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The Colonial Origins Of American Prosperity

By Matthew Yglesias on July 27, 2011 at 6:15 pm

"The Colonial Origins Of American Prosperity"

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“The Colonial Origins of the Divergence in the Americas: A Labour Market Approach” (PDF) extends the analysis I offered earlier today to conclude that in fact North America emerged as the richest place in the world as far back as the 17th century. They calculate “welfare ratios” that compare nominal wages in different places to the price of subsistence in that location. The higher the number, the more you can afford luxuries and such:

Part of a long-run project to put together a systematic database of prices and wages for the American continents, this paper takes a first look at standards of living in a series of North American and Latin American cities. From secondary sources we collected price data that—with diverse degrees of quality—covers various years between colonization and independence and, following the methodology now familiar in the literature, we built estimations of price indexes for Boston, Philadelphia, and the Chesapeake Bay region in North America and Bogotá, Mexico, and Potosí in Latin America exploring alternative assumptions on the characteristics of the reference basket. We use these indexes to deflate the (relatively more scarce) figures on wages, and compare the results with each other, and with the now widely known series for various European and Asian cities. We find that real wages were higher in North America than in Latin America from the very early colonial period: four times the World Bank Poverty Line (WBPL) in North America while only two times the WBPL in Latin America. These wages place the North American colonies among the most advanced countries in the world alongside Northwestern European countries and the Latin American colonies among the least developed countries at a similar level to Southern European and Asian countries. These wage differences existed from the early colonial period because wages in the American colonies were determined by wages in the respective metropoles and by the Malthusian population dynamics of indigenous peoples. Settlers would not migrate unless they could maintain their standard of living, so wages in the colonies were set in the metropole. Political institutions, forced labour regimes, economic geography, disease environments and culture shaped the size of the economy of each colony but did not affect income levels.

Reasoning backwards, crossing the Atlantic ocean to go from England to the proto-USA was an enormously costly and risky undertaking. Nobody would have done it unless the wages were higher. South America was colonized by poorer countries and had larger indigenous populations and thus a different dynamic. But again as I said before, the story of American prosperity isn’t a story about a poor country that used good policy to become rich. We’ve essentially always been a rich country and if there’s a policy issue it relates to continental europe’s failure to “catch up.”

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