Why did men die of hunger, for six thousand years? Why did they walk, and carry goods and other men on their backs, for six thousand years, and suddenly, in one century, only on a sixth of this earth’s surface, they make steamships, railroads, motors, and are now flying around the earth in its utmost heights of air? Why did families live thousands of years in floorless hovels, without windows or chimneys, then, in eighty years and only in these United States, they are taking floors, chimneys, glass windows for granted, and regarding electric lights, porcelain toilets, and window screens as minimum necessities?
—Rose Wilder Lane, The Discovery of Freedom: Man’s Struggle against Authority, 1943
Our family of three—my wife, Rena, my adult daughter Karen, and I—have a family tradition as we sit to start our Thanksgiving meal: each of us says what he or she is thankful for. One thing I always give thanks for is our high standard of living. I bet that’s not unusual. Millions of American families probably give thinks for the bounty that exists in this country.
It’s important, though, to understand where that bounty comes from. Having studied the issue for over fifty-five years, I do. It results from the relatively high degree of economic freedom and more general freedom that we have in this country. Because I understand that, I have made a point on recent Thanksgiving days of expressing my thankfulness for our freedom. We have come a long way, and we should make sure we don’t blow it.
Past and present: the hockey stick
Many people, unfortunately, tend to take our economic well-being for granted. I’m not one of them.
Consider where our ancestors were and even where our grandparents were. Compare that to where we are.
For centuries, people went along in grinding poverty. One century was pretty much like another. But, starting in around 1800, we in the United States, Britain, Canada, and a few other Western countries have had economic growth every year except for years of recession. A plot of income per capita on the y-axis against time on the x-axis is the shape of a hockey stick. Income per capita zoomed in the nineteenth century and zoomed even more in the twentieth century.
In his famous 1942 book, Capitalism, Socialism, and Democracy, Austrian economist and Harvard economics professor Joseph Schumpeter wrote:
Queen Elizabeth [who reigned from 1558 to 1603] owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort.
In other words, wrote Schumpeter, economic growth was more important for everyday people than for the wealthy rulers. But here’s the striking thing: Schumpeter understated the case. Economic growth was important for everyone, including Queen Elizabeth. She couldn’t travel comfortably to another country, let alone in Britain. Chinese or Thai food? What’s that? And she didn’t even have a 1G cell phone—or, for that matter, any telephone.
Travel, Asian food, and cell phones are all luxuries and the first two are, for many people, relatively easy to go without. But think of some basics. Queen Elizabeth didn’t have fresh fruit or vegetables in winter. She couldn’t have a nice warm shower in the morning. If she got sick, there was little medical care to help her. And don’t get me started about the lack of dentistry and the effect of that lack on the health of teeth and gums.
Although things started to improve slowly in the last half of the eighteenth century, they were still pretty bad. In “Home Economics,” my February 2011 review of Bill Bryson’s book At Home: A Short History of Private Life, I wrote:
It is impossible to read Bryson’s chapter on the bedroom without emerging with an appreciation of economic growth and modern medicine. At inns, strangers often shared beds into the 19th century, and “diaries frequently contain entries lamenting how the author was disappointed to find a late-arriving stranger clambering into bed with him.” He tells of a squabble in 1776 between Benjamin Franklin and John Adams when they shared a bed in New Brunswick, New Jersey. The issue disputed was not the role of the federal government. It was the far more important question of “whether to have the window open or not.” With increasing wealth, people no longer had to share beds.
It’s easy to see the differences between now and earlier centuries, as the above examples and the opening quote from Rose Wilder Lane (the daughter of Laura Ingalls Wilder) make clear. But there are large differences even between life in the 1960s and life now.
I think of my own history. I grew up on the cold prairies in Canada. Here’s what I wrote on my Substack last week about what life was like back then:
We had three bedrooms for 5 people and, starting in 1958, one bathroom. (Before that, we had an outdoor “biffy.”) We used to go to our neighbors’ house to watch Walt Disney on Sunday nights because we didn’t have a TV. We moved to Carman when I was 9 and we didn’t get a TV until I was 10. I think it’s literally true that we were the last family in Carman to get a TV. In 1961, we bought a used 1955 black and white Philco TV. My father paid $150 for it. Adjusting that price for inflation using the Consumer Price Index, I calculate that the price in 2025 dollars would be over $1,600. It’s true that the CPI overstates inflation. Slice off 30% to account for that overstatement and the price in today’s dollars would still be over $1,100.
How about the past fifty years?
OK, you might say, things got better after the early 1960s, but what about from the 1970s to now? In a 2014 blog post titled “On Income Stagnation,” then–Princeton economist Paul Krugman wrote that we’ve had “very little income growth” for the median household since 1979. Interestingly, though, his own graph shows income growth of about 13 percent between 1979 and 2007. Yes, median household incomes fell after that, but that was due to the financial crisis. Moreover, Krugman adjusted for inflation using the consumer price index. But the CPI notoriously overstates inflation. Stanford University economist Michael Boskin, who chaired the Advisory Commission on the Consumer Price Index from 1995 to 1996, estimates that the CPI overstates inflation by 0.8 to 0.9 percentage points per year. So, taking the low end of the estimate, 0.8 percentage points, leads to the conclusion that between 1979 and 2007, US median household income rose not by Krugman’s 13 percent but, instead, by 41 percent. That’s over 1.2 percent annually.
In 2012, Lawrence Mishel, an economist at the Economic Policy Institute, argued that between 1973 and 2011, the real median hourly wage increased by a mere 4.0 percent, and real median hourly compensation, which includes fringe benefits, increased by only 10.7 percent. Just as Krugman did, though, Mishel adjusted for inflation using the CPI. Applying Boskin’s 0.8 percentage point per year adjustment leads to the conclusion that between 1973 and 2011, real wages rose by 40 percent and total compensation by 49 percent. That’s a big difference from Mishel’s numbers.
Maybe you’re skeptical of the idea that the CPI overstates inflation. Fine. Then do what economists Michael Cox and journalist Richard Alm did in their 1999 book, Myths of Rich & Poor: look at actual households’ consumption of goods and services. Cox and Alm showed that between 1970 and the mid-1990s, the average size of a new home increased from 1,500 square feet to 2,150 square feet, an increase of over 43 percent. They also looked at what was in and around the home. In 1970, only 34 percent of American homes had central heat and air conditioning; by the mid-1990s that had more than doubled to 81 percent. In 1970, 62.1 percent of all homes had clothes washers; by the mid-1990s, 83.2 percent had them. In 1970, only 29.3 percent of households had two or more vehicles; by the mid-1990s, that was up to 61.9 percent. That last statistic is even more impressive when you consider that over the same quarter century, the number of people per household fell from 3.14 to 2.64.
Cox and Alm even showed that by 1994 poor families did better on virtually every household item, from washing machines to color TVs to clothes dryers, than they had done in 1984. More impressively, what poor families had in their homes in 1994 was comparable to what the average family had in 1971.
Whence comes economic growth?
Steady economic growth is good and makes life easier. But what causes it? Economic freedom. Free markets allow people to find what they are best at and sell what they produce for money that they then use to buy what other people are good at producing. In his 1776 classic, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith showed the power of this extensive division of labor with his famous example of a pin factory. Smith also showed that allowing free trade across borders leads to an even more extensive division of labor, making people on both sides of any border better off.
One way to see the power of free markets in making people better off is to compare with similar backgrounds but starkly different economic systems. Two candidates for such comparisons are North and South Korea and East and West Germany. I compared them as an added feature to economist Kevin Grier’s article “The Empirics of Economic Growth” in David R. Henderson, ed., The Concise Encyclopedia of Economics.
North and South Korea had similar cultures, and both were in horrible shape when the Korean War hostilities ended in 1953. But North Korea went with communism, while South Korea had relatively free markets. In 2004, I wrote, “North Korea’s GDP was about $40 billion, up from $11 billion in 1953 (also in 2004 dollars). This implies an average annual growth rate of 2.6 percent.” How about South Korea? In 2004, I wrote, “South Korea’s GDP was about $925 billion, up from about $13.8 billion in 1953 (also in 2004 dollars). This implies an average annual growth rate of 8.6 percent, more than three times as much as North Korea’s official rate.”
Similarly, East Germany and West Germany, both in tatters after World War II, traveled very different economic paths: East Germany had communism, while West Germany had relatively free markets. Between 1950 and 1990, East Germany’s gross domestic product rose from $51.4 billion to $86 billion (all in 1990 dollars), for a meager annual growth rate of 1.3 percent. Over those same forty years, West Germany’s GDP rose from $214 billion to $1.24 trillion (all in 1990 dollars), for an average annual growth rate of 4.4 percent, over three times that of East Germany.
Economic freedom works.
Threats to our economic freedom
There is some bad news: we can’t take economic growth for granted because we can’t take economic freedom for granted. We in the United States are dealing with three main threats to our freedom: (1) a large federal government, whether measured by federal spending as a percentage of GDP or measured by the amount of regulation; (2) high tariffs on imports from other countries, which, in less than one year, have turned the United States from one of the freest trade countries in the world to one of the most protectionist; and (3) increasing restrictions on even legal immigration, which has been the source of many of the new ideas that make our economy dynamic. Those of us who care about economic freedom need to fight against all of these threats.
Conclusion
Here’s a test of whether this article is effective. When you give thanks next Thanksgiving, will you, if you don’t already do so, be more inclined to give thanks for economic freedom?
