The Rational Optimist: How Prosperity Evolves

Affluence for all

Nor was 1955 a time of deprivation. It was in itself a record – a moment when the world was richer, more populous and more comfortable than it had ever been, despite the recent efforts of Hitler, Stalin and Mao (who was then just starting to starve his people so that he could use their grain to buy nuclear weapons from Russia). The 1950s were a decade of extraordinary abundance and luxury compared with any preceding age. Infant mortality in India was already lower than it had been in France and Germany in 1900. Japanese children had almost twice as many years in education in 1950 as at the turn of the century. World income per head had almost doubled in the first half of the twentieth century. In 1958 J.K. Galbraith declared that the ‘affluent society’ had reached such a pitch that many unnecessary goods were now being ‘overprovided’ to consumers by persuasive advertisers.

He was right that Americans were especially well off compared with others: they were three inches taller in 1950 than they had been at the turn of the century and spent twice as much on medicine as funerals – the reverse of the ratio in 1900. Roughly eight out of ten American households had running water, central heating, electric light, washing machines and refrigerators by 1955. Almost none had these luxuries in 1900. In his 1890 classic How the Other Half Lives, Jacob Riis encountered a family of nine in New York living in a ten-foot-square room plus a tiny kitchen, and women earning 60 cents a day for sixteen hours’ work in sweatshops and unable to afford more than one meal a day. This would have been unthinkable by mid-century.

Yet looking back now, another fifty years later, the middle class of 1955, luxuriating in their cars, comforts and gadgets, would today be described as ‘below the poverty line’. The average British working man in 1957, when Harold Macmillan told him he had ‘never had it so good’, was earning less in real terms than his modern equivalent could now get in state benefit if unemployed with three children. Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these. Even in 1970 only 36 per cent of all Americans had air conditioning: in 2005 79 per cent of poor households did. Even in urban China 90 per cent of people now have electric light, refrigerators and running water. Many of them also have mobile phones, internet access and satellite television, not to mention all sorts of improved and cheaper versions of everything from cars and toys to vaccines and restaurants.

Well all right, says the pessimist, but at what cost? The environment is surely deteriorating. In somewhere like Beijing, maybe. But in many other places, no. In Europe and America rivers, lakes, seas and the air are getting cleaner all the time. The Thames has less sewage and more fish. Lake Erie’s water snakes, on the brink of extinction in the 1960s, are now abundant. Bald eagles have boomed. Pasadena has few smogs. Swedish birds’ eggs have 75 per cent fewer pollutants in them than in the 1960s. American carbon monoxide emissions from transport are down 75 per cent in twenty-five years. Today, a car emits less pollution travelling at full speed than a parked car did in 1970 from leaks.

Meanwhile, average life expectancy in the longest-lived country (Sweden in 1850, New Zealand in 1920, Japan today) continues to march upwards at a steady rate of a quarter of a year per year, a rate of change that has altered little in 200 years. It still shows no sign of reaching a limit, though surely it must one day. In the 1920s demographers confidently asserted that average life span would peak at 65 ‘without intervention of radical innovations or fantastic evolutionary change in our physiological make-up’. In 1990 they predicted life expectancy ‘should not exceed…35 years at age 50 unless major breakthroughs occur in controlling the fundamental rate of ageing’. Within just five years both predictions were proved wrong in at least one country.

Consequently the number of years of retirement is rocketing upwards. Starting from 1901, it took sixty-eight years for the mortality of British men between 65 and 74 to fall by 20 per cent. Subsequent 20 per cent falls took seventeen years, ten years and six years – the improvement has accelerated. That is all very well, say pessimists, but what about quality of life in old age? Sure, people live longer, but only by having years of suffering and disability added to their lives. Not so. In one American study, disability rates in people over 65 fell from 26.2 per cent to 19.7 per cent between 1982 and 1999 – at twice the pace of the decrease in the mortality rate. Chronic illness before death is if anything shortening slightly, not lengthening, despite better diagnosis and more treatments – ‘the compression of morbidity’ is the technical term. People are not only spending a longer time living, but a shorter time dying.

Take stroke, a big cause of disability in old age. Deaths from stroke fell by 70 per cent between 1950 and 2000 in America and Europe. In the early 1980s a study of stroke victims in Oxford concluded that the incidence of stroke would increase by nearly 30 per cent over the next two decades, mainly because stroke incidence increases with age and people were predicted to live longer. They did live longer but the incidence of stroke in fact fell by 30 per cent. (The age-related increase is still present, but it is coming later and later.) The same is true of cancer, heart disease and respiratory disease: they all still increase with age, but they do so later and later, by about ten years since the 1950s.

Even inequality is declining worldwide. It is true that in Britain and America income equality, which had been improving for most of the past two centuries (British aristocrats were six inches taller than the average in 1800; today they are less than two inches taller), has stalled since the 1970s. The reasons for this are many, but they are not all causes for regret. For example, high earners now marry each other more than they used to (which concentrates income), immigration has increased, trade has been freed, cartels have been opened up to entrepreneurial competition and the skill premium has grown in the work place. All these are inequality-boosting, but they stem from liberalising trends. Besides, by a strange statistical paradox, while inequality has increased within some countries, globally it has been falling. The recent enrichment of China and India has increased inequality within those countries by making the income of the rich grow faster than that of the poor – an income gap is an inevitable consequence of an expanding economy. Yet the global effect of the growth of China and India has been to reduce the difference between rich and poor worldwide. As Hayek put it, ‘once the rise in the position of the lower classes gathers speed, catering to the rich ceases to be the main source of great gain and gives place to efforts directed towards the needs of the masses. Those forces which at first make inequality self-accentuating thus later tend to diminish it.’

In another respect, too, inequality has been retreating. The spread of IQ scores has been shrinking steadily – because the low scores have been catching up with the high ones. This explains the steady, progressive and ubiquitous improvement in the average IQ scores people achieve at a given age – at a rate of 3 per cent per decade. In two Spanish studies, IQ proved to be 9.7 points higher after thirty years, most of it among the least intelligent half of the group. Known as the Flynn effect, after James Flynn who first drew attention to it, this phenomenon was at first dismissed as an artefact of changes in tests, or a simple reflection of longer or better schooling. But the facts do not fit such explanations because the effect is consistently weakest in the cleverest children and in the tests that relate most to educational content. It is a levelling-up caused by an equalisation of nutrition, stimulation or diversity of childhood experience. You can, of course, argue that IQ may not be truly representative of intelligence, but you cannot argue that something is getting better – and more equal at the same time.

Even justice has improved thanks to new technology exposing false convictions and identifying true criminals. To date 234 innocent Americans have been freed as a result of DNA fingerprinting after serving an average of twelve years in prison; seventeen of them were on death row. The very first forensic use of DNA in 1986 exonerated an innocent man and then helped to catch the real murderer, a pattern that has been repeated many times since.

Cheap light

These richer, healthier, taller, cleverer, longer-lived, freer people – you lot – have been enjoying such abundance that most of the things they need have been getting steadily cheaper. The four most basic human needs – food, clothing, fuel and shelter – have grown markedly cheaper during the past two centuries. Food and clothing especially so (a brief rise in food prices in 2008 notwithstanding), fuel more erratically and even housing has probably got cheaper too: surprising as it may seem, the average family house probably costs slightly less today than it did in 1900 or even 1700, despite including far more modern conveniences like electricity, telephone and plumbing. If basic needs have got cheaper, then there is more disposable income to spend on luxuries. Artificial light lies on the border between necessity and luxury. In monetary terms, the same amount of artificial lighting cost 20,000 times as much in England in the year 1300 as it does today.

Enormous as that difference is, in labour terms the change is even more dramatic and the improvement is even more recent. Ask how much artificial light you can earn with an hour of work at the average wage. The amount has increased from twenty-four lumen-hours in 1750 BC (sesame oil lamp) to 186 in 1800 (tallow candle) to 4,400 in 1880 (kerosene lamp) to 531,000 in 1950 (incandescent light bulb) to 8.4 million lumen-hours today (compact fluorescent bulb). Put it another way, an hour of work today earns you 300 days’ worth of reading light; an hour of work in 1800 earned you ten minutes of reading light. Or turn it round and ask how long you would have to work to earn an hour of reading light – say, the light of an 18-watt compact-fluorescent light bulb burning for an hour. Today it will have cost you less than half a second of your working time if you are on the average wage: half a second of work for an hour of light. In 1950, with a conventional filament lamp and the then wage, you would have had to work for eight seconds to get the same amount of light. Had you been using a kerosene lamp in the 1880s, you would have had to work for about fifteen minutes to get the same amount of light. A tallow candle in the 1800s: over six hours’ work. And to get that much light from a sesame-oil lamp in Babylon in 1750 bc would have cost you more than fifty hours’ of work. From six hours to half a second – a 43,200-fold improvement – for an hour of lighting: that is how much better off you are than your ancestor was in 1800, using the currency that counts, your time. Do you see why my fictional family ate by firelight?

Much of this improvement is not included in the cost-of-living calculations, which struggle to compare like with unlike. The economist Don Boudreaux imagined the average American time-travelling back to 1967 with his modern income. He might be the richest person in town, but no amount of money could buy him the delights of eBay, Amazon, Starbucks, Wal-Mart, Prozac, Google or BlackBerry. The lighting numbers cited above do not even take into account the greater convenience and cleanliness of modern electric light compared with candles or kerosene – its simple switching, its lack of smoke, smell and flicker, its lesser fire hazard. Nor is the improvement in lighting finished yet. Compact fluorescent bulbs may be three times as efficient as filament bulbs in turning electrons’ energy into photons’ energy, but light-emitting diodes (LEDs) are rapidly overtaking them (as of this writing LEDs with ten times the efficiency of incandescent bulbs have been demonstrated) and have the added benefit of working at a portable scale. A cheap LED flashlight, powered by a solar-charged battery, will surely soon transform the life of some of the 1.6 billion people who do not have mains electricity, African peasants prominent among them. Admittedly, LEDs are still far too expensive to replace most light bulbs, but that might change.

Think what these improvements in lighting efficiency mean. You can either have a lot more light, or do a lot less work, or acquire something else. Devoting less of your working week to earning your lighting means devoting more of it to doing something else. That something else can mean employment for somebody else. The improved technology of lighting has liberated you to make or buy another product or service, or do a charitable act. That is what economic growth means.

Saving time

Time: that is the key. Forget dollars, cowrie shells or gold. The true measure of something’s worth is the hours it takes to acquire it. If you have to acquire it for yourself, it usually takes longer than if you get it ready-made by other people. And if you can get it made efficiently by others, then you can afford more of it. As light became cheaper so people used more of it. The average Briton today consumes roughly 40,000 times as much artificial light as he did in 1750. He consumes fifty times as much power and 250 times as much transport (measured in passenger-miles travelled), too.

This is what prosperity is: the increase in the amount of goods or services you can earn with the same amount of work. As late as the mid-1800s, a stagecoach journey from Paris to Bordeaux cost the equivalent of a clerk’s monthly wages; today the journey costs a day or so and is fifty times as fast. A half-gallon of milk cost the average American ten minutes of work in 1970, but only seven minutes in 1997. A three-minute phone call from New York to Los Angeles cost ninety hours of work at the average wage in 1910; today it costs less than two minutes. A kilowatt-hour of electricity cost an hour of work in 1900 and five minutes today. In the 1950s it took thirty minutes work to earn the price of a McDonald’s cheeseburger; today it takes three minutes. Healthcare and education are among the few things that cost more in terms of hours worked now than they did in the 1950s.

Even the most notorious of capitalists, the robber barons of the late nineteenth century, usually got rich by making things cheaper. Cornelius Vanderbilt is the man for whom the New York Times first used the word ‘robber baron’. He is the very epitome of the phrase. Yet observe what Harper’s Weekly had to say about his railways in 1859:

The results in every case of the establishment of opposition lines by Vanderbilt has been the permanent reduction of fares. Wherever he ‘laid on’ an opposition line, the fares were instantly reduced, and however the contest terminated, whether he bought out his opponents, as he often did, or they bought him out, the fares were never again raised to the old standard. This great boon – cheap travel – this community owes mainly to Cornelius Vanderbilt.

Rail freight charges fell by 90 per cent between 1870 and 1900. There is little doubt that Vanderbilt sometime bribed and bullied his way to success, and that he sometimes paid his workers lower wages than others – I am not trying to make him into a saint – but there is also no doubt that along the way he delivered to consumers an enormous benefit that would otherwise have eluded them – affordable transport. Likewise, Andrew Carnegie, while enormously enriching himself, cut the price of a steel rail by 75 per cent in the same period; John D. Rockefeller cut the price of oil by 80 per cent. During those thirty years, the per capita GDP of Americans rose by 66 per cent. They were enricher-barons, too.

Henry Ford got rich by making cars cheap. His first Model T sold for $825, unprecedentedly cheap at the time, and four years later he had cut the price to $575. It took about 4,700 hours of work to afford a Model T in 1908. It takes about 1,000 hours today to afford an ordinary car – though one that is brimming with features that Model Ts never had. The price of aluminium fell from $545 a pound in the 1880s to 20 cents a pound in the 1930s, thanks to the innovations of Charles Martin Hall and his successors at Alcoa. (Alcoa’s reward for this price cut was to be sued by the government on 140 counts of criminal monopoly: the rapid decrease in the price of its product being used as evidence of a determination to deter competition. Microsoft suffered the same allegation later in the century.) When Juan Trippe sold cheap tourist-class seats on his Pan Am airline in 1945, the other airlines were so insulted that they petitioned their governments to ban Pan Am: Britain, shamefully, agreed, so Pan Am flew to Ireland instead. The price of computing power fell so fast in the last quarter of the twentieth century that the capacity of a tiny pocket calculator in 2000 would have cost you a lifetime’s wages in 1975. The price of a DVD player in Britain fell from £400 in 1999 to £40 just five years later, a decline that exactly matched the earlier one of the video recorder, but happened much faster.

Falling consumer prices is what enriches people (deflation of asset prices can ruin them, but that is because they are using asset prices to get them the wherewithal to purchase consumer items). And, once again, notice that the true metric of prosperity is time. If Cornelius Vanderbilt or Henry Ford not only moves you faster to where you want to go, but requires you to work fewer hours to earn the ticket price, then he has enriched you by granting you a dollop of free time. If you choose to spend that spare time consuming somebody else’s production then you can enrich him in turn; if you choose to spend it producing for his consumption then you have also further enriched yourself.

Housing, too, is itching to get cheaper, but for confused reasons governments go to great lengths to prevent it. Where it took sixteen weeks to earn the price of 100 square feet of housing in 1956, now it takes fourteen weeks and the housing is of better quality. But given the ease with which modern machinery can assemble a house, the price should have come down much faster than that. Governments prevent this by, first, using planning or zoning laws to restrict supply (especially in Britain); second, using the tax system to encourage mortgage borrowing (in the United States at least – no longer in Britain); and third, doing all they can to stop property prices falling after a bubble. The effect of these measures is to make life harder for those who do not yet have a house and massively reward those who do. To remedy this, governments then have to enforce the building of more affordable housing, or subsidise mortgage lending to the poor.

Happiness

As necessities and luxuries get cheaper, do people get happier? A small cottage industry grew up at the turn of the twenty-first century devoted to the subject of the economics of happiness. It started with the paradox that richer people are not necessarily happier people. Beyond a certain level of per capita income ($15,000 a year, according to Richard Layard), money did not seem to buy subjective well-being. As books and papers cascaded out of the academy, Schadenfreude set in on a grand scale among commentators happy to see the unhappiness of the rich confirmed. Politicians latched on and governments from Thailand to Britain began to think about how to maximise gross national happiness instead of gross national product. British government departments now have ‘well-being divisions’ as a result. King Jigme Singye Wangchuck of Bhutan is credited with having been the first to get there in 1972 when he declared economic growth a secondary goal to national well-being. If economic growth does not produce happiness, said the new wisdom, then there was no point in striving for prosperity and the world economy should be brought to a soft landing at a reasonable level of income. Or, as one economist put it: ‘The hippies were right all along’.