An between national markets and the transport revolution can

An unprecedented expansion to the industrialized network of
transportation within domestic economies occurred around the world between the
mid 18th and late 19th century. This was the transport
revolution. Investments in roads, river traffic, canals, steamboats and
railways not only complemented the birth and development of industrialization,
these infrastructure investments led to the formation of national markets. National
markets emerged from market integration: when prices are co-integrated in
different locations due to reduced transaction costs and factor mobility.1 The
fundamental relationship between national markets and the transport revolution
can be assessed through the prism of New Economic Geography, NEG, in relation
to market potential and agglomeration
advantages based on thick labour markets,
most prominently highlighted by Midel-Knarvik et. al and Rice & Venables, respectively.23 Simply
put, transportation investments led to capital accumulation that reduces
transportation costs therefore enabling the special concentration of production
that utilized internal and external economies of scale and includes backward
and forward linkages alongside increasing labour productivity subsequently
leading to Marshallian externalities. In this regards,
railroads offers the best possible transportation type by which to analyze the
role of transportation in the creation of a national market because railroads
were widely adopted around the world therefore offer a strong case for cross regional
comparison. Whilst the NEG model proposes evaluation into market potential and
agglomerations based on thick labour market, the scope of analysis for both
these factors is too wide.

Subsequently, this essay will be highlighting the importance of
railroads to the creation of national goods
markets in the 19th and 20th century through the analysis
of the process by which domestic market integration occurred in economies
around the world through the realization of market potential. Moreover, the
static and dynamic implications of market integration shall be considered
through out this paper. Firstly, a brief historiography outlining some
prominent literature on market integration and the transport revolution will be
presented. Secondly, the textiles industry located in Lancashire, UK, will be
assessed as one of the first industrial cluster that rapidly developed due to
railroad expansion. After which the role of railroads in the US shall be
examined as a catalyst for a new manufacturing organizational form- the
factory- due to the access to new markets. Following this will be an
investigation into the social savings induced by railroads in Brazil thereby
creating forward linkages leading to a domestic market. In closing, it will be
clear that the transport revolution, through the establishment and expansion of
railways, led to the formation of a national goods markets in various
heterogeneous economies through the realization of exploiting market potential
through railroads.

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There is abundant literature regarding the transport revolution and
its implications on economic growth and contribution to modern society. Notably,
in Railroads and American Economic Growth
Fogel used the social savings methodology
to assess counterfactuals: without railways primary sector produced goods would
have been transported using rivers and canals- the next best alternative to
railways- therefore freight and transaction costs would have been substantially
higher.4
Subsequently, differences in fright rates led to some areas prospering relative
to others. George Taylor highlights the role of the transport revolution in
expanding markets and weakening localized monopoly power.5
Whilst O’Rourke and Williamson state that market integration in numerous
economies over time was the result of price convergence for goods due to
falling transportation costs.6
Nonetheless, it is the role of steam engine, as a General Purpose Technology, that should be emphasized as the
necessary requirement to the efficiency and price reduction of steam powered
trains and steamboats. David Paul highlights the role of steam in the transport
revolution and the perceived lack of awareness from firms and individuals on
how they would best utilize steam power.7 Accordingly,
this historiography illustrates the advantages of initial transportation
infrastructure, its ability for market expansion and the path dependent nature
of this revolution based on the forward linkages from the invention of steam
power.

***

Expansion to the railway network within the British economy in mid 18th
century Lancashire illustrates the establishment of one of the first industrial
clusters; consequently, resulting in a complex integrated textiles market
through reorganization to the factors of production leading to increased
competition. After their invention, railways within the UK grew rapidly; in
1850 there was 6000 miles of track and 65 million journeys, increasing to
20,000 miles and 1.5bn journeys by 1913 respectively.8
This is especially true for the area of Lancashire, Liverpool and Manchester
where there existed five distinct north-south railroads with approximately
seven miles between them linking spinning and weaving towns of various sizes
such as Oldham, Preston and Blackburn.9  Consequently the transportation of goods and
people in a given region became shorter and at a lower cost. Evidence of market
formation is clear in the 19th century contemporary book from French
engineer Moreau where he states:

This primary source highlights the contemporary perception of the
first fully steam powered railway between Manchester and Liverpool. The railway
eased access to agricultural and manufactured goods through exploiting market potential.

Additionally, it induced high levels of both private and public social benefits
thus contributing to the dynamic nature of market integration.

The theoretical rational for this successful market integration was
the result of good transportation networks facilitating a competitive market
for textiles. Firstly, transport allowed for the migration of human capital,
confirmation of this in the growth of the local population that tripled between
1841 and 1911, with approximately 2.3m working in Lancashire by 1911.10 Secondly,
there existed many small spinner companies that were vertically disintegrated
therefore sold the yarn onto the open market. Finally, the textiles producers
faced competition from indigenous producers, as the textiles were
export-oriented goods.  This industrial
cluster subsequently led to increased innovational and price competition which
was facilitated by the dense railroad network linking various sized towns and
cities that specialized in different production functions of the final good.

Simply put, Marshallian externalities were in abundance.  

***

Prior to the transportation revolution within the US economy, market
access for manufactured goods was limited to the surrounding regions due to
high transportation costs relative to the marginal unit cost of production;
railroads reduced transportation costs and thus increased the realization of
new market potential. The establishment of railroads leading to lower
transportation costs stimulated a change in organizational form from artisans,
whom employed low levels of physical capital, to factories, which tended to employ
many lower skilled workers specializing routine tasks.11 This
reallocation of labour and capital is evidence of the formation of a national
goods market in the US. Atack, Haines and Margo’s cross-section research links
county level data on railroad infrastructure to manufacturing establishment
between 1850 and 1870 manuscript census of manufacturing. Findings indicate
that counties in the Northeast region had the greatest access to railroads
followed by the Midwest and Southern counties.12
In this period the share of newly established factories containing more than,
or equal too, 16 employees was 71.2%, 21.8% and 7% respectively.

The logic in how transportation improvements led to more factory
establishments and thus a national goods market can be clarified through the
channels of demand and supply. On the demand side, a manufacturing firm in a
localized market with high transportation costs can hire employees and exercise
the division of labour until the point at which the additional labour increases
productivity and decreases the average cost to the minim average cost. Thus
such a firm would probably be a monopoly in a small market place. Therefore, as
railways expand leading to lower transportation costs the market is not locally
constrained. Subsequently, enabling the possibility for internal and external
economies of scale to be exploited as well as increased competition from other
firms resulting in further increase firm size due to further division of
labour.

On the supply side, falling transportation costs impacted access to
the supply of raw materials changing relative prices to the factors of
production subsequently incentivizing investment division of labour. For
instance, lower railway costs would make the relative cost of coal lower, due
to increased access to remote regions, thus allowing factories to increase the
number of unskilled labour resulting in larger factories. Moreover, from a
managerial perspective, railways enabled a steady flow of raw materials
smoothening price volatility.13
As a result, firms would require less capital for inventory allowing for expenditure
in more productive avenues- such as steam engines.

In short, reduced transportation costs enabled localized factories to
assess remote markets subsequently leading to more demand for manufactured
goods, the ability to employ more staff, easier, faster and cheaper access to
raw products thus allowing for investment in more productive factors of
production.

***

Increased access to railroads during the late 19th century
enabled Brazil to have impressive levels of social saving, specifically freight
social savings, thus enabling market integration through the development of
forward linkages within the domestic economy. The annual average growth for the
railroads in Brazil increased at a rate of 11% per year between 1854 and 1913;
this meant the tracks increased from a few hundred miles to approximately
15,000 miles by 1913.14
Unlike contemporary western counterparts that had canals, navigable rivers,
easier access to natural resources and roads, Brazil had low quality
transportation substitute thus making the counterfactual methodology of social
savings to have uncommonly high returns.15
For instance, the next best alternative by which social savings was calculated
is a dry season rate of 343 réis per ton-km on a moderately decent roads Sáo
Paulo in 1864.16
The Brazilian railroads of 1913 produced approximately 1.95bn ton-miles of
fright service and a rate of 97.4 réis per ton-mile. Adjusted for inflation
social savings within Brazil would have amounted to approximately 2.19bn milréis
that would amount to an estimated, lower and upper bound figure of 18% of 38%,
respectively, of Brazilian GDP in 1913.17 These
high levels of social savings translated into high levels of social rates of
return that fostered a national market.

Brazil’s social rate of return on railroads based only freight social
savings, by 1913, reached an impressive lower bound rate ranging between 17.9%
to 23.1% which had indirect implication in nurturing forward linkages leading
to a national market.18
Whilst backward linkages were limited in Brazil,19
forward linkages relied on the potential of railways to attract mobile factors
of production. For instance between 1885 and 1912 the annual average
immigration rate into Sáo Paulo was above 50,000,20
coffee farms multiplied by four fold, industrial manufactured goods in Brazil quintupled
and the textiles sector grew by approximate 20 fold.21
Ownership of 61% of railroads by the Brazilian government meant they regulate fright
rates in order to change the composition of frights in favor of domestically
consumed agricultural goods, over export oriented goods- cash crops.

Subsequently, Brazil’s export share reduced at a rate between 0.7% and 1.5% per
year in a period in which economic growth strengthening.22 It
is thus clear that railroads within Brazil allowed for social savings which
lead to high rates of social returns that can best to seen in the forward
linkages that developed leading to the formation of a domestic market.

***

In closing, the transport revolution led by railroads was a
fundamental factor in the formation of national goods market around the world
because it allowed previously localized regions to exploit market potential through
lowering transaction costs, thus increasing factor mobility. The industrial
cluster that formed around the textiles industry in Lancashire alongside the
dynamic Marshallian externalities derived from it were
the direct result of competition induced by a dense network of railroads. In
the United States railways reduced the transaction cost between regions
therefore increasing demand for goods and reducing relative costs of raw
materials leading to the exploitation of new market potential through factories
as new organizational structures. Finally, in Brazil railroads lead to
impressive rates of social savings thus increasing social rates of return through
the formation of forward linkages resulting in the evolution of a complex
domestic market. The ample positive static and dynamic implications of the
transport revolution as a means of utilizing market potential is fundamentally
rooted in the institutional innovation of the 19th century. Namely,
market competition. Competitive markets allowed for Lancashire’s textiles
industry to innovate through local learning, the reorganization of American
production in favor of reducing marginal cost through the division of labour and
in Brazil’s ability to lower fright costs leading to increased economic
activity. In light of the current wave of negative sentiment against
globalization and market competition, the 19th century transport
revolution stimulated by market competition offers emerging markets a blueprint
on now to create a national market and ultimately increase living
standards. 

1 Coleman,
Andrew. “Storage, Slow Transport, and the Law of One Price: Evidence from the
Nineteenth- Century U.S. Corn Market.” Research Seminar in International
Economics Discussion Paper No. 502, Gerald Ford School of Public Policy, University
of Michigan, Ann Arbor, MI, 2005.

2 Midelfart-Knarvik, K. H., Overman, H. G., Redding, S.

J. and Venables, A. J. (2000), “The Location of European Industry”,
Economic Papers No. 142, European Commission, DG for Economic and Financial
Affairs

3 Rice, P. and Venables, A. J. (2004), “Spatial
Determinants of Productivity: Analysis for the Regions of Great Britain”,
CEPR Discussion Paper No. 4527.

4 Fogel, Robert W., Railroads and American Economic
Growth: Essays in Econometric History (Baltimore, MD: Johns Hopkins University
Press, 1964).

5 Taylor, George R. 1951. The Transportation Revolution,
1815?1860. New York: Holt, Rhinehart, and Winston.

6 O’Rourke, Kevin, and Jeffrey Williamson. Globalization
and History: The Evolution of a Nineteenth-Century Atlantic Economy. Cambridge,
MA: MIT Press, 1999.

7 David, Paul. “The Dynamo and the Computer: An
Historical Perspective on the Modern Productivity Paradox.” American Economic
Review  80, no. 2 (1990): 355– 61.

8 Crafts, N. Leuin, T (2005): The
Historical Significance of Transport for Economic Growth and Productivity, Background paper for the Eddington Report, London School of Economics.

p.28

9 Ibid

10Baines, Dudley, and
Robert Woods. (2004), “Population and regional development”. in The Cambridge
economic history of modern Britain : economic maturity, 1860-1939, edited by R.

Floud and P. Johnson. Cambridge: Cambridge University Press. in Crafts (2005)
p.26

11 Atack, J., Haines, M.,
& Margo, R. (2008). Railroads and the Rise of the Factory: Evidence for the
United States, 1850-70. NBER Working Paper Series, 14410. p.2

12 Ibid. p.18

13 Ibid. p.10

14 Brasil. Instituto Brasileiro de
Geografia e Estatistica. Repert6rio Estatistico do Brasil, Quadros
Retrospectivos N. 1. Rio de Janeiro, 1941.

15 Brazil required between 100,000
and 200,000 km of wagon roads, based on freight density factors used in other
case studies in 1913. This would have been difficult given the fact that
natural barriers limited access to regons with high levels of natural
resources; pp. 34-36, 56; Fishlow, American Railroads, pp. 93-94

16 Summerhill, W. (2005).

Big Social Savings in a Small Laggard Economy: Railroad-Led Growth in
Brazil. The Journal of Economic History, 65(1), p. 77

17 Ibid. P.79

18 McClelland, Peter D. “Social
Rates of Return on American Railroads in the Nine-teenth-Century.”
Economic History Review 25, no. 3 (1972): 485 Using upper-bound estimates of
the social saving on railroads, social return in the US in 1859 and 1890, and
the UK from 1840 to 1870, had a range between15% and 20%, In less developed
regions, the average social return was calculated using lower-bound measures,
the figure is are still considerably higher.

19 Backward linkages relied on
railroad inputs such as steel production to generate output and employment,
such linkages were were then supplied by foreign economies.

20 Holloway, Thomas H. (1980).,
Immigrants on the Land: Coffee and Society in Sao Paulo, 1886-1934. Chapel
Hill: University of North Carolina Press

21 Summerhill, W. (2005).

Big Social Savings in a Small Laggard Economy: Railroad-Led Growth in
Brazil. The Journal of Economic History, 65(1), p. 89

22 This decision was influenced due to the
large volumes of agricultural exports leading currency appreciation which in turn
lead to the Dutch dieses making exports of manufactured goods less competitive
thus hindering economic growth.