Hostname: page-component-745bb68f8f-l4dxg Total loading time: 0 Render date: 2025-01-09T23:09:49.122Z Has data issue: false hasContentIssue false
  • English
  • Français

The gains from improved market efficiency: trade before and after the transatlantic telegraph

Published online by Cambridge University Press:  30 July 2010

METTE EJRNÆS  and
KARL GUNNAR PERSSON
METTE EJRNÆS
Affiliation:
Department of Economics, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K, Denmark, [email protected]
KARL GUNNAR PERSSON
Affiliation:
Department of Economics, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K, Denmark, [email protected]
Get access

Abstract

This article looks at the gains from improved market efficiency in long-distance grain trade in the second half of the nineteenth century, when violations of the law of one price were reduced due to improved information transmission. Two markets, a major export centre, Chicago, and a major importer, Liverpool, are analysed. We show that the law of one price equilibrium was an ‘attractor equilibrium’. The implication is that prices converged to that equilibrium in a tâtonnement process. Because of asymmetrically timed information between markets separated by long distances there were periods of excess demand as well as excess supply, which triggered off the tâtonnement process. Over time, adjustments to equilibrium, as measured by the half-life of a shock, became faster and violations of the law of one price become smaller. There were significant gains from improved market efficiency, which took place after the information ‘regime’ shifted from pre-telegraphic communication to a regime with swift transmission of information in an era that saw the development of a sophisticated commercial press and telegraphic communication. This article is the first attempt to actually measure the gains from improved market efficiency and it demonstrates that improved market efficiency probably stimulated trade more than falling transatlantic transport costs. Deadweight losses decline significantly as markets became more efficient. The conventional view that Harberger triangles are almost always insignificant is challenged.

Type
Research Article
Information
European Review of Economic History , Volume 14 , Issue 3 , December 2010 , pp. 361 - 381
Copyright
Copyright © European Historical Economics Society 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Banerjee, A., Dolado, J., Galbraith, J. W. and Hendry, D. F. (1993). Co-integration, Error-correction, and the Econometric Analysis of Non-stationary Data. Oxford: Oxford University Press.CrossRefGoogle Scholar
Coleman, A. (2009). A model of spatial arbitrage with transport capacity constraints and endogenous transport prices. American Journal of Agricultural Economics 91, pp. 42–56.CrossRefGoogle Scholar
Ejrnæs, M. and Persson, K. G. (2000). Market integration and transport costs in France 1825–1903: a threshold error correction approach to the law of one price. Explorations in Economic History 37, pp. 149–73.CrossRefGoogle Scholar
Ejrnæs, M., Persson, K. G. and Rich, S. (2008). Feeding the British: convergence and market integration in 19th century grain trade. Economic History Review 61, pp. 140–71.CrossRefGoogle Scholar
Goodwin, B. K. and Grennes, J. (1998). Tsarist Russia and the world wheat market. Explorations in Economic History 35, pp. 405–30.CrossRefGoogle Scholar
Irwin, D. A. (1998). Welfare effects of British free trade: debate and evidence from the 1840s. Journal of Political Economy 96, pp. 1142–64.CrossRefGoogle Scholar
Jacks, D. S. (2005). What drove 19th century commodity market integration? Explorations in Economic History 43, pp. 383–412.CrossRefGoogle Scholar
Lew, B. and Carter, B. (2006). The telegraph, co-ordination of tramp shipping, and growth in world trade 1870–1910. European Review of Economic History 10, pp. 147–73.CrossRefGoogle Scholar
Mccloskey, D. (1994). 1780–1860: a survey. In Floud, R. and McCloskey, D. (eds.), The Economic History of Britain since 1700, vol. 1: 1700–1860. Cambridge: Cambridge University Press, pp. 242–70.Google Scholar
Mitchell, B. R. (1993). International Historical Statistics: The Americas 1750–1988. New York: Stockton Press.CrossRefGoogle Scholar
Olson, M. Jr and Harris, H. C. (1959). Free trade in ‘corn’: a statistical study of the prices and production of wheat in Great Britain from 1873 to 1914. Quarterly Journal of Economics 73, pp. 145–68.CrossRefGoogle Scholar
O'Rourke, K. and Willliamson, J. G. (1999). Globalization and History: The Evolution of the Nineteenth-Century Atlantic Economy. Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Persson, K. G. (1999). Grain Markets in Europe 1500–1900: Integration and Deregulation. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Persson, K. G. (2004).‘Mind the gap!’ Transport costs and price convergence in the 19th century Atlantic economy. European Review of Economic History 8, pp. 125–47.CrossRefGoogle Scholar
Williamson, J. G. (1980). Greasing the wheels of sputtering export engines: Midwestern grains and American growth. Explorations in Economic History 17, pp. 189–217.CrossRefGoogle Scholar
Williamson, J. G. (1990). The impact of the Corn Laws just prior to repeal. Explorations in Economic History 27, pp. 123–56.CrossRefGoogle Scholar