Marketization
Thus the second half of the nineteenth century saw the development of the first global economy based largely on an international division of labor derived from Ricardian comparative advantage.
What Arthur Lewis calls the "regions of European settlement"–the United States, Canada, Australia, New Zealand, Argentina, Chile, Uruguay, and perhaps South Africa–soon demonstrated that they could produce and ship staple grains, meats, and wool at vastly cheaper prices than could Europe itself. The steam-driven iron-hulled ship and the steam-driven iron-riding locomotive quickly brought down transport costs. From the 1870s German farmers found themselves with new competitors: not just new world producers, but Russian grain shipped from Odessa. In 1870 wheat cost nearly fifty percent more in Liverpool than in Chicago, meat cost more than ninety percent more in London than in Cincinnati, and iron cost seventy-five percent more in Philadelphia than in London. By 1913 all these prices were within twenty percent of one another.
By 1900 the harvest west of Chicago affected grain prices in Odessa and Hamburg; the price of lambs in Auckland affected meat prices in London; the agricultural sector was the first to become globalized–and in becoming globalized, to demonstrate that farmers could feed more people better than had ever been possible before. In commodity after commodity, prices drew tther in the years between 1870 and 1913. In 1870 it would have cost you 60 pre to buy wheat in Liverpool than in Chicago. By 1913 the price differential was down to 15 percent. In 1870 copper cost some 33 percent more in Philadelphia than it did in Londos. By 1913 the prices of copper in the two cities were almost exactly the same.
Improvements in food processing and preservation meant that mutton from Argentina and Australia, beef from the American west, grain, and hides for leather could be produced on the praries or the pampas and consumed in the growing economies of Europe. A sharp division of international labor began to emerge: "temperate" settler colonies, like the western United States, Canada, Australia, and Argentina, produced and supplied grain, meat, leather, wool, and other high-value agricultural products to Europe and to the eastern, urban, industrialized United States; "tropical" regions, like Malaysia, Colombia, Cuba, Brazil, or Ghana (and to some degree the U.S. south), supplied rubber, coffee, sugar, vegetable oil, cotton, and other relatively low-value agricultural products to Europe; Europe paid for its imports by exporting manufactured goods--some 75% of Britain's exports were manufactured goods in the years before World War I, and textile exports made up half of Britain’s manufacturing exports.
By contrast, some 40% of United States exports in 1900 were food, feeds, and beverages; and a futher 35% were industrial supplies and materials. Industrial supplies and materials would rise to be fully half of exports by 1910.
Falling transport costs led to an integrated world economy. By 1910 exports of goods and services amounted to more than a quarter of British, and Australian, and Canadian, national product; and to perhaps a fifth of German and Italian national product. Even the enormous and largely closed economy of the United States managed to import and export roughly five percent of national product in the years before World War I.
The social returns to the investments in technology and infrastructure that created this late nineteenth-century world economy were enormous. Robert Fogel calculated that the social rate of return on the Union Pacific Railroad’s trans-North American tracks and vehicles was some thirty percent per year.
The development of the integrated world economy brought new industries and new agricultural specialties to all the corners of the world. As William Ashworth points out, the rubber tree was not introduced into Malaysia, Indonesia, and Indochina until the last quarter of the nineteenth century. But by the end of World War I these three regions had become the principal sources of the world’s natural rubber supply. Tea was introduced to India and Ceylon through a similar process. And the world was covered with railroads: some 12,000 miles of railroads in Africa, 38,000 miles in Asia, and 26,000 miles in South America by 1900; some 40,000 miles of railroads in Africa, 80,000 miles in Asia, and 60,000 miles in South America by 1930.
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