A safe economic prediction

One of the grand joys of any science is that any given reason for why something is happening can be applied to other things.

That is, a theory, an hypothesis -- the best definition of which is a theory you've not tested yet -- can become a general explanation, not just a specific one.

For example, it's not just apples that fall out of trees that is explained by the theory of gravity. That same theory explains journalists falling over when walking back from the pub -- to use an example that never happens at all.

Or, more usefully, why a rocket has to use so much energy to get satellites up to where they don't fall down again.

Now this isn't true of every theory, obviously. Each one only works in its own domain, nothing is truly generalizable across everything.

There are those who tell us that economics isn't properly a science because we cannot do those experiments with the whole economy that tell us if a theory is, in fact, right.

We thus have a lot of hypotheses but nothing we've proven is right.

And yes, it's true, we cannot set up experiments to test things -- not using a whole economy we can't.

On the other hand, people have run economies in different ways and we can compare the outcomes -- what we call “natural experiments.”

The 20th century can be called a fair natural experiment between capitalism with markets and socialism, just as one example. We've even had parts of countries run on either system -- and not once did socialism produce the better result.

But now to make a prediction -- always the harder parts of these things.

Bangladesh is, in these coming decades, going to see an explosion in sales of things like vacuum cleaners and dishwashing machines. Because having servants -- or cleaning ladies, or home help, whatever we desire to call them -- is going to become too expensive.

The background here is that it's a common theory that the Industrial Revolution started in Britain because labour was expensive.

So, it was worth designing machines to do work instead of just using more of that really cheap labour that didn't exist -- but did exist in other places.

It's not the only possible explanation, true, but it's a very common one among economists.

We can extend this further.

What became the United States never did have as many servants -- leaving aside the unfortunate slaves of course -- as most of Europe. The Americans were always fascinated by labour-saving gadgets, especially inside the household.

Labour was always much more expensive -- the other way of saying wages were always higher -- in North America.

Well into my grandmothers' lifetimes, it was common for a European middle class household to have a servant or two. One grandmothers' family had one, the other grandmother was one for a time in fact (no, not in the same household, we Worstalls are not quite that odd).

America was really very unlike that, they had those labour-saving gadgets instead.

Another way of putting this is that they mechanized expensive labour tasks just as Britain did in industry.

Add one more economic observation. A place is richer when labour costs more.

Because that's what a place being richer means, that an hour of human labour is worth more.

For each hour worked people can have more things -- they're richer.

So, as Bangladesh continues to become richer then the human labour inside the household of servants -- or cleaning ladies, whatever -- is going to become more expensive.

Which will mean that more of that labour will be mechanized, there will be more machines and fewer servants.

After all, this has actually happened everywhere that has got rich so it's a pretty safe prediction that it will occur in the next place that does so.

We can all check back in a few decades and test this of course.

But this is almost a definition of economic advance, that it's the machines that take the strain. I, for one, am wholly in favour.

Tim Worstall is a senior fellow at the Adam Smith Institute in London.