Douglass North, Shipping Productivity and Institutions

Vincent Geloso
The author is visiting assistant professor of economics at Bates College
Note: Prepared as a book chapter which is to be included in A Companion to Douglass North. This is the unedited
version, please do not quote without permission.

Douglass North is known largely for his work on institutions (1981; 1990; 1991; 2005; North and
Thomas 1973; North, Wallis and Weingast 2009). This legitimate emphasis on this segment of his
work overshadows his earlier contributions regarding the empirical measurement of the past. Yet,
when awarding him the Nobel Prize in economics in 1993 (jointly with Robert Fogel), the Nobel
committee justified itself by pointing to his “explanatory model for American economic growth
before 1860” and his research on “productivity in ocean shipping”. Throughout his early career,
North dedicated numerous articles and books to the topic of measuring economies in the past. Over
time, these articles have been supplanted with richer empirical works, but it is necessary to realize
how important these earlier works were to shaping North’s later research agenda on institutions.
Without these early works, the empirical knowledge about trends and levels of living standards in
the past would have remained limited. Hindered by a limited pool of stylized empirical facts about
the past, many false starts could have been made as they would have relied on false premises. The
creation of empirical knowledge about the past prevented this. More importantly, in the process of
producing the data, some puzzling questions were raised. These questions are those that brought
forth the necessity of a research agenda on institutions. Absent these early works, the wrong
questions would have been asked in addition to the production of inaccurate answers caused by
the limited empirical knowledge. As such, there is a symbiosis between the two agendas.
The article that is more emblematic of this symbiosis between North’s two research agendas is his
1968 article on shipping productivity. As of April 2018, a few months shy of the article’s fiftieth
anniversary, it is one of North’s least cited articles: 332 citations according to google scholar.
Nevertheless, in that article, North made two significant contributions. 1 First, he used a simple set
of economic theory to derive a measure of total factor productivity in the shipping industry
showing that it had increased close to sevenfold between 1815 and 1860. Extending his result to
the 17th century, he found that the increase was even more impressive. However, and this is the
foundation of the second claim, he could not agree with those who argued that shipping had
become more productive thanks to technological improvements: riggings, sails, speeds all failed
to deliver the coup de grâce that some expected it to deliver. The increase in productivity preceded
the arrival of important technological changes. As such, North argued that the nature of the
increase was organizational.
It is through these two claims that I intend to demonstrate the symbiosis between the two agendas
in order to make the following claim: those interested in understanding Douglass North should

1
A reprint with revisions was published in an economic history textbook edited by Robert Fogel and Stanley
Engerman (1971).

Electronic copy available at: https://ssrn.com/abstract=3187628

consider his earlier empirical works even if they are today largely ignored. In those there is a lesson
on how to shape a research agenda.
Shipping, Living Standards and Institutions
The first thing to bear in mind when considering North’s article on shipping productivity is that it
occurred in the heydays of the popularity of the Solow growth model. This was before any of the
strides forwards in terms of understanding the causes of growth. In the classical Cobb-Douglas
function, output (Y) is a function of technology (A), capital (K), and labor (L). Any economist
trained to study economic growth in those days would have identified technological as the main
variable to affect to generate economic growth. As such, upon observing rapid development in a
given area or time period, the first instinct of an economist circa 1965 would have been to attribute
the changes to technological factors. However, on a macroeconomic level, this was hard to
measure back then.
To circumvent this problem, North introduced his own work by arguing that a microeconomic
focus on shipping would allow us to assess the relevance of technological change. Shipping
productivity could serve as a microcosm for other topics. It is not hard to see why the shipping
industry would have been the object of his attention. North had discussed this role in earlier work
on the economy of Antebellum America (1965) and he had a comparative advantage in terms of
data collection. More importantly, the productivity of shipping is crucial in the diffusion of trade,
the ability to specialize, the ability to harness economies of scale, and (if sailing speeds increase)
increase the efficiency of transoceanic communications (allowing for arbitrage opportunities to be
better seized). All of these would also entail falling freight rates which would have meant, during
the 19th century, reducing food prices in Europe and prices for manufactured goods imported from
Europe from the New World. Finally, some scholars had already laid the foundations for
measuring productivity while also setting the foundations for stating that technological change
may have been irrelevant.2
At first sight, what North found was striking: a rapid productivity growth as exemplified by falling
freight rates. From 1740 to 1840, freight rates fell by close to half their initial levels (see Harley
1988: 853 for best graphical depiction). As this increase preceded the arrival of the iron steamship
and that sailing speeds could not fully (in North’s opinion) explain it, something else had to be
identified. The proposition he put forth was simple: the decline of piracy reduced the optimal crew
size which economized on labor costs. Combined with a greater efficiency of port operations which
reduced times in port, these two factors explain the reduction in freight rates.
In a 1982 volume, Richard Sutch (a former student of North) pointed out the crucial importance
of this finding. The improvements in “economic organization” that North found were a sign that
“institutions did matter after all” (Sutch 1982: 32). To explain economic growth, the mechanistic
explanations of change, such as those embodied by the Solow growth model which dominated at
that moment in North’s career, became unsatisfactory in North’s eyes. What was needed on the
part of the economic historian was to explain “the evolution of the particular set of economic

2
For example, in a 1928 article in the Quarterly Journal of Economics, Abbott Usher argued that
there were no notable increases in the size of ships until at least the 1830s (1928: 476).

Electronic copy available at: https://ssrn.com/abstract=3187628

institutions, behaviorial constraints, legal rights and rules that define, at any point in history what
is commonly called the ‘economic system’” (Sutch 19832: 32).
Not long after the publication of his article, North began this task. Alongside Thomas, he published
“An Economic History of the Growth of the Western World” in the Economic History Review
where he argued that “cause of the rise of the Western world was the redirection of incentives as
a consequence of the development of institutions which made it more profitable to attempt to
increase productivity within any economic activity” (1970: 17). The productivity of shipping, as a
microcosm of wider economic change, provided the foundation for such a claim. It served the
purpose of mimicking the trend in the overall level of living standards. From there, North would
later incorporate elements of Ronald Coase’s work on transaction costs arguing that economic
growth stems from institutional arrangements that allow reductions in transaction costs to expand
the realm of possible exchanges. The greater the realm of possible exchange, the greater the scope
for specialization (including specializing in developing innovative ways to produce goods and
services) which fuels economic growth. From there, he began to develop his later works such as
Institutional Change and American Economic Growth (Davis and North 1971). Later, the logic
was further fleshed out in The Rise of the Western World (North and Thomas 1973) which can be
considered as the penultimate outcome of the thought process they had initiated in the
aforementioned Economic History Review article (1970). When, in 2005, Understanding the
Process of Economic Change was published, North had completed his trek which had started from
a very simple observation regarding shipping productivity.
In analyzing North’s intellectual evolution with the benefit of hindsight, Ménard and Shirley
(2014) pointed out that while he had begun his career by applying neoclassical economic tools to
the study of history, North matured as an economist as he began to deviate from a strictly
neoclassical framework through the incorporation of institution. This deviation, they argue, began
with the 1968 article on ocean shipping productivity. In essence, the research of ocean shipping
served as the point of entry for North into the topic of institutions. The empirical portrayal of the
evolution of the sector’s productivity provided the motivation for asking the questions about the
role of institutions in determining living standards. In most of these early works on institutions,
North would rely on similar empirical foundations to motivate his agenda and provide answers.
However, it ought to be mentioned that the core stylized fact that shipping productivity increased
from circa 1700 to circa 1850 has been heavily criticized. The main criticism levelled at North’s
article has come from Knick Harley (1988) who reasserted the primacy of technical invention by
showing that productivity did not increase as much as North had claimed. The main empirical
problem was that cotton, which constituted the bulk of the freight rate index given the manner in
which North calculated it, was not treated the same over the period. Shipowners deal with two
problems when deciding what to ship: volume and weight whereby heavy items need not be
voluminous and vice-versa. Cotton can be a voluminous but light item to ship. If the density of
cotton packages is low, a ship can be easily filled to capacity even if the total weight is well below
the capacity of the ship. Cotton freight rates tended to be quoted by the pound over the studied
period, but its density changed dramatically. In the early days of the cotton trade, cotton was
stuffed into bags by men who jumped on them. Later, screw pressed became the principal method
of packing. As such, the poundage per cubic foot rose from somewhere between 5 and 12.5 pounds
to around 20 to 25 pounds by the 1840s (Harley 1988: 857). As the amount of shipping space
occupied by a pound of cotton changed, a reduction in freight rates for cotton would have fallen
regardless of productivity growth in shipping. Series for other goods such as Canadian timber also
show a severely different trend in freight rates (Sager and Panting 1990) which indicates a tinier
improvement in shipping productivity. Recently, some scholars have found that there were
nonetheless improvements in shipping productivity (Solar and Hens 2015), but this resulted in part
from technological improvements in new ships which used copper sheathing which caused speeds
to increase.
As such, the core conclusion that technological change did not matter has been partially revised.
The point that remains uncontentious now is the role that the decline of piracy (and greater safety
at sea) played in improving productivity to circa 1800.
Shipping and Institutions
If the stylized fact that shipping productivity increased rapidly to 1850 has not aged very well, the
agenda that it inspired has. Institutional change remains a key component of discussions regarding
shipping productivity. If changes lead to reductions in transaction costs, then it can increase
productivity. Later in his life, North used the example of the through bill of lading by railroads as
an institution that could increase productivity:
The through bill had a direct impact on transaction costs as it immediately became easier
to sell tickets and freight, thereby increasing the productivity of shipping clerks, freight
managers, etc. But it had a similar impact on the transformation side of the operation,
effectively allowing a given number of engines, cars, and engineers to haul a larger amount
of freight over a given amount of track (North and Wallis 1994: 618).
If an institution (and its changes) allowed to economize (reduce) on transaction costs, it could
increase overall productivity. This point in North’s research agenda has never been abandoned
since he began enunciating and refining it in the 1970s. The “stylized fact” that he spawned
motivated his agenda and the latter has survived even if the former has not. To this day, the simple
idea
In fact, this survival of his research agenda can be easily seen in the microcosm of the world of
shipping productivity. Numerous scholars continue to consider the institutional environment
around the shipping industry to evaluate what could have reduced those costs over time. For
example, Bertrand (2016) argues that the nationalization of the inefficient English lighthouse
system improved safety which would have increased productivity. Kingston (2007) points to the
role of maritime insurance markets and the nature of prudential institutions. Rahman (2010)
emphasized the role of seapower in generating security for trade. Eloranta et al. (2017) argue that
shipping productivity may have been depressed by recurrent warfare as fluctuations in government
demand for the naval sector may have induced some crowding-out.
Conclusion
When selecting a topic, young researchers in the field of economic history are encouraged to find
a topic that is relevant to the wider social sciences rather than merely fitting a regression equation
within a historical dataset. The past must serve to bring economic theory to life as much as
economic theory must explain the past. Admittedly, this is not an easy task. It requires studying a
certain topic in depth in order to experiment with its wider implications. The process is one of
continual efforts to explore the past in ways that matter to the present and future. Yet, if this is
done properly, one can inscribe himself in the wake of people like Douglass North. After all, the
intellectual tree that grew from North’s research on ocean shipping productivity is impressive
given how – at first sight – the topic may appear dry and of little interest to the mainstream of
economics. However, it shows how starting from good empirical foundations allows us to identify
the right question. It also shows that once the right question is asked, the topic can take a life of its
own and continue well after some of the initial motivators have been proven incorrect.

References:
Bertrand, Elodie. "Lighthouses." Encyclopedia of Law and Economics (2016): 1-5.
Davis, Lance Edwin and Douglass C. North. Institutional change and American economic growth.
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Eloranta, Jari, Vincent Geloso and Vadim Kufenko. Crowding-Out at Sea: Shipping Productivity
and the Burden of the British Navy, 1760 to 1860. Working Paper (2017). Available Online at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2963620
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