Phase transitions as a cause of economic development

Abstract

Economic development spans centuries and continents. Underlying infrastructural causes of development, such as institutions and networks, are subject to slow but persistent change. Accumulated infrastructural changes eventually become so substantial that they trigger a phase transition. Such transitions disrupt the prior conditions for economic activities and network interdependencies, requiring radically transformed production techniques, organizations and location patterns. The interplay of economic equilibria and structural changes requires a theoretical integration of the slow time scale of infrastructural change and the fast time scale of market equilibration. This paper presents a theory that encompasses both rapidly and slowly changing variables and illustrates how infrequent phase transitions caused four logistical revolutions in Europe over the past millennium.

Keywords

Infrastructure development institutions logistical revolution phase transition

Introduction

The performance of any economic system depends on its infrastructure, because infrastructure changes at a much slower pace than other relevant factors. An example of the slow pace of infrastructural change is the extension of railway networks. This process lasted almost a century before its completion in each nation. The British network was the earliest to be built in Europe; after a slow start in the first decades of the 19th century it was completed in the 1930s. Gruebler (1990) and Nakicenovic (1988) show how the transport infrastructure develops over long periods of time. New networks that are better at adapting to topographic conditions gradually become more important than older networks with inferior technology.

This paper focuses on the short-term causal impact of the infrastructure on market activities as well as on the long-term interdependencies between the infrastructure and markets. The next section defines infrastructure as durable factors with public effects, following which we show how differences in time scales and publicness between ordinary market goods and the infrastructure necessitate a novel analysis of equilibria and structural change. The fourth section shows how historical structural transformations – logistical revolutions – of the European economy were the outcome of long-term interdependencies between a spatially expanding market economy and a slowly evolving material and non-material infrastructure. The fifth section describes how the most recent structural transformation – the Fourth Logistical Revolution – has created a new knowledge arena consisting of a network of spatially distinct nodes. The final section offers a short conclusion.

Attributes of the infrastructure

There are two fundamental attributes of the material as well as the non-material infrastructure:

It is public capital that different firms and households can use at the same time.

It is more durable than other capital.

The material infrastructure consists of networks for transmitting information and energy or for transporting goods and people. The non-material infrastructure comprises scientific, artistic and other generally accessible knowledge as well as formal and informal institutions. Formal institutions include legal systems, constitutions, voting rules and durable laws and regulations. Informal institutions include conventions, internalized rules and cultural norms.

Equilibrating economic processes occur on a pre-configured arena of material and non-material infrastructures. General equilibrium theory presumes the pre-existence and stability of all networks for exchange as well as the existence and stability of institutions such as the property rights that are necessary for market exchanges to occur and for market prices to arise.

Theoretical framework

The synergetic theory of complex dynamics

In the 1970s and 1980s, Hermann Haken developed the theory of synergetics (see Haken, 1983). It was first used for modelling the laser and was later applied to numerous non-linear and complex chemical and physical dynamic processes. Synergetic theory classifies phenomena according to their typical time scales and the scope of their effects. This implies that synergetic theory is a suitable starting point for a dynamic analysis of the infrastructure and its impacts on the markets for private goods.

In economics, the application of synergetic theory implies that the state of the infrastructure and its slow evolution facilitate and constrain the relatively fast processes towards market equilibrium, as well as processes of private capital accumulation and economic growth. Figure 1 shows what a synergetic subdivision implies for the analysis of economic processes.

Table 1.

Population and gross domestic product (GDP) estimates (1990 international Geary–Kamis dollarsa), 1 AD, 1000 AD and 1500 AD.

Country/region	1 AD	1000 AD	1500 AD
Italy
GDP (million)	6,475	2,250	11,550
Population (million)	7,000	5,000	10,500
Western Europe
GDP (million)	14,433	10,925	44,183
Population (million)	24,700	25,413	57,268

^aThe Geary–Khamis dollar is widely used in economics and financial statistics for various purposes (see Khamis, 1972; United Nations Statistics Division, 2007).

Source: Maddison (2007).

General equilibrium theory and the most influential theories and models of economic growth assume that the infrastructure – corresponding to the lower-right cell in Figure 1 – is parametrically stable. Despite occasional references to time and space in some equilibrium and growth models, the treatment is always superficial, and these theories are thus not general in the deep sense of the word.

Figure 1.

Subdivision of economic processes according to time scale and scope of effects.

In the long-run perspective of economic history, the standard approach of equilibrium and growth modelling is untenable. Economic development, as it plays itself out over centuries and continents, involves substantial accumulated changes to the material and non-material infrastructures. These accumulated changes can be large enough to disrupt the basic conditions of most economic activities, necessitating radical transformations or phase transitions of the network interdependencies that exist among agents. Because of such infrastructural changes, firms’ established production techniques and organizational principles become obsolete, which in turn changes the economic behaviours of households and firms as they adjust to new economic realities.

General equilibrium theory and the solvability of a synergetic equation system with fast and slow equations

General equilibrium theory has commanded a central position in economics since the publication in 1874 of Leon Walras’ Éléments d'économie politique pure. Walras (1896) conjectured that a model of the market economy could simultaneously determine all prices and exchanged quantities. The Vietnamese mathematician Hoang Tuy (1976) proved the equivalence of proofs of the existence of a general equilibrium by Walras’ excess demand theorem and the fixed-point theorems used by later mathematical economists.

It is also important to note that fast-paced economic processes do not occur in a vacuum, and that equilibria are not automatic. Roger Koppl (2002; see also Koppl and Whitman, 2004) shows how the existence and speed of equilibrating tendencies depend on the tightness of the system constraint that economic actors face. Markets with atomistic competition in societies with stable and transparent institutions are likely to exhibit strong equilibrating tendencies. These tendencies are less pronounced when the system constraint is weaker, such as when a producer has non-contestable monopoly power or when powerful individuals can change institutions through dictates or executive orders. Equilibrating tendencies are entirely absent if there is no efficiency-inducing systemic feedback, which means that attempts to model a ‘market in marriages’ as analogous to markets for apples or oranges are rather pointless.

Ordinary market goods – goods of quite limited durability – are exchanged for money in different marketplaces such as shops, auction houses and designated websites. Well-functioning markets rely on a legal system that enforces contractual agreements and protects buyers, thereby keeping transaction costs at manageable levels (Andersson and Andersson, 2017, ch. 10; Hurwicz, 1973).

In contrast, most general equilibrium theorizing relies on some unknown mechanism that automatically establishes equilibrium. It was their dissatisfaction with the non-uniqueness and instability of the assumed equilibrating mechanism that led Leonid Hurwicz (1973) and Don Saari (Saari and Simon, 1978) to pursue their analyses of the economic mechanisms that helped markets approach equilibria.

Stephen Smale’s (1976) use of the global Newton method implies that a stable search for general equilibrium can be possible but requires an enormous amount of information. The method necessitates a local evaluation at each iteration of all partial derivatives associated with market reactions. Saari and Simon (1978) investigate whether one can instead find ‘locally effective price mechanisms’ that turn all economic equilibria into sinks or attractors, implying the use of less information than the global Newton method. They prove that this is impossible, concluding that there is a need for more sophisticated institutional conditions that help markets approach underlying equilibria. Spatial models by Beckmann and Puu (1985) and Nagurney (2013) indicate the necessity of given transport networks in the search for a stable equilibrium.

However, standard general equilibrium theory relies on conditions that are exogenous to the theory. It is only useful for analysing short-term partial market phenomena and is entirely misleading in models of economic growth or restructuring. Debreu’s technique of dating and locating variables (Debreu, 1959) does not address the problems of structural change. Analyses of structural change require a subdivision of economic dynamics into fast and slow processes and a subdivision of goods into private and public to allow for both economic equilibrium and structural change. Synergetic theory and related applied models can handle such dynamic systems.

The key contention in this paper is that competitive general equilibrium processes, seen as complex dynamic systems, can only approach a stable equilibrium state if they are constrained by spatial and social networks and other infrastructural conditions. The basic assumption is that equilibrating processes operate in fast-paced and short-term markets for private goods, thereby determining the prices of such goods while at the same time being constrained by the slowly changing arena of networks and institutions. Tychonoff’s (1930) theorem ensures the applicability of this approach.

Solving for stable general equilibrium in an infrastructural context

Theorems of the solvability of interactive fast and slow scale systems of equations have been proved by Tychonoff (1930), Fenichel (1979) and Sugakov (1998). Assume a dynamic system of N ordinary differential equations that can be divided into two groups of equations. The first group consists of m fast equations; the second group consists of (m + 1, …, N) slow equations. Tychonoff’s (Tikhonov’s) theorem states that the system

\begin{matrix} d x_{i} / d t = f_{i} (x); i = 1, \dots, m (fast equations); g e n e r a l e q u i l i b r i u m e q u a t i o n s \\ ε d x_{j} / d t {=f}_{j} (x) \approx 0; j = m + 1, \dots, N (slow equations); i n f r a s t r u c t u r e e q u a t i o n s \end{matrix}

has a solution if the following conditions are satisfied:

The values of x are isolated roots.

The solutions of x constitute a stable stationary point of f_j = 0 for any x, and the initial conditions are in the attraction domain of this point.

The solution of x is determined by an adiabatic approximation, at work if ${Δ T}_{i} / {Δ T}_{j}$ = $ε_{i j}$ is sufficiently small, where $Δ T_{i}$ is a change of time on timescale i.

One may interpret adiabatic approximation as a fast-equilibrating process of the type that occurs when a small change in the infrastructure of a dynamic system disrupts a locally stable equilibrium. An example is a person who is being subjected to a very slow increase in the temperature of her environment – say from 0 to 40°C over a period of two months. During this slow process, the faster process of adiabatic approximation would enable the person to attain a new state of homeostasis each day. Conversely, a drastic increase from 0 to 40°C within a time span of a few minutes could lead to a collapse of her entire body.

Similarly, the adiabatic approximation of a competitive general economic equilibrium implies the attainment of a stationary point each year, but only if year-on-year changes to the infrastructure are sufficiently small.

Four logistical revolutions

Most of the time the causality of the synergetic economic system runs in the direction from infrastructure to market processes. However, at critical times the infrastructure has changed to such an extent that the structure of the market economy must undergo a phase transition or an economic revolution. If a long period of slow and steady changes to trade and other transaction networks constitutes the main cause of the phase transition, then the phase transition is a logistical revolution.

Henri Pirenne (1969) was the first historian to claim that slow and continual improvements to transport networks caused the radical change of late medieval Europe from an autarkic set of feudal regions into an integrated European trading economy. He claimed that a growing population and innovative ideas were only secondary causes of the First Logistical Revolution.

Braudel’s (1979) historical studies supported Pirenne’s analysis, as did Mees’ more theoretical analysis (Mees, 1975, pp. 403–425). According to these studies, an improved transport network was the key cause of the economic transformation of late medieval Europe.

The phase transition of the European economy meant a break with the stagnation that followed upon the downfall of the Roman Empire. The Romans had built an impressive interregional transport infrastructure with roads, seaports and fortified towns as far north as the Rhine and northern England. They also controlled most of the Mediterranean coast. These infrastructural conditions implied an advantage in interregional trade. This advantage applied to trade between coastal areas and river towns in the conquered parts of Europe and the Mediterranean. It applied less to long-distance land transport and trade.

The laws of Pax Romana were the institutional support structure for Roman trade and other market activities, but these activities were at the same time constrained by the rule that senators and other members of the upper class should not themselves engage in risky trading activities. Their prescribed role was to rely on farming and the productive use of the slaves that the Roman army had captured in its various expansionary wars. Peter Temin writes that

ancient Rome had a market economy. There are many references to markets in ancient history, and it does not take much reading to see that they were ubiquitous. Focusing on markets allows us to ask how these markets worked, whether they were helped or hurt by the structure of Roman society, and how far they extended. I argue that markets knit the Roman economy together enough to call it a market economy … the Pax Romana stimulated Mediterranean trade. Shipping costs over sea were far less than over land before the Industrial Revolution and the advent of the railroad. Extensive Mediterranean trade promoted regional specialization, and comparative advantage worked to raise incomes across the Roman Empire … ordinary Romans lived well, probably better than any other large group—consisting of many millions of people—before the Industrial Revolution. They lived well as a result of extensive markets, comparative advantage, and technological change. (Temin, 2013, p. 2)

Although Temin provides a persuasive overview of the Roman economy, Maddison’s empirical estimates (2007) imply that he may have overstated the Roman standard of living in comparison with 16th-century Europe, although it is at most a minor exaggeration.

This relatively high standard of living ended in the 5th century AD, at the time when Romulus was conquered by the Germanic ruler Odoacer. The Roman material and non-material infrastructure rapidly deteriorated towards a point at which the southern European and Mediterranean transport and trading network collapsed in a downward cusp bifurcation.

Maddison’s (2007) estimates of the gross domestic product and population size of Italy in the years 1 and 1000 AD illustrate this process. The population shrank from seven to five million over a period of 1,000 years, while the economy experienced a sharper contraction: Italy’s economy in the year 1000 was less than 35% of its size in the year 1 AD. By the year 1500, Italy’s and Europe’s development surpassed the level reached by the Roman Empire at the peak of its powers, as Table 1 illustrates.

The fall and downward phase transition of the infrastructure that the Roman Empire had established set the stage for the upward phase transitions or logistical revolutions that have occurred over the past millennium in Europe. Apart from the ongoing restructuring from an industrial to a knowledge-based post-industrial society, there have been three such logistical revolutions in the economic history of Europe since the late Middle Ages:

the First Logistical Revolution, starting in the 12th century;

the Second Logistical (Commercial) Revolution from the 16th century onwards; and

the Third Logistical (Industrial) Revolution, starting in late 18th-century Britain and then spreading globally from region to region into the 20th and 21st centuries.

A handful of economists and economic historians have made path-breaking contributions to our understanding of how the infrastructure has shaped the size and scope of these revolutionary structural changes over the centuries. Seminal contributions include Heckscher (1955), Pirenne (1969), Schumpeter (1942), Braudel (1979), M. North (1990), D.C. North (2005), and Maddison (2007). These contributions focus on one or more of the infrastructural factors, with the key ones being transport networks, institutions and (public) knowledge.

Transport infrastructure and the First Logistical Revolution

Pirenne and Braudel identified the role of the transport infrastructure as a determinant of the historical development of the European economy. Pirenne (1969) tracks the late medieval transformation of Europe from a loose system of autarkic feudal regions into a networked economy with trading nodes such as Bergen, Lübeck and Bruges in the north and Genoa, Florence and Venice in the south. After considering several popular explanations of the growth of European trade and urbanization – such as technological advances, new values or population pressures – Pirenne finally arrived at the conclusion that the only reasonable explanation was the development of a serviceable transport network. This network consisted of seaports and safe, navigable rivers deep into the hinterlands of various trading towns. The development of vessels such as the cog made it easier to transport goods and people along coasts and rivers.

The integration of late medieval Europe into a trading network with numerous shipping nodes led to the first measurable urbanization process in the history of the continent. From 1100 to 1400, Europe experienced unprecedented growth in the number of towns. Braudel’s calculations show that about 20,000 new towns were created during this period. Some of these new and usually quite small towns became trading nodes in the European (Hanseatic and Italian) trading network. The largest cities – for example Venice and Genoa – had populations of 100,000 or more, while important towns specializing in long-distance trade such as Florence, Bruges and London hosted populations of about 40,000 each.

Most new towns were small, but they still provided opportunities for greater division of labour along the lines of the von Thünen Model (von Thünen, 1966). A medieval town supplied artisanal goods in exchange for agricultural produce from its hinterland. Some of these towns gradually became capable of supplying goods that exceeded the demand within their home regions. Towns with sufficiently large and stable excess supplies became nodes in the interregional trading network of the Hanseatic League or the Mediterranean network centred on the Italian-speaking city states.

The Second Logistical Revolution: interactive effects of material and non-material infrastructural transformations

Trade is conditioned on credit. Trade between distant regions requires access to long-term credit. Already in the 12th century, it became common to use bills of exchange rather than direct monetary transfers in Italy; this led to the creation of the first banks. Florence, Venice and Genoa became leading centres of early banking. But these early merchant-initiated private banks were often regarded as unreliable because of their role in bankrolling the Church and the nobility.

The limited supply of money and credit became a constraint that slowed down the expansion of trade in the 15th century. The explorations in the Americas after Columbus’ initial voyage opened new opportunities for the creation of money and the expansion of credit. The European monetary system was a metallic standard, with silver as the predominant metal. Kugler and Bernholz summarize different studies of the volumes and impacts of metal imports in the 16th century:

According to an estimation by [Michael] North (1990, p. 74) central European silver output doubled between 1470 and 1520 and increased further in the 1520s with the new mine of Joachimsthal. In the 1530s, however, it declined sharply. Between 1492 and 1550 a substantial amount of gold, looted in the New World, was brought to Europe by the Spanish and Portuguese. From the 1540s a rising supply of silver was shipped to Europe from the newly discovered mines in Mexico and Peru, where the silver mountain of Potosi was discovered in 1545. The output of the Potosi mine rose strongly in the 1560s after mercury deposits had been discovered in the Andes. Mercury was necessary to process the silver. According to Hamilton (1934) the total imports of treasure (gold and silver) from the New World during the 16th century amounted to 206.6 million pesos, of which only about 15% were imported before 1555. (Kugler and Bernholz, 2007, p. 3)

Thus, the total amount corresponded to about 3,915 metric tons of silver. But Kindleberger notes that

[i]t is generally recognized that Hamilton’s estimates understate imports for the early years of the seventeenth century, because he counted only those imports recorded by the official Casa de Contratacion in Seville. Dutch and English East India shipped directly in Cadiz, downstream from Seville. In addition, considerable amounts of silver went from Peru to Acapulco in Mexico between 1573 and 1815, and from thence to the Philippines. (Kindleberger, 1998, p. 3)

The massive import of silver not only relieved Europe of the old trading constraints, it also gave rise to an extended period of inflation, as was recorded for the Low Countries and Spain. According to the accounting identity of monetary theory, a relative growth in the money supply would either be accompanied by a relative growth in trade and/or an increase in the rate of inflation. Both of these phenomena appeared in the 16th century.

The Spanish and Portuguese seafarers’ role in expanding money, credit and trade caused a structural shift in the European trade networks. They shifted from coastal and river-based short-distance trade flows, towards a global trading network with a focus on new opportunities in the Americas. Lisbon became a new but short-lived centre of gravity of world trade. After a few decades, Lisbon was overtaken by Antwerp, which offered superior access to European markets. The expansion of Spain’s territory and the flow of silver from the Americas to Flanders transformed Antwerp into a commercial and financial centre by the mid-1500s. One sign of Antwerp’s growing importance was the growth of its population from 50,000 in 1500 to 100,000 in 1550.

The role of Antwerp as a commercial European centre diminished in the 1560s because of the disruption of shipping routes between the Low Countries and Spain. But the overall change to the European trading network was small; Amsterdam replaced Antwerp as the centre of gravity in long-distance trade.

In the 16th century, new opportunities for such trade had engendered a global trading network of seaways in the Americas, Africa and Asia. There were technological breakthroughs in shipping technology with the caravel and especially with the fluyt, which was a more efficient type of merchant ship that was invented in Holland.

The Dutch commercial fleet was by 1670 Europe’s largest. Dutch shipbuilding technology had become highly specialized and efficient. The new fluyts could handle larger volumes of goods with smaller crews than earlier ships. Transport costs declined rapidly. The Dutch trading companies expanded the North Atlantic transport network with the help of routes that connected different regions of Western Europe with the east coast of North America.

The increasing distances over which goods were exchanged led to an increasing need for long-term credit. It became necessary to find a reliable method for funding trading projects that were both risky and protracted. The demand for predictable instruments of credit mounted.

Amsterdam’s rulers and merchants addressed the needs of traders. They did this by introducing several financial inventions and innovations at the beginning of the 17th century. The establishment of a stock exchange was followed by the first publicly guaranteed bank. Merchants could deposit silver coins for which they received guaranteed banknotes. This new technology reduced the transaction costs associated with trade, and Amsterdam’s head start in effecting this reduction enabled it to become the centre of the world economy. The increase in the number of towns and cities had stagnated in the 16th century, but Amsterdam’s innovativeness spurred renewed urbanization in the Low Countries. Amsterdam exhibited spectacular population growth, from 10,000 in the early 16th century to 200,000 in the late 17th century.

Reductions in the costs of land, river and coastal transport caused the First Logistical Revolution. The Second Logistical Revolution was more complex. Ultimately, it was a combination of better shipping technology – leading to lower long-distance transport costs – and improved institutions – leading to lower transaction costs (Andersson and Andersson, 2008).

Amsterdam turned out to be remarkably stable as a dominant equilibrium node within the European and transatlantic trading network; its ‘equilibrium’ character refers to its stability as a geographical centre for world trade in the period between the Second and Third Logistical Revolutions. It remained the most important node until the mid-1700s.

At the end of the 17th century, Amsterdam’s central bank was joined by a larger publicly guaranteed bank, the Bank of England, which could conduct its business using both money and bills of exchange. It could thus both provide credit and print banknotes. The Bank of England later became the prototype for central banks in all parts of the world. The City of London had thereby secured its lasting position as an international financial centre. London’s financial innovations moved the centre of the European economy from Amsterdam to London.

In the meantime, France had been bypassed as a commercial nation by both the Netherlands and England. The reason for its loss of relative economic competitiveness was the steady growth of the monarchic bureaucracy along the principles of mercantilism as codified by Colbert. According to mercantilism, state planning should be the main instrument of economic development. The most influential opponent of mercantilism was the Scottish economist Adam Smith. His analysis has been a starting point for debates between pro-market and interventionist economists ever since.

The Swedish economic historian Eli Heckscher (1955) provides a historically grounded argument against mercantilism, focusing on the institutions of the Hanseatic League and its dominant commercial towns, on mercantilism as a strategy of nation states, and on the system of competitive market economies.

According to Heckscher (1955), one of the greatest differences between England and France was the English institution of common law. It was different from the French version of civil law, which relied on a strong central state that was intent on protecting a fixed rather than an evolving economic system. As anticipated by Adam Smith in the 18th century, Heckscher (1955) concludes – on the basis of comparative economic history – that the use of common law, free trade, protected property rights, as well as the decline of monarchic power, constituted an interlinked set of institutions that jointly amounted to a necessary condition for economic development as well as for efficiency-inducing market processes.

Economists and historians have had contentious arguments regarding the importance of the slave trade as an economic precondition for the Third Logistical Revolution. However, there is no consensus on this issue. Findlay (1990; see also Findlay and O’Rourke 2007) presents a simple comparative static model of the economic impacts of slave colonies and their trade. The model comprises a metropolitan manufacturing sector using colonial raw materials as inputs produced with slave labour. The equilibrium of the model simultaneously determines the size of the slave labour force, the output of manufactured goods and the trade in raw materials as well as the relative prices of raw materials and of slaves. Harley (2013) used the model to conclude that the slave trade was important but not essential in determining the rapidly growing role of Britain during the Industrial Revolution. Instead, he formulated a theoretical hypothesis based on endogenous growth processes:

However, by the late seventeenth century the bulk of the trade-based stimulus to industrialization came not from the slave economies but from the northern Malthusian economies … Conclusion: In the absence of slavery, the northern settlements would have found alternative goods to sell into the Atlantic economy and their growth, and their demand for British manufactures, seem unlikely to have been stifled. (Harley, 2013, pp. 22, 29)

Knowledge infrastructure as the precondition for the Third Logistical Revolution

The third important type of infrastructure – apart from transport networks and institutions – is knowledge or, to be more specific, scientific knowledge. The European Enlightenment initiated an irreversible change in public access to scientific knowledge for thousands of prospective technological inventors in Britain and on the European and North American continents. The most remarkable creation of new accessible knowledge is associated with the names of Newton and Leibniz and their discovery (or invention) of the calculus of infinitesimals. Most mechanical and electrical inventions in the 18th and 19th centuries would have been impossible without the dramatic increase in the number of important calculus-based theorems and theorem-derived extensions by scientists such as Gauss, Lobachevsky and Maxwell.

In economics, Adam Smith proposed a new org-ware:¹ firms would gain from organizing their production according to a distinct and productivity-increasing division of labour. This org-ware novelty, in combination with improvements to the scientific knowledge base, new rail-and-canal infrastructure and English common law, amounted to necessary and sufficient conditions for the Third Logistical (Industrial) Revolution in the countries around the North Atlantic. Britain took the lead in this phase transition, with new industrial plants spreading rapidly along rivers, canals and newly built railways. London grew into a global financial centre, while all accessible English towns experienced increasing innovativeness, employment and productivity. Unprecedented urban population growth followed, with small towns becoming large cities within the span of a few decades. Infrastructure investments proceeded at an unprecedented pace: during the 100 years that followed the onset of the Industrial Revolution in England, these investments included almost 10,000 km of railway tracks, 3,200 km of canals, as well as roughly 30,000 km of turnpike roads (Clark, 2005).

Findlay (1990) shows that England’s industrial growth first revolved around the production and trading of cotton. The cotton industry relied on imports of raw cotton. Britain’s Asian colonies initially supplied the English textile industry with raw cotton, but later a slave-based triangular trading system became dominant. Slave traders sold captured Africans to American plantation owners. On the plantations, the slave-owners forced their slaves to plant and harvest raw cotton that was sold to British importers. In Britain, innovative spinning-and-weaving factories processed the raw cotton, and these factories and related processing plants made up the core of the expansive British textile industry. This industry was also a driving force behind the rapid urbanization of England and Scotland.

Despite its increasing importance as early as the 1770s, Adam Smith (1776) had very little to say about the textile industry in the Wealth of Nations, even though he wrote the book in Glasgow, which was an early centre of the cotton industry. But British raw cotton consumption rose dramatically in subsequent decades. By the 1830s cotton accounted for 20% of British imports, and garments and other processed cotton were 50% of British exports. The relative importance of the cotton industry increased from less than 1% of Britain’s gross domestic product in 1760 to about 8% as early as 1812. New transport infrastructures and liberal British institutions provided the preconditions for this rapid growth of interregional and international trade, part of which relied on the sinister practices of the slave trade.

The Third Logistical Revolution had an enormous impact on the towns around the North Atlantic Basin. At the beginning of the Industrial Revolution, there were four cities with a population of more than 50,000 in Britain. In the span of a lifetime, the number of towns of at least this size grew 10-fold. One of the most important of these new urban centres was Liverpool, which grew from a population of 20,000 in 1770 to almost half a million by the middle of the 19th century. Across the North Atlantic there was similar urban population growth in the north-eastern United States. The Third Logistical Revolution generated urban growth of the same kind as occurred during the two earlier logistical revolutions, but now on a much grander scale (Wrigley, 2010).

Common features of the three logistical revolutions

The three logistical revolutions in Europe’s past display several common features. Each restructuring has had similar infrastructural causes and has been associated with at least nine similar development phenomena:

They were all caused by a slow but persistent expansion of the material and non-material infrastructure.

Trade and production expanded rapidly in the most accessible towns and cities.

An expanded integrated trading system increased the advantages of regional specialization.

All logistical revolutions have entailed greater advantages associated with urban specialization and high growth rates in the number or size of cities and thus in the total urban population.

Every logistical revolution has led to innovative outbursts. The most radical innovations have been based on the scientific creativity of earlier periods.

Successful radical innovations have given rise to protracted periods of high profits, private accumulation of wealth and skewed distributions of wealth and income.

The massive accumulation of wealth among successful entrepreneurs has in many cases been used to support creativity in science and the arts, often with the aim of increasing the social prestige of the nouveaux riches.

During logistical revolutions, there is always creative destruction of industries, occupations and institutions.

Creative destruction has caused conflicts between new-economy and old-economy segments of the populations.

The Fourth Logistical Revolution and the emerging creative society

The regional economies of the world are currently undergoing two different structural transformations. Both have been caused by improved transport and communication networks in tandem with improved human and computer-based cognitive capacities. The combination of improved networks and greater cognitive capacities has made possible a more extensive global division of labour. The industrialization of previously underdeveloped economies is one of these two major transformations, affecting much of the Global South.

In parallel, advanced regions are in a process of transformation – a Fourth Logistical Revolution – that leads away from the industrial system and towards a global post-industrial network of creative regions. In these creative regions, firms’ profitability increasingly derives from the exploitation of modern transport and communications, the cognitive skills of the local population, and – most importantly – creativity in research, development and design. For new-economy firms, the result is a set of increasingly complex products (goods and services). Firms produce and market these products with the help of networks with global reach.

The structural transformation is leading the advanced economies away from the simple old growth paradigm within which the quantities of goods and services are increasing at constant or declining world market prices. One consequence of increasing product complexity has been greater value per unit of output rather than greater output quantities. Regions with high research intensities tend to produce increasingly complex products.

Strategies for education, science and industrial R&D form the foundation for efficiency-enhancing ‘complexity policies’ of creative regions around the world. Policies related to higher education and university research are becoming the focus of their development strategies. These regions usually consist of a dominant urban core and many suburbs, exurbs and sometimes also well-connected university towns or industrial parks on their geographic peripheries. The competitive infrastructure for creative regions comprises universities, international airports and good access to global information and communication systems. Attractive housing and cultural or natural amenities make it easier to attract and retain creative workers and innovative entrepreneurs.

The new scientific knowledge arena

At the end of the 19th century, many scientists believed that the end of science was imminent. Nothing could have been further from the truth. Young physicists such as Einstein, Mach, Boltzmann and Planck tentatively applied some seemingly obscure findings of 19th-century mathematics. Eventually these novel applications of mathematics caused physicists to abandon the whole body of post-Newtonian physics in favour of relativity theory and quantum theory. At an even later stage, the resulting new physics led to great technological and even greater political consequences.

Other equally consequential examples include the new mathematics of the 1930s, which in the hands of Alan Turing and John von Neumann caused the preconditions for the much later revolution in information technology.

Turing’s and von Neumann’s theories also led to the development of cognitive science in the late 20th century. One practical consequence has been the use of improved models of artificial intelligence in the design of industrial robots.

Likewise, Richard Feynman’s speech at the annual meeting of the American Physical Society in 1959 set the research agenda for what would become the nanotechnology industry almost 50 years later. Feynman’s proposal was followed by much theoretical and experimental development associated with physicists such as Gerd Binnig, Heinrich Rohrer and Harry Kroto, and with chemists such as Richard Smalley and Robert Curl. Yet another example is Crick’s and Watson’s breakthrough in genetics, leading to numerous biotechnological and medical applications at a much later stage.

The key observation is that all these 20th-century findings in the natural sciences and in pure and applied mathematics became accessible for a global public almost instantaneously. Yet there were delays of several decades before their first practical technological and economic impacts materialized, ranging from inventions over innovations to the accumulation of private capital.

The spiky nature of scientific creativity in space

Systematic studies of the distribution of creative capacity in science are based on Thomson Reuter’s Science Citation Index, which records articles and citations in peer-reviewed scientific journals. Although the world’s highest-ranked universities according to popular league tables are mostly located in the United States and in Britain, a more detailed examination of the distribution of science output shows that it is disproportionately concentrated in a handful of large metropolitan areas as well as in two English university towns. Table 2 shows the 12 functional urban regions with the greatest overall science output during three different three-year periods between 1996 and 2010.

Table 2.

Top 12 science regions, 1996–1998, 2002–2004, 2008–2010.

Rank	1996–1998		2002–2004		2008–2010
Rank	City region	SCI papers	City region	SCI papers	City region	SCI papers
1	London	69,303	Tokyo–Yokohama	81,798	Beijing	100,835
2	Tokyo–Yokohama	67,628	London	73,403	London	96,856
3	San Francisco Bay Area	50,212	San Francisco Bay Area	56,916	Tokyo–Yokohama	94,043
4	Paris	49,438	Osaka–Kobe	54,300	Paris	77,007
5	Osaka–Kobe	48,272	Paris	53,005	San Francisco Bay Area	75,669
6	Moscow	45,579	New York	51,047	New York	70,323
7	Boston	42,454	Boston	49,265	Boston	69,250
8	New York	41,566	Los Angeles	44,401	Seoul	67,292
9	Randstad (Amsterdam)	37,654	Randstad (Amsterdam)	44,094	Randstad (Amsterdam)	65,527
10	Los Angeles	37,437	Beijing	42,007	Osaka–Kobe	60,615
11	Philadelphia	29,376	Moscow	41,001	Los Angeles	58,176
12	Berlin	24,514	Seoul	33,083	Shanghai	50,597

Source: Andersson et al. (2014).

The top Asian creative regions – especially Beijing and Tokyo – have become increasingly important in the world of science. Despite these Asian inroads, most of the creative networks involve North American and Western European science centres. A key problem that the Asian and especially the mainland Chinese and Korean regions face is their patchy integration into global collaboration networks (D.E. Andersson et al., 2014; Matthiessen et al., 2011).

Andersson et al. (2013) show that the correlation between scientific productivity and scientific impact is imperfect. If our only concern is the number of journal articles, then Beijing would be the most important city in the world. But Beijing has the smallest mean number of citations per published article among the 40 cities with the greatest publication volumes. Scientists affiliated with universities and institutes in London have the greatest aggregate impact, as reflected in overall citation counts. At the national level, Switzerland consistently ranks as the country with the world’s greatest number of citations per head of population (D.E. Andersson et al., 2013; Matthiessen et al., 2011). Notable features of Swiss universities are that they have the world’s highest percentages of foreign faculty and students, and that they offer higher salaries than at comparable universities in neighbouring countries such as France, Germany and Italy.

In the new creative society, the long-run economic importance of scientific research is more important than in industrial society. Research on the spatial distribution of science shows that accessibility is no less important than in the past, due to agglomeration economies associated with the transfer of tacit knowledge (Andersson and Andersson, 2015). But it is not just output volumes that matter. Detailed studies of the institutional structure of science suggest that citation volumes – a proxy for both quality and impact – are positively associated with polycentric funding systems and multicultural populations of scientists and students.

Concluding remarks

The games of the competitive market economy are played on an infrastructural arena, which is treated as a static set of background variables by the fast-paced agents participating in the games of the market. If the infrastructure is changing in a slow but persistent way, there will sooner or later be a need for a new market structure with new market games.

The three most important types of infrastructure are networks for transport and communications, publicly accessible knowledge and institutions. These three types jointly determine the market equilibria and drive the process of long-term economic development. This paper shows that a subdivision of the economy into slowly changing infrastructure equations and rapidly changing market equations is necessary both for the existence and stability of a general equilibrium and for rare bifurcations or phase transitions into new economic structures. The term ‘logistical revolution’ refers to phase transitions caused by the slow improvement of the infrastructure for transport, communication or transaction networks, triggering a multifaceted transformation of the economic, social and cultural aspects of a region or nation.

Over the past millennium, four such logistical revolutions affected the European continent. The first and second revolutions were mostly confined to Europe, in contrast to the third and fourth, which have been global in scope. The Fourth Logistical Revolution is still playing itself out and is creating an increasing number of interacting knowledge regions around the world, most of which have a subnational spatial extent.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship and/or publication of this article.

Note

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