Saturday, 6 June 2009

Understanding progress

Brad DeLong shares, via his blog, this exposition of economic history. The approach is to investigate average earnings per head across the past 800 or so years, and to find tipping points, where a genuine shift in the pre-existing correlation exists.

In a so-called Malthusian economy, named after Thomas Robert Malthus, the income of most individuals is determined by the land at their disposal, so any technology that enables land to be more productive, leads to more people being supported, and thus lower per capita income.

Page 10 of the pdf shows the historic relationship between population and income (working class real wages) and the break that occured in the mid-17th century. Curiously, the same figure doesn't appear on the graph on the next page, which shows income against time. This latter graph shows a peak during the wars of the roses and Henry VII's reign, which wasn't matched again until the age of Karl Marx, 100 years after the Declaration of US Independence or the publication of the Wealth of Nations.

The other key tale told is about the value of these 'real' numbers on income. Page 24 shows a table, demonstrating the number of man-hours (or more precisely, the multiple of an average earner's wage) required to purchase a variety of items. A single-speed bicycle, for instance, costs under 3% of what it did in 1895, by that metric. A silver spoon, however, costs more.

There then follows a vital desciption of the importance of substitute goods. The cost of live music in a middle class household has fallen from 2400 hours for the piano, plus however long is required to train, to a couple of hours, to buy an iPod with speakers. The key paragraph (in my view) is this one (with emphasis added by me):

Thus perhaps the most important component of the past century’s economic growth is the new commodity component—the goods and services of which people alive in the 1890s could dream but not purchase. Whenever we hear a sentence like “average GDP per worker in 1890 was equal to some $15,000 at 2008 prices,” we cannot help but think that the material standard of living then was about what we could obtain now if we had $15,000 to spend. But it was not. The simple valuing of the past’s production at the present's prices leaves out a very important part of the picture: the material standard of living then was about what we could obtain now if we had $15,000 to spend, but were required to spend it all on commodities that have been around for more than a century: no modern entertainment or communications or transportation technologies; no modern appliances; buildings, roads, bridges, and other infrastructure built using century-old technologies. And an income of $15,000 that must be spent exclusively on late nineteenth-century commodities is, for most of us, worth a lot less than $15,000.

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