Communication costs, science, and innovation

Scientific and technological progress is a fundamental driver of long-term economic growth (Romer 1986, Lucas 1988). Not surprisingly, a lot of research aims to understand the factors that facilitate science and technological development. One reason that has received enough attention is the role of communication between scientists, engineers and inventors. It seems natural that those working within the boundaries of scientific and technological knowledge will benefit by exchanging information, discussing their ideas and getting advice and feedback on their work. Nevertheless, only a limited number of empirical studies have shown how much communication costs hinder scientific and technological progress and thus long-term economic growth.

One of the primary challenges in studying the cost of communication in the modern environment is the huge array of communication methods available. While individuals can easily switch between different communication channels, it is difficult to differentiate the effect of changes in communication costs on results.

Researchers have taken four common approaches to tackling this challenge. A method assumes the importance of communication without directly measuring communication costs. For example, Jaffe et al. (1993) looking at the geographical proximity of inventors who cite each other in patents to estimate the importance of communication costs, which are probably shorter than short distances.

The second approach is to consider observed changes in trade costs (e.g. using Agrawal et al. 2017 highways, or using Catalini et al. 2020 airlines) which refers to changes in communication costs.

The third focuses on a narrow event and community where changes in communication costs can be better isolated. Agrawal and Goldfarb (2008) studied the effects of BITNET, an early pioneer of the Internet, on collaboration between university researchers.

A fourth method involved examining historical settings, when there were far fewer methods for 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 Cowdis’s (2014) work on 18th century financial markets – have shown how historical settings can be used to better understand the importance of communication. However, existing work in these veins has not yet examined the impact of communication costs on science or innovation.

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

An 1839 Act of Parliament replaces the complex and expensive system of distance-based postal systems in Britain with a single low postage rate, uniform penny post and the first 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 to Britain before and after the uniform penny post

Since the reform has replaced the distance-based postal system with a single uniform rate, communication costs have changed across the space. We use it as a natural experiment to test the effect of communication costs on the development of science and technology.

The first step in our analysis is to measure the change in communication costs within the UK location. To develop this measurement, we identify and geo-locate 618 post cities in England and Wales and more than 1,600 associated sub-post cities (left panel of Figure 2). We also map out the postal road network connecting each postal city (right panel of Figure 2). Reorganizing the distance-based pricing plan prior to the 1840 reforms, we calculated the change in postage costs between any two post cities in the country due to the reforms.

Figure 2 Post Town, Sub-Post Town and Post Road in the UK around 1838

To study the impact on science, we collect articles and quotes from leading academic journals of that era, Philosophical dealings of the Royal Society of London. We determine geography through a meticulous manual review of the biographical sources available to each author and cited scientist. Once grounded, these data allow us to examine whether we see a relative increase in quotations between pairs of scientists who have experienced a large relative reduction in the cost of bilateral communication after reform. Our results clearly show an increase in scientific citations due to lower communication costs. Since the reform, the gradient of quotes that have been reduced with distance-based postage costs has been reduced by about 70%.

To test the impact on technology development, we use patent data, a standard data source for investigating innovation results. In particular, we look at whether patenting has increased in areas where reform has benefited the most. To create a position-level measure of the impact of the reform, we follow the market access method of Donaldson and Hornbeck (2016) but apply communication costs to create it Access to the letter market To measure. We show that patents have increased in positions that have experienced more significant improvements in letter market access due to the reforms.

Naturally, we need to be aware that the estimated effects were due to postal reform rather than other changes that took place in Britain at the same time. The most important of these was the construction of the primary railway. We control for the roll-out of new railroads during our study period, creating a year-level GIS map of the railroad network, turnpike network and network of canals and coastal shipping routes. The introduction of the telegraph could not confuse our inquiries as it was only used for railway operations until the mid-1850s.

These new discoveries push us to understand the impact of communication costs on the development of science and technology. In particular, they show that a significant reduction in the cost of long-distance communication can have a meaningful impact on both science and technology, the two main drivers of long-term economic growth. Facilitating communication between researchers is likely to contribute to economic growth.

These results also contribute to working on the important role that institutional reform played in early economic growth. As Acemoglu et al. (2016) Note 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 organization can facilitate the development of technology. Our results provide further evidence of the contribution of institutional reform to economic growth during the Industrial Revolution.

References

Abhay, A, and G Xu (2022), “Strengthening State Power: Postal Reform and Innovation the Golded Age”, NBER Working Paper 29852.

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

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

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

Catalini, C, C Fons-Rosen and P Gaulé (2020), “How does the cost of travel shape cooperation?”, Management science 66 (8): 3340–60.

Donaldson, D., and R. Hornbeck (2016), “Railways and the American 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 Thought”, NBER Working Paper 30076.

Jaffe, AB, M Trajtenberg and R Henderson (1993), “Geographical localization of knowledge dissemination as evidenced by patent quotes”, Quarterly Journal of Economics 108 (3): 577-98.

Koudijs, P (2014), “The Boats That Didn’t Voyage: A Natural Experiment of Resource Price Instability”, Journal of Finance.

Lucas, RE (1988), “On the mechanics of economic development”, Journal of Monetary Economics 22 (1): 3-4.

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

Steinwender, C (2018), “The Real Impact of Data Friction: When States and States Come Together”, American Economic Review 108 (3): 657-96.

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