Nineteenth Century Inequality Not As Bad As We Think
A proper interpretation of consumption data shows that the 1800s fostered an egalitarian shift in wealth distribution.
Joakim Book —
When prices change, how that impacts people depends crucially on which prices increase and what goods and services people are consuming. Across the western world, price inflation–the rate at which prices increase–has been relatively slow for over a decade. Central bankers have consistently undershot their inflation targets despite their careful implentation of complex monetary policy.
The supposed dearth of inflation might seem like small comfort–or a cruel joke–to the Californian hipster paying $15 for a smoothie bowl, the German renter whose rents are increasing at a stunning rate or the London young professional shoveling out £5 for an unimpressive lunch sandwich. The larger the diversity in consumption patterns, the less appropriate it is to aggregate price changes into a general price index such as CPI or PCE statistics.
One reason for the dissonance between official figures and real-world experience is the weight that statisticians place on various items when constructing a consumer price index (e.g. the Bank of England’s CPI; the ECB’s HICP; the Fed’s PCE). For instance, in the price index used by the European Central Bank, housing costs make up only 17% of the index, whereas the Federal Reserve places a 24% weight on housing expenses. That divergence turns a 25% increase in housing costs–with all other prices and consumption patterns held constant–into a 4.25% overall inflation in the Eurozone but a 6% inflation in the U.S.
While policymakers are aware of those data limitations and we have standardized statistical ways to adjust for quality improvements, these problems can still cause headaches. One illustrative example is the impact of iPhone prices on Sweden’s price index; Martin Enlund, FX strategist at Nordea, estimates that the quality adjustment of iPhones alone reduced the reported price increase by 0.1 percentage points every year for the last 5 years.
That minor detail has some implication for our modern world, considering that the Riksbank’s interest rate decisions have turned on such small margins before. Looking at these differences in consumption bundles and quality adjustments over longer historical periods, they quickly become astronomical. In a famous paper, Nobel Laureate William Nordhaus surveyed “lumens”–a unit for light–emitted by various sources throughout the centuries. Nordhaus estimated the price of light, the essential service its originators provide us with, to have fallen by 99.97% between 1800 and 1992.
Over decades or centuries, even small differences can result in very large adjustments when we evaluate past incomes. For instance, how much better is a computer as a calculating tool than an abacus? Is a keyboard and word processor ten, fifty or a hundred times better than quills, ink, and bulky, slowly decaying paper?
A recent study by Vincent Geloso and Peter Lindert makes a big deal out of consumption bundles. By disaggregating purchases by working classes and upper classes, they make a revolutionary discovery: beginning earlier than we used to believe, the poor’s standards of living improved faster than those of the rich. Contrary to the tired claim that capitalism involves the rich getting richer while the poor get poorer, it seems that during the 19th century the opposite was true.
The authors reach this conclusion by using different consumption bundles for two different income segments. People’s standards of living depend on what they themselves consume, not on what they could buy if they had the rich’s consumption patterns:
“[T]he contrasts that matter are contrasts in individuals’ abilities to buy what they care to buy, or need to buy, and not the (nominal) inequality in their ability to buy the same common bundle as some other class could buy.”
The components that drove this extraordinary reduction in cost of living, argue Geloso and Lindert, were falling prices of grain-based foods and a rise in the relative price of services that the poorer classes supplied (mostly wage rates for common labor).
The American rise in inequality over the nineteenth century, using both top-1% / bottom-99% and top-10% / bottom-40% metrics, is much less pronounced than previously believed. The authors conclude:
“[T]he ‘nineteenth-century’ period 1815–1914 brought a clearly egalitarian shift in the price structure for all four countries—England, Canada, the USA, and post-1850 Australia. The net change over these 100 years is unmistakable.”
A century before Paul Ehrlich would predict imminent starvation in the entire world (specifically in what he thought was a remarkably backwards India), the world surplus of grains had enriched the poor–even in the “dark Satanic mills” of Britain. The lower relative price of grains mitigated and partly reversed the economic inequality we tend to associate with the nineteenth century.
The exact bundles used to measure consumption matter greatly for understanding prosperity, today as well as in the past.
Amazon and Walmart Compete to Better Serve Rural Communities
“Many rural online shoppers are used to waiting half a week or longer for purchases to arrive. Amazon, which disclosed its $4 billion rural delivery push last year, has narrowed that to less than 24 hours for 1 in 5 rural and small-town households, according to a Bloomberg analysis of delivery times for commonly purchased items. The company offers 48-hour delivery to 62% of rural households, the analysis found.
The payoff could be huge. Rural shoppers in the US collectively spend $1 trillion a year on clothing, electronics, household goods and other items, representing about 20% of retail purchases excluding cars and gasoline, according to Morgan Stanley. Amazon aims to recondition those shoppers to expect quick delivery, which would play to its strengths and make the company top-of-mind for online purchases.
Amazon’s biggest obstacle is Walmart Inc., which claimed the heartland decades ago during an aggressive expansion on its path to become the world’s largest retailer. Walmart has spent years training rural shoppers to come to its stores for groceries and then snag clothes, TVs and crockpots while there. It has a big head start on Amazon in proximity, with stores and Sam’s Clubs located within a 10-mile drive of nearly two-thirds of rural households, Bloomberg’s analysis shows. Walmart is also upping its e-commerce game, turning its thousands of locations into delivery hubs and pickup locations for products ordered online.”
India’s Recent Durables Goods and Asset Ownership Progress
“This study compares the Household Consumption Expenditure Survey 2023–24 with 2011–12 and finds significant advancements in spending on durables goods and ownership of key durable assets. These changes represent shifting priorities and aspirations for consumption among Indian households and improvements in quality of life. Additionally, our analysis focuses on the Bottom 40 (B40) percent of the households by consumption, which have been extensively targeted through programs of the Government of India and state governments. Studying the consumption and ownership trends of these households is an important measure of the effectiveness of welfare policies. Consumption patterns of households have transformed significantly over the last decade with households spending a smaller portion of the monthly per capita expenditure (MPCE) on food items. Across the three components – food items, consumables and services, and durable goods the share of food has fallen to less to than 50% in both sectors. Consequently, a greater share of household consumption expenditure is now non-food spending on consumables and services, and durable goods. Consumables and services are the largest component of household spending in urban areas.”
Drone Deliveries, Slow to Take Flight, Come to Silicon Valley
“The hype around drones may finally be starting to deliver.
Drone deliveries, first touted by Amazon more than a decade ago, are slowly taking off in some parts of the U.S. On Thursday, Matternet, a drone delivery startup, launched its service to Silicon Valley…
The announcement adds to signs of growth for drone delivery. In Fort Worth, Texas, which recently became the first major city in the United States to offer commercial drone deliveries, they’re being used to deliver groceries from WalMart.
In College Station, Texas, Amazon’s drone delivery service has become common enough for residents to see the service as a noisy nuisance. And, with recent FAA approval, the company seems set to expand drone delivery operations across the city and beyond.
Experts say many of the obstacles to drone delivery, most notably the technology and regulations, have been hurdled.”
Ro Launches GLP-1 Supply Tracker to Mitigate Shortages
“Telehealth company Ro on Wednesday launched a new tracker to help patients find a popular class of weight loss and diabetes drugs called GLP-1s amid shortages of those treatments in the U.S.
The supply tracker could be a valuable tool for many Americans scrambling to get their hands on GLP-1s, such as Novo Nordisk’s weight loss injection Wegovy and diabetes drug Ozempic.”