If we are so rich, why do we feel so poor? As it concerns the fifth or so of Americans who subsist in official poverty, the question need not detain anyone. By criteria old or new, these casualties of affluence lack much of what their fellow citizens define as essential to a minimum American standard of life. But what is the occasion for the complaints, dissatisfactions, and demonstrations of so many other people, ranging in economic status from New York City East Siders scraping by on $50,000 a year, through militant unionists rejecting contracts which improve on annual incomes of $13,000-$15,000, to the half of the population disaffected because their earnings fall below the national median of $8,000 a year? The prophets tell those who still hearken to their words that in 1971, or even in 1970, the Gross National Product of the United States will break the trillion mark—a thousand billion, no less. The endless flow of goods, services, and junk which issues from the factories and the offices grows by $30, $40, even $50 billion annually,1 and in absolute terms, even after adjustment for rising prices, each lucky American’s share of the loot expands every year, unless he has encountered some sort of personal misfortune and fallen behind the affluent procession or, worse, never joined it.
Is the economic discontent of the 1960’s entirely the result of individual expectations which have risen even faster than income? Should the advertising agencies be given the “credit” for training Americans to be perfect consumers? I wonder whether the matter is quite that simple. It is much too easy to blame it all on hucksters who, after all, are flesh of our flesh. Although Madison Avenue appears to elect our Presidents, its power probably does not extend so completely to the more important realm of commerce. This is not to deny the advertiser’s intention to create wants, arouse dissatisfaction with present possessions, play upon the jealousies, sexual competitions, and personal perceptions of inadequacy with which modern man is lavishly endowed, and thus triumphantly cajole from the pockets of the customers whatever scraps of currency or credit they may possess. But there is little or nothing that is new or startling about these strategies; moreover, consumers are by now sufficiently sophisticated in their responses and advertising itself sufficiently self-cancelling in its effects so that the phenomenon of advertising can no longer be cited to explain why the 1960’s, by all conventional measures so much more prosperous than the 1930’s, should have stimulated so many to give such vociferous tongue to their financial complaints.
One source of the trouble is all too familiar: the differential impact of a price inflation which has been accelerating since the escalation of the Vietnam war in 1965. Of course, for some people—bankers, doctors, lawyers, miscellaneous consultants, and, until that bubble burst, conglomerate promoters—inflation is a heavenly season. For anyone fast on his financial feet a bull market and a buoyant price level are the stuff of which personal fortunes and business legends are constructed. This is the world, already receding into myth, celebrated in Adam Smith’s The Money Game. Once young gun-slingers prowled the Wall Street canyons, and when they shot it out at high noon, they and the mutual funds they managed were all richer and nobody fell dead. In a falling market, alas, there are no financial wizards, least of all the performance men of the mutual funds. After the binge, comes the hangover.
But a good many unfortunates enjoyed no binge, although they have not been excused from the effects of their betters’ indulgences. As ever, the major victims of contemporary inflation are the weak, the unprotected, and the immobile. Thus in 1969—a year when the cost of living jumped 6 per cent—New York State’s “liberal” Governor recommended, and the legislature enthusiastically endorsed, reductions in dollar payments to welfare and Medicaid recipients. If the point had previously escaped their attention, welfare clients were placed on notice that it is highly uncomfortable to be poor and dependent on gifts from the public purse. But even more generally esteemed categories of the citizenry—elderly pensioners, thrifty souls living upon interest from past savings, members of weak unions, the less militant civil servants, and small businessmen confronted with prohibitively high interest charges and intolerably high lease-renewal terms—have found themselves losing ground to the cost of living.
The general rule of inflation still holds: in a capitalist society, income and wealth are redistributed in the direction of still greater inequality. Profits, the most volatile of income sources, go up steeply while capital gains, which are not even measured as a portion of the Gross National Product, inflate the wealth of the astute still more notably than do profits. As long as prices rise and the stock market goes up, expense accounts are fattened and ingenious executive compensation schemes flourish. It is no wonder that factory wages in real terms have in recent years ceased to improve. Indeed, the average blue-collar worker was worse off in 1969 than he was in 1968. Inflation authorizes sharp operators of all varieties to print their own money, quite legally. This funny money is inflation’s cream. What is left for the remainder of the public is pale, blue, fat-free milk. No wonder militant blue-collar workers demand 10 and 11 per cent wage improvements. No wonder frugal souls feel cheated when they realize that every dollar they have saved at 5 per cent interest is now worth 99 cents after a year of 6 per cent price inflation. It is a poor time for the practice of Poor Richard’s maxims.
All this, however, is too well known to require comment. What does need exploration, though, is the malaise of the prosperous that is rooted in the everyday context of life in the cities and the suburbs. The national mythology holds that such sinful Babylons as New York and Los Angles will be supplied with the polluted air that their inhabitants no doubt deserve. But even in such staunchly conservative country as western Suffolk County the air, like the water, is of uncertain quality. As Newsweek sagely observed some time ago, it is impossible to get anywhere. Looking, after its fashion, into the 1970’s Esquire played amiably with the fancy of Governor Rockefeller’s assassination by a maddened Long Island Railroad commuter. The jury promptly exonerated the assassin on the grounds of justifiable homicide. All that an optimist might say about the Long Island Railroad is that its rival, the Long Island Expressway, is nearly as slow and twice as dangerous. Wherever he looks, the consumer finds that the quality of his experience is deteriorating. Houses are still worse built than of yore. If products are not more adulterated than ever, they are more alertly suspected of adulteration. Crime, if not necessarily greater, is more greatly feared. So runs the litany of despond—urban, suburban, rural.
Why don’t the demon calculators of the Department of Commerce and the National Bureau of Economic Research record these community trials? After all, the national-income statistician, as human as the next commuter, frays his soul with the same daily afflictions as any other office worker. Yet the canons of his craft apparently prevent him from identifying and measuring the various ills which accompany the multitudinous goods routinely totted up in the national ledger. What he is expected to compute is identified in the following definition: “The gross national product . . . is the total market value of the goods and services produced by our economy for a specified period of time, usually a year.”2 This quite representative definition is notable for its utter neutrality. An unassuming man, the economist makes no value judgments of his fellow citizens’ tastes. Whether the customers prefer the Beatles to Bach, football to ballet, Reader’s Digest to COMMENTARY, or Oh! Calcutta! to Othello is absolutely none of the national-income analyst’s professional business. Nor does his private opinion gain force from his professional skills. But this apparently harmless and even ingratiating (scholars ought to be humble!) posture can be shown to sanction some very odd and even ridiculous consequences. Thus, if cigarette smoking were to double, the increase would naturally show up as an expansion of the consumer component of the Gross National Product. And if the corollary were a parallel rise in medical expenditure for the treatment of lung cancer, tuberculosis, heart ailments, and emphysema, this too would be solemnly added to the GNP. If a new pulp mill discharges chemical wastes into a hitherto clean stream, the GNP will go up, not only because of the mill’s valuable output but also because other enterprises and municipalities located downstream from the polluter will be compelled to invest in cleansing devices required to return the water to usable condition. Similarly, the GNP rises both with automobile sales and with the increased consumer expenditure for the cleaning of furniture, clothes, lungs, and bodies, necessitated by such purchases.
In The Affluent Society, John Kenneth Galbraith bitingly castigated the triviality into which modern commercial society has plunged us all. His service was akin to the one performed in the 1920’s by R. H. Tawney and still earlier by Thorstein Veblen. Their point remains valid: enormous proportions of the goods and services which constitute the Gross National Product cater to trivial and capricious tastes, leave their purchasers unsatisfied, and create an undivine discontent which is turned to the commercial profit of the purveyors of still newer fashions and gadgets. So long, indeed, as the community’s income is distributed with gross inequality, the inconsequential wants of the affluent will be filled by the market before the quite pressing wants of poorer persons are attended to, if they ever are. The economists who celebrate most strenuously the virtues of free markets seldom add that the freest of markets achieve their triumphs of allocation and maximization only within the context of a given distribution of income and wealth. If that distribution is inequitable (does anyone doubt that it is?), then the pattern of national output is distorted by the strength of the inequitably rich and the weakness of the inequitably poor.
I take it to be a mark of the dangerous deterioration of our economy and society that the Galbraith of the 1950’s now reads like a sunny optimist. One response to The Affluent Society readily available to Galbraith’s critics was the assertion that a man should be free to make his own errors of choice. At best, he would learn from them and become a better consumer. At worst, he was conceded by the Constitution and the economics profession alike the freedom to make his own life miserable. Even so, there was no convincing reason for a community to promote the trivial and neglect communal amenities. Nevertheless, if all that a man ruined by his misguided choices were himself, the case for inaction would be strong.
But in fact, the situation is both more complex and more dangerous. The mechanism of consumer choice is so radically defective that we are compelled against our wishes to consume some items (not necessarily purchased by ourselves) and deprived of the opportunity to choose others which we might prefer. The ubiquitous motor car exemplifies this condition. When a motorist acquires a car powered by an internal combustion engine, he purchases transportation, pleasure, and, conceivably, the enjoyable contemplation of his neighbors’ envy. He also endows himself with a little additional air pollution from the emissions of his engine. He is not, however, offered a choice between a car (at a higher price) which traps and dissipates the noxious vapor and another car (at a lower price) which poisons the atmosphere around it; he is limited to the product as is (pleasure plus pollution) or none at all.
Limited as it is, however, the consumer at least has some choice. But unless our hypothetical motorist emigrates to Nevada or Wyoming, he has no choice at all in regard to the quality of the air he breathes. Whether or not his own possessions add minutely to the fouling of his environment, he cannot escape from breathing the air which his fellow citizens have adulterated for him. Air, as the statisticians see the world, is a free good (or ill) and it is, therefore, unmeasured. The result is by now familiar: if the output of cars and air pollution grows, not only will the second fail to enter the national accounts as an offset to the first, but the Gross National Product will be further swelled by the extra cleaning and medical costs.
Time and again the cherished free market enforces this limited (or non-) choice upon consumers who by buying what is thrust upon them, according to official doctrine, are thereby casting their dollar votes for the manufacturers who compete for their favor. Yet even if markets were unrigged and consumers as rational as economists sometimes generously presume them to be, they could not buy appliances that function with reasonable reliability, foods innocent of chemical preservatives, medicines uninflated by the pharmaceutical companies’ labeling and marketing maneuvers, or living space securely protected from intolerable environmental noise.
The last item is worth a moment’s attention. Perhaps you bought a house fifteen or twenty years ago in the general vicinity of Kennedy Airport. At the time the planes were few, small, and relatively quiet. As the years have gone by, the traffic has become brisker, the planes larger, and the noise many times greater. Your windows may not break very often, but the walls crack here and there; when air travel peaks you talk in shouts, and for practical purposes your radio and television set are useless irritants; your temper deteriorates, your sleep vanishes, and it is almost an understatement to add that your life is less wholesome than it used to be and your standard of living is psychically much lower. Yet again the statistician takes no note of the incidence or level of noise pollution. As with the parallel instance of air pollution, the national product will even rise if you are driven either to your druggist for chemical relief or to a psychiatrist.
What has occurred in all this can be put slightly differently. The airlines fly the most economical routes, at least until they are diverted by the agencies which indulgently regulate them. The logic of profit maximization (as powerful an imperative as the consumer’s thrust toward utility maximization) imposes upon airline managements the obligation to keep costs to a minimum so that profits can be coaxed to their maximum possible value. Even if such were not the operative legal and ethical canons of behavior, the competition of vigorous rivals would force each airline management to select lowest-cost operating procedures. The executives of the airlines are seemingly vindicated by the popularity of air travel, the comparatively low fares, and the expansion of airlines and aircraft companies over the years.
Only a moment’s reflection is needed to disclose just how misleading is this success story. The comparison of costs and benefits is perverted by the absence of a major, unrecorded, and unreimbursed cost—the decline in the usefulness and, therefore, in the real value of the property which airplanes fly over. If the airlines had been legally compelled to purchase the permission of property owners in their paths of flight, the outcome would have differed substantially from the present pattern of air traffic. If the airlines succeeded in purchasing the right of overflight, their costs and prices would have been sufficiently higher so that the volume of air travel would have been substantially lower. Indeed, mass air travel might have proven prohibitively expensive. A pity? Not at all. If by more accurate social-accounting devices, a product is so expensive that too few customers will pay the price necessary to justify its manufacture, this is simply a sign that resources ought to flow into other uses where costs are lower or demand is larger.3
The airline situation is paradigmatic. The simple truth is that a great many enterprises have expanded and many industries have flourished in part because they have been able to escape some of the costs of their own growth. These costs did not thereby disappear, they simply fell upon other enterprises, individuals, or the community at large. Autos, steel, chemicals, paper, and fabrics are among the children of external diseconomies unrecovered by society from the industries whose expansion generated them. Other prices and the general level of taxation are higher and other industries and the public sector are smaller because the favored few have been allowed to escape the full costs of their operations.
A word, I suppose, should in fairness be said on the other side of the account. Innovation has always been synonymous with disturbance of existing arrangements, and while some undoubtedly suffer from such disturbances others benefit and sometimes the gains are general. Which is to say that there are external economies as well as external diseconomies of private, unregulated growth. Yet in our time the nature of growth, particularly in the urban context in which it is concentrated, renders it almost certain that the external diseconomies of growth—the unreimbursed costs imposed on other people—have outpaced the external economies of growth—unreimbursed benefits conferred on other people. One phenomenon by itself justifies the conclusion: the sheer momentum of population growth. Only reluctantly, and very late in the day, are fair numbers of Americans approaching the judgment that larger communities are not necessarily happier or more peaceful communities. On the contrary, rapid urban growth practically guarantees that the housing stock has risen too slowly to fill new demands upon it, public services are ill-equipped to carry larger loads, mass transportation buckles under the strain, and the omnipresent automobile clogs roads rendered more inadequate than ever by the sheer pressure of clotted traffic. To say it simply, people impinge upon each other. The individual living spaces which define privacy and are essential to the preservation both of amenity and of civil freedom are narrowed by each escalation in the ratio of people to space.
For most Westerners, at least, the loss of personal space is tantamount to a reduction in the standard of life. Although in a country as large as the United States population increase need not entail loss of privacy, the outcome is politically and socially unavoidable as long as legal arrangements encourage the growth of private outputs at less than their true costs in disamenity, loss of privacy, inability to move conveniently from one place to another, and dangerous pollution of air and water.
No better example of the present idiocies of resource allocation could be imagined than the production of the supersonic transport plane. This prodigiously expensive piece of apparatus possesses a single virtue: it will fly the Atlantic in three instead of six hours—the solution to a problem which must afflict just about nobody. If it is confined to transoceanic flights it will disturb marine life and such stray mariners as stubbornly persist in treating the high seas as a route of commerce. However, if past precedent is a reliable guide, the engines of propaganda will soon be churning out an endless stream of “evidence” designed to demonstrate, for example, that land routes can be devised which avoid population centers, or that the noise level of the planes has been reduced to tolerable murmurs, or possibly that people, once accustomed to the merry, companionable sound of the sonic boom, really rather like the noise. This dangerously nonsensical national decision is a consequence in part of technological momentum, the superstition endemic in the 20th century that anything which engineers are capable of designing must ipso facto be thrust into production and operation. In this instance even the airlines and the aircraft companies, the natural parents of this folly, doubted their child’s capacity to earn its way in the world, with the result that substantial public funds (with more to follow) have been devoted to the creation of a volume of aggressive noise unprecedented in an already adequately rackety country.
What I have thus far described is a characteristic defect of a quantitative society which measures whatever activity is readily susceptible to enumeration, and implicitly discounts the remainder, however vital to comfort and joy that remainder might just happen to be. The excellent gentlemen who gather, analyze, and promulgate the good news of growth in the Gross National Product are telling us less about the genuine state of our welfare with each of their monthly announcements.
I write this in December. It will be read some time after the Nixon economists issue that annual triumph of the Council of Economic Advisers, the Economic Report of the President. I do not risk the danger of being caught in that most embarrassing variety of speculation, the one readily exposed as foolish by those who encounter it, when I state my confidence that the three wise men of the Council of Economic Advisers will point with mingled pride and apprehension to a rise of $40 or $50 billion in the Gross National Product between 1968 and 1969. The pride will be in the national capacity to pour out larger volumes of merchandise, the apprehension will derive from a parallel capacity to place ever higher price tags on these good things. And, I suggest, a prudent soul will put absolutely no stock in the significance of the numbers as a measurement of anything except the limited nature of the things measured—of which the economic health of the community is not one.
At best, the national-income measures are an index of that proportion of human effort which is registered by the marketplace or permits of the imputation of market prices. Why should the upward or downward movement of such measures imply a movement of our economic welfare in the same direction? In the first place, the statistics take no account of the way the national output is distributed. The commonsense, liberal tradition of the West (which used to be but is no longer applied by economists) holds that redistribution of income and wealth toward equality promotes welfare, and redistribution in the opposite direction diminishes welfare. Here let me shamelessly ally myself with Hobson, Pigou, and Keynes, rather than with the modern welfare economists. The conclusion is then plain that an inflationary period robs the slow and enriches the quick, particularly those whose quickness assumes the shape of the speculator’s maneuverability. Blue-collar and white-collar workers who consider themselves cheated are quite correct: inflation has cheated them by channeling the new money created by the Federal Reserve System in disproportionate quantities into the pockets of speculators, promoters, and sharpies who add little or nothing to the output of usable goods and services and a great deal to their own resources.
The numbers, it has been argued, are radically defective in another respect: their blind impartiality in lumping together goods and ills. The official measures swell the official totals by adding together pluses and minuses, but a more sophisticated sort of bookkeeping would include some corrective subtraction. Finally, our way of keeping the national accounts ignores the largest of all subtractions from affluence, the losses in amenity which are the consequences of overcrowding, pollution, transportation failures, housing shortages, and the sheer pressure of people upon one another.
Thus, the sense of deprivation which bewilders a great many middle-class, even moderately affluent, Americans comes as no surprise when one realizes that the conventional measures of affluence cover smaller and smaller proportions of what significantly affects the quality of everyday experience. It is, of course, indefensible that Americans allow the older forms of poverty to persist. These, should the national will to do so manifest itself, can be readily alleviated by income transfers in the shape of negative income taxes. But what is required to restore some sense of relationship between income and enjoyment for more prosperous Americans is a much more complicated affair.
I have concerned myself here with identifying a situation, and I shall conclude with no more than a general suggestion or two about the ways in which it can be improved. The first is that more realistic national measures of the influences affecting daily experience should be developed. If economists follow the path of enlightenment, they will, in their official and scholarly writings, place less emphasis upon quantitative income measures and exercise more ingenuity in inventing indices to measure overcrowding, congestion, public health hazards, pollution levels, transportation delays, and amenity costs. One day, perhaps, statisticians will deflate the Gross National Product by an index-of-amenity movement as an important supplement to the price deflators now conventionally applied. I take it as a fact of common experience that we are all poorer than we are publicly told that we are, but until the experts seriously apply themselves to measurement, we cannot know by how much we are actually poorer than the inflated national income estimates say we are.
Two routes at least of public policy are open. One is a more rational organization of national priorities. In a general way what is needed is striking enough to be a commonplace: less money should be committed to military hardware, foreign adventurism, space exploration, road construction, and the care and feeding of rich farmers, shipbuilders, oil magnates, and real-estate speculators; more money is urgently required for the revitalization of the cities: mass transit, low-cost housing, new satellite towns, schools and colleges, hospitals and clinics. More money still is needed in the shape of straight-income subsidy to the poor in the shape, as suggested, of negative income taxes. A reconsideration of public expenditure priorities should go hand in hand with the sort of statute which limits the harms legally permitted private producers—safety regulations, anti-pollution requirements, food and drug inspection, and the like.
The second route to improved public policy harks back to some of the analysis presented by E. J. Mishan and involves a more subtle use of the market to register rather more of the costs which enter into private expansion than is now possible. Suppose that the law defined as part of the rights of property the quiet enjoyment of its possession and required of potential infringers of such enjoyment successful negotiation with all the property owners affected. Noise, which is unpleasant, could be bartered for a price which could be converted into offsetting pleasures. Owners would be reimbursed and noise polluters would be made to bear the full economic burden of their operations. If they could find sufficient numbers of customers willing to accept a partial or complete transfer of that burden, well and good. If not, as the argument holds, then it would be a mistake to commit resources to this particular enterprise. The principle is extendable to a good deal of water and air pollution as well. As Mishan correctly emphasizes, definition of this new dimension of property rights is an extension of the efficiency of private markets, not a bureaucratic invasion of free choice. A nation of lawyers and economists should not find it: beyond the communal ingenuity to define some of the more important amenity losses, devise financial remedies for these losses, and allocate the cost to those who have caused them.
We are now at the very beginning of sensible attempts to preserve an environment in which private production really has very much to do with economic health. It is safe to say that so long as we think that economic growth as currently measured really is the occasion for rejoicing when the Gross National Product leaps, we shall be measured as rich, and increasingly we shall define ourselves as thwarted, deprived, cheated—and poor.
1 To give some idea of the extent of these year-to-year changes (the numbers are expressed in 1958 prices): in 1961 the Gross National Product was $497.2 billion; in 1962 GNP was $529.8 billion; 1963, $551.0 billion; 1964, $581.1 billion; 1965, $617.8 billion; 1966, $657.1 billion; 1967, $673.1 billion; and 1968, $706.9 billion.
2 See Norman F. Keiser, Economics: Analysis and Policy, Wiley, p. 190.
3 I should express ray debt here to the distinguished English economist E. J. Mishan who in The Costs of Economic Growth (Praeger) and in his more recent “The Spillover Enemy” (Encounter, December 1969, pp. 3-13) has dealt sensitively and subtly with these issues, including the vexed case of airline overflights.