In modern economics, “iceberg costs” is an assumption built into certain models of international trade The metaphor is that if you were actually trading an iceberg, it would melt along the way. The extent of the melting would be greater, the farther it was carried across the ocean. Thus, an item which needs to be shipped a longer distance can be modelled as having “iceberg transportation costs”–that is, the value of the item to the ultimate user diminished with greater distance, like an iceberg melting.

The metaphor of iceberg transportation costs is a venerable one in economics, going back to a prominent 1954 paper by Paul Samuelson (“The transfer problem and transport costs, ii: Analysis of effects of trade impediments,” Economic Journal, 64 (254) pp. 264–89). But what about trading of actual ice?

Akanksha Singh provides a readable overview of the historical market in ice during the 1800s (with links to a number of articles in the scholarly literature) in “On the Rocks,” subtitled “Ice harvesters once made a living from frozen lakes and ponds, and the international ice industry was a booming business. Then refrigeration came along” (JSTOR Daily, August 1, 2023). In this business, ice was cut in large blocks from frozen rivers and lakes, and then shipped both domestically and internationally.

At its peak in the nineteenth century, an estimated 90,000 people and 25,000 horses were involved in the natural ice trade in the [United] States. In fact, such was the demand for American ice in London at one point, Lake Oppegård in Norway was rechristened “Wenham Lake” (after a lake in a Massachusetts town) to compete with American ice imports in England. By 1856, American ice was shipped to all four corners of the world, including South America, the Caribbean, Southeast Asia and Australia, the Persian Gulf, and its biggest market–India. The United States had three epicenters for ice: New York, Boston, and Chicago.  …

Indeed the ice industry radically changed dietary habits, writes Stott. Thanks to it, salmon and lobster from Boston made its way to Calcutta–where, by 1833, “the first ice cream ever eaten in India was made using Massachusetts ice,” note Kistler, Carter, and Hinchey. Eventually, writes Stott, this is what would lead to the downfall of the ice harvesting industry, taking with it the need for ice harvesters: “[The] demand for ice stimulated the development of reliable means of artificial refrigeration. At the same time, the immediate success of an ice trade based on abundant ice ponds and efficient transportation, postponed the rapid development of artificial ice-making.”

But of course, the key question for readers of this blog is whether the actual melting of icebergs during the 19th century is an accurate measure of how distance affects trading costs in the modern economy. Is the metaphor quantitatively accurate?Maarten Bosker and Eltjo Buringh take a detailed look at “Ice(berg) Transport Costs” (Economic Journal, July 2020, pp. 1262-1287) and (perhaps unsurprisingly) find that it is not. They write:

Our data primarily comes from the records of the Tudor Ice Company, Boston’s leading ice exporting company that, during the nineteenth century, shipped over one million tons of natural ice all over the world on wooden sailing ships. Ice(berg) transport costs in practice consisted of both a true ‘iceberg’ component: melt in transit, as well as the standard transport cost components (freight, landing, loading and insurance costs).

It turns out that the costs of freight, landing, and loading were several orders of magnitude bigger than the melt costs. In addition, melt costs themselves were smaller when the ice being shipped was bigger: that is, there were economies of scale in packing larger icebergs with sawdust or wood shavings (to reduce how much they would melt) and larger ice kept themselves colder, longer.

As it turns out, modern economics research in the determinants of trade has been experimenting for some years with variations on the classic assumption of iceberg trading costs. Along with thinking about distance, the research has looked at other costs of trade that don’t vary with distance, the possibility of economies of scale in trade, the importance of “backhaul” and what a ship (or plane or truck) can do after carrying a freight in one direction, the interaction between the product being shipped and the technology used for shipping, and so on. Ironically, looking at the actual practical costs of trading ice is quite likely a more useful real-world model than the stylized model in which trading costs can be proxied just by melting.

Near the start of their article, they provide a quick overview of the historical ice trade as well:

But, before the widespread adoption of artificial refrigeration and ice making in the early-twentieth century, natural ice was a heavily traded natural resource in almost all parts of the world. It was used for cooling purposes and the preservation and preparation of food, both by households and businesses. Ice houses, storing
large quantities of ice, dotted the North American landscape, and many (wealthy) people’s homes had a private ice cellar. To give an idea of the size of the trade, the 20 largest US cities consumed nearly 4,000,000 tons of ice in 1879 (Hall, 1880). New York alone consumed 500,000 tons per year (Encyclopedia Britannica, 1881).

For most of history, the ice trade was very localised, with ice harvested from nearby frozen lakes, rivers or mountains. This changed in 1806 when Frederic Tudor shipped 130 tons of natural ice from Boston to the Caribbean island of Martinique. After further refining the process of insulating the ice during the voyage and at the destination, shipments to other Caribbean destinations and the main cities in the southern US quickly followed. In 1833 Tudor sent an experimental shipment to Calcutta, and upon its success expanded this long-distance ice trade to
Brazil, Indonesia, China, the Philippines, Australia and even (around Cape Horn) Peru and San Francisco. Drawn by the extreme profitability of the trade, other companies soon entered the market … The trade’s heyday was around 1860.

Just something to think about in August, as I walk over to the automatic ice dispenser built into the door of the refrigerator in our kitchen.