What a 150-Year Old Indian Railway System Tells Us About Trade

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it's called lens. Learn more at Bloomberg dot com slash lens. Hello and welcome to another edition of the Ad Thoughts Podcast. I'm Tracy Alloway and I'm Joe wisntal So, Joe, I'm trying to think have we ever had a Nobel Prize winner on the show? Can you remember? I don't think so. I don't think we have. Yeah, I don't think we have either um and not to get your hopes up, we don't have one UM for this episode either. Shoot. Yeah, very disappointing. We do have someone who has a really

good shot at eventually, UM getting one. We actually have the recent winner of the latest John Bates Clark Metal. It's a medal that's given by the American Economics Association to economists under forty who make big contributions to the field of economics. Isn't it also true that among economists the John Bates Clark Medal is actually considered to be

more impressive and prestigious than the Nobel Prize. You're probably right, I mean, statistically, I think the recipients go on to win a Nobel and of course the John Bates one is confined to young economists, so that's pretty impressive. Another thing, uh, that sort of will make today's episode distinct is it's kind of timely. So I kind of like the fact that on our podcast we usually talk about things that

aren't really in the news. We sort of give people a rest bite from the top stories of the day and just let them explore something completely out there. But this one might actually be a little bit on the news. Yeah, So we are definitely huge fans of financial and markets and economic history. And the guy that won this medal, I should just go ahead and say his name. It's David Donaldson. He's an associate professor of economics at Stanford.

But Professor Donaldson is basically famous for being a sort of trade economic historian. And he's famous for one paper in particular. It's called Railroads of the Raj and it basically went back and looked at the railway network that was built up by the British in the late eighteen hundreds early nineteen hundreds in India and he used that to check what impact building that infrastructure has on trade

and general incomes in India. So I mean imagine putting that paper together, right, It definitely sounds like it would be quite a task. All right, well should we just go ahead and ask him. Let's let's bring him in. David, thank you so much for joining us today. Hey guys, thanks for having me. You know, we just mentioned probably your most famous paper on railroads of the raj and that was a paper you started, I think when you

were a grad student. Um, but you worked on it for years and years and years, and if I'm right, it's it's still actually hasn't been published. It's still forthcoming, right. Yeah, I've been I've been very slow in many ways. So um, but yeah, it's something that you know, has occupied my

interest for a long time. It struck me as a you know, among other episodes in world history, one of one of the great episodes that integrated economy has made it easier for one market to trade with another market, and that trade, that integration happens obviously internationally, things like the Panama Canal or the sewer Is Canal, the invention of the steamship did that across oceans, and then you know, the railroads sort of did that within countries like India

and of course famously also the United States. So before we even get to what you did to work on this paper and or even the conclusions, What originally sparked your interest in this particular event from history. Well, actually I was. I was a grad student, and I knew I was interested in trade, but and I knew I was particularly interested in intra national trade, that is, kind of trade across regions of the same country, which has typically always been hard to study, just for for lack

of data. Basically, when when goods cross international borders, customs agencies have always tax that you know, not always, but the most part most countries throughout history of taxed international trade, and so they've kept a record of the flow of international trades, whereas typically when goods moved within countries they don't get either tax or or recorded, and we don't

know much about it. But I was always interested in India, and I got got wind to the fact that at the time when I was doing my doctoral work, and in fact almost still to this to this day, India had had sort of domestic tariffs, tariffs on a movement of goods across state boundaries within India, and I wanted to know more about that. I wanted to kind of

scope it out. So I went to India for for a couple of weeks one summer and in order to meet with people in government, people in academia, and librarians in in order to try to sort of find out the facts. And actually it was it was in that process that I met Hovant. You know, just heard this kind of endless refrain. Well, you know, the thing that really brought India together is was the railroads opposite of about a hundred years ago? And that, I guess pique

my interest. I assume there would be no data, you know that that obviously the further you go back in time, that's typically the the less data that survives. And so I thought, well, I guess I could at least sort of explore what exists in the in the libraries on that historical year. And I was just shocked to learn what was actually available, you know, um, what they've recorded back down back then, what they published, and what still survived.

So one thing about the British railway system is it's famous for being absolutely massive in India, I mean hundreds of thousands of miles worth of railway. How how did you go about collecting that data and then isolating certain effects away from other effects because I imagine, like, if you look at the fact that one railway line has been built between one county and another town or whatever,

that's going to have an impact on all sorts of things. Right, It's almost like a tree diagram, Like the impact just keeps spreading and spreading. So how do you I have so many questions, how do you go about kind of limiting that impact? There's no easy, easy way to do that, and I don't claim to have um necessarily nailed it

by any means. You know, the the ideal way you know that any scientist learns about the world around us is by something like an experiment, right, either a formal lab experiment or in less controlled settings where you can't you know, a lab experiments just advantageous because you know that you can control everything except the one treatment that you're trying to sort of study the effect of. But sometimes you can sort of make sure that the treatment

is randomly assigned. That way, you know that on average across the sort of subjects, if you like in in the experiment, those differences will cancel out on average. And so social scientists like me are always you know, looking for things that that hopefully. You know, we we think there's a case to be made for your features of the way that the sub program was allocated to the world having some quasi sort of random element to them.

And of course we never know if that's actually the case, except in rare, rare instances where social scientists him herself or the policymaker actually explicitly decided to randomize. But that's of course extremely rare. Much more likely is the case like the Indian railroads, where they had a complicated decision process about where and when to um to roll out the network. And and I should say, all that is um it doesn't even really address the heart of your question,

which is that there will be spillovers. You know. That is to say, in a classic lab experiment, you have a treatment group that randomly is chosen to get the drug or something in the control group is randomly chosen not to. But there's a serious problem if you think that it's possible that your control group is affected. Sort Of one way to think about it is they're the very fact that they were the control group means they're affected.

The other way to think about it as closer to what you said, which is that some of the treatment spills over onto them. They're sort of partially effected. Even they weren't directly affected, they were partially affected. Okay, so that's the big backdrop against which we tend to think about these things. UM and you know you need you need help from the re I think it's fair to say that we don't. There's no you know, I I did. In principle, you could design an experiment that which is

kind of completely ideally nail everything. But in the in the real world, we don't have enough statistical power to to follow all those spillover effects in their kind of manifold directions. As you said, this kind of four king tree just makes it. It's sort of that basically impossible with the kind of data, the kind of world we

live in. UM, so you need so economists you know like me sort of turned to um hopefully fairly uncontroversial notions in economic theory to to help structure those you know, what, we where we expect to find those spillovers and sort of where therefore to sort of shine the light and and try to see them. H And another way were to say it would be we can sort of structure things so that we know the kinds of places that

are likely to have had a full treatment. Other places maybe that we we think they whatever the treatment was, we know that some other place had three quarters of that, or half of that, or a quarter of that, or maybe finally just a place that we're pretty confident would have been almost an affected by the event. So we're always trying to do that sort of thing. And I guess that's a high level overview of how I thought

about the problem. I want to ask you to talk a little bit more about the process, Like how many times did you have to travel to India, how many libraries did you have to visit? What was it like digging up the archives of all this data that you discovered about the uh you know what specific data you ended up looking at, and then also you know what

did you discover about the ramifications of the railway build up? Yeah, I mean the process was certainly unlike anything I imagine I would end up doing doing my PhD. Um the first thing that you just have to find out what data exists, So that's UM kind of a scoping project. I this never would have been possible. I lived in London at the time I was doing my PhD. At

the London School of Economics. And none of this would have been possible if it weren't for the fact that the main libraries in London actually had as good a collection of kind of official government British Indian publications as did any library in India, almost better maybe because things

have been preserved better. Yeah, so I that, I mean, that made it all sort of possible given where I was based, and also made it possible because just getting the sort of numbers out of the books was of course just a huge, huge project because obviously I think, I it's complete back at the envelope calculation. But I once convinced myself there was somewhere between fifty and a hundred man you know, but a person years worth of the work involved in typing in the numbers. So I

was never going to do it myself. And so that but that process, you know, very Fortunately, just around the time I was doing this, in the mid two thousands, late two thousands, was just when people started talking about business process outsourcing, you know, the ability to hire, um, somebody to do a fairly low skilled task like typing in numbers on a computer terminal far away. If you know, if only you can find them, you know, And of

course that wasn't hard by that period of time. And pay them that was also relatively easy once I could raise the money and then finally just get the get the raw materials to them. And I could never send these books obviously they're they're way too big and and and they're obviously they're held in libraries. But but I was able to organize a team of people to take kind of digital photographs of every page. It kind of

like scanning, but way faster. You know, scanning is super slow. Um. But luckily digital cameras just became good enough around that time where archived based historians like me were able to um, kind of skip the scanner, skip the photocopy, and just go straight to a good digital camera. Anyway, So I

sent you a fifty thousand JPEGs or something. Took almost half a year just to organize the jpeg send them to a number of firms in in India actually, and uh, and they sent back spreadsheets full of you know, the numbers typed in. Um. You know, the the original publications were kind of too low quality to trust optical digital character recognition. And uh, at least at that period of

that technology. Yeah, so I guess you know that that's the basic idea of how I and many people like me kind of would convert the sort of archival paper records into digital machine readable versions. And then right, so I guess you know. There are a number of things I looked at. I looked at trade actual volumes of

trade flows. I looked at prices, that is, um, whether there was evidence that um, you know, it gets a basic prediction that is, when two markets get connected by via some technology that makes it easier to move something between the markets, then the price of that thing should look more similar. That's often just the basic notion of arbitrage. If the price were different, then yet it didn't cost much to move it. You can always just sort of buy in the cheap place and then sell the good

at the high at the high price place. So we kind of think that if if arbitrage is likely to be like that likely to happen, and it certainly did in this environment of British India, then we would expect that the railroads should narrow the difference in prices of exactly the same good over over to say two points in space. And there's a the data was consistent with that obviously as well that as railroads connected places, their prices started to converge. And then finally I looked at

um the kind of consequences for income. As you put it, there's such a stresses sort of aggregate income, think of kind of like a county or a district as they were called in British India. We're looking at the just this is is not individual people. I wasn't able to look at inequality or anything important like that, but on aggregate, the sort of the closest notion we could get to, sort of g d P of of a county kind

of went up and on average went up. And you're right, because the spillovers and and the fact that everybody's experience was different. These averages can be of course a little misleading, but but they represent the average, and the average was an increase of about eighteen percent in g d P. Huh. We are going to pause for a short break, but knowledge to work and grow your business with c i T.

From transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c i T dot com. Put knowledge to work, David. I know the Railroads of the RAJ paper is probably your most famous work, but a lot of people were pointing out when you won the John Bates Metal that it was fantastic that you

had won it. All the two hundredth anniversary or birthday of the notion of comparative advantage, which is of course a big, big deal in economics, and it's basically the idea that people can specialize in one type of industry or production, and then they can trade with other people who are also specialized and everyone can eventually benefit. Walk us through your work when it comes to comparative advantage. What have you been looking at and what have you found? All?

Everything I've done on comparative advantage. In fact, most of my work really since my doctoral thesis has been joined with a guy at m I T named are No Costano and and so we um we started thinking about comparative advantage and you're you're right. It was about two d years ago to this kind of day that David Ricardo really wrote down the first logical argument about why trade between two people or two regions or two countries would would you know, should benefit both of those people?

In that trade, and and the essence of his argument was just a kind of simple example with two activities. They were cloth and wine, and his example that and two countries. These were England and Portugal, and the jet. The example completely generalizes to as many countries and products as you want. But but the two by two was

the minimum ingredient to kind of see the point. So the one kind of catch that are know and I got interested in, and this this point was well known, but we kind of we were were a little bit taken aback when we discovered it for ourselves, was that, Um, once those two regions are actually trading, you know, I suppose you observe them today, suppose you were observed England, or even in David Kardo's time, you observe England and Portugal they're actually trading cloth and line with each other.

Then you know, according to that very same model in which that that you're using to explain the trade and the understand the consequences of trade in that exact same model, um, actually it would have to be the case that one of one of the two activities is not being done in one of the two countries, at least as as you put it kind of there will be specialization and and and that means, you know, in the sense that

there's something that somebody's not doing. So I guess it won't surprise you that we kind of predict you'd expect that England was not producing much or any wine, right, Um, they that was sort of the result of specialization, was that England was not producing wine. And the theory tells us that there's good reasons for that. It's that England is relatively worse at making wine than they aren't making cloth relative to Portugal. But the question is how bad

are they making wine? And we kind of know they're bad, both from introspection and also from the theory. We know that they couldn't have been good, or else they would have been producing it. But how bad and so And of course that basic idea pervades all of economic life. I mean, I know I benefit from not doing my own dental work, But how bad would life be if I had to be my own dentist? You know, I I don't know, but I know it would be awful.

And that kind of unknown number, it's not just unknown, it's kind of unknowable, right, I mean, Um, it's so that so basically everything I've been working on with comparative advantage with our no has this flavor of how could an economist ever hope to know that fourth number in Ricardo's example, That's the basic idea we got interested in where one could know that in general that sort of fourth number, or generally, just how good are regions at doing the things they don't do? And um, the first

example that came to our mind was agriculture. We thought, that's a case where you know, um, nowadays, regions of let's say Iowa, most most farms grow either corn or soy or maybe wheat. You know, other regions of the

US do different crops. And but so the question again comes up, well, how bad how bad would life be if we didn't sort of outsource all of our specialization, all of our output of corn and soy to to the corn and soy belt, right, I mean, what if we had to do it ourselves in New St New England,

or in California or in the southeast. You know, we were, of course, you know, since discovered, but deep down weren't too surprised to learn that that there are, of course, entire scientific fields, typically under the name of agronomy where their goal is to, in a sense kind of just try to tell farmers, you know, how, given your soil, given your climate, given everything else about your local environment, how good would you be at growing any of the

following kind of list of crops. You know, corn and soy, but also cotton, and and and and wheat and peanuts, you know, And and it's that advice that agronomous give to farmers that of course helps those farmers make the

right decision about what to grow. But we so we sort of in a sense kind of downloaded that advice in a in a data file, you know, the advice from the agronomous, the actual numbers on you know, if this small parcel of land somewhere in the U s. Divide the US up into about a million small parcels of land, and the agronomos will tell you how good each parcel would be at a whole, at virtually any crop.

And of course it doesn't mean the agronomous are necessarily right, but they but they have kind of hundreds of years of their own randomized trials in a sense, and and greenhouse trials, etcetera, and all physiological knowledge of how crops

work too in order to build up those numbers. So anyway, so we were kind of designed to study around that information because we thought it was it was it was the core of the economic notion of comparative vantage was to know things like, you know, how how how hard would it be to grow peanuts in Iowa. So we then kind of use that information and filtered it through the last hundred year hundred and twenty years or so of US um agricultural history, you know, as the as

the U. S. Counties. The one one, one plausible story that we think is consistem with the data is that over the last hundred thirty years or so, at least this study started in eight the ability for one county in the US to trade with another county in the U. S. Or with you know, consumers elsewhere in the US, like in a big city. Uh, that ability to trade you know,

dramatically improved. We had the railroads, we had the interstates, we had you know, the the the invention of the truck, you know, major major improvements in the ability to trade. And so we wanted to kind of quantify how how beneficial that that process was for the U. S. Economy as the whole as a whole, and what the numbers

of came out. We're we're startling to me at least, you know, the U s. Agriculture has been this incredible growth story, right, I mean, in a sense, the fastest product sustained productivity growth that that we've experienced in any sector has happened in agriculture over the last hundred years or so. And that's why we can feed the nation and beyond with I don't forget the exact number, but something under under three percent of the workforce. And so

that dramatic growth and productivity is just amazing. But according to our estimates, about half of it comes from just pure allocative efficiency in the sense of kind of specialization, places being sort of free as markets are trading, places are free to specialize in what they're good at and not produce what they're bad at, and that that of course enhances aggregate productivity, and that those are the gains from trade, those are the gains due to comparative advantage

at work. That's pretty startling. We just have a few minutes left, and of course we want to talk about some current applicability of your research, and obviously the place I think most people's minds would go is sort of, you know, some of the trade disputes that the US

might soon find itself in. But something else occurred to me that is maybe a little more off the beaten path, but also interesting, which is that India, which you studied, obviously, is still dealing with a lot of the same things that you talked about in terms of the diversity of its regions and lack of a completely coherent domestic free

trade area. I believe it was sometime last year that the Modi government tried to uh sort of move forward and pushing through a national sales tax so that there wouldn't be this sort of disparate tax regime across regions. There's also efforts to have the sort of national payment system to harmonize and unify payments. Do you see applicability of your work on India's rail system to some of the big domestic debates happening in Indian policy right now? Yeah?

I do, I mean I of course, you know, it would be naive to suggest that sort of the It is easy to translate a lesson from one technology one point in the past, you know, because it's a very backward technology was this. These trains were slow and you know, they were the first trains of the world that's ever seen.

So even just for studying trains, they're they're misleading. A piece of evidence the more versatile and long living I think piece of evidence is more to do with or a lesson that we learned from that that that kind of work is more just to do with the the overall sense of benefits from trading. You know, if if you if you do something that allows more trade, the odds are good that people are going to benefit on the whole, that the average kind of the total pie

will grow. Um. And that's the kind of thing I've tried to I've tried to quantify and I think you know, so you know, the lesson from that that work I've done, as well as the huge body of work that I've read that other that other people have done that's built up our knowledge of that uh tends to leave a pretty an equivocal picture that on aggregate, those games can be um, you know, exist and or there in the data, and they're and they're important and they're worth um yeah,

they're worth not standing kind of in the way of you know that, so when we when we make it hard for people within the same country to trade with each other, we stand in the way of those benefits. Uh, just way we make it hard for me to do We make it hard for me to hire a dentist rather than doing my own dental work. You know, we we stand in the way of gains from trade between

me and the dentist. Thankfully, in the US, there's not much discussion of intrnational trade barriers, and in fact, everyone tends to agree that improving infrastructure, transportation infrastructure would be

a good idea. You know, we we don't think it's you know, we we want to encourage more trade between Colorado and California, or Kansas or Connecticut, and we we we think we have a basic instinct that those are things are a good idea, and and that's consistent with the evidence that I've seen and that I've worked on myself. And I don't think it needs to be any different internationally. Just kind of turned into your first question about the

Internet shield trade policy terrorists. There's no good reason to embrace international trade and yet stand in the way of international trade, in my book, unless one possible reason it would be extreme distributional concerns. You know, if you I've stressed obviously aggregate gains, I have not. You know, myself worked on the distributional consequence is how virtually any change in the economy is very likely to have people who

are harmed by the change. You know, as Walmart displaced Kmart, and as Amazon displaces Walmart, people suffer, right, I mean, people who have jobs and capital tied up in the industry, the firm that's being pushed out by competition, they suffer, and and competition from foreigners is no different. So we need policies that help minimize that suffering. But but standing in the way of growing the aggregate pie I don't think is likely to be the best policy solution to

those challenges. David, can I ask just one very very quick follow up, Um, which is I mean, given the body of academic research that points out the benefits of trade and the benefits of comparative advantage and specialization, why do you think the notion that trade is a zero sum game seems to persist in the wider world, and in some parts of the world seems to be growing.

I think there's two basic answers. One is um, yeah, and this is a well known problem that political scientists have talked about for a long time that whenever you have something that with you know, as I stressed lot originally, any change I can think of it is going to generate benefits for you know, some people, maybe everyone, and some costs for some people. But sort of trade and many many other things like it, you know, free markets

in general, tenders that have very concentrated um costs. When I say concentrated, concentrated on a relatively small chunk of the of the population, and very dispersed benefits, right, I mean, think of think of China, right, They've displaced somewhere, you know, relatively I mean a huge number of jobs in the in the in the absolute, but relative to the total population,

a relatively small percentage of workers. Yet virtually all of us every day, you know, consume things that that that are cheaper and maybe only exist thanks to large foreign

manufacturing countries like China. So so um. But you know, I think deep down there's a bit of us a incumbent producer bias in our in our society, you know, the it's as if you know, it's as if as a nation we think I mean, I don't mean we all, but if you you listen to a number of people, you get this impression that we were just dying to produce, right, I mean when when my wife and I trade, you know, when we when we kind of bargain over who's gonna

sort of cook the food and who's gonna mow the lawn. You know, I think we specialized according to comparative vantage. We understand that that's in our mutual best interest. We tend not to fight over who gets to do more producing. Yeah, we you know, the debate is more about like, if anything, you know, we'd both rather not produce. But so how weirdly, at the national level, when it concerns international trade, we were we stress over the fact that there's a trade deficit.

You know, that's of course, like the other people are doing the producing, you know, you know, we shouldn't sort did in some sense embrace that. So I don't understand how at the micro level people understand that that kind of consuming is good and producing is costly and unpleasant,

whereas the macro level it's sort of the opposite. I I sort of think deep down that might be because producers, you know, I have have a lot of power obviously for an individual firm and would much rather produced than than not right, Uh, that's how they make their profits. But that an aggregate societal level, we we should sort of embrace the fact that we can um consume for less effort, and that's the basic notion of gains from trade is just more productive. We can get more for

less um for less input. All right. Dave Donaldson, Associate economics professor at Stanford and the recent winner of the John Bates Clark Metal Award, Thank you so much. Fascinating conversation, fascinating work. I can't wait to continue seeing the evolution of what you've done. Really appreciate you coming on the podcast. Well, like I said, thanks again for talking about me. It's been a play. Yeah, come back when you want a

Noball prize. Okay, I don't want to drink it, So, Joe, I thought that was fascinating and it was sort of right in the sweet spot for our All Thoughts podcast because it uses all these historical examples to really illustrate some of the stuff that's going on today. Right. Yeah,

I love that conversation. Um. I think my favorite detail was the idea that the best recorded data on all of this Indian trading and taxes and income levels and whether was what was how in the UK and then the ultimate solution to putting that in usable form was to take photographs of all the pieces of paper and then email fifty JPEGs two people in India appropriately enough to then put back into an Excel spreadsheet to be

usable for an economist. I mean, it does make you wonder what other academic research could be enabled by new technology relatively soon, based on old data. And I think we've had similar discussions about this before, at least I think I did with Sid Verma and Simon Henrisen. The other thing that I thought was really interesting was some of the stuff he was saying about the way we

trade within countries versus the way we trade internationally. And it does seem to be that trading with our neighbors within a country, with the exception of India, um just seems to be much more palatable to us than trading with other people outside of the country, which I assume speaks to human natuy here a little bit. Yeah, I mean, I think this does really get to questions of nationhood, so that if we see, you know, they're even just

sort of domestically within this country. We have some places that have done very well, like the coastal areas San Francisco, New York, some places that have done really poorly, and we it doesn't really you know, for the most part, intra national gains from trade don't seem to get people

anxious or winners and losers. But then the idea that you know, if we expanded beyond the borders and some country is doing well, or and the perception that parts of this country are losing out in that trade, then that really sort of you know, strikes a deep chord with people, gives them anxiety. I don't think there's any obvious way to resolve that. I think the sort of purely academic way perhaps still doesn't sit right with people. And obviously we see that playing politically, but it is

a really interesting comparison. All right, shall we call it a day, Let's do it cool. All right, This has been another edition of the APPS podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wis and all follow me on Twitter at the Stall and also Tracy, I realized we never unlike some other podcasts, thank are awesome producers, So I think we should start doing that. Maybe we're just ungrateful. I think we're it's it's just I realized other people do that.

We've never been doing it. We've been doing this podcast for a long time. Should I say we change the tradition? We want to thank are awesome producers and Sarah Patterson who is on Twitter at Sarah patt with two ts, and the head of Podcasts Alick McCabe. But knowledge to work and grow your business with c i T from transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses.

Learn more at i T dot com put Knowledge to Work