T



hree years ago, Thomas Piketty’s Capital in the Twenty-First Century (2013) made its author the most famous economist in the world. The book caused a sensation by highlighting rising income and wealth inequality in the United States and Europe, especially in its jarring claim that inequality is just as bad today as it was a hundred years ago. Piketty writes: “The poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth in 2010, just as in 1910. Basically, all the middle class managed to get its hands on was a few crumbs.”

These two sentences sum up a profound irony—the central contradiction of modern progressives. They do not believe in progress. A century ago, America’s first progressives believed very much in the power of their reforms. Theodore Roosevelt was proud to protect the environment. John Dewey was busy promoting universal education. Alice Paul was busy fighting for a woman’s right to vote. They succeeded. Today, neo-progressives would have us forget all that, and maybe it’s because economic hindsight is anything but clear.

As a professional economist, I find myself haunted by Piketty’s book. After reflecting on the issue many, many times, attending conferences, and reading dozens of scholarly papers, I keep coming back to his disturbing comparison of our time to the year 1910. Why 1910? He could have picked 1960 or 1800, I suppose, but the year 1910 seemed to float in the back of the mind like a silent paradox. Have we nothing but crumbs to show for a century of capitalism?

One way to value the progress enjoyed by everyday people is to imagine having to do without all of the material things we have that our ancestors lacked. How much money would you be willing to accept to give up indoor plumbing for a year? Having water on tap in every home in 2010 offers us no point of comparison to 1910. The current crisis of toxic tap water in Flint, Michigan has caused an uproar, but it’s in part a story that shows how much we take clean tap water for granted. Most homes have five or more taps between the kitchen, bathroom sinks, shower, and washing machine. The cost of tap water across the United States is roughly half a penny per gallon, which is surely far less than the actual value we get from it. But few homes in 1910 had any taps. Treating water with chlorine to cleanse it of toxins was first done in 1908.

How much money would you demand to give up modern public goods such as highways or emergency fire and ambulance services? How much is air conditioning worth to you? What about penicillin? Entertainment of any kind that is not live? The ability to travel to Australia from Minneapolis in a day’s time for the price of five men’s suits? Recorded music, movies, and cable television? How much would you have to be paid to surrender the Internet for a month? No Facebook. No Netflix. No email. No Google searches. No Google Maps.

These are Piketty’s crumbs. Here are some others.

I



t is doubtful that anyone in my old Ohio neighborhood on the west side of Columbus was a one percenter. My mother worked as a “lunch lady” at the local elementary school and later as a secretary for Xerox. My father worked at a grocery store before enlisting in the military. They never complained, but, as my mother says, “We ate a lot of Hamburger Helper.”

I remember hot summer days before many people with middle incomes could afford an air conditioner. I remember how dramatically it changed our quality of life, too. AC is ubiquitous and cheap today, but is it a crumb?

My mother slept in on one Christmas in, I think, 1978, on orders from my father. She awoke to find that he had bought and installed our first dishwashing machine. As an economist, I try to think about how to measure the value of that washing machine, but I am at a loss. Surely, it was worth more than it cost. There’s a notion of consumer surplus in welfare analysis, but that fails to capture the extra-economic utility people actually experience.

I remember getting one of the nation’s first cable television systems—30 channels instead of three, including CNN (which debuted in 1980) and HBO and ESPN. A movie “costs” $15 to see at the theater, yet we have millions of hours of broadcasting piped over cable every month at no marginal cost.

I remember the invention of the VCR, soon forgotten when the DVD took its place. And who could forget the first computer their parents bought in the late 1970s, expensive and hopelessly limited by today’s standards?

These are Piketty’s crumbs, too, things that add value invisible to economic metrics.

For Americans with distinct memories of life in 1980 or 1940, technical charts about inequality cannot possibly describe the difference in their lives made by these crumbs. Blue-collar families worked too hard and achieved too much to be told that an air conditioner and a dishwasher are nothing but crumbs. They know what life was like without seat belts and orthodontics. They, not some abstract economic philosophy of free markets, built the country. So when neo-progressives question capitalism in America, they are ultimately questioning the values and choices of middle-class workers who toiled to purchase all those invaluable little luxuries.

To be sure, the flaw in inequality accounting is not Piketty’s alone. It is fundamental to microeconomic analysis. So much of what makes life worth living cannot be measured in dollars. The point is that if those things could be measured, they would probably show how much richer everyone has become.

1910 in Pictures

Maybe history, not economics, has the answer. Howard Zinn, the leftist polemicist and author of The People’s History of the United States, challenged people look back in time with a wide unfiltered lens. Published in 1980, Zinn’s book is touted as “the first scholarly work to tell America’s story from the bottom up—from the point of view of, and in the words of, America’s women, factory workers, African Americans, Native Americans, working poor, and immigrant laborers.”

Consider the note scrawled on the back of a photo taken in Seaford, Delaware in May 1910. “This photo shows what was formerly a chicken coop, in which during the berry season the Arnao family live on Hitchen’s farm. Seventeen children and five elders live here. Ten youngest children range in age from 3 to 13.” The photographer was Lewis Hine, a teacher in New York City. Hine took around 40 plates (photos) per year—fewer in number than the photos my fourth-grader took of her parakeets on a recent Saturday. But photography was young in 1910, and Hine realized his images could be a powerful tool for social change. He was hired by a progressive organization to travel and document child labor around the United States, images that are freely available in an online collection. They reveal young lives cut short, ruined lungs, broken backs, and poverty almost beyond our imagination.

In December 1910, Hine wrote this description for another photograph: “Shorpy Higginbotham, a ‘greaser’ on the tipple at Bessie Mine, of the Sloss-Sheffield Steel and Iron Co. in Alabama. Said he was 14 years old, but it is doubtful. Carries two heavy pails of grease, and is often in danger of being run over by the coal cars.” According to the historian Joe Manning, who dug up other records, Henry Sharp “Shorpy” Higginbotham had six brothers and three sisters. His father died a few years after the photo was taken. Shorpy survived the trenches of World War I but was “crushed by a rock” in a mining accident just two months after getting married.

Another chilling picture from another photographer in 1910 shows what a real chain gang looks like. The caption reads: “Chain gang of convicts engaged in road work, Autumn 1910. Pitt County, North Carolina. The inmates are quartered in the wagons, which are equipped with bunks and move from place to place as labor is utilized. The central figure is J.Z. McLawhon, county superintendent of chain gangs. The dogs are bloodhounds used for running down any attempted escapes.”

Look closely and you see the shotguns and the sad unlucky prisoners who are tasked with holding the dogs that hunt down their fellows. Chain gangs often housed poor blacks who couldn’t pay simple fines and became indentured to the state indefinitely. Slavery, as Zinn might remind us, didn’t end so suddenly as we were told. Progress has been hard, and slow. Yet who would trade today’s race relations for yesteryear’s?

The most compelling photo from the first decade of the 20th century comes from a street in Manhattan. A dead horse, clearly malnourished, had collapsed and was awaiting collection. This was a common occurrence in cities everywhere, as horse-drawn commerce and transportation remained predominant. Indeed, there are a half dozen other carriages—not automobiles—in the background. What compels are the eight boys at play in the sewer a few feet from the dead horse. Two older boys are standing and staring at the photographer, while the younger boys are barefoot and seated along the gutter, splashing. Nearby wooden buildings are in shambles, windows wide, shutters hanging askew. The streets and sidewalks are bricked and worn down.

The germ theory of disease was barely a half-century-old when this photo was taken. Antibiotics would be discovered decades later, and widely used only when these boys were adults, assuming they survived the Great War and the plague of 1918.

Life, Death, and Externalities

If material progress is difficult to measure, immaterial progress is impossible to measure, yet is arguably much more valuable—things like increased health, greater liberty, and deeper social connections. Although the most common fatal conditions of 1910 have been cured, try to imagine getting a cancer diagnosis a century ago. The five-year survival rate for breast cancer today is 91 percent, according to data from the National Cancer Institute, much better than the 75 percent rate in 1975. But in 1910, the survival rate was zero. You only survived breast cancer if you were misdiagnosed.

And consider the dangers of birth in 1910. Of every 100 births, one mother died. According to the Centers of Disease Control, 10 percent of newborns died before their first birthday. In the century since, infant mortality declined by over 90 percent, while maternal mortality declined by 99 percent.

Yet how does one factor mortality into gross domestic product? That narrow economic metric ignores the real terror and insecurity of procreation before modernity. Can you imagine how much we would have to pay a pregnant, middle-class American woman today to face the mortality odds of 1910? She does not pay for medical safety in this sense. The psychological absence of mortal terror in 2010 medicine is not included in the list price.

Medical progress is what economists call a “positive externality.” You may be vaguely familiar with the term externality because it is evoked often in environmental debates. When a dirty factory belches pollution into the river, or when a vulgar patron screams to himself in the library, others pay the “social cost” for the negative externality. In cases involving oil tankers and pristine coastlines, the costs are clear. Lawsuits and government regulations are meant to “internalize” such costs and make the economy run more fairly. But what about positive externalities? Those are mostly ignored as a matter of policy.

Now, to be sure, positive technological externalities are encouraged by governments—in the form of intellectual property rights. Without copyright protections that make it possible for people who produce intellectual work to prosper from it, we wouldn’t be able enjoy Downton Abbey or Guardians of the Galaxy or the music of Adele. Without patents, commercialization of inventions would be radically slower. However, allowing creators to charge monopoly rents for their creations is a far cry from giving them full compensation for the associated social gains. If a doctor invents a pill tomorrow that extends productive human life by 5 percent, will he reap 5 percent of the world’s labor income?

Piketty neglects positive externalities entirely. To be fair, there is one passage in Capital that could be interpreted as a discussion of tech externalities, but it reflects poorly on the author. He mocks the “cult of Bill Gates” and admits knowing frankly nothing about what exactly Gates did to earn so much money. His message is that Gates, and all wealthy software entrepreneurs, are riding for free on the shoulders of giants because none of their innovations would be possible without the work of thousands of hardware engineers. Piketty must be unaware how widely shared Microsoft’s stock is among its employees and how well hardware engineers have been compensated upstream and downstream from the Seattle company, including the thousands who worked at Intel, Dell, Cisco, and Hewlett-Packard, to name a few. Many became millionaires with Microsoft stock options, and many more worldwide piggy-backed on the publicly traded stock. What’s strange is that Piketty misses the irony: Capital in the Twenty-First Century was composed by his own free-riding on desktop software applications: word processing and spreadsheets. Will Piketty be sharing his royalties with Microsoft engineers?

Everyone alive today is free-riding on technology, yet none of these social gains are included in Piketty’s income data. Think about the free riding we get from medical science, and then narrow it down to just one medical innovation. Leave aside Alexander Fleming’s discovery of penicillin on September 28, 1928. Leave aside the introductions of vaccines for yellow fever in 1935, influenza in 1945, polio in 1955, and the measles, mumps, and rubella in the 1960s. Leave aside, too, the development of pretty much every painkiller known to man (except aspirin and alcohol)—all developed after 1910.

Just think about blood.

Few people survived surgery at the dawn of the 20th century. Surgery was invasive. Sepsis was common. There were was no blood supply. Indeed, the very idea of a “blood supply” is a modern one. It wasn’t until 1901 that blood types—A, B, AB, and O—were first discovered.

Blood could not be stored for transfusions in 1910, and not because refrigerators had yet to be invented. Blood naturally coagulates outside the body within minutes, so doctors had mere minutes to transfuse blood from a donor to a patient before the stuff gummed up the needle, tubes, and funnels. The very rare exception was to find a donor who would allow a major artery to be levered up out of his skin, severed, and then sewn into a wealthy patient’s vein.

Early experiments with anti-coagulants proved fatal because the chemicals were toxic. A German doctor named Richard Lewison challenged skeptics and continued to test different chemicals in different ratios to find a non-fatal blood thinner, using animal subjects to prove the concept. In 1915, he discovered the right mix—a small amount of sodium citrate—allowing donor blood to be stored for days and used on demand.

The invention was resisted by the medical establishment for years. There was a cultural bias against donors and fears about sharing blood between the races. Would just one drop make you an African? Logistics were a problem, too. Where would the blood be stored in mass quantities to accommodate dozens or hundreds of surgeries?

A century later, the United States has a vast blood infrastructure that supplies a patient in need every two seconds. The American Red Cross, which provides just under half of the blood supply in the U.S., reports that 41,000 donations are needed every day, 15.7 million donations per year. Other innovations have extended the shelf life of donated red blood cells to 5-6 weeks.

How do economists calculate the gains of all those lives? They don’t.

Let there be Light

The workplace in 1910 offers another stark contrast with 2010. In the crowded tenements of New York City where dozens of immigrant families toiled, men, women, and children crowded around tables near the windows and strained their eyes to see what they were sewing. The industry exploited young women with no recourse to vote for change because they had no right to vote and precious few labor rights.

Much has changed between 1910 and 2010, particularly when one considers an event that riveted Americans at the time: the Triangle Shirtwaist Factory fire in Greenwich Village that killed over a hundred shirtwaist factory workers in early 1911. It was preceded by a failed strike during which many of the young factory women were beaten by paid thugs. Triangle is remembered because most doors were locked from the outside to keep girls in place during factory hours, locks that trapped them inside when the fire came.

The typical workplace in the U.S. today is much safer. And well lighted. Your office probably has four or more overhead bulbs bathing every corner with the light of the noontime sun. That light costs pennies, but how much is it worth?

After years of obsessive research into that question, William Nordhaus published a paper in 1996 that challenged this “Achilles heel” for economists: measuring incomes across times of technological change. “Estimates of real income are only as good as the price indexes are accurate,” he said. And “most of the goods we consume today were not produced a century ago.” Nordhaus was already a famous economist, co-author of the leading introductory textbook in the field and a distinguished critic of environmental pollution. But his 1996 paper revealed dramatic technological progress in the ways people light their homes at night, especially the acceleration during the industrial revolution.

Nordhaus opened our eyes to the advent of kerosene lamps in the 1860s (which probably saved whales from extinction). He accounted for dozens of innovations over the centuries in candle-making, lamps, and electrification. But his biggest insight was translating the nominal costs of light in terms of a day’s work, pithily concluding that “an hour’s work today will buy about 350,000 times as much illumination as could be bought in early Babylonia.”

Comparing the most recent data to the Piketty baseline, Nordhaus calculates a true price of light for a filament lamp has declined to one percent of what it was in 1910. That’s not even comparing the fluorescent revolution since the 1990s, which has led to an improvement of another order of magnitude. All told, light costs less than one-tenth of one percent now than it did when Shorpy and other children were mining coal a century ago. The deeper message of Nordhaus’s research is that standard economic measures of GDP and prices were failures at measuring real progress. He wrote:

We travel in vehicles that were not yet invented that are powered by fuels not yet produced, communicate through devices not yet manufactured, enjoy cool air on the hottest days, are entertained by electronic wizardry that was not dreamed of, and receive medical treatments that were unheard of. If we are to obtain accurate estimates of the growth of real incomes over the last century, we must somehow construct price indexes that account for the vast changes in the quality and range of goods and services that we consume, that somehow compare the services of horse with automobile, of Pony Express with facsimile machine, of carbon paper with photocopier, of dark and lonely nights with nights spent watching television, and of brain surgery with magnetic resonance imaging.

Other economists have expanded upon this insight, none with more wit than Don Boudreaux. Using a 1956 Sears catalog he bought on eBay in 2012, Boudreaux applied the hours-of-work approach to pricing a dozen products over half a century. Neglecting the quality improvements entirely, Boudreaux still found that the cost reductions ran 75 to 95 percent. The cheapest television set in 1956 was six times more expensive in hours of work than the lowest priced 2012 model—and the newer one is in color, has two more inches of screen, higher resolution, lower weight, better sound quality, durability, and a remote control. Washing machines were five times more expensive during the fifties. Refrigerators, nine times more.

Refrigeration did not even exist in 1910. In fact, as I’ve spent time researching innovations that have reshaped modern living, I’ve discovered that Piketty could hardly have picked a worse year for contrast. As Wikipedia will tell you, key innovations that led to the refrigerator for domestic use occurred in 1913, 1914, and 1916. In that decade, Frigidaire was founded. Of course, a home unit in the 1920s often cost more than an automobile, but prices came down and made the refrigerator a standard appliance in middle-class homes by the middle of the 1950s.

Today, the penetration of refrigerators has reached essentially 100 percent of all homes, rich and poor, just as it has for microwave ovens and vacuum cleaners. Even poorer, developing countries such as Thailand, China, and Brazil have refrigerator penetration rates between 70 and 95 percent.

The global market for appliances was over $300 billion in 2013, according to a study published by Citi. That’s just one third the size of the market for consumer electronics, but I would wager that appliances are valued much more highly. Again, value—not only price—is the key to Piketty’s crumbs. The whole paradigm of incomes and prices leads to the false conclusion that cheap modern goods are crumbs.

How much do you personally value refrigeration? Imagine no leftovers, cheese, or produce in your home. And without a freezer, you could not enjoy ice. I found a two-door model on sale for $435. If we count the cost of electricity to power the refrigerator 24 hours a day, seven days a week, assuming a modern, efficient model running at 350 kilowatts per hour (kWh), it adds five dollars per month. Keep in mind, modern units use one quarter of the energy of models from the 1980s. All told, a refrigerator will cost you $500 this year, at most.

Here’s the vital question: Would you accept ten times that amount in cash to give up refrigeration? The reason you are likely to say no is that you value refrigeration much more than it costs. Yet it looks like a crumb to economists because income comparisons over time neglect utility. Adam Smith called this the paradox of value.

Most would say the biggest difference between 2010 and 1910 is not in medicine or lighting, or Sears appliances, but in the climate in which we live every day—the interior climate of homes, offices, and vehicles. I’m talking about air conditioning.

“Until the 20th century, Americans dealt with the hot weather as many still do around the world,” writes Will Oremus in Slate. “They sweated and fanned themselves.” It wasn’t until 1902 that a New Yorker named Willis Carrier invented the process of “conditioning” the humidity in air, and not until 1922 that he developed a giant system of machines that cooled air for human comfort. Far too big and expensive for home use, the invention was deployed in public for the first time in Rivoli Theater in Times Square during the summer of 1925. As the technology diffused and improved, it was primarily experienced in public venues such as hotels and movie theaters. Now air conditioning has become so ubiquitous, so common, that we take it for granted.

I asked my mother what it would take for her to give up air conditioning for a year. She lives in Florida, and she didn’t have to think long to name her price. “Nine million dollars.”

What does all this mean? It means the inequality debate is a slippery slope almost by design, cleverly limited to ensure that free-market advocates will never have the high ground except the one afforded by sheer common sense. The way to win the argument is simply to ask about those crumbs of progress that progressives ignore. Ask if critics of capitalism actually believe progress can happen (child labor laws, voting rights, electrification, hot showers) and can continue.

Second, it means that economic theory is falling short, because it cannot successfully measure progress over the long term. What economists call consumer surplus—the difference between what you are willing to pay for something and its actual price—is a fraction of the value we experience, but Piketty doesn’t even count consumer surplus. To paraphrase Oscar Wilde, progressive economists know the price of everything, but the value of nothing. Scholars who research income trends should no longer ignore positive externalities which are tiny year to year but extraordinarily large decade to decade. The political stakes are too high, and inequality debate too central, for us to pretend the foundations of microeconomics are firm. If Nordhaus is right, intangible gains are many multiples greater than median incomes.

For voters, this means we should pause in our rush to “fix” capitalism. Yes, modern economies in Europe, Asia, and the Americas are imperfect, but recognize that they have enriched everyone in intangible yet vital ways. Does this mean, as the sharp-witted economist Brad DeLong charges, that I am saying we shouldn’t care about inequality? Maybe a better way to frame it is that the inequality you’ve been told about is almost certainly an illusion. If poorly measured inequality is the price of progress—mothers and babies alive, blood transfusions, civil rights, ice cubes in summertime, and, yes, Facebook—it is a very small price indeed.