Chapter 3 Our world transformed: Institutions, inequality, and planetary limits

3.1 Introduction: The changes in life as we know it

In this chapter, we take a step back and look at the big economic picture: our entire economy and its changes through time.

We examine different ways of measuring well-being in an economy and find that, over time, some economies have increased their well-being more than others. We examine economic systems and how capitalism has transformed the way we live and helped make possible dramatic increases in technology and well-being. Yet, this improvement does not always benefit everybody, and economic transformation can harm the environment.

In late October 2012, Hurricane Sandy battered much of New York City and the seacoast of New Jersey. The massive storm brought winds of up to 100 miles per hour and flooded large parts of lower Manhattan, including subways and tunnels, causing mass power outages across New York City and neighboring New Jersey.

After the storm, many learned firsthand what it was like to live 200 years ago. The power failure left residents without the electricity they needed to power modern conveniences, including electric lighting, washing machines and dryers, refrigerators and freezers, central heating and air conditioning, fans, and elevators. Flooding and no electricity also meant no subway, the primary means of transportation in New York City. Car transportation was cut off because gas station pumps could not function without electricity. Mobile phones and laptops shut off when their batteries were drained.

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Lower Manhattan in darkness, seen from Brooklyn Heights two days after Hurricane Sandy, New York City, USA.

The life we live and the technology we rely on in the twenty-first century would seem like science fiction to an observer two centuries ago. At that time, the toilet was in an outhouse, separate from the main house. People bathed in a tub in the kitchen with water that someone had gathered and carried into the house and warmed on the stove with fire rather than electricity. Nobody had a phone or TV. Most people worked in farming and lived in rural areas rather than cities. Cloth was rough and homespun—literally spun on a loom at home and therefore rough to the touch and variable in quality. The economist Robert Gordon wrote, “Life and work were risky, dull, tedious, dangerous, and often either too hot or too cold in an era that lacked not just air conditioning but also central heating.”¹

Living standards have increased enormously since 1800. Today, we have access to fruits and vegetables year-round. In the United States, only about 1 in 100 people works in agricultural production. While at birth the typical American in 1880 could expect to live 40 years, a typical American today lives about 79 years on average, because of vaccines, sanitation, antibiotics, and readily available food.

Economics uses data to help us understand how the modern world works (and how to make it work better for all). In this video, the economists Thomas Piketty and James Heckman explain how collecting data has been fundamental to their work on inequality.

The increase in our living standards has not come without costs. It has also brought unprecedented transformation to our natural environment. The concentration of carbon dioxide in Earth’s atmosphere is at its highest level in the last 800,000 years, and the intensity of recorded weather events like Hurricane Sandy has increased.

While living standards have improved overall, some parts of the world have improved more than others, as the satellite image that opens this chapter shows. Being able to switch on a light at night is one measure of living standards. For the very poor, light at night is a luxury. As you can see in the satellite image, light at night is brightest in areas that are densely populated and have higher levels of economic prosperity.