Economic Growth. Part I. Economic Growth and True Inequality

John V.C. Nye*
"Our understanding of the rich and the poor has been skewed by what we choose to measure, and not realizing how different are the classes of goods that the rich and poor consume."
Imagine a system where the efforts of the richest people in the world greatly expand the range and quality of goods and services available to most people—oftentimes at the expense of those groups at or near the top of the income ladder. Imagine a system where wealthy capitalists and ambitious innovators work day and night on projects with little chance of success, all at their own expense. Sometimes, even to the point where even the most successful among them manage to capture only a small part of the benefits while the rest goes to the average man or woman in the street. In their own lives they have the privilege of paying more for goods that they always would have bought, while the poorest get better, more numerous, and more widely available goods at cheaper prices than ever before.

I propose that in the real world, no system would come closer to implementing the most important parts of this scheme than market capitalism.

Many people have often been told of how much good the market does for people and how much of the benefit accrues to the common man. But many feel that the rich are getting much the better of the bargain. Studies of income inequality focus on the widening gap between the have-a-littles and the have-a-lot-mores. Many are sure that whatever gains in progress may have come were disproportionately enjoyed by the wealthiest and most economically successful groups.

Yet what if I were to tell you that the statistics lie. Or rather, that those who collect and fashion and often interpret the statistics, have misconstrued the issues or else done a poor job of helping us delve beneath the surface ideas. This is not going to be some claim that we are leaving out important information like payments in kind (though this is often true). Nor that the CPI is biased upwards (which it almost certainly is). Nor that we compare apples and oranges when comparing households with many individuals in the 1960s to household today where many more singles live alone (which is also true). While all these issues matter, they are not my focus here.

No, the real point is that our understanding of the rich and the poor has been skewed by what we choose to measure, and not realizing how different are the classes of goods that the rich and poor consume.

Let us begin by reviewing one of the oldest accusations leveled at economic growth. Growth is often accused of promoting mass production and low cost at the expense of quality and craftsmanship. Now while there are any number of items for which this is not true (craftsmen working in someone's garage would not be a good way to build a reliable, wide-bodied jet), there are more than enough cases in which the charge is true. It is especially valid for the earliest phases of the transformation of a process from a low output, highly labor intensive procedure to a high output, high efficiency, low cost mass production scheme.

Take a simple case in point: The Model T Ford was not a better car than the majority of high end, often custom-made automobiles being driven by the wealthiest at the time of the Ford's introduction. Indeed Henry Ford was disdained for being so foolish as to think that a sufficiently large market existed for cheap cars to justify mass production. It is not even clear that for some of the rich the early cars were much better than riding in cushioned horse-drawn carriages. Whereas the cars were unreliable and belched smoke and fire, horse-drawn carriages seemed more graceful, refined, and manageable than any of the earliest automobiles.

Of course it helped that the problems of dealing with horses and carriages were taken care of by coachmen and servants of various sorts. The fact of the matter is that for the average citizen of the United States today, compared to the average eighteenth century European, no differences in quality between the finest car that could be ordered and driven by the rich today and the modest family sedan, could begin to approach the differences between the average transportation available to an elite that rode in cushioned carriages while the bulk of people slogged through the mud and grime for most of their lives.

Think about it even in the twentieth century. A moderately wealthy matron of the Jazz Age 1920s would have found it much easier to ride a chauffeur-driven car, cared for by home and service mechanics, and cleaned by servants than she would be able to obtain such services today even were she wealthier still by the standards of our time. Today, cars are safer, better, faster, and contain more gadgets than we could ever have dreamed of. But if we also wish to avoid driving the car and caring for the car, we find it hard to come up with the money to obtain services that would have been available not simply at a lower cost many years ago, but also more widely available to people who were not outrageously wealthy.

Thus, income measures that focus on money wealth and money prices will often misrepresent the changes in "true" inequality that have arisen over time. Even if a modest car today cost ten thousand dollars, while a deluxe, special production super automobile cost ten million dollars, that thousand-fold difference in monetary price would not match the vast differences between riding in cushioned carriages and walking in the mud.

We can better understand what I mean by "true" inequality through the following exercise:

Forget about money and prices for a moment. Consider the following example of an extreme, hypothetical feudal kingdom where all income and wealth were doled out arbitrarily by the King. The rich lived well. The poor did not. Indeed, the poor had fewer things and what items they had or consumed were of uniformly lower quality. Think of average incomes as being comparable to Europe in the mid-eighteenth century, with most of the middle group simply cut out.

Now, ask yourself what changes in distribution would constitute a substantial narrowing of the material differences between the rich and the poor? Not equality mind you, just more equal.

Obviously, the places to begin would be in the basics: food, shelter, clothing.

Consider food. At the minimum we would want the poor to have access to adequate, even plentiful amounts of tasty, nutritious foods with reasonable variety. This would be paramount. Whether the poor had enough food to eat to excess, or whether they could go to the finest restaurants, or purchase slices of a finely prepared rare seafood, would count for much less than everyone being able to have most kinds of food. Once the majority had enough to eat of good quality food, the gap between the rich and poor could never be as important no matter how many exotic delicacies are exclusively available to the rich.

But that is precisely the transformation that has been undergone throughout the developed world in the last two centuries. The enormous gaps in access to a variety of healthy (and not so healthy) foods have mostly disappeared.

Consider what the menu from a lavish, mid-nineteenth century American feast might look like:

You had hot broth (consommé), roast beef, chicken, ham, lots of meats in aspic (i.e. salty Jello), maybe some fish or shrimp, various meat pies, stewed vegetables, a variety of breads and cakes, bread pudding, a few stewed or cooked fruits, and perhaps even an early sort of ice cream dish, along with coffee, tea, and fine wine. All the Brahmins of Boston and Swells of New York would have been suitably impressed by the variety and extravagance and would have been still further impressed had they been able to serve exotic out-of-season fruits like bananas or kiwi.

I don't think I need to prod the reader hard to realize that—except for the wine—this is essentially the typical menu of your basic Midwestern, eat-all-you-can $7.99 buffet. Indeed, the buffet would have more and better breads and fresher fruit and vegetables year round, while maintaining superior standards of hygiene in preparation and service. Compared to the fact that blue collar workers can have such food today on a regular basis without much effort, is it really so much better for the rich to be able to afford $200 a plate dinners or $400 bottles of wine? But if we judge inequality by what people can afford we will be blind to the fact that most of what ordinary people want to eat can be had for trifling sums and are therefore ignored. Indeed, progress at this level might be seen to count against the poor.

A world with cheap basic food leads to a situation where food is effectively subtracted from the equation of considering the differences between rich and poor. We focus on the enormous differences in going to these cheap buffets vs. the ability to afford elegant eateries without noticing that the relative price difference might be growing while the quality differential might actually be shrinking. And it would be difficult to widen the real food gap—no matter how much money the rich could afford to spend or throw away on meals.

After all, the average person in mid nineteenth-century Western Europe would have been counted fortunate to be able to afford meat once a week. There were often insufficient quantities of the basics like potatoes, bread, and porridge for a great many. Indeed, at one point, the politicians' promise of "a chicken in every pot" was considered as ritual and outlandish as "no new taxes" seems today.

Just as spices like vanilla and pepper are now so trivially cheap that we forget that fortunes were once made importing such treasures to the West, we come to denigrate if not simply ignore the vast number of things that ordinary people can afford because they have become so cheap. In some sense, fixating on monetary income will always overstate these differences.

Thus, whatever the measured gap between the rich and the poor in today's world—the real, (utility-adjusted) gap in incomes and wealth is liable to be substantially smaller than that of a century or so earlier, even when monetary measures tell us otherwise. While the losses, or at any rate, the relative losses are liable to be felt more keenly by the rich.

In my next essay, I plan to discuss items that are not so easily produced as the economy expands or that become otherwise relatively more expensive. I plan to show that especially in these situations, the losses are borne most acutely by the upper classes rather than the ordinary citizens and that here too, measured income differences overstate the true level of inequality.

* John V.C. Nye is Associate Professor of Economics and History at Washington University in St. Louis.

For more articles by John V.C. Nye, see the Archive.
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