Saturday, February 15, 2020

Historical wealth: How to compare Croesus and Bezos

A few days ago I wrote a post on wealth comparisons overtime. I have done such a comparison myself in “The haves and the have-nots” and have used Adam Smith’s argument that person’s wealth ought to be measured in the amount of labor he commands. In other words, wealth needs to be measured in its historical context. I gave two examples of misleading wealth comparisons: over time, when we try to use the same bundle of commodities to compare Croesus and Bezos, and when we conflate wealth and power.

Here I would like to explain a bit more the problems with historical comparisons of wealth (or income) because they have direct bearing on our understanding of the past, and raise also some essentially philosophical points.

The difficulty of measurement of wealth between different periods derives not only because of our lack of data for most of the past but from the inability to meaningfully compare wealth or consumption patterns in the past with those of today. Some economists believe that if people in the past did not have certain amenities that we have today they must have been infinitely poorer. This is what one finds in Nordhaus and DeLong’s view of historical progress as unfolfding through reduced cost of artificial lighting, the approach that Angus Maddison (in  “Contours of the World Economy: 1-2030”) termed a “hallucigenic history”.

The logic of such authors is as follows. Take the example of artificial lighting or voice recording. For Julius Caesar to read a book overnight, easily move at night around his palace, or listen to the songs he liked would have required perhaps hundreds of workers (slaves) to hold the torches or sing his favorite arias all night. Even Caesar, if he were to do that night after night, might, after some time, have run out of resources (or might have provoked a rebellion among the singers). But for us the expense for a similar pleasure is very small, even trivial, say $2 per night. Consequently, some people come to the conclusion that Caesar must have had tiny wealth measured in today’s bundle of goods since a repeated small nightly expense of $2 (in today’s prices) would have eventually ruined him. Other people at Caesar’s time had obviously much less: ergo, the world today is incomparably richer than before, and people then must have felt horribly poor and deprived of all pleasurable things. (Even if you cannot feel deprived of the things you do not know exist.)

The logic seems at first reasonable even if somewhat extreme. But it is not reasonable. Let’s extend this logic, now in a different direction, from us today to the next 500 years. Suppose that in 500 years people are able to choose for their vacation between Mars, Venus, Pluto or perhaps even to go further than that. Suppose they can fly around our solar system, go to the bottom of the ocean, zip from one end of the Earth to another in a few minutes, or do lots of fun things that we cannot imagine today, no more than Caesar could have imagined that his singers’ voices could be recorded on a tiny chip and reproduced ad infinitum at almost no cost. And when we then look at Jeff Bezos’ wealth today using the consumption opportunities of the future, that wealth is likely to look to us –from the vantage point of 500 years hence- insignificant. Bezos might be rich in our own terms, but he cannot fly to Mars this weekend, no matter how much he tries.  

So should we then absurdly turn around and claim that Jeff Bezos, Bill Gates et al. are poor? Clearly not. But thus, equally clearly, rich Romans were not poor either. In other words, we cannot compare wealth of vastly different epochs by using one yardstick, whether it be the yardstick of the past (which is on balance more reasonable) or the yardstick of the present. This is a well-known problem for empirical economic historians. If time-periods are not vastly apart, or rather if technologies and consumption baskets are not vastly different, we can perhaps use some equal weighting of the baskets (½ of the past and ½ of the present). But that clearly will not do for the very remote periods.

This is why wealth has to be measured with a yardstick belonging to the same time when that wealth exists.* And this is why Adam Smith’s approach seems the only one that makes sense. No other commodity but labor power (an hour of unskilled work) is both as unchanged over time in terms of effort exerted, and yet paid the equivalent of different amounts of real goods and services reflecting the general level of productivity of a society. It is both covariant with wealth and an unvarying numeraire.     

Angus Maddison who created the original series comparing incomes of countries over a very long-run was perfectly aware of the problem. He directed his scorn towards those who believed that looking at the past through our today’s lenses made them treat everybody who lived then as “cavemen”: “[Such authors as] Nordhaus and DeLong have constructed fairytale scenarios that greatly exaggerate progress since 1800, before which they seem to believe that people lived like cavemen. These views are fundamentally wrong.”

* The same problem technically applies to cross-country comparisons at a given point in time. However with globalization which brings similarity in technologies and consumption patterns across the world the comparisons are much more meaningful.

Monday, February 10, 2020

What is wealth?

It seems obvious. Let me start with the definitions that economists who work on inequality use. It is the sum total of all assets that you own (cash, house, car, furniture, paintings, money in the bank, value of shares, bonds etc.) plus what is called  “the surrender value” of life insurance and similar plans minus the amount of your debts. In other words, this is the amount of money that you would get if you had to liquidate today all your possessions and repay all your debts. (The amount can clearly be negative too.) The definition can get further complicated as some economists insist that we should also add the capitalized value of future (certain?) streams of income. That leads to the problems that I explained here—but be this as it may, in this post I would like to take a more historical view of wealth.

I did that too in my “The Haves and the Have-nots” when I discussed who might have been the richest person in history. If you want to compare people from different epochs you cannot just simply try to calculate their total wealth. That is impossible because of what is known as the “index number problem”: there is no way to compare the bundle of goods and services which are hugely dissimilar. If I can listen to a million songs and  read the whole night using a very good light, and if I put a high value on that, I may be thought to be wealthier than any king who lived 1000 years ago. Tocqueville noticed that too when he wrote that ancient kings lived lives of luxury but not comfort.

This is why we should  use Adam Smith’s definition of wealth: “[A person] must be rich or poor according to the quantity of labor which he can command”. This means that the extent of one’s wealth ought to be estimated within a historical context: how many thousands hours of labor one can command if he were to use his entire wealth. This metric however is easier to implement in the past than now. When, say in Roman times, countries were at approximately the same level of income, taking the richest person in Roman and Chinese empires, and comparing their wealth with the subsistence income (i.e. the usual wage at the time) made sense because that “usual wage” was the same in Rome as in China. But if you take Jeff Bezos or Bill Gates with whose wages should you compare their wealth? Wages of US labor or some notional global wage rate? If the former, should not then Carlos Slim’s or Russian oligarchs’ wealth be compared to the average wage in Mexico and Russia?  This is what I did in “The Haves and the Have-nots” and here are the results. They are from the year 2010-11, but could be easily updated. One can see that Slim and Khodorkovsky (the Russian super-oligarch before he was jailed by Putin) were probably the richest people in history—if their wealth is measured in terms of their county’s wages. And in the same yardstick, Rockefeller in 1937 was richer than Gates in 2005.


When we do this kind of calculation, we implicitly look at billionaires potential domestic power: their ability to hire thousands of people.  But notice that here I have moved a bit the goalposts. I am really measuring wealth in the space of potential power. Now, that power does not always require actual financial wealth. It can come from straight political power. Stalin, to take one example, could have moved much more labor by his decisions than either Khodorkovsky or Slim. The same is true for many other dictators in history.

This conflation of the amount of money as such and the power to order workers  around leads people to believe that absolute rulers must have been extraordinary wealthy. The view is implicitly based on the values of our own contemporary societies that are fully commercialized,  and where having wealth comes close to having power. With people like Trump, Berlusconi, Thaksin, Bloomberg etc. it becomes even more “natural” to see wealth and power as just one and the same thing.

Wealth also, it is thought, should include the ability to leave it to your heirs. After all, many people justify their amassing extraordinary amounts by their concern for family, or maybe for some philanthropic causes. But what happens when the actual private wealth is low even if the ability to control an enormous amount of resources is huge? This was the case, in an extreme way, with Stalin, but also with most communist leaders. Whoever among them was a supreme leader within his own country had a huge power to move resources around. They also used for themselves many resources; not (in the case of Stalin) in an  ostentatious Czarist  way but in order to showcase own power and the power of the state (as argued very convincingly in Vladimir Nevezhin’s “Dining with Stalin”, reviewed here). Resources were also used to pay for  incredibly high security costs so that no one could track the movement of the supreme leader. (The same reason that leads American presidents to always use two or three helicopters and not one.)  This resulted in Stalin having access to approximately twenty residences in different areas near Moscow and on the Black Sea coast. (Some of these residences were  only for his own use, others were shared with the rest of the leadership). Very similar was Mao’s situation. Tito had at least seven residences in different parts of the country.

But what neither of these dictators had was the ability to transfer such “wealth” to their offspring. Many of them did not much care about their nearest family—certainly the cases of Stalin and Tito. Mao cared just a bit more, but his son inherited little; Chiang Ching (Jiang Qing), his widow, even less and died in prison. Thus, if we make a simple table (see below) of what wealth consists of, we note that in these cases it did not fulfill all the functions that we normally assign to it. The reason why it failed to do so is because we ascribe to wealth the characteristics of our own  commercialized societies. In different societies even if they are relatively close in age and technological development to ours (like Stalin’s Soviet Union or Mao’s China) the function of wealth was different. Power was the true wealth—not the mansions that were used ex officio and that you could not bequeath to your heirs.

Functions of wealth in different societies

In despotic societies of the past
In “high” communism
In today’s commercialized societies
To command people’s labor
To move resources (in a macroeconomic way)
Only if combined with political power
To live luxuriously
Yes (but not quite)
To leave it to your heirs

We thus find that comparing wealth over different ages is not only fraught with difficulties or rather impossible because we cannot assign values to the things that did not exist in the past and exist now, but because we have trouble comparing wealth in different societies with structurally different features. We have to realize that it is okay to compare wealth of the people on the Forbes list so long as they share similar social environment: the same ability to protect that wealth, to use it to boss people around, to bequeath it. The moment when these underlying  conditions diverge comparison ceases to be meaningful.