INTRODUCTION
I wrote my Ph.D. dissertation at Stanford during the late 1970s and early 1980s about the British canal system. I’d wanted to write on the methodologies behind two different approaches to competition by Friedman and Chamberlin but couldn’t find a willing thesis adviser for that topic. The canals turned out to be much better, by carrying all the methodological issues in a historical example.
Canals were a real conundrum for one such as I, well-versed in neoclassical economic approaches, and that is much of the reason I chose them. We inhabit a world of interconnection; networks seemed a way to address the boundless interdependence of economic activities. I thought that transport might give me a simpler handle on how to frame the larger problem of interdependence.
But canals were not only interconnected; they were also ‘natural monopolies’ based on their increasing returns (or declining unit costs with higher volumes of traffic). The bulk of the costs of a canal lay in its initial investments: setting the route, gaining Parliamentary approval of a Canal Bill, and then digging the waterway route with whatever installations were needed (locks, aqueducts, towpaths, gates, fences, etc.). So, the marginal costs of carrying goods on canals were relatively insignificant compared to their costs of construction. Canals embodied a public good with increasing returns to scale, which ventured far beyond the well-behaved, partitionable markets so revered in neoclassical theory.
Furthermore, the history carried a message to me that seemed out of synch with this situation, though I had to learn the factual patterns well enough to see it. This secret was hidden within the unfolding story of these canals. The Canal Age in Britain involved three basic stages: Construction; Operation; and Collapse. Let us consider each in turn.
THE THREE PHASES OF THE CANAL AGE
The Construction Phase saw two periods of ‘investment mania’ in the late 1700s and early 1800s. But in our economics, people are rational homo economicus who always make sensible decisions based on foresight standing on full and complete information, so such mania moments are ruled out of play. Being a bit of a maniac myself, this history piqued my curiosity…
I found construction cost data sprinkled throughout Charles Hadfield’s extensive and detailed histories of various British canals, so I used it to execute a hedonic analysis of the costs of canals based on the number of locks, total mileage, width, and various other factors including the year of construction. These costs, when regressed against time – adjusted for all other relevant factors available at that time – showed a secular rise in construction costs per mile for these canals. I found this surprising, because with a sequential learning process those costs per mile should have fallen. In the regrettable absence of any reliable land price index, I attributed all of the rising construction costs per canal mile to the tightening entry barriers in the Canal Bill approval process, which encumbered later canal projects with a lot of extra costs. But that is also an important part of the Operations Phase for canals.
The Operations Phase also opened another mystery to me. The established canals used the Parliamentary Canal Bill approval process against new waterway projects, either defeating them altogether or restricting them in diverse ways. This resistance seemed counterproductive to me, by impeding the network’s expansion which would have benefited every canal. Why did the established canal interests oppose new routes and waterways instead of acting to promote them? I spent a lot of time wondering about this question.
The Canals’ Collapse occurred very suddenly, when fully 1000 miles of canals (one third of the network) fell into railroad ownership in three short years, between 1845 and 1847. After that, the game was over and this option no longer worked for the remaining canals. The waterway network was fatally broken, though it has continued as a tourist destination to this day. When this magnificent edifice of durable capital fell into ruin so quickly, it raised a lot of questions for me. The whole process seemed so wasteful! I wondered why it all happened that way.
Eventually, I realized that I was seeing a persistent pattern of myopic behavior, reflected in the investment manias, in the endless bickering among canal projects, and ultimately in their rapid collapse. For such a major investment, with a vast influence over firms’ location along waterway routes, one would expect that longer-term perspectives would rule, which was not the case. So I was trying to understand why canal owners were so myopic.
THE CANALS AS AN ECONOMIC ANOMALY
Also, another conundrum arose. My education in economics separated the world into markets and industries simply defined as aggregations of substitute products or firms. These markets were ‘well-behaved,’ meaning that they entailed decreasing returns (rising unit costs with growth in scale) to restrict the sizes of firms so competition could work. Within such a realm, markets work well, assuring good outcomes for everyone in accord with Adam Smith’s much-touted ‘Invisible Hand.’ His view was that private, acquisitive values play out to advance the ‘Common Weal’ in a benign, free-market competitive process. And that was what we were taught in our economics courses as undergraduates and in graduate school…
The canals were not that sort of environment: substitution and complementarity coexisted together in an increasing returns setting that was totally interconnected. I puzzled over this situation, which was pushing me way beyond the well-defined rules I was taught. Both these issues – first of network interdependence, second of falling costs in ‘natural monopolies’ – caused me much consternation. I worked on these two issues before addressing myopic concerns.
Interdependence
Figure One
The problem of interdependence in networks sidestepped ‘industry’ aggregation because substitution was fully entangled with complementarity here. Think of a simple square rural network of towns within a much larger complex of transportation routes, linked by four canals. Counting clockwise from the NW corner, the towns are A,B,C,D. Now imagine collusion between routes AB (north) and BC (east), and ask the question of whether linkages between AB and BC are parallel or end-to-end (substitutes or complements). This is the very same question of comparing beer vs. wine to beer and pretzels in a consumer economy, except that here we have falling costs mixed into the issue as well.
For parallel lines – substitute goods – standard models apply. Any collusion of substitutes raises the markup on price by internalizing what would otherwise be external pricing effects. End-to-end mergers among complements cut markups and prices so raise growth through internalizing positive pricing feedbacks. Growth also reduces costs due to increasing returns, another reinforcing effect due to positive feedbacks among complementary goods with increasing returns. Complementarity inverts the welfare impact of collusion vs. rivalry in this situation. The question turns to one about the nature of interdependent relations, and about the balance of substitution with complementarity.
Whether routes AB and BC are rival substitutes or joined complements depends on direction of travel. For passage between towns B and D they are parallel or substitute routes, but for travel between towns A and C they have end-to-end or complementary ties. If traffic goes in both directions, substitution and complementarity are entwined in a nondecomposable balance in need of a systems approach. How do we analyze that?
The problem is the relation of any two routes in this setting is both substitutional and complementary, depending on purpose and travel direction. Both forms of relation are ineffably tangled together. How do we deal with this situation, as it strays well beyond the standard purview of orthodox economic models?
A General Method of Aggregation for Interdependent Entities
It occurred to me that for any one agent, canal, product, firm or entity (which we can call “j”) in this story, as a member of any group I made up of (a … z) members, the difference between its own-profit maximizing price Pj* and its joint-profit maximizing price Pjʹ within group I expresses the net interdependence within that group with respect to that single member j. Why is that important?
There are several ways to think about this matter. The joint-profit maximizing price Pjʹ includes interagent payments to compensate all i ≠ j members in group I for any external profit effects that fall on them arising from the pricing decision for j. In this situation, substitutes want a higher Pj* because that will shift sales over to them from j, while complements want a lower Pj* because their sales are positively related to j’s sales. So the difference of the joint-profit maximizing price Pjʹ from the own-profit maximizing price Pj*, in resolving the argument over whether Pj* is raised or lowered, provides an expression for the net interdependence between j and the rest of group I (however that group is defined). The point is that we have a method described here that allows a grouping of entities that does not impose substitution assumptions such as economists do with their ‘industry’ aggregation. This more general method allows a far more flexible notion of framing how our social and economic relations are structured and connected.
Let us call SI a measure of this net interdependence between j and any group I, where SI = Pjʹ – Pj* signifies this measure. For net substitution, SI > 0, and for net complementarity, SI < 0, though we can forego a rather complex mathematics behind this analysis. The point is that this concept gave me a way to express the relationship between any single canal (or economic entity) and any group I of interrelated canals (or entities). Thus it gave me a means to think about complexly interdependent systems and networks and how integration from individualized to joint pricing behavior might play out in welfare terms, for better or for worse. With this approach, I had a method to deal with all of these anomalous interdependence and public goods issues. But what about canals’ increasing returns and falling cost dimensions? I still had to deal with that, and this story is still amazing to me…
Dealing with Increasing Returns as an Economic Taboo
The increasing returns problem was the second major issue I had to resolve, since it so drastically departed from all of the ‘well-behaved’ market assumptions I had been taught. In this situation, the higher the traffic volume, the lower the unit costs of production, in this case the marginal cost of transport. The institutional question becomes one of whether competition is efficient or possible in this setting. The literature of economics said no. Falling costs throughout their relevant range meant firms would grow without limit, merging into monopolies via an ever-accreting concentration. Was that a good thing, due to reduced costs? Or would it be bad, because of market power growth and abuse? I pondered over that question. I wasn’t sure how to frame the issue in a way that would open me up to an answer.
I explored and devoured the literature on the shape of the cost curve in economics, finding two papers in the late 1920s by A.C. Pigou, the Paul Samuelson of his time, declaring increasing returns as the rule, calling any embrace of diminishing returns (rising costs) “inadmissible”! A debate raged in economics throughout the 1930s – mostly in Cambridge, U.K. – over how to deal with increasing returns phenomena, which proved incompatible with equilibrium, competition, stable outcomes and so calling for a quite different economics in need of development. The underlying thrust during over ten years of this debate was about increasing returns, taken as a given premise on which all economics must take its stand as a universal truth.
‘The Hicksian Getaway’
Then, in 1939, a young economist named John Hicks published a book called Value and Capital that took a different turn, simply asserting decreasing returns (rising costs) to make competition work. This was an amazing and abrupt departure from what was believed, though Hicks was quite dismissive of what had engaged economists for over a decade of ferocious debate during the 1930s. He put it thus:
At least, this getaway seems well worth trying. We must be aware, however, that we are taking a dangerous step, and probably limiting to a serious extent the problems with which our subsequent analysis will be fitted to deal. Personally, however, I doubt if most of the problems we shall have to exclude for this reason are capable of much useful analysis by the methods of economic theory.
Period. End of section. The next starts with a sigh of relief for removing this annoyance so one can get to the work at hand: “Let us, then, return to the case of perfect competition…” Thus Hicks dismissed the doubts he himself had sown on diminishing returns as a “limiting” and “dangerous step” for the ensuing analysis.
I call this ‘The Hicksian Getaway’; it has proved a critical and disastrous error for the ongoing course of economics. This illegitimate move formed the basis for a neoclassical framework of analysis that developed directly from Hicks’ foundation. First, Paul Samuelson’s 1947 Harvard Ph.D. dissertation on the Foundations of Economic Analysis was constructed to extend the Hicksian framework, which was then further developed during the 1950s and 1960s by people like Kenneth Arrow, Gerard Debreu, Frank Hahn and many others, who were rewarded with Nobel Prizes for work contributing to and developing a set of General Equilibrium (GE) models of the economy. This is how ‘The Hicksian Getaway’ became the basis of a rigid and unyielding orthodoxy in economics, stimulating an Age of Denial about increasing returns and their overwhelming influence on any economy.
Interestingly, after winning the Nobel Prize in economics in 1972 for his 1939 Value and Capital, by 1977 – on the heels of many assaults on and rejections of GE models by mostly European economists – Hicks apologized for his ‘Getaway,’ calling it “nonsense” and an “indefensible trick which ruined the ‘dynamic’ part of Value and Capital.” But his retraction came much too late, after diminishing returns suppositions had developed into a rigid doctrine not to be questioned or challenged. Consequently, ‘The Hicksian Getaway’ endures as a monumental error savaging economics today, ushering economists into an Age of Denial about increasing returns to warrant treating competition as synonymous with efficiency, without any proper scientific justification or supporting evidence for this specious claim. Not many economists would willingly accept this statement, though it arises from a direct reporting of the relevant literature.
Time Horizons are the Difference Between Decreasing and Increasing Returns
It all has to do with the role of time in economic analysis. The main point is that decreasing returns (rising costs) apply to short-term models of production in which certain inputs are essentially fixed. Consequently, for short-run analysis, you cannot expand via full replication of all productive inputs to generate constant unit costs as an upper bound for production cost per unit of output. Only in the long run are all inputs fully variable. And any expansion of scale brings new opportunities for reorganization to access greater efficiencies than mere replication allows. This is the essence of the logical case for increasing returns. The empirical evidence supports this view, at least whenever addressed or acknowledged.
The difference of short-run from long-run production is a matter of time horizons, which should be treated as a variable to understand the way short time moments unfold into longer production periods in economics. But just treating dynamic processes in terms of time horizons is not sufficient, since how we achieve a longer-run view through time is by knowing everything relevant to a given choice. Time horizons reflect a much broader, multidimensional concept to be called the planning horizon. The planning horizon offers a formalization of Herbert Simon’s concept of bounded rationality, which won him a Nobel Prize. Planning horizons define the bounds of our prior rational awareness of radiant impacts spreading out from any choice. Planning horizons extend through greater understanding and accurate knowledge.
A Brief History of Time in Economics
Attempts by economists to incorporate concepts of time into economic analysis have a long history. We will start in the 20th century with Knight (1921), Stigler (1939) and J.M. Clark (1940, 1955), where the last two well-known economists ended up dismissing any attempt to treat time as a variable as it would “overload any possible system of graphic presentation.” A geometric model of pricing and cost with a third axis for time making costs into surfaces shifting with expectations “would still be a simplification.” This work continued to uphold Hicks’ 1939 dismissal of a proper economic analysis of dynamic processes based on time and decreasing returns.
In 1959, another economist, Armen Alchian, published a chapter that posed nine propositions on the relation of production cost to time and output, with a three-dimensional frame of the sort described by Stigler and Clark. Alchian tackled the problem as the relation of firms’ “equity cost” to the volume, output rate and period of a production run. He argued that equity cost – namely, the impact on company value – was a way to incorporate actual long-term factors into production decisions. Total equity cost (C) is a function of volume (V), output rate (X), production run length (m) and a planning interval (T) such that: C = C(V,X,m,T). Alchian then transformed that cost relation to A = A(V,X,T), as V is the sum of X(t) over the interval t = 0 ® m, allowing m to be dropped. My argument is that dropping time out of the cost function was a key mistake, about which more is said below.
Alchian’s propositions state that the equity cost of production turns on how runs structure volume in generating output through time: more rapid output rates (X) for a given volume (Vo) increase its cost, whereas more time (m,T) reduces its total and marginal costs of production. The key to Alchian’s explanation is that a faster X for a given Vo means shortening m (and vice versa for slower rates of output).
A year later Julius Margolis developed this story into an explanation of the relation of planning horizons to pricing decisions, and he had the basic components right in his presentation thereof. When I came across Margolis’ paper, which solved the pricing problem in the same way I had addressed it, I wondered where the rest of this seminal literature had gone. But Margolis’ contribution went totally unheeded, as an unnecessary and superfluous refinement against the successful competitive model of economy based on ‘The Hicksian Getaway.’ As Nobel Laureate Kenneth Arrow had said in a 1969 article, a theory of monopolistic competition (with downward sloped cost and demand curves) “is forcibly needed in the presence of increasing returns and is superfluous in its absence.” So such innovations were seen as irrelevant in a dominant economics based on decreasing returns.
‘The Hirshleifer Rescue’ as a Reconfirmation of Decreasing Returns
The next step was taken by Jack Hirshleifer (1962), who saw Alchian’s nine propositions as a threat to the substitution, scarcity and diminishing returns assumptions of modern neoclassical theory. He declared that the goal of his paper was “rescuing the orthodox cost function.” Consequently, I call this moment in the history of economics ‘The Hirshleifer Rescue.’ The argument made by Hirshleifer was that a slightly revised set of propositions along the lines of Alchian showed – according to him – diminishing returns were an outcome of an increasing rate of production beyond a certain point, based on Alchian’s 1959 frame. Consequently, the orthodox analysis was secure and not to be seen as challenged or undermined by Alchian’s nine propositions or any introduction of time as a relevant variable.
There had been several discussions of learning curves, progress functions and technical change in the literature at that time, and so Walter Oi’s (1967) synthesis of this work brought together Hirshleifer’s argument and the Hicksian framework with some minor additions to argue that none of these horizonal issues of learning, progress or technical change were required or had to be treated explicitly. These horizonal elements were already incorporated into Hicks’ competitive framework. Consequently, any special attention to changes in learning and knowledge – and therewith any concern with horizonal issues – was simply unneeded and quite superfluous. Oi concluded his analysis with this dismissive finding:
To sum up, a dynamic theory of production along the lines of Hicks provides us with an essentially neoclassical explanation for progress functions. … To attribute productivity gains to technical progress or learning is, I feel, to rob neoclassical theory of its just due.
Decreasing Returns as a “General and Universally Valid Law”
So none of Margolis’ horizonal arguments were required, because the competitive model in economics has stood us all in such good stead. As a result of this series of papers, we see Alchian (1968) returning to the issue with an authoritative essay on “Cost” in the Encyclopedia of the Social Sciences that included this declaration, directly based on ‘The Hirshleifer Rescue’:
A general and universally valid law is that for every volume of output there exists an output rate beyond which the marginal cost with respect to rate always increases. This is commonly called the law of diminishing marginal returns with respect to output. … Average cost per unit of volume can be decreasing for small outputs. But as larger outputs are considered, the average cost will, beyond some output rate, begin to rise persistently and with increasing rapidity…
So here we are, with a radical flip of economic belief – between Pigou in 1928 and Alchian in 1968 over only 40 short years – from increasing returns as the only admissible rule over to decreasing returns as a “general and universally valid law” of economics. There was only one minor problem that got lost in this shuffle: the entire argument is wrong, and Hirshleifer’s alleged ‘proof’ was incorrect. No one could possibly have checked his claim because everyone knew it was right! In the very first step of his mathematics, recast in a more sensible way, something looks strange and peculiar. We’ll come back to that after raising a few more issues.
Why Time Matters
Ralph Turvey (1969) reviewed this series of papers, observing that the traditional analysis “attempts to deal with time – with the length of runs – without adequately incorporating a time dimension.” He concludes with this statement:
What does emerge in general terms is the importance of the time dimension and the resulting multi-dimensionality of marginal-cost concepts. … When uncertainty concerning demand is coupled with uncertainty in production, cost minimization ceases to be a simple concept. … This review … makes it clear that the definition of marginal cost as the first derivative of cost with regard to output is too simple to be useful. Both cost and output have time dimensions, and both may be subject to uncertainty.
Debunking ‘The Hirshleifer Rescue’
The problem with this complex series of papers is that they wrongly reinforced and confirmed both ‘The Hicksian Getaway’ and ‘The Hirshleifer Rescue’ as a core frame for an economics of competition. The whole exchange left the role of decreasing returns secure within a rigidly orthodox economics. But all this was wrong. ‘The Hicksian Getaway’ stood on nothing more than a bald assertion of decreasing returns against an established belief accepted throughout the 1920s and 1930s based on Pigou’s two influential papers. And ‘The Hirshleifer Rescue’ was the only purely technical argument for diminishing returns that I could find in the literature, so I scrutinized the mathematics of his argument a lot more closely than (obviously) anyone else had done, during the late 1970s and early 1980s.
Recall Alchian’s argument, that his nine propositions state that cost depends on how production runs structure volume with respect to speed vs. time: higher output rates (X) for a given volume (V0) increase its cost, whereas taking more time (m) reduces V0’s cost of production. The key to Alchian’s story is that a more rapid X for a given V involves shortening m, inviting Hirshleifer’s simplification of V = m0X, so V and X shift in the same proportion over run length m0. The key to ‘The Hirshleifer Rescue’ is an argument that – within this frame – marginal cost with respect to output rate X eventually must turn upward, justifying “the powerful logic of the law of diminishing returns” which Alchian later accepted.
But Hirshleifer did something peculiar, suppressing production time m in the way he defined his cost function as H(V,X,T), while combining stocks (V and T) and flows (X) in this formulation. So I converted that function into one using just stock variables as J(V,m,T), with time made explicit instead of suppressed within the flow rate X. Once you make that change, it is obvious that the relation of output levels to marginal costs is based on production time m, with no implications in this scenario for any rising marginal costs stemming from higher output rates, which is what Hirshleifer claimed. My 1985 doctoral thesis, after reviewing a more complex version of this proof than that in my 2015 paper on this, finished the argument thus:
[We have shown] nothing less than the following fact: that Hirshleifer’s ‘rescue’ does not really follow from Alchian’s statements at all! … Hirshleifer’s argument is a non sequitur… Its status reduces to simple assertion, which flies in the face of an evident fact: unbounded increasing returns… The upshot of this grievous mistake is that any incorporation of learning by doing and technical change into cost and price theory has been deferred. The point lies in fifty [now 80 – FBJ] long years during which we have painted a ‘well-behaved’ world, forestalling development of our conceptions in the direction of proper behavioral science. … The limits of Hirshleifer’s central contention could not have been checked very closely. The carelessness thereby implied is appalling, with how much we rest on this claim. After all, the error is not well-concealed to any skeptical eye. Its impact stretches well beyond sight if his proof has diverted attention from learning. We cannot doubt that it has.
From Time to Planning Horizons
The key point is that time matters and needs to be part of our economic theories of cost and pricing. It was suggested above that the best way to incorporate time into cost and price theory is by introducing a time horizon as one component of a more widely embracing concept of the planning horizon. In this way, objections voiced by Stigler and Clark to bringing in time, based on the role of uncertain expectations of future prices, become part of the planning horizon implicit in a pricing decision. Therefore, the reason that they could not see the solution – despite that Margolis described it correctly in 1960 – was methodological; they sought to objectify these phenomena into observable magnitudes, which was not possible (as they said).
What they needed to see is that the H* inherent in any decision is a cognitive variable, living within a subjective domain of knowledge and conscience in an explicitly ethical economics. Here, short-term theories of competition must give way to longer-run theories of complementarity and cooperation. Otherwise, any horizonal growth is stifled by a myopic culture reinforced by our rivalrous systems.
The Inadvisability of Embracing Controversial Issues in a Ph.D. Dissertation
Yikes! My Ph.D. dissertation was venturing into some of the most controversial issues there were in economics, and my dissertation adviser was not supportive of what I was doing. This is never a good position to find oneself in… But I bulled my way through anyway, against my adviser’s urging to “Get off this theory stuff and just do the canals!” I simply was stubbornly unwilling to walk away from the most interesting ideas I’d probably ever have, just to earn a credential that would have been worthless to me with such a price of accession. So I forged ahead, with enough in the thesis – which included a hedonic econometric analysis of canal construction costs, a model of pricing calculated within an interdependent network, and a lengthy critique of neoclassical economic theory with a debunking of Hicks and Hirshleifer – to smuggle the theoretical stuff by placing it all behind two other legitimate thesis-level analyses of both costs and pricing. My three advisors finally signed my thesis in 1985, after eleven long years in Stanford’s Ph.D. program.
BACK TO THE BRITISH CANALS AT LAST
So what was the story of British canals, and how did it teach me all this? The Construction Phase involved overinvestment and losses during two ‘mania’ periods, followed by rising overall costs through a period when they should have been falling. Both insights called up questions on the vaunted rationality of economic decisions and the learning that failed to manifest in lower construction costs through time. During this period, I was also reading Herbert Simon on boundedly rational economic behavior and why it mattered, while starting to think about planning horizons, horizon effects, and their role in behavior.
The Operations Phase was revealing. Because of fears about preferential patterns of pricing by canal projects, the transport industry in Britain was divided into three separate vertical tiers, conveniently labeled A, B and C for Agents (who booked and sold transport services to final customers), Boats (that carried the goods), and Canals (that provided and maintained the waterways as the means for transport). This rule was called the Carriage Trade Restriction; it ultimately had a fatal effect on the waterways’ structure and future.
The Horizonal Impact of Losing Control over One’s Customer Base
If you owned a canal, you had to set your own tolls with no control over toll rates along other interconnecting routes. There were two pricing options, as Margolis had described. You either can price low to encourage growth in trade – the long-horizon strategy – or you can jack up your toll rates for instant profits – the short-horizon strategy. But cutting my price will only grow traffic if those savings are passed through to benefit downstream consumers at Agents’ levels of business, and by Boatmen situated between the Agents and the Canals. Canal owners themselves have no control over price setting by these downstream vertical sectors from which they had been barred, due to the Carriage Trade Restriction. So raising prices for immediate profits at the cost of potential traffic growth was clearly the only viable strategy left for canals to adopt. This is how institutional structures can engender subtle incentives for myopic behavior.
Canal owners also saw each other as rivals contending over shares of a given pie of traffic on their own waterways. Motivated by this belief, they used the Canal Bill approval process against potential rivalrous entrants, thus opposing expansion of the overall network despite that it would have benefited all linked canals together. This story was shouting myopic behavior at me just at a moment when I was trying to figure out how concepts of time can be assembled into a rigorous economic analysis of network production cost. So, for me, this was a true “Eureka!” moment.
The Collapse showed the final lesson, and the upshot of all this myopic behavior. The canals set tolls like local monopolies, gouging their traffic for all it could bear while neglecting costly maintenance of towpaths, gates, locks, water retention and depths, and other technical features. So once the railroad technology had become feasible enough for investment, the flow of funding into railroad construction and operation was vastly augmented by a widespread public hatred of canals for their myopically selfish practices.
The canals sought to protect themselves by using the Railroad Bill approval process in Parliament in the same way that they had used it against new waterway projects, by forcing railroads to buy out canals until that ploy ceased to work after only three years from 1845 to 1847. In other words, the canals exploited this compensated exit mechanism for the brief moment that it lasted, grabbing all they could for quick profits at the expense of future enduring gains.
THE ECONOMICS OF HORIZON EFFECTS AND MYOPIC CONCERNS
Myopic behavior ruled the day, from the start to the finish. So in this setting I happened to ask exactly the right question: If, in every situation, we find a hopelessly tangled balance of substitution and complementarity in the relations of any one agent or entity to a containing group I of socially interactive members, how will ‘horizon effects’ (namely, ordinal shifts in H*, which can either be private or social due to ‘interhorizonal complementarity’ as the contagious social impact of private changes in planning horizons) shift that balance? That turned out to be the right question, with a totally general answer that applies across all economics.
While sparing you the mathematics, when I examined this issue it turned out that – assuming socially contagious horizon effects, as noted above – then SI (our measure of net interdependence within group I with respect to any one member j) responds to horizonal change in the following way: dSI/dH* < 0 or, namely, that longer/broader planning horizons (private or social) will shift the balance of interdependence or social relations always away from substitution and opposition in favor of complementarity and consilience, for many diverse reasons.
Another way of expressing this point is that horizonal growth – by increasing the rationality of our decisions – yields a direct gain in the efficiency of our own outcomes, while also working to transform interpersonal conflicts into concerts of interest. In this sense, a horizonal economics also operates as a theory of how we can enhance and nurture peaceful social relations through cooperative systems.
Horizonal expansion – what many are starting to call ‘longtermism’ – consequently ought to become a primary goal of our social systems of organization, which might cure a range of social and cultural ills. To the extent market-based competition is keeping horizons short, through incentives stressing immediate impacts at the expense of long-term effects, competitive frames are reinforcing and maintaining a myopic culture in a dangerously self-destructive mode. Look all around us at our ethical and ecological losses as examples of this horizonal problem along with its spreading of harm to us along with our descendants. These enduring outcomes matter, as we live out the spreading and ongoing costs of prior decisions.
WHAT I LEARNED FROM THE BRITISH CANALS
So here is a brief compendium of what I learned from the British canals. They confronted me with their interdependence, showing me why economists’ substitution assumptions were only one side of a two-sided coin regarding the nature of our radically interconnected social relations. They also required me to think about increasing returns to scale and the role of this concept in our economic theories of production cost and pricing. This query uncovered some fundamental errors in the way we economists have framed our standard analyses. I kept thinking of Nicholas Georgescu-Roegen’s remark that: “the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” And these errors were quite elementary, yet undiscovered.
The canals also alerted me to the role of myopic concerns in human decisions and why they matter so much, consequently opening a comprehensive theory of planning horizons to my understanding. It’s funny how a venture into economic history – confronting us with a hard reality yielding to no unrealistic conceptions – may open new theories and insights that in no way could be anticipated.
So that is what I learned from the British canals, or more properly what they taught me: a new way to think about and conceptualize interdependence; a discovery of a serious and longstanding elementary error in our economic understanding; and the opening of a novel concept of planning horizons and horizon effects to solve a problem manifest in network contexts stemming from the first two insights. The essential point is that economists’ competitive frame is falsely founded, and that our competitive social systems are spawning and reinforcing a dangerously myopic culture that is doing us a great deal of damage. All leads to a pathway into a new ‘horizonal economics’ in urgent need of further research…
* * *
Author’s Note: For those who want to dig more deeply, this essay is based on several academic publications. The story of the canals is in my 1985 dissertation, found on this site (https://independent.academia.edu/FredericJennings) under the title “Public Policy, Planning Horizons and Organizational Breakdown: A Post-Mortem on British Canals and Their Failure”). A summary paper on this history is found as Chapter 15 in THE ECONOMICS OF HORIZON EFFECTS, pp. 360-95, also on that site. As for the more theoretical aspects of the horizonal analysis of cost and pricing behavior, the best source for many of the arguments presented above is my paper entitled “The Case for Increasing Returns I: ‘The Hicksian Getaway’ and ‘The Hirshleifer Rescue’” found at www.jpe.ro/pdf.php?id=7303 (also Chapter 4 in THE ECONOMICS OF HORIZON EFFECTS, pp. 105-44), where you will find specific references to all of the papers discussed above plus many more. Additional information on my academic research work can be found on my academia.edu web page above.
Teaser photo credit: By G-Man – en:Image:Working canal boats.jpg, Public Domain, https://commons.wikimedia.org/w/index.php?curid=1761329
