The Great Stagnation?

by Russ Roberts on November 20, 2013

in Inflation, Innovation, Standard of Living, Uncategorized

A number of people like to talk about the slow growth in the American economy or the slow growth in the standard of living for the 99%. I am skeptical about these claims for a variety of reasons. One of the reasons is our poor ability to adjust purchasing power when quality is changing rapidly. What does that mean? When we want to see whether the average American is better off, we usually look at some measure of income. But then you have to correct for inflation. When the quality of goods is improving rapidly, that is very challenging.

Here’s a nice example. In 1984, you could buy a Macintosh computer for $2495. (That was the actual dollar price.) Today, you can buy a Macbook Air for $999. So it looks like the price has fallen by 60%. The two machines do have something in common. They both purport to be portable. They both have small bright screens. Both are capable of doing a variety of tasks. But they almost have nothing in common. To treat them as the same good–portable computers is absurd. So maybe I should use an iMac for comparison–a desktop machine. An iMac is $1299 at the Apple Store. So that’s a decrease of 48%. But they decrease massively understates the true fall in price when I take account of the quality of the iMac relative to the Macintosh.

It is hard to remember how little computing you were able to purchase for $2495 in 1984. Here is a video that will help you remember. I find the video profoundly moving because of the incredible enthusiasm for a product that today we would find appalling. Watch it and see how far we’ve come in three decades. Those gains are very hard to measure.

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