Saturday, March 16, 2019

Bread, Butter and Beer: One of Our Favorite Economists Talks Breakfast and Other Stuff

Readers who have been with us for a while may remember Hans-Joachim Voth from such hit posts as:
The papers linked in those posts were written while he was a young Professor in Barcelona.
These days he sits in a comfy endowed chair as the UBS Professor of Macroeconomics and Financial Markets in the Department of Economics at Zurich University.
We don't hold his time at McKinsey against him.
From VoxEU, another of his older pieces:

03 September 2009
Coffee, consumer choice, and the consequences of Columbus 
There is a broad consensus that living standards stagnated for millennia before the Industrial Revolution. This column attributes that conclusion to a measurement error in real wage indices. The introduction of new goods such as coffee, sugar, and tea to England in the 1700s and 1800s dramatically raised living standards – perhaps more than 15%.

What’s a cup of coffee worth to you? A lot, given the price of a “venti latte” at Starbucks. In this column, we argue that almost all coffee for sale today is a steal. Imagine a world without that morning kick from hot, caffeinated (and often sweet) liquid. How much would you be willing to pay to get it?

Instead of asking modern-day consumers to imagine a world without coffee, we go back to a time when coffee, tea, and sugar actually were new goods. Techniques for measuring the gains from newly imported goods have made progress recently (e.g. Broda and Weinstein 2006). Using historical data on prices and quantities for these “new luxuries”, we estimate their value to consumers. It turns out to have been very large. By 1850, English consumers were better off by 15-20% as a result of new goods. The Age of Discoveries boosted peoples’ well-being – not by changing the quantities or prices of goods that Europeans already knew in 1500, but by expanding the range of goods that consumers could buy.

Comparing these gains to more recent new goods, we find that – from a welfare perspective – sugar, tea, and coffee mattered more back then than did the recent introduction of the internet, computers, satellite television, and mobile phones combined.
The dramatic rise of colonial luxuries Tea reached Europe from China in 1606, spreading to France in 1630, and finally to England in 1650 (Goodman 1995). Coffee spread through the Middle East and arrived in Europe in 1615. Sugar, available before 1500 in limited quantities, only became affordable once production centres developed in the Caribbean starting in the mid 17th century.

At first, these goods were luxuries rarely consumed by the lower and middle classes. Gradually, the real price of these goods began to fall, as the use of slaves on large-scale plantations in the Caribbean, advances in production technology, better shipping, and increased sophistication of trade networks all contributed to declining costs.

Figure 1 shows the real price of tea (left panel) and per capita tea consumption (right panel) for the years 1690-1850. The real price falls from 614 pence per pound in 1690 to 54 pence in 1850, a decline of 91% (Clark 2004). Consumption, not surprisingly, grows commensurately, starting at very low levels in 1690 (Forrest 1973) and growing to 2.43 lbs per capita per year in 1854-56 (Mokyr 1988). Both sugar and coffee exhibit a similar pattern; sugar fell from 32 pence per pound in 1600 to 5.7 pence, with consumption rising to a staggering 33 lbs per capita in 1854-56 (Clark 2004; Mokyr 1988). Far from being trivial expenditures, these goods grew to occupy a surprisingly large share of the average household’s budget.
Figure 1. Tea consumption, 1690-1850
By the end of the period, sugar, coffee, and tea constituted 7.2% of an average English household’s budget, and roughly 10% of their food expenditure (Horrell 1996). To put this in perspective, personal consumption expenditure on personal computers in the US in 2004 was only 0.6% of consumption expenditure, meaning that, by at least one metric, the average Englishman valued sugar more than the average American values his or her computer (Greenwood and Kopecky 2009). And neither were these goods reserved solely for the wealthy, as budget shares across incomes confirm these goods were broadly consumed across class lines (Horrell 1996).
Bread and butter (and beer) measurement: Real wages before 1850 Prior to 1700, the average European consumed 182 kg of bread and 182 litres of beer per year (Allen 1992). Half of all spending was on beer and bread, and fully three-quarters of all calories came from these two sources alone. The reason for massive beer consumption was simple – water was often contaminated. This was especially true in the cities. Brewed beer was safe. It is hence not surprising that it was consumed throughout the day, often with breakfast, and in all forms – including as beer soup in the morning (Schivelbusch 1992)....
...MUCH MORE

For the third time our link to the South Sea Bubble paper has rotted,
Here's the version hosted at MIT:
By PETER TEMIN AND HANS-JOACHIM VOTH