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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,
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
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.
Discuss the role of the transport revolution in the creation of national
markets.
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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.
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.
***
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.
Discuss the role of the transport revolution in the creation of national
markets.
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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
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
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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
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
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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,
13 Ibid. p.10
14 Brasil. Instituto Brasileiro de Geografia e Estatistica. Repert6rio Estatistico do Brasil, Quadros Retrospectivos N. 1. Rio de Janeiro,
1941.
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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
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.
Discuss the role of the transport revolution in the creation of national
markets.
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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.
Discuss the role of the transport revolution in the creation of national
markets.
201400710 8
Bibliography
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.
Brasil. Instituto Brasileiro de Geografia e Estatistica. Repert6rio Estatistico do Brasil, Quadros
Retrospectivos N. 1. Rio de Janeiro, 1941.
Coleman, Andrew. (2005) “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
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
David, Paul. (1990) “The Dynamo and the Computer: An Historical Perspective on the Modern
Productivity Paradox.” American Economic Review 80, no. 2: 355– 61.
Fogel, Robert W., Railroads and American Economic Growth: Essays in Econometric History
(Baltimore, MD: Johns Hopkins University Press, 1964).
McClelland, Peter D. “Social Rates of Return on American Railroads in the Nine-teenth-
Century.” Economic History Review 25, no. 3 (1972): 471-88.
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
Moreau. P., (1833), Description of the Rail Road from Liverpool to Manchester by Engineer.
Together with a History of Rail Roads, and Matters connected Therewith, Published by Hillard,
Grey and Company.
Rice, P. and Venables, A. J. (2004), “Spatial Determinants of Productivity: Analysis for the
Regions of Great Britain”, CEPR Discussion Paper No. 4527. Commission, DG
Summerhill, W. (2005), Big Social Savings in a Small Laggard Economy: Railroad-Led Growth in
Brazil. The Journal of Economic History, 65(1), 72-102.
Taylor, George R. (1951), The Transportation Revolution,

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