Wealth has to be measured with a yardstick belonging to the same time when that wealth exists: labour power
Branko Milanović is an economist specialised in development and inequality. His newest book is “Capitalism, Alone: The Future of the System That Rules the World”
Cross-posted from Branko’s blog
To read the previous article on the topic, “What is wealth?”, by Branko Milanović, go here
A few days ago I wrote a post on wealth comparisons overtime. I have done such a comparison myself in “The haves and the have-nots” and have used Adam Smith’s argument that person’s wealth ought to be measured in the amount of labor he commands. In other words, wealth needs to be measured in its historical context. I gave two examples of misleading wealth comparisons: over time, when we try to use the same bundle of commodities to compare Croesus and Bezos, and when we conflate wealth and power.
Here I would like to explain a bit more the problems with historical comparisons of wealth (or income) because they have direct bearing on our understanding of the past, and raise also some essentially philosophical points.
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 unfolding through reduced cost of artificial lighting, the approach that Angus Maddison (in “Contours of the World Economy: 1-2030”) termed a “hallucinogenic 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 favourite 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. But thus, equally clearly, rich Romans were not poor either. In other words, we cannot compare wealth of vastly different epochs by using one yardstick, whether it be the yardstick of the past (which is on balance more reasonable) or the yardstick of the present. This is a well-known problem for empirical economic historians. If time-periods are not vastly apart, or rather if technologies and consumption baskets are not vastly different, we can perhaps use some equal weighting of the baskets (½ of the past and ½ of the present). But that clearly will not do for the very remote periods.
This is why wealth has to be measured with a yardstick belonging to the same time when that wealth exists.* And this is why Adam Smith’s approach seems the only one that makes sense. No other commodity but labour power (an hour of unskilled work) is both as unchanged over time in terms of effort exerted, and yet paid the equivalent of different amounts of real goods and services reflecting the general level of productivity of a society. It is both covariant with wealth and an unvarying numeraire.
Angus Maddison who created the original series comparing incomes of countries over a very long-run was perfectly aware of the problem. He directed his scorn towards those who believed that looking at the past through our today’s lenses made them treat everybody who lived then as “cavemen”: “[Such authors as] Nordhaus and DeLong have constructed fairytale scenarios that greatly exaggerate progress since 1800, before which they seem to believe that people lived like cavemen. These views are fundamentally wrong.”
* The same problem technically applies to cross-country comparisons at a given point in time. However with globalization which brings similarity in technologies and consumption patterns across the world the comparisons are much more meaningful.