April 24, 2017

THE COMPARATIVE ADVANTAGE THIS TIME:

A trade economist wins the John Bates Clark medal : The law of comparative advantage at 200: still winning prizes (The Economist, Apr 20th 2017)

IN 1853 the government of India, then directed by Britain's East India Company, began construction of a vast rail network, continued by the British Raj, established in 1858. At the time, most inland transport in India was hauled by draught animals: with carts where roads existed and were passable; packed on animals' backs when they were not, which was often. Moving goods across the great expanse of the subcontinent was costly and painfully slow. That changed with the arrival of the railway. Between 1853 and 1930 more than 67,000km (42,000 miles) of rail was laid across India, providing transport that was fast, cheap and reliable. A bullock could carry a pack 30km a day; an engine could haul freight 600km over the rails in the same time.

Working out the impact of this took Dave Donaldson (a PhD candidate at the London School of Economics when he started trying) nearly a decade. He dug through mountains of yellowed colonial-era records that had never before been collated and digitised. He found that eight different kinds of salt were sold across India, each sourced from just one region: this quirk allowed him to use local differences in the price of salt to calculate transport costs. He painstakingly plotted water, road and rail routes to work out how to ship from any place in India to any other most cheaply. He found that the introduction of the railway dramatically reduced costs and increased trade. Connecting to it led to significant increases in real local annual incomes: of about 16%. That compares with an increase in real income across India as a whole of just 22% between 1870 and 1930. The railway was a big deal. [...]

An isolated community has to do everything for itself. It must grow whatever cotton it wants, however poorly suited the local land and climate. But, as it comes into contact with other places, it can stop doing the things it is especially bad at relative to people elsewhere.

Nevermind people--the reality of the current technological revolution is that Man is especially bad at everything relative to machines and the reduction in costs that comes with accepting this will make us all wealthier.

Posted by at April 24, 2017 7:46 AM

  

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