From Adam Smith to the 21st century.

Abstract

In the past 50 years, trailer-truck-sized cargo containers have transformed surface freight transportation worldwide. Containers have greatly reduced the cost and time required to pack and move cargoes, have made intermodalism possible, and have supported the growth of new patterns of global production and distribution. This article outlines how the impact of this recent innovation fits into the long history of commerce and transportation from the 18th century to the present.

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The Container Revolution 

In the second half of the 20th century the use of standard-sized cargo containers transformed surface freight transportation and global commerce. A stroll down the aisles of any Wal-Mart store reveals that a very high proportion of the items for sale were made overseas. Every year Wal-Mart ships more containers to the United States than any other company. Containers are the key both to Wal-Mart's policy of "every-day low prices" and its success in becoming America's largest corporation, as measured by annual revenue. Wal-Mart's rapid ascent is stunning confirmation of the observation that "the heart of the global economy is a rectangular metal box, 40 feet long, eight feet wide, and eight and a half feet tall. It's called a freight container" [8:46].

But how in a single generation did this innovation in cargo handling manage to transform global commerce? Fifty years ago no one anticipated that surface freight transportation was about to undergo a major revolution, nor did anyone foresee that using containers would radically change the way goods are produced, distributed and sold worldwide. How did it happen?

We don't have many well-documented answers to this interesting question, for very few scholars have investigated the history of containerization [1,3]. We do know that containerization, like most significant innovations, was inaugurated by industrial practitioners rather than by scientists or inventors working in other fields. The pioneers of containerization were transportation managers and engineers, who believed that using containers would reduce freight costs for the businesses in which they were working.

Of course, once they had figured out how to build, load and move containers, these entrepreneurs began eagerly exploiting the competitive advantages that containers afforded. Their success soon forced others working in surface freight transportation to take notice of the advantages of using containers.

But the story is not as simple as this outline suggests, and we should not forget that in the 1950s, when trailer-truck-sized steel boxes packed with general cargo were first hoisted aboard ocean-going ships, most maritime veterans were convinced this costly experiment would fail. Experience proved them wrong, but their doubts were not unreasonable. As successful innovations move from being a bright idea to full-scale testing and then on to transforming established ways of doing business, they leave trails marked by unanticipated twists and turns. The container revolution was no exception; its ultimate success was only assured long after it was first proposed.

This article focuses on the impact of containerization, rather than its origins. Containerization was able to transform global transportation, commerce and manufacturing because it brought about a steep drop in the cost of transportation. Of course containerization was not the only factor forcing change in the global economy during the latter half of the 20th century, but its consequences were especially dramatic and widespread. Containerization is not significant because it is technologically sophisticated, which it isn't, but because it made freight transportation relatively cheap and reliable. And, as Adam Smith emphasized over 200 years ago, the cost of transportation is crucially important in global commerce. This account of the impact of containerization therefore begins with a review of what Adam Smith had to say about transportation and commerce.

Adam Smith on Specialization, Transportation and Markets

Adam Smith's The Wealth of Nations, published in 1776, is such a venerable monument in the literature of economics that it seems unlikely it can throw any light on as recent a development as containerization [7]. Nonetheless, in his first three chapters Smith explores in considerable detail the connections between specialized manufacture, the cost of transportation and the extent of markets, and he does so in a way that can be directly applied to the story of containerization. This relevance is doubly surprising because not only is The Wealth of Nations over two centuries old, it was written before manufacturing was extensively mechanized, before the steam engine had been adapted to provide power for factories and locomotion, and at a time when horse-drawn wagons, canal boats and wind-driven ships provided the only means available for moving heavy freight over long distances. Of course Smith was unaware of the mechanical technologies that would transform manufacturing and transportation in the 19th century, but his deeply informed study of Great Britain's economy in the 18th century gave him an unrivaled understanding of the forces that governed the commercial world of his own time. And it is Smith's concern with costs and markets that links the analysis he presents in his classic study of 18th century commerce and the impact of containerization in the 20th century.

Smith begins his treatise by focusing on the division of labor, for he was fully convinced that productivity gains in manufacturing processes are the fundamental source of increased wealth. he illustrates his argument with the famous example of a pin factory. Smith tells us that a man of normal capabilities working alone can in a single day make at most 10 pins. But when 10 workers produce pins together, with each of them concentrating on just one step in the process, they can, according to Smith, produce 48,000 pins a day.

But increased production and lower costs are not the whole story, for as Smith also points out, if all these pins were put on sale in a single local market, the demand for pins would be swamped and most of the products offered for sale would not find buyers. But fortunately, he notes, British manufacturers have access to a large number of widely dispersed markets, and the fruits of increased productivity can therefore be offered to a great range of buyers. If sufficient commercial outlets are found, producers, merchants and consumers can all benefit from the low cost and ready availability of products manufactured in factories that utilize a high degree of specialization [7].

Smith was also a student of human nature, and he realized that focusing all one's productive efforts on a single repetitive task is unnatural and often stultifying. But he also noted that most humans are inclined to engage in market activities, an attribute he characterized as an innate "propensity to truck, barter and exchange one thing for another" [7:25]. And since specialization increases the economic returns available to producers and merchants, there is considerable evidence, both from his time and our own, that many people are willing to put up with the dreariness associated with specialized manufacture so as to enjoy the economic rewards that are available in market economies.

Smith in essence has sketched out a "virtuous circle of commerce" driven by both natural and learned behaviors, but of course the assumptions that support his optimistic picture of commerce are not self-evidently true. The theory he presents is in fact an example of what the 18th century called "conjectural history," a rational reconstruction of the past that is quite unlike the detailed and heavily documented histories that began to appear in the 19th century. If his key assumptions seemed plausible and the conclusions he arrives at appeared reasonable, that was good enough for him.

Smith realized, however, that there are gaps in his argument that must be bridged with additional assumptions. For instance, several hundred pages after asserting that humans have a propensity to truck, barter and exchange, he explains rather off-handedly how this universal inclination to engage in trade gives rise to a collective social benefit. When an individual trades with another, "he intends only his own gain," but "in this, as in many other cases, [he is] led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interests he frequently promotes that of the society more effectually than when he really intends to promote it" [7:456].

Convinced that commercial activity promotes human progress, Smith introduces an "invisible hand" as the agent that coordinates self-interested actions so as to make the collective outcome socially beneficial. This resolution of the tension between self-interest and the common good, while perhaps not entirely convincing, at least freed him from having to take at face value the pious assertions merchants and politicians sometimes make of their concern for the public interest: "I have never known much good done by those who affected to trade for the publick good," Smith wrote. "It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it" [7:456].

Once Smith had explained how specialization enables manufacturers to produce large quantities of low cost goods (e.g., pins), he turned to the question of what the level of production should be. He answered this question by turning once again to the market. While the existence of a market promotes specialization and increased production, the size of the market will determine the appropriate level of production: "As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of ... the market" [7:31].

Focusing on the extent of the market brings the cost of transportation into the picture, and Smith next undertakes an extended discussion of the relative costs of moving freight overland in horse-drawn wagons and coastwise in sailing ships. He finds that cargoes can be moved long distances more quickly and at lower cost in ships rather than in wagons. While this conclusion is hardly surprising, making it explicit enabled Smith to provide a rational explanation of the geography of British commerce in the 18th century: "As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself" [7:32].

Freight Transportation in the United States After WW II

Fast forward now to the United States in the 1950s, the decade in which containerization was introduced into coastwise maritime commerce. Thanks to the Commerce Clause of the U.S. Constitution, the entire U.S. and its offshore territories comprise, in political terms, a single market, as did the British Empire in the 18th century, but the transportation technologies available in these two eras were, of course, vastly different.

In the 1950s overland freight transportation in the U.S. was still largely dominated by the railroads, although motor trucks were capturing an increasing share of high-value less-than-carload freight. A century earlier, when local railroads were being consolidated into regional systems, the largest and most aggressive railroad companies put together hierarchical managerial organizations that became exemplars of modern "big business." These consolidated corporations centralized company-wide management while organizing operations into regional divisions. These new forms of business organization provided, in Alfred Chandler's memorable phrase, the "visible hand" needed to manage geographically extended, technologically integrated enterprises [2].

But the visible hand of big business was not the only institutional force shaping railroad operations. During the century between the 1880s, when the Interstate Commerce Commission (ICC) was created, and the 1980s, when the federal government began systematically deregulating the transportation industries, the federal government also played an active role in determining how America's transportation industries were organized and operated. The government used its "visible hand" of regulation to insure that the nation's transportation companies served the public interest as well as the interests of their owners and managers [5], but as time would reveal, the actual consequences of government regulation were seldom those intended.

This is not the place to review the long, dolorous history of federal transportation regulation. It must be noted, however, that in the 20th century the federal government repeatedly broadened the ICC's authority over freight transportation as competition intensified between different modes, i.e., the different forms of transportation. The government was committed to preserving essential transportation services, to preventing destructive competition within and between the competing modes, and to promoting efficiency and modernization, and the ICC found itself saddled with tasks that became increasingly unmanageable.

Originally created to regulate railroad rates and services, the ICC in the 1930s and 40s was additionally assigned responsibility for regulating interstate trucking, barge traffic on inland waterways, and coastwise shipping [6]. The Commissioners did what they could to insure that each mode would be able to provide the services for which it was best suited in an efficient, privately owned, nationally integrated freight transportation system, but it soon became clear that the Commission's reach exceeded its grasp. The administrative procedures used by the regulators intensified rather than reduced the modes' struggles for preference and protection. The government's obligation to protect the public interest in transportation was never questioned, but the means devised to achieve that goal proved to be singularly inefficient and ineffective.

By the 1950s and 60s it was widely acknowledged that the competing modes of transportation that carried America's surface freight needed to be reorganized, coordinated and revitalized, but no one knew just how to go about doing so. The stalemate left captains of industry and government regulators pulling in opposite directions. In the 1970s major segments of the system finally began to collapse under the strain. A massive railroad bankruptcy forced a rethinking of existing regulatory arrangements, while the government bought time by creating Conrail and Amtrak to preserve existing railroad assets. It was finally decided that the regulatory constraints imposed on the various modes of transportation had to be dramatically reduced. Deregulation was not the whole story, however, for containerization, an innovation that was beginning to expand in the 1970s, also played a role in the reconstruction of America's surface freight transportation system. But containerization would not have flourished as it did had the century-old paradigm of transportation regulation not failed, thereby creating space in which this innovation could take root and grow.

In the 1950s a few maverick individuals in trucking, coastal shipping and the railroads began experimenting with using standard-sized cargo boxes. In the 1960s some of these early experiments began to look quite promising, and by 1966, when Malcom McLean sent the first Sealand Services' container ships to Europe, the advantages of containerizing maritime shipping could no longer be ignored. Subsequent integration of rail and ocean liner container services encouraged the growth of intermodal coordination, and by the time the government's regulatory grip began to ease in the 1970s, integrated container services that made use of several different modes were being widely introduced. As transportation companies began to reach beyond the modal boundaries that had limited their earlier operations, the benefits of coordinating container movements became increasingly obvious, and in the 21st century global intermodalism and the logistics services it supports are continuing to expand rapidly.

The Commercial Impact of Fast, Cheap, Reliable Freight Transportation

If Adam Smith were alive today he would marvel at the speed, reliability and low cost of modern container service, but he would not be puzzled in the least by the fact that containerization has taken global commerce to new levels of integration and has brought greatly increased wealth to many parts of the world. Before the 1960s, moving general cargoes across oceans cost roughly 10 to 15 percent of the retail value of the goods carried. Cargo arrived on the dock in boxes, barrels and bags and was swung aboard ship and stowed in the holds piece by piece. These "breakbulk" cargo ships spent a week or more in every port they served, and port costs accounted for roughly half the total operating cost of a voyage. Cargo was loaded and stowed by gangs of longshoremen, and high rates of breakage and pilferage were commonplace. In the port of New York, through which half the nation's overseas commerce passed, losses during the loading and unloading of valuable cargo such as whiskey and coffee often ran as high as 30 percent.

The classic film On the Waterfront is a dramatization, not a documentary, but as old-timers on the docks have long remarked, its presentation of longshore operations in New York in the 1950s is largely accurate. Warehousing, drayage to and from the piers, and movements of lighters and boxcars across the harbor from the rail yards in New Jersey to the docks in Manhattan and Brooklyn all added to the high cost of freight operations. Since goods spent weeks in transit, manufacturers and retailers had to maintain large inventories of parts and merchandise in warehouses. It was the only freight system available at the time, but the technology employed was, when compared to bulk cargo handling, antique and inefficient. Veterans in the maritime shipping industry have long said that containerization was the first significant improvement in breakbulk cargo handling since the time of the Phoenicians. Today the contrasts between containerization and the earlier ways of handling general cargo appear as dramatic as the cost and speed differences Adam Smith pointed out when he compared freight movements by wagon and by ship. The impact of containerization has indeed been revolutionary.

Today the cost of shipping goods in containers is between one and two percent of retail value, 90 percent less than before containerization. Loading and unloading are fully mechanized, which has dramatically reduced labor costs, ship time in port, total transit time and losses due to breakage and theft. New cargoes are constantly being added to the list of goods that can be containerized, and containers can be sent to any destination to which they can be trucked. Since it costs only one or two cents to move a bottle of beer halfway around the world, it is hardly surprising that your local store has on its shelves, at comparable prices, brands produced in numerous countries. Similar cost savings have been realized in global production as well. Materials and sub-assemblies of all sorts are routinely shipped in containers to distant countries where workers, usually paid relatively low wages, turn them into finished products that are then sent by container to markets in yet other countries. The world has truly become "one big assembly line, [and] the container ship is its conveyor belt" [8:46].

The container has done for the exchange of things what the telegraph, the telephone and the internet have done for the exchange of words, images and data. Since the Second World War, people around the world have become accustomed to living in a global village of information. Now, with the enormous reduction in the cost and time required to send manufactured and processed goods anywhere in the world, we are becoming equally accustomed to living in a global village of things as well. It will be interesting to see how this new system of freight transportation and the highly dispersed forms of production and marketing it makes possible will change the way people live and work in coming decades.

Containerization, Intermodalism, Production and Politics

Containerization is the latest and perhaps the last stage in the mechanization of surface freight transportation. The transportation of containers is now almost completely separated from the packing and unpacking of the boxes that carry the cargo. The boxes themselves have been designed so they can be rapidly shifted between modal carriers without having their contents unpacked and re-stowed. Mechanizing the transfer of cargo between transportation modes has subordinated the differences between the modes to the larger task of making intermodal operations as efficient as possible. This advance of mechanization has had particularly dramatic consequences on the waterfront, where the number of longshoremen needed to unload and load ships has fallen by 95% and losses to breakage and pilferage have been greatly reduced as well. These are some of the more widely acknowledged achievements of containerization, but it has had other, less obvious consequences as well.

One of these is that containerization appears to be bringing to a close the age of mass production. The term "mass production" gained currency in the first half of the 20th century as a description of industrial production in enormous factories that transform raw materials from around the world into finished products that are sold worldwide. Henry Ford's River Rouge car factory near Detroit is a classic example of such a "workshop of the world" [4]. Today, however, industrial production is widely distributed rather than concentrated, and sub-assemblies and semi-finished components are routinely shipped in containers across borders and oceans as manufacturers seek to reduce the cost of more expensive inputs, most notably labor. Containerization, together with the relatively low-cost, flexible and tightly scheduled transportation services used to move containers, is playing a central role in the ongoing transformation of mass production into globally dispersed production.

Intermodalism is also creating pressure to transform the politics of transportation nationally, regionally and globally. In the U.S. federal regulation of interstate transportation was introduced mode by mode as the government was forced to address the distinctive policy problems raised by each new mode. As the number of modes increased, a more comprehensive but not really new regulatory strategy evolved, the goal being to restrict each transportation company to operating in only one mode. This mode-by-mode approach set the pattern when Congress and the Executive Branch began setting up committees and agencies to formulate and carry out federal transportation policies. And as is so often the case, the ideas that predominated when federal responsibilities for transportation were first defined and offices were first created to address them have endured largely unchanged down to the present. Today everyone in government who is concerned with freight transportation knows that intermodalism is the key to future progress, but there has been enormous resistance to reorganizing the existing modal agencies in ways that would vigorously promote intermodal efficiency. Some progress has been made, but much more is needed.

The international politics of containerization are equally challenging [1]. Terrorism, the use of containers as "Trojan boxes," is now widely recognized as a real and extremely serious threat, but there are other issues that require political attention as well. Adam Smith wrote The Wealth of Nations to explain and promote commercial growth in what he called "a well-governed society" [7:22]. He was thinking of Great Britain in the 18th century, but we well might ask what are the boundaries of the "well-governed society" that containerization serves? Container shipping today is a global enterprise, and the "well-governed society" that sustains it must be global as well. But as the scope and scale of container operations increase, the number of containerports serving as global hubs will most likely decrease. Where will these key ports be located? Will the premier port on the northwest coast of the Atlantic be in Halifax, New York City, or at some "greenfield" site that has not yet been developed? Will the dominant containerport in Southeast Asia be the city-state of Singapore or a Malaysian port such as Tanjunk Pelepas [1]? These are the kinds of international challenges that today's global transportation industry faces. Can the shipping companies and the port-operating companies sit down with representatives of cities and nations and work out mutually agreeable arrangements? If the decisions are made solely by corporations and markets, will there be a political reaction as well? Perhaps the United Nations, the World Trade Organization and other international agencies will be able to provide effective assistance in promoting peaceful growth and cooperation in international commerce. The challenges and difficulties are enormous, as is the need to avoid lapsing into the kind of national and imperial hostilities that turned the first half of the 20th century into an era of unrelenting warfare and destruction.

The technology of containerization, although already quite mature, is still advancing, and there is every reason to think that intermodal transportation will continue to expand at a rapid rate in the coming years. This still quite new way of packing and moving the world's commerce is creating enormous and for the most part unnoticed economic, social and political strains worldwide. Taking a long and broad view of the past and probable future of this contemporary development in global market economics may enable us to anticipate and solve some of the less obvious problems it is raising, problems that we simply cannot afford to ignore.

References

1. Broeze, F. "The Globalization of the Oceans." Research in Maritime History, 23, St. John's, Newfoundland: International Maritime Economic History Association, 2002.

2. Chandler, A.D., Jr. The Visible Hand. Cambridge: Harvard University Press, 1977.

3. Donovan, A. "Intermodal Transportation in Historical Perspective." Intermodal Transportation: Selected Essays, Denver: University of Denver National Center for Intermodal Transportation, 2000, 19-46.

4. Hounshell, D.A. From the American System to Mass Production 1800-1932. Baltimore: Johns Hopkins University Press, 1984.

5. McCraw, T.K. Prophets of Regulation. Cambridge: Harvard University Press, 1984.

6. Richter, W.L. Transportation in America. Santa Barbara, CA: ABC-CLIO, 1995, 513-5.

7. Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations. 2 vols, Oxford: Oxford University Press, 1976. All quotations are from Volume 1.

8. Surowieke, J. "The Box that Launched a Thousand Ships," The New Yorker, December 11, 2000, 46

Arthur Donovan, U.S. Merchant Marine Academy