There is another mechanism whereby growth can contribute to the reduction of inequality, or at least to a more rapid circulation of elites, which must also be discussed. This mechanism is potentially complementary to the first, although it is less important and more ambiguous. When growth is zero or very low, the various economic and social functions as well as types of professional activity, are reproduced virtually without change from generation to generation. By contrast, constant growth, even if it is only 0.5 or 1 or 1.5 percent per year, means that new functions are constantly being created and new skills are needed in every generation. Insofar as tastes and capabilities are only partially transmitted from generation to generation (or are transmitted much less automatically and mechanically than capital in land, real estate, or financial assets are transmitted by inheritance), growth can thus increase social mobility for individuals whose parents did not belong to the elite of the previous generation. This increased social mobility need not imply decreased income inequality, but in theory it does limit the reproduction and amplification of inequalities of wealth and therefore over the long run also limits income inequality to a certain extent.
One should be wary, however, of the conventional wisdom that modern economic growth is a marvelous instrument for revealing individual talents and aptitudes. There is some truth in this view, but since the early nineteenth century it has all too often been used to justify inequalities of all sorts, no matter how great their magnitude and no matter what their real causes may be, while at the same time gracing the winners in the new industrial economy with every imaginable virtue. For instance, the liberal economist Charles Dunoyer, who served as a prefect under the July Monarchy, had this to say in his 1845 book De la liberté du travail (in which he of course expressed his opposition to any form of labor law or social legislation): “one consequence of the industrial regime is to destroy artificial inequalities, but this only highlights natural inequalities all the more clearly.” For Dunoyer, natural inequalities included differences in physical, intellectual, and moral capabilities, differences that were crucial to the new economy of growth and innovation that he saw wherever he looked. This was his reason for rejecting state intervention of any kind: “superior abilities … are the source of everything that is great and useful.… Reduce everything to equality and you will bring everything to a standstill.”8 One sometimes hears the same thought expressed today in the idea that the new information economy will allow the most talented individuals to increase their productivity many times over. The plain fact is that this argument is often used to justify extreme inequalities and to defend the privileges of the winners without much consideration for the losers, much less for the facts, and without any real effort to verify whether this very convenient principle can actually explain the changes we observe. I will come back to this point.
The Stages of Economic Growth
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.
What Does a Tenfold Increase in Purchasing Power Mean?
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 ha
s 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.
Growth: A Diversification of Lifestyles
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
Note that an important part of these services, especially in health and education, is generally financed by taxes and provided free of charge. The details of financing vary from country to country, as does the exact share financed by taxes, which is higher in Europe, for example, than in the United States or Japan. Still, it is quite high in all developed countries: broadly speaking, at least half of the total cost of health and education services is paid for by taxes, and in a number of European countries it is more than three-quarters. This raises potential new difficulties and uncertainties
when it comes to measuring and comparing increases in the standard of living in different countries over the long run. This is not a minor point: not only do these two sectors account for more than 20 percent of GDP and employment in the most advanced countries—a percentage that will no doubt increase in the future—but health and education probably account for the most tangible and impressive improvement in standards of living over the past two centuries. Instead of living in societies where the life expectancy was barely forty years and nearly everyone was illiterate, we now live in societies where it is common to reach the age of eighty and everyone has at least minimal access to culture.
In national accounts, the value of public services available to the public for free is always estimated on the basis of the production costs assumed by the government, that is, ultimately, by taxpayers. These costs include the wages paid to health workers and teachers employed by hospitals, schools, and public universities. This method of valuing services has its flaws, but it is logically consistent and clearly more satisfactory than simply excluding free public services from GDP calculations and concentrating solely on commodity production. It would be economically absurd to leave public services out entirely, because doing so would lead in a totally artificial way to an underestimate of the GDP and national income of a country that chose a public system of health and education rather than a private system, even if the available services were strictly identical.
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