The Rational Optimist: How Prosperity Evolves

Some will say that I am merely restating what Adam Smith said in 1776 (#litres_trial_promo). But much has happened since Adam Smith to change, challenge, adjust and amplify his insight. He did not realise, for instance, that he was living through the early stages of an industrial revolution. I cannot hope to match Smith’s genius as an individual, but I have one great advantage over him – I can read his book. Smith’s own insight has mated with others since his day.

Moreover, I find myself continually surprised by how few people think about the problem of tumultuous cultural change. I find the world is full of people who think that their dependence on others is decreasing, or that they would be better off if they were more self-sufficient, or that technological progress has brought no improvement in the standard of living, or that the world is steadily deteriorating, or that the exchange of things and ideas is a superfluous irrelevance. And I find a deep incuriosity among trained economists – of which I am not one – about defining what prosperity is and why it happened to their species. So I thought I would satisfy my own curiosity by writing this book.

I am writing in times of unprecedented economic pessimism. The world banking system has lurched to the brink of collapse; an enormous bubble of debt has burst; world trade has contracted; unemployment is rising sharply all around the world as output falls. The immediate future looks bleak indeed, and some governments are planning further enormous public debt expansions that could hurt the next generation’s ability to prosper. To my intense regret I played a part in one phase of this disaster as non-executive chairman of Northern Rock, one of many banks that ran short of liquidity during the crisis. This is not a book about that experience (under the terms of my employment there I am not at liberty to write about it). The experience has left me mistrustful of markets in capital and assets, yet passionately in favour of markets in goods and services. Had I only known it, experiments in laboratories by the economist Vernon Smith and his colleagues have long confirmed that markets in goods and services for immediate consumption – haircuts and hamburgers – work so well that it is hard to design them so they fail to deliver efficiency and innovation; while markets in assets are so automatically prone to bubbles and crashes that it is hard to design them so they work at all. Speculation, herd exuberance, irrational optimism, rent-seeking and the temptation of fraud drive asset markets to overshoot and plunge – which is why they need careful regulation, something I always supported. (Markets in goods and services need less regulation.) But what made the bubble of the 2000s so much worse than most was government housing and monetary policy, especially in the United States, which sluiced artificially cheap money towards bad risks (#litres_trial_promo) as a matter of policy and thus also towards the middlemen of the capital markets. The crisis has at least as much political as economic causation (#litres_trial_promo), which is why I also mistrust too much government.

(In the interests of full disclosure, I here note that as well as banking I have over the years worked in or profited directly from scientific research, species conservation, journalism, farming, coal mining, venture capital and commercial property, among other things: experience may have influenced, and has certainly informed, my views of these sectors in the pages that follow. But I have never been paid to promulgate a particular view.)

Rational optimism holds that the world will pull out of the current crisis because of the way that markets in goods, services and ideas allow human beings to exchange and specialise honestly for the betterment of all. So this is not a book of unthinking praise or condemnation of all markets, but it is an inquiry into how the market process of exchange and specialisation is older and fairer than many think and gives a vast reason for optimism about the future of the human race. Above all, it is a book about the benefits of change. I find that my disagreement is mostly with reactionaries of all political colours: blue ones who dislike cultural change, red ones who dislike economic change and green ones who dislike technological change.

I am a rational optimist: rational, because I have arrived at optimism not through temperament or instinct, but by looking at the evidence. In the pages that follow I hope to make you a rational optimist too. First, I need to convince you that human progress has, on balance, been a good thing, and that, despite the constant temptation to moan, the world is as good a place to live as it has ever been for the average human being – even now in a deep recession. That it is richer, healthier, and kinder too, as much because of commerce as despite it. Then I intend to explain why and how it got that way. And finally, I intend to see whether it can go on getting better.

CHAPTER 1 A better today: the unprecedented present (#ulink_5cc46cce-c77d-5369-914a-6386864bda11)

On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us? (#litres_trial_promo)

THOMAS BABINGTON MACAULAY

Review of Southey’s Colloquies on Society

By the middle of this century the human race will have expanded in ten thousand years from less than ten million to nearly ten billion people. Some of the billions alive today still live in misery and dearth even worse than the worst experienced in the Stone Age. Some are worse off than they were just a few months or years before. But the vast majority of people are much better fed, much better sheltered, much better entertained, much better protected against disease and much more likely to live to old age than their ancestors have ever been (#litres_trial_promo). The availability of almost everything a person could want or need has been going rapidly upwards for 200 years and erratically upwards for 10,000 years before that: years of lifespan, mouthfuls of clean water, lungfuls of clean air, hours of privacy, means of travelling faster than you can run, ways of communicating farther than you can shout. Even allowing for the hundreds of millions who still live in abject poverty, disease and want, this generation of human beings has access to more calories, watts, lumen-hours, square feet, gigabytes, megahertz, light-years, nanometres, bushels per acre, miles per gallon, food miles, air miles, and of course dollars than any that went before. They have more Velcro, vaccines, vitamins, shoes, singers, soap operas, mango slicers, sexual partners, tennis rackets, guided missiles and anything else they could even imagine needing. By one estimate, the number of different products that you can buy in New York or London tops ten billion (#litres_trial_promo).

This should not need saying, but it does. There are people today who think life was better in the past. They argue that there was not only a simplicity, tranquillity, sociability and spirituality about life in the distant past that has been lost, but a virtue too. This rose-tinted nostalgia, please note, is generally confined to the wealthy. It is easier to wax elegiac for the life of a peasant when you do not have to use a long-drop toilet. Imagine that it is 1800, somewhere in Western Europe or eastern North America. The family is gathering around the hearth in the simple timber-framed house. Father reads aloud from the Bible while mother prepares to dish out a stew of beef and onions. The baby boy is being comforted by one of his sisters and the eldest lad is pouring water from a pitcher into the earthenware mugs on the table. His elder sister is feeding the horse in the stable. Outside there is no noise of traffic, there are no drug dealers and neither dioxins nor radioactive fall-out have been found in the cow’s milk. All is tranquil; a bird sings outside the window.

Oh please! Though this is one of the better-off families in the village, father’s Scripture reading is interrupted by a bronchitic cough that presages the pneumonia that will kill him at 53 – not helped by the wood smoke of the fire. (He is lucky: life expectancy even in England was less than 40 in 1800.) The baby will die of the smallpox that is now causing him to cry; his sister will soon be the chattel of a drunken husband. The water the son is pouring tastes of the cows that drink from the brook. Toothache tortures the mother. The neighbour’s lodger is getting the other girl pregnant in the hayshed even now and her child will be sent to an orphanage. The stew is grey and gristly yet meat is a rare change from gruel; there is no fruit or salad at this season. It is eaten with a wooden spoon from a wooden bowl. Candles cost too much, so firelight is all there is to see by. Nobody in the family has ever seen a play, painted a picture or heard a piano. School is a few years of dull Latin taught by a bigoted martinet at the vicarage. Father visited the city once, but the travel cost him a week’s wages and the others have never travelled more than fifteen miles from home. Each daughter owns two wool dresses, two linen shirts and one pair of shoes. Father’s jacket cost him a month’s wages but is now infested with lice. The children sleep two to a bed on straw mattresses on the floor. As for the bird outside the window, tomorrow it will be trapped and eaten by the boy (#litres_trial_promo).

If my fictional family is not to your taste, perhaps you prefer statistics. Since 1800, the population of the world has multiplied six times, yet average life expectancy has more than doubled and real income has risen more than nine times (#litres_trial_promo). Taking a shorter perspective, in 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. She was less likely to die as a result of war, murder, childbirth, accidents, tornadoes, flooding, famine, whooping cough, tuberculosis, malaria, diphtheria, typhus, typhoid, measles, smallpox, scurvy or polio. She was less likely, at any given age, to get cancer, heart disease or stroke. She was more likely to be literate and to have finished school. She was more likely to own a telephone, a flush toilet, a refrigerator and a bicycle. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is, by any standard, an astonishing human achievement.

Averages conceal a lot. But even if you break down the world into bits, it is hard to find any region that was worse off in 2005 than it was in 1955. Over that half-century, real income per head ended a little lower in only six countries (Afghanistan, Haiti, Congo, Liberia, Sierra Leone and Somalia), life expectancy in three (Russia, Swaziland and Zimbabwe), and infant survival in none. In the rest they have rocketed upward. Africa’s rate of improvement has been distressingly slow and patchy compared with the rest of the world, and many southern African countries saw life expectancy plunge in the 1990s as the AIDS epidemic took hold (before recovering in recent years). There were also moments in the half-century when you could have caught countries in episodes of dreadful deterioration of living standards or life chances – China in the 1960s, Cambodia in the 1970s, Ethiopia in the 1980s, Rwanda in the 1990s, Congo in the 2000s, North Korea throughout. Argentina had a disappointingly stagnant twentieth century. But overall, after fifty years, the outcome for the world is remarkably, astonishingly, dramatically positive. The average South Korean lives twenty-six more years and earns fifteen times as much income each year as he did in 1955 (and earns fifteen times as much as his North Korean counterpart). The average Mexican lives longer now than the average Briton did in 1955. The average Botswanan earns more than the average Finn did in 1955. Infant mortality is lower today in Nepal than it was in Italy in 1951. The proportion of Vietnamese living on less than $2 a day (#litres_trial_promo) has dropped from 90 per cent to 30 per cent in twenty years.

The rich have got richer, but the poor have done even better. The poor in the developing world grew their consumption twice as fast as the world as a whole between 1980 and 2000 (#litres_trial_promo). The Chinese are ten times as rich, one-third as fecund and twenty-eight years longer-lived than they were fifty years ago. Even Nigerians are twice as rich, 25 per cent less fecund and nine years longer-lived than they were in 1955. Despite a doubling of the world population, even the raw number of people living in absolute poverty (defined as less than a 1985 dollar a day) has fallen since the 1950s. The percentage living in such absolute poverty has dropped by more than half – to less than 18 per cent (#litres_trial_promo). That number is, of course, still all too horribly high, but the trend is hardly a cause for despair: at the current rate of decline, it would hit zero around 2035 – though it probably won’t. The United Nations estimates that poverty was reduced more in the last fifty years than in the previous 500. (#litres_trial_promo)

Affluence for all

Nor was 1955 a time of deprivation. It was in itself a record – a moment when the world was richer, more populous and more comfortable than it had ever been, despite the recent efforts of Hitler, Stalin and Mao (who was then just starting to starve his people so that he could use their grain to buy nuclear weapons from Russia). The 1950s were a decade of extraordinary abundance and luxury compared with any preceding age. Infant mortality in India was already lower than it had been in France and Germany in 1900. Japanese children had almost twice as many years in education in 1950 as at the turn of the century. World income per head had almost doubled in the first half of the twentieth century. In 1958 J.K. Galbraith declared (#litres_trial_promo) that the ‘affluent society’ had reached such a pitch that many unnecessary goods were now being ‘overprovided’ to consumers by persuasive advertisers.

He was right that Americans were especially well off compared with others: they were three inches taller in 1950 than they had been at the turn of the century and spent twice as much on medicine as funerals – the reverse of the ratio in 1900. Roughly eight out of ten American households had running water, central heating, electric light, washing machines and refrigerators by 1955. Almost none had these luxuries in 1900. In his 1890 classic How the Other Half Lives, Jacob Riis encountered a family of nine in New York living in a ten-foot-square room plus a tiny kitchen, and women earning 60 cents a day for sixteen hours’ work in sweatshops and unable to afford more than one meal a day. This would have been unthinkable by mid-century.

Yet looking back now, another fifty years later, the middle class of 1955, luxuriating in their cars, comforts and gadgets, would today be described as ‘below the poverty line’. The average British working man in 1957, when Harold Macmillan told him he had ‘never had it so good’, was earning less in real terms than his modern equivalent could now get in state benefit if unemployed with three children. Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these. Even in 1970 only 36 per cent of all Americans had air conditioning: in 2005 79 per cent of poor households did. Even in urban China 90 per cent of people now have electric light, refrigerators and running water. Many of them also have mobile phones, internet access and satellite television, not to mention all sorts of improved and cheaper versions of everything from cars and toys to vaccines and restaurants.

Well all right, says the pessimist, but at what cost? The environment is surely deteriorating. In somewhere like Beijing, maybe. But in many other places, no. In Europe and America rivers, lakes, seas and the air are getting cleaner all the time. The Thames has less sewage and more fish. Lake Erie’s water snakes, on the brink of extinction in the 1960s, are now abundant. Bald eagles have boomed. Pasadena has few smogs. Swedish birds’ eggs have 75 per cent fewer pollutants in them than in the 1960s. American carbon monoxide emissions from transport are down 75 per cent in twenty-five years. Today, a car emits less pollution travelling at full speed than a parked car did in 1970 from leaks. (#litres_trial_promo)

Meanwhile, average life expectancy in the longest-lived country (Sweden in 1850, New Zealand in 1920, Japan today) continues to march upwards at a steady rate of a quarter of a year per year, a rate of change that has altered little in 200 years. It still shows no sign of reaching a limit, though surely it must one day. In the 1920s demographers confidently asserted that average life span would peak at 65 ‘without intervention of radical innovations or fantastic evolutionary change in our physiological make-up’. In 1990 they predicted life expectancy ‘should not exceed…35 years at age 50 unless major breakthroughs occur in controlling the fundamental rate of ageing’. Within just five years both predictions were proved wrong in at least one country. (#litres_trial_promo)

Consequently the number of years of retirement is rocketing upwards. Starting from 1901, it took sixty-eight years for the mortality of British men between 65 and 74 to fall by 20 per cent. Subsequent 20 per cent falls took seventeen years, ten years and six years – the improvement has accelerated. That is all very well, say pessimists, but what about quality of life in old age? Sure, people live longer, but only by having years of suffering and disability added to their lives. Not so. In one American study, disability rates in people over 65 fell from 26.2 per cent to 19.7 per cent between 1982 and 1999 – at twice the pace of the decrease in the mortality rate. Chronic illness before death is if anything shortening slightly, not lengthening, despite better diagnosis and more treatments – ‘the compression of morbidity’ is the technical term. People are not only spending a longer time living, but a shorter time dying. (#litres_trial_promo)

Take stroke, a big cause of disability in old age. Deaths from stroke fell by 70 per cent between 1950 and 2000 in America and Europe. In the early 1980s a study of stroke victims in Oxford concluded that the incidence of stroke would increase by nearly 30 per cent over the next two decades, mainly because stroke incidence increases with age and people were predicted to live longer. They did live longer but the incidence of stroke in fact fell by 30 per cent. (The age-related increase is still present, but it is coming later and later.) The same is true of cancer, heart disease and respiratory disease: they all still increase with age, but they do so later and later, by about ten years since the 1950s. (#litres_trial_promo)

Even inequality is declining worldwide. It is true that in Britain and America income equality, which had been improving for most of the past two centuries (British aristocrats were six inches taller than the average in 1800; today they are less than two inches taller), has stalled since the 1970s. The reasons for this are many, but they are not all causes for regret. For example, high earners now marry each other more than they used to (which concentrates income), immigration has increased, trade has been freed, cartels have been opened up to entrepreneurial competition and the skill premium has grown in the work place. All these are inequality-boosting, but they stem from liberalising trends. Besides, by a strange statistical paradox, while inequality has increased within some countries, globally it has been falling. The recent enrichment of China and India has increased inequality within those countries by making the income of the rich grow faster than that of the poor – an income gap is an inevitable consequence of an expanding economy. Yet the global effect of the growth of China and India has been to reduce the difference between rich and poor worldwide. (#litres_trial_promo)As Hayek put it (#litres_trial_promo), ‘once the rise in the position of the lower classes gathers speed, catering to the rich ceases to be the main source of great gain and gives place to efforts directed towards the needs of the masses. Those forces which at first make inequality self-accentuating thus later tend to diminish it.’

In another respect, too, inequality has been retreating. The spread of IQ scores has been shrinking steadily – because the low scores have been catching up with the high ones. This explains the steady, progressive and ubiquitous improvement in the average IQ scores people achieve at a given age – at a rate of 3 per cent per decade. In two Spanish studies, IQ proved to be 9.7 points higher after thirty years, most of it among the least intelligent half of the group. Known as the Flynn effect, after James Flynn who first drew attention to it (#litres_trial_promo), this phenomenon was at first dismissed as an artefact of changes in tests, or a simple reflection of longer or better schooling. But the facts do not fit such explanations because the effect is consistently weakest in the cleverest children and in the tests that relate most to educational content. It is a levelling-up caused by an equalisation of nutrition, stimulation or diversity of childhood experience. You can, of course, argue that IQ may not be truly representative of intelligence, but you cannot argue that something is getting better – and more equal at the same time.

Even justice has improved thanks to new technology exposing false convictions and identifying true criminals. To date 234 innocent Americans have been freed as a result of DNA fingerprinting after serving an average of twelve years in prison; seventeen of them were on death row. The very first forensic use of DNA in 1986 exonerated an innocent man and then helped to catch the real murderer, a pattern that has been repeated many times since.

Cheap light

These richer, healthier, taller, cleverer, longer-lived, freer people – you lot – have been enjoying such abundance that most of the things they need have been getting steadily cheaper. The four most basic human needs – food, clothing, fuel and shelter – have grown markedly cheaper during the past two centuries. Food and clothing especially so (a brief rise in food prices in 2008 notwithstanding), fuel more erratically and even housing has probably got cheaper too: surprising as it may seem, the average family house probably costs slightly less today than it did in 1900 or even 1700 (#litres_trial_promo), despite including far more modern conveniences like electricity, telephone and plumbing. If basic needs have got cheaper, then there is more disposable income to spend on luxuries. Artificial light lies on the border between necessity and luxury. In monetary terms, the same amount of artificial lighting (#litres_trial_promo) cost 20,000 times as much in England in the year 1300 as it does today.

Enormous as that difference is, in labour terms the change is even more dramatic and the improvement is even more recent. Ask how much artificial light you can earn with an hour of work at the average wage. The amount has increased from twenty-four lumen-hours in 1750 BC (sesame oil lamp) to 186 in 1800 (tallow candle) to 4,400 in 1880 (kerosene lamp) to 531,000 in 1950 (incandescent light bulb) to 8.4 million lumen-hours today (compact fluorescent bulb). Put it another way, an hour of work today earns you 300 days’ worth of reading light; an hour of work in 1800 earned you ten minutes of reading light. Or turn it round and ask how long you would have to work to earn an hour of reading light – say, the light of an 18-watt compact-fluorescent light bulb burning for an hour. Today it will have cost you less than half a second of your working time if you are on the average wage: half a second of work for an hour of light. In 1950, with a conventional filament lamp and the then wage, you would have had to work for eight seconds to get the same amount of light. Had you been using a kerosene lamp in the 1880s, you would have had to work for about fifteen minutes to get the same amount of light. A tallow candle in the 1800s: over six hours’ work. And to get that much light from a sesame-oil lamp in Babylon in 1750 bc would have cost you more than fifty hours’ of work. From six hours to half a second – a 43,200-fold improvement – for an hour of lighting: that is how much better off you are than your ancestor was in 1800, using the currency that counts, your time (#litres_trial_promo). Do you see why my fictional family ate by firelight?

Much of this improvement is not included in the cost-of-living calculations, which struggle to compare like with unlike. The economist Don Boudreaux (#litres_trial_promo) imagined the average American time-travelling back to 1967 with his modern income. He might be the richest person in town, but no amount of money could buy him the delights of eBay, Amazon, Starbucks, Wal-Mart, Prozac, Google or BlackBerry. The lighting numbers cited above do not even take into account the greater convenience and cleanliness of modern electric light compared with candles or kerosene – its simple switching, its lack of smoke, smell and flicker, its lesser fire hazard. Nor is the improvement in lighting finished yet. Compact fluorescent bulbs may be three times as efficient as filament bulbs in turning electrons’ energy into photons’ energy, but light-emitting diodes (LEDs) are rapidly overtaking them (as of this writing LEDs with ten times the efficiency of incandescent bulbs have been demonstrated) and have the added benefit of working at a portable scale. A cheap LED flashlight, powered by a solar-charged battery, will surely soon transform the life of some of the 1.6 billion people who do not have mains electricity, African peasants prominent among them. Admittedly, LEDs are still far too expensive to replace most light bulbs, but that might change.

Think what these improvements in lighting efficiency mean. You can either have a lot more light, or do a lot less work, or acquire something else. Devoting less of your working week to earning your lighting means devoting more of it to doing something else. That something else can mean employment for somebody else. The improved technology of lighting has liberated you to make or buy another product or service, or do a charitable act. That is what economic growth means.

Saving time

Time: that is the key. Forget dollars, cowrie shells or gold. The true measure of something’s worth is the hours it takes to acquire it. If you have to acquire it for yourself, it usually takes longer than if you get it ready-made by other people. And if you can get it made efficiently by others, then you can afford more of it. As light became cheaper so people used more of it. The average Briton today consumes roughly 40,000 times as much artificial light as he did in 1750. (#litres_trial_promo) He consumes fifty times as much power and 250 times as much transport (measured in passenger-miles travelled), too.

This is what prosperity is: the increase in the amount of goods or services you can earn with the same amount of work. As late as the mid-1800s, a stagecoach journey from Paris to Bordeaux cost the equivalent of a clerk’s monthly wages; today the journey costs a day or so and is fifty times as fast. A half-gallon of milk cost the average American ten minutes of work in 1970, but only seven minutes in 1997. A three-minute phone call from New York to Los Angeles cost ninety hours of work at the average wage in 1910; today it costs less than two minutes. A kilowatt-hour of electricity cost an hour of work in 1900 and five minutes today. In the 1950s it took thirty minutes work to earn the price of a McDonald’s cheeseburger; today it takes three minutes. Healthcare and education are among the few things that cost more in terms of hours worked now than they did in the 1950s. (#litres_trial_promo)

Even the most notorious of capitalists, the robber barons of the late nineteenth century, usually got rich by making things cheaper. Cornelius Vanderbilt is the man for whom the New York Times first used the word ‘robber baron’. He is the very epitome of the phrase. Yet observe what Harper (#litres_trial_promo)’s Weekly had to say about his railways in 1859:

The results in every case of the establishment of opposition lines by Vanderbilt has been the permanent reduction of fares. Wherever he ‘laid on’ an opposition line, the fares were instantly reduced, and however the contest terminated, whether he bought out his opponents, as he often did, or they bought him out, the fares were never again raised to the old standard. This great boon – cheap travel – this community owes mainly to Cornelius Vanderbilt.

Rail freight charges fell by 90 per cent between 1870 and 1900. There is little doubt that Vanderbilt sometime bribed and bullied his way to success, and that he sometimes paid his workers lower wages than others – I am not trying to make him into a saint – but there is also no doubt that along the way he delivered to consumers an enormous benefit that would otherwise have eluded them – affordable transport. Likewise, Andrew Carnegie, while enormously enriching himself, cut the price of a steel rail by 75 per cent in the same period; John D. Rockefeller cut the price of oil by 80 per cent. During those thirty years, the per capita GDP of Americans rose by 66 per cent. They were enricher-barons, too (#litres_trial_promo).

Henry Ford got rich by making cars cheap (#litres_trial_promo). His first Model T sold for $825, unprecedentedly cheap at the time, and four years later he had cut the price to $575. It took about 4,700 hours of work to afford a Model T in 1908. It takes about 1,000 hours today to afford an ordinary car – though one that is brimming with features that Model Ts never had. The price of aluminium fell from $545 a pound in the 1880s to 20 cents a pound in the 1930s, thanks to the innovations of Charles Martin Hall and his successors at Alcoa. (Alcoa’s reward for this price cut was to be sued by the government on 140 counts of criminal monopoly: the rapid decrease in the price of its product being used as evidence of a determination to deter competition. Microsoft suffered the same allegation later in the century.) When Juan Trippe sold cheap tourist-class seats on his Pan Am airline in 1945, the other airlines were so insulted that they petitioned their governments to ban Pan Am: Britain, shamefully, agreed, so Pan Am flew to Ireland instead. The price of computing power fell so fast in the last quarter of the twentieth century that the capacity of a tiny pocket calculator in 2000 would have cost you a lifetime’s wages in 1975. The price of a DVD player in Britain fell from £400 in 1999 to £40 just five years later, a decline that exactly matched the earlier one of the video recorder, but happened much faster.

Falling consumer prices is what enriches people (deflation of asset prices can ruin them, but that is because they are using asset prices to get them the wherewithal to purchase consumer items). And, once again, notice that the true metric of prosperity is time. If Cornelius Vanderbilt or Henry Ford not only moves you faster to where you want to go, but requires you to work fewer hours to earn the ticket price, then he has enriched you by granting you a dollop of free time. If you choose to spend that spare time consuming somebody else’s production then you can enrich him in turn; if you choose to spend it producing for his consumption then you have also further enriched yourself.

Housing, too, is itching to get cheaper, but for confused reasons governments go to great lengths to prevent it. Where it took sixteen weeks to earn the price of 100 square feet of housing in 1956, now it takes fourteen weeks and the housing is of better quality. (#litres_trial_promo) But given the ease with which modern machinery can assemble a house, the price should have come down much faster than that. Governments prevent this by, first, using planning or zoning laws to restrict supply (especially in Britain); second, using the tax system to encourage mortgage borrowing (in the United States at least – no longer in Britain); and third, doing all they can to stop property prices falling after a bubble. The effect of these measures is to make life harder for those who do not yet have a house and massively reward those who do. To remedy this, governments then have to enforce the building of more affordable housing, or subsidise mortgage lending to the poor (#litres_trial_promo).

Happiness

As necessities and luxuries get cheaper, do people get happier? A small cottage industry grew up at the turn of the twenty-first century devoted to the subject of the economics of happiness. It started with the paradox that richer people are not necessarily happier people. Beyond a certain level of per capita income ($15,000 a year, according to Richard Layard (#litres_trial_promo)), money did not seem to buy subjective well-being. As books and papers cascaded out of the academy, Schadenfreude set in on a grand scale among commentators happy to see the unhappiness of the rich confirmed. Politicians latched on and governments from Thailand to Britain began to think about how to maximise gross national happiness instead of gross national product. British government departments now have ‘well-being divisions’ as a result. King Jigme Singye Wangchuck of Bhutan is credited with having been the first to get there in 1972 when he declared economic growth a secondary goal to national well-being. If economic growth does not produce happiness, said the new wisdom, then there was no point in striving for prosperity and the world economy should be brought to a soft landing at a reasonable level of income. Or, as one economist put it: ‘The hippies were right all along (#litres_trial_promo)’.

If true, this rather punctures the rational optimist’s balloon. What is the point of celebrating the continuing defeat of death, dearth, disease and drudgery, if it does not make people happier? But it is not true. The debate began with a study by Richard Easterlin in 1974 (#litres_trial_promo), which found that although within a country rich people were generally happier than poor people, richer countries did not have happier citizens than poor countries. Since then the ‘Easterlin paradox’ has become the central dogma of the debate. Trouble is, it is wrong. Two papers were published in 2008 analysing all the data, and the unambiguous conclusion of both is that the Easterlin paradox does not exist (#litres_trial_promo). Rich people are happier than poor people; rich countries have happier people than poor countries; and people get happier as they get richer. The earlier study simply had samples too small to find significant differences. In all three categories of comparison – within countries, between countries and between times – extra income does indeed buy general well-being. That is to say, on average, across the board, on the whole, other things being equal, more money does make you happier. In the words of one of the studies (#litres_trial_promo), ‘All told, our time-series comparisons, as well as evidence from repeated international cross-sections, appear to point to an important relationship between economic growth and growth in subjective well-being’.

There are some exceptions. Americans currently show no trend towards increasing happiness. Is this because the rich had got richer but ordinary Americans had not prospered much in recent years? Or because America continually draws in poor (unhappy) immigrants, which keeps the happiness quotient low? Who knows? It was not because the Americans are too rich to get any happier: Japanese and Europeans grew steadily happier as they grew richer despite being often just as rich as Americans. Moreover, surprisingly, American women have become less happy in recent decades despite getting richer.

Of course, it is possible to be rich and unhappy, as many a celebrity gloriously reminds us. Of course, it is possible to get rich and find that you are unhappy not to be richer still, if only because the neighbour – or the people on television – are richer than you are. Economists call this the ‘hedonic treadmill’; the rest of us call it ‘keeping up with the Joneses’. And it is probably true that the rich do lots of unnecessary damage to the planet as they go on striving to get richer long after the point where it is having much effect on their happiness – they are after all endowed with instincts for ‘rivalrous competition’ descended from hunter-gatherers whose relative, not absolute, status determined their sexual rewards. For this reason a tax on consumption to encourage saving for investment instead (#litres_trial_promo) is not necessarily a bad idea. However, this does not mean that anybody would be necessarily happier if poorer – to be well off and unhappy is surely better than to be poor and unhappy. (#litres_trial_promo) Of course, some people will be unhappy however rich they are, while others manage to bounce back cheerful even in poverty: psychologists find people to have fairly constant levels of happiness (#litres_trial_promo) to which they return after elation or disaster. Besides, a million years of natural selection shaped human nature to be ambitious to rear successful children, not to settle for contentment: people are programmed to desire, not to appreciate.

Getting richer is not the only or even the best way of getting happier. Social and political liberation is far more effective, says the political scientist Ronald Ingleheart (#litres_trial_promo): the big gains in happiness come from living in a society that frees you to make choices about your lifestyle – about where to live, who to marry, how to express your sexuality and so on. It is the increase in free choice since 1981 that has been responsible for the increase in happiness recorded since then in forty-five out of fifty-two countries. Ruut Veenhoven finds (#litres_trial_promo) that ‘the more individualized the nation, the more citizens enjoy their life.’

Crunch

And yet, good as life is, today life is not good. Happy statistics of recent improvement sound as hollow to a laid-off car worker in Detroit or an evicted house owner in Reykjavik as they would to a cholera victim in Zimbabwe or a genocide refugee in Congo. War, disease, corruption and hate still disfigure the lives of millions; nuclear terrorism, rising sea levels and pandemic flu may yet make the twenty-first century a dreadful place. True, but assuming the worst will not avert these fates; striving to continue improving the human lot may. It is precisely because so much human betterment has been shown to be possible in recent centuries that the continuing imperfection of the world places a moral duty on humanity to allow economic evolution to continue. To prevent change, innovation and growth is to stand in the way of potential compassion. Let it never be forgotten that, by propagating excessive caution about genetically modified food aid, some pressure groups may have exacerbated real hunger in Zambia (#litres_trial_promo) in the early 2000s. The precautionary principle (#litres_trial_promo) – better safe than sorry – condemns itself: in a sorry world there is no safety to be found in standing still.

More immediately, the financial crash of 2008 has caused a deep and painful recession that will generate mass unemployment and real hardship in many parts of the world. The reality of rising living standards feels to many today to be a trick, a pyramid scheme achieved by borrowing from the future.