Wednesday , April 1 2020

Who is Wealthy?

Summary:
Branko Milanovic argues against comparing wealth over time: The difficulty of measurement of wealth between different periods derives not only because of our lack of data for most of the past but from the inability to meaningfully compare wealth or consumption patterns in the past with those of today. Some economists believe that if people in the past did not have certain amenities that we have today they must have been infinitely poorer. This is what one finds in Nordhaus and DeLong’s view of historical progress as unfolfding through reduced cost of artificial lighting, the approach that Angus Maddison (in “Contours of the World Economy: 1-2030”) termed a “hallucigenic history”. The logic of such authors is as follows. Take the example of artificial lighting or voice recording. For

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argues against comparing wealth over time:

The difficulty of measurement of wealth between different periods derives not only because of our lack of data for most of the past but from the inability to meaningfully compare wealth or consumption patterns in the past with those of today. Some economists believe that if people in the past did not have certain amenities that we have today they must have been infinitely poorer. This is what one finds in Nordhaus and DeLong’s view of historical progress as unfolfding through reduced cost of artificial lighting, the approach that Angus Maddison (in “Contours of the World Economy: 1-2030”) termed a “hallucigenic history”.

The logic of such authors is as follows. Take the example of artificial lighting or voice recording. For Julius Caesar to read a book overnight, easily move at night around his palace, or listen to the songs he liked would have required perhaps hundreds of workers (slaves) to hold the torches or sing his favorite arias all night. Even Caesar, if he were to do that night after night, might, after some time, have run out of resources (or might have provoked a rebellion among the singers). But for us the expense for a similar pleasure is very small, even trivial, say $2 per night. Consequently, some people come to the conclusion that Caesar must have had tiny wealth measured in today’s bundle of goods since a repeated small nightly expense of $2 (in today’s prices) would have eventually ruined him. Other people at Caesar’s time had obviously much less: ergo, the world today is incomparably richer than before, and people then must have felt horribly poor and deprived of all pleasurable things. (Even if you cannot feel deprived of the things you do not know exist.)

The logic seems at first reasonable even if somewhat extreme. But it is not reasonable. Let’s extend this logic, now in a different direction, from us today to the next 500 years. Suppose that in 500 years people are able to choose for their vacation between Mars, Venus, Pluto or perhaps even to go further than that. Suppose they can fly around our solar system, go to the bottom of the ocean, zip from one end of the Earth to another in a few minutes, or do lots of fun things that we cannot imagine today, no more than Caesar could have imagined that his singers’ voices could be recorded on a tiny chip and reproduced ad infinitum at almost no cost. And when we then look at Jeff Bezos’ wealth today using the consumption opportunities of the future, that wealth is likely to look to us –from the vantage point of 500 years hence- insignificant. Bezos might be rich in our own terms, but he cannot fly to Mars this weekend, no matter how much he tries.

So should we then absurdly turn around and claim that Jeff Bezos, Bill Gates et al. are poor? Clearly not.

I am baffled by the last two sentences. Bezos and Gates clearly are poor relative to people in the future who can choose to vacation on Mars. It seems absurd to me to think otherwise. Jeff Bezos has four children. Suppose one of them had cancer. If he could, do you think Bezos would hesitate for one minute to spend a billion dollars buying the medicine that will be available to an ordinary American in the year 2050? How much would Bezos pay for an extra 10 years of life? What about an extra 100? How much for a bionic eye, a dozen extra points of IQ, or freedom from Alzheimer’s disease?

Or put it the other way. How much wealthier would you have to be to want to live in 1950, 1900 or 1850? I can come up with numbers for 1950 and 1900 but I think I would prefer my income and lifestyle today to anyone’s income and lifestyle in 1850. Dentist anyone? I’d also prefer it if my wife didn’t die in childbirth.

Branko argues that comparisons of wealth across long time periods are impossible, meaningless, even “hallucinogenic.” I think he has it backwards. It’s quite difficult to compare wealth over fairly short periods. Am I wealthier than my father was at my age (he was also a professor). Maybe. Maybe not. We consume somewhat different bundles. I have Netflix and a nicer car. He had a nicer house. But am I wealthier than my grandfather? Absolutely. On either side.

The post Who is Wealthy? appeared first on Marginal REVOLUTION.

Alex Tabarrok
Alex Tabarrok is Bartley J. Madden Chair in Economics at the Mercatus Center at George Mason University and a professor of economics at George Mason University. He specializes in patent-system reform, the effectiveness of bounty hunters compared to the police, how judicial elections bias judges, and how local poverty rates impact trial decisions by juries. He also examines methods for increasing the supply of human organs for transplant, the regulation of pharmaceuticals by the FDA, and voting systems.

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