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Railroads and Economies of Scale and Scope in U.S. Manufacturing Industries: 1850-1880

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Railroads and Economies of Scale and Scope in U.S. Manufacturing Industries: 1850-1880 City University of New York (CUNY) CUNY Academic Works All Dissertations, Theses, and Capstone Projects Dissertations, Theses, and Capstone Projects 2010 Railroads and Economies of Scale and Scope in U.S. Manufacturing Industries: 1850-1880. Chandler Revisited Michael Kalson Graduate Center, City University of New York How does access to this work benefit ou?y Let us know! More information about this work at: https://academicworks.cuny.edu/gc_etds/1745 Discover additional works at: https://academicworks.cuny.edu This work is made publicly available by the City University of New York (CUNY). Contact: [email protected] RAILROADS AND ECONOMIES OF SCALE AND SCOPE IN U.S. MANUFACTURING INDUSTRIES: 1850-1880. CHANDLER REVISITED by MICHAEL KALSON A dissertation submitted to the Graduate Faculty in Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy, The City University of New York 2010 © 2010 MICHAEL KALSON All Rights Reserved ii This manuscript has been read and accepted for the Graduate Faculty in Economics in satisfaction of the dissertation requirement for the degree of Doctor of Philosophy. Michael Edelstein Date Chair of Examining Committee Merih Uctum Date Executive Officer Michael Edelstein Elizabeth Field Hendrey Simone Wegge Supervisory Committee THE CITY UNIVERSITY OF NEW YORK iii Abstract RAILROADS AND ECONOMIES OF SCALE AND SCOPE IN U.S. MANUFACTURING INDUSTRIES: 1850-1880. CHANDLER REVISITED by Michael Kalson Adviser: Professor Michael Edelstein This study concerns the measurement and quantification of the relationship between railroadization in the United States in the mid-19 th century and the subsequent evolution of the modern, large-scale, corporate form of industrial business organization marked by significant economies of scale and scope, as described in various writings by Alfred Chandler. Focusing on American industry as it developed from 1850-1880 using data uniquely suited to empirical analysis of economies of scale and scope, its aim is to determine whether the growth of the American railroad network, as Chandler contended, expanded markets and augmented the American financial sector such that the result was a more concentrated, large-scale mode of industrial organization characterized by extensive and increasing economies of scale and scope in sync with the growth of its extensive railroad system. Apart from some positive results found in the scope analysis of Chapter 6 showing an ascending scope pattern from 1850-1880 in a few key industries, our findings indicate an overall gloomy prognosis for the empirical validity of the Chandler hypothesis. With the cross-country analyses of Chapters 2 and 3 showing no evidence of a greater expansion of the railroad systems of the United States and Germany at mid-century and resultant vastness thereof with respect to Britain circa the 1870’s as contributing to a more concentrated industrial sector in those countries, and the mixed evidence in support of a rise in efficient scale in American industry from 1860-1880 as shown in Chapters 4 and 5, not to mention the omnipresent dips at 1870 seen in both the scale and scope estimates, our findings reflect poorly upon Chandler’s idea of that date as the iv benchmark period in which to begin to expect to see the effects of transportation improvements upon scale and scope economies in American industry. Rather, they indicate a far greater impact of the Civil War aftermath shock than Chandler accounted for—perhaps one that persisted on until the 1880’s--and suggest a much later date of the full impact of the railroads upon scale and scope of industry than Chandler bargained for—perhaps 1900 as indicated by Atack (1985). v TO MY PARENTS vi PREFACE AND ACKNOWLEDGEMENTS This thesis had a long gestation period. It began as independent study readings in the history of industrial technology as part of graduate studies in economics at City University of New York exploring the paradoxical development of Britain’s failure to maintain the position of supremacy it had achieved in the earlier iron-, coal-, and steam- based industries of the “First Industrial Revolution” of the 18 th century later on in the science-based industries of the “Second Industrial Revolution” that emerged in the late 19 th century; for example electricity, chemicals, and technology centered around the internal combustion engine, when it was faced with formidable new competition from later industrializers; most notably the United States and Germany. The contention of many authors that Britain’s “early start” in industrialization may have actually conferred disadvantages upon it in development of these later technologies, and created opportunities for latecomers that were shrewdly exploited by the United States and Germany provided me with the initial research aim of examining the various arguments in support of this theory and assessing their strengths. The primary focus of this research was the industrial applications of electrical technology and developments therein, starting from the discovery of the scientific principles upon which the modern electrical industries were based—approximately Michael Faraday’s discovery of the principle of electromagnetic induction in 1831--up until the beginning of WWI, the period that essentially encompasses the time during which the basic parameters of the industry were established and its clear leaders going into the 20 th century emerged. vii Although this initial research identified a few hypotheses that connected Britain’s early start to its relative electrical failings, the one that formed the predicate of the study you are about to read is that raised by Alfred Chandler in his 1994 book, Scale and Scope: The Dynamics of Industrial Capitalism . (Cambridge: Harvard University Press, 1994.) which addressed the issue of economies of scale and scope in the production of electrical technologies among many other industries, and raised the question of whether failure to achieve such economies explains any of the British retardation in the large- scale, capital intensive science-based industries of the late nineteenth century, and if so, can any of that failure be traced to Britain’s early start. Chandler believed that economies of scale and scope were an essential feature crucial for success in these modern sectors, and that Britain failed to develop substantial industrial structure of this type due, in no small part, to a lesser impact of the railroads on its industrialization. Since Chandler believed this lesser impact of the railroads was in itself a function of Britain’s early start, this book provided me with an as-of-yet untested hypothesis that appeared ripe for empirical enquiry and examination. My research on the electrical industry revealed that failure to achieve economies of scale and scope therein was indeed a stumbling block for Britain in the late nineteenth century, as it also was for Britain in most other large-scale, capital intensive science-based industries at that time. Economies of scale, efficiencies in production that tend to be captured by larger firms capable of producing in large volume, figure prominently in electrical industries, particularly in electric power distribution, where it has been observed that larger utilities serving an extensive network of customers are able to transmit power at a lower cost per kilowatt- hour than utilities serving a smaller network of subscribers. Economies of scope, viii efficiencies in production that tend to be captured by larger, more integrated firms capable of joint production and distribution of many different, but interrelated products, figure prominently in electrical technology due to the tremendous interdependence of the various components of the industry. Standardization of current, voltage and frequency characteristics is essential to ensure that machinery and appliances are manufactured so as to be compatible with the form of power supply in use, and vice versa. Larger electrical firms capable of branching out and producing a diverse array of products have an advantage in this respect in their ability to market a working system of compatible apparatus to consumers. In examining the research of many historians of industrial technology, there was a consensus that the British electrical industries in the late nineteenth century were, on the whole, smaller scale than their American and German counterparts, with a greater assortment of voltages, frequencies and currents in use, and it has been argued that this factor contributed to the less rapid development of this technology in Britain. Thus my challenge as a scholar lay clearly before me—to construct and conduct some kind of empirical analysis to see if there was in fact, this positive correlation between the impact of the railroads on the industrial development of these three key nations of the United States, Germany and Britain, and economies of scale and scope achieved in their industry in the wake of that impact. It is exactly in this manner that this study came to be. Before we proceed to that analysis, there is an extensive literature that that while it did not play that important a role in the main study itself, was nonetheless crucial in ix that it provided the necessary background, inspiration and motivation responsible for its birth. It is therefore worthy of mention here. Besides Chandler’s analyses, there is an extensive literature surrounding Britain’s decline as the industrial leader in the 19 th century, and the relationship between Britain’s early start and its weakness in the more modern industrial sectors that formed the background for this study. Much of it concerns the legacy of its early start and its implications on the size and scale of its industry, which is explained in general economic histories such as David S. Landes’ The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present . London: Cambridge University Press, 1969, and The Wealth and Poverty of Nations: Why Some are so Rich and Some so Poor .
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