Institute on California and the West Railroaded Workshop, Huntington Library, San Marino, CA, July 9, 2011: Taking Counterfactual History Seriously
Lamoreaux, Naomi R., California History
How many economists does it take to change a lightbulb? None, the answer goes. If the lightbulb needed changing, the market would have already done it. Now, with the publication of Richard White's book Railroaded: The Transcontinentals and the Making of Modern America, it appears we will be able to tell the same joke about western historians. That might seem to be an unfair jibe--I am being deliberately provocative in making it--but I would justify this reading of White's book by pointing out that what economists mean today by the term market is generally misunderstood. Most would agree with White's assertion that "there is no such thing as a market set apart from particular state policies, institutions, and social and cultural practices." They also would agree with his follow-on statement: "The question is not whether governments shape markets; it is how they shape markets." (xxv)
Economists generally prefer governments to shape markets by harnessing competitive forces rather than by pursuing an explicit industrial policy, and so it seems does White. The root of all the evils he depicts in his book was government subsidization of the transcontinental railroads: "[W]ithout the extensive subsidization of a transcontinental railroad network, there might very well have been less waste, less suffering, less environmental degradation, and less catastrophic economic busts in mining, agriculture, and cattle raising. There would have been more time for Indians to adjust to a changing world.... The issue is not whether railroads should have been built. The issue is whether they should have been built when and where they were built. And to those questions the answer seems no. Quite literally, if the country had not built transcontinental railroads, it might not have needed them until much later, when it could have built them more cheaply, more efficiently, and with fewer social and political costs." (517)
White argues that history could have turned out differently. If the government had not thrown its largess at the railroads, the United States (and Mexico and Canada) would have been better off. Even the Indians would have been better off. His point is not that the transcontinentals should never have been built. Rather, he claims that if private enterprise had constructed them only when and where they could be justified by calculations of profitability untainted by subsidy, the United States would have been a kinder, gentler place in the late nineteenth century.
It might seem from this last phrase as if I am mocking White's argument, but that is not my intention. White is offering an explicitly counterfactual hypothesis that deserves to be taken seriously. All historical arguments by their very nature imply that history would have turned out differently if the events or factors singled out for emphasis did not occur. Unfortunately, most historians never even think about, let alone attempt to test, the alternative hypotheses that are implicit in their work. White should be applauded for posing his argument in explicit counterfactual terms. In my view, however, he does not take his own argument seriously enough. That is, he does not bring the evidence to bear on the counterfactual that is needed to go beyond the surface of plausibility and truly assess its utility for illuminating the history of the period.
The purpose of my commentary is to suggest how one might work through such an assessment. I first highlight the basic theoretical assumptions that structure White's narrative. I suggest that these assumptions are similar to those that underlie much current economic thinking and argue that a more explicit use of this framework could help to resolve puzzles that the book currently leaves hanging. The remainder of the commentary is devoted to demonstrating how some simple models can illuminate the economics of the transcontinentals and also their effects on American society more generally.
THE PROBLEM OF ASYMMETRIC INFORMATION
At the heart of White's narrative is a set of theoretical assumptions that are essentially the same as those that underpin what is often called the new economics of information/Practitioners reject neoclassical models that depend on the assumption that all economic actors have perfect knowledge of the choices they face. …