Capital in the Twenty-First Century (16 page)

I turn now to the growth of per capita output. As noted, this was of the same order
as population growth over the period 1700–2012: 0.8 percent per year on average, which
equates to a multiplication of output by a factor of roughly ten over three centuries.
Average global per capita income is currently around 760 euros per month; in 1700,
it was less than 70 euros per month, roughly equal to income in the poorest countries
of Sub-Saharan Africa in 2012.
⁹

This comparison is suggestive, but its significance should not be exaggerated. When
comparing very different societies and periods, we must avoid trying to sum everything
up with a single figure, for example “the standard of living in society A is ten times
higher than in society B.” When growth attains levels such as these, the notion of
per capita output is far more abstract than that of population, which at least corresponds
to a tangible reality (it is much easier to count people than to count goods and services).
Economic development begins with the diversification of ways of life and types of
goods and services produced and consumed. It is thus a multidimensional process whose
very nature makes it impossible to sum up properly with a single monetary index.

Take the wealthy countries as an example. In Western Europe, North America, and Japan,
average per capita income increased from barely 100 euros per month in 1700 to more
than 2,500 euros per month in 2012, a more than twentyfold increase.
¹⁰
The increase in productivity, or output per hour worked, was even greater, because
each person’s average working time decreased dramatically: as the developed countries
grew wealthier, they decided to work less in order to allow for more free time (the
work day grew shorter, vacations grew longer, and so on).
¹¹

Much of this spectacular growth occurred in the twentieth century. Globally, the average
growth of per capita output of 0.8 percent over the period 1700–2012 breaks down as
follows: growth of barely 0.1 percent in the eighteenth century, 0.9 percent in the
nineteenth century, and 1.6 percent in the twentieth century (see
Table 2.1
). In Western Europe, average growth of 1.0 percent in the same period breaks down
as 0.2 percent in the eighteenth century, 1.1 percent in the nineteenth century, and
1.9 percent in the twentieth century.
¹²
Average purchasing power in Europe barely increased at all from 1700 to 1820, then
more than doubled between 1820 and 1913, and increased more than sixfold between 1913
and 2012. Basically, the eighteenth century suffered from the same economic stagnation
as previous centuries. The nineteenth century witnessed the first sustained growth
in per capita output, although large segments of the population derived little benefit
from this, at least until the last three decades of the century. It was not until
the twentieth century that economic growth became a tangible, unmistakable reality
for everyone. Around the turn of the twentieth century, average per capita income
in Europe stood at just under 400 euros per month, compared with 2,500 euros in 2010.

But what does it mean for purchasing power to be multiplied by a factor of twenty,
ten, or even six? It clearly does not mean that Europeans in 2012 produced and consumed
six times more goods and services than they produced and consumed in 1913. For example,
average food consumption obviously did not increase sixfold. Basic dietary needs would
long since have been satisfied if consumption had increased that much. Not only in
Europe but everywhere, improvements in purchasing power and standard of living over
the long run depend primarily on a transformation of the structure of consumption:
a consumer basket initially filled mainly with foodstuffs gradually gave way to a
much more diversified basket of goods, rich in manufactured products and services.

Furthermore, even if Europeans in 2012 wished to consume six times the amount of goods
and services they consumed in 1913, they could not: some prices have risen more rapidly
than the “average” price, while others have risen more slowly, so that purchasing
power has not increased sixfold for all types of goods and services. In the short
run, the problem of “relative prices” can be neglected, and it is reasonable to assume
that the indices of “average” prices published by government agencies allow us to
correctly gauge changes in purchasing power. In the long run, however, relative prices
shift dramatically, as does the composition of the typical consumer’s basket of goods,
owing largely to the advent of new goods and services, so that average price indices
fail to give an accurate picture of the changes that have taken place, no matter how
sophisticated the techniques used by the statisticians to process the many thousands
of prices they monitor and to correct for improvements in product quality.

In fact, the only way to accurately gauge the spectacular increase in standards of
living since the Industrial Revolution is to look at income levels in today’s currency
and compare these to price levels for the various goods and services available in
different periods. For now, I will simply summarize the main lessons derived from
such an exercise.
¹³

It is standard to distinguish the following three types of goods and services. For
industrial goods, productivity growth has been more rapid than for the economy as
a whole, so that prices in this sector have fallen relative to the average of all
prices. Foodstuffs is a sector in which productivity has increased continuously and
crucially over the very long run (thereby allowing a greatly increased population
to be fed by ever fewer hands, liberating a growing portion of the workforce for other
tasks), even though the increase in productivity has been less rapid in the agricultural
sector than in the industrial sector, so that food prices have evolved at roughly
the same rate as the average of all prices. Finally, productivity growth in the service
sector has generally been low (or even zero in some cases, which explains why this
sector has tended to employ a steadily increasing share of the workforce), so that
the price of services has increased more rapidly than the average of all prices.

This general pattern is well known. Although it is broadly speaking correct, it needs
to be refined and made more precise. In fact, there is a great deal of diversity within
each of these three sectors. The prices of many food items did in fact evolve at the
same rate as the average of all prices. For example, in France, the price of a kilogram
of carrots evolved at the same rate as the overall price index in the period 1900–2010,
so that purchasing power expressed in terms of carrots evolved in the same way as
average purchasing power (which increased approximately sixfold). An average worker
could afford slightly less than ten kilos of carrots per day at the turn of the twentieth
century, while he could afford nearly sixty kilos per day at the turn of the twenty-first
century.
¹⁴
For other foodstuffs, however, such as milk, butter, eggs, and dairy products in
general, major technological advances in processing, manufacturing, conservation,
and so on led to relative price decreases and thus to increases in purchasing power
greater than sixfold. The same is true for products that benefited from the significant
reduction in transport costs over the course of the twentieth century: for example,
French purchasing power expressed in terms of oranges increased tenfold, and expressed
in terms of bananas, twentyfold. Conversely, purchasing power measured in kilos of
bread or meat rose less than fourfold, although there was a sharp increase in the
quality and variety of products on offer.

Manufactured goods present an even more mixed picture, primarily because of the introduction
of radically new goods and spectacular improvements in performance. The example often
cited in recent years is that of electronics and computer technology. Advances in
computers and cell phones in the 1990s and of tablets and smartphones in the 2000s
and beyond have led to tenfold increases in purchasing power in a very short period
of time: prices have fallen by half, while performance has increased by a factor of
5.

It is important to note that equally impressive examples can be found throughout the
long history of industrial development. Take the bicycle. In France in the 1880s,
the cheapest model listed in catalogs and sales brochures cost the equivalent of six
months of the average worker’s wage. And this was a relatively rudimentary bicycle,
“which had wheels covered with just a strip of solid rubber and only one brake that
pressed directly against the front rim.” Technological progress made it possible to
reduce the price to one month’s wages by 1910. Progress continued, and by the 1960s
one could buy a quality bicycle (with “detachable wheel, two brakes, chain and mud
guards, saddle bags, lights, and reflector”) for less than a week’s average wage.
All in all, and leaving aside the prodigious improvement in the quality and safety
of the product, purchasing power in terms of bicycles rose by a factor of 40 between
1890 and 1970.
¹⁵

One could easily multiply examples by comparing the price history of electric light
bulbs, household appliances, table settings, clothing, and automobiles to prevailing
wages in both developed and emerging economies.

All of these examples show how futile and reductive it is to try to sum up all these
change with a single index, as in “the standard of living increased tenfold between
date A and date B.” When family budgets and lifestyles change so radically and purchasing
power varies so much from one good to another, it makes little sense to take averages,
because the result depends heavily on the weights and measures of quality one chooses,
and these are fairly uncertain, especially when one is attempting comparisons across
several centuries.

None of this in any way challenges the reality of growth. Quite the contrary: the
material conditions of life have clearly improved dramatically since the Industrial
Revolution, allowing people around the world to eat better, dress better, travel,
learn, obtain medical care, and so on. It remains interesting to measure growth rates
over shorter periods such as a generation or two. Over a period of thirty to sixty
years, there are significant differences between a growth rate of 0.1 percent per
year (3 percent per generation), 1 percent per year (35 percent per generation), or
3 percent per year (143 percent per generation). It is only when growth statistics
are compiled over very long periods leading to multiplications by huge factors that
the numbers lose a part of their significance and become relatively abstract and arbitrary
quantities.

To conclude this discussion, consider the case of services, where diversity is probably
the most extreme. In theory, things are fairly clear: productivity growth in the service
sector has been less rapid, so that purchasing power expressed in terms of services
has increased much less. As a typical case—a “pure” service benefiting from no major
technological innovation over the centuries—one often takes the example of barbers:
a haircut takes just as long now as it did a century ago, so that the price of a haircut
has increased by the same factor as the barber’s pay, which has itself progressed
at the same rate as the average wage and average income (to a first approximation).
In other words, an hour’s work of the typical wage-earner in the twenty-first century
can buy just as many haircuts as an hour’s work a hundred years ago, so that purchasing
power expressed in terms of haircuts has not increased (and may in fact have decreased
slightly).
¹⁶

In fact, the diversity of services is so extreme that the very notion of a service
sector makes little sense. The decomposition of the economy into three sectors—primary,
secondary, and tertiary—was an idea of the mid-twentieth century in societies where
each sector included similar, or at any rate comparable, fractions of economic activity
and the workforce (see
Table 2.4
). But once 70–80 percent of the workforce in the developed countries found itself
working in the service sector, the category ceased to have the same meaning: it provided
little information about the nature of the trades and services produced in a given
society.

In order to find our way through this vast aggregate of activities, whose growth accounts
for much of the improvement in living conditions since the nineteenth century, it
will be useful to distinguish several subsectors. Consider first services in health
and education, which by themselves account for more than 20 percent of total employment
in the most advanced countries (or as much as all industrial sectors combined). There
is every reason to think that this fraction will continue to increase, given the pace
of medical progress and the steady growth of higher education. The number of jobs
in retail; hotels, cafés, and restaurants; and culture and leisure activities also
increased rapidly, typically accounting for 20 percent of total employment. Services
to firms (consulting, accounting, design, data processing, etc.) combined with real
estate and financial services (real estate agencies, banks, insurance, etc.) and transportation
add another 20 percent of the job total. If you then add government and security services
(general administration, courts, police, armed forces, etc.), which account for nearly
10 percent of total employment in most countries, you reach the 70–80 percent figure
given in official statistics.
¹⁷