A History of Personal Wealth

Personal Wealth

Much attention is paid these days to the economic growth of our modern economies and the resulting growth of individual wealth. There is no shortage of theories as to what causes this growth or what hinders it. But the track record of this growth of personal wealth is far less debatable.

Scottish economist Angus Maddison was one of the first to notice a startling discontinuity in economic growth around 1820. Among his findings were a doubling of average life span, a near quadrupling of education levels, and the rapid disappearance of illiteracy, all in the four decades before World War I. His most notable finding was that before 1820 economic growth was essentially nonexistent, and after, explosive and sustained.

To start off lets take a look at per capita GDP in America adjusted for inflation. This is the amount of wealth available to each and every individual in terms of 1998 US dollars. You can see how closely growth matches the 2% per year average. That is to say that over the past 200 years the average American has become 2% more wealthy each and every year.

USA per capita GDP adjusted for inflation USA per capita GDP adjusted for inflation
photo credit: The Birth of Plenty by William J. Bernstein

The phenomenon was experienced across the rest of Western Civilization, and later the rest of the world, as well. The figures below show per capita GDP once again adjusted for inflation. Notice how this dramatic change begins in the early 19th century as is the case for America.

Per capita GDP for European countries adjusted for inflation Per capita GDP for European countries adjusted for inflation
photo credit: Monitoring the World Economy by Angus Maddison
World per capita GDP World per capita GDP adjusted for inflation
photo credit: The World Economy by Angus Maddison

This is even more remarkable when one takes into account all of the historical events of the past 200 years. Wars, recessions, depressions and other calamities had little effect on hindering the relentless progress forward. Even in the cases of Germany and Japan, whose economies were thoroughly destroyed in one of the largest wars in human history, economic progress was almost immediately resumed after the end of World War II.

It is difficult to put this all into perspective. What these graphs show is that 200 years ago in the United States per capita GDP was about $1000 per year, again adjusted for inflation. Today per capita GDP is about $53,000 per year. This is a 5,300% increase in personal wealth. If the trend continues unabated, as it probably will, then 200 years into the future per capita GDP in America is likely to be around $2.8 million per year. Imagine if the average American possessed this kind of wealth today. This should help to illustrate our current state of material well being as seen from the lives of everyday Americans 200 years ago.

Costs Dropping

As remarkable as the dramatic increase in wealth is, it is only half of the story. Additionally, the cost of almost every material thing has been in continual decline. As new technologies and processes were applied to centuries old endeavors, the cost of food, clothing, housing, transportation, communication, energy, etc. have continued to fall as time goes by.

Below are charts showing the cost of various metals and the cost of food relative to income in the United States. This reflects rising incomes coupled with falling inflation adjusted prices.

Decline in the price of metals relative to wages Metal prices relative to income
photo credit: The Rational Optimist by Matt Ridley
Percent of disposable income spent on food Percent of disposable income spent on food
photo credit: USDA

I'm sure that many of the details of this article could be debated. But the larger point remains, the average person is becoming ever more wealthy as time goes by. What is remarkable is that this growth is sustained and shows no sign of letting up. If any change is likely, it is rather that the rate of growth will accelerate.


Originally published March 20, 2016

Sources:
  The Birth of Plenty by William J. Bernstein
  Monitoring the World Economy, 1820-1992 by Angus Maddison
  The Birth of the Modern by Paul Johnson
  Guns, Germs, and Steel by Jared Diamond
  The Rational Optimist by Matt Ridley



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