Real wages and growth

Growth measures always understate welfare gains when new products are of superior quality; quantifying the gains from categories of goods previously unavailable is even tougher. One example: the introduction of sugar, tea and coffee into Britain in the 1600s-1700s.

Using historical data on prices and quantities for these “new luxuries”, we estimate their value to consumers. It turns out to have been very large. By 1850, English consumers were better off by 15-20% as a result of new goods. The Age of Discoveries boosted peoples’ well-being – not by changing the quantities or prices of goods that Europeans already knew in 1500, but by expanding the range of goods that consumers could buy.

Comparing these gains to more recent new goods, we find that – from a welfare perspective – sugar, tea, and coffee mattered more back then than did the recent introduction of the internet, computers, satellite television, and mobile phones combined.

They find that sugar, coffee and tea went from 0% of household budgets ('cause they weren't available) to 7.2% of household budgets, with rich and poor alike enjoying the benefits of increased product diversity. Their results suggest Greg Clark's work understates true increases in real incomes over the period.

Call me a cornucopiaist if you like, but life just keeps getting better. Or, as Don Boudreaux asks, would you rather live in 1960 with 2009's median income, or in 2009 with 1960's median income? Pick up an old catalog from the 60s and figure out what you'd be missing....

Update: Paul Walker also likes this one.