Wednesday, November 12, 2014

Transportation, divergence, and the industrial revolution (and the oil tanker king John Fredriksen)

I was thinking of Fredriksen because there is an outside-but-not-zero chance his crown jewel, Frontline Ltd., could go bankrupt.
Then the link to this post dropped out of one of the feedreaders. Bolding, ours, historical errors, his (kidding)
From Unenumerated:
After about 1000 AD northwestern Europe started a gradual switch from using oxen to using horses for farm traction and transportation.  This trend culminated in an eighteenth-century explosion in roads carrying horse-drawn carriages and wagons, as well as in canals, and works greatly extending the navigability of rivers, both carrying horse-drawn barges. This reflected a great rise in the use of cultivated fodder, a hallmark of the novel agricultural system that was evolving in northwestern Europe from the start of the second millennium: stationary pastoralism.  During the same period, and especially in the seventeenth through nineteenth centuries, most of civilized East Asia, and in particular Chinese civilization along its coast, navigable rivers, and canals, faced increasing Malthusian pressures and evolved in the opposite direction: from oxen towards far more costly and limited human porters. Through the early middle ages China had been far ahead, in terms of division of labor and technology, of the roving bandits of northern Europe, but after the latter region's transition to stationary pastoralism that gap closed and Europe surged ahead, a growth divergence that culminated in the industrial revolution.  In the eighteenth century Europe, and thus in the early industrial revolution, muscle power was the engine of land transportation, and hay was its gasoline. 

Metcalfe's Law states that a value of a network is proportional to the square of the number of its nodes.  In an area where good soils, mines, and forests are randomly distributed, the number of nodes valuable to an industrial economy is proportional to the area encompassed.  The number of such nodes that can be economically accessed is an inverse square of the cost per mile of transportation.  Combine this  with Metcalfe's Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation. A reduction in transportation costs in a trade network by a factor of two increases the potential value of that network by a factor of sixteen. While a power of exactly 4.0 will usually be too high, due to redundancies, this does show how the cost of transportation can have a radical nonlinear impact on the value of the trade networks it enables.  This formalizes Adam Smith's observations: the division of labor (and thus value of an economy) increases with the extent of the market, and the extent of the market is heavily influenced by transportation costs (as he extensively discussed in his Wealth of Nations).

The early industrial revolution was highly dependent on bringing together bulk goods such as coal and iron ore.  Land transportation of such materials more than a dozen miles in most parts of the world was prohibitively costly, and they were only rarely located a shorter distance from navigable water (the costs per mile of water transport were generally orders of magnitude cheaper than the costs per mile of of land transport).  As a result, the early industrial revolution, and the potential for a region to be the first to industrialize, was very sensitive to small changes in land transportation costs.

Furthermore, land and sea-borne transportation were far more complements than substitutes.  Cheaper land transportation was a "force multiplier" for water transportation.  Decreasing the costs of getting to port from field or mine by a factor of two increased the number of fields and mines accessible by a factor of four, and increased the number of possible ways to divide labor, and thus the value, by an even greater factor via Metcalfe's law.  This in turn incentived greater investment in sea-borne transport. It's thus not surprising that, even before the industrial revolution, the leaders in global trade and colonization were European countries that could access the Atlantic....MORE 
HT: the underappreciated Aquanomics blog which we have not linked to nearly enough and who riffs:
...Let's take those facts (factor of 16) as a basis and look back in time:
  1. Human and animal transport is more expensive than water transport (cities locate on water)
  2. Technology improvements were gradual, until (wood-fired) steam power blew everything up
  3. Markets grow, prices drop and variety increases. An industrial revolution of consumption
  4. We switch to coal, then oil. Transport power lowers costs and makes us even richer
  5. Backlash: CO2 emissions and climate change
  6. People facing increases in transport costs (and decreasing living standards) say no way
  7. The End?
Here's another riff: