and powerful navy — the largest in the world after recently defeating the Napoleon — that was used to protect our foreign markets from other European countries’ exports.
8. The availability of large numbers of home-based weavers in the country able to take up vastly increasing quantities of cotton thread from the northern factories until their incomes were driven down to poverty levels.  It was only then — in the 1830s and 1840s –that spinning mill owners decide to build associated weaving factories.

Investment sources of the Industrial Revolution

Moving to (b) above, the original factory managers — hired by mostly land-owning aristocrats — by taking advantage of the jobless countryside workers, were able to get away with paying them at barely survivable rates of pay.  The subsequent profits were enormous. This might have continued for many years to come had not the prospects for even greater profits risen quite quickly.  These were

1.  automating cotton weaving as well as spinning,
2. expansion of deep coal miines; and
3. the need to develop different types of steel for different mechanical purposes.

The last in particular meant that railways were able to be launched quite early in the 19th century.  These, in turn, were beneficial in so many ways they were able to broaden out into the whole economy through to heavy engineering, steel ship building and all the rest of the IR up to the era of electronics in the 1980s.

Seeking the state of ‘Least Effort’

Arriving now at (d), the last, but by no means least important component of the theory, we now consider one of the deep mysteries of physics which Richard Feynman drew attention to in the last century and called The Law of Least Effort.  One way of exemplifying this is as follows.

Imagine atom A emitting an electron it doesn’t need.  The particle, wherever it may be, with an electro-magnetic force that is trillions of times stronger than gravity will seek and find an atom B which needs it.  Furthermore, the electron will travel to B along a route that’s the shortest possible one and thus involves the least expenditure of energy.  Any surplus energy is then dispersed to the rest of the environment — or empty space on cloudless nights — as waste [technically called entropy].

The world’s manufacturing and trading system consists of quadrillions or more electrons ‘searching for better homes’, impelled by the electrical energy yielded from coal, oil, gas or solar power, etc that we use in our machines.  Not all electrons will be able to be satisfied at any one instant of time because they’ll all be jostling one another.  They’ll all be trying different movements until they all arrive at one settled permutation of movements.

Sooner later — depending on the size of the system — they’ll reach a steady state.  To increase (or decrease) the size of the system then the energy inputs must be changed upwards (or downwards).  However, changing energy inputs significantly — apart from marginal adjustments from year to year — is easier said than done regarding most of the countries of the world.

Unless a country carries out enough deep scientific research of its own then it will never be able to attract investment and develop any brand new high value consumer goods — if there are any left to be invented — that can challenge the stranglehold that about half-a-dozen advanced countries — and no more —  have had on world manufacturing and trade ever since the beginning of the IR.

With the exception of China, which still has some way to go yet in order to completely absorb the rural poor, and which is still exporting appreciably, there is not likely to be any significant extension to world trade.  Countries which don’t have the investment scale of China or those which have little scientific research of their own don’t have a chance developing a ‘junior IR’ of its own.  It simply can’t happen.  At best, they end up making products with their own cheap labour for multinationals of other countries.

Finally

Presumably, man will always be a species of great curiosity with discoveries and innovations following on.  If, as this theory proposes, there are no new categories of consumer goods that can be bought for social status reasons, what then will be the incentive to drive the economic system?  As more of our manufacturing will be automated, relative competition between profit margins will diminish and personal service fees will take over for investment purposes — the higher specialization requiring many more years of education and training.  Also, if there’s a future dearth in new status goods there certainly won’t be in new production methods and infrastructure.  Future scope for further creativity seems limitless.

As for testing the above theory, that must await time.  No scientific theory can be proven, only disproven when new facts arise that cannot be explained by the old theory.  In the case of the above theory, its most important conclusion is that world manufacturing and trade is probably now settling down to a largely stationary state.  It may stabilise with a GDP 20 or 30% higher or lower than now, but the eight-year gap between the 2008 Crisis and now implies that something deep is taking place.  For a more confident verdict then we must await a 50 to 250-year time frame.