Measuring economic growth over generationsBerkshire Hathaway's annual report was released last week and it of course includes another letter written by Warren Buffet. There are always nuggets in there to help understand our world, business management, and even obligatory diet advice (burgers and cola all the way down). But in this issue I found a theme on measuring "economic growth" over time.
The percentage of people employed in farming has decreased tremendously over the past 200 years however output increased. This resulted in many disrupted jobs but now nearly everybody has access to very affordable food. This drastic change has also happened in other industries and as we speak there are several being steamrolled right now. What tools should we use to determine if this was a good development (improvement in quality of life) or a bad one (exploitation of labor, concentration of wealth, robot conspiracy)?
Lots of numbers are available from statisticians: GDP, worker productivity, inflation, gini index and more. You could find these number if you read the reports (and trust the authors), but is there something that is more readily available and obvious?
Yes! Directly compare the quality of life across time and across income levels. If we can assume that people with higher income levels or more wealth have a higher quality of life then this is a sound method. Buffett gives one explanation:
All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.It might not be easy, but this is the correct way to compare the improvement of the life circumstances across times. Luckily, for most of mankind this is a simple comparison and progress has been positive.