I know I’ve written about this before, but Robert Fogel’s groundbreaking argument about the role of railroads in shaping U.S. economic history is, in my view, absolutely crucial to understanding how the world works, and how to think about the impact of public policy. One of the central intellectual challenges facing policy analysts is status quo bias, e.g., the firm conviction that in the absence of the particular mix of social insurance programs we have today, the elderly would be living in the dire poverty that prevailed in the first decades of this century — a conviction that neglects the counterfactual possibility that rising productivity and the material affluence that flowed from it would have been channeled into a higher standard of living for the old via other means, whether through public-private partnerships or civil society approaches or more robust kinship networks.
Faced with the pervasive conviction that the railroads were responsible for America’s 19th century economic expansion, Fogel rigorously thought through a counterfactual in which railroads had never been invented:
Had the railroads not been invented, shipments would have taken place via canals, rivers, and wagons. Wagons being expensive and inefficient, they would have been useful only for short hauls to rivers or canals. Fogel concluded that the costs of wagon transport would have made agriculture economically feasible no more than roughly forty miles from any navigable waterway. Based on the system of canals in 1890, both in use and previously abandoned, Fogel was able to include 76 percent of all contemporary agricultural land within forty-mile buffer zones adjacent to the system of waterways. Nearly all of the agricultural land that fell outside the buffer zones, and hence would have been lost to the economy, were concentrated in the four states of Illinois, Iowa, Nebraska, and Kansas, meaning that the railroad’s impact was felt most in the intraregional trade between farms in those states and the great primary markets of the Midwest.
Yet, even here, Fogel believed the railroad’s advantage was illusory. He advanced the idea that, in the absence of the railroad, the modern combustion engine (i.e., cars and trucks) likely would have been developed much more rapidly and could have replaced the horse-drawn wagon decades before the end of the nineteenth century. If nothing else, at least rural roads might have been improved sooner. Perhaps the most compelling idea was that with a moderate expansion of the canal system into Illinois, Iowa, Nebraska, and Kansas, in combination with reduced trucking rates, an expanded eighty-mile buffer zone around the increased waterway network could have included all but four percent of the agricultural areas actually in use in 1890.
Fogel’s work is obviously not the last word on the matter, and one can imagine many other scenarios. But his analysis is an effective, and amusing, rejoinder to the conventional view that federal subsidies to build the transcontinental railroads were so obviously a good idea that they should be invoked every time we want to justify a public investment. To the contrary, it seems reasonably likely that in a universe in which railroads were forced to compete on a more level playing field with shipments via canals, rivers, and wagons, the railroads would not have had as much economic power relative to shippers, including small-scale farmers.
Update! Ah, but what if Fogel was wrong?