Technology has improved living standards by more than we think

The media seems full of gloom at the moment. Chaos over Brexit, Saudi Arabia, potential nuclear escalation between America and Russia, you name it, it is there.

A ray of light is shone – an apt phrase as you will see - by the work of Bill Nordhaus, a Yale economist who was the co-winner of this year’s Nobel prize in economics, along with Paul Romer.

Over the past two decades or so, Nordhaus has worked mainly on integrating climate change into macroeconomic models and was awarded the accolade for this research.

Nordhaus is no knee-jerk lefty in this respect. For example, he was a prominent critic of the report on climate change by Nick Stern, which was commissioned by Gordon Brown.

But in my view, Nordhaus should have been awarded the Prize years ago for his brilliant work on measuring how well off we all are.

The conventional measure of GDP per head is widely criticised these days. Instead of just whinging from the side lines about how economics is wicked and useless, a common feature in modern critiques, Nordhaus actually tried to do something about it.

In 1972 he developed with James Tobin – another future Nobel laureate – the Measure of Economic Welfare.

The two economists took GDP as their starting point. They adjusted it to include, for example, an assessment of the value of leisure time and the amount of unpaid work in an economy. Taking these into account means we are better off than the conventional GDP measure suggests.

Nordhaus’ most dramatic paper, published in 1996, is on the seemingly obscure topic of the history of lighting. He analysed the topic over a vast time span, from the first sources of artificial light, the fires used by humanity around 1 million years ago, to the modern fluorescent bulb.

The focus of the paper was not the technology as such, but whether the standard ways of measuring the price of lighting captured the massive improvements in quality which have taken place, particularly in the 20^th century.

Nordhaus concludes that the traditional price indexes of lighting vastly overstate the increase in lighting prices over the last two centuries. So, the true rise in living standards has consequently been vastly understated.

The magnitude of the difference is remarkable. Nordhaus estimates that the price measured in the conventional way rose by a factor of between 900 and 1600 more than the true price.

Bodies such as the Office for National Statistics receive information about the economy in current prices. If output in any particular sector has increased, a key task for the ONS is to decide how much of the increase is due to a rise in prices, and how much to a genuine increase in output.

Rapid quality change means that the conventional ways of doing this simply cannot cope. Price rises are overstated, and in consequence “real” changes in output and living standards are understated.

The implication of Nordhaus’ apparently esoteric work on lighting is that modern technology such as the internet has increased living standards far more than the official statistics indicate.