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Monday, September 8, 2014

19th Century Fencing and Information Technology

It's no surprise that US investment is disproportionately focused on information technology. The broad category of information processing technology and equipment was 8% of all private nonresidential US investment in 1950, but 30% of all investment by 2012. This raises the question: Is there a previous time in U.S.  history when investment has been so  heavily focused in a single category?

David Autor offers a possible answer: Investment in fences in the late 19th century U.S. economy. The answer is side comment in Autor's paper "Polanyi's Paradox and the Shape of Employment Growth," presented in August at the Jackson Hole conference sponsored by the Kansas City Federal Reserve. The paper is well worth reading for what it has to say about the links from automation to jobs and wages. Here, I'll offer some thoughts of my own about fencing and information technology.  (Full disclosure: Autor is the Editor of the Journal of Economic Perspectives, and thus my boss.)

Richard Hornbeck published "Barbed Wire: Property Rights and Agricultural Development", in a 2010 issue of Quarterly Journal of Economics (vol. 125: 2, pp. 767-810). He argues for the importance of fencing in understanding the development of the American West. Hornbeck writes (citations and footnotes omitted):

In 1872, fencing capital stock in the United States was roughly equal to the value of all livestock, the national debt, or the railroads; annual fencing repair costs were greater than combined annual tax receipts at all levels of government ... Fencing became increasingly costly as settlement moved into areas with little woodland. High transportation costs made it impractical to supply low-woodland areas with enough timber for fencing. Although wood scarcity encouraged experimentation, hedge fences were costly to control and smooth iron fences could be broken by animals and were prone to rust. Writers in agricultural journals argued that the major barrier to settlement was the lack of timber for fencing: the Union Agriculturist and Western Prairie Farmer in 1841, the Prairie Farmer in 1848, and the Iowa Homestead in 1863 ... Farmers mainly adjusted to fencing material shortages by settling in areas with nearby timber plots."
Then in 1874, Joseph Glidden patented "the most practical and ultimately successful design for
barbed wire." The fencing business took off. Hornbeck quotes a story from a 1931 history:  “Glidden himself could hardly realize the magnitude of his business. One day he received an order for a
hundred tons; ‘he was dumbfounded and telegraphed to the purchaser asking if his order should not read one hundred pounds'".

Remember that fencing was already of central importance to the U.S. capital stock in 1872. Hornbeck presents estimates of how the total stock of fencing expanded over the decades. The pent-up demand was enormous, and cheaper steel was becoming widely available after the 1870s. From 1880 to 1900, for example, the total amount of fencing in Prairie states went from 80 million rods (where a rod equals 16.5 feet or about 5 meters) to 607 million rods; in the Southwest region, the rise was from 162 million rods in 1880 to 710 million rods by 1900. In the South Central states, the gains were comparatively smaller, only about a doubling from 344 million rods in 1880 to 685 million rods in 1900. By comparing across regions with and without fencing, as the fencing arrived, Hornbeck argues:
"Barbed wire may affect cattle production and county specialization through multiple channels, but these results suggest that barbed wire’s effects are not simply the direct technological benefits that would be expected for an isolated farm. On the contrary, it appears that barbed wire affected agricultural development largely by reducing the threat of encroachment by others’ cattle."

The juxtaposition between 19th century fencing and 21st century information technology offers an irresistible chance for loose speculations and comparisons. Fencing in the 19th century made property rights to U.S. land more valuable, especially in the Prairie and Southwest regions, because it protected the farmers crops. Of course, there was also considerable conflict and dislocation as the land was fenced, including conflicts between farmers and ranchers and between settlers and Native Americans. But for many Americans, the fencing of the American West felt like a clear-cut opening of productive opportunities.

The economic gains from modern information technology often seem to arrive in less clear form. True, for some workers the vast gains of electronic technology feel like a brand-new frontier. But many workers throughout the economy experience information technology as a continual mix of gains, costs, and disruptions. For example, email is great; and email eats up my day. Information technology can offer vast cost savings in office-work, greater efficiency in logistics and shipping, and faster development of new designs and technologies--all of which also disrupt companies and workers.

New information technology is far more mutable than fencing: it finds ways to slither into aspects of almost every job, including how that job is scheduled, organized, and paid for. Moreover, information technology is really a series of new technologies, as Moore's law drives the cost of computing lower and lower, creating waves of distinctively different growth opportunities. As Hornbeck points out, barbed-wire fencing did get substantially cheaper over time, with the cost falling by half from 1874 to 1880, and then again almost another two-thirds by 1890, and falling almost to half of that amount by 1897. But that impressive technological record is dwarfed by the productivity gains in information technology.

In short, 19th-century fencing may well have been an investment similar in relative size to modern information technology (although the economic statistics of the late 19th century don't allow anything resembling an apples-to-apples comparison). But at least to me, information technology seems considerably more disruptive, transformative, and ultimately beneficial for the economy.