Avoid the Average: A Tale of Two Op-Eds

Imagine a society where everyone gets the same income. Then the income of one quarter of the population suddenly increases by a factor of five while the income of the other three quarters stays the same. How would we compare the society before and after this jolt of riches? Here are some common reactions:

• The average income has doubled. The new world is better than the old.
• Most people in the society have seen no change. The new world is not really different from the old world.
• There is increased inequality. The new world will be marked by unequal access to power and by failing democratic institutions. The new world is worse than the old.
• … and on and on. You know the drill.

The standard positions have been hashed out ad nauseam, but two recent op-eds in the New York Times prompt this challenge: Avoid using the words "on average" in your reaction to the stories they tell – no matter how tempting you find it.

The first op-ed was back in February by Michael Cox and Richard Alm, and was called You Are What You Spend:

To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.

…[T]his wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.

According to this story, inequality creates markets for luxury products that, over time, we all come to enjoy. Are you saying to yourself "yes, that's it – the new world is indeed better than the old" or do you find yourself opposing the story – "wait a minute, that's outweighed by other changes"? Well either way, stop now.

The second op-ed was last week by Amartya Sen, and was called The Rich Get Hungrier:

[A] country with a lot of poor people suddenly experiences fast economic expansion, but only half of the people share in the new prosperity. The favored ones spend a lot of their new income on food, and unless supply expands very quickly, prices shoot up. The rest of the poor now face higher food prices but no greater income, and begin to starve. Tragedies like this happen repeatedly in the world.

A stark example is the Bengal famine of 1943, during the last days of the British rule in India. The poor who lived in cities experienced rapidly rising incomes, especially in Calcutta, where huge expenditures for the war against Japan caused a boom that quadrupled food prices. The rural poor faced these skyrocketing prices with little increase in income.

Misdirected government policy worsened the division. The British rulers were determined to prevent urban discontent during the war, so the government bought food in the villages and sold it, heavily subsidized, in the cities, a move that increased rural food prices even further. Low earners in the villages starved. Two million to three million people died in that famine and its aftermath.

The income of the poorer part of society stayed the same, but the increase in prices caused by the expanded appetites of the newly wealthy made some of the poor worse off in the most obvious way possible – they were dead, rather than alive. Are you saying "yes, but that's the price of progress" or "This is what matters. How can you compare life and death to cellphones"? Well either way, stop now.

For some reason we spend most of our time assessing which of these changes outweighs the other rather than just admitting that both stories have some truth to them. In a technological age, inequality provides one of the driving forces for innovation that generates long-run growth. In a society where basic goods are rationed by price, inequality will put more of those basic goods out of reach of the poorer ranks of society.

I am in natural sympathy with the second story and not with the first, but I suspect both are largely true. The industrial revolution contained both these stories. Technological change and inequality-driven poverty that made many people really worse off. And as so often, EP Thompson got it right. Commenting [in The Making of the English Working Class, p232] on John Clapham's Economic History of Modern Britain he wrote "Throughout this painstaking investigation" of changes that affected field labourers at the turn of the 19th century, Clapham "eschews all generalizations except for one — the pursuit of the mythical 'average'." "What he was really doing [with his pursuit of the average], of course, was to offer a tentative value judgement as to that elusive quality, 'well-being'… Since the judgement springs like an oak out of such a thicket of circumstantial detail — and since it is itself discuised as an 'average' — it is easily mistaken as a statement of fact".

Was the industrial revolution good or bad? Yes.

So how do we react to these two different stories? By refusing to let one cancel out the other. A natural conclusion of Sen's story is that scarce basic goods should stay out of the market economy (public education, public health care) as price is not a good way to ration access to such goods. And a natural conclusion of the innovation story is that the market economy has an important role when it comes to providing new goods. Neither are particularly controversial of course, but if we pursue the mythical average we end up thinking of them as being in contradiction. If the market is good for cars why not antibiotics? If price cannot be trusted to supply rice in Bengal, why can it be trusted with cellphones? It is in pursuing the mythical average that we end up with such one-dimensional statements as "markets are bad" or "government should stay out of the economy". The trick, I increasingly think, is to refuse to pursue that average.