Communication costs, science and innovation

Scientific and technological progress are major drivers of long-term economic growth (Romer 1986, Lucas 1988). Not surprisingly, much research aims to understand the factors that facilitate scientific and technological development. One factor that has received considerable attention is the role of communication between scientists, engineers, and inventors. It seems natural that those working at the frontier of scientific and technical knowledge would benefit from exchanging information, discussing their ideas, and receiving advice and feedback on their work. Yet, only a limited number of empirical studies examine the extent to which communication costs impede scientific and technological development and, therefore, long-term economic growth.

A major challenge to the study of communication costs in modern environments is the vast array of communication methods available. When people can easily substitute different communication channels, it is difficult to isolate the impact of changes in communication costs on outcomes.

Researchers have taken four general approaches to address this challenge. One approach infers the importance of communication without directly measuring the costs of communication. For example, Jaffe et al. (1993) looked at the geographic proximity of inventors who cite each other in patents to infer the importance of communication costs, which are likely to be smaller over shorter distances.

A second approach is to look at observed changes in trade costs (e.g., Agrawal et al. 2017 using highways or Catalini et al. 2020 using airlines) that suggest changes in communication costs.

A third focuses on narrow events and communities where changes in communication costs can be better isolated. Agrawal and Goldfarb (2008) examine the impact of BITNET, an early precursor to the Internet, on collaboration among university researchers.

A fourth approach involves examining historical conditions when there were far fewer methods of long-distance communication. Existing studies – such as Claudia Steinwender’s (2018) work on the introduction of the Atlantic telegraph cable on trade flows and Peter Koudij’s (2014) work on 18th-century financial markets – have shown how historical conditions can be used to obtain more well-identified evidence of the importance of communication. However, existing work in this vein has not yet examined the impact of communication costs on science or innovation.

In Hanlon et al. (2022), we use one of the most dramatic changes in communication technology in history, the introduction of the first modern postal system in Britain in 1840, to provide new evidence on the impact of communication costs on the development of science and technology.

An Act of Parliament in 1839 replaced Britain’s complex and expensive distance-based postal service system with a single, low-rate postage, the Uniform Penny Post, and the first self-adhesive postage stamp, the famous Penny Black. The result was a huge and rapid increase in the number of letters sent (Figure 1).

Figure 1 Number of letters sent in Great Britain before and after Uniform Penny Post

As the reform replaced the distance-based postal system with a single flat rate, the reduction in communication costs varied across space. We use this as a natural experiment to investigate the effects of communication costs on the development of science and technology.

The first step in our analysis is to measure the change in communication costs between UK locations. To develop this measure, we identify and geolocate 618 post towns in England and Wales and over 1,600 associated sub-post towns (left panel of Figure 2). We also plot the postal road network connecting each postal city (right panel of Figure 2). Reconstructing the distance-based pricing scheme before the 1840 reform, we calculate the change in postage between any two postal towns in the country due to the reform.

Figure 2 Post towns, sub-post towns and post roads in the United Kingdom circa 1838

To explore the impact on science, we collect articles and citations from the leading academic journal of the era, Philosophical Papers of the Royal Society of London. We geolocate each author and scholar cited through a thorough manual review of available biographical sources for each individual. Once geolocated, these data allow us to examine whether we see a relative increase in citations between pairs of scholars who experienced a greater relative decrease in two-way communication costs after the reform. Our results clearly show increased scientific citations caused by lower communication costs. After the reform, the gradient by which citations decline with distance-based postage falls by about 70%.

To examine the impact on technology development, we use patent data, a standard data source for research on innovation outcomes. Specifically, we examine whether patenting increased in places that benefited more from the reform. To construct a location-level measure of reform impact, we follow Donaldson and Hornbeck’s (2016) market access approach, but apply it to communication costs to generate access to the letter market measure. We show that patenting increased in places that experienced greater improvements in letter market access due to the reform.

Of course, we must be careful that the expected effects are due to the postal reform and not to other changes occurring in Britain at the same time. The most important of these, undoubtedly, was the construction of early railroads. We monitor the deployment of new rail lines during our study period by constructing a year-level GIS map of the rail network, highway network and canal network, and coastal shipping routes in use. The introduction of the telegraph cannot confound our findings, as it was only used for railway operations until the mid-1850s.

These new findings advance our understanding of the impact of communication costs on the development of science and technology. Specifically, they show that significant reductions in the cost of long-distance communication can have a significant impact on science and technology, two key drivers of long-term economic growth. Facilitating communication between researchers is likely to contribute to economic growth.

These results also contribute to work on the critical role that institutional reforms played in early economic growth. As Acemoglu et al. (2016) noted that the post office was one of the most important government institutions during this period. Recent work by Abhay and Xu (2022) shows that strengthening this institution can facilitate technology development. Our results provide further evidence on the contribution of institutional reforms to economic growth during the Industrial Revolution.

References

Abhay, A and G Xu (2022), Strengthening Government Capacity: Postal Reform and Innovation in the Gilded Age, NBER Working Paper 29852.

Acemoglu, D, J Moscona and JA Robinson (2016), “State Capacity and American Technology: Evidence from the Nineteenth Century”, American Economic Review 106 (5): 61–67.

Agrawal, A and A Goldfarb (2008), “Restructuring Studies: Communication Costs and the Democratization of University Innovation”, American Economic Review 98 (4): 1578–90.

Agrawal, A, A Galasso and A Oettl (2017), Roads and Innovation, Review of Economics and Statistics 99 (3): 417–434.

Catalini, C, C Fons-Rosen and P Gaulé (2020), “How do travel costs shape cooperation?”, Management Science 66 (8): 3340–60.

Donaldson, D and R Hornbeck (2016), “Railroads and US Economic Growth: A ‘Market Access’ Approach”, Quarterly Journal of Economics 131 (2): 799–858.

Hanlon, WW, S Heblich, F Monte and MB Schmitz (2022), “A penny for your thoughts”, NBER Working Paper 30076.

Jaffe, AB, M Trajtenberg and R Henderson (1993), “Geographical Localization of Knowledge Diffusion as Evidenced by Patent Citations”, Quarterly Journal of Economics 108 (3): 577–98.

Koudijs, P (2014), “The Boats That Never Sailed: Asset Price Volatility in a Natural Experiment”, Journal of Finance.

Lucas, RE (1988), ‘On the Mechanics of Economic Development’, Journal of Monetary Economics 22 (1): 3–4.

Romer, PM (1986), “Increasing Returns and Long-Term Growth”, Journal of Political Economy 94 (5): 1002–37.

Steinwender, C (2018), “Real Effects of Information Friction: When States and Kingdoms Unite”, American Economic Review 108 (3): 657–96.

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