The real price of nails fell by a factor of about 10 from the late 1700s to the middle of the 20th century, averaging a decline of about 1½ percent per year.Sichel, D. E. (2021). The Price of Nails since 1695: A Window into Economic Change. NBER Working Paper, (w29617).
It’s not just a working paper now, of course, and the paper is also available on the JEP website, but this is a paper that is a must-read if you are a young student beginning your journey in the world of academic econ.
- Economic progress is real, under-rated, and these days, vastly under-appreciated. I’m willing to argue for each of these three points, and this paper helps us understand why I say that economic progress is real.
- Of course, this point has been made before, as the very first page in this paper points out. “These declines are paltry compared with more dramatic examples: for example, Nordhaus (2007) calculated that the real cost of computing dropped by a factor of at least 2 trillion times from 1850 to the early 2000s, while Nordhaus (1997) showed that the real cost of lighting fell by a factor of about 3400 times from 1800 to 1992.”
- But still, this paper is worth reading, for at least the following reasons:
- It puts technological progress into perspective. Consider this: “Over the same span of 300 plus years during which these transformations occurred, the place of nails in the economy (and in popular accounts) also underwent a huge shift. In 1810 (the earliest year for which I could assemble necessary data), the use of nails in the US economy (measured as production plus imports minus exports) was 0.4 percent of nominal GDP, as shown in Figure 1. To put this share into perspective, in 2019 household purchases of personal computers and peripheral equipment amounted to roughly 0.3 percent of GDP and household purchases of air travel amounted to about 0.5 percent. That is, back in the 1700s and early 1800s, nails were about as important in the economy as computers or air travel purchased by consumers are today.“ (Emphasis added)
- The author has included a pun on nails (who could have resisted in his place), but restricted himself to just the one, which shows Michelin chef level restraint.
- Rare is the academic paper that is able to give literary references (and I have duly added Little House on the Prairie to my reading list)
- One gets to see the application of basic economic concepts in an econ paper in easily understandable form. For example:
- Substitutes and complements (run a CTRL-F for nail guns, for example)
- Production functions and multi-factor productivity, including a very nice applications of the KLEMS growth accounting framework. And if you are from India, have you taken a look at KLEMS database yet?
- The construction (and the difficulty involved in constructing one) of a price series for nails that incorporates technological progress, quality improvements, and shipping costs.
“Shipping costs are another characteristic that would be important to some buyers. For example, the 1897 Sears catalog indicates that shipping costs for a 100-pound keg of nails from Chicago to Boston amounted to about 20 percent of the price of the nails. Given the greater number of wire nails that would be in a keg compared with the number of cut nails, shipping costs per nail would have been considerably lower for wire nails than for cut nails”
On a related note, did you know that it is much more expensive to buy (illegal) beer in Bihar than it is to buy “hard liquor”? Can you figure out why this might be so?
- Estimating factor shares (probably my personal favorite section in this paper)
- The last paragraph on pp 146 is positively delightful, and deserves multiple re-reads. How often does an economist get to say this: “Finally, I assume (based on personal experimentation with a hammer and nail gun) that a worker with a hammer can install six nails per minute and that worker with a nail gun can install 20 nails per minute”?
- And for a useful pairing, read about Baumol’s Cost disease next.