Efficiency And The Cost Of Living

Raising productivity growth is the holy grail of economic policy. Improving productivity - or the efficiency of production - is the surest way of improving human welfare.

The application of new technologies and the reorganisation of work and markets are two of the great engines of productivity growth.

Such innovations have, in the last century, collapsed the cost of living and brought what were once luxuries within the reach of all households.

One way of gauging these effects is to look at the proportion of consumer spending accounted for by expenditure of different goods and services.

Innovation has transformed productivity in agriculture and manufacturing. Productivity in agriculture has been revolutionised by mechanisation, new plant varieties, selective breeding, improved husbandry and the use of fertilisers and pesticides. Along with the growing international trade, consumers enjoy a dizzying array of foodstuffs at ever lower prices.

In 1954, when food rationing in the UK finally ended, food accounted for almost 40% of average household spending; today food accounts for just over 11% of all spending. We are spending far less for a far wider range of foods, many of them pre-prepared, so requiring less labour input than in the 1950s.

The same magic combination of trade and rising productivity has collapsed the cost of goods.

Thus the real price of cars in the UK has halved in the last 25 years.

In 1948 a Freed-Eiseman 16 inch TV cost $795 in the US, roughly a quarter of the average annual salary, or roughly $12,000 in today's money. A top of the range TV can be bought today for less than $1,000. But this comparison fails to capture the huge quality improvements seen in the last 60 years. On a quality-adjusted basis the cost of a TV in the US has fallen by 98% since 1950.

When things become cheaper we consume more of them. Foodstuffs that were, within living memory, luxuries or treats, such as smoked salmon or chicken, have become everyday items.

As Google's Chief Economist, Hal Varian, puts it - "A simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an...