1998-31

October 16, 1998

How Fast Is Modern Economic Growth?


The pace of productivity growth since the end of the Civil War has averaged about 1.6% per year–or so historical estimates (Kendrick 1961) and the official statistics of the Department of Commerce say. This average annual growth rate implies that output per worker doubles every 44 years, and that in the 133 years since the Civil War, productivity has doubled three times. This means that Americans today can make the same goods that our predecessors made in one-eighth the time (Cox and Alm 1997; Baumol, Blackman, and Wolff 1989), and it would seem to imply that an American a century and a third ago would have had to possess eight times the average worker’s real income then to be as well off as someone with today’s average worker’s income. Thus the top 2% of the American population then had a material standard of living equivalent to or higher than that of the average American now.

Such a pace of modern economic growth is blazingly fast in historical perspective. Even the century and a third from the invention of the first steam engine to the end of the Civil War saw at most one doubling of productivity–not three. Yet for the past several decades, evidence has been mounting that official statistics and historical estimates significantly understate economic growth since the mid-nineteenth century. This Economic Letter explains the nature of some of the controversy over measuring economic growth and productivity.

Taking the measure

The process by which standard measures of output or productivity understate economic growth is straightforward. Take all the final goods and services produced and sold over a year, value them at today’s prices, and divide by the number of workers to get a measure of GDP per worker, which today is $60,000 per year, and in 1867 was some $7500 per year (in 1998 dollars). So GDP per worker in 1867 was one-eighth of today’s value.

But this is not necessarily an accurate measure of production per worker back in 1867, because it does not make sense to compare the way a worker in 1867 could spend the equivalent of $7500 per year with the way a worker in 1998 would spend $7500 per year. A worker with $7500 today probably would spend some of it on modern medicines, such as antibiotics, some on a television set every few years and the electricity to run it, some on bus trips, some on consumer durables, such as a stove, and a large proportion on food and rent for a small, poorly maintained and inconveniently located apartment (which probably has central heating).

But the average worker back in 1867 was much worse off than a worker today would be with an annual income of $7500. Back then, no worker could spend a cent on modern entertainment or communications or transportation technologies, not to mention a toaster or the gas or electric utilities to run it or a telephone, or an apartment with central heating.

Perhaps a more fruitful way to conceptualize the material standard of living of average Americans back in the late 1860s would be to think of them as having to spend the $7500 exclusively on commodities that have been in existence for more than a century–food (although not freeze-dried or mechanically processed), clothing (although not artificial fibers), and shelter–but not on anything invented since the middle of the nineteenth century.

How valuable is the increase in technological capabilities since the mid-nineteenth century–the ability not to make goods more cheaply than they were made a century ago, but to produce new goods and new types of services like central heating, electric lights, fluoridated toothpaste, toaster ovens, antibiotics, CAT scans, synthetic fiber-blend clothes, radios, intercontinental telephones, copy machines, notebook computers, automobiles, and steel-framed skyscrapers?

Finding the answer in literary criticism?

Here I believe there is more insight to be gained by adopting the viewpoint not of an economist but of a literary critic and examining Edward Bellamy’s (1887) Looking Backward. Although the prose is wooden to our sensibilities, this book was a best-seller in the late nineteenth century, because it gave a very hopeful vision of how economic growth would bring us to utopia.

The narrator goes forward in time from 1895 to 2000, and his hosts of the future ask, “Would you like to hear some music?” The narrator expects his host to play the piano–a social accomplishment of upper-class women around 1900. Instead, the narrator is stupefied to find that 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.

In Bellamy’s late twentieth-century 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 narrator then says, “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….”

What if someone were to take Edward Bellamy to Tower Records today? His heart would stop. Yet we do not daily give thanks for our cassette players and our CD collections for having brought us to the limit of human felicity. We rarely think about them at all: we take them for granted.

Thus the answer implicit in Looking Backward is that modern economic growth has been so great as to carry us off the scale of measurement that past generations could imagine: from Bellamy’s point of view only one century ago, we today have been carried beyond the limit of human felicity. Thus in some respects, no one in the America of 1867 had then the same material standard of living as an average American today. Neither Junius Spencer Morgan nor Jay Cooke in 1867 could buy access to late twentieth century medicines, or to the products of modern entertainment industries, or to the products of our information technology industries, or even to our utilities. Nathan Mayer Rothschild, the richest man in the world in the first half of the nineteenth century, died of an abscess that could have been cured with less than $10 of antibiotics and fifteen minutes of a nurse’s time today (Landes 1998). So, if we ask, “How great a multiple of average income would someone have to have had in the past in order to have the same material standard of living today?” then perhaps the most plausible answer is, “Modern growth is so fast, it’s off the scale.”

Estimating the inestimable?

Still, we do look for a measure. For example, Nordhaus (1997) attempted to calculate the long-run decline in the real price of illumination. He investigated not the price of a single good (like a light bulb) but instead the price of the service that the good is used to deliver (casting light so that you can see). Nordhaus concluded that traditional indices of the price of light would miss the extraordinary upward leaps in productivity that took place whenever one technology of illumination was succeeded by another. For the case of illumination, this unmeasured technological progress and economic growth was fastest in the 50 years around the end of the nineteenth century.

In addition, there is a growing body of literature on the consumer surplus from increases in product variety–that is, the increase in consumer welfare created from gaining access to new goods and new types of goods even if the prices of old goods and the level of nominal income remain unchanged. Trachtenberg (1990), Nordhaus (1997), and other studies in Bresnehan and Raff (1997) find strong evidence of large economic benefits from the increase in the types of goods that consumers can buy that are not captured by standard price increases.

If a single number on the underestimation of productivity growth is required, however, one worth considering comes from the Boskin Commission’s (1998) findings on the reform of the Consumer Price Index. The Boskin Commission estimates that price inflation has been overestimated and productivity growth underestimated by about 1 percentage point per year. Based on this estimate, productivity would have doubled every 27 years instead of every 44 years, so we would have seen five doublings since the Civil War instead of three. Thus, productivity today would be thirty-two times–not eight times–what it was at the beginning of the Gilded Age.

But now suppose we ask: what fraction of average income in the present would give the same standard of living as average income in the past? Extrapolating from the Boskin Commission’s conclusions would suggest that a worker with an average income immediately after the Civil War had the same material standard of living as an American worker with an annual income of $4000 today. That seems very unreasonable, for if you cannot afford to consume the modern information, communications, entertainment, and transportation technologies, you can hardly be said to have benefited from their invention. The magnitude of the benefits today’s Americans receive from their power to use the new goods and new types of goods invented over the past century depends on how high they rank in the income distribution, and it drops off rapidly as you approach the bottom of the distribution of income. But how about the poor of today? So the fact that the middle-income household today appears to have a vastly higher material standard of living than even the rich of yesteryear need not mean that today’s poor also live much better than the middle class of even a century in the past. People benefit from the enlarged range of choice–from new goods and new types of goods–only if they can afford to consume them. To the extent that the incomes of the poor are spent now on the same basic goods–food, clothing, and shelter–that were available in the past, their material standards of living have not received the same massive boost from the inventions of the past century as have those of the middle class and the rich.

Conclusion

From the standpoint of anyone above (and many of those below) the poverty line, modern economic growth over the past century has been significantly faster than standard measures record, because standard measures omit much of the benefit to material standards of living from the explosion of human technological capabilities over the past century. But how much more? Obtaining good solid numerical estimates of how much more is difficult, and creating estimates on which everyone might agree would be impossible.

National income accountants continue to report the standard estimates. But we should not let the fact that the standard estimates tell us that productivity growth over the past century and a bit has averaged 1.6% per year to blind us to the fact that true improvements in material standards of living for those at, not too far below, and above average incomes have been and still are much more rapid.

J. Bradford DeLong
Professor of Economics, UC Berkeley,
and Visiting Scholar, FRBSF

References

Baumol, W., S. Blackman, and E. Wolff. 1989. Productivity and American Leadership: The Long View. Cambridge: MIT Press.

Bellamy, E. 1887. Looking Backward. New York: New American Library (reprint).

Boskin, M., et al. 1998. “Consumer Prices, the Consumer Price Index, and the Cost of Living.” Journal of Economic Perspectives 12 (Winter) pp. 3-26.

Bresnehan, T., and D. Raff. 1997. The Economics of New Goods. Chicago: University of Chicago Press.

Cox, W. M., and R. Alm. 1997. “Time Well Spent: The Declining Real Cost of Living in America.” Federal Reserve Bank of Dallas Annual Report.

Kendrick, D. 1961. Productivity Trends in the United States. New York: NBER.

Landes, D. 1998. The Wealth and Poverty of Nations: Why Some Are So Rich and Others So Poor. New York: W.W. Norton.

Nordhaus, W. 1997. “Do Real Output and Real Wage Measures Capture Reality? The History of Lighting Suggests Not.” In The Economics of New Goods, eds. Bresnahan and Raff, pp. 26-69. Chicago: University of Chicago Press.

Trachtenberg, M. 1990. Economic Analysis of Product Innovation: The Case of CT Scanners . Cambridge: Harvard University Press.

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