January 2011

A third complication caused by the Industrial Revolution is that technologies that serve the same function at different times often cannot be readily compared in economic terms.

In the nineteenth century housework was done by hand or by servants (hired hands). Today washing machines, food processors, dryers, Scotchgard, dishwashers, vacuum cleaners, wash-and-wear clothes, and a host of other inventions have changed matters completely. Although the real cost of a maid has increased greatly over the last hundred years, the need to have one has drastically diminished.

There is a quick way to determine approximately how much time is required for anything that is compounding to double, whether it be a national economy, a sum of money in a bank account, or even, theoretically, rabbits in a hutch. Simply divide the annual percentage of increase into 72. Thus something that is growing at 10 percent a year will double in 7.2 years.

In a free market, if the price of a commodity, such as sugar, drops substantially, the price of everything made with that commodity—candy, bakery products, soft drinks—will drop as well, and the effects of the new price will ripple through the economy. If the price of something used in every commodity plunges, however, a tidal wave of change may result and a new economic universe be created.

The collapse in the prices of transportation in the first half of the nineteenth century produced just such a fundamental transformation. Cheap transportation created an integrated, worldwide economy out of a myriad of local ones. Writing in the 1880s, the American economist Arthur T. Hadley noted that “two generations ago, the expense of cartage was such that wheat had to be consumed within two hundred miles of where it was grown. Today, the wheat of Dakota, the wheat of Russia, and the wheat of India come into direct competition. The supply at Odessa is an element in determining the price in Chicago.”

One very important consequence of both the Industrial Revolution and the Information Revolution has been the steady increase in the value of human labor. Between 1900 and 1970 the average annual wage of American workers, net of inflation, rose by a factor of three. Again, there is more than one reason. The first is that as machines have taken over more and more of the physical work and routine calculations, humans have been able to concentrate on other, more wealth-creating tasks. (Of course, that is a long-term trend. In the short term, there are often severe dislocations as machines compete with and replace human beings in the old jobs.)

The second is that as physical capital has been built up, the productivity of workers has increased. More goods and services are produced for every hour of human labor utilized, and the workers have gotten a share of this. Needless to say, the owners of the physical capital did not volunteer this sharing. The rise of the union movement was another factor in the increase in real wages.

There would seem to be little disagreement that “rich is better,” and since the end of World War II the world economy has been generating enormous private wealth. In the last two decades especially, as Germany and Japan recoved from the war and turned into economic superpowers, the numbers of the very, very rich have grown by leaps and bounds. In 1988 Fortune magazine listed 129 billionaires in the world and didn’t even bother to list those who possess mere tens and hundreds of millions of dollars.

Being rich, of course, is supposed to allow you to have not only the necessities of life but its luxuries as well. Unfortunately, the supply of some luxuries is fixed, and as the numbers of rich people grow, the price of these luxuries soars. Mercedes, presumably, will always be willing to roll out one more 560 SL to satisfy demand, but the sturgeon of the Caspian Sea are not so accommodating. The amount of top-grade caviar is strictly, ineluctably limited.

A newspaper article the other day informed me that the late 1930s are back in fashion. Historical societies are girding to protect Art Deco. The clarinet of Benny Goodman is heard on compact discs. Designers are filching illustrations and typefaces from The Saturday Evening Post. If the trend continues, we may shortly be revisited by dotted swiss housedresses, junket rennet custard, the wimple, and the Studebaker sedan.

L.P. Hartley began his masterly novel The Go-Between with the words “The past is a foreign country: they do things differently there.” No-where is this difference with the past more apparent than in the realm of getting and spending, for like most foreign countries, the past uses a money different from ours, and the historian must somehow translate its value into modern terms.

This seemingly simple imperative turns out to be one of the most intractable problems a historian faces. Indeed, there is no simple solution. But there are some helpful rules to guide the way. Let’s begin by considering a famous New York real estate deal.

In 1917, Morton F. Plant—a man who got off to a brisk start in life by inheriting his father’s railroad fortune—sold his Fifth Avenue mansion to the jewelry firm of Cartier for $1,200,000. Instead of taking the money, however, Mr. Plant took it out in trade, exchanging his house for a “two-strand, Oriental pearl necklace.”

First, the goods that people actually buy change significantly over time. (In 1900 we bought a lot of oats to feed horses; in 1986 we bought a lot of gasoline to run automobiles. The per capita consumption of electricity in the United States has multiplied more than 135 times in this century.) Therefore, the more separated in time two dates are, the less meaningful in realworld terms is any relationship between them that is based on the CPI.

Second, inflation is by no means the only factor to affect prices over time, as a quick look at the mansion and the necklace again will demonstrate. Between 1917 and ) 1986 prices inflated about 8.5 times in dollar terms. Morton Plant’s mansion and Cartier’s necklace should ’ then each be worth about $10,000,000 today. But they are not. The mansion is worth much more, the necklace much less.

The law of supply and demand is one of the great natural forces of the universe, as ineluctable as gravity. Unhappily for the world, the law—like Rodney Dangerfield and unlike gravity—gets no respect. Nobody would jump out a tenth-story window without intending to die. But a great many people, from historians to elected officials, ignore the law of supply and demand or simply declare it null and void to suit their purposes. Regardless, the law works its way inexorably.

In the case of the necklace and the mansion, the supply of mid-Manhattan land is fixed. There is just so much of it, and that is that. The Dutch made the greatest real estate deal in history when they bought the whole island for trinkets and blankets valued at sixty Dutch gulden. (An excellent example, by the way, of the difficulty of translating the value of money over time: What are sixty Dutch gulden of 1626 worth in today’s dollars? Tradition has said twenty-four for many generations.) Because the demand for Manhattan real estate has been rising ever since that time, the price has been rising steadily as well.

Because of rising real wealth, even if the price of a commodity stays the same, net of inflation, its price as a percentage of per capita annual income drops. In 1939, the first year of commercial television transmission in this country, a television set cost about five hundred dollars. But in 1939 that amounted to fully one-third of the average annual per capita income in this country, and very few people can afford to spend that much of a year’s pay on a luxury. Today five hundred dollars represents only about 3 percent of average annual per capita income. The luxury of 1939 has become the commonplace of 1989.

(Obviously this ignores inflation, but inflation would only change the numbers; it would not significantly affect the relationships. Also ignored is the fact that a 1939 television set was the size of a chest of drawers, had a tiny screen, could display only black-and-white images, and broke down.)