12 November 2014

Path dependency: transportation, energy, markets and consumption

This blog post makes a useful point about the relationship between transport costs and market size:
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).
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?

1 comment:

  1. But that original blogpost really emphasises the massive marginal importance of ...horses... Anyway I've commented on that blogpost here : http://pseudoerasmus.com/2014/10/24/szabo-china/


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