One day, on her way to work, a woman decides that she’s going to take a mass-transit system instead of her usual method. Just before she gets on board, she looks at an app on her phone that gives her position with the exact latitude and longitude. The journey is smooth and perfectly satisfactory, despite frequent stops, and when the woman disembarks she checks her phone again. Her latitude and longitude haven’t changed at all. What’s going on? The answer: this lady works in a tall office building, and rather than taking the stairs, she’s taken the lift. We don’t tend to think of elevators as mass-transportation systems, but they are: they move hundreds of millions of people every day, and China alone is installing 700,000 elevators a year. The tallest building in the world, the Burj Khalifa in Dubai, has more than 300,000 square metres of floor space; the brilliantly engineered Sears Tower in Chicago has more than 400,000. Imagine such skyscrapers sliced into fifty or sixty low-rise chunks, then surrounding each chunk with a car park and connecting all the car parks together with roads, and you’d have an office park the size of a small town. The fact that so many people can work together in huge buildings on compact sites is possible only because of the elevator.
The index fund
Index funds now seem completely natural – part of the very language of investing. But as recently as 1976, they didn’t exist. Before you can have an index fund, you need an index. In 1884, a financial journalist called Charles Dow had the bright idea that he could take the price of some famous company stocks and average them, then publish the average going up and down. He ended up founding not only the Dow Jones company, but also the Wall Street Journal. […] And Samuelson went further: he said that since professional investors didn’t seem to be able to beat the market, somebody should set up an index fund – a way for ordinary people to invest in the performance of the stock market as a whole, without paying a fortune in fees for fancy professional fund managers to try, and fail, to be clever. At this point, something interesting happened: a practical businessman actually paid attention to what an academic economist had written. John Bogle had just founded a company called Vanguard, whose mission was to provide simple mutual funds for ordinary investors – no fuss, no fancy stuff, low fees. And what could be simpler and cheaper than an index fund – as recommended by the world’s most respected economist? And so Bogle decided he was going to make Paul Samuelson’s wish come true. He set up the world’s first index fund, and waited for investors to rush in.
Back in the mid-1990s the economist William Nordhaus conducted a series of simple experiments. One day, for example, he used a prehistoric technology: he lit a wood fire. Humans have been gathering and chopping and burning wood for tens of thousands of years. But Nordhaus also had a piece of high-tech equipment with him: a Minolta light meter. He burned 20 pounds of wood, kept track of how long it burned for and carefully recorded the dim, flickering firelight with his meter. Another day, Nordhaus bought a Roman oil lamp – a genuine antique, he was assured – fitted it with a wick, and filled it with cold-pressed sesame oil. He lit the lamp and watched the oil burn down, again using the light meter to measure its soft, even glow. Nordhaus’s open wood fire had burned for just three hours when fuelled with 20 pounds of wood. But a mere eggcup of oil burned all day, and more brightly and controllably. […] To see why [keeping track of inflation] is difficult, consider the price of travelling from – say – Lisbon in Portugal to Luanda in Angola. When the journey was first made by Portuguese explorers, it would have been an epic expedition, taking months. Later, by steam ship, it would have taken a few days. Then by plane, a few hours. An economic historian who wanted to measure inflation could start by tracking the price of passage on the steamer. But then, once an air route opens up, which price do you look at? Perhaps you simply switch to the airline ticket price once more people start flying than sailing. But flying is a different service – faster, more convenient. If more travellers are willing to pay twice as much to fly, it hardly makes sense for inflation statistics to record that the cost of the journey has suddenly doubled. How, then, do we measure inflation when what we’re able to buy changes so radically over time? […] Because we don’t have a good way to compare an iPod today to a gramophone a century ago, we don’t really have a good way to quantify how much all the inventions described in this book have really expanded the choices available to us. We probably never will. But we can try – and Bill Nordhaus was trying as he fooled around with wood fires, antique oil lamps and Minolta light meters. He wanted to unbundle the cost of a single quality that humans have cared deeply about since time immemorial, using the state-of-the-art technology of different ages: illumination. That’s measured in lumens, or lumen-hours. A candle, for example, gives off 13 lumens while it burns; a typical modern light bulb is almost a hundred times as bright as that. […] Switch off a light bulb for an hour and you’re saving illumination that would have cost our ancestors all week to create. It would have taken Benjamin Franklin’s contemporaries all afternoon. But someone in a rich industrial economy today could earn the money to buy that illumination in a fraction of a second.
Tim Harford, Fifty inventions that shaped the modern economy
Here’s Nordhaus’ paper, “Do Real-Output and Real-Wage Measures Capture Reality?”
Added to diary 15 January 2018