Monday, November 22, 2010

Entrepreneurial market design in old New York

My colleague Ed Glaeser has penned an economist's love letter to New York City that focuses on its entrepreneurial history: Start-Up City: Entrepreneurs are the heroes of New York’s past and the key to its future.

You should read the whole thing, but here's a part that caught my eye as focusing particularly on an entrepreneurial act of market design.

"Entrepreneurs have played a key role in every stage of New York’s development. During the early nineteenth century, when waterways were the lifelines of commerce, New York owed its expanding sea trade partly to natural advantages: a safe, centrally located harbor and a deep river that cut far into the American hinterland. But those advantages became important because of the vision and energy of entrepreneurs like Jeremiah Thompson, the gambling Quaker. Thompson immigrated to New York at 17 to work in the American branch of his family’s wool business. By the 1820s, he had established himself as America’s largest importer of English clothing, its largest exporter of raw cotton, and its third-largest issuer of bills of exchange.

"As a global trader, Thompson was acutely aware of the shortcomings of the transatlantic ships of the time, which would stay in port until their hulls were filled with goods. (Imagine showing up at LaGuardia and having to sit around until the airline sold enough tickets to fill the entire flight to Frankfurt.) Thompson saw an opening and created the Black Ball packet line, whose ships set sail on a scheduled day every month, no matter how light their cargoes were. His innovation was a gamble, since sometimes his ships sailed with relatively empty hulls, which meant less income from the merchants who bought the space. But a virtuous circle developed: fixed schedules attracted more cargo, and more cargo made ships sailing on fixed schedules more profitable. Once Thompson was turning a profit, other packet lines, like the Yellow Ball and Swallowtail lines, entered the market. An 1827 letter to the New England Palladium described the significance of Thompson’s invention: “I consider Commerce by lines of ships, on fixed days, an invention of the age nearly as important as Steam Navigation and in its results as beneficial to New York, which has chiefly adopted it, as the Grand [Erie] Canal.

"Thanks to such innovation, the city grew great during the first half of the nineteenth century, its population rising from 33,000 in 1790 to 814,000 on the eve of the Civil War. In 1821, New York’s exports, measured in dollars, were less than 10 percent higher than Boston’s. By 1860, New York was exporting over 700 percent more than the city on the Charles."

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