Improvements in our standard of living and ‘The Price of Everything’

This page discusses the radical improvement in the standard of living we have seen over the last 100 years.  Why are things so incredibly better now? If we can grapple with that question we have a good shot at sustaining that improvement.

The primary driver is radical improvements in productivity. Some of the underlying factors that allow all of this are freedom, capitalism, a rules-based legal system, property rights, and a functioning democracy.

I discussed these ideas in a series of posts, which are combined here.  The main prompt for this discussion is a book, The Price of Everything, which you will hear much more about.

Introduction to The Price of Everything

I’m going to have a series of posts discussing a fiction book that teaches economics.  I just finished reading it for the second time.  Enjoyed it more the second time than the first!

In the last few years I’ve thoroughly enjoyed books that are called “didactic fiction.” These are teaching tools written in the form of a novel.  This gives the author the opportunity to teach in an entertaining format.

Russell Roberts offers an explanation of the price mechanism in his book The Price of Everything – A Parable of Possibility and Prosperity.  As a bonus, the author explains how we developed into a rich economy.

The story line of the book is an ongoing visit between a college provost, Professor Ruth Lieber and a star tennis player at the university, Ramon Fernandez.

In the sources section of the book, he explains:

This book is my attempt to give the beginner and the expert a better understanding of the role prices play in our lives – how they create harmony between the competing desires of consumers and entrepreneurs, and how they steer resources and knowledge to transform and sustain our standard of living.

As you will soon be obvious, I thoroughly enjoyed the book. I heartily recommend it as a very entertaining way to learn how our economy works and why we are so much better off now than 100 years ago.

Why discuss this book in this Outrun Change blog?

Understanding how we got to the place we are now is key to understanding how to move forward.  There are astoundingly powerful forces that moved our economy from near-subsistence agriculture 150 or 200 years ago to the world’s most productive and rich economy today. 

It wasn’t an accident.  It wasn’t just good luck. 

There are understandable, repeatable, and destroyable reasons we have the economy we have today.

Understanding how we got here is key to moving forward into the future.

What are the underlying drivers of economic development?

I’ve previously mentioned that freer countries are richer countries. See

• Economic development makes every country healthier and richer
• “If you care about improving peoples lives, then you really care about economic freedom”

What does freedom have to do with countries getting richer?

Russell Roberts offers a partial explanation in his book The Price of Everything – A Parable of Possibility and Prosperity

The main character in the book makes a lot of great points in a monologue discussing why rich countries are rich.  A few of the comments and my thoughts:

…The wealthy nations have more capital. More physical capital, machines and factories and computers.  The people in those wealthy countries have more human capital, more knowledge and skills to work with the physical capital. The wealthy countries have policies that encourage risk-taking and the accumulation of both kinds of capital.

When you have that kind of capital you are more productivity. Everyone in the country is more productive.  It takes time and effort to build up that capital, whether knowledge, machines, tools, or companies that can produce stuff.  If you can’t build it up, or you risk having everything ripped off on a moment’s notice, or the regulatory structure makes it extremely difficult to accumulate the capital, then there would be less of it.  If you have less capital, the entire country will be less productive and every person living there will be less wealthy.

Economic and political power are disbursed in the wealthy countries. The poor countries are more likely to be run by thugs who take what they can. Think Cuba or Syria. That discourages the accumulation of physical or human capital. That discourages foreign investment that might make workers more productive. The presence of thugs discourages risk-taking.

Just how much money are you willing to invest in a country that might steal it from you at any moment? Not much.

A long time ago I traveled in some countries that had severe currency restrictions.  It was quite enlightening.  You could bring money into the country but it was extremely difficult to take money out. Feel free to bring money in to make an investment, but you can’t take your money out.  Why would anyone be so foolish as to invest in such a country when they could not do anything with the profits or the proceeds from selling the investment when they were ready to move on?

The rich countries have the rule of law, so a person can buy something or enter a deal and know that the fruits of the deal won’t be arbitrarily stripped away.  And on top of all that, the rich countries have a culture of trust so that everything doesn’t have to be put into a contract.

Here’s a formula for failure – try building a plant or developing a distribution system in a setting where the rules only have meaning based on what the powerful or connected want them to be at the moment.  Oh, and those rules are subject to change on a whim.  Why would you build up something complex or difficult if someone who has better connections than you could take it away or change the rules at any time?

But if I have to sum it up in a single thought, the rich countries have more freedom. Freedom to innovate, freedom to compete, freedom to take risks, freedom to fail.

Freedom is the underlying driver for economic growth.  That is the message you see in the posts I linked above.  Professor Roberts’ characters explain the concept well.

By the way, go get the book.  You will get a fun read and be enlightened at the same time.

Have things gotten better in the last 100 years? Hint: there’s no better time to be alive than today.

This is a continuing review and commentary on The Price of Everything (introduced here and here).  At one point the characters discuss how much better off we are today than 100 years ago.  The main character, Prof. Ruth Lieber, makes a guess on the improvement in overall standard of living:

A good guess is that we’re somewhere between five and 15 times better off in terms of material well-being than we were 100 years ago. Maybe more.

A good point estimate is that our standard of living has increased tenfold in the last century.  Not 50% better.  Not 100% better.  But perhaps something range of 1000% better.

The characters argue about whether we are really better off or not. The professor’s monologue, with a few of my comments:

America’s success since 1900 isn’t really about money. It’s about using that indoor toilet and having penicillin so you don’t die from infection. It’s about women not dying in childbirth. In 1900, the chance of a woman in America dying during childbirth was about eight out of a thousand, almost one percent. Today, it’s about eight out of 100,000. Childbirth is 100 times safer than it was 100 years ago. Think that’s about money?

One out of 100 women dying in childbirth versus about 1 out of 10,000!  In my reading of Civil War history, I’ve noticed frequent comments of some  general who was in his second marriage, having lost his first wife in childbirth.  That was a common situation.  Has anyone reading this blog ever heard of a mother dying in childbirth in the last two decades?

Or infant mortality. In 1900, one out of every ten – ten! – babies died in the first year of life. Today the mortality rate is under one out of 100. That’s a tenfold improvement. It’s about ridding the world of polio.

Walk through a really old graveyard some time.  In a cemetery of 100 or 150 years of age, you will find several headstones that say something like “Baby Jones / August 15 – September 8.”  I cannot imagine an environment where you don’t even bother naming your baby because of such a great chance of losing your little one in the first month or three of life.

I have a good friend who contracted polio just as the vaccine went into wide-spread distribution.  I am very glad we are rid of polio.  I am very glad that American and Russian scientists have to intentionally work at keeping a live sample of smallpox in storage, since that vicious killer does not exist anywhere on planet Earth outside those two laboratories.  Do you grasp the wonderful joy that smallpox is gone and polio is astoundingly rare?  That is wonderful!

It’s about painkillers. Try getting a tooth pulled in 1900 if you want to have some fun.

No thank you.

There were about 6000 books published in 1900. Today, about 300,000 books are published every year.

I have published 3 books. Even 25 years ago that would either not have been possible or would have been prohibitively expensive.  I hope to publish five e-books in the next six months. Maybe they will be widely popular or maybe they will be flops.  I don’t know.  But I have the freedom, technology, and resources to publish them. 

Today, Russell Roberts (author of this book) is publishing not just books, but podcasts and videos.  He does so with low production costs, negligible distribution costs, and no gatekeeper stopping him from publishing.

Do you grasp the radical change that you or I can publish a book if we feel like it?

If I had a choice between living in that wonderful, closer-to-nature, no-preservative, less-frantic life of 100 years ago or living today, there’s no doubt what my choice would be.

100 years ago only the very richest people had servants – today even the poor have servants

I have discussed Russell Roberts’ book, The Price of Everything, here, here, and here.  At one point in the book, he suggests that today even poor people have servants.

As a way of measuring increasing standard of living in the last hundred years, the main character in his book compares a rich guy served dinner by a waiter today to a rich guy 100 years ago served dinner by a servant.

As a starting point, consider one of Prof. Roberts’ comparisons:  the rich guy back then had an expensive, fancy watch while the servant had no watch.  Today, the rich guy has an exquisitely expensive, fancy watch, while the waiter has an inexpensive digital watch. 

Which do you suppose keeps better time and requires less maintenance?

A comparison of then and now points out that 100 years ago

..rich people rode in carriages and poor people walked. Rich people then had nice clothes and poor people dressed in cruder clothing made of coarser fabric. Rich people ate plenty and poor people often went hungry. Rich people had servants while poor people used washboards to keep their meager wardrobe clean and spent hours each day making meals.

Comfortable versus coarse cloth.  Hire someone to do your wash or spent hours at a washboard.  Eat nice or go hungry.  Extremes. Which has changed most in the last 100 years?

The monologue says today poor people have servants.

Servants?  Poor people have servants?  How can that possibly be?

The monologue continues:

Today, almost 2/3 of the poor families in America have washing machines. Over half have dryers.  A third have a dishwasher. These machines are servants, aren’t they? And they’re usually more reliable than the old-fashioned kind.

What would you consider a gas stove, refrigerator, microwave, furnace, vacuum cleaner or electric fan?  How about calling them servants?

Yes, the richest people in this country have gone from extremely rich to astoundingly rich in the last century.  Fine. 

Far more importantly, the middle-class and poor have gone from something I wouldn’t want for myself to a standard of living unimaginable to even the filthy rich of 100 years ago.

I’m thrilled that today the poor don’t still have coarse cloth for clothing and have to clean clothes on a washboard.  That is progress.

I have dozens of servants in my home and business

Got to thinking about Russell Roberts’ comment in The Price of Everything that today poor people have servants. 

Realized I have lots and lots of servants in my life.  Here are a few:

• I have a servant that brings clean water to my kitchen.
• I have another servant who keeps water hot, readily available for bathing and washing dishes. Hot water is always available for another servant who washes our clothes.  (When my dad was a child, his mother had to heat the water after grandpa or uncles cut, stacked, and carried into the house enough wood to heat the water.)
• After thinking about that, I remembered another servant that gets natural gas and brings it to the house for heating and cooking.
• Ever tour a museum home that is outfitted as it was in the 1800s? Remember those little ceramic jugs in all the bedrooms? Remember what they are for?  I have a servant that removes from my home what would otherwise go into chamber pots.
• I have a number of servants, one standing by in every room of my home, that can turn on dozens of candles at the snap of my fingers.
• I have a servant that brings water from the community well and pours it on my lawn in the amounts and on the schedule that I provide.  Remarkably precise groundskeeper.
• I have a servant that makes ice for me and makes sure that the ice bucket is always filled.  Also defrosts the freezer for my wife.
• I have a servant that will open and close my garage door on my whim.

I’m a CPA. That involves working with lots of numbers and doing thousands of calculations.  I print lots of documents and send them to my clients.  I’ve hired a lot of servants for my business.

• I hired a servant from Mr. Gates that can do tens of thousands of calculations a second. (You would call that Office Excel – thank you Mr. Gates. The staff person you sent over is quite efficient.)  I very rarely use a 10-key calculator.
• I have a servant that answers my phone and takes messages.  Tells me who is calling before I take the call, too.
• I have another servant that takes dictation and types my comments almost as fast as I can speak.  Sometimes I have to wait for all of a few seconds for my servant to catch up type what I’ve dictated.  Unfortunately, I have to keep a close eye on this servant.  Accuracy isn’t quite what I’d like. 
• I have 4 servants in my CPA firm that can print documents at a speed that would make Mr. Guttenberg green with envy. (Thank you Mr. Hewitt and Mr. Packard)
• I have several servants that working together can deliver a critical document to a client across town or across the country in 20 seconds.  Takes ‘em 90 seconds if they are lethargic.
• I have a file clerk that can retrieve any one of thousands of documents from my filing cabinet and bring it to me in just moments. (Some of my colleagues call that paperless. I call it an efficient staff.)

Don’t tell the state wage and hour department, but I pay those servants a few pennies an hour.  Some far less.  And I don’t give any of them a morning or afternoon coffee break.

As a small businessman I have a very large volume of servants hard at work.  Can’t even count the size of my staff.  Nary a complaint from any of them.  Once in a while, one of them resigns, but that is quite rare.  Can’t really beat the price either.

Yes, people have many servants today. I have a larger staff of servants than even the most filthy rich people from 100 years ago.

How the price of eggs show we have seen a twentyfold increase in the standard of living in the last 100 years.

Found an incredibly helpful explanation of the radical change in the standard of living over the last 100 years.  It is an explanation of the change in the price of eggs provided by Prof. Russell Roberts in his book The Price of Everything.  I’ve been discussing this book in the last several posts starting here and continuing here and here.

A challenge I have had when looking at history, particularly the Civil War, is trying to relate salaries or costs from back then to today. It’s one thing to say a soldier made $10 a month or a skilled laborer made $100 a month or a set of uniforms cost $17 or a barrel of flour went from this price to that price in the South.  However, I can’t relate that to anything.

How do those prices compare to now? Adjusting for inflation doesn’t really work.  Comparing those prices to the cost of an ounce of gold or an ounce of silver helps a little, but that brings in distortions from inflation that we have seen in the last 30 years along with the odd things in today’s economy.

How about using a comparable job to buy a comparable product then and now?

I will drill down in my review of Mr. Roberts book by pulling together several ideas into one linear discussion.

Illustration is to compare how much labor it takes to buy a dozen eggs in 1900 compared to how much labor it takes to buy a dozen eggs today.

The first comparison by Mr. Roberts is how long a teacher works to buy a dozen eggs.

Why a teacher and why eggs? Because teaching is a skill set that’s reasonably comparable in terms of overall skills compared to the economy and in relation to social standing then and now, so it is a good measure of average income. Eggs are a good basis for comparison over time because that is a reasonably comparable product today versus 100 years ago.

So, here’s the explanation:

A schoolteacher in 1900 needed to work an hour to earn a dozen eggs. Today, a school teacher has to work about 3 minutes. A twentyfold drop in the price of eggs. How did it come to pass the teachers only have to work 3 minutes to earn a dozen eggs when they used to have to work an hour?

Wow. Lots to unpack there.

On page 197, the good professor provides the raw numbers and sources. If you really want to know the sources, you can get the book and look them up. The data, however, is that an average teacher earned $328 a year in 1900. With eggs at $0.21 a dozen that works out to about an hour of labor to earn a dozen eggs. In 2005, the average salary is about $48,000 a year (per survey from the NEA), which works out to be around two or three minutes to earn enough to buy a dozen eggs at one dollar per dozen.

Adjust the stats anyway you want. I think you’ll come up with roughly the same result – an improvement in the range of twentyfold.

Yeah, but how about the working poor, the other main character asks?

Things have gotten even better.

Back in 1900, a maid earned maybe $240 a year and worked 12 hours a day, six days a week. That’s about seven cents an hour. A dozen eggs in 1900 cost twenty cents. So it took a maid in 1900 about three hours of work to earn a dozen eggs. Today, a maid who earns $10 an hour has to pay about one dollar for a dozen eggs. Six minutes! So eggs are 30 times cheaper for someone who cleans houses today compared to someone who cleaned houses 100 years ago.

So a teacher is 20 times better off and a maid is 30 times better off.

What happen?

Technology enabling productivity improvements. Continued in my next post.