Am I better off than Henry VIII? Dressing the question up in inflation statistics doesn’t make it any more sensible.
If you are reading this, Linda, I hope you still remember the evening we spent together in Oxford in the summer of 1972. We dined at the Elizabeth restaurant. We enjoyed the piperade, the supreme de volaille, and the crême brulée, and much else.
I had exactly the same meal there a few weeks ago. I have changed and so, I expect, have you. But the Elizabeth has not. The décor is just as it was, the service is still classically impeccable and the piperade, the volaille and the crême brulée are still on the menu. The coffee is brewed by the same vacuum process that brewed it in 1972.
But the price is very different. I don’t have the bill for our dinner (not even my Scottish canniness goes that far) but an old Good Food Guide buried in the Bodleian Library tells me that I could have bought that meal in 1968 for 31/- (or £1.55 as it became on decimalisation). This year, it cost me £23. In 1972, neither Linda nor I had eaten a hamburger. McDonalds arrived in the UK in 1974 and a Big Mac then cost 45p. Today you will pay £1.84, an annual inflation rate of 6 per cent. These comparisons are freaks. The curious time warp that envelopes the Elizabeth, and the relentless standardisation of McDonalds, enable us to look at these price changes with confidence that we are comparing like with like. Most of the modern economy is not like that.
If you had gone to Australia in 1960, you would probably have gone by sea. A shared cabin on P&O would have cost you £132. Today Qantas will fly you to Sydney for £791, a price rise of 5 per cent per annum. But what you get is a very different product. I am willing to bet that faced with the choice of a six week journey by sea for £132 or a twenty-four hour flight at £791, most people would choose Qantas. The improvement in quality more than offsets the increase in cost. When we recognise this, we see that the price of getting to Australia has not gone up. It has come down.
A brilliant essay by the American economist Bill Nordhaus provides a good illustration of the issues. The price indices we see reported measure changes in the price of light bulbs and of electricity. But we don’t buy light bulbs because we want light bulbs. We buy light bulbs because we want light. Nordhaus showed that if you measure the price of light, rather than the price of the things you use to make light, the difference amounts to nearly 4% per year. The price of lighting things has moved in line with general inflation: the price of light itself has fallen.
Health budgets around the world are under pressure from the escalating cost of medical services. But are these costs really rising? David Landes has recently explained how Evelyn de Rothschild, probably then the richest man in the world, died prematurely in 1836 despite the best medical attention money could buy. He died from an infection which could today be cured by drugs available for a few pence at any pharmacy. The cost of medicaments may have gone up, but the cost – literally – of living has come down.
But these arguments do not all go one way. When I bought Linda dinner in 1972, I was not really purchasing a supreme de volaille. I was buying her the best dinner Oxford could offer. To do that today, I would have to take her to the Manoir aux Quat’Saisons, and pay the £72 that M. Blanc demands for a meal. That is equivalent to inflation of 16 per cent per annum. Fine dinners are a positional good – their value rests on the fact that not everyone can afford them, and their price rises with the incomes of the people who can afford them.
These problems are not minor quibbles. The developments I describe – the creation of new, higher quality restaurants, the substitution of new forms of transport for old, advances in medical technology, and improvements in lighting efficiency – are typical of what has happened right across the economy. And that is why the price indices we use are hedged by doubts. As it happens, the cost of a meal at the Elizabeth, rising at 11 per cent a year almost exactly matches the movement in the catering component of the Retail Prices Index.. But I could reduce catering inflation to 6 per cent by looking at the price of a Big Mac or increase it to 16 per cent by measuring the change in the cost of a very good evening out. You could present a good argument for adopting any of these figures.
And if we are so uncertain about what has really happened to prices, we are therefore uncertain about what has really happened to output and economic growth. How do we compare a bundle of output that consists of sea crossings, slide rules and Ealing comedies with one made up of package holidays, computers and televisions? Only by making a decision as to how many Ealing comedies equal one television. I don’t know how to do that and nor does the Office for National Statistics.
It is tempting to argue that we could solve these problems if we were more careful in the way we compile economic statistics. There is not much doubt that if we paid more attention to quality improvements and the consequences of the introduction of new goods the reported rate of inflation would be lower – probably much lower – and the reported rate of growth would be higher – probably much higher.
But the issue goes deeper. Am I better or worse off than Henry VIII? True, I have fewer wives, servants and palaces. But Henry suffered agonies from piles and could not get to Bristol in less than a week. Asking whether I would rather be me or Henry VIII is as stupid a question as asking whether I would be happier if I were a sheep or a fly, and the question is not made less stupid by dressing it up in figures. When someone tells you that inflation is 3.7 per cent and growth 2.1 per cent, be very wary of believing that these numbers tell you what has happened either to the cost or the standard of living.
Nordhaus, W. Do Real-Output and Real-Wage Measures Capture Reality
in T. F. Bresnahan & R. J. Gordon (eds.) The Economics of New Goods Chicago University Press, 1997
Landes, D. The Wealth and Poverty of Nations