Fact in fiction? : the relative costs of steam and water power : a simulation approach / BEBR No. 516

Over the past decade or so, simulation modeling has become commonplace in the analysis of economic problems, where it can perform a number of important roles such as supplementing otherwise inadequate data, avoiding the difficulty of formulating a mathematical model to describe the behavior of a complex system, and predicting behavior or validating the model by facilitating statistical testing (Naylor, 1966). Economic historians, including cliometricians, however, have largely ignored this development despite the clear applicability of the method to historical analysis. This paper introduces a simulation model of wide applicability and demonstrates the power of simulation methods to illuminate difficult and complex historical problems. The simulation technique is applied to the analysis of historical, risky capital investments. Specifically, we are concerned with steam power and waterpower, in an attempt to determine the extent to which the relative costs of steam power and waterpower may have determined the rate at which steam power was adopted by manufacturing industry in America during the 19th century. This is part of a larger study into technological changes during the 19th and early 20th centuries. 1