Sweet diversity: Colonial goods (tea, coffee, sugar, tobacco) and the welfare gains from global trade after 1492

Sweet diversity: Colonial goods and the welfare gains from global trade after 1492. Jonathan Hersh, Hans-Joachim Voth. Explorations in Economic History, July 23 2022, 101468. https://doi.org/10.1016/j.eeh.2022.101468

Abstract: When did overseas trade start to matter for living standards? Traditional real-wage indices suggest that living standards in Europe stagnated before 1800. In this paper, we argue that welfare may have actually risen substantially, but surreptitiously, because of an influx of new goods. Colonial “luxuries” such as tea, coffee, and sugar became highly coveted. Together with more simple household staples such as potatoes and tomatoes, overseas goods transformed European diets after the discovery of America and the rounding of the Cape of Good Hope. They became household items in many countries by the end of the 18th century. We apply two standard methods to calculate broad orders of magnitude of the resulting welfare gains. While they cannot be assessed precisely, gains from greater variety may well have been big enough to boost European real incomes by 10% or more (depending on the assumptions used).

Keywords: Gains from varietyGlobal tradeWelfare gains from new goodsAge of discoveryLiving standards over the long run

JEL D12D60F10F15N33

5. Conclusions

When did globalization begin to matter for living standards? According to the prevailing consensus, the answer is – not before the 19th century. O'Rourke and Williamson (2002) analysed traditional wage indices to show that trade across the Atlantic did not change real incomes before the 1830s. This paper argues that global trade quickly began to matter for living standards. As Europeans rounded the Cape of Good Hope, they brought back tea; from the New World, they brought tobacco, chocolate, and potatoes. In the Caribbean and other tropical colonies, Europeans set up a production system for sugar, tea, and coffee that transformed the supply of these goods. By the eighteenth century at the latest, consumption habits had undergone a profound transformation. New consumption goods offered variety where monotony had once reigned: hot, sweet caffeinated beverages replaced water and ale, and by revealed preference, consumers favoured tea, sugar, and coffee. Sugar also helped to reduce the culinary monotony of winter: it facilitated the making of jam and marmalade, preserving fruit flavours throughout the winter.

The welfare gains from access to new goods can be assessed by asking a counterfactual question – how much would incomes have to go up to compensate for a particular consumer item no longer being available? We use two different methods, pioneered by Hausman and Greenwood and Kopecky, to gauge orders of magnitude. Results are broadly similar. Most estimates, even under pessimistic assumptions, suggest that colonial luxuries made consumers better off by about one tenth of final-period consumption – and perhaps more. We cannot confirm these results using highly granular data on individual demand curves as modern-day studies can, but the closest historical analogues also imply welfare gains of 10% or more.

Our quantitative results for tea, sugar, and coffee may well constitute a lower bound on the discoveries’ overall effect. An even wider range of ‘new goods’ arrived on European shores as a result of overseas expansion (Nunn and Qian, 2010). The addition of tomatoes, potatoes, chocolate, exotic spices, polenta, and tobacco transformed consumption habits in even more fundamental ways than sugar, tea, and coffee. If data tracking the rise in consumption of all of these colonial goods were available, welfare increases for European consumers after 1492 as a result of growing variety could be even larger than our findings suggest.

Compared to the gains from new goods today, the welfare increases from introducing sugar, tea, and coffee in the past appear large. In Table 3, we compare the impact of recently invented new goods with our results, including welfare gains from tobacco estimated in the Appendix. Even for the contemporary new goods with the biggest impacts, such as personal computers and the internet, welfare gains pale in magnitude compared with those for colonial goods. Goolsbee and Klenow (2006) calculate a gain of approximately 2% for the internet. Our findings suggest welfare gains that are up to an order of magnitude larger (except when compared with personal computers).26 Other studies of modern-day gains from trade through increasing variety also show smaller increases than the ones we derive. Broda and Weinstein (2006) find welfare gains of 2.2-2.6%, approximately 1/4 of our “best-guess” improvement of 10% from sugar, tea, and coffee alone.

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Relatively large gains in the more distant past make sense intuitively: Introducing a new good matters more when the pre-existing range of goods is small. Put another way – adding Apple Cheerios to the range of choices for breakfast cereals has (some) value. However, being able to replace beer soup, porridge and cold cuts with milky, sugary coffee and bread with jam was much nicer, as evidenced by rising budget shares of colonial goods. Exotic new products from the Americas and the Far East – pepper and nutmeg, tea and sugar, coffee and tobacco, chocolate and cloves – improved living standards by far more than modern consumers, sated by an ever-expanding range of new goods, can readily appreciate. The reason why seemingly mundane goods like sugar, coffee and tea probably made a big difference to living standards is that life was not just ‘nasty, brutish, and short’ in Hobbes’ phrase, at their time of introduction – it was also (in culinary terms) boring and bland.