There is No Great Stagnation: Gas-Grill Parts Edition
Statistics don't tell the whole story.
Over the last several months Tyler Cowen’s short e-book The Great Stagnation (also in hardcover) has generated much discussion. Cowen argues that we have entered a period of very low growth that will extend into the foreseeable future because we have already picked all the “low-hanging fruit” of technological innovation.
Is it really true that growth has slowed so dramatically? Are Americans not seeing the increases in their economic well-being that prior generations did? It is true that money wages have grown far more slowly since the 1970s than before, and the same is true of median household incomes. However, there are numerous explanations for those data, including the fact that more of our total compensation comes from nonmonetary benefits and that flat median incomes are consistent with most people doing better if the incomes of new immigrants and labor market entrants are below the median.
Another line of criticism is that these aggregate data do not capture the real gains that households have seen. Rather than focus on major technological innovations, we should look at the ways in which applications of innovations make our lives easier. There have been no major technological changes to automobiles in the last few decades, but each year they get safer, more fuel efficient, and more convenient and comfortable. No, we don’t have flying cars, but the tires are much less likely to blow – and that’s hard to capture in economic statistics.
Inadequate Aggregates
Or think about the Internet. Critics point out that the traditional economic aggregates on which Cowen relies aren’t good at measuring how much it (along with other technologies) improves our lives. The falling cost of broadband and the ease of engaging in secure economic transactions have been boons to lives.
Economists frequently talk about economic growth in terms of reduced transactions costs. The easier it is for us to find exchange partners, make exchanges, and enforce contracts, the more exchanges will take place and the better off we will be. The Internet’s great economic contribution is in reducing transactions costs, whether in buying goods more easily, finding a romantic partner, or selling your old baseball card collection on eBay.
About a week ago, while grilling chicken breasts, I realized that the heat distribution plate on my four-year-old grill was pretty much shot. If this were 15 years ago or more, I would have had to find the time to call propane stores to see who carried the part for my brand and drive back and forth (assuming a store was nearby) to get it. But today I simply put the brand and model number into Google and in about 30 seconds discover that the part is available from Amazon.com — in a porcelain-covered version at that. A few mouse clicks later the piece is on its way to my house without my ever leaving my desk chair.
Income Gain
The lesson is that what seem like the most obvious measures of economic growth might not tell the full story. The dramatic decline in transaction costs necessary to buy the replacement part is a huge gain in real income. The time I saved, not to mention the money I saved thanks to Amazon’s size compared to a small propane store, makes me richer. I could devote the time to a variety of other things: earning income, enjoying consumption, or anything else I prefer. Even the cost of shipping is likely less than the time and gasoline it might have taken to find and visit the propane store.
It’s also worth noting that I bought the grill, fully assembled, from Walmart at a reasonable price, one far less in labor hours than it would have cost 25 years ago.
The story of my grill is something of a modern miracle, the real gains from which are probably only apparent to those of us who can remember how things used to be. As existing technology continues to get tweaked at the margins, we will live better and better lives even if traditional economic data make it seem as though we are stagnating.
Comment by Eric Hosemann on 15 September 2011:
To think that the subtitle of Marginal Revolution is “Small steps to a much better world!”
Comment by Richard W. Fulmer on 15 September 2011:
This is a great example of our inability to measure important economic phenomena – in this case falling transaction costs. There are a few things we can measure, however, including how people vote with their feet and with their money. People and capital tend to move toward freedom: from East Germany to West, from North Korea to South, from Havana to Miami, from California to Texas.
Comment by Kevan on 15 September 2011:
… and after Texas, Heaven is about all that’s left!
Comment by Augie on 15 September 2011:
The real cost computed in the number of your labor hours to purchase something is the only good way to compared to 10,20,30 years ago. It costs me 20 minutes of labor each day to buy my cigarettes, compared to 10 minutes 40 years ago.
Comment by Deefburger on 15 September 2011:
I like Texans generally, but I will not trade Northern Cali for Texas! LA can move there if they like…..
Comment by Augie on 15 September 2011:
On the other hand, since most products seem to break or fall a part far quicker than older well-made products the comparison is faulty. I would need to buy 10 toasters in a lifetime now, whereas two of the well-built quality ones in the 40s would be needed–and perhaps passed on to the children.
Comment by Steve Horwitz on 15 September 2011:
If today’s toaster is sufficiently cheaper, then you may well be better off with the lower-quality product. The lower prices has also expanded the number of people who can afford one.
Comment by Steve Horwitz on 15 September 2011:
And I did the calculations looking at both a toaster and toaster-oven from a 1975 Wards catalog and the nearest equivalent at Walmart.com today.
Toaster: 1975 required 5.24 hours at the average private industrial wage, while today the toaster can be bought with 51 minutes of labor. Today’s toaster is about 1/6th the real price.
Toaster-oven: 1975 required 8.19 hours of labor, 2011 1.18 hours, so almost 1/8th the price.
Bottom line: unless those products are breaking lasting 1/6 or 1/8 as long as before, you’re ahead by buying new ones.
Comment by Charlie on 15 September 2011:
I tend to agree with Augie, Dr. Horwitz, in terms of product quality vs. cost.
True, in dollars, you might be better off, but what about the other costs? The wasted materials, wasted labor, wasted engineering time, and wasted shelf-space- selling an inferior product that wastes resources of all kind- labor, material, distribution and marketing.
Creating a disposable society is something I cannot, for any reason, get behind. It encourages, and to a great degree, demands, lack of thrift, lack of restraint in spending (beyond thrift, that is,) and forfeits all that helped previous generations prosper- spending as little as possible by buying a product once, and banking the difference.
It teaches our children that it’s okay to make sub-standard, poor quality junk and that replacing junk with junk is normal and proper behavior. Rubbish- at least that theory is to me.
While there is a benefit to enabling more people to afford stuff- and speaking as someone who’s never made a lot of money, I appreciate that, the bottom line is I would rather spend the money once and not have to replace something. With lower price/quality items, even higher-priced goods have decreased in quality in my observation, many being made by the same companies that have a one-size-fits-all procedure someplace overseas.
Value and cheap are two different things. We’re forgetting the difference.
Comment by Troy Camplin on 15 September 2011:
eHarmoney lowered my transactions costs back in 1995, and now I have two children and a third on the way (which actually has increased a variety of other costs, but that’s okay — I’m pretty fond of the bunch I’ve got).
Comment by Steve Horwitz on 15 September 2011:
Charlie,
If you want to pay more for higher quality, please go right ahead. You can still find very expensive toasters that will last much longer. Frankly, I think it’s better that more people in the US and globally are able to afford these sorts of electronics and appliances and that they are SO cheap that even folks of modest incomes now have money leftover to enjoy more/better food, air conditioning, a cell phone, more health care, etc..
You might call it a disposable society. I call it one in which the value of human labor is so high that the real cost of these things has fallen so much and where we have better things to do with our time than fix old appliances. The very fact that more things are disposable is a sign of our wealth and, I would argue, a society that is not more disposable, but more humane.
Comment by Econophile on 15 September 2011:
All that is true up to a point. But while as an ardent free market Austrian theory capitalist I think capitalism is a wonderful thing, I don’t think you are focusing on the the harm and destruction that the boom-bust cycle has done to us. Critics of capitalism point to these statistics as capitalism’s failure and while I appreciate you are trying to point out the benefits, I think you are off the mark. We ARE going backward. Even if you say we are materially better off because goods are better values, that is not enough to offset the harm. If inflation adjusted income is back to the 1996 level, you have to admit that something is wrong. We can argue whether the measures of inflation are proper or not, but under the government’s own measure (probably the most benign) we are doing worse than just a few years ago. I appreciate the cheer leading, but the proper focus is on the failures of Keynesian boom-bust cycles.
Comment by Mark Plus on 15 September 2011:
I have a question for Austrian economists: I’ve noticed that the Mises Institute has digitized many books by Mises, Rothbard and similar authors, and it gives them away for free over the internet, like Jehovah’s Witnesses’ literature or something. Apparently the Mises Institute has had to do that because not enough people want to pay money for these books in old-fashioned paper formats.
If the Mises Institute can’t charge prices for these digital books, how does it know how many to “produce” (digitally copy) and give away without causing economic chaos?
Comment by Gary on 16 September 2011:
A digital copy isn’t produced until a customer requests it. Exactly the right number of copies is produced. One for each customer. That’s the beauty of digital information, no physical inventory to collect dust or take up valuable real estate.
Some things, tobacco products for instance, have increased in cost because of government imposed taxes. What used to be taxed at 25 cents per unit is now taxed at $2.50 per unit.
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