Ambrose Evans-Pritchard, in the Telegraph, has a fascinating article today about Globalisation, headed “Nobel gurus fear globalisation is going horribly wrong”. (I promise this blog post won’t be too dry, so bear with me!)
The traditional economic theories say, in a nutshell, that free trade makes us all richer. In the article, Mr Evans-Pritchard suggests it may not be that simple.
The article has a pretty horrible graph in it, of real wages and productivity since the war. Wages went up in line with productivity until about 1970. From that point, wages stopped growing – but productivity went onwards and upwards.
The article suggests this is because the benefits of Globalisation are being taken by the rich, with inequality widening dramatically across the world. And please note: this trend started a decade before Margaret Thatcher came to power!
Interesting stuff. It got me thinking though – how come we all feel like we are getting richer, but the figures tell us we’re not?
I suspect the answer has something to do with this: we could each be getting a rise each year, so we each feel (and are in reality) better off than we were last year. However, the country as a whole could be getting poorer. The reason is the comparison between generations.
Consider then an imaginary country. In this country, real wages are declining by 5% every decade. The country is very clearly getting gradually poorer.
However, in this same country, every worker gets a pay rise every year, equating to a 10% rise every 10 years.
Here is a graph of wages in that imaginary country, plotted against the age of the worker. Each line on the graph represents the wage history of a worker in a particular year.
As you can see, a typical worker is getting richer all his life in this fictional country, with his income nearly doubling as he goes from age 20 to age 80. And yet, each decade, the graph of rising wages is lower than it was the previous decade.
In our fictional country, somebody who is 20 years old in 2000 earns £20,000.
In 2010, he is 30 years old. Over that time, the wages of 20-year-old workers have fallen by 5%, to £19,000. But our imaginary worker doesn’t care. He is now 30, and his own wage has risen to the wage of a 30 year old in 2010. That wage is £20,900. It has fallen by 5% because of general wage falls in the economy, but risen by 10% from his greater age (and experience etc). The rise he achieves by getting more experience, getting promoted etc, outweighs the general downward trend in wages.
And that explains why everybody can be happy that they are doing all right, while their country slowly sinks into the mire.