A Short History of Riches and Wealth Creation

By Phil Miller
And the engine of technological progress is ideas -- not just the ideas from engineering laboratories, but also ideas like new methods of crop rotation, or just-in-time inventory management. You can fly from New York to Tokyo partly ...

Steven Landsburg pens this excellent column ($$$) about the history of wealth:

Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture -- but none of that stuff had much effect on the quality of people's lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.

Then -- just a couple of hundred years ago, maybe 10 generations -- people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world.

Comparing a bit across time:

Rising income is only part of the story. One hundred years ago the average American workweek was over 60 hours; today it's under 35. One hundred years ago 6% of manufacturing workers took vacations; today it's over 90%. One hundred years ago the average housekeeper spent 12 hours a day on laundry, cooking, cleaning and sewing; today it's about three hours.

As far as the quality of the goods we buy, try picking up an electronics catalogue from, oh, say, 2001 and ask yourself whether there's anything there you'd want to buy. That was the year my friend Ben spent $600 for a 1.3-megapixel digital camera that weighed a pound and a half. What about services, such as health care? Would you rather purchase today's health care at today's prices or the health care of, say, 1970 at 1970 prices? I don't know any informed person who would choose 1970, which means that despite all the hype about costs, health care now is a better bargain than it's ever been before.

The moral is that increases in measured income -- even the phenomenal increases of the past two centuries -- grossly understate the real improvements in our economic condition. The average middle-class American might have a smaller measured income than the European monarchs of the Middle Ages, but I suspect that Tudor King Henry VIII would have traded half his kingdom for modern plumbing, a lifetime supply of antibiotics and access to the Internet.

In September of 2005, I wrote this post on the effort it takes to buy a high quality personal computer in 1989 and in 2004. High quality, of course, is relative to the time the computer was produced. In 1989:

It's a Tandy! It costs only $8,499! It's got 2 MB of RAM! It's got a 20 MHZ Intel 386 processor.

Today, I type this blog post on a Dell Dimension 8400 computer with a 3.4 GHZ Pentium 4 Processor and 512 MB of RAM with CD and DVD RW drives and a lot of other goodies! I think we paid around $1,500 or so for our Dell. My, how far computers have come in 16 years!

Think about it this way: in December of 1989, average hourly earnings were $9.97. In December of 2004, average hourly earnings were $15.85 (see here from the St. Louis Federal Reserve Bank Data Base). So, in 1989, the average worker would have to work approximately 850 hours (more than 20 weeks assuming a 40 hour work week) to earn enough (pre tax) cash to buy a 386. In 2004, the average worker would have to work less than 100 hours to earn enough pre tax cash to buy a Dell Dimension like I describe above.

But back to Landsburg's column. Who planned this explosion in well-being?

The source of this wealth -- the engine of prosperity -- is technological progress. And the engine of technological progress is ideas -- not just the ideas from engineering laboratories, but also ideas like new methods of crop rotation, or just-in-time inventory management. You can fly from New York to Tokyo partly because someone figured out how to build an airplane and partly because someone figured out how to insure it. I'm writing this on a personal computer instead of an electric typewriter partly because someone said, "Hey! I wonder if we can make computer chips out of silicon!" and partly because someone said "Hey! I wonder if we can finance startups with junk bonds!"

In other words, no one person planned it. No all-knowing, all-seeing directing body made it happen. It just happened bit by bit, increment by increment. One person doing his thing. Another person doing her thing. Little bits of coordination here. Little bits of coordination there. Trials here. Errors there. Everyone trying to make things better, even smallish improvements, for him or herself. People competing. People cooperating.

Wealth created.