PM Lawrence on canals and railways

Occasionally my comments thread gets a contribution that deserves a fully-fledged post of its own. I posted one from Observa some time ago. Now regular commenter PM Lawrence has presented a history of transport in the UK, which I think deserves a bit more prominence than a comments thread.

Here is where it begins

As promised – an overview of the economic history of UK transport since the canal age (much omitted, obviously, e.g. no stage coaches or aircraft).

Of course, this should also provide some insights of wider applicability. I shall take the opportunity of making a few asides about things they told me during my Monash MBA studies that weren’t true, which I had more sense than to tell them at the time.

The idea and practice of canal building reached England in the late 17th century, from Holland, which had got them in turn from northern Italy (the term “canal” actually comes from the Italian).

There had always been three main types of canal, which overlapped:-

– military defences;

– water management; and

– transportation (navigation canals).

Even in England there was a need for the fortification sort, most famously the Royal Military Canal built along the south coast during the Napoleonic Wars. This sort is distinctive from a layout determined for tactical purposes – that particular one has regular small kinks to allow for enfilading fire. But the other two kinds are more important from our point of view.

One very important thing from our point of view is that the water management sort and the transportation sort blurred. I have heard that the earliest records of the Italian canals come from law cases between farmers who intercepted them to draw off water and catch fish in weirs, and merchants who wanted them kept clear. It’s a property rights thing suitable for Coasian treatment – but the interesting thing for us is that there in Italy, then in Holland, and later still in England, the water management thing came first. There was no need for a sudden leap to a full fledged canal which is what transport needs – a transport canal has to go from A to B, and it is even better if there is a network with network effects. You could start with useful results on a small scale, if you were after managing the water. And just as the Dutch started out managing their water for the sake of improving the land, so also that was how it first started in England, with things like London’s “new river” as an aqueduct, and draining various areas – most famously the Fens of East Anglia, but most productively the Bedford Levels. Indeed, now that canal transport is less important, that water management need is probably the most significant in economic terms.

How was this paid for? Measuring in real terms rather than nominal, by tapping the direct interest of the landowners (this should confuse some Georgists I have been hearing from recently, who stubbornly refuse to allow for any duality between owning and improving land, and insist on all gains being mediated through the state with their single tax – no Coasians allowed). But late 17th century England was already developing entrepreneurial behaviour – the “projectors” who are caricatured in literature of the period – and there was also an influx of long term flight capital from the continent, as endemic war there coincided with increasing stability in England. The first canals of England were built with Dutch financial help as well as Dutch expertise. This financial help was of course nominal, Dutch gold being added to English landowners’ own means to help mobilise and deploy real resources – land, workers, food and so on – that were present in the three kingdoms.

The moral from this that is relevant later is, that you can get started on the back of one thing even though the full grown beast needs something else for its support.

[Aside: during my MBA law unit we were told that an Australian law case had construed an insurance claim to allow for damage from a flooding canal, even though it had ruled out canals, on the grounds that it was a standard UK form and had only ruled out the UK sort of canal which was only for transport, while the Australian drainage sort was different in kind and so not what the standard wording could possibly have meant. As we see, the lawyers had misdirected themselves about the UK. Even the term “Navigation Canal” came in to distinguish the transportation sort from the others.]

Some time during the 18th century England started making canals for transporting goods. Landed money from the likes of the Duke of Bridgewater mostly paid for them – there was not so much of the other sort yet – but, inspired by the Dutch example and British potential, a transport network gradually came into being on top of the water management canals; mostly, the return was from their fees and tolls.

Mostly, but not always. There were network externalities, which contributed to prosperity in general. And these were recognised at the time, synergies before the word: Wedgwood became a stockholder in a projected local canal company on condition that its course be diverted to run past his factory of fine pottery (hitherto, his products had had to be transported expensively on muleback to minimise breakages from carting). This also tells us that there was other money than just landed money, by then. And Birmingham grew on the back of network externalities, as a canal crossroads in the Midlands (it’s interesting to run Birmingham past the Thunen transport economics model – there isn’t anything special there to grow around, except location).

[Aside: the MBA corporate finance people told us that it doesn’t make sense to get into a corporate endeavour for anything but its dividend stream, since you can always apply dividends to a corporate end elsewhere more effectively than directly using the resources of the first corporation. Wedgwood shows us that it wasn’t even true in the early days of the commercial company, since even then there were synergies to be had – if you were clever enough to spot them.]

So much for canals as such. Only, they paved the way for the railways that took over so much of their transport function, because it is rare for single railways to make much sense – you need to make it easy to have a network that works. By the early 19th century three things had come together to make railways practical, and one of them came courtesy of the canals.

The first thing, the canal thing, was the availability of coal nearly everywhere. Canals made it possible to build up stocks, and gas lighting had provided a demand so that there were dumps nearly everywhere (heating alone didn’t drive that). Without a full blown rail network the railways themselves couldn’t achieve that – but they didn’t have to, since the canals did that, which is the moral I pointed out before. And the same moral comes back again later, in the decline of the railways in the face of motorised roads.

The second thing is the availability of cheap iron, which made railways cheap enough to build.

The third is – well, “I know two things about the horse/and one of them is rather coarse.” This is the other thing. The Napoleonic Wars caused a huge shock affecting many aspects of economics, and one was horse transport. I’ll come to that in its place.

Steam power and steam transport technology had been growing slowly in mining areas for centuries. Cornish tin mines were high enough in value to justify the expense of the first efforts, and then Newcastle coal mines had enough scrap coal that couldn’t be transported cost effectively that they could afford to use it as fuel for steam engines – it’s not for nothing that it was said that “the only cheap thing you can do with coal is burn it”, and so there was some that wasn’t worth shifting.

There was something special about Newcastle. It was the only English coal mining area that met the sea (well, the only one known then). That meant that, despite the distance, coal could be shifted cost effectively to London – which is where it is as it was the lowest convenient ford of the Thames (apparently in the 1960s an eccentric peer tried to show it was still fordable at Westminster at low tide, and got halfway over before he got stuck; embankment works no longer allowed the stream to spread as wide and shallow as it once had). London has a lane called Sea Coal Lane, leading down to what was then a short stretch of canal along the lower Fleet where coal could be landed from colliers in the Thames. (Captain Cook used one of these colliers because of its all weather seaworthiness and its ability to be stranded upright.)

That still wasn’t cheap though, and as the mine workings moved back inland or further under the sea, pumping needs went up and coal field transport got dearer. Both needs drove the development of steam technology and transport, so that by the early 19th century railways were technologically practical.

Only, railways weren’t economic; this is where the horse thing comes in. [Aside: the MBA microeconomists told a “horse story”, about which you had to get the “right” answer showing you understood how progress not only displaces old ways, it brings in new possibilities that take up those displaced so that their last case is better than their first. But it wasn’t true, either in its moral or in its background history; this essay will show what really happened to horses in the steam age. Maybe I’ll write another essay to show the mistake in its moral.] Railways don’t need steam: they are quite good enough for shifting coal underground, or on the surface between pithead and port, if they are mere horsedrawn tram systems, with single carts rather than long stream-drawn trains; slower, but enough cheaper and with less wear on the rails to be worth it – if you’ve got the horses. Where common sense tells us (and the Monash microeconomists) that steam displaced the horse, common sense is wrong. What actually happened was a horse shortage from the shock of the Napoleonic Wars, a shock that meant that substitute technology had to be found. By the time of the Rainhill Trials that chose Stephenson’s Rocket as the technology for the railways, that shortage was over. It very nearly happened that horse power ran the railways, in the old way, with a reversion. This was actually quite possible; the same shocks had made Marc Isambard Brunel’s mechanised method of making pulley blocks succeed, and they even had a horse powered contraption in the Rainhill Trials that showed the slower method was still nearly cost effective even with a horse shortage. That method of making pulleys is often touted as an early example of the success of technology, but that leaves out the moral that it went broke when all the contracts were cancelled (just like Tommy Sopwith’s aeroplane efforts a century later). As soon as old fashioned ways were possible again, with the end of the shock, the Royal Navy went back to them; it could have happened with the horse.

With the Rainhill Trials, though, the Napoleonic War shock moved past a tipping point; steam traction was – though only just – better than horses. So a railway boom began, fuelled in all the usual bubble ways, with this difference from today’s dot com failures: it left behind infrastructure, and it left behind human capital. The Stephensons made both engines and the railways themselves, and indeed the latter is probably the greater enduring achievement. The bubble brought things past the point where there were network externality gains, and even with the crash what was left – writing off sunk costs – could pay for itself; it was the best game in town, if not the only, and it took much trade away from the canals, then grew some more. In particular, railway networks took over the job of moving coal around – they passed that criticality point. Feeders to the railways needed upgrades to the road system in places; London’s “New Road” was built as a feeder lateral link between Railway termini, and to feed between them and some of London’s existing commercial centres. [Aside: while the history was wrong, with horse shortages driving the adoption of steam rather than steam displacing horses, the moral of the MBA microeconomics horse story was true to this extent: horses were taken up by railways, which became their largest user by the 1920s for feeder transport between end customers and stations, and for intra-station shifting of unmade loads. But the story didn’t stop, though it should have done if the moral were to fit.]

There is a point of difference from canals, and indeed from railways in developing countries like the USA; they did not get most of their value from associated land holdings as they did not open up new lands (much of the wealth of canals today is tied up in canalside lands acquired under their original Acts of Parliament; much of this is as timber plantations, which incidentally secure the soil – but much was foolishly divested, leaving insufficient associated value as a continuing revenue stream to cover the cost centre that the canals themselves often are now, and if redeveloped that damages the banks). In fact, the railways could only afford to acquire the sites for their great termini after their initial profits had come in – their first London termini had to be further out; and in some places like Oxford, established interests kept the main lines from ever going there at all. Still, even in Britain the railways did get some of their gains from appreciating land holdings – some of British Rail’s land holdings in Hammersmith followed the line of a former spur line that linked to the former Hammersmith Creek, once canalised to allow a coal and timber landing but filled in in the early 20th century using the earth from London’s last new dock, St. Katharine’s Dock.

As you see, by then things were changing away from rail transport as motorised roads prevailed, gradually then suddenly as they too passed a tipping point. So let us turn to motor transport on the roads.

We can see some of this in literature, following it in things like T.H.White’s “Farewell Victoria”. Expensive cars were arriving, and even before 1914 old photographs show the Hansom Cabs of “Farewell Victoria” had mostly been displaced by motor taxicabs. But three things made a shock to push railways aside, and these things were helped by the rail network in its turn allowing petrol to be supplied throughout the land – the same service canals had given to railways, railways gave to cars and trucks.

One of the things that helped road transport was a shock created by the end of the First World War; there was now a large supply of human capital, trained to drive vehicles they could never have afforded themselves. This allowed all sorts of new businesses to spring up, trucking and bus companies. Lord Hanson’s Hanson Trust got its starting capital from the compensation his father got when the Conservatives closed down his bus business, nationalising it to provide a more controlled and regulated service to the public (ever after he despised Labour as nationalisers in principle and the Conservatives as nationalisers in practice – though they were why he got fair compensation). So they were in place when the General Strike of 1926 came along, the second thing that helped; in fact it was the tipping point.

You see, all sorts of businesses had their own spur lines, even if only for occasional wagonloads, even on a seasonal basis. You can see the vestiges of these at gravel pits, since much of that gravel is actually used by the railways. Those lines were sunk cost, and it made sense to the businesses to keep using railways – until the General Strike forced them onto road transport. Once most businesses were there the network effect was gone, with business to business trade no longer available by rail alone. So the General Strike broke the power of that union by breaking the bread and butter of its very industry. [Aside: the moral of the horse story isn’t over. This destroyed the new role that horses had found as feeder transport, and accelerated the change to motorised feeder transport for the railways that was already underway. The horse story moral that progress means new opportunities will always turn up isn’t quite true; it omits that this creative destruction has to keep creating as the new roles get destroyed in their turn, and there is the risk that eventually the even newer roles may be bad. Len Deighton records in “Blitzkrieg” that when most railway horses became redundant in the 1930s, their new role was to be exported as transport animals for the new German war machine. Many lasted until Stalingrad, or their descendants did.]

But what of that third thing, I hear you ask. It was the burden of government regulation, exaggerated in a wartime environment. Where the railway boom had left a large capital stock as infrastructure, needing little more than maintenance, the fixed prices imposed by governments between 1914 and 1918 ran railway systems into the ground all over Europe. In practice, they only allowed for marginal costs and a small uplift, but nothing could go into maintenance. (I have seen internet accounts of the 1860s Confederate States of America doing much the same to their system; one dividend payment was accompanied by a directors’ statement saying that this actually represented a cash flow from patriotically running down stock, and that simply closing for the duration would have preserved shareholder wealth better.)

In the face of the infrastructure crisis the network itself was damaged: the government leaned on the railway companies, which were encouraged to consolidate down to a few though they kept their independence in name, a decline from their days of glory on a par with the reduction in independent German States after the French Revolutionary and the Napoleonic Wars. This rundown happened again between 1939 and 1945, only this time the government was a nationaliser in principle: the necessary reorganisation was accompanied by a nationalisation for which much of the justification was spurious. It was made out that the railways’ predicament showed that they, well, “couldn’t run a railroad” and had to have control taken away from them, whereas in actuality that same mess was of government creation.

The same problems continued, with insufficient being ploughed in and the needs of a network for network externalities being neglected under Beeching. It is noteworthy that Beeching had previously presided over a similar narrow remit exercise that had deprived the British armed forces of an improved rifle; you can get any result, quite honestly as far as a committee’s efforts go, if only you send out the committee with a selective and selected remit. But a rope frays at the end, and the Beeching cuts that trimmed back the unprofitable parts of the network only made the rest less profitable in their turn, over time.

Some new hope began to show in the 1970s. All along, engineers had dominated; a new era of transport might be introduced by them, aided by the new engineers trained in new ways. Only, the new ones didn’t appreciate the value of thorough testing and making things work in field conditions; their APT (Advanced Passenger Train) didn’t work and had to be withdrawn. The thing was, the network either needed to be reworked for faster trains, or else there had to be faster trains that worked on old lines. The new engineers prevailed over the old ones, but reality prevailed over the new ones – scissors cut paper, but the stone of reality broke the scissors even though the paper could have wrapped it. So by the end of the 1970s with all engineers discredited a marketing ethos had taken over the railways, which simply failed to address the actual problems – indeed, it is also why later London buses are inadequately built compared to the apparently over-engineered and “gold plated” Routemaster, that was built to operating requirements not accounting or marketing ones.

This marketing ethos is why later privatisation has been done the way it has, horizontally with service entities quite separate from operations that don’t get the funds back that they need. One example of the wrong sort of split is the “Bedpan Line”, between Bedford and St. Pancras; it continues on through London to the south by way of a long disused tunnel, the Snow Hill tunnel. This was first built to connect a projected channel tunnel’s traffic to the north; remember that London is where it is as a convenient Thames crossing – but now the City of London was there with all its land value. That tunnel had fallen idle as larger railway stock came in, but it was hastily modified to make the Bedpan Line work “cost effectively”. By so doing it ruled out any possible channel tunnel use when that was built; I cannot help suspecting the hand of some marketing Sir Humphrey, preventing a network working.

And so we have a transport system in Britain as much under government control today as it has been ever since 1914, and the only privatisation being of precisely the sort that focusses on modern ways of doing business and not at all on running railways.

One thought on “PM Lawrence on canals and railways

  1. Interesting stuff – I didn’t realise that the canals bootstrapped the railways and the railways bootstrapped the roads.

    I think you need to sit back a re-read this as your get yourself tied up in a few knots in some places.



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