FRBSF Economic Letter
98-31; 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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