Standards of Living and Modern Economic Growth

The official measurement of national output—gross domestic product—shows that the average American’s annual income in 2000 was five times as high as the annual income of his counterpart in 1890, and twelve times as high as the average American’s income in the middle of the nineteenth century.

Even for the poorer areas of the Earth, the growth of the last fifty years has been quite remarkable. Excluding the developed nations of North America, Western Europe, and Japan and focusing only on the so-called Third World, we find that per capita economic growth, improvements in life expectancy, and declines in mortality from disease and malnutrition outstripped the performance of the most advanced nations of Europe, Britain, and France, during the Industrial Revolution of 1760–1860 (see Williamson 1993, p. 12). Indeed, the economic growth of China, South Korea, and Taiwan has been so rapid since the 1960s that their people have seen material improvements in thirty or forty years that took the British, French, and Germans a century or more to attain.

When we read about the great civilizations of ancient Egypt and Rome or of the Aztecs and the Incas, we tend to compare them with the empires of Britain or the growth of the United States. This comparison, judged in economic terms, is highly misleading. Although the great civilizations in Egypt and Rome were able to construct big buildings, the vast majority of their citizens, by today’s standards, were dirt poor.

What is unusual about the developed world since the 1700s is that—beginning with Britain and then spreading to all of Western Europe, North America, and much of Asia—the population rose dramatically and was accompanied by an even more sustained rise in income per person. At first, particularly in the eighteenth and early nineteenth centuries, this was more a matter of rising population without falling per capita incomes. Overall improvements in material prosperity seemed so modest that even contemporaries such as Adam Smith did not appear to notice that they were living through what historians would later label the Industrial Revolution. Eventually, the changes were so dramatic that everyone could see that the daily lives of even the common laborers of Britain, France, Germany, and the United States had been greatly transformed. The reason for this transformation was the accumulation of capital, which was due in turn to technological improvement and to the fact that these societies had large doses of economic freedom. The twentieth century saw this transformation spread to a large part of the world.

The United States has been especially remarkable: here, real per capita income has grown by about 2 percent a year for two centuries (Maddison 1982, p. 44). This has meant an astounding improvement in well-being not just for the richest, but even for the poorest. Not only is per capita income up, but mortality is down (see, e.g., Fogel 2004). Contrary to popular wisdom, the air and water are cleaner than they were a century or two ago (cf. Baumol and Oates 1995). Both the quantity and the quality of food have improved. And even outside the United States, famine has been virtually eradicated.

To see how much more an American worker can buy today, compare the number of hours he would have had to work to obtain various items in 1895 versus 2000 (Table 1). Whereas a one-hundred-piece china set would have taken 44 hours of labor income in 1895, a twenty-first-century American would need to work 3.6 hours or less for it. The numbers are 28 versus 6 hours, respectively, for a gold locket; and 260 versus 7.2 hours for a one-speed bicycle (taken from De Long 2000, based on prices in the 1895 Montgomery Ward catalog). Comparing the prices charged in the Montgomery Ward catalog with prices today—both expressed as a multiple of the average hourly wage—provides an index of how much our productivity in making the goods consumed back in 1895 has multiplied.

The productivity multiple for the Encyclopedia Britannica is vastly understated in the table because the Internet has made the encyclopedia far cheaper. A banquet for the wealthy in the mid-1800s might have consisted of roast beef and chicken, ham, potatoes, fried fish, heavy soups, different types of beans, and perhaps some cake. Today, this type of meal is consumed in the Midwest’s all-you-can-eat restaurants for $8.99 a person, with special $2.00 discounts for senior citizens. The only difference is that today’s meal has fresher fruits and vegetables, which, in the 1800s, could often not have been obtained at any price out of season, as well as juice, both diet and nondiet soft drinks, and cake and ice cream.

Even these comparisons understate the increases in our well-being over the past century. The official statistics do not reflect the enormous range of goods and services widely consumed today that were not available at any price in earlier times. This is most obvious for medicine. Prior to antibiotics, the common cold or flu was not a mere inconvenience but often a life-threatening disaster. A small wound, if improperly cared for, might have become infected and resulted in the loss of an arm or leg. While still in office, President Calvin Coolidge saw his younger son die of a blood infection from a blister incurred while playing tennis on the White House lawn without socks. Absent the polio vaccine, tens of thousands of children became handicapped every year, and parents everywhere worried that their living environments were not clean enough to forestall the infection. More recently, triple bypasses and even heart transplants have gone from being an unattainable miracle to being the perquisites of a very rich or very fortunate few, to almost routine procedures in the developed world. On a more mundane level, can any medicine have done as much good for as little cost as aspirin? This simple and inexpensive product not only reduces headaches and fevers, but also lowers the likelihood of heart attacks and, perhaps, some cancers. This improvement is due to product availability and better knowledge.

Less than 150 years ago, controversy still existed over whether doctors and nurses should wash their hands and disinfect their instruments before performing operations and delivering babies. Ignaz Semmelweis discovered that, indeed, they should—a discovery, incidentally, that gained him no fortune and drew great resentment.

Moreover, we can scarcely go a day without using inventions and innovations that were once the stuff of science fiction. Cell phones, flat-screen TVs, airbags and antilock brakes, CT scans, digital video players, portable computers, and, of course, the World Wide Web were completely unavailable a few decades ago.

Most of the growth indexes that economists use calculate improvements by comparing the cost of standardized, comparable bundles of goods in different time periods. But the price indexes do not adjust adequately for new goods or for quality improvements (see consumer price indexes). And the quality of almost every good has improved. Compare, for example, a 2007-model car to its 1988 counterpart. The 2007 model is much more likely to have power doors and windows, dual airbags, antilock brakes, a more powerful and fuel-efficient engine, a built-in CD player, environmentally friendly air-conditioning, better and more durable paint, often greater passenger space, and substantially fewer defects.

One final example: Before radio, television, or musical recordings, one could not hear Beethoven’s Fifth Symphony without attending a live concert. Today, for a fraction of a day’s wages, most anyone in the United States can hear any of Beethoven’s nine symphonies performed by some of the greatest orchestras and conductors that have ever lived. That sort of improvement in our standard of living is what the statistics do not fully capture.

There is one main downside to improvements in productivity, and it is small compared with the upside. The downside is that goods that require human input, especially specialized, highly skilled human input, are likely to increase in price over time. After all, the flip side of saying that human incomes have risen is to say that human labor has become more costly. We get a glimpse of what life was like for the middle class one hundred years ago, when real wages were lower, by looking at the middle class in poor countries today, where wages are substantially lower than in the rich countries. In poor countries today, even middle-class families, though less able than our middle class to afford stereos and nice cars, can hire servants and maids. As long as servants and maids are still available, the prices they command allow us to correct our statistics accordingly. The problem is more complicated where the quality of the good or experience has been diminished in some way as improved technology and more costly labor have led to substitutions in the good provided. A trip to the beach, for example, may not feel the same if ten thousand other tourists are competing for the same strip of sand.

Moreover, differences in preference may cause losses for those with unusual tastes. Although most people may prefer ballpoint pens to fountain pens, the few that prefer the older technology may lose out as people switch to the newer, cheaper product. This lessens the economies of scale to be enjoyed by the traditional pens and may drive out those skilled workers with special skill in making these pens.

Also, luxury goods that are valued for their exclusivity as well as their quality complicate the story further because the widespread availability of the product may actually degrade its value even if the object is nominally the same.

But for all this, the news is undoubtedly positive. The greatest losers from these trends are likely to have been either the very rich or those with unusual tastes that have not been supported by the market. The difficulties that arise from the universal spread of high incomes throughout the population are hardly disasters. Even if money does not buy happiness, raising as many people as possible to a middling level of prosperity is still an important first step.