Were average incomes in Australia far behind those in Britain a century ago?

In his book, “The moral consequences of economic growth”, Benjamin Friedman claims:
“A century ago, Britain enjoyed the highest per capita income in the world, while southern European countries like Italy and Spain were far behind, as were distant parts of Britain’s own empire like Canada and Australia” (p300).

It is not clear where Friedman obtained his information about Australia, but it is almost certainly wrong. By most accounts, Australia had the highest per capita income in the world during the late 19th century. Research suggests that in the early years of the 20th century Australia’s per capita income was still at least on par with that in Britain, if not still slightly ahead. One set of estimates suggests that Australia’s per capita income was 2.8 percent higher than Britain’s in 1901 and 16.3 percent higher in 1911. Another set of estimates suggests that Australia’s per capita income was 11.2 percent higher than Britain’s in 1901 and 3.9 percent higher in 1911. (See: Stephen Broadberry and Douglas Irwin, ‘Lost exceptionalism? Comparative income and productivity in Australia and the UK, 1861-1948’, The Economic Record, September 2007.)

Why does it matter whether or not average income in Australia was as high as that in Britain a century ago? If this was just about past glory it seems to me that it would just be a suitable topic for discussion at the local pub. It would matter no more than, say, the relative merits of warm and cold beer, or the relative merits of cricket pitches in England and Australia.

The reason why it should matter to Australians whether our per capital income was as high as Britain’s a century ago is because this is the base from which we assess the performance of the Australian economy during the 20th century. If Friedman was correct, then Australia’s relative economic performance during the 20th century would not look so bad. In reality, however, Australia’s economic performance throughout most of the 20th century was just about as pathetic as that of Britain. In my view the relatively poor economic performance of both countries, compared to the United States, can be attributed largely to economic policy failures.

Does inner freedom link liberty with flourishing?

Dan Gilbert claims that “human beings come into the world with a passion for control, they go out of the world the same way, and research suggests that if they lose their ability to control things at any point between their entrance and their exit, they become unhappy, helpless, hopeless and depressed” (“Stumbling on happiness”, 2007, p 22).

As an economist I rarely feel entirely sure how much credence can be placed on strong claims made by psychologists. The problem is not with psychologists. Their knowledge of psychology might even make them less prone than, say, economists or climate scientists to let their enthusiasm run away with them when propounding their pet theories. It is just a problem of asymmetric information – scientists who are selling ideas related to their areas of expertise know a lot more about the strength and weakness of those ideas than do potential buyers of those ideas.

In this instance, however, I feel that a lot of credence can be placed on Dan Gilbert’s claim, not least because he backs it up with a reference to Martin Seligman’s path-breaking work on helplessness in the 1970s. This research has been tested extensively in the intervening years.

So, if humans have a passion for control of their own lives (or inner freedom) it seems to me that this raises a series of questions that are relevant to the purpose of this blog.

1. Is self-direction necessary for happiness? This question has already been addressed at two levels in this blog. First, at a philosophical level, it has been discussed in terms of Aristotelian views - ancient and modern - of about the nature of human flourishing as an inherently self-directed process (here). Second, at a more pragmatic level, it has been discussed in terms of the research undertaken by Edward Deci and Richard Ryan that indicates that human flourishing depends on the extent to which people satisfy a need for autonomy as well as a need to feel competent and connected to others (here).

More recent research by Alan Waterman and others suggests that requiring the performance of an activity previously associated with the feeling of eudemonia – developing one’s unique individual potentials and furthering one’s purposes in living – “may have the effect of moving it from the category for which both hedonic enjoyment and eudaimonia are present to the category for which neither is present” (‘The implications of two conceptions of happiness ...’, Journal of Happiness Studies, 2008).

However, it seems to me to be consistent with self-direction that people voluntary submit to various requirements because they feel that some short-term sacrifice is worthwhile in order to achieve greater happiness later. For example, people submit to examinations in the process of skill development - knowing that this will take some of the joy out of learning. From an economic perspective such sacrifices are what investment is about.

2. Is liberty necessary for human flourishing? Some people view human flourishing as a communal effort that does not leave individuals much if any room for self-direction. I think that view is mistaken, but I am prepared to live and let live provided the people who hold that view are willing to reciprocate. I agree with Douglass Rasmussen and Douglas Den Uyl that if people are to be allowed to flourish to the maximum extent possible without infringing on the flourishing of others, then we need a political/ legal order that will not favour some varieties of human flourishing above others (see here).

3. Is freedom a sufficient condition for happiness? Some people may not flourish under freedom simply because they lack the minimal resources that are necessary. This opens up questions about how such people might be helped (see here).

Learned helplessness can also be a problem. In Seligman’s original experiments some dogs were subjected to conditions under which they were unable to escape electric shocks no matter what they did. Some of these poor animals "learned" to be helpless because after changes were made so that they could easily escape shocks by jumping over a low partition, they didn’t even try. Even though they were free to escape the shocks, they just lay down passively and whined. (The experiment is described here.)

I propose to consider the following additional questions at some stage in the future:

• How closely is inner freedom correlated with life satisfaction?
  
• Is inner freedom correlated with external freedom as measured in indexes of economic freedom?
  
• Is inner freedom correlated with income and other economic variables?

How much do ideas matter?

In recent posts I have been discussing whether there is a tendency for people to be more tolerant in periods of economic growth than during periods of stagnation. In his book, The moral consequences of economic growth, Benjamin Friedman argues that when the economic pie is growing, people are happy that they are getting more than in the past and are less concerned about whether the slice they are getting is larger or smaller than that of other people.

Another way of thinking about this is in terms of perceptions about the nature of the economic game. The economic game can usually be thought of as a game of mutually beneficial exchanges in which everyone is a winner. However if individuals think that they can only win by taking from other people then they think they are playing a zero sum game (total gains minus losses equal zero). If large numbers of people think that way, the economic game actually becomes negative sum because there are costs involved in the redistribution process (including costs in lobbying governments to redistribute wealth or to defend the existing distribution).

In a growing economy people are more likely to perceive that they are involved in a positive sum game – gains clearly exceed losses and everyone has a better chance of being a winner. The opposite is true in a declining economy.

However, I think that ideas (or ideologies) often matter more than economic circumstances in determining perceptions about the nature of the economic game. I will give three examples.

First, it would be hard to think of anything more like a zero sum game than a gold rush. There is a limited amount of gold to be found. If one person is lucky enough to find some, that means that there is less gold available for others. As a result, mining camps could be expected to be unruly places with a great deal of dispute over mining claims (property rights). In fact, however, observers of the mining camps at the time of the Australian gold rushes of the 1850s were surprised at the order maintained and the capacity for spontaneous organisation shown by the miners, who came from many different countries. In many camps order seems to have been maintained through the miners’ own efforts to ensure compliance to informal codes of conduct rather than through a permanent police presence. (See Edward Shann, “An economic history of Australia”, 1930, p 171.)

Second, export booms in Australia have in the past often been characterised by increased conflict over distribution of national income, even though they offered the prospect of widely-shared benefits through stronger economic growth. The prevailing ideology, from early in the 20th century until the mid-1980s, was that the wage fixing system – combining a centralised system for setting minimum wages and a system of pattern bargaining where wage increases in one industry quickly spread to others – should be used to distribute the benefits of prosperity being experienced in export industries. This led to a great deal of industrial conflict, higher inflationary expectations and higher unemployment.

Third, the difference in response to the 1930s depression in Germany and other industrialised countries seems to be largely attributable to differences in prevailing ideas or ideologies. The discontents of the1930s provided fertile grounds for radical ideas (including Keynesian ideas which weakened resistance to budget deficits and monetary expansion) in all industrialised countries, but in Germany the idea that the world was a dog eat dog kind of place had gained considerable academic respectability prior to the depression and the rise of national socialism. These ideas were evident, for example, in Werner Sombart’s identification of Jews with the elements of capitalism that he most despised – the calculative search for advantage that led to dissolution of the traditional way of life of the Volk. (See: Jerry Muller, The mind and the market, 2002, pp 253-255.) Another influential example was Hans Freyer’s view that individuals acquire a sense of meaning and purpose only from the particular culture of the Volk of which they were a part and that the state exists to assert the interests of the Volk through struggle against external threats (Muller, pp 276-287). Even though Hitler declared himself to be anti-intellectual, national socialism was widely supported within German universities.

The social consequences that follow from economic events depend to a huge extent on prevailing ideas about what those events mean.

Are there good reasons why income comparisons can influence happiness?

One of the findings of happiness research is that when people are asked how satisfied they are with life as a whole their answers often depend partly on comparisons of their income levels with those of other people. Thus, for example, some people whose income level has risen may report that their life satisfaction has gone down if their incomes have not kept pace with the growth in average incomes in the community in which they live.

Many of us tend to assume that those who allow interpersonal income comparisons to influence how they feel must be either be feeling envious or gaining pleasure from others being less fortunate than themselves. Either way, the most obvious solution is for them to get over comparing themselves to others.

However, there are some good reasons why people compare their incomes with those of others when considering how satisfied they are with their own lives. Consider an imaginary person who responds to the life satisfaction question by considering how her (his) life is unfolding compared with her expectations. She had clear expectations about some important aspects of what life might hold – for example, she knows what she expected married life would be like and whether it is turning out to be as she had expected. At the same time, although she had no idea what rate of increase in income she could expect to receive, she nevertheless has a strong view that her income has not increased in line with her expectations. She has come to this view because at an earlier stage of her career she had good reason to expect that her income would rise at about the same rate as the average incomes of the people she was working with at that time. The fact that her income has not kept pace with the average rate of increase in the incomes of her former work colleagues does not make her feel envious of them. She just feels disappointed that she has not been able to live up to her own expectations in this regard.

In this example the individual is using a comparison with incomes of a specific reference group merely as a source of information. There is research evidence that in some countries this information effect is positive and dominates any negative comparison effect. Research by Claudia Senik suggests that in transition countries (Russia, Hungary, Poland and three Baltic countries) the life satisfaction of individuals rises when the income of their reference group -people with the same skills and occupation - increases (see here). Her explanation is that in these countries people consider that their own future prospects to be better when the income of their professional peers rises. By contrast, in EU countries increases in incomes of the reference group tend to reduce life satisfaction - people tend to assess how well they are doing relative to their reference group. The difference seems to stem from the greater income volatility and uncertainty of the transition countries.

The important point is that when people use income comparisons in assessing how satisfied they feel we should not assume that they perceive themselves to be involved in some kind of rat race. They may merely be using comparisons to consider their own expectations.