Walton and Rockoff

In Walton and Rockoff’s History of the American Economy they discuss the relative and absolute prosperity of America on the eve of the revolution. In year 2000 prices they estimate that real per capita income of free persons was in the $1,300 to $1,500 range. While they note that this meant that the standard of living for the average free colonial was less than half the official U.S. poverty level that “(N)evertheless we can safely guess that free colonials enjoyed surprisingly high standards for the world at that time” (Walton and Rockoff, p. 102). They go on to claim that “(E)ven today, relatively few countries generate the earnings of free Americans on the eve of the Revolution. In fact, more than one-half of the current world population lives in countries where the average income is below the level of free American’s income of more than 200 years ago. This is true of most of the people of the “Third World”, including India, Pakistan, Indonesia, and large parts of Africa and South America. Relatively speaking, free colonial Americans lived very well, both by today’s standards in many areas of the world and in comparison with the most advanced areas of the world in the late eighteenth century”. (Walton and Rockoff, p. 102). In short, while American were poor by contemporary American standards we were well ahead of where the majority of the world is even today and already close to the lead, in material terms over 200 years ago. There is a difference between less than half of contemporary poverty levels and well less than half: Adjusted for inflation, the poverty level for a single person in 2009/2010 in the U.S. was almost six times greater than $1,500 (http://aspe.hhs.gov/poverty/09poverty.shtml *) Even for a family of eight, the 2009/2010 poverty level comes to $3,735.82 a head or almost two and a half times the higher end of the range that Walton and Rockoff report. One –sixth of current poverty level to forty percent is indeed less than half, quite a bit less. {* I used a price index of 123.8349 to put the 2009 figures into comparable terms to the figures of $1,300 to $1,500 Walton and Rockoff report. I arrived at this figure by taking ratio of the GDP deflators for 2009 and 2000 (base year 2005) and then multiplying the result by 100. } Purchasing Power Parity Ratios and real per capita income: According to World Development Indicators (source: http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08_section1_intro.pdf )in 2005 (the year the edition of Walton and Rockoff Iam quoting from was published) real per capita income in India was $2,222 , Indonesia it was $3,209 , and in Pakistan it was $2,184. Even for countries of Africa, such as Kenya ($1,375), Lesotho ($1,311) and Nigeria ($1,520) you find per capita income within the $1,300-$1,500 range . One must assume that Walton and Rockoff used earnings figures converted into dollars using local currency to USD (U.S. dollar) exchange rates. By failing to take into account the substantial differences in the cost of living between countries (typically far lower in economically poorer countries than in economically richer countries such as the U.S.) the level of earnings can be grossly underestimated. For example, the cost of living in India is only one-third that of the U.S. So when the Rs 32,596.74 earned by the average Indian in 2005 is converted into USD using an exchange rate of Rs44.27=1 USD it would appear that the average person in India only earned a little over $700 ($736.32 to be exact). This assumes that the cost of living is the same in the two countries. However, with one-third the cost of living in India the $764.32 actually goes slightly over three times farther or is closer to earning the $2,222. Poverty is still very real but the sting of poverty is somewhat less painful as it is offset by a lower cost of living. Focus on the fine lady. Ignore the boy in rags: The illustration (Walton and Rockoff, p. 104 ) used to further support the enviable prosperity of America in the late 18th century is in fact English artist W.P. Firth’s “The Crossing Sweeper” . http://en.wikipedia.org/wiki/The_Crossing_Sweeper which was painted in 1858 and meant to depict the sharp contrast between wealth and poverty in mid-19th century London. However, in Walton and Rockoff , the painting is meant to illustrate how far America had come from Jamestown’s mud huts to the eve of the Revolution. The fact that even if it were a painting of late 18th century America rather than mid -19th century England the shoeless boy is helping his family make ends meet et by sweeping the way clear for a fine lady as she crosses a dirt road would seem to support an alternative view. That alternative view is that at the eve of independence we were by today’s standards a poor country and. we had much more in common with contemporary economically developing countries than Walton and Rockoff would care to admit. Summary: Walton and Rockoff are not unusual in the approach they have taken. It is a variant to the idea that today’s economically dominant economies have been far ahead a very long time ago and, although relatively poor, were never quite so poor as the poorest sections of the world today. The fact is that in the admittedly broad terms of real per capita income it was not until the after the middle of the 19th century that we here in the U.S. approached a standard of living that placed us roughly on par with where the average Indonesian is today. Using the figure reported by Fogel in Without Consent or Contract for 1860 (see Table 1 p. 85) and the Economic History Assocation’s measuring worth website (http://www.measuringworth.com/ppowerus/ ) to convert the figures quoted in 1860 prices to a year 2000 base, the level of real per capita income we, as a nation enjoyed (the portion that was not enslaved), was a meager $3,080. This means that over six decades after the period Walton and Rockoff are discussing the average American had a standard of living still well below the per person poverty level, even the poverty level for a large family today. Note too that it would require only ten years of real economic growth at 3.3% a year for India to reach the point we were at in 1860, Pakistan a little over ten and a half years and Nigeria about 22 years. All three are in the admittedly very rough terms of real per capita income around where the average free American was at the end of the 18th century or in fact beyond that point.