Ohio Canal Era

Appendix 4: A Note on the Problem of Estimating "Indirect Returns"

A jJjJendi..r: 4 A NOTE ON THE PROBLEM OF ESTIMATING "INDIRECT RETt.:RNS" One of the principal arguments of canal promoters in the nineteenth century-·-as it is today a major argument in the rhetoric of highway and airport promoters··-was that transport facilities generate "indirect benefits"; and hence the returns they might yield on the capital invested to build them can exceed what the government itself recaptures through user fees. In recent years, economists have devoted much attention to devising means of quantifying such indirect benefits. and a school of cost-benefit analysis has attracted the interest of many. In cost-benefit analysis , the projected construction cost of a facility is set against (I) the estimated revenues from user fees (direct returns) , and (2) the estimated external benefits (indirect returns. or "social savings') that accrue to the society but are not recaptured by the investing agency itself. This kind of analysis can yield data that is valuable in two respects: first, it can provide a quantitative basis for establishing priorities among alternative projects competing for available funds; and second, it can offer a quantitative measure of total benefits (direct and indirect) that will be generated by any single project-a measure that is useful when a govermnent has established a certain minimum return as prerequisite for any appropriation of funds for social-overhead investments.1 Economic historians recently have seized upon cost-benefit analysis as an instrument for making retrospective judgments 392 } OHIO (A:-.rAl ERA concerning the benefits that were derived from various investments in the past. For instance, Douglass North has asserted that the social savings derived from pre-I860 state canal investments (many of which did not generate direct returns, from tolls, sufficient to carry interest and amortization of principal on their cost) probably in fact were not very large-ot at best were not large enough to have represented the best use of the society's available investment capital. In a parallel but substantively different and mote thorough argument, Robert William Fogel has a"crted that the U. S. investment in railroads. up to 1890, did not pay large social returns. He states that if the society had lacked railroads and instead used its capital to build a comprehensive system of waterways and ancillary wagon roods, then it \\'ouid have sacrificed at most 5 per cent of Gross National Product in f 890. Fogel's is an elaborate exercise in hypothetical history: he hypothesizes the feasibility, construction cost, and operating ('osts and revenues of an imaginary system of waterways and roads; and he obtains his 5 per cent social-saving estimate by comparing the cost of moving all goods on facilities actually operating in 1890 with the cost of moving the same goods the same distances on his hypothetical (imaginary) system . The burden of his argument is that canals and other waterways were nearly (within 5 per cent of G!'JP in J890) sufficient to perform the transport services necessary to the nineteenth century U, S. economy,!; The assertions of North and Fogel raise questions relevant to the suhject of this book. First of all, what were the social returns from Ohio~s investment in canals and other public transport facilities'? And do the quantified returns suggest that Ohio made the best use of its investment capital? To explore this issue, the author and Roger L. Ransom have used a theory of rent (developed by Ransom) to measure the impact of the Ohio Canal's operations during J 827-60. This analysis finds that the Ohio Canal paid very satisfactory social returns until the advent of railway competition in the early 1850'S,3 Our finding accords with the conclusions of a similar analysis by the Ohio canal commissioners : in a report of 1833, the commission computed the costs of operating the state canals and amortizing the canal debt, setting Appendix 4 off co~ts agaioj.t the returns (llirec[ as measured by revenue from toBs, and iJUlirecr as measured hy the: price differential on Ohio export commodities before and after the canal'S were built). The commissioners concluded that during J 832 some SI 69_(HW in social l),wings had been generated "in consequence of the canals."1 1f applied consistently over the next two decades. the commission's formula for measuring benefits would have shown that the cann! investment was highly "profitableH to the society, even if it failed...