Historical experiments: investigating the economic history of the 19th century

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“The first ICT revolution [Editor’s Note: Information and Communications Technology]”, explains Professor Claudia Steinwender, “was actually the development of telegraphy in the 19th century – and it was bigger and more dramatic than that of the Internet. For the first time history, it was possible to send information faster than physical goods.” The economist is particularly interested in the effects of the worldwide network of telegraph poles on trade – so that lessons can be drawn for our digital age.

Since July of last year, the native-born Austrian has held the Chair of Innovation and International Trade in the Faculty of Economics at LMU. In Vienna, she studied international business administration and mathematical economics, before working at the management consulting firm McKinsey for three years. “Even though academia was always my goal, I wanted to know first what business looks like in practice.” Next, she did a Ph.D. at the London School of Economics (LSE) and made her first intellectual forays into economic history.

In her paper Real Effects of Information Frictions: When the States and the Kingdom Became United, which was later to be published in the prestigious American Economic Review, she illuminated the development of the worldwide telegraph system in 1866 – and the question as to how it influenced trade. “A basic aim was to explore historical parallels to shed light on the challenges of the digital age,” says Steinwender. “The effects of digitalization itself are difficult to analyze because of their gradual nature. So-called historical experiments, by contrast, are clearer and less complex, making it easier to isolate individual mechanisms.

An invention that increased prosperity

Specifically, Steinwender observed the effects of the transatlantic cable between New York and Liverpool on the cotton trade. “Here, I was able to show for the first time that information not only influences prices, but also the commodity flows themselves.” The telegraph system created unprecedented transparency in relation to where there was a supply of cotton and where there was demand for it – thus increasing prosperity in the respective countries. With this experiment, it was possible to demonstrate more generally the problems a lack of information creates for international trade. “You see, markets are only efficient when there is extensive information – although total market information is a chimera,” explains the economist. “This remained the case after the invention of the telegraph, holding true for the telephone, and for the fax – first in black-and-white, then in color – and now too for the age of the Internet.”

In 2014, Claudia Steinwender took up a postdoctorate position at Princeton University, and was assistant professor at Harvard Business School, Boston, from 2015. In 2017, she moved to Massachusetts Institute of Technology (MIT) to work as an assistant professor at the MIT Sloan School of Management.

All the while, economic history never loosened its grip on her imagination. Steinwender is especially interested in the influences of important events on global trade – such as wars and pandemics, but also innovations such as the use of containers for shipping goods. “The ‘containerization’ after the Second World War greatly reduced transport costs – because loading and loading was so much faster and more efficient,” says Steinwender.
On closer analysis, however, the team of researchers came to realize that containerization also had a price. “The advantage of containers can only be leveraged into cost and time advantages if you can sort and transfer them on a large loading space.” Accordingly, “secondary” cities such as Liverpool and Rotterdam supplanted the densely populated metropolises like New York and London as shipping hubs. And port designs also changed. “Take for example the many narrow ‘finger piers’ in the old port of New York, which jutted out into the Atlantic with one ship on the left and one on the right all along their length. With the advent of containerization, these piers were widened and warehouses were built – until eventually freighters docked parallel to the land.”

“Information frictions” with pizza and pullovers

In August of last year, Steinwender herself crossed the Atlantic to become Professor of Innovation and International Trade in the Faculty of Economics at LMU. In making the move, she wanted “on the one hand to be closer to my wider family in Austria and enjoy the quality of life in Europe, but also to research at an intellectually stimulating university”. LMU stood out for the Austrian economist. “During a research visit, I encountered so many passionate and intellectually inspiring colleagues at the economics department of the university such as I had rarely met on my travels.”

Furthermore, the LMU network – with the Technical University of Munich, the Ifo Institute, the Max Planck Institute for Innovation and Competition, the independent Center for Economic Studies at LMU, and of course the university itself – offers “a veritable economic ecosystem.” The only place where Steinwender had previously experienced such a density of top-quality research institutions was in Cambridge, Massachusetts. On top of this, there were the contacts with researchers at LMU’s Historical Seminar, with whom there are also interfaces.

In her as yet unpublished work Spinning the Web: Codifiability, Information Frictions and Trade, Steinwender builds on her insights into the influence of telegraphy. It explores the question as to whether specific commodity flows at that time responded particularly strongly to the flow of information beneath the Atlantic. “To our surprise, however, it was not in the trade in consumer goods such as clothing that telegraphy made a big difference, but the trade in more standardized commodities such as raw materials,” says the researcher. “We found that this was due to their easier codifiability. Complex characteristics are just harder to communicate than those of simple commodities.”

Even today, despite the Internet, it is not yet possible to convey certain attributes – like taste, smell, and feel. “The pullover that feels scratchier than it looked, the pizza that doesn’t taste like you expected: these are ‘information frictions,’ which are still complicating trade in our times – although researchers are already using machine learning and artificial intelligence to explore how even these product attributes could be rendered perceptible at a distance.”