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
