How Fast Is Modern Economic Growth?

J. Bradford DeLong

delong@econ.berkeley.edu

http://www.j-bradford-delong.net

 

 

I want to talk today about the collision in my mind of three--largely unrelated--lines of thought, all springing from the twentieth-century economic history course that I teach at Berkeley roughly every second year.

The first is the Boskin report. Michael Boskin et al.'s conclusion that our current ways of counting price increases overstate the rate of inflation by about one percent per year or so. Since the rate of inflation plus the rate of output growth add up to the rate of total spending growth, and since nothing in Boskin et al.'s report suggests that we are failing to estimate total spending growth properly, Boskin's conclusion that inflation is a percentage point per year lower than the Bureau of Labor Statistics calculates is also a conclusion that real growth is now--and has for at least several decades if not centuries been--a percentage point per year higher than the Bureau of Economic Analysis has calculated.

The second is William Nordhaus's attempts to calculate the real price of illumination, not the price of a good, like, say, a light bulb, but the price of the service that the good is used for: casting light into dark corners. Nordhaus's conclusion is that traditional measures of economic growth that focus on falling prices of goods miss the extraordinary upward leaps in real incomes that take place whenever one good is succeeded by another. He find that this unmeasured technological progress and economic growth takes place fastest, for light at least, in the fifty years surrounding the end of the nineteenth century. The upshot is that if my wife and I go away to Monterey for the weekend, and if we by accident leave our normal daytime lights on, by the time we come back we will have blown the entire lighting budget of an early-nineteenth century American family, an early nineteenth-century American family that spent perhaps five percent of its cash income on illumination. And we will not notice our weekend's effect on our PG&E bill.

The third line of thought is that I have been rereading the utopian literature of the late nineteenth and early twentieth century, the positive as well as the negative utopias, and finding out that even though their utopias had inventions and capabilities that we do not, that we today have a very large number of inventions and capabilities that they never thought of. We seem to be richer than people from a century ago imagined that a technological utopia could be.

The upshot? That when we talk and think about the past century or two, we grossly underestimate the magnitude of the economic growth that went on and is still going on--even though our standard estimates of economic growth over the past century are quite high.

Let me begin with standard estimates of economic growth.

Consider the 1895 Montgomery Ward catalog. At the turn of the century Montgomery Ward was the largest mail-order business in the United States. It was one of the ways that the forty percent of Americans who lived in small towns or isolated farms could purchase the products of industrial civilization. Shipping by mail order from centralized warehouses, companies like Montgomery Ward were willing to supply goods ranging from sterling silver teaspoons to sets of the Encyclopedia Britannica to drill presses.

 

Table 1: Multiplication of Productivity 1895-1997

Time Needed for an Average Worker to Earn the Purchase Price of Various Commodities

 

Commodity

 

Time-to-Earn in 1895 (Hours)

 

Time-to-Earn in 1997 (Hours)

 

Productivity Multiple

 

Horatio Alger (6 vols.)

 

21

 

0.6

 

35.0

 

One-speed bicycle

 

260

 

7.2

 

36.1

 

Cushioned office chair

 

24

 

2.0

 

12.0

 

100-piece dinner set

 

44

 

3.6

 

12.2

 

Hair brush

 

16

 

2.0

 

8.0

 

Cane rocking chair

 

8

 

1.6

 

5.0

 

Solid gold locket

 

28

 

6.0

 

4.7

 

Encyclopedia Britannica

 

140

 

33.8

 

4.1

 

Steinway piano

 

2400

 

1107.6

 

2.2

 

Sterling silver teaspoon

 

26

 

34.0

 

0.8

 

 

In 1895 a one-speed bicycle cost $65 if ordered from Montgomery Ward in 1895. At then-prevailing wages, it took perhaps 260 hours' worth of the average American worker's production in 1895 to amount to the money to buy a one-speed bicycle. Today an average American worker can buy a one-speed bicycle of higher quality for a little less than one day's worth of value added.

In terms of labor power bicycles have become 36 times cheaper over the near-century from 1895 to 1990. On the bicycle standard--measuring wealth by counting up how many bicycles it can buy--the average American worker today is some 36 times richer than his or her counterpart was back in 1895. Other commodities would tell a different story. A cushioned office chair has become only 12 1/2 times cheaper, in terms of the time the average worker requires to produce enough to pay for it. A Steinway piano is only twice as cheap in terms of the labor time of the average worker.

If you take a representative cross-section of commodities from the 1895 Montgomery Ward catalogue and take the geometric average of all of their falls in labor cost, you arrive at an estimate that the average American worker today has some six times the real income and real productivity of his or her predecessor a century ago. You get roughly the same answer if you pull Historical Statistics of the United States off the library shelf, and determine that GDP per worker in the United States today is some $60,000 dollars per year at today's prices, and was some $12,000 a year a century ago.

 

 

 

Such a large upward jump of productivity and wealth has not been exclusively confined to the industrial core of the world economy. In 1987, 97 percent of households in Greece, not usually considered one of the world's industrial leaders, owned a television set. In Mexico in that same year there was one automobile for every sixteen people, one television for every eight, one telephone for every ten

We naturally take the numbers fromHistorical Statistics and from the Montgomery Ward Catalogue to mean that what their material standard of living was then was about what we could obtain now if we had $12,000 to spend. But that is not the situation people were in then. The simple valuing of the past's production at present-day 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 $12,000 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. $12,000 that must be spent exclusively on commodities that were produced in the late nineteenth-century is, for all of us, worth a lot less than $12,000 without this peculiar restriction.

Thus the standard calculations are flawed because our material wealth and productivity today has more dimensions than just the one of our increased capability to produce the goods that were made a century ago. They are flawed because there are many things we make today that were not made back in 1895: much of our wealth today lies is our ability to make a broader range of commodities than used to be possible. That broader range is not factored into the calculations.

Now the people at the Bureau of Economic Analysis who calculate real GDP estimates are not stupid. They know that increasing technological capabilities have amplified our real productivity more than their standard calculations suggest. But they are in the business of producing numbers that everyone, or nearly everyone, will accept. So they count what they can count without ambiguity, and try not to worry too much that what they can count without ambiguity is not what everyone really would like for them to count.

We here don't have to be in the business of coming up with unambiguous numbers that can resist challenges. So try to think: how much is the increase in technological capabilities--the ability not to make more cheaply goods made a century ago, but to produce new goods and new types of services--worth to us?

How much are the central heating, electric lights, fluoridated toothpaste, electric toaster ovens, clothes-washing machines, dishwashers, synthetic fiber-blend clothes, radios, intercontinental telephones, xerox machines, notebook computers, automobiles, and steel-framed skyscrapers that I have used so far today worth--and it is only noon?

It is here that I think we can gain more insight by looking not at what economists look at but at what literary critics look at, in this case at one of the top ten best-selling novels of the 1890s, Looking Backward. Looking backward is a wooden, poorly-written, painful book that sold extraordinary numbers of copies in the 1890s because it did give a very hopeful and very positive vision of utopia.

In Looking Backward the narrator, thrown forward in time from 1895 to 2000, is asked by his hosts in the year 2000--more than a century in his future--the question: "Would you like to hear some music?"

He expects his host to play the piano--a social accomplishment of upper-class women around 1900. To listen to music on demand then, you had to have in your house or nearby an instrument, and someone trained to play it. It would have cost the average worker some 2400 hours, roughly a year at a 50-hour workweek, to earn the money to buy a high-quality piano, and then there would be the expense and the time committed to piano lessons.

Now the labor-time value of a Steinway piano has fallen in price from 2400 average worker-hours a century ago 1100 average worker-hours today. But if what you value is not the piano itself but the capability of listening to music at home, the cost has fallen from 2400 average worker-hours a century ago to 10 hours today (240 dollars for the boom-box plus 10 dollars for the CD).

So when we calculate the increase in material wealth, do we count the halving of the labor-time price of the commodity (which is what Historical Statistics does); or do we count the 240-fold decrease in the real labor-time price of the capability of listening to piano music?

Let's listen to the answer given by the author of Looking Backward, Edward Bellamy.

Bellamy's protagonist is stupefied to find his host "merely touched one or two screws," and immediately the room was "filled with music; filled, not flooded, for, by some means, the volume of melody had been perfectly graduated to the size of the apartment. 'Grand!' I cried. 'Bach must be at the keys of that organ; but where is the organ?'"

He learns that his host has called the orchestra on the telephone: that in Bellamy's utopia you can dial up a live orchestra, and then put it on the speakerphone.

You even have a choice of orchestras. There are four playing at any moment.

Bellamy's protagonist then says that:

if we [in the nineteenth century] could have devised an arrangement for providing everybody with music in their homes, perfect in quality, unlimited in quantity, suited to every mood, and beginning and ceasing at will, we should have considered the limit of human felicity already attained...

To Edward Bellamy--a self-described utopian visionary, a late-nineteenth century minister's son from western Massachusetts--a speakerphone that could connect to any of four orchestras is "the limit of human felicity."

What if someone were to take Edward Bellamy or his protagonist to Tower Records? Or Blockbuster Video? His heart would stop. Yet we do not think of our modern ability to cheaply listen to high-fidelity go-anywhere listen-to-anything music as a remarkable or even a notable part of our economy. We do not daily give thanks for our cassette players and genuflect in front of our CD collections. We do not reflect that they have brought us to the limit of human felicity.

We do not think about it at all.

Thus I have no problem at all with the conclusion that Historical Statistics significantly understates growth. My family's income today is roughly three times average GDP per worker. Suppose that you stuffed me and my family into a time machine, sent us back a century to 1890, and then gave us an income equal to twenty times that of 1890 average GDP per worker--an income that would put us at the same place in the relative income distribution then as some $1,000,000 a year would today. We would be at the bottom of the 1,000 or so richest families in the country.

Would we be happy with the switch?

My own personal guess (and if you do not agree, your introspection-based assessment is certainly as valid as mine) is that, if confined to purchasing and consuming only those commodities that were in the set of items producible in 1890, I would be very, very unhappy indeed. I am not sure that anyone in 1890, not even Andrew Carnegie, John D. Rockefeller, or Queen Victoria, was as well-off then in a material-welfare sense as I am today.

Now our power to purchase some commodities would be vastly increased: live-in servants, fifteen-room houses on Russian Hill, and so forth.

But I would want, first, health insurance: the ability to go to the doctor and be treated with late-twentieth-century medicines. Franklin Delano Roosevelt was crippled by polio. Nathan Meyer Rothschild--the richest man in the world in the first half of the nineteenth century--died of an infected abscess. The second thing I would want would be utility hookups: electricity and gas, central heating, and consumer appliances. The third thing I want to buy is access to information: audio and video broadcasts, recorded music, computing power, and access to databases.

None of these were available at any price back in 1890.

I would not be satisfied with attempts to substitute using late nineteenth century technology for capabilities that I have now. First of all, I would be dead. Without antibiotic and adrenaline shots I would now be dead of childhood pneumonia.

Second a very large chunk of my-high-material standard of living comes from the broad range of commodities newly-invented over the course of the past century that I can choose to purchase, and that I do use because they give me capabilities that were simply not possible a century ago.

So how much has material wealth grown in the past century?

If you do need a single number, the Boskin Commission's number, that inflation has been overstated and real growth understated by between 1 and 1.5 percent per year, is as good as any. Splitting the difference, applying it to the past century, and taking into account the decline in the number of hours worked per year all produce an estimate that American real GDP and real incomes per work hour have grown not sixfold but thirtyfold over the past century.

Perhaps the right answer is that we are so much wealthier than our counterparts of a century ago that the question has no real meaning.

Let me close by noting two things.

First, that such enormous estimates of the increase in wealth over the twentieth century apply only to those of us in the middle class of developed industrial democracies, or above. The invention of the internet or the passenger jet doesn't add to your material well-being at all if you cannot afford it.

Second, the twentieth century is unique. Such rapid growth in standards of living has never been seen before, anywhere, anywhen. The nineteenth century saw perhaps a a tripling or quadrupling real growth und proper account is taken of the impact of new technologies like the railroad and the telegraph, and the expanded range of technological capabilities. And nineteenth century growth was itself fast compared to what had come before: people called it the "industrial revolution" for a reason.

Before the nineteenth century growth was even slower. The standard of living in the Netherlands, probably the richest economy in the world at the end of the eighteenth century, might (or might not) have been some fifty percent higher than it had been three centuries before, at the time of the Renaissance. And before that? Upper classes certainly lived better on the eve of the industrial revolution than they had beforehand, but for the average guy? Was it better to be a slave of the Roman politician Marcus Tullius Cicero or an enserfed peasant under the Han dynasty in the first century B.C., or was it better to be a slave of the American politician Thomas Jefferson or a casual laborer working the Canton docks in the late eighteenth century? As best we can tell, it is very close to being a tossup.

 


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