Markets

What if railroads didn't change the world?

Following up on Robert W. Fogel's 1962 paper that challenged conventional wisdom

By C. Hoyt Bleakley     

From: Magazine

Bob Fogel liked spinach. And he liked to tell stories.

In the Population and the Economy course that I had the privilege of teaching alongside him at Booth, I would present various long-term trends, including the rise in health-care spending. Fogel, who was Charles R. Walgreen Distinguished Service Professor of American Institutions at Chicago Booth until he passed away in June, would interrupt, recalling how he was sent as a boy by his mother to buy spinach at the local market. Fetching the vegetable was only the beginning of this chore: when he got home, he would have to laboriously clean the spinach, which usually was, by weight, more sand than actual leaves.

The story left some students initially puzzled as to what this had to do with economics, but Fogel was illustrating a powerful point about data and measurement. We might be able to collect data about spinach consumption over the past 100 years, but in doing so we could easily miss that this product, while labeled the same thing now as it was then, has evolved into something quite different. The spinach we buy in the supermarket nowadays is bundled with a lot more labor services. Not only do we not pay for sand, we also pay for a product that requires little labor to clean it. 

This idea applies to many goods over time. One example is in health care. When we go to see a doctor today, we do so with some expectation that the doctor is going to help. One hundred and fifty years ago, that was not necessarily a good expectation. The doctor then was just as likely to do something that would make patients worse as make them better. So spending on health care is much higher today by any measure, but the quality is also markedly different. The spinach story was a wonderful way to illustrate this point.  

The story also exemplifies Fogel’s original approach to economic history. In this case, we see the benefits that are sometimes hidden in the “same old” things. On the flip side, his work also showed that we could easily overstate the benefits of new things. This is evident in his 1962 paper, “A Quantitative Approach to the Study of Railroads in American Economic Growth: A Report of Some Preliminary Findings,” which appeared in the Journal of Economic History. The paper, based on his PhD thesis, was essentially a summary of what was to be his first book, Railroads and American Economic Growth: Essays in Econometric History, which was published two years later. It is this paper that I use in the classroom as a critical tool to help students develop a long-term perspective on economic and social change.

If it seems odd to teach MBAs about 19th-century railroads, I would argue that the importance of the paper is as much in the approach, structure, and methodology of the research as in the results themselves. What Fogel presents is a general parable about how new technology affects economic growth. We are often told that new products are “changing the world.” Fogel’s work forces us to question the validity of that claim, and to ask what existing products are displaced by innovations.   

Fogel’s railroads paper challenged the conventional wisdom of the day. That had been shaped predominantly by nonquantitative historians, who had come to the conclusion that the railroad must have been a significant driver of economic development in 19th-century United States—a large country whose development clearly depended on transportation. Railroads became such a dominant mode of transport so quickly that it seemed obvious that they played a critical role in the country’s rapid economic growth. 

The railroad boom in the United States meant a massive increase in the supply of transportation services. Fogel asked an important and basic question: what are the benefits of this shifting supply? His response is that it depends on what other transportation services were, or would have been, available. He sets the problem in a simple economic framework—the effect on price from the change in supply is dependent on the availability of substitutes.

Much of the United States is pretty flat; the obvious other source of long-distance transportation at the time was the river-and-canal system. Fogel used to joke that he was the most ambitious “canal builder” in history, because he simulated what canals would have been built had the railroad not existed. He aimed to determine what the price of transportation would have been under that scenario versus building the railroads. 

This was quite an innovation in its day. Use of these counterfactuals was anathema to traditional historians, who took a view that counterfactual narratives were hokey, almost science fiction. “Just the facts, ma’am,” summarized their approach. But from Fogel’s economist perspective, a counterfactual was quite natural. In a sense, all of our meaningful questions are counterfactual. A demand curve, for example, is a model of what would happen to quantity if price changes. So it is obvious that an economist like Fogel would bring to the study of history the same “what if?” perspective.

So Fogel “built” canals and examined what transport would look like in that world. His finding was that transport would have been good and cheap, not unlike the world with the railroad. He concluded that by 1890, output per capita in the United States was a few percent more with the railroad than it would have been had the railroad not been invented. That was undoubtedly important, but it was far from the transformational impact that had been argued by others. 

In the classroom, I emphasize that this approach can be employed to help us think about lots of problems that involve the introduction of new goods or a new mode of production. When things take off, there is a tendency to say that they’ve made a significant contribution. But Fogel reminds us to ask: “What is it substituting for?” The fact that an innovation replaced something else tells you it had a cost advantage, but not the size or importance of that cost advantage. That gives us a framework for thinking about newer goods and processes. 

Moreover, having a winner and a loser between competing technologies tells us something about the difference between the two technologies or processes, but not about the aggregate gains. One example I use in class is the 1980s rivalry between the VHS and Betamax video technologies. More recently, Facebook triumphed over Friendster in the struggle to dominate the world of social networking. In both cases, there is clearly money to be made by being the winner, but that is different from evaluating the overall gains to society.

Not only was Fogel’s work unconventional, it also foretold the empirical revolution in economics. In the decades after his railroads paper, it became much easier to collect and work with data. That was not solely due to Fogel, but he was certainly in the vanguard of the movement. Fogel was a pioneer in going out and collecting data about prices, quantities, and use of assets, and in crunching the numbers. Economic historians had been doing that before Fogel, but they had not really had a significantly quantitative focus. Most were unable or unwilling to go through the data and look for patterns not just in the large, but also in the small. 

Fogel’s railroads research involved not just thinking about the price of one good, but looking at the bigger picture of what infrastructure looked like overall, how it would be affected if the provision of railroads and canals were changed, and what effect that would have on prices. That approach was a forerunner of the data-crunching ethic in microeconomics. 

Fogel carried that ethic through with his subsequent work on slavery, finding records from plantations and slave auctions on how plantation-owners used slave and free labor and what they paid for different inputs. It was for his work on slavery and on railroads that he was awarded the Nobel Memorial Prize in Economic Sciences in 1993.

Fogel had an enormous influence on the study of economic history. Traditionally, it had been unusual to dive deeply into microdata, but Fogel was an important member of the movement that helped make that standard. The idea took hold in the field that researchers had to slog through the data, find new information, and use it to undertake economic analysis. Such an approach began by asking, “What data would help us understand this phenomenon?” Then the researcher would have to go out and get it. Fogel kept true to that idea throughout his career.

The most exciting part of teaching his research is seeing the effect it has on students. They have amazing “aha!” moments. That is my goal, and was Fogel’s goal. We want to get them to think about something in a new way by juxtaposing things they would have never thought to juxtapose, and by exposing them to these critical themes of continuity and change. Teaching Fogel’s work is to me a wonderful example of Booth’s philosophy of not telling students what the right decision is today, so much as giving them the tools to make the right decisions over the whole course of their career. That means giving them a general framework and exposing them to ideas from a variety of different perspectives. In their future business lives, they can assemble pieces from their Booth education as they need them. Fogel’s railroads paper helps the students who study it to construct that general framework. n

Works cited

Robert William Fogel, Railroads and American Economic Growth: Essays in Econometric History, The Johns Hopkins University Press: 1964.