by Marc Flandreau (University of Pennsylvania and Wharton School) & Geoffroy Legentilhomme (University of Zurich)
This blog is based on the authors’ article in the Economic History Review which has been published on early view: https://onlinelibrary.wiley.com/doi/10.1111/ehr.13134
This paper is about what we call the first digital revolution, a radical transformation of the world, particularly evident in the world of finance, which occurred under the reign of Queen Victoria, with bifurcation between 1850 and 1880.
Our starting point is to postulate that in the money market, computers are, fundamentally, financial intermediaries. Just like honest brokers, computers facilitate financial transactions. With the help of computers, clauses in contracts are translated into prices, and prices into yields, which permits comparison across securities. Computers also facilitate the detection of unusual or excessive riskiness. Building on this insight we show that at the root of British financial development in its era of maturity was a rich world of computers and computations.
The computers that generated the first digital revolution were organic: They were human machines. Starting with the annuity, for which early calculators developed formulae enabling the determination of interest rates, a universe of financial calculations emerged comprising algorithms and the computers that employed them. These innovations were rapidly disseminated throughout the nineteenth century.
The inflection point was 1848. To support this transformation, ‘human computers’ had to be trained, formatted, and organized to upload the latest information. This task fell upon the British Institute of Actuaries, created in the same year, which started the registration of ‘human machines’. This initiated a virtuous cycle: As the population of computers expanded (around 600 high-end human machines circulated in the City of London around 1870) so too did the market for better formulae. During the 1860s and 1870s, the efficiency of numerical techniques increased explosively.
One difficulty with recovering the traces of this lost world, is that the digital infrastructures of capitalism are not well preserved. They are part of a technical archive (calculating instruments, tables, registries, and other abaci) that has been disposed of over time. Consequently, we had to mobilize forensic techniques. Our guide to this exploration of the “cyberpunk” Victorian universe is the Investors Monthly Manual (IMM), a companion publication of The Economist, which started reporting interest rates for multiple securities in the 1880s.
We trace the origins of the information published by the IMM — a direct response to increasing information asymmetries. Concerns were voiced that numerical outsiders would be exploited by insiders, such as loan underwriters. Because sophisticated financial engineering was only understood by the ‘sell-side’ of the market, there was a risk that the ‘buy-side’ would be exploited, which threatened to undermine the growth of the capital market.
Under the leadership of Robert Inglis Palgrave, who succeeded Bagehot as head of the Economist group, the IMM became one of the agencies dedicated to patching the widening digital divide. Using the digital print of the IMM releases as a starting point, we inferred the way its computers generated the data. To distribute to ordinary readers a faithful image of the manner in which the sell-side calculated the numbers, the IMM computers relied on the digital state of the art. Further, the underlying algorithms addressed another concern: They minimized calculation costs, which kept publisher’s expenditures under check. In summary, the IMM was a number-crunching factory, an early provider of ‘Big Data’.
We note the coincidence of these developments with the financial revolution initiated in the 1860s. As myriad examples show, computers were the handmaid of the revolution, both individually (as promoters and entrepreneurs), and collectively (as calculators). The digital economy played a leadership role in Britain’s drive to financial maturity, a finding that underscores the importance of the accumulation of digital power as a vital element of the dynamism of capitalism. We suggest that at the heart of the British financial empire was a gigantic rhizome of human calculators.
Our paper suggests the need to narrate the history of capitalism through its instruments and the agglomeration economies of knowledge they produced. Instrumental innovation (the creation of new financial products) took advantage of scale economies (made possible by digital agglomeration), and scope economies (through the transplant of established algorithms to support the design of new products). The case of foreign government debt instruments offers a case in point. As we show, ‘complex’ foreign government bonds with mesmerizing redemption clauses were a derivative product of the old annuity.
This perspective is new. Several authors have suggested that our Victorian predecessors were digital simpletons. Mauro, Sussman and Yafeh (2006, p. 41), use government debt instruments to provide the erroneous argument that, ‘the formulae for exact calculation of yields […] were only developed in the middle of the 20th century and their application often requires the use of calculators and computers’. We show that with the help of organic computers, investors understood the instruments in which they were investing. The algorithms used were long-established, had emerged from mathematicians such as Halley and Simpson, and had been gradually perfected ever since.
One way to contextualize this article is in terms of Robert Gordon’s productivity paradox which held that computers were appearing everywhere – except in productivity statistics. (Gordon 2000). Our article may resolve this paradox. Earlier transformative innovations, such as the development of the organic computer in the nineteenth century, foreshadowed the subsequent PC revolution. The products that were developed during these early stages shaped the contours of a digital universe in which ‘modern’ computers offered even faster solutions. But in truth, a significant part of the productivity gains traditionally associated with modern computers had been already realized.
Marc Flandreau, firstname.lastname@example.org
Geoffroy Legentilhomme, email@example.com
Gordon, R. J. “Does the ‘New Economy’ measure up to the great inventions of the past?” Journal of Economic Perspectives, 2000.
Mauro, P., N. Sussman, Y. Yafeh, Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870-1913 and Today, Oxford: Oxford University Press.