A rising tide lifts yachts and rowboats

The Financial Times recently interviewed Daron Acemoglu:

The research shows that major technological disruption — such as the Industrial Revolution — can flatten wages for an entire class of working people. It also points to the distributional conflict and power dynamics inherent in it. “Yes, you got progress,” Acemoglu says, “but you also had costs that were huge and very long-lasting. A hundred years of much harsher conditions for working people, lower real wages, much worse health and living conditions, less autonomy, greater hierarchy. And the reason that we came out of it wasn’t some law of economics, but rather a grassroots social struggle in which unions, more progressive politics and, ultimately, better institutions played a key role — and a redirection of technological change away from pure automation also contributed importantly.”

This is not an accurate description of the Industrial Revolution.  Technological progress greatly raised living standards, especially during the pivotal 19th century.

My research focused on the interwar period.  During the late 1920s, the living standard of American blue collar workers was far higher than 100 years earlier.  And yet almost none of the “progressive” ideas advocated by leftists had been put in place.  There was no minimum wage, no federal unemployment compensation, no OSHA, and labor unions were fairly weak.  In 1929, the federal government spent only a bit over 3% of GDP.

When trying to understand living standards, it is more helpful to focus on output, not money.   Billionaires have no wish to own a million pairs of pants, or a million cars, or a million refrigerators.  As American industry began churning out vast quantities of consumer goods, it was almost inevitable that the living standard of the average American would rise sharply.  If Apple and Samsung produce a billion phones, then lots of people will end up owning smartphones.

That’s not to say that income distribution plays no role in living standards.  For any given average income, a more equal distribution of income will generally provide higher living standards.  But the effects of distribution are completely dwarfed by the effects of technological progress on long run economic growth.

PS.  Reason magazine has an excellent article explaining how the Netherlands created modern capitalism, without a strong central government.  This led to the emergence of the world’s first middle class.  Most readers of this blog probably have a middle class lifestyle.  If so, thank the Dutch.