54/2011 Stephen Broadberry, Sayantan Ghosal and Eugenio Proto

The Industrial Revolution is often characterized as the culmination of a process of commercialisation; however, the precise nature of such a link remains unclear. This paper models and analyses one such link: the impact of a higher degree of anonymity of market transactions on relative factor prices. Commercialisation raises wages as impersonal labour market transactions replace personalized customary relations. This leads, in equilibrium, to higher real wages to prevent shirking. To the extent that capital and labour are (imperfect) substitutes, the resulting shift in relative factor prices leads to the adoption of a more capital-intensive production technology which, in turn, results in a faster rate of technological progress via enhanced learning by doing. We provide evidence using European historical data consistent our results.

Economic History