Part 2 of Chapter 2 looks at the growth, first acknowledging that worldwide economic growth has been absolutely incredible over the past two centuries, with worldwide per capita income up more than tenfold since 1700.  He adds some qualifiers,

“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, unmistakeable reality for everyone.” (pag e86-87)

Here is a four minute long video by Hans Reisling which makes much the same point in a rather impressive way!

 

That said, Thomas Piketty makes an excellent point about growth:

Economic development beings 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. (page 86)

In economics class I contrast our life to that of a Pharoah thousands of years ago.  We can hear any song we want whenever we want with the press of a button.  A pharaoh might be able to summon any musicians to his palace, but if they were elsewhere it might take over a week before they could return to Cairo and play the requested song.  Other modern products, from computers to telephones to cars to antibiotics to chocolate, where known in the Ancient World.  By contrast, certain things were relatively cheap, or at least cheaper, in the Ancient World:  land, servants, wood from huge old-growth trees.

Piketty continues,

In the short run (a few years), 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 (many decades+), however, relative prices shift dramatically as does th composition of the typical consumer’s basket of goods, owing largely to the advent of new goods and servies, 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…(page 87)

 

Thomas Piketty then looks at productivity growth by three main sectors: manufactured good, food, and services.  As a rule of thumb, industrial/manufacturing productivity growth is higher than that of the entire economy, agricultural productivity roughly equals that of the economy, and “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.”  Of course, sectors are by no means uniform, with productivity in certain areas rising faster than others.   (For example, in food, animal products and imported fruit have become a lot more plentiful/cheap, while local vegetables have become pricier relative to these.)

 

What we are seeing here is that, agricultural productivity increased a lot, but there’s only so much food people can eat, so most of that increase in productivity translated to fewer workers.  Manufacturing of course led to far more goods purchased, but even that has its limits.  As people become wealthier, there is greater demand for services, but since productivity growth has been slow (Think, for example, a barber or a house cleaner.  Both are barely more efficient today than a century ago.), this results in more workers in these sectors.

As an aside, I do wonder if we are going to see a spike in service sector productivity over the next few decades as intelligent robots do an increasingly large number of jobs.  That’s another discussion, but I wonder if we are headed toward a new paradigm, in which employment in the service sector will shrink in absolute terms, with neither other sector picking up the slack.  I suppose we will see.

 

 

Thomas Piketty gives a great example near and dear to my heart:  bicycles.  He compares the bicycle of the 1880, the cheapest one costing roughly half a year’s wages for the typical worker and ways dangerous, slow, and uncomfortable to ride , with bicycles of today.

 

A bicycle from 1880 (above), and me with my bicycle (below), which is used to commute to Berklee most days.  Here are some things my bike has that the bicycle from 1880 lacks:

• multiple gears (7 in this case).
• Folding rear pannier bags and a front basket.
• Flashing front lights, tail light, reflectors, and reflective tape.
• Inflatable tires (much softer than the solid rubber tires).
• Form-fitting gel seat.
• Fenders to prevent filth from splashing upward.
• Front and rear brakes, versus a barely-functional front brake if that.
• Rear-view mirror and bell.
• Lower to the ground for easier mount & dismount, plus less hazardous to fall off.

Including accessories, my bicycle cost under 3 days’ wages.  While I make above the median salary in this country, a bicycle such as this remains affordable to a majority, and there are many cheaper bicycles available as well!

 

 

 

This section ends with this table on growth, along with a prediction.  “The key point is that there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.”  Thomas Piketty continues that it’s hard to predict the future, and he can’t say whether per capita growth in advanced countries will be 0.5%, 1%, or 1.5% with a smaller chance of higher or lower.  He quotes economist Robert Gordon who believes that per capita output will fall below 0.5%/year and justified this guess with the claim that technologies are becoming less transformative in terms of economic growth.  (I’m reminded of a chapter in the book I use in class, 23 Things They Don’t Tell You About Capitalism by Ha-Joon Chang:  “Thing 4:  The washing machine has changed the world more than the internet has,” which makes a similar general claim.)

 

In economics, we talk about a “catch up phase,” which can feature very high growth.  We saw this in the United States after 1929-1932 had plunged the country into the Great Depression:  for the next few there was double-digit growth, though this simply meant getting partway out of the hole.  Europe recovering from the world wars is another example.  More recently, China has been in a “catch up phase,” as its economy started to modernize when it was well behind much of the world technologically, and could achieve very high growth rates simply by emulating other more developed countries.  These high growth rates invariably end as a country catches up.  (We’re seeing the realization of this immutable fact in China these days, as people discover that the days of 8+% growth probably are never coming back.)